NTNX: fast grower and a bargain price?

NTNX: Fast grower at a low valuation

This post is a write up about NTNX. I first learned about NTNX from Saul on Sunday morning. Saul said he learn about it from Bert Hochfeld. I started researching it that same morning. Here are some articles written by Bert:

Sept 5, 2017: https://seekingalpha.com/article/4104089-nutanix-puzzling-pr…

June 5, 2017: https://seekingalpha.com/article/4078766-nutanix-lots-contro…

Mar 20, 2017: https://seekingalpha.com/article/4056551-king-hyper-converge…

Oct 5, 2016: https://seekingalpha.com/article/4010460-nutanix-rockin-boat…

These articles from Bert are definitely worth a read if you are considering investing in NTNX. They will give you a very good overview of the company as well as some of the issues that the company has faced and is facing.

What does NTNX do?

Here’s an overview of their business from their Q3 FY2017 report (note: NTNX just reported Q4 FY2017 results on August 31st but the 10-K is not yet available):

We provide a leading next-generation enterprise cloud platform that converges traditional silos of server, virtualization and storage into one integrated solution that can also connect to public cloud services. Our software delivers the agility, scalability and pay-as-you-grow economics of the public cloud, while addressing enterprise requirements of application mobility, security, data integrity and control. We provide our customers with the flexibility to selectively utilize the public cloud for suitable workloads and specific use cases by enabling increasing levels of application mobility across private and public clouds. We have combined advanced web-scale technologies with elegant consumer-grade design to deliver a powerful enterprise cloud platform that elevates IT organizations by enabling them to focus on the applications and services that power their businesses. Our invisible infrastructure provides constant availability and low-touch management, enables application mobility across computing environments and reduces inefficiencies in IT planning.
We were founded in September 2009 and in October 2011 began selling the initial version of the Nutanix Operating System, which pioneered hyperconverged infrastructure by providing block storage for virtualized environments on VMware. In 2012, we released a new version of our software which included support for file storage, high availability and enhanced security. In 2013, we released several versions of our software, which added our intuitive Prism interface, built-in disaster recovery, deduplication, compression, and additional hypervisor support for Hyper-V and KVM. In 2014, we added enhanced resiliency, One-click Upgrade, Cloud Connect backup to Amazon Web Services, or AWS, and Cluster Health Analytics. In 2015, we rebranded the Nutanix Operating System as Acropolis and introduced the Acropolis Distributed Storage Fabric, Acropolis Mobility Fabric and Acropolis Hypervisor.
Our solution can be delivered either as an appliance that is configured to order or as software only. When end-customers purchase our platform, they typically also purchase one or more years of support and maintenance in order to receive software upgrades, bug fixes and parts replacement. Product revenue is generated primarily from the sales of our solution, and is generally recognized upon shipment. Support and other services revenue is derived from the related support and maintenance contracts, and is recognized ratably over the term of the support contracts.

To put what they do in a nutshell: NTNX provides “invisible infrastructure” to firms enabling them to easily use applications across diverse computing environments such as internal networks as well as public cloud environments.

NTNX has been in business for about 8 years and they went public last Fall at $16 per share. The shares rose as high as $46.78 a few days after the IPO and then quickly settle back down to the mid $30s. The shares stayed in a trading range (mid $20s to mid $30s) until February when they began selling off, after a disappointing quarter, reaching a low of $14.38 on May 1st. The shares are currently in the $21-22 range.

Where does NTNX get it’s revenue?

NTNX sells hardware appliances with software or just software. They also sell service and support and to a lesser degree they sell professional services. Here’s a description of their products and service (taken from the Q3 FY2017 10-Q):

Product revenue. We generate our product revenue from the sales of our solution, both delivered on a hardware appliance as well as software-only. Our revenue from software-only sales, which currently constitute a small portion of our product revenue, is subject to industry-specific software revenue recognition guidance and has typically been deferred and recognized over the contractual support period associated with the delivered software licenses. However, revenue associated with certain software licenses can be recognized upon delivery to our end-customers to the extent we have established VSOE for related support and other services.

