It's been a rough stretch for recent storage technology IPO Nutanix (NTNX), which has slid lower by about 15% since issuing its 4Q18 results. As we discuss in more detail below, the quarter itself was solid, but it was its downside guidance for Q1 that had taken the wind out of its sails. Today, though, the stock is seeing a bump higher after the company announced a major new contract win. In fact, according to NTNX, it is the largest contract it has ever won.
First, before discussing that contract and its recent quarterly results, we wanted to provide some more background on the company:
NTNX's platform is comprised of two software product families: Acropolis and Prism. Here is a closer look at each.
- Acropolis: This software delivers distributed storage, application mobility capability, and a built-in "hypervisor", which is software that allows multiple operating systems to share a single hardware host.
- Prism: Prism provides integrated virtualization and infrastructure management, operational analytics, and administrative capabilities.
NTNX's platform is much more agile compared to legacy systems since it converges silos, virtualization, and storage infrastructure into one system. To put that benefit into some context, an IDC study indicated that customers can deploy its technology in up to 85% less time than traditional infrastructure. Additionally, with NTNX's application, infrastructure can be provisioned in minutes with one click by a single IT administrator.
NTNX's platform is also a money saver. According to that same IDC report, its solution can reduce total cost of ownership by up to 60% for a broad set of workloads, and up to 30% compared to public cloud offerings. And, with Acropolis, its customers can benefit from application mobility, simplicity of use, resulting in an 80% reduction in virtualization costs.
Q4 Results & Today's Contract Win
First, as noted above, NTNX recently reported earnings back on August 31. Its Q4 results actually came in ahead of expectations, but, the report -- namely, its guidance -- instigated the sell-off we have seen over the past several sessions. For the quarter, 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 million compared to a cash burn of $6.65 million in 4Q17.
As expected, total revenue growth tapered off to 20% -- well lower than growth reported in recent quarters -- as NTNX generated $303.7 million in sales. However, software and support revenue jumped by 49% year/year to $267.9 million, now accounting for 88% of total revenue. The decline in revenue growth is tied to the planned phase out of the hardware business as it transitions to a software-centric business model. The reason for the shift is that NTNX is looking to driver higher margins and improved profitability. But, in the near-term, this is coming at the cost of stronger growth. Which was illustrated in its downside guidance for 1Q19.
Specifically, NTNX guided for Q1 revenue of $295-$310 million versus the $308.8 million consensus, billings of $370-$390 million, and EPS of ($0.28)-($0.26) versus the ($0.23) consensus.
The revenue and EPS guidance caused 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 million 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.
Now, as for today's news, NTNX announced that it has closed the largest deal in its history, worth more than $20 million. The deal is with an agency in the U.S. Dept. of Defense, which will use NTNX software to operate 15 remote sites running two different networks. More specifically, the agency selected its Enterprise Cloud Operating Systems software. In the press release, NTNX states that the deal is one of five worth more than $1 million in the U.S federal vertical.
This deal will help push the company's migration away from harder to software, providing another boost to margins.
To conclude, with the downside guidance moving further into the rearview mirror, this new deal may provide a needed spark for the stock.