When saying concerning not talking in the apocalyptic manner, but as Fish discovered the numbers are not what they seem and it is a reverse hidden revenue scenario.
The big come away number with Nutanix is the accelerated growth of billings for software and support. We all assume that is an accurate representation of software billings as service is lower margin and service derives from software licensing.
The numbers are for software billings growth = 47.6%, nearly 20 points lower than the headline number, or sound 29%.
Support billings growth was 90%!, which made up for the number.
That is a huge disconnect and puts the earnings number, particularly the prime take away headline earnings number in different perspective. I will need to look at the earnings call to see if any analyst caught this and asked about it.
But Fish caught something that Bert missed and it seems that most analysts missed, but the market itself may not have missed.
Nutanix is cheap regardless, but most investors are reacting to the headline 66-67% billings growth on SOFTWARE and support. We just consider support to be ancillary.
Excellent catch. What does this mean for the overall thesis?
Is NTNX still the future of hybrid clouds?
Are they still a better choice technically for the customer than VMWare ?
Since you pointed out that we’re not talking “concerning” in apocalyptic terms, how “concerned” should we be?
Does this disparity change the growth trajectories and/or the future sales assumptions we’ve been making here?
Would greatly appreciate some deeper discussion around this just so I understand. I’m not very good with these subtle nuances in the numbers.
Paul - who has has the “if something seems too good to be true…” feeling creeping in.
For 2018, NTNX did $1.2 Billion in software and support.
They say by 2021, they will be doing OVER $3 Billion is software and support.
That would be a CAGR of approx 40%.
Hence, I do not think this concern about revenue growth % is (or should) be a surprise…we have known this growth rate for quite some time.
IMO, the greater concern about NTNX is that they have moved away from a singular focus of aspiring to be the operating system of the cloud to the “investment” in multiple businesses that are not accretive at this time and for which we have no clear timetable for such:
Such R&D leverage notwithstanding, we you need to invest in the go-to-market machinery of these “apps” in the coming 24 to 36 months. Simply spiffing the current salesforce will only take money out of one pocket and put it into the other.
The revenue from these newer products won’t be accretive until we have talked about their P&Ls explicitly. This is why we’re using an approximate 70/20/10 rule of thumb around capital allocation. That is 70% in our core business, 20% in the transformation of the business into cloud and subscription, and 10% on new products or services that will be accretive to the platform.
From singular focus to multidimensional…some might be concerned about loss of focus.
But as to revenue growth…this has been pretty transparent all along.
Sorry…meant this post for the NPI.
My two cents about the topic, and apologies if I’m off at all (there are much brighter accounting minds than mine on this board). Also, I’m typing this quickly and somewhat stream of consciousness:
Net net, I’m not really concerned. Definitely something to keep an eye on, but not a large concern for me. A few reasons why:
At a very high-level (which is where I like to live as an investor), NTNX is projecting $3+ billion in billings by fiscal 2021 (which starts 21 months from now). They are projecting long-term gross margins of 80%. Does it matter what portion are software vs. support makes up those numbers? Not to me. If they hit $3-4b in billings at 80% gross margins, I’ll be a happy camper…
Because I believe NTNX views software and support somewhat holistically, using terms such as “applied software value”. This also includes very minor professional services ($2.5m a quarter). But these revenue and expense items are mostly to support the software installs, customer service, and upgrades. Said another way, they consider software as 100% gross margin and support as 55% gross margin. Obviously software is not 100% gross margin, so they lump in revenue/costs to the support piece. But I view them somewhat, but not entirely, as related items.
In terms of the YOY change, take what the CFO said from Q3 transcript: “we had a really good quarter in Q2, which brings up a good point guys, we internally now and maybe you want to start doing this also is that we are starting to analyze the business really on a rolling two quarters basis because it’s a lot more insightful…”
If you do so for software billings YOY growth, you get rolling 6 month YOY growth rates for software of 52% and 51%, instead of quarterly YOY rates of 57% and 46%.
It is definitely a good call-out, but not too concerned about it at the moment. Lets keep an eye out for this over the next few quarters though.
90% support growth is an anomaly and not sustainable. What that means is that the 66% billings growth this quarter will be much smaller next quarter and probably more consistent with 47% that software licensing was. With billings growing slower, revenue growth will be slower as well. With the higher number it appeared that revenue growth would be greater than 50%, but that is not the case now unless and until the new products start to deliver in spades.
By my calculation, if billables only grow at 40% YoY Nutanix misses the $3 billion target in their time frame. Therefore Nutanix must believe that revenue growth will remain > 45% for the next two years following this year. I project $1.4 billion this year and from there you need a bit more than 45% YoY growth to get to $3 billion.
At greater than 45% growth to get to the $3B in billings, from $1.2B, that is 2.5x.
The current valuation is really cheap for 45% growth for 3 years.
So in 3 years, at this valuation, its a 2.5x return.
So the main thing we need to watch out for is managements commitment to the $3B.
If they continue to maintain the $3B target, all is good.
A few interesting data points:
They added 1,000 customers in Q4.
New customers made up 30% of total bookings in Q4.
New customers average spending 4x their original purchase in the first 18 months.
They are projecting software & support billings growth of 50-55% in Q1. I’m fairly confident they will beat that number or hit the high end. So a slight deceleration is expected, however we are still talking about 55% growth. For what it’s worth, I don’t think anyone projects them to grow billings at 65% forever.
Longer-term, the HCI market is projected to grow at 40%+ for the next few years. I would feel confident saying NTNX can grow at 40%+ rate along with the market.
With a 9 month forward EV/S of <4.5, lets say they maintain a similar valuation to current (not sure how much lower it could go), that is 40%+ growth rate minimum if you hold for a few years.
Lastly, and this is the big unknown / opportunity, all the past (2018) and immediate growth (fiscal 2019), doesn’t include significant billing contributions from Xi, Frame, Beam, Flow, Sherlock, and Era. Also Files may be set to grow at rapid rates. If Xi or Frame or Sherlock or Beam or Files starts to contribute meaningful revenue in 2019/2020, they may blow away the 40% growth rates. That is what really has me excited. 40% growth is great. It is even better with a forward EV/S of 4.5. If we all could grow our investments at 40% YOY forever I’d take it! But the big opportunity here is the future products! They will probably start contributing meaningful revenue in fiscal 2020 (late 2019).
As always, I could be wildly wrong about NTNX, so don’t take my confidence as truth. LOTS could go wrong with this story. But I believe you have an incredibly de-risked valuation, and upside that is as high as almost any other company in the next few years if it goes right…
Basically, you are betting on Pandey. Can he out innovate the old behemoths? No one is questioning the TAM of their future vision of being the OS of the cloud (at least I don’t think so). So the question is, do you believe they can continue out-innovating…my bet is always on founders / disruptors.
For what it’s worth, they kept saying “at least $3b in billings” on the latest call. I’m fairly confident they are projecting closer to $3.5-$4b in billings by fiscal 2021. They just don’t want to count on revenue from all their new products without seeing actual sales. But hard to imagine one or two of their products don’t contribute to their upside…
Even if only Xi succeeds, watch out. Xi could be huge.
Tinker and Gaucho Chris,
As I remember, you guys had posted quite a bit of good analysis on NTNX over the past few months before they announced their most recent earnings this week.
I don’t think I’ve seen your thoughts on their most recent report (unless I missed them). I for one would be interested in what you thought of their report released earlier this week if you’re so inclined to post them, if not, I understand, no problem.
I’ve decided to hold my position even with Bear, Saul, and others exiting theirs.