Support and other services revenue. We generate our support and other services revenue primarily from support and maintenance contracts, and, to a lesser extent, from professional services. The majority of our product sales are sold in conjunction with support and maintenance contracts with terms ranging from one to five years. We recognize revenue from support and maintenance contracts over the contractual service period. We recognize revenue related to professional services as they are performed.

Revenue recognition

NTNX has been public only a short time They have been reporting results only for 4 quarters. A large portion of their billings have been deferred which has lead to a growing balance of deferred revenue. Referred revenue, as I understand it, has come from 2 main sources: software sales and service/support contracts. Support and maintenance contracts are from 1-5 years and the company must recognize this revenue over the period of the contracts.

On August 1, 2017 (start of the 2018 fiscal year) NTNX will change it’s accounting for deferred revenue. Basically, NTNX will be recognizing all/most of its sofrware revenue upfront. With the change the company has recalculated its financials for the past 8 quarters. I was able to get FY2015 financial results because they are available in the S-1 which was filed prior to the IPO. I asked investor relations if they could provide the restated numbers for FY2015 but they would not provide that. With the changes, the billings will be unchanged but the reported revenue will be higher primarily due to reduced deferred revenue.

Since Bert’s articles provide much of the useful information, I will not repeat any of that in this post. Instead, I will focus on providing and analyzing some of the financial metrics. I will also point out some of the things that I like about NTNX.

Revenue and revenue growth

Here is the revenue for the past 3 years (old accounting method):

FY      Q1      Q2      Q3      Q4      Total   Growth
2015	46.1	56.8	64.5	74.1	241.5	
2016	87.8	102.7	114.7	139.8	445	 84%
2017	166.8	182.2	191.8	226.1	766.9	 72%
2018	245(E)					

I used the old accounting numbers so that we can look at growth for an extra year. As you can see, the growth over the past years has been very impressive. Later, I will also show the numbers under the new accounting method.

Now let’s look at the growth on a yoy basis rather than a full year over full year basis:

Q116	90%
Q216	81%
Q316	78%
Q416	89%
Q117	90%
Q217	77%
Q317	67%
Q417	62%
Q118	47%(E)

The growth has decelerated a slightly but it is still very positive. The Q1 2018 growth of 47% is based on the midpoint of guidance. However, the guidance factored in a government shutdown in Sept 2017 so I think it will be easily beaten.

Now we must also remember that revenue is comprised of commodity hardware (low margin), high margin software sales, and support and maintenance. The blended gross margins have been in the high 50s. Now we must remember that high memory prices have increased COGS and led to margin compression. Bert thinks that the doubling of DRAM prices will reverse. Here’s what I think is even more relevant: high margin software revenue has been steadily increasing as a percentage of total revenue. Here are those figures:

Q114	2%
Q214	2%
Q314	1%
Q414	2%
Q115	3%
Q215	4%
Q315	5%
Q415	8%
Q116	9%
Q216	11%
Q316	12%
Q416	14%
Q117	15%
Q217	15%
Q317	16%
Q417	17%

Management’s goal is for software-only revenue (probably has 90% or higher gross margin) to reach 33% of sales. So the company is halfway there, and, as the company moves the mix more and more toward software-only sales, there will be pressure for margins to go higher.

Before I move on, I want to show the revenue under the new accounting.

FY      Q1      Q2      Q3      Q4      Total   Growth
2016	100.5	116.4	126	160.5	503.4	
2017	188.6	199.2	205.7	252.5	846	68%
2018	265(E)					

And the yoy growth:

Q117	87.7%
Q217	71.1%
Q317	63.3%
Q417	57.3%
Q118	40.5%

Growth numbers are about 5-7% lower than under the old accounting method but not so different that it affects my investment decision.

