NTNX - Billings vs. Revenue

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1

Hi all,

I wanted to chime in on the most recent discussion about NTNX’s revenue growth, and add some semi-relevant / semi-random musings, which applies to many of the companies we follow:

  • Traditional financial GAAP metrics (and reporting) fail to capture the power and health of subscription companies.
  • A quick review of the terminology:
  1. Bookings is the commitment by a customer to spend money with a company, or most often, the total contract value.
  2. Revenue is counted when the service is provided. So if a customer signs a monthly contract for 12 months, revenue is counted 1/12 each month.
  3. Billings is the amount “billed” or invoiced to a customer (e.g. you owe us money within 45 days)
  • To give an example, if NTNX signed a new 24-month contract for $2.4 million dollars tomorrow, for the month of September it would be considered $2.4m in bookings, $100,000 in revenue (the rest to deferred rev), and potentially $2.4m in bookings (this depends how the contracts are written, but for example if it’s invoiced 50% upon signing and 50% after 12 months, $1.2m in bookings in Sept 2018 and $1.2m in bookings in Sept 2019).
  • As you can see, does $100k revenue (or 300k for the quarter) for a $2.4m deal do the new contract justice? No. In my opinion, billings is a much more accurate gauge of the health of subscription companies. It gets much closer to the intention of revenue, which is income generated from the sale of services or goods.
  • Back to NTNX. They are growing software and support billings at 65%+ (two quarters in a row). In a sense, who cares about revenue? It’s a very deceiving metric, and if billings keep growing, revenue will certainly rise dramatically at some point soon.
  • I believe NTNX’s financials are misunderstood by most investors, but as you will see below, this will probably change in the next few quarters.
  • NTNX announced in December 2017 that they were going to eliminate pass-through hardware. We are now 3 quarters from that announcement. In 2-3 more quarters, the bulk of that hardware elimination will be gone, and presumably, we will be comparing apples-to-apples.
  • Mix of software/support to hardware: Q1 2017 (74/26), Q2 2017 (77/23), Q3 2017 (78/22), Q4 2017 (91/9).
  • One other question for the group, is it safe to assume gross margins have more room to rise from 78%, as NTNX still counted 9% hardware in the quarter? Or at least, they have cushion to protect any margin pressure.
  • Either way, there is significant hidden growth in NTNX caused by: the elimination of passthrough hardware, subscription/GAAP terminology issues, and rapid growth of billings & deferred revenue vs. slower revenue growth.
  • Net net, NTNX is in rarefied air, as they are essentially growing their business at 55-65% (billings) with 78% gross margins (and maybe rising), and are trading at a discount to their software peer’s EV/S. Also the HCI market as a whole is expected to continue growing at 40%+ for the next few years, and NTNX is projecting 40%+ growth for the next 2-3 years. This is not a slam dunk, as nothing ever is, but I continue to try and figure out what I’m missing (or if this is just like TTD / TWLO, and time will cure the market’s misunderstanding)…

Stephen

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2

Hi Stephen

Billings for Nutanix is revenue + change in deferred revenue. I’m not sure if it has a ‘proper’ definition, but thats what Nutanix use.

So I think your billings definition is not quite right?

eg: if someone signs a 3-year software contract with Nutanix, then the value of that will be deferred, and part of it recognised as revenue each subsequent quarter.

Billings for the quarter will then be:
Total revenue [current part of deferred revenue + normal revenue]

  • deferred revenue end of quarter
  • deferred revenue end of quarter.

I think Nutanix’s financials are pretty well understood. The analysts seem to be pretty clear on the hardware pass through elimination process, and what it means for margins.

The hardware pass-through is down to 9% of revenue from memory I think.

I think the uncertainty with Nutanix is just the uncertainty around the HCI market, and Nutanix in particular. Will people like Nutanix’s new software products? When will Nutanix start making money? What about VMware? What will the cloud giants do, do they care (they seem to). How long will Nutanix have to continue developing? According to Dheeraj, they’re at the point Microsoft were in 1991, so a lot.

