Nutanix: Customers & Offerings

[PaulWBryant]

Nutanix is difficult to grasp. It just is. I don’t know whether or not to trust them, because I’ve been burned by complex stories recently, like Pivotal and Talend. Nutanix seems to do similar “tricks” with the numbers, but maybe they’re above board. I just have a lot of questions. Some don’t really have answers other than the obvious, like “Why did they increase SBC so much when revenue was almost flat sequentially?” But others…we should be able to figure out. I came up with questions under 2 big headings: customers, and pricing. Can anyone answer them?

Customers

1. Who are their customers?
2. How big are their biggest customers? Smallest customers?
3. What does a Nutanix customer look like? (How many businesses need Nutanix?)
4. How much are all these new customers spending?
5. How much are their top and bottom customers spending?

Offerings: Pricing & Products

1. How does their pricing work? (Just a simple answer, if possible, like “Wix sells subscriptions which increase in $/mo. as customers want to use more of their offerings” or “Twilio gets paid a fee per-use, when customers use their platform. (ratable revenue).”
2. How does/did it work with “non-portable” software, and how does it work with SaaS? (Why was billings down sequentially? Especially when recognized hardware revenue was roughly the same as last quarter.)
3. What’s the segment revenue breakdown on their products? Do the other products besides Acropolis even make a dent?

This stuff really matters! With Talend I thought the story was “they sell subscriptions to data integration cloud and on-prem deployments.” But the real story was, “they mainly sell on-prem Hadoop integration deployments – that no one is buying anymore! They also have a tiny cloud segment that is 14% of total revenue but that is growing fast and that they hope is becoming their future.”

Thanks! In order to get back into NTNX, I need answers to these questions that I, a non-techie, can understand. I appreciate any help anyone can offer.

Bear

[Darthtaco]

The easiest way to visualize the answer to most of your questions is to look at their “highlights” data sheet.

https://s21.q4cdn.com/380967694/files/doc_financials/2019/Q1…

3.6 years is average customer contract length for subscriptions.
11,490 total customers
714 with lifetime bookings >$1M
880 new customers in quarter

“In this quarter alone, we closed 63 deals worth more than $1 million and 3 deals worth more than $5 million, and we now have 15 customers who have lifetime spend of more than $15 million, and more than 700 customers with a lifetime spend of more than $1 million. In fact, when you look at our customer base, we have seen 83% year-over-year growth in customer with a lifetime spend of $3 million to $5 million, and 111% year-over-year growth in customer with a lifetime spend of more than $5 million.”

“AHV was a decision factor of one of America’s leading operators of general acute care hospitals, our second largest deal of the quarter, which was more than $5 million. This healthcare provider will expand deployment of our platform to support its field facilities, all using AHV virtualization.”

They also highlight how a government customer landed with their core product and then has been expanding into licenses for additional servers and then started using other Nutanix products resulting in millions in bookings. And many more examples of their land and expand process at work. The conference call has a lot of info on who customers are, how much they spend, and what kind of product mix they are starting with and expanding into.

Customers typically buy licenses for products and pay up front for multi year contracts which has given Nutanix a massive pile of deferred revenue to be recognized over that average 3.6 year period.

That’s a start at least to answering some of those questions.

Darth

[Oforfive]

Darth,

If I remember correctly, and if I read the 10k correctly, there seems to be a disconnect between the 3.6 years average contract length and the balance sheet that shows over 50% of the deferred revenue being “current”. Have read about bookings, billings, revenue, deferred and THINK I understand. Not too difficult, but I must be missing something. Have been meaning to post about this for awhile so taking this opportunity.

KC

[Darthtaco]

KC,

Forgive me but I’m not really sure what you’re getting at. “Current” is short term expected to be recognized over the next 12 months.

The 3.6 years is specifically for the recurring subscription contract side of revenue. They state it is measured as the average contract length entered into over trailing 4 quarters.

