The hyperconverged infrastructure pioneer’s stock is down more than 28 percent Thursday after Nutanix reported its second fiscal quarter earnings Wednesday night. Nutanix’s stock is currently trading at $23.28 per share as of Thursday morning.
The San Jose, Calif.-based company posted solid growth in its bread-and-butter software and support sales, which makes up the majority of Nutanix’s business, during its second fiscal earning report. Software and support revenue reached $338 million, up 14 percent year over year, while software and support billings hit $420 million, an increase of 12 percent compared with the same quarter one year ago. Nutanix’s total revenue in the second quarter was up approximately 4 percent year over year to $347 million.
So why did Nutanix’s stock drop 28 percent?
Lowering Full Fiscal Year Guidance Due To Coronavirus Fears
The coronavirus epidemic continues to hit the worldwide IT industry hard.
Uncertainty due to the coronavirus was one of the two main reasons Nutanix cited as to why it lowered revenue guidance for its current full fiscal year 2020.
“We are in an environment that is murky due to the impact of the coronavirus—dealing with the unknown for the first time in the company’s decade-long history,” said Nutanix CEO Dheeraj Pandey during the company’s second fiscal quarter 2020 earnings call with media and analysts. “Hence, we are cautious about our second-half guidance.”
The company previously projected total fiscal year 2020 software and support revenue of between $1.3 billion and $1.4 billion, with billings between $1.65 billion and $1.75 billion. Nutanix now projects total fiscal year 2020 software and support revenue to be between $1.29 billion and $1.36 billion, with billings between $1.6 billion and $1.67 billion.
“If you look at the impact of the coronavirus in general and the verticals that it hits—it’s retail, transportation, manufacturing, hospitality and travel and all that stuff,” said Duston Williams, chief financial officer at Nutanix. “It’s kind of a ripple effect.”
Too Quick A Transition To Subscriptions
In 2018, Nutanix made the decision to start pulling away from being an IT hardware provider and shift to becoming a software and services company. Over the past two years, Nutanix has completely transformed its portfolio, innovation road map and go-to-market strategy to focus solely on software subscriptions, services and applications.
However, Nutanix executives this week said the company has transformed more quickly than it expected, which is one of the main reasons why it needed to lower its full-year revenue guidance.
In its second fiscal quarter, 79 percent of billings came from subscriptions, surpassing the company’s previously stated goal of 75 percent by the end of fiscal year 2020.
“We repeatedly stated that it’s our desire to move forward through the subscription transition as fast as possible as we made great progress on this goal in the quarter. Our execution in this area far exceeded our expectations in the second quarter, significantly surpassing our fiscal year 2020 fourth-quarter goal of 75 percent,” said Williams. “Of the $50 million to $80 million decrease in [fiscal year 2020] billing guidance range, approximately $25 [million] to $30 million is related to the faster-than-expected transition to subscription, with the remaining amount attributed to the reduction in our APJ [Asia-Pacific and Japan] region sales plan.”
Stall In Asia-Pacific And Japan Region
Nutanix said the lowering of guidance was primarily due to a fall specifically in the Asia-Pacific and Japan region, known as APJ. Sales growth in this region, said Williams, is heavily dependent on net-new business, which undoubtedly will be stalled due to the coronavirus.
“Our APJ region is more dependent on new business in any given quarter, and with the shutdown in China and the slowness and uncertainty being exhibited in other APJ countries, we believe it’s prudent to take a cautious view of our APJ performance for the next few quarters,” said Williams.
In addition, there are some big deals in Japan that will need to be halted, according to Williams. “We have some very intriguing deals in Japan that we feel really good about, but the timing of those, we just can’t take an aggressive stance on that at this point,” he said.
Hiring ‘Pause’
Nutanix has been increasing its global head count every quarter for the past several years. However, due to market uncertainty, the company will slow down its hiring march for the short term.
Nutanix said excluding sales teams and a few other selective roles, it is “taking a pause on a significant portion of our planned head count” in the second half of its fiscal year, which will contribute to a $20 million to $50 million expense reduction from its previous guidance range.
“Regarding our hiring, we have slowed head count for the following two reasons. First, we would like to have more clarity to see if there might be any further potential disruption related to the impact of the coronavirus, and whether that disruption spreads to other portions of the world,” said Williams. “And secondly, quite honestly, it puts us in a better position to more efficiently integrate the 1,400 or so employees we’ve added over the last year.”
Williams said regardless of this head-count pause, Nutanix still plans to hire for critical roles on an as-needed basis. “We view this selected head-count pause as simply the right thing to do, and iit s in no way related to any change to our overall positive view of our business going forward,” he said.
Nutanix currently has a global head count of approximately 6,100 employees.
$217 Million Loss
For its second fiscal quarter 2020, Nutanix reported a loss per share of $1.13, or $217 million. In the same quarter one year ago, Nutanix reported a loss of $123 million, or $0.68 per share.
Needham Investment Banking lowered Nutanix’s target from $46 to $42 per share Thursday. Analyst Jack Andrew cited “near-term uncertainty” due to the coronavirus outbreak as one cause for the target cut.
However, Nutanix’s CEO said he is not worried about the stock drop or lowering its full- year 2020 fiscal guidance.
“Business is robust,” said Pandey. “We just have to be a little more cautious.”
