Why I sold NTNX

Investment Analysis Clubs Saul’s Investing Discussions
1

In the July 2018 quarter they broke down revenue:
Sofware Rev $189m
Hardware Rev $36m
Support & Serv $79m
(Total $304m)

This (October 2018) quarter it was:
Non-portable software $147m
Subscription $127m
Hardware $33m
Prof Serv $7m
(Total $313m)

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.

So to boil it down, I’m saying that it looks to me like they sold subscriptions instead of one-time software. Very Pivotal-eque. Of course I like the transition to SaaS, but because of it, it’s hard to tell what’s really going on, and the extent of the slow down.

I don’t like the way they’re telling the story. “104% growth” is very misleading, a la Talend.

I’m out.

Bear

38 Likes
2

I don’t like the way they’re telling the story. “104% growth” is very misleading, a la Talend.

I’m out.

Bear

I appreciate your “Bearish” perspective.

I just read a rather positive view from a respected source here. NTNX is still in value territory and is likely to easily exceed sales targets over the next couple years.

It will be interesting to see how it plays out.

I’m staying put and added a little. But it’s only one egg among many in my basket.

Dave

5 Likes
3

So to boil it down, I’m saying that it looks to me like they sold subscriptions instead of one-time software.

I don’t get that. They had $147M in “one time software” revenue in July quarter and $147M in the same in October quarter.

Subscription revenue was $114 to $127 (million$).

Pass through HW was $131M in July Q and $136M in Oct Q. So it’s $8M additional HW eliminated q to q.

“Software and support” is subscription + non portable sw + pro services. There is no hiding or hard to tell. It is made up of the same parts as last quarter. That grew 44%. Less than 49% growth in last.

The only thing new they have done is break out “software” to subscription and one time license sales.

Darth

15 Likes
4

Hi Bear,

Appreciate the post, but I don’t quite see it like that.

Firstly, you are correct with “Software Revenue” ~ “Non-portable Software,”. But they are open with the fact that they are transferring customers onto the subscription, ‘pay-as-you-grow’ model. So yes, they are cannibalising from themselves so the 104% growth should be taken with a pinch of salt (whilst quarter-to-quarter actually maintaining the same amount of non-portable software sold). But this is the correct route for the company to take and they are executing their strategy well.

Revenue only up 10 million sequentially. This is as expected. Absolutely no surprise here. Infact, I posted my predictions prior to earnings on the NPI board here:
https://discussion.fool.com/my-earlier-predictions-total-revenue…

Basically just a rehash of guidance. The upside surprise for me is that we will start to see revenue accelerating in Q2. I had figured it would take one more quarter for that to happen.

Appreciate the reference to Talend. I got double-burned with that one as after being infuriated with their explanation at earnings, I immediately sold it all and transferred to NVIDIA just before their earnings. Awesome, right? :slight_smile:
But I really don’t see the same thing here - they’re actually giving us real numbers!

For me, NTNX is a very simple follow the money investment. They’ve laid out a 3 year target. If they make that target, the stock price will follow by rewarding investors. So far, they’re on track with that. Management so far has an excellent track record. HCI, their bread and butter, is predicted by Gartner and Forrester to grow significantly in the next few years. They’re putting out a host of infrastructure products whilst maintaining an NPS of 90+.
My excitement with the company is being tempered by Dreamer’s arguments questioning the longevity of NTNX’ CAP, so that keeps me prudent with my allocation. The other negative being high SBC, but so long as they maintain hyper-growth levels, it’s okay.

35 Likes
5

Software and support rev grew only $13M sequentially QoQ. I dont see that a concern though. If you look at the slide deck there is a slide which shows revs going back to 13 quarters. it has been lumpy in past quarters as well. Management is upfront in the breakdown and is providing a lot of metrics to see adoption of Core vs other parts. Also Talend was predicting a big slow down while Nutanix management is guiding $3B+ billings by FY 21.

