From the Dust bin - NTNX

Please see the following numbers:


NTNX Q  End of Q         TRev*.  SSRev*. Seq.   QoQ.    TTM
Q4 2018	7/31/2018	$303.7	$267.9	18.1%	49%	37%
Q1 2019	10/31/2018	$313.3	$280.7	4.8%	44%	28%
Q2 2019	1/31/2019	$335.4	$297.4	5.9%	43%	22%
Q3 2019	4/30/2019	$287.6	$265.8	-10.6%	17%	12%
Q4 2019	7/31/2019	$299.9	$286.9	7.9%	7%	26%
Q1 2020	10/31/2019		$300.0	4.6%	7%	17%
Q2 2020	1/31/2020		$377.8	25.9%	27%	15%
Q3 2020	4/30/2020		$340.8	-9.8%	28%	17%
Q4 2020	7/31/2020		$382.0	12.1%	33%	24%

*TRev = Total revenue
*SSRev = Software & Subscription revenue
Then the growth rates are sequential, quarter over quarter and TTM.

The 2020 quarters are based on the annual revenue guide the company gave this quarter. I used the high end of the guide for the next quarter and then roughly the seasonal revenue percent for the remaining three quarters. You can see the acceleration in revenues starting the quarter after next.

In actuality, that acceleration is depressed by about 7% annually due to the business model transition.

Here are the margins and expenses.
Watch out belowwww. Operating Margins are terrible and going in the wrong direction!


 GM%    S&M%    R&D%    G&A%     OpM%
61.9%	67.6%	25.2%	6.4%	-37.3%
63.5%	64.8%	25.8%	4.6%	-31.8%
68.4%	67.0%	28.6%	7.5%	-34.7%
77.7%	61.9%	26.7%	7.5%	-18.5%
78.6%	62.0%	28.4%	6.7%	-18.4%
77%	64.0%	29.7%	6.3%	-23.1%
77.10%	79.2%	36.0%	8.0%	-46.1%
80.0%	79.3%	33.7%	7.4%	-40.3%

But, the numbers above don’t tell the whole story. Revenues are compressed as a result of the transition to a subscription model. If you are interested at all, this is discussed exztensively in the conference call. But the end result is, expenses look much higher as more ratable revenue takes over.

About 10% of ACV this past year comes from new sources. The HCI space is growing in a very, very large way. Nutanix has not been disbaled by VMWare in the HCI market. In fact, Nutanix is a leader.

Nutanix made one huge investor relations mistake. While they told us about the transition from hardware to software, they completely forgot to mention the transition to a ratable business model and what the impacts would be because of it. It was nothing less than atrocious, but I don’t count out the fact management simply missed it and has made course corrections in real time they didn’t anticipate. It does seem like VMWare became much more aggressive in an instant.

Regardless of management’s folly in forecasting the change to a ratable model, the company does appear very valuable to its customers. Customer growth remains impressive at around 7-8% sequentially and I believe we just received the first DBNRR of 132% from the company.

At any rate, there is really a lot to look at given the roughly 3x valuation (EV/S) on just software and subscription along.

A.J.

16 Likes

Phoolio, there is accounting and there is real cash. Nutanix’s business change was suppose to create higher margins and more deferred revenues, thus higher cash flow. And yet Nutanix went from cash flow positive to way negative and it still anticipating nearly burning through $300 million in cash for next year.

If the negative margins are simply a function of change in revenue recognition, then why is the cash flow so negatively impacted? This is a huge change in cash flow if you take into account how positive they were beore the crash.

I have not done a forensic analysis or anything, it just does not make sense to me that things are simply a matter of how revenue is recognized as it does not correspond with real cash flow.

Help me here if you have figured this out.

Thanks.

Tinker

11 Likes

when you buy revenue…

This is a huge change in cash flow if you take into account how positive they were beore the crash.

Tinker,

No real deep forensics are required here and it is pretty simple. By the way, everything you said in your post is correct, except suggesting the company was positive cash flow before the double headed dragon of eliminating hardware and changing to a subscription model. Over the past 13 quarters, free cash flow was positive only 4 of those quarters and only 2 of those were greater than $10M. So, Nutanix was really never to the point of a cash flow story.

Their business has certainly not been selling itself as has been evidenced within the sales reorganization and increase in headcount that has been ongoing. Come to think of it, that makes three heads to the dragon considering they have defined the need to ramp sales efforts.

The company burnt $33M in cash last quarter and has just over $900M in the bank with about $450M in convertible notes. And they are expecting to burn around $200M this year as sales efforts continue to be a focus for grabbing market share. They are spending a lot right now. SM/RD have been increasing around 37% or so the past couple of quarters and that is expected to continue. That is obviously higher than revenue growth so the operating margins have been declining. The best they ever were was just above -20%. Now they are closer to -40%.

