Saul - NTNX - what changed?

Investment Analysis Clubs Saul’s Investing Discussions
#10

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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#11

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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#12

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.

1 Like
#13

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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#14

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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#15

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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#16

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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#17

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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#18

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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#19

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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#20

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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#21

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?

I think finding the right questions is key, but I don’t think that’s it. What I want to know is, Is Nutanix more like Talend or Twilio? Both solved business problems, saved costs, etc, but Talend depended on a technology (Hadoop), and when it went out of favor, Talend’s offerings did too. Twilio isn’t dependent on any technology that I know of. They have created a network…an infrastructure…that solves the business problem. They’re not choosing a horse to bet on.

It seems to me, though I’m no techie, that NTNX has picked HCI to bet on, and built its core business around that. It has other innovative irons in the fire as you’ve pointed out, but I don’t know how big they are at present, or how much they depend on the HCI core offering.

I’m concerned there might be many other ways to solve the same problem other than HCI, and that it might fall out of favor like Hadoop, and that’s why I’m just not interested.

Bear

6 Likes
#22

It seems to me, though I’m no techie, that NTNX has picked HCI to bet on, and built its core business around that. It has other innovative irons in the fire as you’ve pointed out, but I don’t know how big they are at present, or how much they depend on the HCI core offering.

I’m concerned there might be many other ways to solve the same problem other than HCI, and that it might fall out of favor like Hadoop, and that’s why I’m just not interested.

Bear

I have heard no rumors of an HCI-killer in the wings.
Typically when a new technology gets hot, it starts in the fringes due to being considered “1.0” and many clients, especially larger enterprises, won’t jump in heavy into 1.0 releases of anything.

So even if a new disruptive technology comes out, it will likely be a couple years before it starts being meaningful/realistic as a replacement on-site. Amazon is working on “Outposts” which is new and not yet released, but I am less concerned about AWS as the trend in the larger Enterprises seems to be towards Azure due to tendency for Amazon to compete against everyone, and Microsoft already has a relationship with all the Enterprises and bundles Azure into the mix to get clients to adopt and use.

So could Azure/Microsoft create a competitive product to HCI? Maybe, but they have had Hyper-V competitor to VMware’s hypervisor for a decade or so and haven’t dented VMWare’s marketshare…I just don’t think getting into on-prem HCI-like hardware is of interest to Microsoft.

I mentioned elsewhere that had a sharp NetApp technical leader state to me a few weeks ago that he saw the future of storage as:
HCI predominantly for all storage needs, at edge and in DC.
Remaining storage footprint would be more the traditional SAN (NetApp, Pure, EMC) loaded up with GPUs and primarily used for data analytics.

NetApp now has an HCI solution too, so that doesn’t go against NetApp’s future, but it does inadvertently create a plug for NTNX, NVDA, and even AYX if you think it through.

I have heard similar thoughts/feelings in from multiple vendors/articles over the past year, it seems.

The strength of a platform, like HCI, can also be gauged by the “me too” type of imitation you see with multiple vendors all touting that they also have an HCI solution, such as:
HPE - organically, and via acquisition of SimpliVity
Cisco - Hyperflex
NetApp - newer entry
Dell/EMC/VMware - vxrail, vsan
Lenovo - reselling Nutanix
Dell - reselling Nutanix

Then, when they can’t win any longer, usually two things happen:

  1. the vendor not succeeding in that space will tout a competing product and bash the leaders
  2. the vendor not succeeding in that space will capitulate and form a partnership (an example here could be HPE eventually deciding to “bless” and tout the use of Nutanix on their servers, which they do not do today.

There are no guarantees in investments, so I can only state that I see no catalysts approaching that will definitely disrupt the HCI growth in IT over the next couple years, which the folks at IDC/Gartner seem to agree with.

Dreamer

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#23

Paul,

Is Nutanix more like Twilio or Talend? Maybe you should ask if Twilio or Talend more like Nutanix?

