What happened

Shares of Nutanix (NTNX -1.17%), the hybrid cloud infrastructure specialist, were surging higher today after the company delivered a better-than-expected fiscal fourth-quarter earnings report.

As of 11:26 a.m. ET, the stock was up 28.8%.

So what

Nutanix, which appears to be wrapping up a yearslong transition from a hardware company to a subscription software one, said that annual recurring revenue rose 37% in the quarter to $1.2 billion. Due to the timing of contracts and shortening contract lengths, GAAP revenue actually slipped 1% to $385.5 million, but that was still well ahead of analyst expectations at $354.9 million.

Other metrics also showed its performance improving as operating expenses fell and free cash flow swung from a loss of $42.2 million to profit of a $23.2 million. On the bottom line, its adjusted loss per share narrowed from $0.26 to $0.17, which easily beat the consensus at a loss of $0.38 per share.

CEO Rajiv Ramaswami said: "Fiscal 2022 was an important data point in demonstrating the long-term benefits of our subscription business model transition. We expect these benefits to compound further in the coming years as renewals become a bigger share of our business."

The growth of subscription renewals should smooth out the gap between revenue and annual recurring revenue and lead to higher profits, as expansions tend to be more profitable than signing up new customers.

Now what

In its guidance for fiscal 2023, management called for $1.77 billion to $1.78 billion in revenue, ahead of the consensus at $1.66 billion, and it sees annual contract value (ACV) billings, its preferred top-line metric, growing 18.7% to $895 million to $900 million. It also expects an adjusted operating margin of 2% for the year, showing it is making the transition to profitability.

Nutanix's stock has struggled over its history, and it's still below its 2016 IPO price. However, it earns high customer satisfaction scores, and its business model finally seems to be gaining traction. The cloud stock has a lot of upside if it can deliver on its potential.