Saul - NTNX - what changed?

Investment Analysis Clubs Saul’s Investing Discussions
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Hi Saul,
I tried looking around to see if there was a post explaining your change of heart on NTNX and didn’t find one, so thought I would just ask.

You don’t owe anyone an explanation, so it is appreciated if you decide to share.
I checked out on the boards quite a bit since Thanksgiving, but the last I remembered for your view on NTNX came from this thread: https://discussion.fool.com/by-the-way-guys-bear-and-i-and-othal…

Given there was no new Qtrly ERs since then, and no notable news (outside of maybe Xi being released?) I wasn’t sure what caused your change in thinking.

Nutanix is a great company in my IT world, and I have run across many smart folks outside of Nutanix that think HCI will continue to grow and grow. One colleague, from a competing giant storage company, envisioned a world where almost all on-prem storage was HCI-based and the remaining on-prem storage would be more typical storage arrays loaded with GPUs for data analytics that can’t be done as easily in the cloud. Given that Nutanix is the current HCI leader, this bodes well for their core business.

Their other new business segments (such as Beam/Xi) are smart attempts to diversify and expand their TAM, but in now way is it a guarantee that any of those new products will be a hit.

Finally, while I know their finance re-structuring is basically to move hardware out of the number and become a “software” company, the reality, at least for HCI, is that it has, and will continue to have, a very hardware-like feel to it, both in how a customer consumes it (hardware will be needed, physical space needed, etc) and the sales cycle of new customer acquisitions (customers don’t typically buy NTNX if they just recently invested in more traditional storage, no matter how great the benefits…they all have budgets and job security to worry about).

Would like to add your reasoning of why you got back into NTNX into my thought process, if you are willing to share. Thanks!

Dreamer

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From Saul’s post summarizing 2018:

https://discussion.fool.com/my-portfolio-at-the-end-of-2018-3409…

Okay, why did I buy back into Nutanix? Well, a lot of the posts on the board influenced me, and press releases from Nutanix, and Bert’s enthusiasm, but probably the straw that broke the camel’s back was when Bert quoted the Morgan Stanley analyst who said that Nutanix was the most innovative company she had seen in almost 20 years of experience. However, it’s only a 4.5% position, and it will have to prove itself.

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Would like to add your reasoning of why you got back into NTNX into my thought process, if you are willing to share. Thanks!

Hi Dreamer,
Kaleeater found my explanation for you: Okay, why did I buy back into Nutanix? Well, a lot of the posts on the board influenced me, and press releases from Nutanix, and Bert’s enthusiasm, but probably the straw that broke the camel’s back was when Bert quoted the Morgan Stanley analyst who said that Nutanix was the most innovative company she had seen in almost 20 years of experience. However, it’s only a 4.5% position, and it will have to prove itself.

I guess I was getting out because I couldn’t understand what was going on, but a lot of smart people on the board kept telling us that Nutanix knew what it was doing, and Bert really seemed to understand and recommend it, and their press releases of honors they received and new products they were coming out with, moved my ambivalence arrow from the negative side to the positive side, so I took back a small/medium position. It’s not rational, or thought out, but I’ll see how it works.

Best,

Saul

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One area of curiosity on my end was their revenue. Their last five quarters looked like this:

2017-10: 276
2018-01: 287
2018-04: 289
2018-07: 304
2018-10: 313

Those are improving each quarter, but less so than what I’ve seen from other companies discussed here.

Additionally their revenue growth percentage has been declining year over year for a few years now.

Are there revenue catalysts forthcoming that could reverse this trend? There seems to be a lot of excitement surrounding this company.

Please note, I have no actual positions in NTNX but follow it as a result of following this board. I recently discovered this board in October, and I’m transitioning out of my large companies (AMZN, APPL, GOOG)into those that can double, triple and quadruple much easier. I’ve learned quite a bit thus far, and look forward to continuing my investment education by following this board.

Brandon

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Hi Brandon, If you are going to follow a company you have to read their press releases and their conference call transcripts. Plus there has been an enormous amount of discussion on the board about Nutanix, and it’s recent too. What you are doing is asking us to do the work for you, but since you are new to the board, here’s a quick explanation.

