K. Liu's Week in Review

Happy Thanksgiving! At K. Liu & Co., we are particularly thankful for all of the support we have received in our first year of existence. Despite the short holiday week, there was still a fair bit of news to digest with the off-calendar reporting season now underway. QAD (QADA) was our lone reporting company this week, so we refer readers to our recap, “Q3 Earnings Boosted by Strong Cloud and Services Margins,” for our take on the numbers.

As for the rest, Nutanix (NTNX) led the way, posting strong fiscal Q1 results highlighted by the second highest number of large deals ever signed in a quarter, traction for new products, and continued progress in the company’s transition to a subscription model. Efforts to increase lead generation, expand the size of the salesforce, and move into the mid-market also appear to be paying dividends with the annual contract value (ACV) of new business booked in the quarter up 18% Y/Y, expected to accelerate to 24% in Q2, and increase approximately 25% in FY ‘20. Nutanix shares ended up 27.5% for the week. Box’s (BOX) results and guidance were also well received with the company’s fiscal Q3 revenue performance outpacing expectations and Q4 guided slightly above consensus. While the six-figure deal count metric was impacted by lower-than-anticipated contribution from the EMEA region, management highlighted strong early traction for Box Shield and larger deal sizes as more customers embrace the totality of Box’s platform. Guidance for Q4 compared favorably versus consensus expectations, and the company remains on track to deliver revenue growth plus free cash flow margin of 25% in the coming fiscal. Autodesk (ADSK) also saw shares appreciate following strong results, which benefited from several deals closing earlier than anticipated and a higher mix of deals with upfront revenue recognition. Continued momentum in Construction, share gains in Manufacturing, and success in converting nonpaying users were all reflected in the results. Management’s initial glimpse into FY ’21 calls for both revenue and free cash flow growth in the low 20% range.

Palo Alto Networks (PANW) was the biggest decliner of the reporting companies this week. While the company’s fiscal Q1 results beat expectations on robust growth in next-generation security offerings, an 11% increase in Firewall as a Platform billings fell short of internal expectations. Per management, incentives skewed the salesforce’s focus towards next-generation security products exiting the prior fiscal year but have now been recalibrated. Separately, Palo Alto Networks also announced plans to acquire Aporeto, which identifies workloads and applies microsegmentation across all infrastructures, for approximately $150 million in cash. With minimal revenue anticipated and approximately $13 million in net expenses to be absorbed, management guided FY ’20 non-GAAP EPS lower on an unchanged revenue outlook. Somewhat similarly, Veeva Systems (VEEV) delivered fiscal Q3 results ahead of expectations but non-GAAP operating income guidance for Q4 and the year ahead was weighed down by expenses associated with the recent acquisitions of Crossix and Physicians World. Shares of VMware (VMW) also lagged despite fiscal Q3 results exceeding expectations. Guidance for Q4 was mixed with revenue higher and non-GAAP EPS lower than consensus, and management’s preliminary FY ’21 outlook reflects low double-digit growth excluding the pending acquisition of Pivotal Software along with up to two percentage points of compression in the non-GAAP operating margin. In conjunction with the results, VMware also announced changes to its sales leadership with Jean-Pierre Brulard assuming the role of Executive Vice President, Worldwide Sales, effective February 1, 2020. He succeeds Maurizio Carli, who will transition from his role and continue as a go-to-market strategic advisor. Luigi Freguia, who most recently led the Central EMEA region for VMware, will take over Mr. Brulard’s prior responsibilities for the EMEA field organization.

Other notable hires this week included CyberArk’s (CYBR) appointment of Matthew Cohen as Chief Revenue Officer and New Relic’s (NEWR) hiring of Dmitri Chen as EVP and General Manager, Asia-Pacific and Japan. Mr. Cohen joins CyberArk from PTC (PTC), where he most recently served as Executive Vice President of Field Operations, while Mr. Chen comes to New Relic from Dell EMC, where he led the company’s go-to-market efforts in the APJ region.

Mergers and Acquisitions

Palo Alto Networks Announces Intent to Acquire Aporeto

  • Palo Alto Networks (PANW) has agreed to acquire Aporeto for approximately $150 million in cash.

  • Aporeto identifies workloads and applies microsegmentation across all infrastructures, enabling customers to secure their applications at scale.

  • The acquisition is expected to add $3 million in net expenses to the company’s Q2 and approximately $13 million to FY ’20.

