NTNX Q1 - Another Solid Quarter!

Investment Analysis Clubs Saul’s Investing Discussions
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Nutanix released after market close today and the stock was trading up about +22% in the after hours.

I was only able to listen to a portion of the earnings call but, for the second quarter in a row, management really sounded upbeat, and seemed to feel that everything is progressing according to plan.

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

and there is an infographic here:

https://mms.businesswire.com/media/20191125005740/en/758965/…

A few highlights:

  • +72% increase in Subscription revenue
  • More than 70% of billings are now subscription
  • +39% Deferred Revenue to $975 Million.
  • Total Revenue and Billings essentially flat, but that’s due to the continuing move away from low margin hardware to software, and from non-portable software to subscription (hence the deferred rev growth). Revenue was well ahead of consensus estimates.
  • Margins are increasing, +1.5% this quarter
  • 97% customer retention rate
  • 132% Dollar based net expansion rate
  • 780 new customers (14,960 total customers now) New customers include Anheuser-Busch InBev
  • Closed a record number of $1 million+ deals, 66 this quarter
  • 28% of deals now include at least a second product in addition to the core offering

In particular, they saw strength in the Americas, more so than internationally. Still a ways to go in order to swing to profitability and cash generation, which I’m sure will continue to keep a lot of people on the sidelines, but they continue to invest for continued growth which I am glad to see.

Congrats to those of us that were beating the drum for NTNX this summer and had the stomach to keep buying as the stock sunk into the teens. If the after hours price holds, the stock will now be up more than 75% from the August lows (while most everything I sold to grow my Nutanix position has been down). I won’t get into the details since options talk is OT, but most of the NTNX I was buying at the end of the summer were LEAP options that were already up 100%+ over the past three months before today, and some of which might be up as much as 300% tomorrow if the AH price holds, with more than a year to go before they expire!

I’m looking forward to reading through the full conference call transcript when it comes out.

-mekong

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And why I continue to subscribe to Bert’s wisdom and patient approach.

Loved his last article enough on NTNX to get into the stock again. He called it.

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mekong: +72% increase in Subscription revenue

That doesn’t tell you much due to the corresponding (negative 47%) drop in non-sub software.

mekong: Total Revenue and Billings essentially flat, but that’s due to the continuing move away from low margin hardware to software, and from non-portable software to subscription (hence the deferred rev growth).

It helps that you point this out, but I think to paint a more accurate picture we should say something like: Part of the reason revenue was flat is due to eliminating pass-through hardware, but even if you strip that out, NTNX grew 9% YoY.

Bear

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Hi Mekong, I was intrigued by your write-up on Nutanix enough to read the press release. Here are a few of the things that I noted:

Net Loss: GAAP net loss of $229.3 million, compared to a GAAP net loss of $94.3 million in the first quarter of fiscal 2019; Non-GAAP net loss of $135.3 million, compared to a non-GAAP net loss of $23.7 million in the first quarter of fiscal 2019.

Remembering that total revenue was only $315 million (and showed 0% gain, by the way), that loss is horrendous. GAAP loss was 73% of revenue, while even adjusted loss was 43% of revenue (and almost six times what they lost last year).

You get the same picture from EPS, of enormous losses:

Net Loss Per Share: GAAP net loss per share of $1.21, compared to a GAAP net loss per share of $0.54 in the first quarter of fiscal 2019; Non-GAAP net loss per share of $0.71, compared to a non-GAAP net loss per share of $0.13 in the first quarter of fiscal 2019

You get the same picture from Cash Flow:

Operating Cash Flow: Use of $26.2 million, compared to generation of $49.8 million in the first quarter of fiscal 2019
Free Cash Flow: Use of $44.4 million, compared to generation of $20.0 million in the first quarter of fiscal 2019

They went from a nice gain the year before to large losses this year.

Now what about that picture would make me rush out and sell one of my rapidly growing, cash generating or close to it, companies to buy this one. I’m sorry, but I just don’t see it. Sure you can feel it’s turning around, but then what?