Nutanix used to sell hardware to its customers to run its software on. The hardware came from others, and Nutanix used to just sell it at cost to its customers. It called it pass-through hardware (no profit and no loss on it). So there was a lot of revenue with no profit attached which made for low overall margins. About a year and a half ago, it decided to do away with the pass-through hardware and refer its customers to its suppliers if they needed the hardware. Each quarter, they have done away with a little more of it, which reduced the perceived growth in revenue, both sequentially and year over year. Currently they are down to almost doing away with 100% of hardware revenue, but they are still comparing against a year ago quarter when they had only done away with 25% or 30% or so. The comparisons will slowly get better over the next four quarters, as they will be comparing against quarters which are progressively more similar to the present quarter. There, you have it. It’s a mirage! If you don’t get it yet, just re-read it until you do.
Saul

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Thank you, Saul. I appreciate your response. Perhaps “have it on my radar” was the more appropriate term instead of “follow.” I’ll continue studying them.

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Fantastic post, Dreamer. I’d love to hear how this statement strikes you, as you seem to have more first-hand Nutanix knowledge than the rest of us:

Bert quoted the Morgan Stanley analyst who said that Nutanix was the most innovative company she had seen in almost 20 years of experience

Dreamer, I’m just curious what you think about that because it sounds so weird to me. I don’t doubt that they are innovative, but…MDB, ZS, SHOP, etc…there are so many innovative companies, seemingly doing a lot more interesting things.

Thanks,
Bear

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Bert quoted the Morgan Stanley analyst who said that Nutanix was the most innovative company she had seen in almost 20 years of experience

Dreamer, I’m just curious what you think about that because it sounds so weird to me. I don’t doubt that they are innovative, but…MDB, ZS, SHOP, etc…there are so many innovative companies, seemingly doing a lot more interesting things.

Thanks,
Bear

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Saying anyone is the best is always subjective and I dislike absolute statements, but they seems to be more innovative than most I watch.

Think of HCI as the iPhone to Apple. Not meant to be a dig on Apple or start an Apple thread, but since their lack of innovation just brought down the whole market today, it seems a timely comparison. HCI could also be thought of as Blackberry’s email capabilities, which is the example the Nutanix CEO has used a couple times (I heard him say this specifically at a sales rally event in early August). What their CEO was saying was basically “blackberry was great, but they didn’t innovate, and they were disrupted, and we can’t allow ourselves to be disrupted in a similar fashion, no matter how great we think our HCI solution is.” That was his reasoning as he then began to rattle off all the new “tools in their sales toolkit” in the form of the new products that Nutanix has been rolling out for the past 12 months or so, such as Beam, Xi, and Frame was actually announced while I was at the event.

Amazon is probably the most diverse and innovative company I can think of offhand…they have their hands seemingly in everything. Most companies are hesitant to go outside their comfort zone, and for good reason. Sales teams can stall under the weight of too big a product portfolio, as they lose their ability to be really proficient at selling any one product. I think the key here is leverage and synergy. In Amazon’s case, they disrupted the book world via online sales and kindles, and then used that to build a mammoth ecommerce biz, and then realized they had huge DCs that could be leveraged for cloud computing (I am generalizing to make a point) and once they started crushing brick and mortar stores everywhere, they then opened/bought brick and mortar via Whole Foods. There is a flow to that, you can sense. Every thing they sell and do seems to have a natural transition to another product line. In much the same way, Nutanix (if you believe the CEO) basically came up with HCI as a way to sell their software…they weren’t trying to be in the hardware business, but needed a disruptive niche. Their HCI combines with their hypervisor to give folks fed up with high VMware hypervisor licensing fees an alternative. “hey…like using HCI to solve this particular IT problem, great! Try our hypervisor, too.” They build up a customer base of 10,000+, and then roll out new products that have a good flow from their core HCI offering. “Using HCI for your on-prem needs, but still looking to crack the code on how to best leverage Public Cloud and live in a Hybrid Cloud future world? Ok, we can help via Beam to analyze the best location for your workloads (on-prem or public cloud) and we can provide you with Xi for cloud-based Disaster Recovery, we can leverage Frame for cloud-based notebook/desktop management, and we can leverage Calm to help manage that multi-cloud world you now find yourself in.”