I didn’t understand everything in the reports, but I think the market is really struggling to see the path to profitability, and in particular, how far away that outcome is. Nutanix are definitely not saying.

My 2c.

cheers
Greg

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3

Hi Greg,

You are correct. NTNX defines billings as: “Billings is a performance measure which represents the amounts under binding purchase orders received by us during a given period that have been billed.
Billings is calculated by adding the change in deferred revenue between the start and end of the period to total revenue recognized in the same period.”

The previous two data/SAAS companies that I worked for defined it slightly differently, but either way, I believe the sentiment of billings with NTNX is similar as a more accurate proxy for growth (more accurate than revenue).

Just to reiterate, software & service billings were up 66%, 23% sequentially, and deferred revenue was up 71% YOY. That is serious growth.

In terms of profitability, if billings increase to $3b+ in fiscal 2021 (we are currently in fiscal 2019), with 75-80% gross margins, profitability will not be an issue, but rather a choice (if / when / how much). Like most software companies, expenses are front-loaded, so the real power of each contract & customer should build over time.

Stephen

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4

Hi Stephen,

Wow, that’s a great post and a very easy to understand format! Much better put than I tried to do. ha :slight_smile:

I don’t think you have missed anything at all. I think eventually investors will catch on to the true growth story happening here (bookings and deferred revenue, essentially). Much like Twilio and to some degree, Pivotal.

Best,
Matt

1 Like
5

Does this help?


	Total Revenue	yoy growth	S&S revenue	yoy growth	S&S Billings	yoy growth	Hardware	yoy growth
Q1 2016	88.7            		74		                102		                14.7	
Q2 2016	116.4           		88		                115		                28.4	
Q3 2016	126             		95		                129		                31	
Q4 2016	160.5           		120		                166		                40.5	
Q1 2017	188.6           112.63%	        140	        89.19%	        191	        87.25%	        48.6	        230.61%
Q2 2017	199.2           71.13%	        144	        63.64%  	172     	49.57%  	55.2    	94.37%
Q3 2017	205.7           63.25%	        146	        53.68%  	175     	35.66%  	59.7    	92.58%
Q4 2017	252.5           57.32%	        179.6	        49.67%  	216.3   	30.30%  	72.9    	80.00%
Q1 2018	275.6           46.13%	        195	        39.29%  	235     	23.04%  	80.9    	66.46%
Q2 2018	286.7           43.93%	        209	        45.14%  	275     	59.88%  	78      	41.30%
Q3 2018	289.4           40.69%	        227	        55.48%  	292     	66.86%  	62.6    	4.86%
Q4 2018	303.7           20.28%	        267.9	        49.16%  	359.2   	66.07%  	35.8    	-50.89%
*Q1 2019	310             12.48%	        295	        51.28%  	390.1   	66.00%  	15      	-81.46%*
*Q2 2019	313.5           9.35%	        313.5	        50.00%  	456.5   	66.00%  	0       	-100.00%*
*Q3 2019	340.5	        17.66%	        340.5	        50.00%  	484.72  	66.00%*
*Q4 2019	401.85          32.32%	        401.85	        50.00%  	596.272  	66.00%*
*Q1 2020	442.5           42.74%	        442.5	        50.00%  	647.566 	66.00%*
*Q2 2020	470.25          50.00%	        470.25	        50.00%  	757.79  	66.00%*
*Q3 2020	510.75          50.00%	        510.75	        50.00%  	804.6352 	66.00%*
*Q4 2020	602.775         50.00%	        602.775 	50.00%  	989.81152	66.00%*
*Q1 2021	663.75          50.00%	        663.75   	50.00%  	1074.95956	66.00%*
*Q2 2021	705.375         50.00%	        705.375 	50.00%  	1257.9314	66.00%*
*Q3 2021	766.125         50.00%	        766.125 	50.00%  	1335.694432	66.00%*
*Q4 2021	904.1625        50.00%	        904.1625	50.00%  	1643.087123	66.00%*

CEO said S&S revenue most accurately reflects their growth, so I just took 50% and assumed elimination of all pass-through hardware by Q2 2019, and extrapolated until we got 3 billion of revenue. With this, you reach TTM of 3 billion in Q4 2021 - so they just make it if they maintain a 50% growth for the next 3 years.

