NTNX

Investment Analysis Clubs Saul’s Investing Discussions
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Looking at Ntnx’s transcript they are guiding for revenue growth at the high end of $310 million, this will be growth of 12.48% YoY coming down from 34.32%. While it P/S sets at 9.38 this seems a little high for a company growing revenue’s at 12.48%. It’s free cash flow this quarter was actually negative -$9.4 million but for the year they were positive $30.2 million. So while someone might say this is a hidden growth story I would call it a turnaround story. This might just be semantics or it might be two different ways of looking at it. Yes their hardware is going away but their subscription revenue is growing

So why a turnaround. Well in their Q4 18 conference call they stated this:
While both Red Hat and Nutanix leverage open source, at our current pace, we expect to achieve Red Hat-like sales by fiscal 2021 and 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 the United States, India, Germany, and now, Belgrade.

So they expect Sales of $3 billion by 2021 (that is approximately where Red Hat is at right now)and they have sales of approximately $1 billion. So in Three years they expect growth to go up 200%, That would be 67% a year for the next 3 year, but next quarter they are guiding up only 12.48%. So next quarter they will not be out of the woods but after that they should see accelerating Revenue. I can’t see how this stock will not go down in the near term but maybe I am wrong. But if you are planning on holding the stock till 2021 I think you will be happy with the results.

This is where the analyst had it wrong:

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?

NTNX wasn’t talking about billings but Sales, Billings will most likely be much higher than $3 Billion in 2021 if NTNX is correct that Billings will be $3 billion in 2021.

Here is NTNX revenue growth over the years and next quarters projection.


Q117    Q217    Q317    Q417    Q118    Q218    Q318    Q418   Q119
115%    94%     79%     62%     46%     44%     41%     34%    13%

Andy
no position in NTNX

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Hi Andy,

You are definitely forgetting the elimination of pass through hardware, and are not making an apples to apples comparison with that 12.48% revenue growth number.

In fact, the 66% growth the company achieved in software and support billings, was certainly the strongest quarterly result of the year for that metric-and that is the metric that best suggests the success of the company, overall. The fact that the transition to a pure software model is exactly on target. We are seeing accelerating growth.

Nutanix eliminated $95 million of hardware revenues. So, the company’s adjusted growth rate, on an apples to apple basis was about 58%. Again, that is a significant acceleration in growth performance compared to the most recently reported quarters.

The company has also projected growth for support and license bookings to 50%-55% in the quarter.

From the ER:

Q1 Fiscal 2019 Financial Outlook

For the first quarter of fiscal 2019, Nutanix expects:

Revenue between $295 and $310 million, implying software and support revenue growth of approximately 40-45% YoY;

Billings between $370 and $390 million, implying software and support billings growth of 50-55% YoY;

Bill-to-revenue ratio of approximately 1.26x;

First quarter guidance reflects a faster removal of pass-through hardware than originally anticipated, accelerating the reduction of zero margin billings and revenue with the benefit of improved gross margins. Additionally, the Q1 expected bill-to-revenue ratio of 1.26x is higher than street consensus of 1.21x, implying an approximate $12 million in deferred revenue that would have otherwise been in revenue and gross profit.

https://s21.q4cdn.com/380967694/files/doc_financials/2018/q4…

https://ir.nutanix.com/company/press-releases/press-release-…

Not sure how long it will take for analysts/the street to actually figure out whats going on with NTNX, but they are executing really really well, and have nearly transformed their business model from hardware to 91% software in a little under a years time. The company will definitely continue to invest in itself, sacrificing profits, but with the enormous jump in deferred revenue, the bigger deals they keep signing, and increasing margins, I think they will be able to churn out some healthy cash flow at least. I just dont get why they are still trading at EV/S multiples at least 3-4 points lower than other software companies that arent growing as fast as they are.

Best,
Matt

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Hi Rob,

You are definitely forgetting the elimination of pass through hardware, and are not making an apples to apples comparison with that 12.48% revenue growth number.

No Rob I mentioned it here.

Yes their hardware is going away but their subscription revenue is growing

Not sure how long it will take for analysts/the street to actually figure out whats going on with NTNX, but they are executing really really well, and have nearly transformed their business model from hardware to 91% software in a little under a years time. The company will definitely continue to invest in itself, sacrificing profits, but with the enormous jump in deferred revenue, the bigger deals they keep signing, and increasing margins, I think they will be able to churn out some healthy cash flow at least.