Earnings Releases

Autodesk, Inc. Announces Fiscal 2020 Third Quarter Results

  • Autodesk (ADSK) reported Q3 ’20 results above expectations but guided Q4 short of consensus.

  • Revenue of $842.7 million (+27.5% Y/Y) exceeded guidance of $820.0-$830.0 million and consensus of $826.6 million. Non-GAAP operating income was $225.3 million (26.7% margin), also above consensus of $211.1 million. Non-GAAP EPS of $0.78 beat guidance for $0.70-$0.74 and consensus of $0.73.

  • Strength was broad-based across the entire product portfolio and all geographic regions, and management highlighted momentum in Construction, share gains in Manufacturing, and progress in converting the nonpaying user base.

  • Upside in the quarter was largely driven by deals with upfront revenue recognition with some of the deals also closing earlier than anticipated.

  • Key metrics: ARR of $3.22 billion (+28% Y/Y); billings of $1.01 billion (+55% Y/Y); net revenue retention rate was between 110% and 120%; remaining performance obligations were $2.97 billion (+32% Y/Y).

  • Guidance for Q4 includes revenue of $880.0-$895.0 million and non-GAAP EPS of $0.86-$0.91, falling short of Street expectations for $898.6 million in revenue and $0.93 in non-GAAP EPS.

  • For FY ’20, management lowered its ARR guidance from $3.425-$3.485 billion to $3.405-$3.445 billion, raised its billings guidance from $4.02-$4.08 billion to $4.05-$4.09 billion, increased the low-end of its revenue outlook from $3.240-$3.270 billion to $3.255-$3.270 billion, and narrowed its non-GAAP EPS guidance from $2.69-$2.81 to $2.74-$2.79.

  • Management’s initial outlook for FY ’21 calls for revenue and free cash flow growth in the low 20% range.

Box Reports Revenue of $177.2 Million for Fiscal Third Quarter 2020, Up 14 Percent Year-Over-Year

  • Box (BOX) reported Q3 ’20 revenue above expectations and guided Q4 ahead of consensus.

  • Revenue of $177.2 million (+13.6% Y/Y) was above guidance for $174.0-$175.0 million and consensus of $174.6 million. Non-GAAP operating income was $(0.5) million (-0.3% margin), ahead of consensus of $(1.3) million. Non-GAAP EPS of $(0.01) were at the low-end of guidance and in line with consensus.

  • The number of six-figure deals closed in the quarter was impacted by slower-than-expected growth in EMEA.

  • Key metrics: billings of $171.9 million (+10.5% Y/Y); closed three deals over $1 million, seven deals over $500,000, and 64 deals over $100,000; full churn rate was 4.4% and net expansion rate was 9% for an annualized net retention rate of 105%; 13.2 million paid users; remaining performance obligations of $636.0 million (+5% Y/Y); free cash flow was $(1.7) million.

  • Box Shield is garnering more early sales traction than any other add-on product in the company’s history.

  • Sales efforts going forward will be focused on supporting existing customers and maturing their use of the full Box platform.

  • Q4 guidance includes revenue of $181.0-$182.0 million and non-GAAP EPS of $0.04-$0.05, comparing favorably with consensus of $180.9 million in revenue and $0.04 in non-GAAP EPS.

  • In FY ’21, management plans to keep sales headcount roughly flat while driving greater sales productivity and investing resources in higher performing regions like the U.S. and Japan.

  • Other initiatives to drive greater profitability include optimizing workforce expenses, improving gross margin through a public cloud strategy, and applying a rigorous ROI-based approach to all areas of spend.

  • For FY ’21, management’s goal is to achieve revenue growth plus free cash flow margin of 25% with each component comprising roughly half of that target.

Nutanix Reports First Quarter Fiscal 2020 Financial Results

  • Nutanix (NTNX) reported Q1 ’20 results above expectations and reaffirmed prior guidance for FY ’20.

  • Revenue of $314.8 million (+0.5% Y/Y) was above consensus of $306.4 million. Non-GAAP operating income was $(134.2) million (-42.6% margin), ahead of consensus of $(139.1) million. Non-GAAP EPS of $(0.71) also beat the Street’s $(0.75).

  • The company continued to make progress in its transition to a subscription model, signed the second highest number of large deals ever for a quarter, and experienced traction with new products.