This is their target, and the numbers work for them to get there, so fairly simple for us to follow to see if it’s achievable. I don’t really foresee any good excuse for revenue growth to decelerate. If it drops below 50%, that’s a serious red-flag we’ll need to quickly evaluate and jump ship unless there is a really really good reason (by it I mean Support and Services revenue, which will very soon become revenue).

So let’s assume this all plays out like the above. What’s gross margin do we give? 85%?
Gross profit of FY 2021 = 2.55 billion.
Operating expenses increased 55% FY 2016 to FY 2017, and 37% from FY 2017 to FY2018. So let’s be conservative and say that 37% continues. You would hope that comes down as the business scales, but let’s say it doesn’t. By 2021, Operating Expenses = 2.27 billion
Operating Profit = 280 million.

At that point, NTNX still won’t be judged by its profits, but by the revenue and revenue growth. Just wanted to extrapolate the numbers to show profits can happen, for whatever that’s worth. Clearly there’s a battle or major trends going on. There’ll probably be multiple winners. But for just following the numbers method, this is something we can look out for.

For added measure, here’s the history of their Gross margin Non-GAAP:


2014	50%	50%	52%	56%
2015	57%	59%	59%	60%
2016	60%	63%	62%	61%
2017	61%	60%	58.4%	58.3%
2018	62%	64%	68%	77.7%
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6

I think NTNX CEO said $3B in billings not revenue by 2021

7

Hi Karthiko,
This is what the CEO stated.

While both Red Hat and Nutanix leverage open source, at our current pace, we expect to achieve Red Hat-like sales by fiscal 2021 in about half the time it took them because of our emphasis on last-mile problems of enterprise-grade reliability, consumer-grade design, and our innovation in data and orchestration services. We’re also seeing substantial leverage in having a distributed development team around the world including in the United States, India, Germany, and now Belgrade.

So you have to go look at Red Hat’s sales to figure out what he is stating. Red Hat’s sales are approximately $3 billion at this time.

Here is what Duston the CFO stated:

It’s important to note that at a bill-to-revenue ratio of 1.25 to 1.3, Nutanix is on a net basis, deferring a greater percentage of billings than most SaaS companies, including Salesforce, Workday, ServiceNow, VMware, Splunk, and Tableau.

Here is what an analyst stated.

Aaron Rakers

Yes, thanks for taking the question. I do have a follow-up as well. Just building on the last kind of thoughts there, when I think about your $3 billion of billings target looking out to fiscal 2021 or I even think about your outline of investment or capital allocation around 70/20/10, and you think about that 10% of new products and services that should be accretive to the platform. What is the goalpost for you guys in terms of the contribution from them? If I think about that $3 billion, how much of that business do you think could be driven by that new set of product or services?

here is how the CEO and CFO responded.

Dheeraj Pandey

Yes. So, maybe I’ll take a stab and Duston, you should say the same actually. There’s a part of me as an entrepreneur that says, prepare for the worst, be paranoid, these products will help you get to $3 billion at least. And the side of me that’s optimistic that says, then if things are going well, then these new products will go and be accretive on top of the $3 billion. And so I think it’s very early right now. I would rather play the conservative game and say that we have to assume that in a more noisy landscape, the market, these things are actually going to help us get to at least $3 billion with a good amount of effort.

Duston Williams

Yes, I think – just to follow-on there a little bit, and it’s a completely fair question, it might just be a little bit early – an early fair question that – and I think we mentioned in the script there that our next Investor Day, sometime in calendar 2019, we’ll start to give you a feel for how we view our billings path for some of these products going forward.

https://seekingalpha.com/article/4203320-nutanix-inc-s-ntnx-…

Andy

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8

Yes I saw that.