If you look at the deferred revenue slide from earnings presentation:

https://s21.q4cdn.com/380967694/files/doc_financials/2019/Q1…

They show total deferred revenue. They further provide the break down between short and long term deferred revenues. Notice the $307M ST is what is shown on 10-k as “current”.

One thing Nutanix seems to be doing is laying it all out there. They provide more information upfront than most companies I’d say. Probably because their changing way of reporting could be confusing without it.

As for accounting, when a company like this with a subscription bills a customer say for three years for a software license. They usually don’t take the total and divide by 3. Usually the initial purchase is the larger of the 3 recognitions because it involves the purchasing of the software as well as the first period of the subscription services. Further it may not be recognized 3 times it could be recognized monthly further dividing the pies up, but still the initial purchase recognition would be the largest of them all however it is that it is sliced up.

All of that can get very complicated and I’m not sure I need to know too deep down into that. All I need to know is that Billings run about 1.22-1.25x revenue and that they continue to build a pile of deferred revenue.

Darth

[mekong22]

disconnect between the 3.6 years average contract length and the balance sheet that shows over 50% of the deferred revenue being “current”

KC - if I read your comment correctly, I think you might be assuming that 100% of the contract value is always paid up front on day 1 when the deal was signed. If that happened for all customers, then yes, the current portion of the deferred revenue would only be about 25-30% of the total, based on the 3.6 year average length.

But I think the payment terms vary by deal and, while some might pay for multiple years upfront (hence there is some non-current deferred), others pay annually or regularly over an even shorter period of time repeatedly throughout the contract term. Which is why there isn’t more non-current deferred revenue

-mekong

[Phoolio18]

Bear,

From the Q&A portion of the call, here’s a snippet on your Billings question.

Katy Huberty

Understood. And Duston software and support billings came down a bit this quarter. Is that just new seasonality as the business scales or was there some impact of the subscription transition in the quarter, if so, how much?

Duston Williams

Yes, no, there really wasn’t any impact to say on the subscription piece. Actually, when you look at the length of these new licenses, the $20 million, it’s slightly higher than the 3.6 average. So, there really wasn’t any tilt to one year or anything like that in that. But we had – just looking and addressing billings in total, we had guided billings down actually in Q1, we came off a really strong Q3, a really strong Q4 into a seasonally soft Q1 so that we had guided $370 million to $390 million of total billings and obviously we came in at roughly $384 million, so close to the top end of that range. So, it was kind of as expected there and the pieces kind of fell off as they did.

Certainly something to keep an eye on and may be a big factor in why the market doesn’t like Nutanix right now. The QoQ growth has slowed substantially as well over the past two quarters. Though Q4 did see nice sequential growth.

Nutanix doesn’t give us a product breakdown, but we do know they are coming out with many new offerings for customers progressing through to full utilization. While it remains to be seen how these will work out, I remain optimistic based on management’s historical track record producing great products that customers love.

A.J.

[Oforfive]

Mekong, Darth

KC - if I read your comment correctly, I think you might be assuming that 100% of the contract value is always paid up front on day 1 when the deal was signed. If that happened for all customers, then yes, the current portion of the deferred revenue would only be about 25-30% of the total, based on the 3.6 year average length.
Mekong. “When the deal was signed” is bookings, not billings. Billings are either accounts receivable or money in the bank. That’s why they are on the balance sheet. No?

Darth. Forgive me but I’m not really sure what you’re getting at. “Current” is short term expected to be recognized over the next 12 months.

The 3.6 years is specifically for the recurring subscription contract side of revenue. They state it is measured as the average contract length entered into over trailing 4 quarters.