Best,

Saul

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Now what about that picture would make me rush out and sell one of my rapidly growing, cash generating or close to it, companies to buy this one. I’m sorry, but I just don’t see it. Sure you can feel it’s turning around, but then what?

The gory details of the business shouldn’t be glossed over and, indeed, Bear and Saul pointed them out. To wit, they are spending way too much money to sell their products and that even picked up this quarter as S&M expenses were about 86% of TCV (software and support) revenues. That jumped up about 7 percentage points from last quarter and is the highest in history that I track. And that remains the big question mark with the company.

However, keep in mind you aren’t paying for this company as they are generating tons of cash. EV/S is currently 5.2x. It was close to half of that not too long ago. Here is what I can gather has taken place with Nutanix.

They went through two business transitions in a short span of time. The first was the elimination of pass through hardware sales. The second was a transition to subscription. Both had the impact of reducing revenues. Hardware sales have almost completely gone away at 3% of the business this quarter. The subscription portion is on its way meeting their stated goal of 75%. This quarter was 69%. The company telegraphed the hardware elimination very well. They did a poor job of informing investors of the change to subscription and how that would impact sales.

In the midst of those changes and more important than the accounting, they experienced sales mishaps. They suffered a case of product diarrhea, spewing forth new products at an unprecedented clip without the sales force prepared to deal with it. Maybe this was hubris on the part of Pandey thinking the products would sell themselves because they are great. That isn’t how the real world works and this is the area where they have had the biggest deficiency in my opinion and the primary reason the valuation is where it is.

Since then Nutanix has made significant changes within their sales force and has expanded the force to a great degree. They, of course, are focusing more on partnerships to leverage their efforts in the future, but this isn’t going to happen overnight. They will spend more than they make for their remaining three quarters this FY.

Their gross margins are now at their highest levels ever at 80.1% on a total revenue basis or almost 83% based on TCV revs. This is the good news along with their highly satisfied customer base of almost 15,000. DBNRR is at 132% though I will caution that Nutanix includes new customers in the most recent quarter which most companies do not. That number is likely a bit inflated.

Can sales efficiency increase? Do they have their house in order now? Clearly there were a lot of underperforming sales staff given the changes Nutanix has made. They have hired significantly to get back on track, but it remains to be seen whether they can start moving toward profitability. Again, Nutanix is valued about 1/4 as much as those names that are producing great growth along with profits (or a path towards them).

The last thing that I’ll say is Nutanix gave investors annual guidance which was certainly needed to ease worries over the direction of the business. That guidance suggests the next three quarters will see a return to good growth especially if you compare the part of the business that matters which is software and support.

Just thought I’d provide my 2 cents.

A.J.

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Saul

I agree with most everything you’ve said. At a $6.5B market cap now, while AYX is only a little over $7B, I would be hard pressed to make an argument that NTNX is the best place for new money.

I certainly felt differently when NTNX was trading at about $3.4B a few months ago, as I felt at the time, that there were a few things providing a floor to the stock price, with the possibility of outsized returns in the short term that wouldn’t require blowout earnings. I was definitely met with healthy skepticism for saying in August that only growing in the “high single digits” would get make for good investment returns in Nutanix (at least one person replied saying that NTNX would “get massacred compared to the overall market” with single digit growth), and here we are three months later and the stock price has nearly doubled with revenues barely growing in the low single digits.

I’m not personally adding to my Nutanix position right now. Granted my medium size stake has quickly swelled to a larger one now, but I also acknowledge that there will be significant execution risks ahead to get to where management expects them to be. As far as I know, Nutanix has not stepped back their goal of getting to a run rate of annual $3 billion of billings a couple years from now (although they did dial back the timing by a quarter or two earlier this year). Now, I don’t expect them to get there (which would require growing a good 50%+ for a couple years), but if they get even remotely close, I have to believe that revenue and cash generation will greatly exceed increases in costs and they should be well on their way to profitability.

