One Thing the Market Could Be Seeing (NTNX)

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So as a lot of people on this board, I’ve been skeptical about the general consensus that Nutanix is a buy and yet the stock continues to tank.

Granted, tech has gotten hammered as of late, but the stock is off about 40%. So what gives?

I can’t add much new material to the mix. Tinker and many other posters have covered the technology/ risks quite well per usual.

But here’s one thing. The billings/revs number everyone cites, the 66% growth, includes software and support. This second piece, the support, is much lower margin, about 50%. So what I decided to do was ferret out the software-only sales to see how the growth rates were looking. What resulted made the market’s reaction make a little more sense.


**Just Software Billings**						
	Q1	Q2	Q3	Q4
2017	105.6	102.2	100.7	129.8		
2018	138.6	149.5	158.0	189.6

**YoY Billings Growth - software only**
2018	31%	46%	57%	**46%**

**Sequential Billings Growth - software only**
2017    NA	-3%	-1%	29%
2018	7%	8%	6%	**20%**

**Just Software Revenue**	
2017	104.0	101.5	100.9	128.5				
2018	137.8	146.2	156.3	188.3	

**YoY Revenue Growth - software only**
2018	33%	44%	55%	**47%**

**Sequential Revenue Growth - software only**
2017	       -2%	-1%	27%
2018	7%	6%	7%	**20%**

Ok, ok, ok. I know it’s only one quarter. But this could be what the market is seeing. When isolated, it looks like a sizable slowdown.

Here’s the deal. I’m no Nutanix bear. It’s a big position for me like so many here. I just want to cover everything. I’d love to hear thoughts because there might be a good reason for this software-only slowdown.

Still, with almost 50% revenue growth in software only sales, for less than 5x EV, I like the risk/reward. But I thought it might be a good exercise to go through this.

Best,
Fish

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Fish,

If that software billings number is correct (excluding support) that is a big issue. Please double check the number. 46% in billings growth for software is clearly a disappointment and not consistent with the 66% number. That is indeed worthy of review.

Fish, as I look closer I do not think you have your numbers correct. According to the Nutanix slide total software and support billings for Q4 18 was $359 million. There is another slide graphic on the slide that breaks that out with 48% coming from software and 43% from service and 9% from pass through hardware.

48% of $359 is $172.32 in software billings, $154.37 in service, and $32.31 in pass-through hardware. That places software billings lower than your figure.

I also believe your number for Q4 17 is wrong. Q4 17 had a total of $216 million in software and billings. Using your number of $129,8 that is 60% of the total software and billing revenues. Much higher than the ratio in the current quarter. I doubt very much that the ratio has changed that much, particularly since in the past quarter Nutanix will have sold more appliances that probably was even more service intensive.

If we take the same 48%, 43%, 9% split from their $216 million in Q4 17 we get the following numbers:

$103.68, $92.88, and $19.44.

$172.32 (from above) - $103.68 is $68.64. $68.64/$103.68 = 66%. Exactly right on. Indicating that software billings by itself increased 66% as well. Perhaps this ratio was much different bacon in Q4 '17. Please, if you get the chance, check your numbers for Q4 '17. My numbers for Q4 '18 are correct as they come directly from Nutanix slide that spells all this out.

Tinker

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Here’s what they say about the Support item in their 10-K:

“Support, entitlements and other services revenue — We generate our support, entitlements and other services revenue primarily from software entitlement and support subscriptions, which include the right to software upgrades and enhancements as well as technical support. The majority of our product sales are sold in conjunction with software entitlement and support subscriptions, with terms ranging from one to five years. Occasionally, we also sell professional services with our products. We recognize revenue from software entitlement and support contracts ratably over the contractual service period. The service period typically commences upon transfer of control of the corresponding products to the customer. We recognize revenue related to professional services as they are performed.”

This means you don’t have to necessarily separate support from the software sales. Even if some small part comes from hardware support, I doubt that part has got good margins.

If we take revenues from software and 75% of support for the last twelve months, it’s about $830M in revenue. This would give us EV/Sales of 7.6 - this is cheap, but right now all growth stocks are cheap. Remember, before the fall-off the EV/Sales (sw and support only) was in the 11-12 range.

For comparison, AYX is at EV/Sales of 15. Compared to NTNX I see it having the following advantages:

  • it’s got no competition in its field
  • non-GAAP margins at 90%
  • simple product that any manager can understand
  • NTNX is in transition/restructuring
  • quarterly loss to revenue is 0.10 for AYX vs 0.29 for NTNX

Based on this I can see why the market sees Alteryx’s future twice as bright as that of NTNX.

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All this analysis of Nutanix has been interesting, but I think we are definitely over-complicating the issue. The stock is actually down less than others in October. The question is why it dropped 25% in September. Undoubtedly it was because the market didn’t like their 8/30 Q report. But I don’t think I agree with Fish’s reading of the numbers as a cause for concern. In fact, I don’t think there are any real revelations in the Q. Personally I think the market is just disappointed that NTNX keeps spending more than they take in, even at $1b/yr revenue run rate (frankly I was a little disappointed too).