My point is that the thesis here for SAAS companies is the advantage over hardware companies that have to sell as much as they did last year and then MORE to achieve growth. The 3.6 years average contract length doesn’t mean 3.6 years of of revenue pouring into the P/L. If we took a little bit longer view (one year versus one quarter) we would see that over half of the deferred revenue disappears for the next FY and must be replaced by new orders. The weighted “average” contract length must be more like 2.3 years. The reason I started the head scratching was the target of $3B billings and then dividing by 3.6 years and the annual revenue is less than $1 billion. I was missing something. You have provided the necessary key which is that some portion of the deferred revenue isn’t really deferred (beyond a few quarters) and that this might be the software itself. Only the service portion is meaningfully deferred. NTNX needs to go out and sell more software next year. Of course some of this is new features or use cases for existing customers and not greenfield sales, thus an easier sale. They buy more because it works for them.

I think my head is now wrapped around issue.

Thanks,

KC

[Phoolio18]

KC,

You have provided the necessary key which is that some portion of the deferred revenue isn’t really deferred (beyond a few quarters) and that this might be the software itself

Yes, and this may be part and parcel to the new accounting rules around revenue recognition (606) that moved a larger percentage of recognition forward. However, services only account for a very small piece of the pie. $7.2M this quarter. So there is still quite a bit of the software yet to be recognized over the contract life.

A.J.

[Tamhas]

My point is that the thesis here for SAAS companies is the advantage over hardware companies that have to sell as much as they did last year and then MORE to achieve growth.

Understand that there is a tradeoff here. For a software company working under the traditional model, one gets a large payment up front … or more less up front, since it is often phased into so much on signing, so much on installation, and so much 90 days or whatever later on acceptance … and then one, hopefully, gets an annual maintenance of something like 20%. There also may be highly variable customization costs … I have had customers who spent many times the cost of the original software in customization exactly because the ROI of those customizations was high because my development costs were so low.

So, let’s suppose a package with a traditional up front cost of $500,000 plus 20% per year for 5 years making a total outlay, exclusive of customizations of $1,000,000. The traditional vendor is going to book $600,000 in the first year and $100,000 in each of the following years. The SaaS vendor is likely to price their product to return the same income in 4 or 5 years, so they will book $200,000 to $250,000 per year. Thus, for the first year they are booking much less, but in following years they book more from this customer. The real magic comes after the 4th or 5th year when they keep booking the higher amount when the traditional vendor would still be booking only the maintenance.

If company starts with SaaS pricing, they can just grow with no issues, but if they start with traditional pricing and convert to SaaS, then they are going to have a first year hit of missing that big up front booking, but gradually they will be ahead.

[Darthtaco]

More detail on the how Nutanix earns revenue question from the 10-Q.

http://d18rn0p25nwr6d.cloudfront.net/CIK-0001618732/615a1392……

-Revenue primarily generated by the sale of the enterprise cloud platform.
-Consists of software preinstalled on the appliance, Nutanix branded or from the multiple OEM partners discussed in other threads. Or by software only sales to be used on customer provided certified hardware.
-Typically purchased with 1 or more years of support and entitlement. This includes rights to software updates, upgrades, enhancements, and technical support
-Some Revenue From Hardware Sales still counted but largely eliminated
-Professional Services which includes consulting and training and certification

Non-Portable Software($147M +15.5% yoy)
-Consists of those software sales preinstalled. License is same as for life of device. Revenue recognized at time of transfer of device to customer.

Portable Software($127M +104% yoy)
-Software entitlement and support subscriptions, Cloud based SaaS offerings, and separately purchased software term-based licenses. The first two represent $83M (+62% yoy)and are recognized ratably over the contract period. The latter ($44M up from $11.3M in year prior) is recognized at the time the software is transferred to customer. The weighted trailing 4 quarter average is 3.6 years.

Contracted Not Recognized revenue which consists of Deferred Revenue Plus other non cancellable amounts and excludes any revenue subject to cancellation terms is $719.7M. 45% of that or $323.8M of that is expected to be recognized over next 12 months. Remainder after that.

[Darthtaco]

2. How does/did it work with “non-portable” software, and how does it work with SaaS? (Why was billings down sequentially? Especially when recognized hardware revenue was roughly the same as last quarter.)

