Coming a couple days before Christmas, the timing of Nutanix’s IPO filing, a document that’s undoubtedly been in preparation for months, was more than a little suspect. What was the company trying to hide while everyone else was distracted by holiday festivities? As I detail in this column, a thorough analysis doesn’t uncover any smoking guns or even smouldering embers, however it does show a company growing very fast, burning lots of cash, some serious systemic market risks, but plenty of opportunities.
The highlights of any S-1 are the business details and financial data. Nutanix reveals that it has 2,100 customers including 226 Global 2000 enterprises such as the U.S. DoD, Best Buy, Jabil Circuit, Kellogg, Nasdaq, Nordstrom and Toyota of North America. Nutanix believes this is but “a small portion of our potential end-customer base” that it can grow by increasing spending on sales and marketing, exploiting its network of channel partners and focusing on internationals sales, particularly to large, Global 2000 enterprises. Indeed, the S-1 shows a huge increase in sales and marketing expense, which now accounts for 2.7% of sales, up more than tenfold in absolute terms and from 2% of sales just two years ago.
One of the most revealing parts of an IPO filing is where companies must disclose the risks to future success. Much of this is generic, legal boilerplate that applies to any business and situation, however Nutanix does confess some unique potential roadblocks. Of note is the pending Dell-EMC merger given that Dell is a key outlet for Nutanix products. I detail this an other challenges facing Nutanix in the full column.
Concerning issues I didn’t cover, but that are noted in this annotated copy of the Nutanix S-1 include:
- The dual-class share structure in which existing executives and pre-IPO investors are granted preferential Class B shares with 10-times the voting weight of the Class A shares offered to the public. This obviously greatly disadvantages public investors and renders shareholder meetings and governance effectively meaningless since insiders will control the vast majority of votes. Although this structure isn’t uncommon among tech firms that doesn’t make it fair or wise. As activist investor Carl Icahn is fond of pointing out (see this commencement address for the perfect distillation of his thoughts), too many corporations end up be mismanaged through such crony capitalism since maintaining power, perks and prestige becomes more important than business and stock performance.
- Nutanix’s non-product-related expenses, i.e. R&D, sales and overhead, have been rising almost as fast as revenue. While rising expenses are expected when companies are in growth mode, Nutanix must exercise much better expense control if it hopes to reach break even any time soon. The following are 3-year CAGRs:
- Given the cost of its hardware, the focus on Global 2000 customers is logical however these are the same companies that already have heavy investments in traditional server and storage infrastructure. Th key benefit to Nutanix’s converged approach is simplicity, an attribute that SMBs with limited IT expertise particularly value. Yet Nutanix is often priced out of these deals. Relying on channel partners to sell and support he product provides Nutanix an excellent entry point to these businesses, however without a greater variety of cost-appropriate products and cluster configurations, those same partners, which as the S-1 notes have non-exclusive agreements, will gravitate to other vendor’s more competitively priced alternatives or even cloud services.
IPO Not A Given
Given ongoing consolidation in the server and storage business, it’s conceivable that Nutanix never makes it to IPO, however the Nutanix IPO/bidding war will be one of 2016’s notable tech and financial events and watching the process unfold is something I’m looking forward to in the coming months.