Nutanix Stock, NTNX, Falls 33% On Results And Guidance

Nutanix (NASDAQ: NTNX) stock fell 33% premarket on the back of their results and guidance for the fourth quarter. The results were good, both an earnings and a revenue beat. It was the guidance for the current quarter and thus the year-end that failed them.

Nutanix earnings were a non-GAAP EPS of minus $0.05, which is a beat by 16 cents, and revenue of $403.66 million, a beat by $5.76 million. In which we can see the base structure of the business of course. Costs are largely fixed, gross margins are vast (80% and more) but that fixed cost base is very high. Even the last few marginal sales thus have a significant effect on the bottom line, actual earnings.

Nutanix has also been doing most of the right things by the usual market yardsticks. They're now a services and software supplier, their hardware work is near extinct. This should provide, or we would hope it would, both those gargantuan software margins and also a certainty of a stream of income. They've moved most of their client base over to subscription services and so have regularly recurring revenue. These are all the things that the market looks for in this sector of clould computing and so on.

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There are two clouds (sorry) on this horizon. The first is the growth rate. That's what the predictions about Q4 revenue are about. Expected revenue is now $340 to $360 million rather than market expectations of $440 million. ACV billings are also down on those expectations, at $175-185 million from $215 million. This then obviously lowers expectations for the full year.

So while all the right things are being done revenue growth still isn't where we'd like it to be. Thus the significant pullback in the NTNX stock price of course. For as above we've a business model with very high fixed costs and very low marginal costs (the same thing as noting the 80% plus gross margins). That means, again as above, that it's the last pieces of marginal revenue which determine the bottom line. It costs near nothing to service that last customer, all the revenue flows through into actual profit – or reducing losses perhaps.

The other cloud is that we all know that cloud computing is growing very rapidly. But we all also know that there are three major companies in the space, Microsoft, Google, and Amazon. So, business has to be won away from the natural inclination to go with one of the Big Three. This keeps a cap on the prices that can be charged. The capital position of those Big Three also means that in any price war that limitation does not apply to them.

So, Nutanix is in a challenging business sector. Up against really rather vicious competition. They're doing nearly all the right things, not trading margin for revenue, they've moved from licence and hardware sales to subscriptions. These are all the right things. And yet revenue still isn't growing fast enough to cover the cost base. At which point there has to be a wonder as to whether it ever will – and thus the 33% decline in the NTNX stock price