I have probably read, listened or watch 12-15 hours worth of information over the past few days, including every NTNX related post on this board. I have read the earnings transcripts twice and listen to it once. I have watched youtube videos on NTNX software. I have read Bert, Seeking Alpha, and VMWare’s earnings transcript. I have a lot of thoughts floating around in my head and I am not sure that I can clearly communicate them all but here is a try.
If any of you read my portfolio updates you know that NTNX is my largest holding. I bought some more (approximately 3% of my portfolio) at ~37 pre-market after the earnings announcement, before my deep digging. Sometimes when you try to catch a falling knife you get cut.
Right now I am pretty sure (reserving my right to change my mind) I am going to continue with my NTNX investment. I may even add if the price continues to drop. I have not “fallen in love” with the stock. I am a seasoned investor, cutting my losses does not bother me. However in the past I have had a history of being overly patient with certain stocks in my portfolio. That is reason why I spent alot of time researching after this earnings announcement.
Here are some of my thoughts for continuing with my investment.
Q2’s numbers were good, it was a good quarter. It was guidance that stunk. (I will discuss this in more detail later).
I think NTNX is the leader in HCL, it is recognized by both Gartner and Forrester. I think they are an innovative company that produces superior products. I believe there is a demand for these products. I do not believe that is going away.
I think Dheeraj Pandey is special. Many are saying he is not the man for the job because he is a software engineer. Well he has built a very successful software company in a very short time. I think he is a visionary.
Valuation. EV/S is 4.2 (for 2019 sales). Also I do not believe their forward revenue guidance either, like I felt when TWLO low balled. I am almost certain NTNX has as well. Why would they do that? That is a damn good question. This is one of the things I have been trying to wrap my brain around. Here is the only thing I can think of; the companies overly sense of paranoia. Pandey talks about this all the time. They want to be paraniod, they have to be. Well sometimes paranoia makes a mountain out of a mole hill. I believe this is why guidance was so low.
Looking at the numbers. https://docs.google.com/spreadsheets/d/1OYBxb68U1gH3qDVGt69e…
When you look at the Billings and Revenue numbers Pro Services and Hardware are not much of a factor as stated by other posters. The change in Hardware numbers was where the growth was “hidden” on the company. Pretty safe bet to say hardware is going to be around 10% of Revenue number in Q3 and if it were to drop it is suppose to be a good thing right? It would show a continued transformation to software only company.
This link https://docs.google.com/spreadsheets/d/15BOOI343N_abvpGn52ec… shows % growth of Revenues from quarter to quarter.
Subscription anywere from 8% to 24%.
Non portable software from -10% to 9%
Service really is 0% but because numbers so small it ranges 0-14%
Hardware -42% to 19% (negative is a good thing)
When looking at what NTNX sells:
PaaS-AOS, AHV, Prism (all Core), Era, Karbon, Xi IoT
IaaS-Files, Flow, Prism Pro, Volume, Buckets
Saas-Calm, Xi Leap, Xi Frame, Xi Epoch, Xi Beam
It would be super helpful if NTNX were to break this out in revenue and billings numbers. Obviously many of these do not require any hardware sales.
Using the 300 million expected revenue for Q3. Let’s try and analysis the breakdown.
Pro Services is low hanging fruit, it is steady I think 8m is probably the number. That makes it 2.6% of revenue right where it normal hangs.
Hardware is suppose to be coming down, so I would say 7.5% of overall revenue, which would be lowest ever. 22.5m This would be -41% change, definitely much different from the last two quarters but still in the range.
Subscription, one would think with all of the new SaaS software business to existing customers and growth in deferred revenue this would be growing rapidly. I will use 8% revenue growth for subscriptions only, I personally believe it will be above but trying to figure out where the guidance number is coming from. That would be 169.5m. This would make it 56.5% of projected revenue, which is really too high when you look at the percentage tables above. Range last few quarters has been between 26-47%. That’s why I am not certain that Q3 revenue is accurate.
These three would be 8m+22.5m+169.5m=200m. This would leave only 100m revenue for non portable software. If that were the case it would represent a -24% growth from Q2 to Q3. Q1 to Q2 had a negative -10% growth, so this trend would create panic. If the Subcription number is larger which I believe it probably will be then this would have to be even larger negative number or again the guidance is too conservative.