Yes, those are all reasons to stay away from Nutanix.

The reasons one may want to look into the name are the following. Valuation has to be a consideration as the name is in the dumps. Valued on software and sub only they sit at an EV/S of 3x. Customer count is 14,180 and grows about 4,000 per year. By and large, customers seem to be very satisfied with the company’s solutions evidence by NPS of 90. 26% of new deals involved non-Core products and 10% of ACV last year came from non-core (non-HCI) products. Gross margins are now 80% more reflective of a subscription model. Subscription revenues were 71% of the total with a long term goal of 75%. That is likely to move higher as well.

They still likely have challenges selling their full suite of solutions, but those challenges may very well turn into opportunities for the company. Currently, nothing is bundled which is likely to change over time. The questions is whether the new ramp in S&M will be fruitful. What is the Cac to LTV? With 80% margins and loyal customers, one would believe the model should pay off in the long run. But it remains to be seen.

Yep, it is a value play right now, but I feel comfortable posting about it as there is at least enough information for folks to make their own decisions and/or begin looking into the company more closely.

Happy to try to answer any other questions.

Take care,
A.J.

20 Likes

Valued on software and sub only they sit at an EV/S of 3x.

You think someone can buy this company and fire the entire salesforce and make it instantly profitable? The acquirer can sustain the revenue rate with standard sales support? If you are not able to say yes then there is no value.

At what revenue runrate, the company can bring down SG&A and get to profitability? I don’t see a path to profitability.

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You think someone can buy this company and fire the entire salesforce and make it instantly profitable? The acquirer can sustain the revenue rate with standard sales support? If you are not able to say yes then there is no value.

At what revenue runrate, the company can bring down SG&A and get to profitability? I don’t see a path to profitability.

I don’t think anyone would buy the company with that intent. Yes, the company would be profitable, but likely for a short period of time as they would allow someone else to eventually take over the market. Since S&M expenses are about 70% of revenues. I’d say firing the vast majority of them would make the company instantly profitable, but that seems like a silly question and an even sillier maneuver for a company interested in becoming much larger in the future.

Agreed the path to profitability is not something that is just around the bend. If the growth rate doesn’t accelerate, the company will be toast for all intents and purposes. The company expects the growth rate this year to be between 15% and 24% that should be thought of as 23% to 32% based on an 8 point compression attributed to the subscription transition. I believe it is likely the following year can show even higher growth rates.

And they are accelerating their investments in sales and engineering which won’t help near term profitability. They have released a slew of additional products with 10% ACV which is somewhere around $100M in revenues. Uptake of those new offerings will be an important part of whether the company has success. DBNRR is 132%. This is certainly a positive sign as well.

Finally, Nutanix will be discussing their 3 year plan in more detail at an upcoming investors day. We may learn a bit more about profitability then. If they spend $250M this year, they will end up with around $650M at the end of the year. I haven’t looked into the terms of the convertibles.

A cynic believes they are buying their revenues and will have to do so forever. An optimist would believe there is a huge market ahead of them with loads of margin and it makes sense to land all of the customers they can as quickly as they can to become locked in. The making of horse races…

A.J.

16 Likes

but that seems like a silly question and an even sillier maneuver for a company interested in becoming much larger in the future

There are many tuck-in acquisitions happen all the time, where either revenue, product are bought and not necessarily other parts of the company. I guess perhaps you are not aware or limited understanding of such thinks doesn’t make such scenarios as silly.

The critical part of my question which you are still not getting is, if you say the company has to spend 70% of SGA to defend its market share, then the model is broken. They are buying revenue.

A cynic believes they are buying their revenues
Very poor choice of word, I would have used something like a skeptic.

I think you are suffering from superiority complex. You dismiss questions as silly, while acknowledging they cannot sustain the already sold revenue with standard sales spend, also acknowledge you don’t see a path to profitability, you continue to argue that they require 70% as SGA to defend that market share, and claim this is a value stock.

Are you sure, you are not suffering from commitment bias?

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I think you are suffering from superiority complex. You dismiss questions as silly, while acknowledging they cannot sustain the already sold revenue with standard sales spend, also acknowledge you don’t see a path to profitability,

kingran

Saying something like “superiority complex” seems a bit out of line here as AJ did a really good job of laying out his thought process above based on the his expectations. Obviously he and I feel differently about the opportunity than you do, on NTNX. And that’s ok. I bet the majority of this board currently shares your overall view on the company.