That is exactly my argument Rob. What you are talking about is a turnaround and not looking how the business as a whole is performing. It’s like someone having a small part of their portfolio in really strong growth stocks saying look I am growing my portfolio 100 percent a year but having the majority of their portfolio in index funds that are chugging along at 10 percent a year. (That is an analogy not strictly representative). In order to look at this you have to look at the whole investment Rob, next quarter they are stating they will only be up 12.48 percent, I do not know what they will say it will be in Q219 but it will take time for this to move forward.

I just dont get why they are still trading at EV/S multiples at least 3-4 points lower than other software companies that arent growing as fast as they are.

I believe the reason is because of exactly what I have stated. How much would you pay for a company growing 12.48 percent a year? I would only pay around a P/S of 5 so you could say it is overvalued. But in a year or so the growth has to accelerate in order for them to reach sales of 3 Billion in 2021. That is when you will see a P/S of around 18 to 25 because the growth will really shine through. A turn around doesn’t deserve a high P/S until it’s turned around. NTNX is guiding for still lower growth.

Take care Rob and thanks for your thoughts.
Andy

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What you are talking about is a turnaround and not looking how the business as a whole is performing. It’s like someone having a small part of their portfolio in really strong growth stocks saying look I am growing my portfolio 100 percent a year but having the majority of their portfolio in index funds that are chugging along at 10 percent a year.

Andy, not to overly belabor something, but I know you are a smart guy, and I like you, and I know you can get this. Please try to think about what I’m about to say with an open mind. What Nutanix is eliminating (the hardware) is NOT part of their business. It was zero-margin hardware that Nutanix just passed through to customers to help Nutanix make their software sale. Zero margin! Now Nutanix is referring the customers to the partners who were providing the hardware before, or similar partners, for the hardware.

In the past they counted this pass-through, zero-margin hardware in their total revenue, but it really wasn’t “revenue” for them. Now they are no longer counting it, so it looks like revenue growth is falling, but it isn’t. Their own revenue (with 75% margins instead of zero margins) is up like 60%, or more. Their own software business is now 95% of their business, not a small part of the business. They’ve gotten rid of almost all the pass-through hardware. The problem is that they still have to compare with the same quarter a year ago when they were still counting the hardware, and that is why the growth looks low.

There’s a reason that Nutanix is up 162% since I bought it 10 months ago.

Best,

Saul

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Andy, not to overly belabor something, but I know you are a smart guy, and I like you, and I know you can get this. Please try to think about what I’m about to say with an open mind. What Nutanix is eliminating (the hardware) is NOT part of their business. It was zero-margin hardware that Nutanix just passed through to customers to help Nutanix make their software sale. Zero margin! Now Nutanix is referring the customers to the partners who were providing the hardware before, or similar partners, for the hardware.

Saul,
I am no where as smart as you and I have read everyone of your posts about them eliminating their hardware and I agree, they are eliminating their hardware. But what I think you all are glossing over is that they still have to compare earnings to previous quarters where there hardware was more a part of their business. This is all driving down their revenue. What surprises me Saul is that you are calling this anything but a turnaround. We just do not know when they will be able to start growing Revenue’s again. The company says they will grow Revenue by 200% by 2021. That is great but while the Revenue is still dropping I would rather stay on the side lines. Could they guide for higher revenue next quarter? I think it is very possible.

In the past they counted this pass-through, zero-margin hardware in their total revenue, but it really wasn’t “revenue” for them. Now they are no longer counting it, so it looks like revenue growth is falling, but it isn’t. Their own revenue (with 75% margins instead of zero margins) is up like 60%, or more. Their own software business is now 95% of their business, not a small part of the business. They’ve gotten rid of almost all the pass-through hardware. The problem is that they still have to compare with the same quarter a year ago when they were still counting the hardware, and that is why the growth looks low.

Ok that is something I didn’t know and that makes it more Tricky because as you can see the Revenue has been dropping which obviously scared the street. Going from 30% growth to 12% growth is quite a drop and not everyone is going to know what you know Saul. Ant could be right that the next quarter will be the start of them showing growth.

There’s a reason that Nutanix is up 162% since I bought it 10 months ago.

I am happy for you Saul.

Thanks,
Andy

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Andy, think of this in comparison to Square. Part of the fee they collect for processing payments is the fee that is owed to Mastercard or Visa. GAAP rules require them to include this in their revenue statements because it is money they are taking in. But, they know this is purely pass through and doesn’t reflect actual revenue to Square, so they tell us separately what their revenue is with the pass through eliminated.

The same thing is happening here except that Nutanix decided to actually eliminate the pass through part and have their customers get the hardware from other sources. Obviously, this is going to make a big short term drop in their apparent revenue, but the pass through part was never real revenue. One has to look separately at the software part alone and that is growing.

