My thought on NTNX

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I have probably read, listened or watch 12-15 hours worth of information over the past few days, including every NTNX related post on this board. I have read the earnings transcripts twice and listen to it once. I have watched youtube videos on NTNX software. I have read Bert, Seeking Alpha, and VMWare’s earnings transcript. I have a lot of thoughts floating around in my head and I am not sure that I can clearly communicate them all but here is a try.

If any of you read my portfolio updates you know that NTNX is my largest holding. I bought some more (approximately 3% of my portfolio) at ~37 pre-market after the earnings announcement, before my deep digging. Sometimes when you try to catch a falling knife you get cut.

Right now I am pretty sure (reserving my right to change my mind) I am going to continue with my NTNX investment. I may even add if the price continues to drop. I have not “fallen in love” with the stock. I am a seasoned investor, cutting my losses does not bother me. However in the past I have had a history of being overly patient with certain stocks in my portfolio. That is reason why I spent alot of time researching after this earnings announcement.

Here are some of my thoughts for continuing with my investment.

  1. Q2’s numbers were good, it was a good quarter. It was guidance that stunk. (I will discuss this in more detail later).

  2. I think NTNX is the leader in HCL, it is recognized by both Gartner and Forrester. I think they are an innovative company that produces superior products. I believe there is a demand for these products. I do not believe that is going away.

  3. I think Dheeraj Pandey is special. Many are saying he is not the man for the job because he is a software engineer. Well he has built a very successful software company in a very short time. I think he is a visionary.

  4. Valuation. EV/S is 4.2 (for 2019 sales). Also I do not believe their forward revenue guidance either, like I felt when TWLO low balled. I am almost certain NTNX has as well. Why would they do that? That is a damn good question. This is one of the things I have been trying to wrap my brain around. Here is the only thing I can think of; the companies overly sense of paranoia. Pandey talks about this all the time. They want to be paraniod, they have to be. Well sometimes paranoia makes a mountain out of a mole hill. I believe this is why guidance was so low.

Looking at the numbers. https://docs.google.com/spreadsheets/d/1OYBxb68U1gH3qDVGt69e…

When you look at the Billings and Revenue numbers Pro Services and Hardware are not much of a factor as stated by other posters. The change in Hardware numbers was where the growth was “hidden” on the company. Pretty safe bet to say hardware is going to be around 10% of Revenue number in Q3 and if it were to drop it is suppose to be a good thing right? It would show a continued transformation to software only company.

This link https://docs.google.com/spreadsheets/d/15BOOI343N_abvpGn52ec… shows % growth of Revenues from quarter to quarter.
Subscription anywere from 8% to 24%.
Non portable software from -10% to 9%
Service really is 0% but because numbers so small it ranges 0-14%
Hardware -42% to 19% (negative is a good thing)

When looking at what NTNX sells:
PaaS-AOS, AHV, Prism (all Core), Era, Karbon, Xi IoT
IaaS-Files, Flow, Prism Pro, Volume, Buckets
Saas-Calm, Xi Leap, Xi Frame, Xi Epoch, Xi Beam

It would be super helpful if NTNX were to break this out in revenue and billings numbers. Obviously many of these do not require any hardware sales.

Using the 300 million expected revenue for Q3. Let’s try and analysis the breakdown.

Pro Services is low hanging fruit, it is steady I think 8m is probably the number. That makes it 2.6% of revenue right where it normal hangs.

Hardware is suppose to be coming down, so I would say 7.5% of overall revenue, which would be lowest ever. 22.5m This would be -41% change, definitely much different from the last two quarters but still in the range.

Subscription, one would think with all of the new SaaS software business to existing customers and growth in deferred revenue this would be growing rapidly. I will use 8% revenue growth for subscriptions only, I personally believe it will be above but trying to figure out where the guidance number is coming from. That would be 169.5m. This would make it 56.5% of projected revenue, which is really too high when you look at the percentage tables above. Range last few quarters has been between 26-47%. That’s why I am not certain that Q3 revenue is accurate.

These three would be 8m+22.5m+169.5m=200m. This would leave only 100m revenue for non portable software. If that were the case it would represent a -24% growth from Q2 to Q3. Q1 to Q2 had a negative -10% growth, so this trend would create panic. If the Subcription number is larger which I believe it probably will be then this would have to be even larger negative number or again the guidance is too conservative.