7 Likes
6

As you all know, I’ve been reducing my stake for quite a number of quarters now. It’s become a complicated, hard to figure out, low-confidence position, and went into my “Too-hard-to-figure-out-what-is-going-on” basket. I’m now out too. You have to make too many guesses at what is actually happening. Been there, done that. But just because it’s too hard for me to figure out doesn’t mean it won’t do just fine, honest-to-God. Make your own decisions. This is not one to just follow me on.
Best,
Saul

11 Likes
7

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.

Bear,

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.

Duston Williams:

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.

13 Likes
8

though I am uncertain at the moment IF its growth prospects can match up to other companies I am invested in.

Hi othalan, that is the problem isn’t it? It’s hard to be certain about anything about it. I just found others that were so much easier to understand, and to be more sure about.

Some have said that this is like the hidden growth with Twilio some months ago. Not True! Twilio was crystal clear. One company, Uber, which had been a big customer was reducing their purchases and doing it themselves, while the rest of revenue was growing 60% or more, every quarter. Everything about what was going on was simple and spelled out by the company. With Nutanix, I can’t even tell what the heck is going on any more.
Saul

7 Likes
9

The company is not loosing the “non-portable software sales” and it is not selling subscriptions instead of non-portable software sales.

I am somewhat familiar with the HCI business model in general but not specifically with Nutanix, so grain of salt and all that. I think it is common for HCI solutions to be sold and licensed as a unit, an appliance if you will. When the hardware reaches end of life, the software license goes end of life with it. I believe this is the ‘non-portable software’… the software that is tied to the life of the underlying hardware. It is non portable in the sense that it is bound for use on specific hardware and it cannot be moved to new hardware. So yes, I thing thing Nutanix is getting out of the ‘non-portable software sales’ model and transitioning entirely to the SaaS/subscription model. That is my read.

10 Likes
10

it has been lumpy in past quarters as well

And guidance for next quarter is up $17M sequentially at midpoint.

11

I look at the gross profit change instead of Revenue to eliminate the pass thru hardware.

Gross Profit percent change for NTNX (year over year)

2017 84 63 52 51
2018 41 46 58 49
2019 43

The software & subscription sales were up 44%, and the gross profit was up 43%, so a slight decrease in gross profit with out hardware.

Non-gaap operating expenses were up 41% vs the 43% Gross profit growth, so a slight operating margin improvement, but still negative and not making much progress.

To me it looks like they are slowing down, and could hit the 30’s soon with tougher comps upcoming. Unless the slowdown is being temporarily caused by the switch to the subscription model.

I don’t like that they are slowing and not moving more to profitability.

The Cash flow from operations increase was nice, but you can’t just look at 1 quarter of cash flow (see Bear’s post about cash flow)

So to me, slowing, not getting more profitable, and mass changes eliminating more hardware and switching to a subscription model creating more risk.

Also, way more share based compensation.

Most of the arguements for NTNX seam to be that it is cheap from a valuation perspective.

Jim

5 Likes
12

Hey Saul,
Cant disagree on NTNX.

Curious: did you allocate the NTNX funds anywhere in particular that you would care to share?

More TTD perhaps?

Thanks,
Dreamer

13

Bear,
I have been out of ntnx a while.
Here were my long-winded thoughts:
https://discussion.fool.com/hey-stephen-i-won39t-rehash-everythi…

The company will continue to do well in on-prem IT space just based on HCI momentum. And they could get a cloud/sw win or two from their new offerings.

But to me they just werent a cut and dry saas/sw/cloud play and they may never be. Felt better in other stocks.