Customer growth

Here are the numbers for customer count growth:

	Cust   Net New  Seq 	1YR 
10/13	287			
1/14	426	139	48.4%	
4/14	583	157	36.9%	
7/14	782	199	34.1%	
10/14	923	141	18.0%	221.6%
1/15	1168	245	26.5%	174.2%
4/15	1412	244	20.9%	142.2%
7/15	1799	387	27.4%	130.1%
10/15	2144	345	19.2%	132.3%
1/16	2638	494	23.0%	125.9%
4/16	3111	473	17.9%	120.3%
7/16	3768	657	21.1%	109.4%
10/16	4473	705	18.7%	108.6%
1/17	5382	909	20.3%	104.0%
4/17	6172	790	14.7%	98.4%
7/17	7051	879	14.2%	87.1%

NTNX is adding customers at a rapid clip. Much higher than any of the other companies that I am invested in. How are they doing this? I think there are a couple of reasons that stand out.

First, NTNX is investing heavily into expanding its sales and marketing headcount. Here are those figures:

  S&M Headcount
Q114	139
Q214	179
Q314	230
Q414	273
Q115	342
Q215	392
Q315	470
Q415	571
Q116	686
Q216	798
Q316	894
Q416	968
Q117	1127
Q217	1226
Q317	1299
Q417	1362

Bert mentioned in his latest article that NTNX has a Net Promoter Score (NPS) of 90. I’ve never seen such a high score. NPS is a measure of how your customers are recommending your products and services so you can say that a high NPS indicates that customers are satisfied and that they are recommending (creating word of mouth) inside your target market. NPS is based on a scale of -100 to 100 with 100 being the highest possible and indicating that ALL your customers are willing to recommend the products/services. Here’s a link that describes how NPS is calculated (http://www.medallia.com/net-promoter-score/ ). I invested in private start-up several years ago and the company’s product routinely has a NPS of 60. This score is totally awesome and has contributed to very strong word of mouth and very rapid revenue expansion. Word of mouth makes expansion less costly and more efficient. NTNX has a score of 90 which means that almost all of the customers love the product enough to recommend it. I’d say that customers are delighted. NTNX has been focused on growing revenue in the enterprise market. Let’s see how they’ve done there. NTNX reports customer count in the Forbes Global 2000 which is comprised of the 2000 largest enterprises. Here are those figures:

FY     Glob 2k Seq Gr   yoy Gr
Q114	   41		
Q214	   66	61.0%	
Q314	   82	24.2%	
Q414	  109	32.9%	
Q115	  127	16.5%	209.8%
Q215	  159	25.2%	140.9%
Q315	  177	11.3%	115.9%
Q415	  214	20.9%	 96.3%
Q116	  242	13.1%	 90.6%
Q216	  281	16.1%	 76.7%
Q316	  318	13.2%	 79.7%
Q416	  372	17.0%	 73.8%
Q117	  424	14.0%	 75.2%
Q217	  473	11.6%	 68.3%
Q317	  521	10.1%	 63.8%
Q417	  559	 7.3%	 50.3%

In 3 years, NTNX has managed to capture >25% of the 2000 largest enterprises. Wow! OK, next we can examine how much these customers spend. I got this information from the investor presentation which can be found here:


You will want to look at slides 8, 10, and 12. NTNX is trying to use the land and expand strategy where they get a customer and then over time they try to get that customer to spend more. Slide 12 shows the spending pattern for each of their top 25 customers; it just shows when they spent and respent but not how much. In aggregate their top customers have spent 19.4x the amount that they spent on their first order. Slides 8 and 10 show how much companies are spending initially compared to how much they have spent over time. The Global 2000 customers who have been customers more than 18 months spent 8.1x more than they did initially. The conclusions here are that their customers are repeat purchasers. I think this looks good for revenue prospects in the coming quarters because NTNX has added 241 enterprise customers in the past 18 months and if these customers continue to spend 8.1x (after 18 months of being a customer) the amount that they spent initially then there’s a wave of revenue coming still.


