Nutanix, Inc. Q1 FY2021 earnings

Nutanix started fiscal 2021 with a mixed quarter. Revenue slipped 0.6% year over year to $312.8 million in Q1 FY21, but gross profit rose 0.9% to $244.8 million. GAAP gross margin was 78.3%, up 1.2 percentage points. The operating loss narrowed to $182.1 million, yet the net loss widened to $265.0 million. Diluted EPS was -$1.31, a wider loss. The gap between operating and net results came largely from non-operating expense tied to the new convertible notes. Management pointed to ACV billings of $137.8 million, up 10% year over year, and run-rate ACV of $1.29 billion, up 29%. Those metrics are the company's preferred way to track its subscription transition.

Operationally, Nutanix expanded its hybrid cloud story. It launched its solutions on AWS in August and announced a partnership with Microsoft to develop its portfolio on Azure. The company introduced new hyperconverged infrastructure capabilities that it says will deliver up to 50% faster performance, plus a Kubernetes-based PaaS offering called Karbon Platform Services. It also rolled out Elevate, a global partner program. The customer base reached 18,040 end customers as of October 31, 2020, including about 930 Global 2000 enterprises. The company held its .NEXT conference virtually with more than 40,000 attendees. Retention and expansion remain solid: 68% of end customers with at least 18 months of tenure made a repeat purchase, and their lifetime orders were more than 5.9 times greater than the initial order, rising to approximately 16.4 times greater for Global 2000 customers. On the sales side, 77% of the global sales team was fully ramped, while 23% was still ramping.

Cash flow improved from a year earlier. Operating cash flow was -$4.1 million, an 84.4% improvement. Capital expenditures were $12.3 million, down 32.7%. Free cash flow was negative $16.3 million, compared with negative $44.4 million a year earlier. Non-GAAP operating expenses fell 12% to $341.2 million, helped by COVID-19 cost actions such as a global hiring pause, a temporary 10% reduction in executive salaries, and furloughs. Deferred revenue rose 23.7% to $1.21 billion. Still, the subscription transition is weighing on reported revenue. Total average contract term was 3.5 years, down from 3.9 years. The MD&A notes that term-based licenses have an average term of less than four years, while life-of-device licenses last about five years. Starting in fiscal 2021, the company began compensating its sales force on ACV instead of total contract value, which could further compress contract terms. Nutanix expects operating and free cash flow to remain negative for the next 12 months.

For Q2 FY21, guidance calls for ACV billings of $145 million to $148 million, non-GAAP gross margin of approximately 81.5%, non-GAAP operating expenses of $360 million to $370 million, and weighted shares outstanding of approximately 202 million. The outlook uses non-GAAP measures. Risks remain significant. COVID-19 continues to curtail demand, lengthen sales cycles, disrupt supply chains, and raise component prices. The subscription transition can reduce near-term revenue and billings, especially if customers choose shorter terms or pay only the first year upfront. Some cost savings are temporary, and operating expenses are expected to rise as hiring restarts and salary and bonus reductions expire. Competition in hybrid cloud and hyperconverged infrastructure also remains intense. The quarter showed progress on ACV and margins, but GAAP net loss and operating loss remain substantial.