Dreamer

5 Likes
14

I apologize for any redundancy as we had a flood of comments added while I was typing this up:

I admit to having a little discomfort as well with their change in revenue reporting. On one hand, it makes sense to clarify things as much as possible as they change to a subscription-based model. On the other, there’s always the concern of wondering what narrative the company might be trying to change. A few things make NTNX more challenging than some of my other stocks:

  1. What exactly they do. Like most on this board, I feel like I’m about 75% of the way there. That being said, I’ve got much higher conviction that their customers seem to like it and that matters a lot more from an investment perspective. I’m OK with that as long as I’m paying close attention to the company news.

  2. I find Pandey tough to follow sometimes. There’s no doubt he’s knowledgeable and believes in his product. However, many of his answers are long-winded where simplicity would suffice. In addition, he’ll sometimes answer questions by overwhelming with technical jargon rather than being concise. It’s kind of like the IT guy who’s trying to show you what you don’t know. I’m not saying it’s intentional or deliberately misleading, but it can be confusing.

  3. Their financials are more difficult to follow than some of the other stocks we discuss. Obviously some of that is inherent in the pass through hardware issue. In addition I find some verbal looseness in their calls between total billings, support/software billings, total revenues, and support/software revenues. It sometimes feels (bad term for rational investing I know) like they give themselves more avenues to cherry pick the best answer to whatever question is asked. I usually tune out during those part of the calls and wait for the transcript to hash out exactly what was said. The new method of reporting revenues will likely add another example to this mix going.

Despite those observations, I saw quite a few positives that support the investment thesis which drew us to NTNX in the first place:

  1. They remain emphatic on hitting $3B in billings by FY 2021. As outlined above I’ve sometimes heard ambiguity as to whether that was total billings or software/support billings (which run a little less than total). Pandey was very specific on this topic in his remarks yesterday: “Nutanix Core customers represent the foundation of our business in the near-term, and are what will enable us to deliver on our goal of at least $3 billion in software and support billings in 2021.”

  2. They did beat in a lot of areas this Q, including handily on EPS. Revs increased 13.7% YoY (slightly above top of guidance) and should begin to accelerate next Q (16.8% at top of guidance). This matches what we’d hoped to see given the pass-through investment thesis.

  3. Software/Support revs (+44.0% YoY) and Software/Support billings (+49.7%) are still growing faster than Op Ex (+41.3%). However, revs and billings are drifting down while Op Ex is drifting up. The delta has definitely narrowed and their low-end non-GAAP Op Ex guide of $300M for Q2 would represent a 48.2% YoY bump. This is something I’m noting if they don’t beat on revs or hold expenses next Q. Op Ex crossing the other two would be a major issue for me.

  4. They clearly landed some big contracts and Total Deferred Revenue checked in a $701.8M (+71.8% YoY).

  5. Their % of Software Revs to Total Revs over the last 4 Q’s – 72.9%, 78.4%, 88.2%, 89.6%. Non-GAAP gross margins – 63.5%, 68.4%, 77.7%, 78.6%. Both trending the right way.

  6. They saw 51% of their revenues from billings this Q vs 31% in Q118. They estimate they will hit 70-75% of revenues from recurring subscription billings over the next 4-6 Q’s. This seems to imply their switch to SaaS strategy is seeing positive momentum.

  7. They announced the general availability of Xi and seem pleased with the initial response. This has been touted as a potential growth catalyst for some time and seems to have occurred on a reasonable timeline. The question now is how fast it will add to revenues.

  8. Their customer count jumped to 11,490 vs 7,810 in Q118 (+47.1%). Nice progress there.

  9. Their internal Rule of 40 jumped to 54 from 51 this Q. According to their info: “Rule of 40 score is calculated by adding software and support revenue growth % to free cash as a % of software and support revenue.” Adding $19.99M of FCF to the TTM while dropping -$7.86M off the front end clearly helps here, but it doesn’t change the fact they’ve improved the metric. I don’t know if their new revenue breakout will affect this.