I have compared these fast growing tech companies across several metrics:


One of the metrics that I use to compare them is enterprise value / TTM sales. SHOP has a multiple of 20.4 (richly valued using this metric). TLND: 8.2, HUBS: 7.7, TWLO 7.5, WIX: 8.4. The faster the grower the higher the justification for a higher EV/Sales. So I went ahead and added a column for EV/ forward TTM Sales which normalizes for the growth rate or in other words shows what the EV/TTM Sales will be in a year assuming the prior year’s revenue growth rate is repeated. Another factor to consider is gross margin because revenue is more valuable the higher the gross margin is. NTNX’s gross margins are respectable at around 58%. Bert thinks they can go much higher.

NTNX’s EV/Sales is 3.5 and its forward EV/Sales is 2.1!!! Bert mentioned in one of his articles that EV/Sales for storage companies is around 2 so NTNX’s would be inline with this industry valuation standard. But is NTNX an ordinary storage company. I would ask what gross margins are like for other storage companies. On a margin basis, I think NTNX can be compared to SHOP, TLND, HUBS, etc.

Based on the above, I made the decision to take a substantial position in NTNX. The shares are about 2% lower since I purchased.



Chris, I congratulate you for putting in the effort to compile all this information! I won’t be investing in Nutanix (NTNX) for two simple reasons: 1) despite all the explanations of what NTNX offers to its customers, I still don’t understand the business or the competition. All I know is that it’s a rapidly growing market sector but…2) NTNX is still losing money. But, hey, that’s just me. I’m old school. I want to invest my money in companies that make money. Revenue growth is nice but EARNINGS growth is much, MUCH nicer.

After a few minutes of additional research, I came across this Forbes article:


VMworld 2017: All Things HCI

As VMware gets its mojo back and the secondary storage part of the market explodes, the world of hyper-converged vendors keep chugging along…While we’ve seen some consolidation—SimpliVity got bought by HPE…there are still lots of companies trying to make a go of it in the competitive HCI market as standalone companies…Pivot3 is talking up its position as “one of the top three HCI vendors”…Pivot3 has over 2000 customers already, and is growing strongly. “We had 85% growth last year”…Maxta was also making some noise at VMworld this year, directly taking aim at rival Nutanix with it’s “Your Way” campaign. The company was giving out buttons with the slogan “You can’t have it your way with Nutanix” on them…Maxta is talking up the anti lock-in sentiment that is swirling around the industry…

Anyway, it’s obvious there are a whole lotta players cavorting in this particular sandbox. I’m in no way qualified to pick a winner.

Good luck to all, but I’ll sit this dance out.


If you can’t open putnid’s link (Safari has a problem with it), try this one:


Denny Schlesinger

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Here’s an abbreviation of the June quarter and fiscal year results. Note that they adopted the new accounting standard which accelerates software revenue recognition after the end of the fiscal year. It’s pretty impressive and speaks for itself.

Nutanix Reports Fourth Quarter and Fiscal 2017 Financial Results

72% annual revenue growth,
Record large deals in Q4, and
75% YoY growth of Nutanix AHV Hypervisor, mark strong close to fiscal 2017

Nutanix, a leader in enterprise cloud computing, today announced financial results for its fourth quarter and fiscal year ended July 31, 2017.

