2023-03-09 23:50:22 ET
Summary
- NTNX exceeded expectations in revenue, ACV billings, and free cash flow in its 2Q23 earnings report, with revenue growth accelerating compared to the previous year.
- Despite longer sales cycles, management raised revenue and ACV billing guidance, while maintaining its FY23 FCF guide.
- NTNX remains in a strong and improving fundamental position in the market, but the audit overhang must be resolved before it is safe to invest.
Investment thesis
Nutanix ( NTNX ) had a strong performance in its 2Q23 earnings report, exceeding expectations in revenue, ACV billings, and free cash flow. The company's revenue growth accelerated compared to the previous year, and the supply chain constraints with partners improved sequentially, which positively impacted revenue. The macro environment, however, caused sales cycles to lengthen slightly, but this has been factored into the company's guidance. Despite this, management raised its revenue and ACV billings. The company's FY23 FCF guide remained unchanged, indicating a robust business model and strong performance from a growing base of renewals. Even with several additional one-time expenses, the company was able to maintain its FY23 FCF guide.
However, investors don't seem to care (stock is down 7% since then), and I believe a large number of NTNX shareholders have already abandoned the company due to the cloud cast by the audit committee investigation. On the one hand, I can understand the apprehension; the investigation is into the possible improper use of an evaluation software, which is why the business did not reveal its 3 statements for the period under review or issue any guidance. If I were to stretch my imagination to the extreme, it's possible that all reported numbers are inaccurate. The fact that NTNX has indicated it will be unable to file its 10-Q on time due to the ongoing investigation is also not a good sign. That said, management did try to ease investors' concerns by stressing that the investigation will not change the company's fundamentals, such as its market opportunity or demand for its solutions. I have no doubts that this overhang will result in short-term pressure on the stock price. It is very unlikely anyone would like to stick their neck out to go long now as the investigation must unveil much more problems than expected. At that point, NTNX stock price will be decoupled from whatever good fundamentals we know of.
On the other hand, giving management the benefit of the doubt, I do not anticipate any lasting damage to the company's core operations as a result of this investigation. From both a product-portfolio and P&L/profitability standpoint, I maintain that NTNX is in a strong position right now. If the VMware deal goes through, it could also help NTNX's standing in the market. NTNX is in a strong and improving fundamental position in the market, which should drive its value higher, but the short-term overhang in stock price is preventing me from making a buy recommendation at this time. The end of this committee, which will allow investors to more accurately evaluate underlying performance and margin cadence, is what would convince me to go long. My recommendation could backfire if opportunities to increase market share as a result of strategic moves in the sector materialize more quickly than I anticipate, which could lead to investors ignoring this audit issue.
2Q23 results
NTNX announced that its revenue for 2Q23 was $486.5 million, while its ACV billings were $267.6 million. The company's ACV billing outperformance was largely due to strong renewal billings, with an additional $11 million contributed by the timing of licensing revenue. Despite this success, the company stated that customers were taking longer to inspect deals, which was elongating sales cycles. NTNX adjusted its revenue and ACV billing guidance accordingly to reflect this change in the market. However, the company did see improvement in its supply chain constraints with several of its partners, which is a positive sign. In terms of FCF, NTNX generated $62 million in Q2 and $109 million year to date, which falls within the company's target range of $100 million to $125 million for FY23.
Audit overhang
It would not be fair to finish this post without discussing this audit overhang . Before going into it, I am pretty disappointed that this actually can happen. NTNX is not a newly IPO-ed company. It is a company that has been around for at least 10 years.
The full financials and outlook for NTNX have been withheld pending the outcome of an audit committee investigation, as the company has announced. On the specifics, management recently learned that some evaluation software supplied by one of its third-party suppliers had been used for years in interoperability testing, validation, and customer proofs of concept. The audit committee has retained outside counsel to assist with their investigation. The accounting impact of this situation is currently unknown, but management has stated that they do not expect it to have a significant impact on the company's business and prospects.
Conclusion
NTNX had a strong 2Q23 earnings report, with revenue, ACV billings, and free cash flow exceeding expectations. Despite longer sales cycles, management raised revenue and ACV billing guidance, while maintaining its FY23 FCF guide. However, the stock price has been impacted by the ongoing audit committee investigation, which has resulted in the withholding of full financials and outlook. While this investigation is a cause for concern, I believe it is unlikely to have a lasting impact on the company's core operations (supposing nothing major is found from the investigation), which remain strong from both a product portfolio and profitability standpoint. The short-term overhang in stock price is preventing a buy recommendation at this time, but the end of the investigation will allow for a more accurate evaluation of NTNX's underlying performance and margin cadence. Overall, NTNX is in a strong and improving fundamental position in the market, but the audit overhang must be resolved before it is safe to invest.
For further details see:
Nutanix: Wait For Audit Investigation To End Before Investing