  • Key metrics: ACV booked in Q1 was $123 million (+18% Y/Y); software and support revenue of $305.0 million (+8.7% Y/Y) was above guidance for $290.0-$300.0 million; software and support billings of $370.3 million (+5.5% Y/Y) was above guidance for $360.0-$370.0 million; subscription billings of $275.5 million (+41.5% Y/Y) accounted for 73% of total billings.

  • Closed 66 deals in excess of $1 million and ended the quarter with 14,960 total customers.

  • Management remains focused on lead generation, added a record number of net new sales reps in the quarter, and now plans to build a strong mid-market business to complement its enterprise business.

  • Q2 guidance includes software and support billings of $410.0-$420.0 million, software and support revenue of $330.0-$335.0 million, and non-GAAP EPS of $(0.70).

  • Management reiterated prior FY ’20 guidance for software and subscription billings of $1.65-$1.75 billion and software and subscription revenues of $1.30-$1.40 billion.

Palo Alto Networks Reports Fiscal First Quarter 2020 Financial Results

  • Palo Alto Networks (PANW) reported Q1 ’20 results above expectations but lowered its FY ’20 non-GAAP EPS guidance.

  • Revenue of $771.9 million (+17.7% Y/Y) was above management’s $760.0-$770.0 million guidance and consensus of $768.0 million. Non-GAAP operating income was $122.0 million (15.8% margin), slightly below consensus of $125.3 million. Non-GAAP EPS of $1.05 beat guidance of $1.02-$1.04 and consensus of $1.03.

  • Key metrics: billings of $897.4 million (+18.3% Y/Y) were above guidance for $875.0-$890.0 million; next-generation security billings were $173 million (+217% Y/Y).

  • Firewall as a Platform (+11% Y/Y) was the only area in which the company did not meet its expectations for the quarter, which management attributed to incentives that skewed the salesforce’s focus to next-generation security products.

  • Guidance for Q2 and FY ’20 includes approximately $0.02 per share and $0.10 per share, respectively, in expenses from the acquisition of Aporeto.

  • Q2 guidance includes billings of $985.0 million to $1.0 billion, revenue of $838.0-$848.0 million, and non-GAAP EPS of $1.11-$1.13, which was mixed versus Street expectations for $845.3 million in revenue and $1.30 in non-GAAP EPS.

  • Management raised its FY ’20 billings guidance from $4.095-$4.155 billion to $4.105-$4.165 billion, reiterated prior revenue guidance of $3.440-$3.480 billion, and lowered its non-GAAP EPS guidance from $5.00-$5.10 to $4.90-$5.00.

QAD Reports Fiscal 2020 Third Quarter and Year-To-Date Financial Results

  • QAD (QADA) reported mixed Q3 ’20 results and guided Q4 short of Street expectations.

  • Revenue of $77.8 million (-2.2% Y/Y) was slightly below management’s $78.0-$79.0 million guidance and consensus of $78.4 million. Adjusted EBITDA was $5.7 million (7.3% margin), ahead of the Street’s $3.7 million. Non-GAAP EPS of $0.16 beat consensus of $0.08.

  • Currency and the timing of deal closures affected the top line performance, while stronger than anticipated cloud and professional services gross margin boosted profitability.

  • QAD closed 25 cloud deals in the quarter of which 11 were conversions and 14 were net new customers.

  • Per management, the cloud funnel is 25% higher than in the year-ago period, and the company has yet to see any impact from the broader macro environment on sales cycles.

  • Management’s revised FY ’20 guidance implies Q4 revenue of $78.8 million, below consensus of $82.4 million, and non-GAAP pre-tax income of $3.2 million.

Veeva Announces Fiscal 2020 Third Quarter Results

  • Veeva Systems (VEEV) reported Q3 ’20 results above expectations and provided a mixed outlook for Q4.

  • Revenues of $280.9 million (+25.0% Y/Y) were above management’s $274.0-$275.0 million guidance and consensus of $274.8 million. Non-GAAP operating income was $111.6 million (39.7% margin), exceeding guidance for $103.0-$104.0 million and consensus of $103.9 million. Non-GAAP EPS of $0.60 beat guidance for $0.54-$0.55 and the Street’s $0.54.

  • Calculated billings of $193 million was ahead of management’s $185 million guidance.

  • Outperformance in the quarter was attributed to great execution by teams across all areas of the business.