Other companies tend to innovate more vertically…NetApp is a storage company…they started to grow stale a bit but did a great job of reinventing themselves in last 1-2 years by adding an HCI solution (where did they get that idea, I wonder?) and becoming very cloud-friendly with Azure and AWS. But they didn’t get into notebook/desktop management or hypervisors nor are they nearly as broad or horizontal as Nutanix is trying to be.

This optionality or broad/horizontal innovation (whatever term you want to use) is something I like in Nutanix, because if they pull it off, they greatly increase their TAM. I tend to like companies that are executing and have largest TAM possible or at least the ability to increase their TAM.

I think ZS is in a good spot here. Being cloud-based, once they have a wide enough customer base they can add more and more features (I hope) over time that have good synergy with the security solutions their clients are already using. I think SHOP had these qualities…we see it in SQ a bit too.

AYX may be “only” about data analytics, but the good news there is that everyone produces data…I guess they could try to become an MDB (or vice versa) but you would be shocked to see AYX announce a new docusign-type feature, right? If Nutanix did that, you wouldn’t be nearly surprised, at that seems to be their DNA to broaden their scope.

On NPI board, Denny brought up the concept of Founder-led vs Pro-led companies…basically a dig at Apple since Jobs passed away and Tim Cook took over. I think there is a lot to that, and Founders remain the most invested and passionate and concerned about the future of their company, vs polishing their resume for the next gig. None of the big IT titans, outside of maybe Oracle seem to be founder-led anymore…Cisco, HPE, NetApp. I just realized Michael Dell is still around, and who is biggest competitor touted for Nutanix usually? VMware, which Dell bought via the EMC acquisition. Michael Dell is still rapidly trying to change things up and expand, probably because he has that Founder mentality. HPE and Cisco are certainly adapting and changing with the times, but due to their big size they just aren’t as innovative or nimble as Nutanix right now.

A bit of a ramble, but hope that adds some color.

Dreamer

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Bear,

Let me answer your innovation question in a different way.

This is the section that stood out most from Dheeraj’s annual letter: We’re confident that our core HCI product should take us to our stated goal of 2021. That clarity notwithstanding, we will serve our shareholders more meaningfully over the longer term, by keeping our eye on technology tuck-in’s and organic products that leverage the core and provide a public cloud-like experience on-prem. Some of these have the potential to be billion dollar businesses on their own in the next 4-5 years.

That means NTNX is confident they can get to $3B in billings in 2.5 years with only their core product.

Beyond their Core product, they believe some of their new businesses can be billion dollar businesses within 5 years. Namely: Leap, Frame, IOT, Files, Beam, etc.

Think about it, how many of our other companies have potential new billion dollar businesses, with gigantic TAMs, launched and in early stages of development? Maybe TWLO with Flex? Most of our companies are working towards getting to $1B in revenue with their core products in the next few years. Let alone developing parallel offerings with potential $1B run rates. Which other companies can say that outside of their Core product (I’m not counting SQ because I sold out of it months ago and it has a much larger market cap)? To me, having that optionality and vision, is true innovation.

Now the real question is can they execute on their innovation?

Stephen

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Stephen,

IMO, the other stuff outside of HCI is all gravy, and honestly if even one of their other products gets to $1b that will be amazing, as it is easier said than done.

IT landscape changes so fast now, especially since Public Cloud disrupted everything, that I have NTNX on a short leash. Meaning if/when they come close to the 3b, I may cut the rope at that point and call it a win, as the stock should be up quite a bit.

If it is late 2020 and we see Xi or some other product becoming materially relevant to the revenue number and looking akin to DC or AV is/was to NVIDIA’s gaming revenue, then you have more reason to stay even longer in the stock.

