Nutanix Financials And What Comes .NEXT
I’m at the Nutanix .NEXT conference this week, as a guest of Nutanix, so here’s some background on my thinking about the company and the kinds of questions I’ll be looking to get answered.
First off, let’s take a look at the overall financials of the company, based on public filings so far. There’s a decent amount of data in the pre-IPO S-1 filings Nutanix has published to date, so we can take a look at some trend information.
We know Nutanix intends to go public, and that it took money in 2014 at a $2 billion valuation. There are also rumors that Cisco offered $4 billion for the company in 2015. That suggests that Nutanix is looking to either match, or beat, that valuation at its IPO.
But that’s tricky in the current environment, because the market seems to be skittish about tech stocks in general, and new offerings in particular. Analysts are grumpy with Pure Storage, for example, which on my analysis seems a tad unfair given that Pure is meeting guidance (not that I put much stock in guidance in general, short-termism is stupid in my opinion) and the animals spirits seems to be trending bearish lately.
Let’s look at some figures! All 2016F figures are based on a fairly simple extrapolation from the first three quarters of 2016, as published in S-1 updates lodged with the SEC. All of this is public numbers, massaged a little by me using simple spreadsheet math like =FORECAST().
Here we see that Nutanix is trending towards profitability at a fairly steady pace over the past three years. On this trend, we should expect to see a positive operational and net profit from Nutanix in about 2 to 2.5 years.
Since Nutanix isn’t making money yet, we need to be concerned with burn rate: how much cash it takes to keep the business running, and hopefully growing. Nutanix has helpfully provided quarterly free cash flow rates for us in the latest S-1 amendment, but note that these are non-GAAP figures because it includes purchase of property and equipment. This isn’t unreasonable, and provides a pessimistic idea of operating cash as we’ll see in a minute.
It moves around a bit, but is trending down, which is what we want to see. There seems to be a bit of seasonality here as well, but the average cash burn is under $12 million a quarter.
If we just take the pure operating cash from the statement of cash flows, my simple forecast for 2016 shows a most operating cash surplus:
Now isn’t that interesting?
Overall, I see plenty of stuff to like in these financials, in terms of a company that should become profitable in a couple of years, assuming that things keep going much the way they already are.
Weather Tomorrow, Same As Today
But that’s the thing, isn’t it? Things are definitely changing. There’s a lot more competition now in the HCI market than when Nutanix started off. Cisco has its own play with HyperFlex, EMC has VxRail. Nutanix has expanded into a new market (for them) in SMB with its Xpress product line, but there are already plenty of established players in that market who live and breathe it, like Scale Computing, which just added all-flash nodes to its product lineup.
Should we be worried about Nutanix? Well, on my analysis, it all depends on what your expectations are, and particularly what your expectations are of other people’s expectations.
Nutanix, and particularly Dheeraj Pandey, has a view of what Nutanix is worth. My guess is that valuation is higher than what the market thinks it’s worth, else Nutanix would have done its IPO by now. We’re coming up on a full year of submissions to the SEC, and all the downsides that entails internally, but with no liquid market for the stock.
The company is well capitalized, with about $200 million in cash and short-term investments, so it’s not going to run out of cash any time soon. I reckon Pandey is willing to wait for market sentiments to improve before going public, and I can’t imagine the other investors are keen to rush the IPO and miss out on a bigger payday. I don’t see anything in the financials that implies the company would run into trouble in the immediate (6-12 months) future.
But I have other concerns: The move down market with Xpress for SMB bothers me. It’s a very different market to the Enterprise Cloud tagline the company is pushing these days. Margins are tight in SMB, and they’re a relatively costlier customer to acquire. They scale differently, too, because you need to close a lot of $25k deals to make the same money as a single $1 million deal. That means lots of sales people and support staff, or a completely different sales structure internally, which causes a bunch of other cascading issues.
If you’ve got concerns you’d like me to dig into, feel free to drop me a line and I’ll see if I can find some answers this week. Stay tuned for updates as I find stuff out.
Justin traveled to Nutanix .NEXT as a guest of Nutanix.
This article first appeared in Forbes.com here.