#Nutanix Inc. answered investors’ wishes with the news Thursday that it will begin to shift to software-focused sales and eliminate hardware sales from its balance sheet, but the move will come with some short-term pain. @Nutanix NTNX, +9.94% is the developer of a cloud-based operating system and software that enables companies to combine storage and software into one data-center device. Its software is sold directly to corporate users and by distributors who sell its software on storage appliances developed by Cisco Systems CSCO, +0.80% Dell Inc. and others. With the big news of its software focus, Nutanix will no longer include revenue from its so-called hardware pass-through on its balance sheet. That will initially lead to what may look like a revenue slowdown to investors.  “Nutanix would have recorded nearly $800 million in pure software and support billings and delivered gross margins above 80%,” Nutanix Chief Financial Officer Duston Williams said Thursday in the company’s statement. Nutanix said nearly $800 million of software and support billings during the past 12 months is calculated as billings, less direct hardware costs of approximately $268 million. “Looking forward, we expect continued strong top-line growth in the remainder of fiscal 2018,” Williams said. The company also made the change ahead of a new revenue recognition rules that require companies to report the revenue of goods and services transferred to a customer. “Look, we have never sold hardware, these are commodity servers, a very different gross margin profile,” said Dheeraj Pandey, founder and CEO of Nutanix, in an interview. “There was no real value we were adding on top of it...It provides choice and flexibility for customers. At the same time Nutanix is no longer at the mercy of the commodity pricing.” Earlier this year, continued spikes in memory chip prices hurt the company’s profit margins. Pandey declined to comment on the company’s full-year revenue outlook, beyond the fiscal second quarter. “We don’t give forecasts for the whole year,” Pandey said, adding that Nutanix “plans to stay in that 40% to 50% [revenue growth] ballpark,” referring to the company’s second quarter forecast. Nutanix forecast fiscal second-quarter revenue in the range of $280 million to $285 million, which excludes approximately $12 million in pass-through hardware sales. That was pretty much on target with FactSet consensus estimates for revenue of $280 million to $285 million, and Nutanix is clearly hoping to make up for the lack of hardware with more software revenue. Investors were buoyed, at least initially, by the news, with Nutanix shares jumping almost 3% in after- hours trading. “Overall I think it’s a positive,” said Jack Andrews, a Needham & Co. analyst, but he cautioned that this is a situation “where some revenue is going to be disappearing, so the company may optically look like the growth rate may slow down. But at the same time, margins are going to be ramping meaningfully.”  CIO Network: Difficulties of Shifting to Cloud Nutanix’s Williams told analysts that using its software-centric billing, software and support was 74% of billing, while hardware made up about 26% of billing. “They want to eliminate two-thirds of that. By the end of Q4, hardware will only represent 8% or 9% of total revenue, versus 25% today,” Andrews said, adding that as its revenue numbers get bigger in the ensuing quarters, it will be tougher for Nutanix to replace all the lost hardware revenue with software revenue. Nutanix has hinted about a pivot to software in the past few months and in recent weeks, many analysts raised their price targets on its stock. Its shares are up about 24% so far this year, compared with the S&P 500 SPX, -0.20% , which is up about 18% year to date. Nutanix shares have not taken off at these levels since just after its IPO last year. Longer term, though, the move should help change investors’ impressions of Nutanix, which Andrews said was seen more as a lower-margin hardware stock “rather than a next-generation data-center operating systems company.”
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