In this scenario I also reduced the hardware signifcantly, if that were to be higher the non portable software number would have to be lower. One could assume that the subscription could be lower, however rev/billings of subscription has been increasing steadily and I do not think likely based on what I know about the company to come in as low as I even projected.

This is why I think the guidance is too conservative. I think NTNX has some softness in sales, but I am not sure I buy the 300m in revenue number for Q3. Of course I could be wrong.

They discussed on c.c. that they will most likely push back the 3B in billings prediction for fiscal year 2021 two quarters, although left that topic for investor day on March 20th. That would put the 3B in billings from half of fiscal 21’ to half of fiscal 22’. That period of time would conclude three years from now. Revenue/Billings ratio has been pretty consistant at 0.81, which is what 3Q guidance is also predicted to be. Three billion in billings would equate to 2.4 billion in revenue.

That gives a current forward EV/S value of 2.3x. The revenue number from Q3 18 thru Q2 19 is 1.2b. So NTNX thinks that it can double revenue in 3 years. That would be 25% growth rate going forward.

This does not include the fact Q3 predicted to be negative growth rate quarter. If you believe they can do it, the growth rate will have to be over 30% after the next two quarters (assumed period of sales corrections). What would the stocks EV/S be if it was consistantly growing revenues at 30%? Some might say that makes it a story stock. Well possibly but NTNX historically has been performing.

  1. Business performance. It now has 12,410 customers around the globe, 779 which have bought at least 1m worth of products. It has a Net promoter score of 90 on a five year average. It customers like what it offers. It is building a nice recurring revenue business. YOY 112%.

  2. Quick action. Being a business owner requires putting out “fires” when they occur. A lot of people were critical of management on the sales issue. However they are already making moves to correct the problems. In fact they announced a new hire two weeks ago that should help with the marketing efforts.

https://ir.nutanix.com/company/press-releases/press-release-…

So what don’t I like about NTNX. The fact they do not break out which is recurring and non-portable software sales by product types (SaaS, IaaS, PaaS). I have not seen anywere how much of non-portable software is now tied to hardware sales. I also think that they have not been laser focused and have taken on pursuing a lot of new software opportunities at once. However that is both a strength and a weakness in my eyes. It shows they know where the opportunities are in their business relm.

NTNX is a hard company to follow as they are very technical. I am not in software business, just an investor of software businesses. So like many on these boards I need to study the numbers and follow what the numbers tell me. NTNX is not making following the numbers easy as they could or in my opinion should.

I absolutely do not like how they run their conference calls. They basically destroyed their own stock by the way they handled giving forward guidance. If they could have provided more information on specifically which areas in Q3 were going to be deficient and why, and went in to detail about what was going to be done to correct these issues it still would have been negative but not a 1/3rd drop in the stock price.

From 10K last year (2018)
Further, as we transition more of our business toward a subscription-based model, our revenue may be impacted in the short term. The revenue associated with certain subscription purchases, such as with Nutanix Xi Cloud Services, will be recognized over the term of the subscription resulting in less upfront revenue as compared to our historical software-only transactions. Also, the revenue we recognize from subscription sales, even if recognized upfront, may in some instances have a lower total dollar value than those associated with licenses for the life of the device because they may be of a shorter term than the life of the device. This may also make it difficult to rapidly increase our revenue in any period through additional sales.

Our success also depends heavily on the ability of our sales team to adjust their strategy to focus on software- only and subscription-based sales. Furthermore, our customers may not understand these changes to our product sales, and investors, industry and financial analysts may have difficulty understanding the changes to our business model, resulting in changes in financial estimates or failure to meet investor expectations. As our business changes, the transition may make it more difficult to accurately project our operating results or plan for future growth. Accordingly, you should not rely on our revenue growth for any prior periods as an indication of our future revenue or revenue growth.

I think to say that management was sleeping at the wheel is a bit incorrect. They obviously understand the challenges as you can see from the 10-K. They reported a strong quarter and are guiding what seems to be conservatively while making corrections to their marketing and sales organization. Was it perfect execution, nope but its not priced for perfection either.

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The only reason anyone is thinking of keeping Nutanix is because it is now “cheap” and we are talking textbook cheap. While at the same time everything else that we want to put the money into may be near their highs for this cycle (or not).

I talk in far more detail about this here: https://discussion.fool.com/most-profound-sa-article-ever-341484…

I too do not feel in my gut the need to sell Nutanix; don’t know why, just I do not feel panicked to sell.

