Why I sold NTNX

and no raises.

On the flip side, Needham did increase their price target on Nutanix from $71 to $76 today

https://pressoracle.com/2018/11/28/nutanix-ntnx-given-new-76…

-mekong

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I am concerned that when they say subscriptions are now 51% of Billings and the fact that deferred revenues are shooting up that the reason deferred revenues are up is they are selling subscriptions and recognizing only immediate payments as revenue and the rest as deferred revenue thus generating “Billings.”

I would be more at ease if it was already 51% of revenue, not Billings being subscriptions. Because as of now I see it they are running at 24% yoy growth for only software and service sales.

A year from now after hardware and one time sales are done they may start to show some real stellar growth.

Guys

Just a few thoughts on this now with time to review and reflect which initially I wanted to be - what I liked and what I didn’t like about the results but before getting to that I wanted add a comment addressing the elephant in the living room:- the model change and the corresponding reporting communications.

Part 1 - Model Change & Earnings Communications

I get all the comments in this thread and the reactions expressed. We had a simple story, we were used to a certain cadence of earnings communications and metrics and we thought we were being smart keeping a close eye on turning the corner with the hardware pass through transition and bang, the company hit us with a change in reporting metrics and a different transition story and suddenly there’s classic case of “who moved my cheese” and a sense of “too hard to understand”.

Before getting on to any of the actual numbers I wanted to replay some longer term context and perspective from what Nutanix have communicated and what has happened here.

  1. They have been signalling the hardware reporting change and have continued to track their reporting against it and not buried it, disguised it or dropped it.

  2. For the last year Nutanix has been communicating to the investor community a more fundamental multi horizon shift in their model on multiple occasions and every opportunity with increasing coverage.
    The model shift communicated was: appliance>>>software>>>subscription>>>consumption. This is aligned with their vision of shifting from invisible infrastructure>>>invisible data center>>>invisible cloud.
    I’ve shared some of the links before but here’s an example:-
    https://seekingalpha.com/article/4155979-nutanix-ntnx-invest…

  3. Part of the timing of the fundamental model shift has been linked to new service introductions and these have in this quarter only just been launched (Xi).

  4. This is Q1 of the new financial year. Frankly if any company is ever going to introduce changes in its reporting metrics and business model categorisations then Q1 would be the time to do it.

I understand we don’t like change and that we don’t like complexity and there are points about the actuals in this report that are to be concerned about but I just wanted to revisit the background and context coming into this earnings release as we react to what we are reading, hearing and seeing.

Part 2 - Results Review
To be continued in another post…

A

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First of all, thanks to everyone for the input, it is really helpful to think through all the aspects.

One thing that hasn’t been discussed yet, at least I didn’t see it in detail, is their comment in the cc that they will see accelerated growth from the exclusion of pass-thru-hardware already in the next quarter (Q2).

However, according to my notes their hardware revenues as a percentage of overall revenue look like this:

     
       Q1   Q2   Q3   Q4
2018   29%  27%  21%  12%
2019   10%

How will they accelerate from that in Q2 already? What I noted to myself was that they should really see a substantial revenue growth acceleration for the first time in Q4 2019, so when they report guidance for Q4 in Q3 that should, in theory, be a boost for shares. Am I missing something?

As far as my own intention on buying/holding/selling shares, if anyone is interested, I decided to hold shares at the moment. I wasn’t overwhelmed by their numbers but thought it was a decent quarter. Pandey’s cc comments, as always, made me feel better about the business but I couldn’t really say why because he really does give longwinded and complicated answers. I liked Bert’s take on the quarter but somehow I didn’t get the feeling that he was very enthusiastic – more like business as usual (seasoned with a little side-stab at market reactions). I share the sentiment that their earnings releases are sometimes hard to follow. Although they make nice graphics and publish a lot of numbers, it is sometimes hard to decide which metrics are actually important – they seem to change so often. Also, them constantly shifting their business model in short intervals is a little yellow flag. I didn’t like that they were not able to hire according to plan this quarter – another small yellow flag. Furthermore, this SaaS-growth of +100% was misleading and to go back to my initial question the announcement of accelerating growth in Q2 is not really supported by the facts.

NTNX has been around a 5% position in my portfolio for some time now and I feel comfortable with it at the moment. My initial plan was to wait out till Q3 or Q4 and see how this revenue acceleration thesis plays out. However, I have to say, my confidence level has been higher in the past and I do feel a bit suspicious about management. I will certainly not add to my position for the time being even though their valuation does seem attractive.

Fool on
Niki

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