Ok…so reading the letter now. Here a different excerpt:

“…we laid down a realistic goal of achieving $3 billion in billings by FY21 (Jul ’21). We are confident that we can do that without buying our way through M&A into a revenue base. Core HCI is a large enough high-CAGR market for a leader like Nutanix to get there organically. All we have to do is to go after new geographies, support more workloads, and certify new server platforms to get our existing HCI customers even more productive. Our recent acquisition of Frame, and our organic development of new data services make us increasingly confident that we can do at least $3 billion in the next 3 years.”

I do think, after reading that a couple times, that he is saying HCI plus new data services will get them to $3b. But reading the excerpt you provided, I can see how it can be interpreted differently though. Either way, still a confident statement and good to see.

Dreamer

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Agree completely about the new products being gravy. And agree about the IT landscape changing rapidly. In my investing opinion, that is why it’s even more important to bet on the most innovative founders & teams.

Just as reference on the $3B in billings by July 2021, that proclamation was made before most of these products were GA’ed or acquired (e.g. Frame and Leap). And I’ve heard Dheeraj mention several times, that they are not counting meaningful revenue contribution from these new products towards that goal.

If all they do is hit $3B in billings by 2021, the stock will 2-3x from here.

But as a shareholder, the upside of developing innovative products in gigantic new or adjacent markets is enormous. These market sizes are being done by memory, so apologies if any of the numbers are off, but the point is some of these markets are huge: backup/recovery market ($50B TAM), file storage ($10-20B), DaaS ($5-10B), IOT (edge is the future).

Again, there is also enormous execution risk with NTNX, but their upside and innovation is as good as any company I follow. I just believe they are operating in a complex and highly technical environment, and are misunderstood financially (more to come on this as I will post something today or tomorrow on NTNX vs. TWLO hidden headline growth).

Stephen

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NTNX has done nothing short of proving they can execute so far in the life of the company.

They struggle to communicate, but the numbers prove out.

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IT landscape changes so fast now, especially since Public Cloud disrupted everything, that I have NTNX on a short leash. Meaning if/when they come close to the 3b, I may cut the rope at that point and call it a win, as the stock should be up quite a bit.

I understand this comment is made from the vantage point of “today” and when you get there, your views could evolve. Just consider this, if they hit $3B in revenue, then NTNX is proved and successful, at that point why would you want to leave?

In simple words, while the concept is getting traction, the company is trying to get traction for their products, the risk of failure is high, you are willing to be invested and when they prove the concept and customers acceptance is gained, and size is achieved you want to move on?

There is a price, at which anything you want to sell. But still…

Separately, I think there is a greater probability that NTNX will be acquired before they hit $3B. I think many were waiting to see how NTNX navigates the HW to SW transition and now that it is becoming clear NTNX has managed the transformation successfully, I am sure for someone like Google, who wants to expand their cloud offerings to enterprise and had challenge with enterprise customer adoption, NTNX offers compelling value proposition. Is $10 B a big price tag for Google? Perhaps not. Is that a price that will allow NTNX management to agree to the merger? Possible.

Let us hope 2019 brings some M&A. :slight_smile:

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Just consider this, if they hit $3B in revenue, then NTNX is proved and successful, at that point why would you want to leave?

Wouldn’t be anything against the company at that point, but rather just the upside to the stock. HPE and Cisco are huge and well-established, but I wouldn’t necessarily be interested in their stocks, as an example.

Sort of like Arista’s stock hitting a wall around last January or so…always a guess as to when best time to exit a stock that may be still growing, but less rapidly so. SHOP another example.

This is a good problem to have in 2-3 years if I feel the same about Nutanix then.

Dreamer

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Is $10 B a big price tag for Google? Perhaps not. Is that a price that will allow NTNX management to agree to the merger? Possible.

I don’t think $10B would be nearly enough for management to accept unless their outlook got much worse very soon.