Nutanix is the company with more than $1 billion in sales, #1 in its market despite the fact that its greatest competitor is VMWare, which is owned by DELL, and yet Nutanix servers are the #1 server sold by Dell despite their clear incentive, if they could, to sell everything with VMWare on it.

No, Nutanix is not a Talend. Talend is slow growth, and Talend seems to have mislead investors as to the grandeur of its cloud opportunity.

Nutanix is not going to fall off a cliff or prove in Rule Breaker parlance that the market it is in is not worth being in (from an investor perspective). Nutanix is in one of the largest and fastest growing markets in the world. A market that Nutanix, like Twilio afterwards, created itself and that it continues to lead.

Twilio has less direct competition. Talend is in a market that they did not create, and that has been mostly stale for a decade. What Talend did was create an open source solution, and then promote themselves as the #1 cloud purveyor in the market. This may be true, but left unsaid is just how small that market niche really is.

Tinker

17 Likes
#24

I believe IDC has named Dell as the leader in HCI currently – makes me worry for a stock like NTNX.

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#25

VMWare (owned by Dell) is number 2.
NTNX is #1.

It is currently a duopoly.

AJ

2 Likes
#26

I believe IDC has named Dell as the leader in HCI currently – makes me worry for a stock like NTNX.

AWS / Azure
Coke / Pepsi
HPE / Dell
NetApp / EMC

There are probably thousands of examples of the ability to be a winner without being the leader.

Amazon, Cisco…those are the exceptions.
NVDA is far and away the GPU leader, yet AMD was one of best-performing stocks in 2018, while NVDA was one of worst.
TTD can’t hold a candle to revenues of FB, GOOGL, or AMZN on ad spend, yet only MDB and TWLO outperformed it in 2018 of the stocks on my watchlist.

Plus, part of Dell’s share may include the 20% of Nutanix sales that are resold via Dell, ironically. Even if it is not included, you then have to parse thru whether we are talking about vSAN or VxRail or both combined, which is also a bit misleading.

But, again, even if Dell is HCI leader, all that really does is help validate the relevancy of HCI in the marketplace and that just makes it that much easier for Nutanix sales reps to sell their solution when Dell, Cisco, HPE, and even now NetApp are all pushing “HCI” solutions, and they are basically the company that created the industry.

Most IT clients don’t like vendor lock-in, may not be fans of Dell, or EMC’s aggressiveness and high maintenance fees, of the ever-increasing licensing costs they have been paying to VMware for VSphere (hypervisor) over the years, and may prefer to utilize HCI from another vendor.

I know more expect 1 vendor to have 70-80% or more of the HCI market than I expect that a vendor will emerge with a similar share in the server or storage markets.

Cisco has accomplished close to this monopoly in switching space for a long long time, but they seem to be the exception to the rule in IT.

Dreamer

5 Likes
#27

I believe IDC has named Dell as the leader in HCI currently – makes me worry for a stock like NTNX.

Looks like it depends on whether you are looking at hardware or software.

https://searchstorage.techtarget.com/blog/Storage-Soup/Dell-…

Dell EMC extended its lead over Nutanix in hyper-converged systems sales in the second quarter, although Nutanix crept ahead of Dell-owned VMware into first when the market is measured by HCI software.…

On the software side, Nutanix revenue grew 88.9% year-over-year to $498 million and 34.2% of the HCI market. It slipped past VMware, which grew 97% year-over-year to $496 million and 34.1% share. IDC considers Nutanix and VMware in a statistical tie because they are within one percent in share. VMware’s share jumped from 30.9% in the second quarter of 2017 to 34.1% a year later. But it dropped from 37.2% share in the first quarter while Nutanix increased from 35.2% to 34.2% quarter-over-quarter to catch VMware. However, Dell did receive part of Nutanix’s revenue gains because the Dell EMC XC platform uses Nutanix software through an OEM deal.

Dell had $79 million in HCI software, putting it in a statistical tie Cisco ($77 million) and Hewlett-Packard Enterprise ($72 million). Dell had 5.4% share, Cisco 5.3% and HPE 4.9% — all within one percent.