Fourth Fiscal Quarter Financial Highlights
• Revenue: $226 million, up 62% year-over-year from $140 million.
• Billings: $289 million, up 40% year-over-year from $207 million.
• Net Loss: Non-GAAP net loss of $50.6 million, compared to a non-GAAP net loss of $46.7 million a year ago.
• Net Loss Per Share: Non-GAAP net loss per share of $0.33, compared to a pro forma non-GAAP net loss of $0.39 a year ago.
• Cash and Short-term Investments: $349 million, up 88% from a year ago
• Deferred Revenue: $526 million, up 77% yoy
• Operating Cash Flow: $5.9 million, up from $2.4 million yoy.
• Free Cash Flow: $(6.5) million, compared to $(6.5) million yoy

Fiscal 2017 Financial Highlights
• Revenue: $767 million, up 72% year-over-year from $445 million
• Billings: $991 million, growing 55% year-over-year from $638 million in fiscal 2016
• Net Loss: Non-GAAP net loss of $199 million, compared to a non-GAAP net loss of $150 million the year before.
• Net Loss Per Share: pro forma Non-GAAP net loss per share of $1.40, compared to a pro forma non-GAAP net loss per share of $1.25 in fiscal 2016
• Operating Cash Flow: $13.8 million, compared to $3.6 million in fiscal 2016
• Free Cash Flow: $(36.4) million, compared to $(38.7) million in fiscal 2016

“The fourth quarter was another record quarter and an outstanding conclusion to the fiscal year. Our newly announced products, Nutanix Calm and Xi Cloud Services, extend our market opportunity by simplifying and harmonizing datacenter operations for the multi-cloud era. This quarter, marked by record revenues, continued adoption of AHV, increased software-only sales, strong growth from our OEM partners, and positive operating cash flow, was a great way to end our first year as a public company.”

Recent Company Highlights
• Continued Customer Growth: Nutanix ended the fourth quarter of fiscal 2017 with 7,051 end-customers, adding over 875 new end-customers during the quarter. Fourth quarter customer wins included ABC Stores, Amgen, Bacardi, HCA Healthcare, Konica Minolta Business Solutions Europe GmbH, The Hershey Company, The Home Depot, and Tokopedia.
• Increased Number of $1 Million+ Deals: 43 customers with deals over $1 million in the quarter, up 39% YoY.
• Innovating for the Multi-Cloud Era: Introduced Nutanix Calm and Xi Cloud Services, along with a strategic alliance with Google to blend the Nutanix environment with the Google Cloud Platform, providing new functionality to address the challenges of the multi-cloud era.
• Increased AHV Penetration: Saw a 75% YoY increase in adoption of AHV, Nutanix’s built-in hypervisor, based on a four-quarter rolling average of nodes using AHV as a percentage of total nodes sold.
• Strong Participation in 3rd Annual .NEXT Conference: 3,500+ attendees with 50+ customer speakers, over 60 partner sponsors, and keynote addresses from many industry visionaries including Bill McDermott, CEO, SAP; Diane Greene, SVP, Google Cloud; Chad Sakac, President, VCE - Converged Platform Division, Dell EMC; and Kirk Skaugen, EVP and President, Lenovo Datacenter Group.

Q1 Fiscal 2018 Financial Outlook
For the first quarter of fiscal 2018, Nutanix expects:
• Revenues between $240 and $250 million;
• Non-GAAP gross margin of approximately 58%;
• Non-GAAP operating expenses between $195 and $200 million;
Non-GAAP net loss per share of $0.37, based on 156 million shares.



We done and nice summary!

The NPI has rather thoroughly explored the ins and outs of NTNX.

The main concerns can be summarized into a few discrete elements:

  1. Is their business scalable?
  2. Can they get better control of the SBC?
  3. Is there a path to profitability?
  4. Can they make that transition to a pure software company (and get away from the near 0 margin hardware)?
  5. Why are they trading at such a low valuation?

These important issues are discussed in these relevant threads if anyone is interested (warning, they can be long and detailed):








<<<Maxta was also making some noise at VMworld this year, directly taking aim at rival Nutanix with it’s “Your Way” campaign. The company was giving out buttons with the slogan “You can’t have it your way with Nutanix” on them…Maxta is talking up the anti lock-in sentiment that is swirling around the industry…>>>

Actually, why would Maxta be making taunts and slogans specifically against Nutanix? The answer is rather obvious, because despite blustering aside, Nutanix is still the clear leader this market.

