Nutanix deep dive

Hi all

Another deep dive, this time Nutanix. It took me a while to get what they do, so hopefully will be helpful to those who don’t follow the stock closely.

https://gregnz.github.io/stocks/NTNX

Interesting takeaways for me was the nature of their deferred revenue, which is support-contract based, rather than SaaS type recurring revenue.

Please let me know any errors or things that should be clarified/improved going forward.

I’m attempting to write some code to produce the numbers, so a look at those would be appreciated.

cheers
Greg

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Thanks for the Nutanix deep dive Greg. Storage and back up was mentioned a few times in you work and made me think of Pure Storeage. Any idea if Nutanix has any influence on storeage / backup providers and if so who they would recommend to their coustomers?

Kindest Regards,
Steve

Any idea if Nutanix has any influence on storeage / backup providers and if so who they would recommend to their coustomers?

In all of their communications they have stressed being agnostic about hardware/service providers and concentrate on being a good partner in their go to market strategy.

Ant

Hi Steve,

as Ant mentioned, hardware agnostic is definitely Nutanix’s song. I did run through some of the OEM providers that they mention on the Nutanix website, but couldn’t really find any spec details on the Dell/Lenovo/IBM boxes.

https://www.nutanix.com/products/hardware-platforms/#oem

I haven’t looked much into PureStorage, but do know they have their own CI box (FlashStorage). I haven’t seen any mention of PureStorage in association with Nutanix.

I did find this doc:
https://drive.google.com/file/d/0B-YHfZeIQgNJT2JORmM4QXJIQ1E…

which shows an analysis of Nutanix vs FlashStorage, which is more interesting because of the estimated TCO of the Nutanix’s solutions. eg: 5 year TCO 24 nodes = $3.6m. Thats a lot of jellybeans!

cheers
Greg

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So to clarify, in addition to still needing outside storage (PSTG), would NTNX customers also still need PVTL based on the following?

“…Calm

Application automation and lifecycle management for the Nutanix and public clouds, as part of the Nutanix Enterprise Cloud OS. Calm orchestrates the provisioning, scaling and management of applications across multiple environments to make IT infrastructure more agile and application-centric.”

Sounds like Kubernetes to me? On investigation, Calm is created from the calm.io acquisition in 2016. It appears to be the equivalent of CloudFoundry, Pivotal, Cloud66 etc. That is, getting your applications deployed (and scaled etc) to the place you want them deployed to.

Calm lets you do what CloudFoundry do, or in the AWS space, what ECS/EKS does, but across multiple clouds (eg, across your Nutanix datacenter private cloud and your AWS/Azure/Google clouds).”

Thank you in advance.

Accidentally posted this to wrong link previously.

sjo

Greg,
Speaking as a non-tech saavy lay person, is it less costly to use a separate flash blade storage such as PSTG or NTNX’s built-in flash storage?

Thank you.

sjo

Hey Sjo,

That was the main problem with nutanix, when you wanted another 20 TB storage you HAD to buy another 200 CPU of compute and 2tb of RAM, even when you ONLY needed 20TB storage. So yes, it is cheaper to buy separate items vs appliance, unless you have an immense infrastructure.

Why i bought nutanix now, is that they are moving off the appliance model (inefficient even for large enterprise) to a software model (Highly efficient for everyone). So the future i am looking for is that i get to manage my precisely provisioned compute and storage with a single nutanix interface, although the storage and compute are NOT nutanix appliances!

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Hi Greg

Nice write up. One or two points you might want to add to this going forwards are:

  1. How Nutanix is tracking in its conversion in its business model from: Hardware, to Software to Subscription solutions. In particular next month is the month where it turns the corner and drops from double digits to single digits in terms of hardware composition. It will be important to track that the wheels don’t come off (I don’t think they will). After that in the next year or two track how the software model moves towards subscription model with BEAM and Xi coming on.

  2. As Nutanix adds more solutions like BEAM, Xi etc as you mention, it is probably also worth tracking how the TAM moves from their current HCI $20Bn to the wider $180BN for cloud operating system management solutions.

I think I made posts on these 2 points recently on the board or NPI when I reviewed some investor presentations.

Thanks again.
Ant

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Hi sarksnz,
thank you for your great Nutanix deep dive.

After reading it, one question remains regarding Calm.
Is this product a direct competition to the Pivotal Cloud Foundry from PVTL ?

If yes - why choose one offering over the other and where are the respective advantages or disadvantages of those products ?

Looking forward to your answer.

Regards,
Freddy

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Hi Greg,
Thank you for taking the time to explain both the company and the numbers!

Greg, I enjoy your deep dives and have been anticipating the one on NTNX. I very much appreciate your communication style and invite you to explain the rules and lead my next board game night.

3 Likes

I have yet to get a chance to read through this deep dive, but am looking forward to it.

On the topic of Nutanix, after reading through Saul’s monthly write-up and looking at the price action of Nutanix recently, I get the impression that Nutanix’s latest quarter actually warrants a share price in the $60-ish range, maybe even $65-ish, but that the market in general is engaging in price anchoring. It seems that the market is disbelieving that the move up from around $20-ish/share in the fall to $60-ish/share now is actually warranted by the growth numbers.

For the sake of a quick reference, I will paste Saul’s summary here (with my emphasis added in bold):

Nutanix was a new position last September. I entered at about $21.70 with a fairly good sized position. It closed Friday at 51.57, so it’s up 140% in nine months. Sure, stock picking doesn’t work. We’ll all return to the mean some day. Statistics prove it! Hah!