Still, Nutanix plans to get to a $3b revenue run rate by 2020. I think the shares are in a good place for incredible appreciation if the company can do what they’ve projected.

It’s about that simple. Better minds than mine can argue over whether Nutanix can deliver what they’ve promised for 2020, but if they do I think we’ll all be happy.

Bear

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I’ve mentioned this before, but I look at the gross profit change for NTNX. It’s a way to look at it’s growth without the pass through hardware sales. Also, it is a way to look at its growth with the high margin software vs lower margin service taken into account.

Gross Profit percent change for NTNX (year over year)

2017 84 63 52 51
2018 41 46 58 49

So they are growing at about 50%. Down from the 58% the quarter before. And with billings coming in at 66% last quarter, it bodes well going forward.

Jim (long NTNX)

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Hey Tinker,

For Q4 '18, total billings were $395, not $359.

48% of $395 = $189.6

And for Q4 '17, total billings were $289, not $216.

45% of $289 = $130

That comes out to 46% growth in software-only billings.

My numbers came straight from the investor slides.

Best,
Fish

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

Fish,

Here is the link to the investor slide. $359 is the number for software and support billings for Q4 18, and the number the put out for Q4 17 is $216, and that is right next to the $359 number again.

Perhaps we are talking about different things, but I was talking about your topic of billings growth. That same slide shows 48% is the share of billings growth.

I do not see $395 anywhere on the earnings slide.

Tinker

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Hey Tinker,

Gotcha. Yes, we were referencing different links.

This is what I was looking at, page 5 in particular, using the total billings number and then using the software-only breakdown.

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

Thanks,
Fish

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Interesting, that the two slides are different and you cannot read the one slide in isolation.

Thanks Fish.

I’ve already spent waaaayyyyy too much time on Nutanix. But worth a view tonight. If accurate the slow down in software billings is masked by a unusually large surge in services and that is a reverse masking unlike the masking we discuss by removing the hardware revenues.

Tinker

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One of the things I’m hoping with ntnx is that as they shed hardware revenue they start to show increased revenue growth momentum attracting more investors. I

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Guys (Tink and Fish)

I think the discrepancy is cleared up in the Non GAAP to GAAP reconciliation at the end of the slide set Fish reported.

There is a line that shows a change to Software and support net of acquisitions which seems to be contributing to the discrepancy.

The reconciliation also shows the software only #s that Fish is calculating. But not familiar enough with the company to understand what’s in that line at the bottom showing change to software and support net of acquisitions.

hope that helps, and i’ll look forward to your guys’ interpretation. :wink:

best,
michael
long NTNX

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Hey Michael,

Thanks for pointing that out.

I think I found the discrepancy though. On the link Tinker posted, the total billings number is absent. I believe he was doing 48% of the software and support billings rather than total billings.

Thanks,
Fish

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the 359 and 216 #s he cited are in that reconciliation, but after accounting for the change to software and support net of acquisitions.

where as the #'s you cited are in there as well but before accounting for the change to software and support net of acquisitions.

michael

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For sure, I do think it’s time to stop wondering why NTNX or any other stock is down and admit this is a bear market. Everything is falling now. Shoot first and ask questions later. That’s what happened to NTNX because of the environment we’re in.

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I do think it’s time to stop wondering why NTNX or any other stock is down and admit this is a bear market…

Make no mistake, this is not a bear market (not yet, anyway). The Dow is down 7+%, the S&P is down 8+%, and the Nasdaq is down 11+% from their highs. Yes, many of “our” stocks are down well over 20%, and all of us in those stocks feel it. But we’re barely in “correction” territory, “bear market” territory is the general markets falling another 10% or more from here, and our stocks will keep falling with them if that happens (more or less than the “markets”, who knows).

In my opinion the most dangerous outcome here is the markets continue to fall over a prolonged period, taking our stocks with them, revaluing them at much lower levels (although still relatively high on EV/S basis), and if we stay there for awhile, long enough for the growth rates of our stocks to show slowing, then the market keeping those lowered valuations on our stocks or even hammering them more because of the slowed growth. That is when your resolve will be tested.

That’s not necessarily what I think will happen, but you should be mentally prepared for what you would do if that or something similar happens. I’m holding, and have actually purchased quite a bit in the past couple weeks, but almost all those purchases are currently in the red, and may be for a while. I’m OK with that for now, but I hope things turn around for our stocks with good earnings showings in the next couple weeks, but that’s not always enough in these environments (falling markets).

These things happen, and will pass in time, we just need to stay the course if you believe in the companies you’re invested in, give them time to prove the markets wrong.

I guess the good news is the current market has taken the # of board posts way down (less reading for me, as I’m a slow reader). At least the posts of how well such-and-such stocks have done in the past 24 hours, 2 days, 1 week, etc, have disappeared. Those posts were really unnecessary (way too short term focused).

Good luck to all!

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