You can think of it also like some company that had two divisions, one profitable, the other just breaking even at the bottom line, although it was bringing in significant revenue. While they are together, the revenue of the company is the total of the two divisions. If they then sell off the break even division or split it into its own company, then the total revenue of the company is going to make a big short term drop, but the profit percentage is going to go way up and, assuming that the revenue of the remaining division is growing, we will be able to see that more clearly.

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The same thing is happening here except that Nutanix decided to actually eliminate the pass through part and have their customers get the hardware from other sources. Obviously, this is going to make a big short term drop in their apparent revenue, but the pass through part was never real revenue. One has to look separately at the software part alone and that is growing.

That is helpful Tamhas thanks.

Andy

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Said another way, how is what’s happening with NTNX cutting out its zero margin hardware any different than Twilio (TWLO) when they lost a substantial amount of revenue (and profit) in the past from Uber cutting ties with them?..Like TWLO (minus Uber), NTNX (minus hardware) has continued to grow their rate of revenue increase in spite of this.
TWLO lost profit and revenueand the stock price has appreciated handsomely, whereas NTNX lost only revenue with zero profit attached to the elimination of the hardware pass through. Once the market “gets it,” I’d be surprised if we don’t see a similar we pop in the stock price of NTNX…But I’ve been surprised before. Just my $.02.

sjo

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Ok that is something I didn’t know and that makes it more Tricky because as you can see the Revenue has been dropping which obviously scared the street…

Andy, I promise this will be my last post on this thread. I promise!

Revenue has NOT been dropping. The rate of revenue increase has been dropping, but revenue has continued to increase in spite of them now not counting hardware that they were counting in the year ago quarter that they are comparing to. And that’s because their actual business is growing so rapidly.

As far as the street being scared, that’s why I pointed out that Nutanix was up 162% since I bought it 10 months ago. The rate of revenue growth has been falling for the entire 10 months. Does 162% rise in the price of the stock seem as if the street is scared? Big deal, they dropped 6% after earnings. On Thursday before the drop they were up 183%. Does that sound as if the street is overly concerned about the rate of revenue growth?

What surprises me Saul is that you are calling this anything but a turnaround…

Companies that are growing their own revenue at 50% to 60% or more are not turnarounds. Companies that have grown the stock price over 160% in less than a year aren’t companies where people are waiting for a turnaround.

We just do not know when they will be able to start growing Revenue again…

Sure we do. First of all, they ARE growing revenue, as I pointed out above. It is the rate of growth that has decreased. Secondly, they told us when they started eliminating the hardware about a year ago, and each quarter as they eliminated more. They’ve now eliminated more than 90%. This last quarter and the next they will have big spreads between the hardware they counted a year ago (most of it) and what they are counting now (almost none of it). After that, the tiny amount they are counting now will not move much but the comparisons will get better and better as the amount they counted in the year-ago quarter will get smaller and smaller, so they will not be comparing against extra hardware from a year ago. They’ll be comparing apples against apples again and revenue growth will be 50% or more if they are still growing their software sales at the same rate as now. Period. Sorry for bothering you with this.

Best,

Saul

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Hi Saul,

As far as the street being scared, that’s why I pointed out that Nutanix was up 162% since I bought it 10 months ago. The rate of revenue growth has been falling for the entire 10 months. Does 162% rise in the price of the stock seem as if the street is scared? Big deal, they dropped 6% after earnings. On Thursday before the drop they were up 183%. Does that sound as if the street is overly concerned about the rate of revenue growth?

That makes sense Saul, I knew you had done well in NTNX and I wasn’t being sarcastic when I said I was happy for you being up 162%, I really am happy for you, that was a great call.

Companies that are growing their own revenue at 50% to 60% or more are not turnarounds. Companies that have grown the stock price over 160% in less than a year aren’t companies where people are waiting for a turnaround.

That is a great point Saul and is true, I just didn’t think of it that way. Matt (XMFBreakerForce) explained it to me but it just didn’t sink in, now I see your point.

They’ll be comparing apples against apples again and revenue growth will be 50% or more if they are still growing their software sales at the same rate as now. Period. Sorry for bothering you with this.

Your not bothering me Saul, you are educating me, this is what this board should be about. Discussing stocks and ideas and trying to find good investments. All without the petty bickering.

Thank you,
Andy

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Just have to say that this thread is a perfect example of what makes this board so great.
One person’s concerns, discussed in a polite, and concise manner, without a lot of jibber jabber.
Helped me as well to better understand this company.
Thanks to Saul, Andy and everyone who contributed.
Mike

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