Nutanix Inc. reported strong sales growth in its fiscal second quarter, sending its stock up nearly 3% in after-hours trading and continuing a string of robust earnings reports following the hammering it took on weak guidance a year ago.

Total quarterly revenue $346.4 million at the data center software and services company was flat compared to a year ago but well ahead of analysts’ estimates of $327 million. Operating expenses fell even more sharply than the company had forecast, dropping 11% to $353.5 million. Nutanix’s quarterly net loss of 37 cents per share was 23 cents better than loss reported in the same quarter a year earlier and far better than the 99 cents-per-share loss analysts had expected.

The company said annualized contract value revenue – an important indicator of business stability and a metric upon which management has been intensely focused – grew 14% year-over-year, to $159 million. Growth was bolstered by sales of new products, which were part of 37% of deals signed in the quarter, up from 31% a year ago.

It was the ACV numbers that were the most encouraging. The company reported that it is now on track to derive $1.3 billion from subscription services this year, up 20% over fiscal 2020. Nutanix has nearly doubled its ACV run rate since the second quarter of 2019.

Sales up, costs down

Chief Executive Rajiv Ramaswami (pictured), who joined the company in December from VMware Inc., said the shift to subscriptions has the potential to drive operating expenses down and the top line up. The company can realize better efficiencies and lower costs through add-on sales and renewals, which are less expensive than new customer acquisition.

“Our business today is largely new business; we haven’t benefited much from the renewals yet,” he said in an interview with SiliconANGLE. Focusing on packaged offerings and renewals means “our cost of sales don’t have to scale linearly with the top line.”

Steve McDowell, an analyst at Moor Insights & Strategy, said Nutanix is doing well in the face of strong competition from VMware, which he called “one of the most dominant and aggressive competitors in the market. Nutanix hasn’t missed a step in its recent CEO transition,” he said. VMware will report its earnings on Thursday.

Moreover, the quickening move by IT organizations to software-defined data center architecture bodes well for both companies, McDowell said. “The two companies have a near duopoly.  They continuously push each other, which ultimately helps IT buyers across the board,” he said.

Ramaswami said he’s looking to combine a large portfolio of point products into packaged suites that can drive higher average sales per customer and help along adoption of Nutanix’s hyperconverged infrastructure software. “We’ve got a broad portfolio and instead of selling stand-alone we’ll put them together,” he said.

The company’s new Era database management lifecycle suite that was introduced last year “is top-of-the-stack, a standalone play that helps attract workloads into our platform,” Ramaswami said. Nutanix expanded its line of hybrid cloud-related offering during the quarter with Objects and Files, which customers can deploy atop their Nutanix-managed infrastructure to provide object and file storage capabilities.

“Customers aren’t looking to buy a point product,” he said. “As we broaden our product portfolio, it’s pretty hard for customers to buy just one product at a time.”

McDowell called that strategy sound. “Nutanix has successfully shifted the HCI conversation away from do-it-all appliances of its early days, into a framework for managing resources across an enterprise,” he said. “This has changed the way enterprises think about HCI and the software-defined data center.”

COVID lessons

Ramaswami said COVID-19 has taught lessons about expense control, demonstrating that high-touch onsite sales isn’t as important as many people once thought. “The focus on working virtually has made us a lot more efficient,” he said. “We went overnight to 100% virtual on events and salespeople doing on-premises proofs of concept to enabling customers to do that themselves with Test Drive,” a try-before-you-buy service for sales prospects.

“We’re not going back to the old way of doing business,” Ramaswami said. “I think we’ll do a lot more virtual events going forward along with digital demand generation.”

Unlike many software firms, Nutanix is bullish on the on-premises data center market, which Gartner Inc. expects to grow 6% this year. “There is a lot of storage that will be displaced by HCI,” he said. “The penetration levels are still small. Given our scale and size there’s still plenty of opportunity to grow there while at same time expanding our cloud business.”

Metrics were strong across the board. Gross margin of 82.7% for the full fiscal year was up from 81% in fiscal 2020 and 63% in fiscal 2017. The company finished the quarter with 18,770 end-customers, including about 950 of the Global 2000, up from 930 last quarter.

Photo: SiliconANGLE