In this scenario I also reduced the hardware signifcantly, if that were to be higher the non portable software number would have to be lower. One could assume that the subscription could be lower, however rev/billings of subscription has been increasing steadily and I do not think likely based on what I know about the company to come in as low as I even projected.
This is why I think the guidance is too conservative. I think NTNX has some softness in sales, but I am not sure I buy the 300m in revenue number for Q3. Of course I could be wrong.
They discussed on c.c. that they will most likely push back the 3B in billings prediction for fiscal year 2021 two quarters, although left that topic for investor day on March 20th. That would put the 3B in billings from half of fiscal 21’ to half of fiscal 22’. That period of time would conclude three years from now. Revenue/Billings ratio has been pretty consistant at 0.81, which is what 3Q guidance is also predicted to be. Three billion in billings would equate to 2.4 billion in revenue.
That gives a current forward EV/S value of 2.3x. The revenue number from Q3 18 thru Q2 19 is 1.2b. So NTNX thinks that it can double revenue in 3 years. That would be 25% growth rate going forward.
This does not include the fact Q3 predicted to be negative growth rate quarter. If you believe they can do it, the growth rate will have to be over 30% after the next two quarters (assumed period of sales corrections). What would the stocks EV/S be if it was consistantly growing revenues at 30%? Some might say that makes it a story stock. Well possibly but NTNX historically has been performing.
Business performance. It now has 12,410 customers around the globe, 779 which have bought at least 1m worth of products. It has a Net promoter score of 90 on a five year average. It customers like what it offers. It is building a nice recurring revenue business. YOY 112%.
Quick action. Being a business owner requires putting out “fires” when they occur. A lot of people were critical of management on the sales issue. However they are already making moves to correct the problems. In fact they announced a new hire two weeks ago that should help with the marketing efforts.
So what don’t I like about NTNX. The fact they do not break out which is recurring and non-portable software sales by product types (SaaS, IaaS, PaaS). I have not seen anywere how much of non-portable software is now tied to hardware sales. I also think that they have not been laser focused and have taken on pursuing a lot of new software opportunities at once. However that is both a strength and a weakness in my eyes. It shows they know where the opportunities are in their business relm.
NTNX is a hard company to follow as they are very technical. I am not in software business, just an investor of software businesses. So like many on these boards I need to study the numbers and follow what the numbers tell me. NTNX is not making following the numbers easy as they could or in my opinion should.
I absolutely do not like how they run their conference calls. They basically destroyed their own stock by the way they handled giving forward guidance. If they could have provided more information on specifically which areas in Q3 were going to be deficient and why, and went in to detail about what was going to be done to correct these issues it still would have been negative but not a 1/3rd drop in the stock price.
From 10K last year (2018)
Further, as we transition more of our business toward a subscription-based model, our revenue may be impacted in the short term. The revenue associated with certain subscription purchases, such as with Nutanix Xi Cloud Services, will be recognized over the term of the subscription resulting in less upfront revenue as compared to our historical software-only transactions. Also, the revenue we recognize from subscription sales, even if recognized upfront, may in some instances have a lower total dollar value than those associated with licenses for the life of the device because they may be of a shorter term than the life of the device. This may also make it difficult to rapidly increase our revenue in any period through additional sales.
Our success also depends heavily on the ability of our sales team to adjust their strategy to focus on software- only and subscription-based sales. Furthermore, our customers may not understand these changes to our product sales, and investors, industry and financial analysts may have difficulty understanding the changes to our business model, resulting in changes in financial estimates or failure to meet investor expectations. As our business changes, the transition may make it more difficult to accurately project our operating results or plan for future growth. Accordingly, you should not rely on our revenue growth for any prior periods as an indication of our future revenue or revenue growth.
I think to say that management was sleeping at the wheel is a bit incorrect. They obviously understand the challenges as you can see from the 10-K. They reported a strong quarter and are guiding what seems to be conservatively while making corrections to their marketing and sales organization. Was it perfect execution, nope but its not priced for perfection either.