In the end it’s nice to see the post-earnings bump today (even if it’s fluctuated as the day goes along). Despite some of the confusion I listed above, I’m comfortable enough with my medium sized position based on my own due diligence plus the work of the Saul/NPI boards. To be honest, my biggest fear between the beginning and end of typing this up is seeing that Saul has decided to join Bear on the sidelines!

However, they’ve both told me numerous times to make my own decisions so I’m going to buck their trend and remain a hold for now. We’ll see how it works out.

47 Likes
15

And guidance for next quarter is up $17M sequentially at midpoint.

Next Q they guide $330M total rev. And they expect hardware to be between 5 and 10%. Let us say 7.5%. That gives software and support rev of $305M which is 45% higher QoQ. Sequentially that is only 8.5% higher. Typically they get most of their gains in Q4 so they could still be up 40% in FY19. They need to grow at 40% to hit their 2021 goals.

16

though I am uncertain at the moment IF its growth prospects can match up to other companies I am invested in.

Hi othalan, that is the problem isn’t it? It’s hard to be certain about anything about it. I just found others that were so much easier to understand, and to be more sure about.

Some have said that this is like the hidden growth with Twilio some months ago. Not True! Twilio was crystal clear. One company, Uber, which had been a big customer was reducing their purchases and doing it themselves, while the rest of revenue was growing 60% or more, every quarter. Everything about what was going on was simple and spelled out by the company. With Nutanix, I can’t even tell what the heck is going on any more.

Saul, I was thinking exactly this as I was walking over to my salsa dancing lesson. I realized, in my post I had talked myself out of Nutanix as an investment. I may still keep a small position as whatever else the difficulties it seems to be a good value at the moment, but I have better places for my money.

As always, thank you for your insights!

1 Like
17

Texmax,

The 2021 goal is for $3B in BILLINGS, not revenue. Billings are running at a faster clip than revenue. I believe their transition to a SAAS model means their growth in revenue will slow, and their billings growth rate will improve. I haven’t checked the historical growth rate of billings, but it might paint a better picture of what is happening. I will do this over the weekend.

I am comfortable holding my NTNX position, but I will be watching BILLINGS growth rate closely going forward.

Regards,

Sean

2 Likes
18

I am estimating 2.5B FY 21 rev which is 2.1x from the TTM rev. But the share dilution can impact gain even if the P/S stays the same.

19

Hi othalan, that is the problem isn’t it? It’s hard to be certain about anything about it. I just found others that were so much easier to understand, and to be more sure about… Some have said that this is like the hidden growth with Twilio some months ago. Not True! Twilio was crystal clear. One company, Uber, which had been a big customer was reducing their purchases and doing it themselves, while the rest of revenue was growing 60% or more, every quarter. Everything about what was going on was simple and spelled out by the company. With Nutanix, I can’t even tell what the heck is going on any more.

Saul, I was thinking exactly this as I was walking over to my salsa dancing lesson. I realized that in my own post I had talked myself out of Nutanix as an investment. I may still keep a small position as whatever else the difficulties it seems to be a good value at the moment, but I have better places for my money…As always, thank you for your insights!

Thanks othalan for your kind words. I hope you enjoyed the dancing lesson.:grinning:
Best,
Saul

20

By the way guys, Bear and I (and othalan) aren’t the only ones who feel this way. This is a little excerpt from the report I received from Schwab (it’s a Reuters report), of the target changes today from analysts:

…

  • Nucor Corp : KeyBanc cuts price target to $72 from $77
    * Nutanix Inc : Jefferies cuts price target to $48 from $60
    * Nutanix Inc : JP Morgan cuts price target to $52 from $56
    * Nutanix Inc : Raymond James cuts price target to $53 from $71
    * Nutanix Inc : Stifel cuts price target to $55 from $64
  • Nuvasive Inc : RBC raises target price to $70 from $65
    …

That’s four target cuts for Nutanix, some huge, and no raises. The average of the four targets went from about $63 to $52. Now analysts are usually trailing indicators, but still…

Saul

2 Likes