Nutanix's Big Transition Is Starting to Pay Off

For years, Nutanix (NTNX 1.26%) posted sluggish top-line growth as the company transitioned to a subscription software model and then shifted its sales focus to annual contract value rather than total contract value, which allows for more upsell and new products.

The fruits of those efforts finally seem to be paying off as the company's fourth-quarter earnings report shows. In this episode of "Beat & Raise" on Motley Fool Live, recorded on Sept. 1, Fool contributors Jeremy Bowman and Jason Hall break down the report and discuss what's next for the cloud stock.

Jeremy Bowman: Let's do a quick hit on Nutanix here. Nutanix, they are a cloud-based software company that enterprises use them for their hybrid cloud tools to move files and applications between public clouds and private clouds. They've had a roundabout history on the market. They started as a hardware company, became an on-premise software, and more recently, subscription software. If you look at their stock chart over the last five years or so, they've been pretty up and down. They get a much lower valuation within than your typical cloud stock.

They have been in the middle of this transition to targeting annual contract value rather than total contract value to get more contract renewals, and that's created some noise in their financial results. A lot of jargon in there. Some numbers from the fiscal fourth quarter, which they just posted. Revenue was up 19% to $390.7 million, so that's been an acceleration from recent quarters, so I think some of the noise that we had seen and the difference between billings and revenue is starting to even out. Annual contract value billings is up 28% to $176.3 million, and run rate annual contract value, that is also 26% to $1.54 billion.

I should also mention that the quarter a year ago, again, we're lapping this pandemic period, I remember that they furloughed some of their, I think maybe their sales force. They were playing the early part of the pandemic cautiously so their numbers might have gotten a boost. The company is still pretty unprofitable, free cash flow widened. The free cash flow loss widened from $13.8 million a year ago to $42.2 million, so that even as they're growing, I think that signals that they're stepping up investments to accelerate their growth. Gross margin, GAAP gross margin was 80%, which is pretty good. To me, this is the kind of company that as they reach scale, a lot of these cloud companies have this high gross margin, you want to see them start to reach scale and hopefully, profitability comes. Nutanix hasn't quite gotten there. I think their former CEO who was the founder of the company stepped down in what might have been a bit of a surprising move. I think that was a year or so ago. This is a stock I did own, I sold it. It seemed like a good turnaround opportunity but it hasn't fully played out yet. I don't know if either one of you guys follow this one, but since letting go, it's a puzzle to me, whether or not it can really deliver on its potential.

Jason Hall: Yeah. Do you think it's the kind of business maybe, and this is something, it's a kind of a philosophical thought that has come up with a few different companies, over the past few months that we've talked about, is this best as stand-alone business or is it a better fit as maybe being part of a bigger company?

Bowman: Yeah, I think that's a good point. It definitely seems like the stock was down for a while and it definitely seemed like it had some acquisition appeal, but the company, maybe this is the thing too. You can maybe see an activist investor coming in and trying to push for it for a move like that. The company they haven't talked about that at all as far as I know. But I think that's a good point. That could play out eventually, I think.