B

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#28

Nutanix is the leading vendor (and this does not even count all sources because Cisco and HP buyers also put Nutanix on their servers - although unauthorized by Cisco or HP, and HP actually did a marketing campaign in 2017 stating that Nutanix was not authorized to run on our servers - and yet still customers put Nutanix on their servers and go to Nutanix for service instead) despite VMWare and Dell and Cisco and HP having 6 figures in the number of enterprise customer accounts vs. now, more than 11,000 for Nutanix.

Despite this huge, and this is a HUUUGEEE disparity between Nutanix and all the rest, VMWare (along with its parent Dell) can only keep within a statistical tie of Nutanix. This means, since Nutanix has many marquee customers, and its deal size is materially growing as HCI approaches and may cross the “chasm” this year, that Nutanix is taking customers from VMWare and from Cisco and HP. Cisco + HP = ~10% total marketshare. VMWARE + Nutanix = ~70%+ of marketshare. Everyone else, including NTAP, EMC, and the new up and coming software companies fight over the remaining 20% or less of the market and are showing no signs of gaining any share from the top 2.

VMWare offers great product. Nutanix offers great product. The rest are also rans. Consider how good Nutanix product must be to be doing what it is doing in this market and it is getting stronger, not weaker. Now the market is moving to the hybrid integration market. Nutanix is the innovator, VMWare the close follower, and the rest…NTAP cannot even be said to be selling HCI, but rather CI (which has peaked and HCI has finally caught and is leaving in the dust. CI is converged infrastructure that was better suited to incumbents with hardware. HCI makes the hardware a commodity with software defined networking defining things).

If one is still worried about Dell, after all this time, so be it. Dell server sales would materially suffer if they forced their customers to buy VMWare instead of Nutanix. And doing this would not even guarantee more VMWare sales as customers (like they do with Cisco and HP) would most likely just continue to buy Nutanix and put it on whatever commodity server they can find. But hey, maybe the Dell MBA’s see the possibilities otherwise. Doubt it very much, but how knows.

Tinker

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#29

The Q3 IDC report on converged systems show continued hyper growth for hyperconverged.

https://www.theregister.co.uk/2018/12/20/converged_infrastru…

The Hyperconverged Infrastructure (HCI) part rocketed up 67 per cent y-o-y – from $1bn to $1.68bn, having grown 63 per cent from the year before.

Big-ticket CI boxes are being overtaken by low-and mid-ticket HCI systems.

Total Nutanix sales grew 65.5 per cent to $594.7m in the quarter. Total Dell EMC HCI sales grew 67.0 per cent to $496.8m. VMware’s software-only HCI sales were $89.3m, up 57.2 per cent.

Total VMware VSAN + Ready Nodes (all vendors combined) had revenues of $590.6m, up 87.4 per cent.

Total Nutanix - $594.7M
Total VMWare - $590.6M

Increase from second quarter IDC report.

Nutanix - $96.7M (594.7-498)
VMWare - $94.6M (590.6 - 496)

NetApp came in with $21M in HCI.

Nutanix is coming off a bigger base than the others which is why their slightly slower growth still yields picking up market share. Nutanix started HCI but VMWare got in before market was too big. As for everybody else ask Google Cloud Platform how easy it is to gain market share when you’re late to the game and only at 8% in a sky rocketing industry with a dominate player or two sucking up all the action.

VMWare is a stagnant virtualization software company with an HCI offering. Nutanix is an HCI (the hot market)company that is bringing complementary SaaS offering to their Enterprise Cloud Platform.

Converged Infrastructure was the old hotness. That rule enterprise infrastructure for quite awhile. In the IDC report CI declined 2.5% to $1.94B while HCI increased 67% to $1.68B

Right about now HCI should cross over to be the bigger piece as HCI continues to climb like a rocket and CI continues to decline.

HCI will not answer every IT use case. But it is evolving into the Private/Public/Multi Cloud Infrastructure Management Platform. It is a hyper growth segment of the economy. There really is only one best horse company to invest in to participate and that is Nutanix.

Darth

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