Such a leader, that despite owning the company (VMWare), DELL still reiterates, loudly, to all that will hear it, and even speaks and sponsors at Nutanix’s .NEXT, that its partnership with Nutanix is alive and well, and ongoing, with nothing changing this. Since DELL is about 10% of Nutanix’s business, that is around $80 million a year in software, and more in hardware sales per year for DELL.

As you can read from Duma’s post linking to New Paradigm, we have been through basically everything with Nutanix. Structurally, it is a winner. Its story is a winner, in 3 years they’ve gone from 0% to 25% of the fortune 2000 as their customers. The company was only funded in 2009, from scratch with 0 customers, and yet it has gone from 0 to 7,000 customers to date, with new customer growth at 83% this year.

The issue is whether or not it is building towards a profitable end game or not.

SHOP is not profitable, it has not been profitable during its great stock run for the last year. It garners investors because of its business model, business leadership, and perception that what it is building will be worth far more in the future than it is today.

Nutanix is the same sort of thing, except that its end game is not as clear as SHOP’s, which involves with customer acquisition and servicing costs going down the more customers they acquire. That same phenomenon may exist with Nutanix, in that Nutanix is swarmed with repeat business. Repeat business if far less expensive to obtain than initial business. At least that is the theory.

But, ton of stuff said and argued on New Paradigm.

The take is that like Baidu at $3 billion, or SHOP at $3 billion market cap, that the market also has NTNX wrong for at least a temporary period of time. It is not losing marketshare, it is still the clear mind and sales market leader, it has the best product (from a 90 marketing score, which is the highest I can find ever recorded for client satisfaction - for whatever that is worth), to Home Depot’s chief technology officer kind enough to give quotes to Nutanix’s latest product release, as Home Depot becomes one of the new customers for Nutanix, to the fact that it is a software company (it outsources and lets other companies handle, completely, their hardware appliances), and thus not a hardware company, although that is one method it uses to diffuse its product into the marketplace, the company seems to have limited downside, and very high upside, with the primary risk being opportunity cost.

I guess that is the gist of it. It is very similar to Arista (well, except for the bottom line, but otherwise they are analogs of each other focusing on different customers and different parts of the network, both commoditizing the underlying hardware, both software companies that sell hardware (Arista has far more value add in their hardware, but is still 90% software vs. 100% for Nutanix in regard to engineers), both attract the best of the best in engineering talent, and both are creating software to act as the new operating system of their respective market segments.

As for marketshare, ANET has not been the market leader, until now, when it is the clear market leader for 100gb switches, with a lot of marketshare to steal from Cisco, although Juniper has been growing quite nicely in some of the segments that ANET focuses on. Nutanix is the market leader, but there are far more competitors in the space, and in the end, it really seems like there are two, VMWare or Nutanix. The rest are also rans that are running out of time to catch up. Network Appliance is making its bid starting this year.



For what it’s worth guys - I bought Nutanix a week or so ago when it crashed after its results at $20.79c. I took a 1% stake and may add to it later if the train hasn’t left the station.

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Thanks Tinker, Nice summary.

Recognizing future contract revenue as current revenue seems like a violation of the good part of GAAP.

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Recognizing future contract revenue as current revenue seems like a violation of the good part of GAAP.

It’s a new change in GAAP and I believe it’s required. It’s GAAP, not “non-GAAP,” as far as I know.


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The NPI has rather thoroughly explored the ins and outs of NTNX.

Thanks for sharing those threads! Very interesting discussion between you and Tinker.

I think that Tinker is on the right track by breaking out the zero margin hardware sales to calculate the EV to Sales ratio. However, I would add that using their new accounting approach which recognizes SW sales upfront rather than over time is a better approach. This will lover the EV/Sales a little bit.


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