One of the things that intrigued me on the portion of the earnings call that I did get to listen to, was a comment about how they’ve had more and more “no human touch” credit card sales. TMF has now posted the earnings call transcript, which I haven’t fully read through yet but just quickly searched and found the relevant passage:

https://www.fool.com/earnings/call-transcripts/2019/11/26/nu…

One very critical initiative within the company is our Xi test drive service running on Google GCP. To me this is one of our most important projects to get right for a true digital transformation of the company. How our prospective customers grow from a digital banner ad to trying out our entire product portfolio hosted in the public cloud in a one click, self-guided experience is a testament to how far we’ve come from being an appliance company a couple of years ago. If we get this right, it will immensely improve our profitability in the commercial mid-market as most of the prospects would then be enabled with a digital touch and only the self-selected ones would require a human touch. I’m proud to say that in this last year, we’ve also done a thousand-odd credit card transactions to sell our cloud services with zero human touch. Digital transactions are core to our future including for subscription renewal and eventually to our profitability.

A ”thousand-odd” transactions sounds good, although I would bet it is a minuscule piece of the pie today. But it’s an example of where future revenue growth could come at much higher margins and potential profitability.

I’m going to sound like a broken record here now, but I’ve never understood why so many folks on this board made claims of management not being trustworthy. I still maintain that Nutanix management has earned my trust due to their openness by announcing the poor expectations in early 2019 well before they were required to, and now a few quarters later, they have been doing what they said they would do, so I am willing to give them the benefit of the doubt that they can continue to progress.

There’s definitely higher risk in owning NTNX today vs August, both due to the higher valuation and with the continuing future execution risk. That being said if they come close to doing what they’ve consistently said they expect to do, they have the potential to become a very large company and cash generator. With a portfolio as concentrated as Saul’s is, Nutanix probably doesn’t fit all that great given the other wonderful companies out there that have been consistently executing without hitting the type of rough batch that NTNX did this year. However with a slightly more diversified portfolio, if I didn’t have a position in Nutanix already, I might be opening a position, at least to give me an excuse to follow the story, given the potential.

When I get a chance to read through the full earnings call transcript, I’ll circle back if there are any other interesting nuggets worth sharing.

-mekong

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DBNRR is at 132% though I will caution that Nutanix includes new customers in the most recent quarter which most companies do not… That number is likely a bit inflated.

Hi Phoolio,

If you mean that Nutanix includes revenue from new customers in a dollar-based net retention rate which (by definition) is supposed to show how last year’s cohort is spending this year compared to its spending last year… that’s not just inflating, that’s outright falsification! It’s not a Dollar-based Net Retention Rate at all! New customers this quarter have nothing to do with “retention”. If that’s what they are doing, that’s awful!

Saul

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If you mean that Nutanix includes revenue from new customers in a dollar-based net retention rate…

My apologies. This pertains to how they report customer retention rates which was 97% this quarter I believe. DBNRR is only based on the prior year’s cohort.

Sorry for the confusion all.

A.J.

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I think one of the key issues people had with Nutanix management was when the CEO said, “We like to let chaos reign and then reign in the chaos”. This did not sit well with the typical American investor. But I think this was a cultural difference between a CEO who comes from an Indian background, and American standards.

There is a great book called, “The Business Sutra” that explains the difference between Western, Chinese, and Indian approaches to business, with an emphasis on understanding the Indian point of view. The statement, “Let chaos reign and then reign in the chaos” is the quintessential Indian approach. It’s only from an American lens that this seems like a bad idea.

I don’t own any Nutanix, but I do remember a lot of people taking issue with the company due to this statement.

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That quote came from Andrew Grove, who is not known for being a poor leader. His reputation is sound. My issue with NTNX is I would not want to be involved in a company that has a business slowdown because they did not get their “lead generation expendature” quite right.

Even though S&M was higher. And now apparently even a bigger portion of the revenue.

And in this transition from hardware to software only to subscription, it is not clear to me if they are actually growing if their subscription growth is just being offset by declining non subscription software sales.

