I have been looking at Nutanix (NTNX) and wonder how are they going to scale or would they flame out like Rackspace. For one yes there is a big TAM but their SG&A is huge and so is the R&D (labor) costs. Given they have to continually tweak their API’s/code/integration with underlying stacksets I am really not sure unless they get some recurring revenue model if they will be able to produce sustainable margins in the long term. Is it a service model more than IP and they are just riding the cloud transition glory at he moment. Any thoughts?
Rajesh
Hi Rajesh, I sent your question to Bert and here’s what he replied:
Saul
"I do not really know how the issue of Nutanix spend is relevant to their growth. Nutanix has had to overcome substantial headwinds with regards to product cost because of temporary high NAND prices. They have been able to manage through that problem. Fortunately, they do sell lots of software and have been able to maintain gross margins at 58%. The company is investing heavily, primarily in sales expense because the TAM is so large. Here is why they do it specifically. They get 4X the initial revenue from an average customer over 18 months compared to the initial purchase. For a major account, the ratio is 8X. For the Global 2000, it is something like 10X. Of course with numbers like those, they are hiring sales people as fast as possible. I had a lengthy discussion on Friday with the head of IR on just that point.
Last quarter, they had a mid-market user who spent $7 [million?] for Nutanix. That is an incredible number. There are similar vignettes. When you are the leader in something that is transforming a space, it would be silly not to spend to capture users while you have a significant product advantage and buyers are replacing their historic infrastructure with HCI.
Sometimes commenters on this space simply have no idea about what they are writing. This person may be a techie but he has no knowledge in detail of the product or the strategy. That happens. But they do not “continuously tweak their API’s”. The comparison with Rackspace is quite silly as well. But I will send the quote to the IR Director and see what she can tell me."