This is a great question regarding Nutanix. To start with “non- portable” is revenue recognized when an appliance is sold to the customer. It can be Nutanix appliances supplied by Super Micro or Flextronics or any number of OEMs like Dell, Cisco, HPE, etc. It is the software license that is issued that is equal to the expected life of the device. The customer at the end of that life has to buy a new device or renew the software license. Nutanix has officially greatly reduced the revenue from their sale of the hardware, which they consider commodity pass through revenue, to only report the software sales of their enteprise OS.

When that device is bought or renewed they also buy support for it over one or more years which is recognized in the subscription revenue side. Now alternatively on those devices or the customers own certified device, that same Enterprise OS can be sold as a subscription. This is counted in the subscription revenue. Subscription contracts include the same support and entitlement but is included in the billing as opposed to support and entitlement sold separately from the device.

On top of this subscription OS and support entitlement is their SaaS offering. Nutanix Core enterprise software, including the HCI hypervisor Acropolis and Management tool Prism is not SaaS. Those are the Nutanix Core software that is either bought as a license or subscribed to. The SaaS offerings are either new or very new offerings like all of the Xi products or things like Buckets, Prism Pro, Calm, Flow, Files, etc.

The SaaS offerings they include in product breakdown is included with the Support and Entitlement Offerings totaling $83M in most recent quarter. Based off historical reporting I believe the SaaS portion of that to be substantially less than $83M because of past reporting of the Support and entitlement revenue. Nutanix does not breakout SaaS revenue. SaaS is likely to be in single or low double digit million revenues. But Xi is just launched and is likely to be a huge growth driver.

Of note is the transition to software subscription to the Nutanix Enterprise Core products which represented $11.1 million a year ago according to 10-q. This is now $44M or almost 4x a year ago. Subscription license is the future of Nutanix but will impact the future of those non-portable sales, which for the first time were exactly flat sequentially. Probably can expect this trend to continue with this subscription growing substantially partially offset by a reduction in non-portable. This will mean high growth in subscription revenue and decreasing non-portable revenue. I expect the difference to result in substantial overall growth for Nutanix.

To the second part of that question. Yes Billings declined from prior quarter. This is in part due to higher dollar amount of eliminated hardware revenue and also due to seasonality and product mix. As much as Nutanix wants to be a software only company, a very large part of their revenue depends on the sale of new Nutanix OS branded appliances, whether one time licenses or a subscription contract.

However, as investors we look forward and we have to look at guidance. Guidance for next quarter is $410M to $420M in total billings. This represents 8% to 9% sequential growth. Software and support only billings would see 9%-10% sequential growth. So as far as forecast go sequential returns to upside. For software and support, which includes pro services, those numbers represent between 39%-40% yoy growth. Software and support revenues come in close to those percentages.

On deferred revenue another point is growth of that revenue expected to be realized over next 12 months. This is directly related to the growth in subscription licenses, support and entitlements, and SaaS. A year ago Nutanix expected to realize $216.8M of their deferred revenue over the next twelve months. As of the most recent quarter they expect to realize $323.9M over the next twelve months for a 49% increase due to contractual deferred revenue. This is money already in the bank to be realized.

Sorry if people are tired of Nutanix, I just find their story very interesting. And they provide so much information it’s easy to go down different rabbit holes that are different than other companies. The thesis comes down to if you think they have dominance in the growing HCI field, which they do based off market share, and they will capitalize on the change to subscription software and the green fields in SaaS.

Darth

[Phoolio18]

Software and support only billings would see 9%-10% sequential growth.

Darth,

Thanks for the posts on Nutanix. Can I ask where you are getting the above from?

Thanks,
A.J.

[Darthtaco]

S&S billings were $351M last quarter. Total billings were $384M. Hardware was approx 8% of total billings per those numbers and management comments on CC. Management says hardware billings will be somewhere between 5-10% of total going foreword so I applied same 8% to forecast of $410-420M. Midpoint to top comes to 9-10% over $351M

Those are the assumptions.