However, it is clear the business model is broken. I won’t go into detail here as it is in the above link, but also another concern, and that is growth rate.

HCI is in hyper growth. Nutanix is the leader in HCI. Best in breed products, best customer service, etc. And yet we are now seeing Nutanix’s growth rate slow well below what is given as the growth rate of the HCI market in general. There may indeed be a secular slow down in the market (it happened last time Nutanix had a bad miss) but if Nutanix is even in the ball park with their projected growth, and even if one says they are low balling, their growth is still materially lower than the market they supposedly are the leader in.

Real world numbers are not supporting hypothetical qualitative statements. If we could find something to show that Nutanix will at least grow with the market then that is different, but what I am seeing is growth slowing well below the growth rate of the market itself.

Whatever the case, I really want to do nothing here and just continue investing in Nutanix for the reasons we did it to begin with. However, there is no sense covering up that the business model itself is broke (even if the products are great, the method of distributing them is really broke), and Nutanix cannot even come close to keeping up with the HCI market growth itself.

Correct me if I am wrong. I have gone over this in all directions like so many. I just want to do nothing and be happy about it. But I cannot unsee what I have seen in regard.

Tinker

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To me, NTNX is a good company and perhaps will deliver surprise us on upside by beating their guidance significantly… skeptic in me also says we will see a large insider buying over next few months… or even more stock award to Dheeraj to take share price to $80 (he already has 100K shares award for this… yes he get $8M if the share price gets to $80… this was done last year i think)…

My big issue is this - i want to invest in hyper growth companies value company that will surprise the market to may be double from here.

my thesis with NTNX was that it can go to 4x to 10x over next few years… this even has certainly shaken that thesis… i feel that ZS, MDB, TTD and may be even TWLO and SQ has 4x opportunity from here… but NTNX will have to prove that it does.

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Sorry, I hit submit instead of preview and couldnt edit the previous post before submitting… Please ignore previous post.

To me, NTNX is a good company and perhaps will deliver surprise us on upside by beating their guidance significantly… skeptic in me also says we will see a large insider buying over next few months… or even more stock award to Dheeraj to take share price to $80 (he already has 100K shares award for this… yes he get $8M if the share price gets to $80… this was done last year i think)…

My big issue is this - i want to invest in hyper growth companies, NOT in a value company that will surprise the market to may be double from here.

My thesis with NTNX was that it can go to 4x to 10x over next few years… this event has certainly shaken that thesis… I feel that ZS, MDB, TTD and may be even TWLO and SQ has 4x opportunity from here… but NTNX will have to prove that it does.

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Retirementdough - this was a good post that clearly reflects the invested hours digesting all the information and discussion. Overall I’m inclined to agree with you.

I have also spent a lot of time looking at Pure Storage and Nutanix in the last few days after having invested a disproportionate amount of time following them in the last year absorbing the story as it all unfolds.

I arrive at the same conclusions on the 6 points you raise.

My only additional broader reflections in trying to maintain some perspective I would add to what Retimrementdough has said are:

  1. There have been other successful companies that have gone through a model change that have slipped up on the sales force performance banana skin. The closest analog I can think of is Palo Alto. This stock basically halved when it hit the sales force issue skids. It has since recovered and some and is a 400% grower for me sitting at an all time high. I don’t feel this is as terminal or reflective of a broken story as others do.

  2. The amount of solutions Nutanix has added to genuinely claim the “Operating System of the Cloud” title vs simply the HCI leader is remarkable and they fit together into a very elegant story even if it is complex from a tech perspective or for a sales force incentive plan. The innovation pace at Nutanix is astonishing and I feel outpacing VMWare and looking at how the stack has come together I’m extremely impressed.

  3. Leaving aside the disappointment on the guidance and the share price crash, similar to Shopify, I feel there is an amount of rear view mirror growth comparisons that may be disappointing but when you set this into the context of a $ billion player, the market growth rates or competitor growth rates - these are still astonishing numbers.

I am willing to bet that many of the ZS, MDBs, OKTAs and possibly Twilios will not be matching Nutanix’ growth rates if or when they cross the $ billion run rate and beyond.

Of all the concerns cited - the one I am most worried about is the profitability impact of ramping up marketing and demand generation spend to support the target growth numbers. Almost all the other issues I see as temporary or viewed out of proportion or both.

Ant

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Retirementdough,

Thank you for your thoughts and to all others who have helped me better understand Nutanix post the debacle of this earnings report. This and the NPI board are truly exceptional places to learn about stocks and I wish they had been around back when I started investing in the very early eighties.

