PaulWBryant: Assuming “Software Revenue” ~ “Non-portable Software,” we can say that it is down sequentially by 42 million dollars, while if “Subscription” + “Prof Serv” (134m) is basically “Support & Serv” (79m), it’s up $55m. The $13m difference, minus the 3m less revenue on Hardware, is why TOTAL revenue was up just 9 or 10 million, or roughly 3% sequentially.
After reading the earnings call transcript I interpret the numbers differently. I don’t entirely disagree with your position, but I do want to add a bit of perspective.
Duston Williams on Financial Highlights:
We stated that we would begin a phased-in approach that will transition our non-portable software sales to recurring subscription licensing model. We further stated that this would replace today’s licensing structure, which is based on the life of device giving customers greater choice and flexibility around their software procurement strategies and provide portability of the software.
We also discussed that we would implement this change beginning in Q2 2019 and ramping through the second half of fiscal year. I’m pleased to announce that we had a bit of an early start with this transition and in Q1, we transacted over 110 customers on this new licensing methodology. These transactions included enterprise, commercial and SMB customers, new and existing customers, as well as a good mix of customers from all geographies.
(bold added by me)
Nutanix is in the process of transitioning from a legacy software sales model based on one-time sales with upgrades to a subscription based SaaS model. The way I read it, this means we cannot look at “non-portable software” and “Subscriptions” as different entities because there is too much overlap. The company is not loosing the “non-portable software sales” and it is not selling subscriptions instead of non-portable software sales. Nutanix is in a transition phase and is selling both non-portable software and subscriptions.
Realistically, this means the only apples to apples comparison we have available at the moment is to simply exclude hardware. This type of comparison is a bit more valid than it might seem at first glance as Nutanix averages a 90% customer retention rate. The customers have already effectively been subscribing to Nutanix, except without the benefits of a SaaS model which has proven so successful for both company and customer in recent years.
Here is Duston Williams talking about the transition to subscription revenue.
In FY 2017, our subscription business accounted for 31% of our billings, in FY 2018 our subscription business accounted for 41% of billings and in Q1 2019, the subscription business accounted for 51% of billings. In Q1 alone, our new term-based licensing accounted for over $20 million in bookings. We believe that in the next four to six quarters, our recurring subscription business will reach 70% to 75% of total billings. And by FY 2021, we expect a large majority of the business should be recurring in nature, either on-prem or cloud-based.
In our view, this continued shift to recurring subscription business model combined with retention rates averaging 90% and an average contract duration period of 3.6 years demonstrates increased visibility and predictability into our model as the company moves away from life of device licenses.
Based on this, an accurate view of sequential software sales:
Q4 2018 Revenue (no hardware): $268M
Q1 2019 Revenue (no hardware): $280M
Sequential Revenue Gain, excluding hardware: 4.5%
What is unquestionably misleading is this statement at the top of the press release:
Subscription Revenue Up 104% YoY to $127 Million
While this number is accurate, it is also entirely meaningless as a metric for investing in the company because of the deliberate transition to a subscription model. The interesting number is buried further down in the financial highlights for the quarter:
Software and Support Revenue: $280.7 million, growing 44% year-over-year from $194.7 million in the first quarter of fiscal 2018
One data points worth noting: Software and Support Revenue growth may be slowing, down from 49% YoY growth in Q4 2018. It is too early to tell for certain.
Also, in the Q&A it was noted that SaaS is only a small portion of subscription revenue, though it will be growing.
Overall, I am holding onto my shares for now. I still see NTNX as a good value, though I am uncertain at the moment if its growth prospects can match up to other companies I am invested in.