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Nutanix (NTNX) Down 20.6% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

A month has gone by since the last earnings report for Nutanix (NTNX). Shares have lost about 20.6% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Nutanix due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Nutanix Q3 Earnings Top, Revenues Miss Estimates

Nutanix incurred third-quarter fiscal 2019 loss of 56 cents per share, narrower than the Zacks Consensus Estimate of 60 cents. However, the figure was wider than the year-ago quarter’s loss of 21 cents.

Revenues decreased 0.6% from the year-earlier quarter to $287.6 million, and also missed the consensus estimate of $296 million.

Transition from device-based to a subscription-based business model led to compression in the top line. However, continued deal wins and increased adoption of AHV hypervisor were positives.

Quarter Details

Product revenues fell 16.4% year over year to $184.8 million. Support, entitlements & other services revenues soared 50.5% to $102.8 million.

Total software and support revenues climbed17% from the year-ago quarter to $266 million.

Billings were down 1% year over year to $346 million. Software and Support billings rose 11% to $324 million.

Subscription billings accounted for 65% of total billings, up from 57% in the previous quarter.
    
New customer bookings represented 25% of total bookings compared with 29% a year ago. Software-related bookings from the company’s international regions were 45% of the total software and support bookings,flat year over year.

The bill to revenue ratio was 1.2, slightly lower sequentially.

During the fiscal third quarter, Nutanix sealed several large deals on the back of its consistent execution in product, customer support and enterprise selling, which also led to a deeper penetration into existing customers. It signed 50 deals worth more than $1 million including eight deals worth above $3 million.

Nutanix now has 18 customers with a lifetime spend of more than $15 million, and about 850 customers with a lifetime investment exceeding $1 million.

The company’s hypervisor, AHV, experienced 42% increase in adoption on a rolling four quarter basis.

Continued shift to a recurring revenue business model resulted in 65% of billings coming from subscriptions, up from 41% a year ago. Subscription revenues represented 59% of total revenues in the fiscal third quarter, up from 28%.

Nutanix clinched a $6 million deal with a Global 2000 French multinational hospitality company that has a lifetime spend more than $7 million. This company spent about $4 million on new term-based subscription licenses in the quarter. Under the new agreement, this customer will replace its existing traditional infrastructure with Nutanix’s enterprise cloud platform.

During the quarter, a deal worth more than $1 million was signed with media, marketing and publishing company Meredith Corp. (MDP).

Also, Nutanix partnered with Hewlett Packard (HPE) to enable channel partners to directly sell fully integrated HPE servers combined with Nutanix’s enterprise cloud OS software.

The company continued to witness a strong adoption of its products, including a $3-million plus deal with the U.S. Department of Defense.

However, selling impact due to the ongoing transition slowed down and extended the sales cycles. The company expects this headwind to gradually dissolve as customers get used to the new term- based subscription offerings.

Margin

In the fiscal third quarter, the company delivered non-GAAP gross profit of $725.4 million, significantly up from $197.8 million. Non-GAAP gross margin of 77.1% was higher than 68.4% in the year-ago quarter.

Operating expenses rose substantially from $232.4 million in the prior-year quarter to $895.1 million.

Operating loss widened to $169.7 million from a loss of $34.6million in the year-ago quarter.

Balance Sheet & Cash Flow

As of Apr 30, 2019, cash and cash equivalents plus short-term investments were $941 million, down $25 million sequentially.

Cash outflow from operations was $36 million against inflow of $46.4 million in the previous quarter. A $17 million ESPP outflow resulted in this unfavorable comparison.

Free cash outflow was $59 million against inflow of $32.4 million in the prior quarter.

Deferred revenues jumped 7.5% sequentially to $838.3 million in third-quarter fiscal 2019.

Guidance

For the fourth quarter of fiscal 2019, revenues are projected between $280 million and $310 million.

Nutanix anticipates billings to be in the range of $350-$380 million.

Non-GAAP gross margin is predicted to be around 77%. Moreover, management forecasts operating expenses in the $340-$350 million band.

Nutanix estimates non-GAAP loss per share to be 65 cents.

Leadership changes, which impacted the fiscal third quarter, are expected to affect the fiscal fourth quarter as well.
    
Nutanix expects an impact on fourth-quarter fiscal 2019 results from imbalance and lead generation spending, coupled with a slower-than-expected sales hiring. The company also expects extended sales cycles due to the transition, to be an overhang on the top line.

Moreover, during the fiscal third quarter, Nutanix ramped lead generation, and thus improved sales execution. These efforts are expected to take a couple of quarters to reflect in its top-line performance.

However, the company remains positive about its transition to software-based revenues as the same is likely to expand its margins significantly, going forward.

A healthy pipeline of big deals is anticipated to be a tailwind for the top line in the fiscal fourth quarter.
 

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -24.52% due to these changes.

VGM Scores

Currently, Nutanix has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of F on the value side, putting it in the lowest quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. Notably, Nutanix has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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