I invested in a start up a few years ago which cost me eye watering amounts of money. The lesson I learned from this was that management matters. The visionary, and he was that, who came up with the brilliant idea couldn’t run a bath let alone anything else. The British army have a similar saying ; that man couldn’t command a view.

Pandey is no doubt a visionary from my limited knowledge of this technology but others in posts have attested as much and I trust their judgement on that. Whether this one hiring he has made is enough to fill the gap in management I don’t know but I suspect not.

The other concern I have at this point is that they need to ramp up S&M spending again. Buying your way in to a market is fine as long as it enables you to make additional revenue in future whether by raising prices , cross selling etc etc. If this is not possible then it is just a bad business at least from the only perspective that matters to shareholders which is that the stock price goes up. Infinera is one of my best investing examples of this.

What to do now ?

I am up 28.71% this year but was up much the same last year at this point and ended the year essentially flat. I bought a second chunk of this stuff prior to earnings and tried to sell all at pre market prices. Did not get filled so there we are.

My sense is now to wait and see if more changes are made at management level. If not then bail at that juncture. The gambler in me wants to buy more down here of if it falls to 25 or so but I shall resist that temptation for now.

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Tinker,

I believe the reason the growth rates are slowing is actually two factors. One is the company is having marketing and sales issues. This is the issue that is scaring everyone (with good reason) and I believe the other is the change in how they recognize their software sales, which is strictly accounting. Previously when sold on hardware revenues were recognized over hardware life cycles, now they are recognized differently. Deferred revenues are growing, there is a reason.

However my big complaint is they are not for whatever reason showing us the numbers with enough details to completely follow what is going on. This is to me why I get others here are selling and getting out of NTNX. As Saul would say too complicated. I totally get that.

What gives me pause is that they are growing deferred revenues, they are introducing a ton of new products, they do seem to be a special company. I can wait 6 months to see what happens. One thing I feel pretty certain of is if or when good news comes, it will go up just as quick or quicker than it went down.

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One thing I feel pretty certain of is if or when good news comes, it will go up just as quick or quicker than it went down.

I think a faster up than an instantaneous 35% drop would be wishful thinking unless you’re hoping for a buyout.

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First time poster here. In our shop, we have to choose between NTNX and VMware and our shop ended up going VMware. NTNX just lost a million dollar contract. It’s not just the marketing, it is also about the ease of use and the technology itself. The concept is pretty good but I am not sure if they are much more robust than VMware. I know my buddies used them for Virtual Desktop Infrastructure (VDI) but that’s about it. I almost became a NTNX employee also back in the days when a lot of VMware employees that I know were migrating to NTNX and it seems like the next big thing. However, some of those employees left the company already. My point is they might recovery from this but right now, I am not sure how. That is also the reason I do not have NTNX in my portfolio eventhough a lot of posters here has 5% or more positions (to each his own).

Just my 2 cents.

Johnny

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EV/S is 4.2 (for 2019 sales). Also I do not believe their forward revenue guidance either, like I felt when TWLO low balled. I am almost certain NTNX has as well.

Retirementdough,

I also don’t believe Nutanix forward revenue guidance either, but I expect the complete opposite result from you. I think it will be hard enough for them to reach their target, lest beat it. In my opinion they are in no position to low-ball anything. Remember what they said in the call: “Generally speaking, our Q2 was a quarter that should afford us to build backlog and that did not happen this year.”

As has been repeated often already, something is wrong with their sales pipeline. I’m firmly in the camp of people believing that this wasn’t the last shoe to drop. In that vein, I think Twilio and Nuntanix are two very different pair of shoes in regards to guidance. Twilio is in a different league in terms of business performance at the moment, as is Alteryx, Zscaler, Square, TradeDesk, Shopify, Okta, DocuSign, and many more. Even ANET looks much better right now if you prefer a company with a slightly lower valuation.

I really don’t know about their long-term outlook, it might very well still be intact. I hope so. But it’s become a lot less certain and there is no way of telling how long their struggles will last.

I was also contemplating a lot during the weekend what to do and finally decided to sell all my shares and move the money into Alteryx, Twilio, Zscaler, Okta and to a lesser extent DocuSign.

I’m still interested in the Nutanix story, though, and will keep an eye on them because I feel like this is a great learning opportunity for me.