That would be about $55/share, and the CEO just got all of his new stock comp that triggers once the price exceeds $80/share. The rumors a few weeks ago that Oracle was going to acquire NTNX was rumored at $65/share which would be over $12B and I also do not think would be enough to make it happen.

but then again, they don’t pay me the big bucks to make these decisions so anything is possible

-mekong

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This is from Google’s last cc:

Heather Bellini (Goldman Sachs): And could I just ask one follow­up, if possible. I was just wondering if you look at Microsoft, they have an on­premise and cloud strategy. If you look at Amazon, what they are doing with AWS and VMware, they are kind of doing a similar strategy. Do you think there’s a requirement for you to also have an on­premise strategy to solve this hybrid world as long as it’s hybrid for? Thank you.
Sundar Pichai, CEO Google: You know, we are thoughtfully looking at it. We are increasingly working with partners like, for example, our partnership with SAP or Pivotal, VMware. These are all on hybrid cloud solutions. And so we are thinking about how to do that better. And our overall approach to cloud hybrid modernization I think is the right long­term direction, and so we are doing that.
You know, there are many, many situations we are in where on­prem is a big, big, big requirement for customers. But with our partnership approach, we’ve been able to address the needs well. So I don’t see that as a gating issue for us.

I would be surprised if they tried to acquire Nutanix anytime soon. They seem to be happy with their partnership approach. Besides, Pandey doesn’t seem like a guy who wants to be acquired. From all that I’ve heard/read/seen he is a true builder and wants Nutanix to become an (independent) force in IT.

Best
Niki

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Dreamer,

My understanding of your post is that you agree Nutanix is extremely innovative, like Amazon. But I can’t help but notice you used a lot of hypotheticals, for example:

AYX may be “only” about data analytics, but the good news there is that everyone produces data…I guess they could try to become an MDB (or vice versa) but you would be shocked to see AYX announce a new docusign-type feature, right? If Nutanix did that, you wouldn’t be nearly surprised, at that seems to be their DNA to broaden their scope.

That’s great, and I don’t doubt you’re right…but I’m still left with the question: will they be the one Amazon out of probably thousands of companies that wanted to become Amazon?

In other words, are they solving something that can’t be completely solved elsewhere? Thanks to Brandon, I’ve just now for the first time had an idea why Hyper-convergence is such a useful technology: https://discussion.fool.com/what-nutanix-does-34099287.aspx But I’m left wondering whether HCI is THE solution, or if hardware advancements will render it obsolete, or if a better mousetrap will come along…or already exists…(or frankly if NTNX will be able to keep leading in HCI, although let’s leave that one to the side for now).

I guess I’m kind of changing the question from “how innovative are they?” to “how necessary are they?”

Thanks for your thoughts.

Bear

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I would be surprised if they tried to acquire Nutanix anytime soon

Don’t be. He has to talk about the partner strategy because currently that is their strategy. But the important point is they are acknowledging hybrid is a real requirement (big big requirement for our customers) and they really don’t have an in-house solution and are relying on partners. What he is not telling is, he is ceding revenue, control of the account and solution to the partners or at least sharing it.

Now, Google is not happy about its cloud business, hence they hired thomas kurian from Oracle. Now, Thomas has to grow the business, and if something is very very important to your customers and you are relying on partners to offer that solution, would you continue to rely on them or address it in-house?

The reason you rely on partner is because it is not important for your customer or you don’t have core competency. Now, companies don’t develop core competency from scratch, rather they acquire. In this case, unless the partner is driving revenue for Google, there is no real benefit for Google to rely on partners and not come up with their own solution.

Pandey doesn’t seem like a guy who wants to be acquired

Product guy turned CEO, is going to be proud, hands-on and to a greater degree requiring control over product development. But, someone who is proud can be pragmatic too. The competition is fierce and big. “an existential threat or an too good to pass” could change his mind.

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Dreamer, thanks for explaining the way you did. that was very well put.

I agree to Bear’s question… just because they are innovative, doesn’t mean they will succeed… are their products as critical and as ground breaking as what Amazon proved to be. Two things to remember, Amazon also tried a whole bunch of things and failed… we just dont remember them because they faded away… e.g. phone (I cant even remember its name). Two, Amazon got “free” funding or “free pass”… whatever you want to say - by Jeff announcing that they dont care for profit, they will only care for top line and domination… and street bought into it and kept share price high (I am willing to be it would be very different if street lost trust on the way and share price tanked for extended period of time).

