Computer storage technology company Nutanix (NTNX 56.92, -3.90, -6.41%) posted
better-than-expected fiscal Q4 results last night, but the stock is trading
lower today due to its downside outlook for Q1. As we discuss in more
detail below, the company has been in transition mode over the past few
quarters, shifting its focus to higher margin software products rather than
This shift is expected to have a larger than anticipated negative impact to revenue next quarter as hardware sales drop off, causing its outlook to come up short of expectations. However, the upside is that gross margins will run sharply ahead of prior expectations. In other words, the transition is having the desired effect, but there will be some short-term disruption as the company phases out the hardware side.
Looking at its Q4 results, NTNX posted a loss per share of ($0.11), comfortably exceeding the ($0.22) consensus, and a vast improvement over 4Q17's ($0.33) figure. The major driver for the upside results is that Non-GAAP gross margin dramatically improved to company record 77.7% from 62.6% in the year ago period -- again, due to its transition to a software business model. This also led to positive free cash flow generation of $6.5 mln compared to a cash burn of $6.65 mln in 4Q17.
As expected, total revenue growth tapered off to 20% -- well lower than growth reported in recent quarters -- as NTNX generated $303.7 mln in sales. However, software and support revenue jumped by 49% year/year to $267.9 mln, now accounting for 88% of total revenue. The decline in revenue growth is tied to the phasing out of the hardware business.
Billings, perhaps an even more important metric than revenue, since it measures current demand in the quarter, increased by a healthy 37% to $395.1 mln.
All in all, it was a strong performance from NTNX. What's knocking the stock lower today, though, is its outlook. Specifically, it guided for Q1 revenue of $295-$310 mln versus the $308.8 mln consensus, billings of $370-$390 mln, and EPS of ($0.28)-($0.26) versus the ($0.23) consensus.
The revenue and EPS guidance is likely causing the disappointment, but it's important to note that one of the main reasons why NTNX didn't provide a stronger revenue outlook is because it is now expecting pass-through hardware revenue of 5-6% of billings, rather than its original expectation of 7%. This negatively impacts revenue by $4-$8 mln and, consequently, negatively impacts earnings projections as well. To put this another way, NTNX's transition to a software-centric model is progressing faster than it had expected. While this will have impact the top line right now, it will also generate higher margins and it will get the company across the finish line sooner, as well.
Overall, though there may be some disappointment regarding its downside guidance, NTNX's core business (software) is seeing strong demand. And as software continues to account for a larger portion of total revenue, margins will continue to rise, pushing the company closer and closer to profitability.
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