I’m looking forward to seeing how the story plays out over the next couple of years

-mekong

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That is the whole gist, the cost to sell their product never declines, never experienced leverage, and therefore like many internet companies before them go poof as there can be found no leverage in the business model.

That is not pessimistic or optimistic but analyzing what is and what is projected with all else beyond that pure speculation.

Zscaler, as an example has more customers in its pipeline than it can competently sell to each quarter. Sellong costs are incurred in year 1 and only small service support thereafter into any foreseeable world of time.
That is leverage!

TEAM sells itself. Elastic, although more complicated, partially sells itself.

Nutanix spends more dollars every quarter to sell less, with the rate of expense growth much greater than revenue growth.

Works for Amazon as they can then leverage their infrastructure and eyeball dominance.

What is Nutanix creating business leverage with? Or is it spend the money and hope the competitive pressures abate.

The company is growing far slower than its own market of HCI that it created. This is its time to shine as HCI crosses the chasm and the market has gone mainstream with 60% plus growth.

That was my thesis on Nutanix. The thesis proved false. So I sell.

Arista was suppose to accelerate because of 100gb switches. The math, the charts, the rhetoric, the blogs, all said so. The thesis proves false. So I sold. With Arista at its very high point as it was added to the s p 500 or such. But I sold, relative price strength be danged. The thesis was demonstrably false!

What is not false about Nitanix’s investment thesis? Yes, you state it is “cheap”. Okay, many find cheap to be a good investment criteria. But what business thesis other than its multiple being “cheap” (which is a subjective term) is not false?

Tinker

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Saying something like “superiority complex” seems a bit out of line here

Not at all. In fact, he failed to get the questions I posed. The point I raised that the company is buying revenue, which he implicitly acknowledges while dismissing it as silly, etc, is a standard debate tactic, where one assume and acts as if they posses superior knowledge, while they don’t get it. It comes out when you make other statements like “cynic” etc.

But what business thesis other than its multiple being “cheap” (which is a subjective term) is not false?

I disagree that is “cheap”, hence the question about can they turn profit if you can strip all the “excess, growth” investments in SGA?

I am not saying NTNX can not right the ship, but I would not call it “cheap” or “value”.

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https://blocksandfiles.com/2019/05/03/gartner-nutanix-leads-…

The game is not over in the HCI market. The link above is now two quarters old, but this is still a duopoly even if NTNX has ceded some market share the past two quarters. Yes, Nutanix has had to spend enormously to obtain their 14,000 customers whereas VMWare has 60,000 existing customers to sell to.

To date, we have not seen any leverage in the business. That is seen clearly in the numbers. And those numbers have detoriated as of late (3-headed dragon). I’m suggesting we will see improvement as the transition progresses.

The HCI market is expected to expand significantly over the next 4-5 years. Nutanix has not been defeated in this market and has tons of new offerings to sell. Most of those offerings are relatively new and already account for 10% ACV.

Also, I’d suggest taking a look at the latest quarterly presentation as well that has all sorts of information I haven’t posted. For instance, big deals with lifetime bookings over $5M are growing at 63%. If that continues, it will eventually move the needle. Cohorts in the $1-$3M and $3-$5M are growing nicely as well.

Finally, the company just provided annual revenue guidance for the first time. My guess is they have given guidance they feel comfortable meeting and exceeding, but that is speculation at this point and we will have to see.

One more thing - I do try to look for some opportunities for multiple expansion in my portfolio. Expansion provides the fastest returns and we don’t see many opportunities for that. Nutanix fits into that relatively small portion of my portfolio dominated by highly valued companies who are going to be relying on continued high growth for price appreciation.

Take care,
A.J.

9 Likes

I see absolutely no reason for a company of NTNX’s size to have to spend 70% on S&M.

My opinion on NTNX remains intact. I want no part of a company that has to fine tune their “lead generation spend” so precisely to avoid an unexpected downturn in growth. It is a sign of a competitive environment.

And I saw signs of hope. Their customer count continues to grow. But I asked myself if I want to be trying to outsmart the market, which is more difficult and not necessarily more rewarding, or do I want to focus on growth. I chose instead of going after value cigar butts to remain a growth investor. Value investing is not easy, especially in tech. And one still has to ask themselves that, yes, it was nice to see that pop after earnings, should they have been concentrating their efforts on Roku. I sold at like $33 after hours 2 quarters ago when the signs became clear and never looked back. Going after those value stocks still has opportunity cost even when they work out well.