To me, it seems that NTNX is NOT going about it the Amazon way - which is establishing some strong base and use it in completely different market (e.g. retail to AWS)… so far NTNX is in the phase of going from book store retail store mode… a linear expansion you will… or more simply, building up product portfolio for a given market. If you look at their chart of product portfolio of “Essentials” and “Enterprise”, this becomes clear.
And I think they will have a few duds on the way but even if they come up with one or two more successful products like HCI, they will have huge growth.
(the retail store to AWS move is harder… it may or may not ever come for NTNX… but thats ok, for now, there is a looong runway just with cloud SW portfolio).

One of the most interesting thing I did see in the last investor presentation was that they were able to rapidly grow their AHV (Hypervisor) penetration and leverage that further for more products. That to me is a real proof that portfolio strategy is bearing fruit… thats what I would be watching more closely.

BTW - one company that I see is able to make the retail store to AWS type of move, successfully, is Square. if you map out their succession of products delivery and success, you can see a lot of parallels with Amazon. e.g. cash register to SME accounting software (linear / vertical move) to offer loans… and create “cash app” and then enable bitcoin exchange… these later moves are the AWS type moves. And so far, all of these have successful customer adoption.

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will they be the one Amazon out of probably thousands of companies that wanted to become Amazon?

In other words, are they solving something that can’t be completely solved elsewhere? Thanks to Brandon, I’ve just now for the first time had an idea why Hyper-convergence is such a useful technology: https://discussion.fool.com/what-nutanix-does-34099287.aspx But I’m left wondering whether HCI is THE solution, or if hardware advancements will render it obsolete, or if a better mousetrap will come along…or already exists…(or frankly if NTNX will be able to keep leading in HCI, although let’s leave that one to the side for now).

I guess I’m kind of changing the question from “how innovative are they?” to “how necessary are they?”

I was answering “are they innovative” and the above are a lot of other/different questions, to be fair.
I like analogies…just how my brain works.

Will they become Amazon? I doubt it. Once any company hits $100b, don’t you have to say “they won”? Depends when you started investing in them, of course. I was just pointing out that Amazon has nice flow/leverage/synergy and not afraid to move into other markets. Nutanix is similar, and not all companies take those risks.

Will something come along and make HCI obsolete? Probably. But who’s to say that an HCI company won’t be the one to do the disrupting by improving on their product. I am not long enough in the tooth to give this explanation enough details (maybe Denny could) but things move in cycles from centralized to decentralized in IT, it seems. Just when it seems to make the most sense to have all the computing in one place, a trend will come along and move everyone towards computing on the edge. Basically, HCI tries to make the server/storage/networking hardware footprint as small as can be. But then it is less flexible. So HCI will likely never replace everything, nor do they need to in order to become a massive winner. I think about Nutanix as a 1-3 year race…get as much HCI footprint as possible, upon which to sell the new stuff, with the hopes the new stuff picks up the growth torch as HCI growth slows. Not worried about whether HCI is relevant in 5 or 10 years.

How necessary are they? Honestly, cell phones aren’t necessary, nor are streaming video services, invisalign braces, outdoor grills, xmas trees, and a million other things consumers and businesses spend money on. Did the executives really need to get that SuperBowl suite, or attend the Masters with their clients, or lease more office space when everyone could work from home?

I would change the question to: Do they solve a business problem (VDI, computing at the remote sites/plants/mills or smaller datacenters or simply as a gateway to the public cloud) and/or save costs (in gear, software, and in facilities footprint and electricity/cooling), improve performance, and free up your expensive human workers to spend time being more innovative rather than reactive and spending their time just managing larger amounts of gear that tends to break down regularly?

All of the above have value to IT/businesses of all sizes and SLED/Fed, too.
Can you solve the problem without HCI? Sure…sell standard rackmount servers and a dozen plus choices of storage (such as Pure) or simply outsource it all to the public cloud (not always possible in remote sites or for compliance/security reasons).

That is why a sales team is so important. And Nutanix has a good one.

Dreamer

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