Earnings Outlook: Nutanix earnings: After software pivot rumors boost stock, confirmation may arrive

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Nutanix Inc. shares have enjoyed a huge rise recently based on excitement about a change at the company that hasn’t happened, or even been officially announced yet.

Nutanix NTNX, -5.00%  will have a chance to share news on a rumored new software focus Thursday afternoon, when it reports fiscal first-quarter results after the bell. Interestingly, the results will arrive on the same day as a more established company with which Nutanix could be developing a rivalry, VMware Inc. VMW, -5.70%  

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Since its initial public offering in 2016, Nutanix has done its part to make “hyperconvergence” the new buzzword in Silicon Valley, essentially combining computer storage and servers in a “hybrid cloud” product that allows businesses to access on-site computing power as well as public-cloud assets. In the past few weeks, though, analysts have suddenly become very excited about a shift to a software-only model, which would boost margins by avoiding the hardware Nutanix currently sells, and Nutanix shares have taken off to levels not seen since just after the IPO.

On Wednesday, Nutanix shares fell 7.7% to $31.98, on track for their worst one-day percentage loss since March 3 amid a selloff in tech stocks. Still, shares are up 44.8% so far this quarter, while the S&P 500 index has gained 4.3%.

Analysts’ exuberance seems to have helped those gains. In November alone, RBC Capital Markets analyst Matthew Hedberg boosted his price target on Nutanix to $37. That follows initiation of coverage from Needham with a buy and a Wall Street high price target of $45, and Raymond James analyst Simon Leopold upgrading the stock to a buy based on competitive momentum.

See also: Nutanix is a ‘once-in-a-decade’ opportunity, says Goldman Sachs

Nutanix still has not officially announced any pivot to a software-only model, but analysts seem to have some pretty specific details about it. RBC’s Hedberg speculated on how Nutanix would shift over to a software-focused model by only compensating sales reps for software deals by the third quarter of 2018. Hedberg also expects disclosures on how gross margins on software are 70% or more starting this quarter. He notes:

At some point next spring, we think the company will host an analyst day and shed further light on the operational pivot to software, which could mean partnering to a greater extent with OEMs (Dell, Lenovo, IBM, etc.), suppliers (SuperMicro, etc.) and distributors/VARs in a meet-in-the-channel model (think Cisco UCS). While this pivot to software would have operational implications, it should be transparent to the customer.

Thursday’s earnings will give executives a chance to publicly announce and discuss such as shift, which could put Nutanix in even more direct competition with VMware’s virtualization software. They also could offer a better look at how the partnership with Alphabet Inc.’s GOOG, -2.47% GOOGL, -2.53%  Google Cloud, announced in June, has affected financial performance.

What to expect

Earnings: Of the 19 analysts surveyed by FactSet, Nutanix is projected on average to report a loss of 26 cents a share, a target that has increased from the consensus of a 37-cents-per-share loss when the quarter began. Nutanix reported a loss of 37 cents a share in the year-ago period, and forecast the same result for this year’s fiscal first quarter. The consensus on Estimize, a software platform that uses crowdsourcing from hedge-fund executives, brokerages, buy-side analysts and others, calls for a consensus loss of 24 cents a share.

Revenue: Of the 18 analysts surveyed by FactSet, the company is forecast to report revenue of $266.9 million, up from the consensus of $232 million when the quarter began. Nutanix reported revenue of $166.8 million in the year-ago period and guided for sales of $240 million to $250 million. The Estimize consensus calls for revenue of $270.5 million.

Stock movement: With Wednesday’s selloff, shares are up 21% for the year. Most of that gain happened this month, with shares rallying as much as 22% in November, and shares are now up 14% for the month. Nutanix is trading 102% above its IPO price from a little more than a year ago.

What analysts are saying: Needham analyst Jack Andrews brought up a curious dynamic between Nutanix and VMware via the relationship they both have will Dell. He notes:

A possible nuance in the competitive marketplace is the 83% ownership of VMware by Dell, a major distributor of Nutanix’s platform. Although congenial at this time, due to nearly half of Dell’s hyperconverged revenue being driven by Nutanix software (Source: Nutanix), Dell could hypothetically provide a VMware-only solution. In some marketing materials, VMware cites a lower cost of ownership than a Nutanix-provided solution on comparable Super Micro hardware. Nutanix’s marketing material counters that its solution scales better, has no node limitations, has multiple hypervisor support, and has built-in automation tools.

Raymond James’s Leopold had this to say:

We believe Nutanix benefits from a conflicting pitch by competitors. Dell, EMC and VMware do not present a unified pitch, and customers are gravitating to Nutanix (ironically, often promoted by Dell). The new partnerships (Google and IBM) present upside opportunities.

JMP Securities analyst Erik Suppiger, who has an outperform rating on Nutanix and a $35 price target, noted that this quarter the company will be reporting using the ASC 606 standard, a new revenue-recognition standard many companies have yet to adopt. He notes:

The new standard allows the company to recognize software sales upfront, whereas previously they were amortized over a three-year lifetime. As a result, ASC 606 positively impacts total and product revenue, with our F1Q18 revenues increasing from $246M to $267M, due to the immediate recognition of revenue for software sales while support revenue is slightly reduced due to some reallocation of revenue from support to product.

Of the 20 analysts who cover Nutanix, 14 have overweight or buy ratings, five have hold ratings, and one has a sell rating, according to FactSet. On average, analysts have a $32.53 price target on the stock, 6.1% lower than Tuesday’s closing price of $34.63 but close to where Nutanix was trading Wednesday.