Their skyrocketing expense suggest to me they are in a competitive environment.

The only metric that suggests to me that they are still growing is their non stop increase in customer count. That hasn’t let up.

I know people enjoy being a contrarian and having their stock go up but there have been growth stocks that have gone up just as much if not more lately that focus could have been applied to.

If I could see what their comparable revenues would have been to get a gauge if they are still growing it may give me a different perspective on this company. But when I look at lethargic overall software sales growth I don’t get too excited.

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If I could see what their comparable revenues would have been to get a gauge if they are still growing it may give me a different perspective on this company. But when I look at lethargic overall software sales growth I don’t get too excited.

For a true comparison, you’ll need to wait until subscription sales level out. They are ratable so there is less recognized upfront versus the other 25% (company goal of 75% subscription). We aren’t at that state yet, but we are getting close though the ratable portion may grow even higher than 75% of course.

That is one reason the growth has been dampened, but the opposite is true as well. Once they reach a steadier state with a full apples to apples comparison, growth will resume.

And since I was thankfully corrected on the DBNRR, they are apparently growing at a 32% clip with no new customers.

We do know how hardware has declined from the numbers they give. One could look further at the subscription rates to try to better understand the puts and takes over the last several quarters but I haven’t gone that far and it would take some assumptions to come up with some number.

A.J.

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Hi 12x

These portions of your post all kind of go hand in hand.

And in this transition from hardware to software only to subscription, it is not clear to me if they are actually growing if their subscription growth is just being offset by declining non subscription software sales…

…The only metric that suggests to me that they are still growing is their non stop increase in customer count. That hasn’t let up…

…If I could see what their comparable revenues would have been to get a gauge if they are still growing it may give me a different perspective on this company. But when I look at lethargic overall software sales growth I don’t get too excited.

I think you are essentially asking - how do we know how they are doing apples to apples since so much has changed recently?

First off let me address your first thought regarding whether new subscription revenue is just replacing non-subscription software sales. While yes, there are certainly going to be customers switching from buying a software license to now be on a subscription, but keep in mind if customers move from one to another without any real growth from new customers, your revenue would not stay flat overall, it would go much lower. That is because non-subscription software licenses were recognized by Nutanix “upon transfer of control to the customer” (e.g. Up Front), as per their Form 10-K. With the subscription model, the revenue for their SaaS software offereings get recognized “ratably”, over the life of the subscription. Hence the much higher Deferred revenue today, much of which would have already been recognized as revenue under the old non-subscription software license sales model of yesteryear.

The company recommends using “annual contract value” (ACV) to get the best apples to apples comparison. Here’s some commentary from yesterday’s earnings call:

…we believe the single best metric to measure the true growth profile of the company during our transition to our new subscription based model is new annual contract value plus renewals, or ACV for short, booked in the quarter, which includes sales of life of device licenses based on an assumed five-year term. By calculating in this way, we take into account the changing term lengths, while still showing the impact of our continued sales of life of device licenses.

Having aggregate ACV in any given period will allow us for a cleaner apples-to-apples comparison of period-over-period growth rates. In its most simplistic form, we define ACV booked in the quarter as the annual contract value of new business plus the annual contract value of renewals. And we calculate ACV booked in the quarter by taking the value of each transaction booked in the quarter including renewals, but excluding professional services divided by its term length and then summing the total of those values.

and for the quarter just ended October 31st:

ACV booked in the quarter was $123 million and up 18% from the year ago quarter. New customer bookings represented 24% of total bookings in the quarter, the same as Q1 '19 and up from 23% in Q4 '19.

So they are telling us that they closed deals this past quarter that, on average will generate $123 m per year (which assumes that any non-subscription software sale would have a theoretical 5 year life). And they are saying that is +18% vs the same quarter of last year so they want us to consider this 18% growth.

