Nutanix sees annual recurring revenue growth slow amidst federal vertical challenges

In the first quarter of fiscal 2025, which took place recently, Nutanix, Inc., a cloud computing company based in the United States, reported its financial results. Despite experiencing strong customer growth, with a year-over-year increase of 66% in customer acquisition, the company faced a slowdown in annual recurring revenue (ARR) growth. ARR grew by 18%, down from 22% in the previous quarter, and incremental ARR was noted to be only $58 million, reflecting a significant 43% decline compared to the previous year. This downturn is primarily attributed to underperformance within the federal vertical due to delays in government spending resolutions. The impact of Broadcom's recent acquisition of VMware is observed as a contributing factor to Nutanix's strong quarterly results, highlighting a shift in focus toward small and medium-sized businesses (SMBs). Analysts have expressed mixed sentiments regarding Nutanix's performance. Needham's analyst, Mike Cikos, upgraded his price target and noted that while addressable market strategies and investments in automation bode well for long-term growth, the cautious management outlook has raised concerns about future financial trajectories. The quarterly report, however, was not without positive highlights, including revenue growth of 16% and an operating margin expansion, which provides the firm with flexibility to invest more in sales, marketing, and research and development. Yet, analysts are wary of how the elongation of large deals and the previous strong performance in ARR may impact future quarterly results. Northland Capital Markets analyst Nehal Chokshi pointed to the tough conditions faced in the federal vertical, concurring with Cikos on the slower ARR growth, despite the overall strength witnessed in customer addition and revenue. The delicate balance between managing expectations and delivering strong financial results amid significant external pressures is crucial for Nutanix as they navigate through changing market dynamics. Investor sentiment appears to have shifted, as evidenced by NTNX shares falling over 7% following the announcement of these results, indicating investor caution regarding the company's future performance against the backdrop of slowing revenue growth.