Let me get it out of the way. I apologize if any of my previous writing helped persuade people to take positions in NTNX. I can assure you, I feel plenty bad myself, and was quite blindsided with yesterday’s earning report. Unfortunately, sometimes these things happen. It helps to have most of your other stocks sky rocketing, but still stings very badly, as it was my second largest holding and I had a decent amount of options on the position.
However, I wanted to take a few minutes and share some thoughts on the current quarter, signs I may have missed, and what I am doing now:
Thoughts on Q2 2019 Earnings Report:
- Without rehashing much of what has already been written, I thought the current quarter was okay, not terrible, but not good. Among the most important metrics I track: S&S revenue growth (42%), S&S billings growth (37%), deferred revenue (63%), and new customer additions (almost 1,000). Obviously S&S billings dipping under 40% in a seasonly strong quarter is concerning. I did like the deferred revenue and customer additions though, and think 12,000+ customers is an incredible base to sell into.
- I agree with Dreamer and others, if I had to make a guess as to the real problem, I believe they drastically underestimated the complexities of selling a host of new products. It’s confusing to investors, and I’m sure to new sales targets. Having seen it first-hand, when the sales team isn’t extremely focused, well, “chaos will reign.” And to go a step further, this means their is a management issue. Of course, that ultimately goes to the CEO, but to be fair, sometimes companies stumble, or have the wrong person in the wrong role. How quickly they can adjust/adapt is the true testament of great leadership.
- I was a bit annoyed / confused about the lead-gen excuse. First off, they added 1,000 new customers, unless this number has fallen off a cliff in Q3, that demonstrates some pretty solid lead-gen. If they’re referring to cross-sell / up-sell opportunities, that is management’s fault plain and simple, and not something an extra $20m can solve in one quarter. Again, if I had to bet, what they realized is that they need to further differentiate the sales team by products, even within accounts. No one account executive can sell 10+ different products into an organization.
- Lastly, Dustin and Dheeraj sounded quite dejected on the call. Part of it is explainable, but another part of me went somewhere else very quickly. It’s probably just my own cognitive bias, but I’m wondering if part of their feelings were a realization that changes may be on the horizon. Either a new President / COO, or more so, that this will give the board an opening to potentially sell the company. Again, it’s easy to hold off takeover offers when the stock is rising and the company is executing perfectly. It’s much harder when the company could use some sales help and more customers. This was just a fleeting thought I had, but I will keep an eye on this in the next quarter or two.
This section is mostly for myself, but there were a few small signs that I overlooked, that in hindsight seem more ominous than innocent:
- NTNX was not comparing apples-to-apples in the title of their press releases. I know this seems small, and at the time I attributed it to the hardware/software and subscription transitions, or just a style choice to highlight different things, but they kept moving the goal posts in their press releases. Let this be a warning sign going forward that if a company is not highlighting the most important metrics consistently, they may be trying to divert attention.
- NTNX lost two founders in the last two years (Mohit Aron and Sudheesh Nair). Particularly, Sudheesh Nair, who was President, and presumably his absence left some pretty large holes to fill.
- Complexity of a sale: This is an important topic, and probably deserves its own post someday, but one of my biggest takeaways in the last few months is adding as a criteria, ease of sale. Specifically, how easy is it for companies to setup a new customer and expand with the same customer. Said another way, not all hyper-growth is the same. That is quite obvious with hardware vs. software, and even SaaS vs. non-recurring, but even within SaaS I’m now going to pay more and more attention to this difference. NTNX, as many have pointed out, is not an easy initial setup. And potentially involves hardware (or hardware adjustments) to expand for many of their products. This differs drastically from TWLO or TTD, which involve very little incremental setup to expand within an account.
- Given all of the above, this may surprise people, but I didn’t sell a single share today. In fact, I added slightly for a short-term trade (I know, I’m insane, but the price action is incredibly oversold). That being said, I have every intention of reducing this to a medium-sized position in the next few months as the opportunity presents itself. Today, was capitulation, with people just exiting the position out of disgust. It traded 20x normal volume.
- If you remove all the emotion, and all the anger at management (which I’m plenty upset with), you still have quite an under-valued stock. Yes, yes, everyone trades on different metrics and for different time horizons, but this is STILL a company which should hit $1.3-1.5b in sales this year, trading at a EV of $5.5b. That’s a EV/S of <4. And before the chorus of posters ready to puke all over their keyboards as I call NTNX “under-valued”, I’m bringing it up mostly in the context of having acquisition potential / a floor to the share price.
- I know Saul advises to move on immediately, and who am I to question him, but I’ve always tried to wait for an appropriate exit. I think the stock will bottom, rebound back into its previous trading range of $36-46, and stay there until something material changes (Q3 or Q4). So…that’s what I’m doing, I’m going to start slowly reducing my position from a Tier 1 holding to a Tier 2 or 3 status (depending on how Investor Day goes on March 20th).
If I wasn’t clear enough up top, I apologize for being wrong on this one. I guess you can’t win every bet. And this was a nice stomach punch to knock out some much-needed humility.
Lastly, if this wasn’t a good enough reminder, please don’t follow my thoughts, or anyone else’s for that matter. They are only one man’s opinion. Please do your own research, make mistakes, feel the pain of those mistakes, and hopefully never make them again! At least that’s what I’m telling myself on a sad Friday.