The hyperconverged infrastructure (HCI) market is a fast-growing cloud computing vertical. It plays an important role in reducing the complexity of data centers by combining networking, storage, and computing into a single platform. The impressive results of Nutanix (NTNX 1.91%) in recent quarters suggest it might be one of the best ways to tap into this lucrative opportunity. The company offers a scalable hybrid cloud platform through a subscription-based model, which allows customers to manage different cloud environments based on their workload requirements, simplifying operations and lowering operating costs in the process.

NTNX Chart

NTNX data by YCharts

The hybrid cloud specialist's switch to a subscription-based business model has been paying off nicely, leading to an increase in margins, higher recurring revenue, and a jump in the annual contract value (ACV). As such, it wasn't surprising to see Nutanix crush Wall Street's expectations when it released its fiscal 2021 fourth-quarter results on Sept. 1.

Nutanix's better-than-expected performance has led to a sharp jump in the company's share price, with the stock up nearly 20% since the report. Let's see what worked for Nutanix last quarter and why this cloud computing stock could soar higher.

The subscription business drove a record quarter

Nutanix's Q4 revenue increased 19% year over year to a record $391 million. The company pointed out that this was its fastest pace of revenue growth in the past three years. Additionally, Nutanix's ACV billings increased 26% over the prior-year period to $176 million, which was again a record and the fastest growth clocked in over two years. 

It is also worth noting that Nutanix's annual recurring revenue jumped 83% year over year to $879 million, while run-rate ACV was up 26% over the year-ago quarter to $1.54 billion. For the full year, Nutanix recorded 7% revenue growth to $1.39 billion. All these metrics point toward a bright future for Nutanix sales.

The annual contact value, or ACV, represents the total value of a contract divided by the number of years in the contract, and excludes the money received from hardware sales and the provision of professional services. ACV billings represent the total ACV of all contracts that were billed during the quarter, and they consist of both new and renewal billings. The run-rate ACV represents the sum of ACV of all contracts that were in force at the end of the quarter.

The fact that these metrics grew at a faster pace than Nutanix's actual revenue points to the strong demand for the company's subscription-based offerings, which grew at a terrific pace last quarter. The company's subscription revenue increased nearly 24% year over year during the quarter to $352.2 million, accounting for 90% of the total revenue. Revenue from professional services jumped 83% year over year to $22.3 million.

Two women inspecting a server in a data center.

Image source: Getty Images

Meanwhile, the legacy business -- hardware and non-portable software -- continued to shrink as Nutanix completes its switch to a subscription-based model. These legacy businesses together produced just over $16 million in revenue last quarter, down by almost half from the year-ago period.

Nutanix's top-line growth can switch into a higher gear thanks to its robust subscription pipeline and fast-growing customer base. Nutanix finished the quarter with a cumulative customer count of 20,130, an increase of 16% over the year-ago period. More importantly, the company also witnessed an increase in spending from its customers.

The number of Nutanix customers with lifetime bookings of more than $1 million increased 25% year over year to 1,512. It is worth noting that Nutanix saw a 42% year-over-year increase in the number of customers with more than $10 million in lifetime bookings.

In the software-as-a-service (SaaS) industry, lifetime bookings (or customer lifetime value) refer to the revenue earned from a customer after deducting the amount of money spent to acquire and service that customer. So the increase in this metric denotes that Nutanix customers are spending more on its services, which should eventually lead to an improved top- and bottom-line performance.

Not surprisingly, Nutanix finished fiscal 2021 with an adjusted gross margin of 82.3%, up one percentage point from the prior year. Additionally, Nutanix's customer retention and contract renewals indicate that the company is building a long-lasting customer base. For instance, its net dollar retention rate of 158% for the subscription-based business exceeded the company's expectation of 155%. The net dollar retention rate compares Nutanix's annual recurring revenue (ARR) at the end of a period to the ARR of the same customer cohort at the beginning of that 12-month period.

Why Nutanix will get better

Nutanix's guidance is proof that the company will continue to remain in the fast lane. Management expects ACV billings to fall between $172 million and $177 million in the first quarter of fiscal 2022, an increase of 25% to 28% over last year. That would be a major step up from the 10% ACV billings growth Nutanix recorded in the prior-year period. The ARR is expected to jump 65% or more this quarter over the year-ago period.

More importantly, the potential of the HCI market should ensure sustained growth for Nutanix in the long run. A third-party report estimates that the HCI market could generate $27 billion in revenue by 2025, clocking a compound annual growth rate of more than 33%. Nutanix itself sees an addressable market worth $30 billion by 2025 in HCI.

Not surprisingly, Nutanix estimates that its ACV billings could continue to grow at more than 25% a year through fiscal 2025. What's more, the company expects to bring down its sales and marketing expenses to between 43% and 47% of the revenue by fiscal 2025, compared to 79% in fiscal 2020.

All of this indicates that Nutanix's top and bottom lines will get better in the long run, which is why investors looking to add a cloud stock to their portfolios should take a closer look at this fast-growing company.