Nutanix's Internal Investigation Limits Outlook, Still Analysts Expect Minimal Impact, Remain Optimistic On Moderate Deal Elongation

Needham analyst Mike Cikos reiterates Nutanix Inc NTNX with a Buy and a $33 price target.

Nutanix released 2Q23 earnings that felt more like a pre-announcement, given that the press release was limited to Revenue, Billings, and Cash Flow metrics. 

Nutanix cited easing supply-chain constraints Q/Q. However, the company saw increased deal scrutiny compared to last quarter's "anecdotal evidence." 

Moderate elongation in deal cycles is a more direct impact from macro - a slight negative to Nutanix but not unexpected compared to peers. Management considered these inputs with its updated ACV Billings and Revenue guidance.

ACV Billings and Revenue exceeded guidance and consensus in 2Q, and 3Q guidance topped estimates. However, updated FY23 guidance implies lower-than-expected ACV Billings and Revenue in 4Q.

Management discovered it had been improperly using a third-party software vendor's solution over a multi-year period - using the provider's software for interoperability testing, validation, and customer proof of concepts, which was beyond the scope of the evaluation use case. 

As a result, Nutanix's Audit Committee is investigating the matter and has engaged outside legal counsel. But the ongoing incident limited Nutanix's ability to provide 2Q actual expenses or guided expenses for 3Q and FY23.

Management updated its Revenue and ACV Billings guidance while reaffirming its Free Cash Flow guidance, but the analyst left his estimates unchanged at this time, given the limited disclosures.

RBC Capital analyst Matthew Hedberg reiterates Nutanix with an Outperform and a $33 price target.

Hedberg updated his estimates for preliminary results and will further adjust his model after it released full results.

On the investigation, it seems like more of a non-event with the company using the software beyond the scope of its evaluation use case, the analyst notes. 

The analyst senses management was trying to resolve it before tonight, but that did not happen.

Management highlighted that the fundamentals of the business remain unchanged but did not comment on the specifics of the case other than they hope to have it resolved before their summer analyst day. 

Ultimately, Hedberg thinks the investigation will incur additional costs but will be minimal in the big picture.

On the deals that had some elongation, management noted that customers had to go further up in the organization chain to get approvals. The analyst notes that there is nothing unusual relative to expectations, and the company has factored these headwinds into the guide. Additionally, management noted that nothing abnormal pushed out of the quarter.

Price Action: NTNX shares traded lower by 8.38% at $26.36 on the last check Tuesday.

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