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Saying something like “superiority complex” seems a bit out of line here

Not at all. In fact, he failed to get the questions I posed. The point I raised that the company is buying revenue, which he implicitly acknowledges while dismissing it as silly, etc, is a standard debate tactic, where one assume and acts as if they posses superior knowledge, while they don’t get it. It comes out when you make other statements like “cynic” etc.

WE DON’T DO PERSONAL ARGUMENTS ON THIS BOARD.

LET’S STOP THIS THREAD RIGHT HERE! THANKS!

Saul

19 Likes

THanks Aj. Some good points and productive honest exchange. We can’t say Nutanix won’t succeed or even if it is cheap now or not. The one thing we can say, and it is based on informed speculation (as we don’t have any real evidence now that it will succeed, only that maybe on a speculative basis combined w their still #2 market position in a high growth market) that if they do succeed their multiple will clearly increase.

I think that covers it. Y’all know my opinion in regard. Not that you can’t find some comeback winners but that, on a systematic basis it is far more hit hit and miss.

Further, almost always, the comeback for such companies comes from doing something different (new product, market demand changes, new way of doing things…something) and does not usually involve doing the same thing but this time better than before (as that boat has often already sailed).

Nutanix has new products and 5g and edge computing and the like. There are new things. There is just no facts we can rely on now other than trust in management that they will find their new killer paradigm.

Tinker

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Very productive exchange, Tinker, and thanks for providing your feedback which I always enjoy. I’ll continue to follow the name and will report on results. Not trying to change anyone’s mind here and wanted to provide a synopsis of the good and the bad. There has been plenty of bad going around at Nutanix lately as we all know.

I’m glad management decided to give investors annual guidance as that is something we will be able to monitor and track. I think management has made plenty of mistakes in the past though they still have a chance to get it right and I do not think they are inept. That annual guidance likely gave investors the confidence to bid up the price 20%+ after earnings. We will see if the company tracks toward the top end of their guidance which I suspect they will.

Be back next quarter to let you all know what is going on.

Take care,
A.J.

5 Likes

For folks referencing revenue and margins, it’s very much worth noting that NTNX is actively purging hardware sells in transition for subscription model.

Autodesk, Adobe, two recent successful examples of this.

NTNX seems to be well on that path and even ahead of their schedule. Their previous two quarters were decimated because they had no pipeline. I see the OpX increase as the reestablishement of that pipeline.

Those arguing profitability seem like you are on the wrong board.

Hypergrowth is blitzkreig, damn the profits. Once you start hearing companies talk about profits it is time to run. It means they’re fundamentally shifting the business model, slowing down growth mode and settling into the space they are at.

Nimble investing affords us to jump out of companies like NTNX and jump back in if we see a turnaround. We have no need to focus on anything other than the path forward.

Some of the biggest winners here (TWLO) came from opportunities that weren’t largely recognized by the larger market.

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JAF,

You have the theory correct and I agree.

But I do want to point out the transition to software is largely complete. The transition now is to a ratable offering. Check out the earnings presentation (slides) and you can see the various components of their subscription offering. Two of the three are ratable. Term licensing is still recognize upfront (or largely upfront anyway). Professional Servies are recognized at the time they are performed, but are a very small part of the pie. Hardware is recognized upfront, but is also a very small part of the pie and has no margin.

The biggest component of the company that we need to keep focusing on is sales. Will their increased pace of hiring be successful and will they be able to sell their other products as well? Those things remain to be seen.

The ratable transition will occur. We don’t know how term licensing (largely upfront) will impact this, but we do have the company expectations for the full year now and can track progress on these fronts better than we have been able to in the past.

Take care,
A.J.

2 Likes

Those arguing profitability seem like you are on the wrong board.

LOL

Hypergrowth is blitzkreig, damn the profits
Are they growing, ex-HW sales? It is not clear to me what is their true revenue growth and whether such growth requires the kind of SGA spend.

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The company expects the growth rate this year to be between 15% and 24% that should be thought of as 23% to 32% based on an 8 point compression attributed to the subscription transition. I believe it is likely the following year can show even higher growth rates.

The most recent quarter is: Software and Support Revenue: $265.8 million, up 17% year-over-year from $226.8 million in the third quarter of fiscal 2018. So if not for the transition to subscriptions, this would have been 25% growth? This is still a significant deceleration for a company that was growing 45% a year ago. I’m curious why there is an impression that growth will accelerate next year? And by growth accelerating are you referring to overall growth including hardware sales, or growth in software sales? Obviously analyzing growth including the hardware sales is not really relevant at this point. It’s software sales we want to see grow. So by software sales growing next year, you expect it to grow faster than this year after even accounting the 8% compression? What I’m getting at is how do you see Nutanix getting back on to match the hypergrowth curve HCI is currently experiencing?

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