My initial reaction to the press release was a sigh of relief. Then when I started digging into the numbers I felt slightly underwhelmed. And by the time I listened to the conference call, I felt completely excited again.
Net net, they did exactly what they needed to do. It was not a blowout quarter like TWLO (not many are). And it was certainly not a disaster (like NVDA or TLND). But to use baseball parlance, they hit a solid single or double. They exceeded expectations and did exactly what they need to do to continue the path toward $3B+ in billings in fiscal 2021 (which starts in 21 months). If they exceed $3B in billings, with 80% gross margins, on mostly subscription/SaaS revenue, this will easily 2-3x in value. It’s important to repeat the previous sentence, because depending on your investing style, that is a very good return if you have 1-2 years of patience.
Things I didn’t like:
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I continue to strongly believe that NTNX needs a new IR or PR director. Whomever is writing the earnings releases and explaining the financial metrics is confusing people. I understand they are trying to highlight the most positive headlines, but it can come across as defensive and that they are hiding things (which I don’t believe they are). They need to do everyone a favor and just simplify.
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In my opinion, the most important numbers to watch are: billings, deferred revenue, and customer adds. Deferred revenue and customer additions were great (72% growth and 900 new customers). Billings growth was a bit underwhelming, dropping to 50% from 66% growth in Q4 2018. However, it’s important to note that they have mentioned several times that Q1 is seasonally weak, and that there has been lumpiness in the last several quarters, so it’s best to view things 6 months at a time, instead of 3 months, as their business evolves so much. Either way, this is something really interesting to watch, as the law of large numbers is going to battle all these new product releases and new revenue streams. We will see what wins out…
Things I liked:
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Most importantly, they announced the GA of Xi Cloud Services. This is huge, and takes off one of the bigger risks for NTNX. Specifically, Xi Leap could be a gigantic opportunity. I’ve seen TAM estimates ranging from $30-60B for disaster/backup recovery market (Bert used $50B this morning). Just put that into perspective, the entire HCI market is currently in the $5-10B range. Now, there are A LOT of competitors, and NTNX is new to that market, so I don’t anticipate meaningful revenue anytime soon. On that note, I don’t anticipate meaningful revenue from any of their new products in the next 1-2 quarters. But it’s important to note how much of a visionary Dheeraj is, and what he is actually trying to build here (the operating system for the cloud). If even 1 or 2 of these new products takes off (Frame, etc.), plus the hidden growth from hardware pass-through, NTNX is going to meaningfully reaccelerate headline revenue numbers over the next 2-6 quarters.
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After reading and listening to a lot of information about NTNX and their products, I felt like for the first time NTNX very clearly laid out their product roadmap (slide 8): https://s21.q4cdn.com/380967694/files/doc_financials/2019/Q1…
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I really liked that Dheeraj (CEO) and Duston (CFO) both reiterated that they are not seeing any slowdown or market weakness. This is corroborated by several other cloud companies. I think cloud, and HCI specifically have shown strength in the face of minor headwinds in a few other sectors.
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Customer additions were around 900 for the quarter. They have pretty consistently added 800-1000 new customers a quarter, which is extremely impressive.
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Deferred revenue was up 71% YOY and 11% sequentially to $702m
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Gross margins keep rising, now at 78.6%, which still includes pass-through hardware, so should be 80%+ going forward.
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Guidance was very good at $415B at the midpoint, which I’m sure they will exceed.
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Operating Cash flow meaningfully improved to $50B. Free cash flow at $20B.
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And lastly, something that seems somewhat hidden but incredibly important, NTNX believes their recurring subscription business will reach 70-75% of total billings within the next 4-6 quarters. If they accomplish this, plus eliminate all pass-through hardware, that should pretty much remove all doubt that NTNX is anything but a software/SaaS company, and deserves an 8-10 EV/S type valuation for comparable hyper-growth companies.
Like I said above, this was a solid single or double. Nothing earth-shattering, but that is fine for me. Their story is very much intact, and I left the call very excited about the next 1-2 years for NTNX, still fully expecting this to double or triple in 2-3 years. They have the .Next conference today and tomorrow, a number of investor presentations in next 1-2 weeks, and are currently in a seasonally strong quarter. The price has a reasonable floor to protect it (low valuation plus acquisition rumors), and a lot of upside. So at the end of the day, I’m happy with an oversized allocation for NTNX, and have the patience to watch this story continue (albeit a somewhat technically and financially confusing, innovation-filled journey). When all the dust settles in 2-4 quarters, I’m either going to look like a genius or a fool… 
As always, please make your own decisions.
Stephen