For the full year fiscal 2020 (year ending July 2020) they forecast ACV to grow +25% for the full year, and that is despite not increasing their full year forecast yet, even after the Q1 beat. This would mean an acceleration from 18% last quarter, and would imply that they will be well above 25% for the second half of the fiscal year, given that they are forecasting an average of 25% for the full year despite that year being weighed down by only 18% in Q1.

So that tells me that if they achieve their forecast for the rest of the year, their growth will accelerate from a fairly negligible amount last year, to 18% last quarter, to 30%+ by the end of the fiscal year next summer. Obviously a big “if” for them to achieve their forecast given their stumble in early '19, but they did beat expectations in Q1, so it might be realistic.

One other comment they made is that, typically, due to Q1 being a seasonally weak bookings quarter, their backlog historically declines by 25% from the end of Q4 to the end of Q1, and management says that, in each of the past three years, this has consistently been the case (-25% backlog drop during those three months of Q1). However, this year, there was no dropoff in backlog from the end of Q4 (July 31st) to the end of Q1 (Oct 31st). Total backlog stayed essentially flat. That sure looks like a positive indication that the year will continue strong. I believe that Q2 and Q3 are the seasonally strongest quarters of the year, so having that higher than usual backlog already lined up to juice the upcoming quarters sure sounds like a good sign to me. Not to mention all of that (growing) deferred revenue that still hasn’t been recognized yet.

Overall, I certainly get why a lot of people don’t want to touch Nutanix stock. Management got it really wrong earlier this year, it caused a lot of pain for shareholders including myself, and I don’t blame anyone for going with whatever feel like the best deployment of your investable dollars, and avoiding NTNX if you have more confidence in other companies.

But yes, I think that, despite the challenges in comparing their results from each of the past few years, there is reason to believe that they are really growing recently, and setting themselves up for accelerating further growth going forward. As I mentioned above, I am not adding to my large position at these prices right now, but I am not planning to sell off anything in the near future either.

This could still go very well or very wrong for NTNX owners, but I am excited to see how it plays out!

-mekong

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I think one of the key issues people had with Nutanix management was when the CEO said, “We like to let chaos reign and then reign in the chaos”.

I can’t speak for others, but I thought that line was pretty bold and kinda dug it. I had a bigger issue when the CFO said, “Looking ahead, our third quarter guidance reflects the impact of inadequate marketing spending for pipeline generation and slower than expected sales hiring." That huge misstep combined with fact they appeared to have lost control of their business plan is what caused me to exit.

As far as mekong’s point about trustworthiness, I never felt management was being deceitful or dishonest. My eventual lack of trust was in their ability to simplify a fairly complicated story. First, I thought Pandey’s speaking style tended to be overly technical to the point of sounding snobbish at times. Second, management seemed to recommend a new metric to track every quarter. It simply became too hard to follow. Frankly, after reading these comments Nutanix still sounds pretty complicated. My perspective at the time was NTNX managed themselves into my too difficult pile. That was a very valuable lesson for me. Unfortunately, it was also very costly.

Kudos to those who understood the Nutanix story well enough to profit from it. I have no problem admitting it simply got too far over my head. I also have no regrets I’ve let it pass since.

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This may be too simplistic with Nutanix (and Nutanix goes out of its way to keep nothing simple when it comes to its numbers, its products, etc), and that is since subscriptions are higher margin the company should also be bringing in more money relative to costs. And yet, not only is this not happening, the losses have gone up by many multiples.

In addition, when do we get the apples to apples comparisons as it has to be getting to that year point or more.

Tinker

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Stocknovice: It simply became too hard to follow. Frankly, after reading these comments Nutanix still sounds pretty complicated. My perspective at the time was NTNX managed themselves into my too difficult pile. That was a very valuable lesson for me.

Saul: I agreed with you completely. That’s why I got out in late 2018.

Stocknovice: That was a very valuable lesson for me. Unfortunately, it was also very costly.