  • Commercial Cloud has a great quarter as the company won a number of new enterprise and SMB customers for its core CRM solution and also saw strength in Events Management and OpenData.

  • Management noted that IQVIA’s anticompetitive tactics have become more extreme, particularly with their OneKey data offering, but customers are beginning to stand up to IQVIA and many are considering moving to OpenData.

  • Embedded in management’s Q4 outlook is approximately $30 million in billings, $13-$15 million in revenues, and a non-GAAP operating loss of $6 million from the acquisitions of Crossix and Physicians World.

  • Q4 guidance includes revenues of $296.0-$299.0 million, above consensus of $279.9 million, and non-GAAP operating income and EPS of $100.0-$101.0 million and $0.51-$0.52, respectively, below consensus of $102.6 million and $0.53.

  • Management’s initial outlook for FY ‘21 includes revenue of $1.38-$1.39 billion, above consensus of $1.28 billion, and a non-GAAP operating margin of 35%-36%, which implies non-GAAP operating income of $483.0-$500.4 million versus consensus of $475.5 million.

VMware Reports Fiscal Year 2020 Third Quarter Results

  • VMware (VMW) reported Q3 ’20 results above expectations and guided Q4 mixed relative to consensus.

  • Revenue of $2.456 billion (+11.6% Y/Y) was above guidance for $2.400 billion and consensus of $2.411 billion. Non-GAAP operating income was $759.0 million (30.9% margin), exceeding consensus of $731.2 million. Non-GAAP EPS of $1.49 beat guidance for $1.42 and consensus of $1.43.

  • Key metrics: revenue plus change in unearned revenue was $2.808 billion (+18.4% Y/Y) and was $2.657 billion (+12.1% Y/Y) excluding the impact from Carbon Black; RPO was $8.5 billion at quarter-end.

  • With the acquisition of Carbon Black, VMware has launched a new security business unit that includes Carbon Black and other app defense offerings.

  • Project Pacific will transform vSphere into a Kubernetes-native platform, enabling enterprises to seamlessly add Kubernetes to their existing environments, operate containers and VMs on common infrastructure, and accelerate the development and operation of modern apps in vSphere.

  • For Q4, management’s guidance includes $2.95 billion in revenue, a non-GAAP operating margin of 37.6%, and non-GAAP EPS of $2.16, which was mixed versus consensus of $2.92 billion in revenue and $2.19 in non-GAAP EPS.

  • Management raised its FY ’20 revenue guidance from $10.03 billion to $10.10 billion, reiterated its non-GAAP operating margin guidance of 33%, and increased its non-GAAP EPS guidance from $6.49-$6.54 to $6.58.

  • For FY ’21, management currently anticipates low double-digit growth excluding the pending acquisition of Pivotal and up to two percentage points of compression in the non-GAAP operating margin.

Notable News

CyberArk Names Matthew Cohen Chief Revenue Officer

  • CyberArk (CYBR) appointed Matthew Cohen as Chief Revenue Officer, effective December 2, 2019, a role in which he will be responsible for the company’s global sales organization, delivering customer value, and driving sustainable growth.

  • Mr. Cohen joins the company from PTC (PTC), where he most recently served as Executive Vice President of Field Operations.

Dmitri Chen Joins New Relic as EVP and General Manager, Asia-Pacific and Japan

  • New Relic (NEWR) appointed Dmitri Chen as EVP and General Manager, Asia-Pacific and Japan (APJ), a role in which he will be focused on driving customer success in the region.

  • Mr. Chen joins the company from Dell EMC where he most recently led go-to-market efforts in the APJ region while serving as Chief Operating Officer and Vice President of Specialty Sales, APJ.

VMware Announces Sales Leadership Changes

  • VMware (VMW) appointed Jean-Pierre Brulard as Executive Vice President, Worldwide Sales, effective February 1, 2020, succeeding Maurizio Carli, who will transition from his operational role and continue as a go-to-market strategic advisor.

  • Mr. Brulard most recently led VMware’s EMEA region and will now have responsibility for the Americas, APJ and EMEA as well as pre- and post-sales engineering and all worldwide channels.

  • Luigi Freguia, who most recently led the Central EMEA region for VMware, will lead the EMEA field organization effective February 1, 2020.

Software IndustryKevin LiuADSK, BOX, CYBR, NEWR, NTNX, PANW, QADA, VEEV, VMW