Nutanix’s area is “hyper-converged infrastructure” in data storage. I don’t have a clue what that means, but Gartner rated Nutanix first on completeness of vision, and first on the ability to execute. It is doing away with the pass-through zero-margin hardware that it was selling, and pivoting to be a pure software company (also moving towards a SaaS model). This makes their revenue growth look deceptively slow because the hardware sales are no longer being counted, and because of subscription revenue being counted only month by month, even if all paid in advance. (Pretty odd to talk about revenue growth of 41% looking deceptively slow, isn’t it?). Nutanix apparently just won a $45 million contract with the Air Force, its biggest contract ever.

Nutanix has a Net Promoter Score of 90 !!! (For those who aren’t familiar with it, NO ONE gets a Net Promoter Score of 90 !!! It means just about all your customers absolutely love you.)

Here’s what their April quarter looked like:

• Revenue: up 41%, but this is with the elimination of the pass-through hardware revenue that they are no longer counting. If you compare apples to apples, revenue was up 65.5%. That’s extraordinary revenue growth! (volfan84 note: that is right around the level of Shopify’s most recent quarter
• And for a little consensual validation, Bert called this a blow-out quarter and came to the same 66% real revenue growth figure that I did. And he’s value oriented and conservative.
• Software and support billings up 67%
• Adj Gross Profit up 57%
• Adj gross margin of 68.4%, up from 61.2% !
• Adj Net Loss of $34.6 million, improved from a loss of $45.7 a year ago.
• That’s a loss of 12% of revenue, down from a loss of 22% a year ago, as well as the dollar loss decreasing.
• Adj net loss per share of 21 cents, improved from a loss of 32 cents.
Cash was $924 million (volfan84 note: with LT debt of $423M this net $500M cash position means their enterprise value is only $6.3B compared to their market cap of $6.8B)
• Deferred Revenue: $540 million, up 62% !
Positive Operating Cash Flow of $13 million, improved from a loss of $16 million
• Free Cash Flow: A loss of $1 million, improved from a loss of $29.2 million !!!

Just read that over again and you’ll see why I don’t have to know what hyperconverged infra-structure is to know that Nutanix is a disruptive category leader. Start with this enormous growth (billings up 67%, gross margins up 7%, deferred revenue up 62%, operating cash flow of positive $13 million, improved from a loss of $16 million, etc), add on Gartner rating them #1 in two categories, and tack on that unbelievable Net Promoter Score showing that their customers are beyond satisfied. That’s enough for me.

-volfan84
long NTNX along with several NTNX call option strikes and expirations

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Thanks all, appreciate the kind words.

re: Pivotal (CloudFoundry), I haven’t looked in depth at it, but Calm seems to do the same sort of thing, although Calm I believe allows you to access AWS as well as your Nutanix datacenter.

I sort of get it, it lets you manage across the ‘Nutanix enterprise cloud’ in a way I don’t believe CloudFoundry does. My guess is that you wouldn’t use both, but it remains to be seen if anyone uses Calm.

Volfan, re: valuation, as indicated in the DCF, $50 indicates some pretty good growth/margin combo, which Nutanix is way off achieving (the margin bit). But thats the future the market currently believes (all normal too-many-unknowns DCF caveats apply).

To say $60-ish means you believe in a different future than the market.

From Berts latest (Mar - share price ~$42) “Should readers buy Nutanix shares today? Probably not”. So he believes a different future again!

cheers
Greg

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in the DCF, $50 indicates some pretty good growth/margin combo

Greg,

I don’t follow your math in the discounted cash flow section, so I would appreciate it if you showed your work a bit. What I’m not understanding is the assumption for a multiple (PE, PS, or whatever).

That said, you’ve already done some great work, so if you don’t get around to it, I understand. And thanks for the great deep dive!

Bear

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Hi Bear

I use Damodarans DCF (FCFF) approach. So estimate revenue growth, then ebit margin.
eg, at 30%, next 10 year revenue growth looks like:

```
30.00%	30.00%	30.00%	30.00%	30.00%	24.45%	18.90%	13.35%	7.80%	2.25%
 $1,333 	 $1,732 	 $2,252 	 $2,928 	 $3,806 	 $4,737 	 $5,632 	 $6,384 	 $6,882 	 $7,037 

```

Hope that comes out!

And operating margin is similar, the 30% example:

```
3.17%	16.58%	30.00%	30.00%	30.00%	30.00%	30.00%	30.00%	30.00%	30.00%
 $42.21 	 $287.31 	 $675.66 	 $878.36 	 $1,141.87 	 $1,421.06 	 $1,689.64 	 $1,915.20 	 $2,064.59 	 $2,111.04 

```

That seems a little aggressive to me to achieve positive EBIT next year, but theres other assumptions in the DCF that are very conservative (eg: reinvestment). It's all smoke and mirrors, but I use it to try and get an idea of what's priced in now.

Let me know if you want more detail, or to run some scenarios. The main knobs are revenue growth, ebit margin (and time to converge), and sales-to-capital ratio which I've got at a super conservative 0.65. 

cheers
Greg
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One point of concern with Nutanix is still their pricing, especially in cases where VxRail or other software might already be used. If nutanix is the one and only infra management software then the price is justified, but if it is in mixed enviroment the cost of switching everything over is significant.

But this is for each organization to decide for itself.