Saul: Nope, you are wrong about that part. I got out the first time in November 2018 at $43 because the story was too complicated. I got talked back in in December 2018 at $41-something by all the people who had great arguments for it (including Bert). I got killed in the crash when they announced that their sales were falling off a cliff, and exited at an average of $36 immediately after in March 2019. Thank goodness! The price got as low as $18.24 in August and EVEN NOW, with the 16% rise today, closing at $33.50, they didn’t get back up to near either of my exit prices, which is why I say it wasn’t costly to you to get out. It saved you money.

In my March summary I had a Section called MISTAKES I MADE THIS QUARTER. Here was one of them:

"Buying back into Nutanix at $41.59
Well, this one I should have known better. I sold out because it was a totally confused picture, even before the latest fiasco. Here’s what it looked like: Nobody on the board could actually figure out what they did (we probably had 100 posts on the board trying to elucidate it). Secondly, they weren’t really dominant in their space as most of our companies are. They shared it with VMWare. And thirdly Nutanix was switching from a business model of software-installed-in-hardware to a pure software model, and in the middle of the switch they decided to also switch from leasing their software to a SaaS model. This must have confused their sales and marketing people no end, as well as confusing their customers. (And that may have accounted for their revenue falling off a cliff later).

This was not a clean picture by any means. I knew all this and I should never have let myself be talked into buying back in. What were the results? I had to sell out at about $36 for a loss of 13%, which isn’t a disaster, but a learning lesson. I don’t think I’ll ever be talked back into investing in Nutanix again."

Best,

Saul

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Stocknovice: “That was a very valuable lesson for me. Unfortunately, it was also very costly.”

Saul: “Nope, you are wrong about that part. I got out the first time in November 2018 at $43 because the story was too complicated. I got talked back in in December 2018 at $41-something by all the people who had great arguments for it (including Bert). I got killed in the crash when they announced that their sales were falling off a cliff, and exited at an average of $36 immediately after in March 2019. Thank goodness! The price got as low as $18.24 in August and EVEN NOW, with the 16% rise today, closing at $33.50, they didn’t get back up to near either of my exit prices, which is why I say it wasn’t costly to you to get out. It saved you money.”

Saul -

In that respect, you’re absolutely right. The decision to sell NTNX did save me money and I have no regrets. In fact, you could say it even made me money since I was fortunate enough to reallocate the funds into profitable purchases of PS, AYX, OKTA and ZEN. In that respect, I owe a lot to this board. I moved on from Nutanix IMMEDIATELY when the story changed and didn’t think twice about it. The costly part was a mistake in how I established and managed the position to begin with. As I wrote after selling it:

“Regardless, the whole thing became too confusing for me to follow. Being brutally honest with myself, NTNX was probably too confusing for me all along…Did I ever really fully understand or believe in NTNX? Something to ponder I guess…In the end I took my 37% loss like an adult. Don’t worry, I didn’t let the door hit me in the a$$ on the way out.”

At that point I was still early in the growth investing game. This board preaches all the time about not following others. Do your own research, form your own conviction and make your own decisions. In this case I didn’t really understand NTNX. In my heart I knew that, but I let my allocation get larger than I was comfortable with mostly because I was riding the coattails of others here who liked it better than I did (including Bert).

Don’t get me wrong. I’m not apportioning any kind of blame. The decision was mine and mine alone. The mistake I made was not the 37% loss. Those are inevitable. The mistake was letting my allocation grow larger than the personal conviction and due diligence I had to support it. That’s what made it a costly lesson. I paid that 37% learner’s fee off a much larger base than it should have been because I thought I might be missing out on something. That’s not a recipe for long term success, and it’s a mistake I know I’m less likely to make now.

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Stocknovice: It simply became too hard to follow. Frankly, after reading these comments Nutanix still sounds pretty complicated. My perspective at the time was NTNX managed themselves into my too difficult pile. That was a very valuable lesson for me.

Saul: I agreed with you completely. That’s why I got out in late 2018.

Yup. Was true then and true now. Just too may easier to understand companies out there to bother with NTNX, IMHO.