This is what Dheeraj said at the end of his opening remarks
“These incremental investments in our core offerings as well as our growing new product portfolio strengthens our conviction that we remain on track to deliver at least $3 billion in billings in FY 2021.”

Later on Duston said
“Our bill-to-revenue ratio increased to 1.23 in fiscal 2018 versus 1.17 in fiscal 2017…”
“The bill-to-revenue ratio in Q4 was 1.3, exceeding our previous estimate of 1.25…”

Assuming a FY 2021 bill-to-rev ratio of 1.25, $3B in billings in FY 2021 equates to $2.4B in revenue. That is still substantial growth in revenue.

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9

Hi Karthiko,
I contacted NTNX Investor relations and this is the question I posed.

Hello, On the last conference call Mr. Pandey stated " While both Red Hat and Nutanix leverage open source, at our current pace, we expect to achieve Red Hat-like sales by fiscal 2021 in about half the time it took them because of our emphasis on last-mile problems of enterprise-grade reliability, consumer-grade design, and our innovation in data and orchestration services. We’re also seeing substantial leverage in having a distributed development team around the world including in the United States, India, Germany, and now Belgrade." Red Hat has sales of a little over 3 Billion at this time. Towards the end of the call he stated "This is what Dheeraj said at the end of his opening remarks “These incremental investments in our core offerings as well as our growing new product portfolio strengthens our conviction that we remain on track to deliver at least $3 billion in billings in FY 2021.” So my Question is this. Could you please clear these statements up for me please. Are they thinking of having 3 billion in Revenue by 2021 or are they thinking of having 3 billion in billings by 2021.

Here is their response:

Thank you for the question.

We said on our earnings call last week that we remain on track to deliver at least $3 billion in billings by fiscal 2021.

Here is my follow up question:

Hi you also stated that you would have Red Hat sales by 2021, could you please clarify what you meant by that?

I never received a response to that question. So I think it would be best to think of this as billings, as you stated, and not Revenue.

Andy

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10

I’ve gone through Nutanix, and yes it is $3 billion in billings in fiscal 2021. However, although it is just a WAG, I think a median case for Nutanix is they will have $2.7 billion in actual sales in fiscal 2021, and blow through $3 billion the following fiscal year.

So there may not be much difference between Billings and actual revenues in regard as Nutanix is probably being a bit conservative (not like Nutanix to not talk big, but I do think they are confident in the number and they do not wish to create an expectation that they cannot at least meet or beat, thus it is a strong statement, but a bit conservative to their actual expectations).

My opinion anyways.

I am still trying to figure out their current valuation at abut 6.4x EV/S. Note Bert miscarried a one and added $1 billion to the marketcap of Nutanix in his last article. The actually number is $8.9 market, and $8.4 enterprise value.

Either way, a software company growing like this at that multiple…either we are really missing something or we are at a low risk point high return window with Nutanix at present. It may be the official 17% revenue growth that is indicated on Yahoo! That is in reality much more rapid growth. If so, then good to be part of the 1% as all of us here are in regard to our understanding of the market and the companies we invest in.

Words to have tossed back in my face one day, but not this day!

Tinker

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11

I agree Tinker, I think it is mostly the appearance of slower revenue growth on the top line number that is holding the stock back, unless we are missing something. What’s somewhat puzzling is the investors that have the type of money to move this stock, aren’t novice investors and should completely understand the removal of the pass thru hardware. Unless most are quant/robo traders now?

Not sure.

The one thing that gives me a little pause, (and not much of one because I have a full position in NTNX), is I wish the CEO wasn’t so brash with his predictions. He clearly got his billings/sales mixed up on the call, and he is very aggressive with his forecasts. I would prefer he left a little on the table to over deliver. If NTNX has a little hiccup on the sales front, his aggressive forecast might come back to hurt the stock.

If the $3B in billings is achieved, the odds this stock is at least a double from here to 2021 are very good.

Jim

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