Best,
Niki

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There has been a lot of talk that NTNX may never be able to turn this around. But how about the following narrative:

We know for a fact that they have a great HCI product. Gartner, NPS etc…
Over the last 1 year sales have been attending training on new products like Frame, ERA, Xi etc. They have spent lot of time and resources in attempting to sell those products with limited success. As a result they spent much less time on selling HCI thier core product. Management wrongly estimated that they could continue achieving sales efficiencies in HCI. Starting this Q the sales personnel have been asked to refocus their efforts on HCI and not the new cloud products. The new cloud products will be sold by the new hires.

If the above is the correct narrative why should take them a very long time to catch up? Remember these are the same sales personnel who sold HCI well in 2017. Not new hires. So it should take them the usual sales cycle. Not the extra time needed for a new hire to get trained is it not?

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Texmex,

When the business results = the hypothesis then you have a real world results to confirm the hypothesis. When there are not the business results necessary to prove the hypothesis then you are just hoping it will play out.

Nutanix is now growing much slower than the HCI market itself. Don’t tell me about the law of large numbers because it is a large market and the market leader should at least grow its HCI business at the rate of the market.

I believe Bear is correct. I wrote about that it appears what is a strong probability is that Nutanix has eaten up the low hanging fruit and future sales will require more effort. Bear stated it much more articulately.

If you want to stay in Nutanix it may indeed turn around at some point. But lets not hide the fact that the business model is broken when you suddenly have to start spending more money to bring in less revenue, despite have the best products in the business, best customer ratings, and a slew of new products - many of them said to be great.

There is no consistency there with vision/hypothesis to real world results. On NPI of course I have done my last mea culpa in regard to Nutanix or any other such “opportunity”. Fortunately my buy point for Nutanix was low enough that it was lost profit, not lost capital. But he reasons why Nutanix should not have been bought to begin with are clearly spelled out in the rules we have devised. If you want to be enticed by a company that does not meet the rules, see Nvidia, Talend, Pivotal, now Nutanix, and you can get sucked into but its a “bargain” too good to pass up.

And maybe you will be right. Systematically however it would be the exception to the rules that have been shown to have an extremely high correlation with success.

Tinker

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I have probably read, listened or watch 12-15 hours worth of information over the past few days, including every NTNX related post on this board

In the past, I used to do the same. Especially when my thesis has gone wrong, searching desperately for answers, often concluding that my existing thesis is right and market is wrong. It is hard to learn something new when you have a commitment bias and emotionally involved in a situation.

Let us look into this…

Quick action. Being a business owner requires putting out “fires” when they occur. A lot of people were critical of management on the sales issue. However they are already making moves to correct the problems. In fact they announced a new hire two weeks ago that should help with the marketing efforts.

See from outside you are looking at it and thinking they quickly realized the problem and took action. If I can peel the onion a bit, the companies track sales effort pretty closely, what deals will close this quarter, what will slip into next, where you are losing, losing to whom, etc. Not having enough sales folks because, sales cycles are taking longer, taking more sales and pre-sales effort, that means how many accounts a sales person can handle, this directly impacts quotas, etc, are all tracked very closely. While, their projections could go wrong time to time, but rarely companies are taken by complete surprise. The surprise is where exactly the sales comes in vs their projected range.

Nutanix would have realized they are understaffed on sales at least a quarter ago. I could be wrong here, I think their sales cycles are lot longer than 90 days. Now, hiring typically takes more than 30 days closer to 60~90 days. Getting qualified, right candidates is not easy. So, the problem should have been visible to the management at least more than 100 days. In other words, the management would have been aware of the problem at least more than a quarter and they haven’t started hiring heavily immediately may be because they were not convinced of the sales ramp up, or waiting for more evidence, or could not find quality hires, etc. Lastly, the new hires are going to take time to understand the products, then understand the internal process, sales playbook, time to get to know their customers, etc. Initially they can take some existing accounts or in-flight sales and that could release some bandwidth for existing sales guys to focus on the new lead generations, still the new hires are not going to be productive at least 3 to 4 quarters.

If you expect somehow the company can turn around and fix this in one to two quarters, I doubt it. Again, I am no expert, I am just another individual investor and that’s my view. My point is, your 15 hour investment in reading would not have helped you to develop an understanding of how quickly the sales force can ramp up and how quickly NTNX can recover from the sales under investment, what are the opportunity costs, etc. These things takes a much longer time, following an industry for a longer time. Understanding this is important for individual investors.

Good luck with your NTNX investments.

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