“Simple can be harder than complex: You have to work hard to get your thinking clean to make it simple. But it’s worth it in the end because once you get there, you can move mountains.”
–Steve Jobs

Here’s to simple!

Swift…
No position, NTNX (too…not simple)

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So Swift, if I understand you properly, given the plethora of investment opportunities out there (and this is a precept in the best business plans - and by corollary investment advice - literature) if you cannot in a sentence of two accurately sum up what a company does and why that makes for a great investment, then perhaps, as a heuristic tool, one should simply just not invest?

I have to agree. One thing with Nutanix (I did not lose money on Nutanix, broke even after the crash, but lost my 50% gain rapidly, buying during a crash does reduce risk) that always bugged me is that they give away their core product for free. Always have, and still do. Even for free fewer than half of their customers use that product anyways and instead opt for a competitors. Overtime the percentage of customers who used the Nutanix hypervisor did increase but never came close to 50%.

So the problem I had was if the core product around which everything else runs you give away for free and yet you still cannot get even half of your customers to want to use it, then what the heck? This made explaining what Nutanix does more complex.

To make matters worse, Nutanix kept choosing (and continues to choose) arbitrary business metrics like rule of 40, or customer ranking numbers, or the like, instead of straight forward revenue and cash flow growth, or achievement thereof. Making explaining Nutanix even more difficult.

But one thing stuck out with Nutanix, and this is what got me to buy in after a particular large marketcrash, and lead to great short term profits that were quickly washed away, and that was, for one quarter, Gartner indicated that Nutanix had become #1 in its market! Nutanix lost that ranking BIG TIME the next quarter.

As we look back the reason for it was that Dell stopped recommending Nutanix on its servers and instead began solely pushing VMWare and EMC products that did the same thing. This materially hit Nutanix. Nutanix clearly saw this coming as well, and that is why they so rapidly created all these new products.

Long and short, it was difficult to explain what Nutanix did and why you should invest in it from the start, but the reason not to invest was simple: Nutanix was materially dependent upon a much larger competitor for its business success. Once one realizes this, in retrospect, all the talk that Dell will play nice with them forever seems fantasy and one could have completely avoided Nutanix to begin with, as the reason not to invest in Nutanix was far simpler than the reason to invest.

We did identify this issue, but we always wished it away.

The positive thing about Nutanix now is that they are no longer dependent on Dell. More than that…I don’t care.

Zscaler is materially dependent upon Microsoft…except unlike Nutanix and Dell, Microsoft does not compete against Zscaler. Zscaler is a simple proposition, out source your security to the cloud for a far more cost effective, user friendly, and secure architecture for all your computing needs in the age of the cloud. Try summing up Nutanix like that.

That does not remove the risk from Zscaler that Microsoft might try to coopt what they do, but it does not appear that Microsoft has even put in a penny of effort to even think of doing so.

So lesson, with each investment, spell out simply what they do and why that is a great investment. And if it is easier to explain why it might not be a good investment, then move on. Down the road, if the narrative no longer fits the numbers and facts, then you might want to consider moving on as well.

Tinker

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On the call,
Did you hear them speaking about another change, moving to a fully ratable model? An analyst inquired and Duston said:

Yeah, obviously our new products are effectively mostly all ratable in nature, now they’re still a relatively piece of the equation there. It’s something that’s that on our minds but quite honestly I think we have a few more quarters to get through first to I think maybe earn that right to do another movement in the model.

After so many self-inflicted wounds, I hope this would not be another. I wasn’t sure if this just meant phasing out life-of-device licenses? Thoughts?

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Did you hear them speaking about another change, moving to a fully ratable model? An analyst inquired …

If I’m interpreting that part right, I think mgmt is saying that their products are now already mostly fully ratable (e.g. the subscription software, 70% of their business now). He’s saying they want to wait a bit before they even start thinking about anything else. My guess is they don’t change things significantly again anytime soon as the most successful tech software companies right now are all using a subscription model.

I agree with you that I don’t want them shaking the apple cart again anytime soon

-mekong