Nutanix: Large Deal Strength Drives Billings and FCF; Raising Estimates, Price Target
Research on Nutanix activities has shown growth in large-deal execution, please read more in this brief article.
Overview
We are buyers of NTNX as F2Q18 results outline a potential inflection in the Global 2000 customer base with expansion in repeat purchase multiple (up 22% y/y) and a record number of large deals. Gross profit dollars were up 45% y/y vs. 38% in the prior quarter as some large customers are now negotiating software ELAs. We see the HCI market (with integrated hypervisor and automation) as a two-horse race with VMware/Nutanix as global enterprises modernize core infrastructure. We are raising our price target to $44 on 6x FY19 revenue.
What Happened
- Revenue of $287M, ahead of guidance of $282.5M and consensus of $283M.
- EPS of ($0.14) was ahead of guidance of ($0.21) and consensus of ($0.20), primarily driven by revenue out-performance and a slowing in hiring (opex $8M below guidance).
- Strong sales execution drove a record number of new customer additions (1,057) and deals over $1M at 57 vs. 28 a year ago, including 32 Global 2000 customers and 19 software and support deals. This drove billings of $356M, above consensus of $322M, and FCF of $32M (11% FCF margin) vs. $7M a year ago.
- Nutanix is successfully back-filling the Dell OEM partnership (now less than 10% of bookings) with other vendors like Lenovo (+80% q/q, four deals over $1M), Cisco (+40% q/q, $2.5M and $1.5M deals), and IBM (first two deals booked).
Guidance and Model Impact
- Nutanix guided F3Q18 revenue to $275M-$280M, which would have been $45M higher under the prior reporting model (implies 57% revenue growth y/y).
- Gross margin of 67-68% (Street at 69%) and EPS of ($0.21)-($0.19).
- We are raising estimates due to improving large deal execution, strong Global 2000, new customer adoption, and billings out-performance.
Bottom Line
- Sales execution challenges in the past year, especially within Global 2000 and internationally, appear to have been addressed during FY18 (9.0x Global 2000 repurchase rate vs. 7.4x a year ago). Our Key FirstLook RFP database has identified several large FY18 EU projects that underscore Nutanix's growing capabilities as it adds traditional enterprise features into the portfolio.
Source: Pacific Crest Securities. The full report can be found here.
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