The latest results from hyperconverged player Nutanix show that business growth is slowing down, with the move to subscriptions and Covid-19 lockdown effects having unhelpful effects. Analyst Jason Ader sees this as a temporary setback, with subscription revenue growth taking up the slack.
Our sister publication The Register covered Nutanix’s Q1 fy21 earnings. We focus here on William Blair analyst Jason Ader’s insights into the underlying growth story,
Nutanix continues to make substantial losses, but Ader reckons the company can fund its way to profitability, on the back of Bain Capital Private Equity’s $750m investment in the company in August.
He remains “optimistic about Nutanix’s long-term growth opportunity, as the company evolves from an HCI appliance vendor into a broader, software platform play, with offerings extending from storage to hypervisor to hybrid cloud. We also see room for multiple expansion, especially as the shift to subscriptions enhances predictability.”
According to Ader, the overall Q1 results “marked a strong out-of-the-gate performance for Nutanix in its first quarter transitioning to an ACV (annual contract value) billings model.”
Nutanix argues investors should look at annual contract value (ACV) numbers rather than revenue, because it has switched to subscriptions. Seen through that lens this part of Nutanix’ business is growing. Total ACV grew 10 per cent Y/Y to $137.8m and there was 87 per cent ACV growth Y/Y from add-on products like Files, Objects, Flow, Calm and Era.
Dheeraj Pandey, Nutanix founder and (soon-to-retire) chairman and CEO, said: “ACV billings were 14 per cent ahead of the midpoint of our guidance and consensus and notably Q1 was our best ACV bookings quarter ever, the pandemic notwithstanding.”
Ader notes ACV contract duration has fallen, and that this is a good thing because it indicates lower levels of discountin, even though less revenue is recognised up-front. He expects one year contracts will help with “higher attach rates for add-on products, which are predominantly sold under annual contracts.”
He points out that “attach rates for add-on products reached a record 35 per cent (up 7 points from the year-ago quarter).”
Nutanix will save money as contracts renew because “renewal deals are transacted at much lower cost than new or up-sell deals.” Also, Ader says, “in fiscal years 2022/2023, this dynamic should be even more pronounced as Nutanix will benefit from both a large pool of term license renewals and a significant renewal cycle for its life-of-device licenses.”