Nutanix (NASDAQ: NTNX) will be the latest hot new software infrastructure company to come public. They just priced 14.87M shares at $16 - that is above the increased proposed range of $13 to 15. This is a hot IPO.
We'll cover the valuation later in the post. You can also review the roadshow slides and prospectus at current roadshows.
I grew up on a raised floor. Corporate datacenters were fine until micro-computers came along. They grew up into "servers" and could only work if you put in racks, and racks, and racks of them. Add in networking racks and storage racks and it's a wonder anyone could manage it. Every application needed a specific server type with an OS, underlying software and a unique configuration. It was all real hardware and real software. Not only hard to manage, but wildly inefficient. Utilization rates were incredibly low and new deployments often took months.
The first major thing that came along was virtualization of which VMWare is the leader. There are other virtualization solutions as well - notably from Citrix and Microsoft. This software allowed a single physical computer to run multiple "virtual servers" so that applications and their underlying software were no longer tied to physical hardware. Storage got better too, and went from direct attachment to individual servers to a "storage network." It all helped make things much more efficient and performant. But as demands for capacity exploded, they too started creaking and breaking.
This chart from IDC illustrated how we may have "solved" the server spending problem but like the game of whack-a-mole, the problem manifested itself in management and administration where it has grown to dominate IT spending.
The crux of the problem is that all applications require compute, storage and networking but these have been separately managed layers of infrastructure. Add in newly massive requirements for scalability, security and disaster recovery and it's a wonder IT works at all within the enterprise.
This phenomenon is one of the big drivers of Amazon Web Services (AWS) because it allows workloads to be outsourced to the cloud. However, enterprises can't move everything into the "public cloud" for a variety of reasons. Still almost every organization uses AWS or similar for specific application types or spike capacity to address short periods of extra demand.
For years, analysts have insisted that the future is a "hybrid cloud" combining a kind of internal version of AWS and the real external (public one.)
As a first step look at how Nutanix represents their solution relative to the existing enterprise "stack" of virtualization, storage, and storage networks.
If you are more of the hardware box type here is the same picture rendered as the familiar boxes you find in the racks of any datacenter.
The goal here is to provide a layer of control and management on top they physical infrastructure of compute, storage and networks as shown above. Nutanix has greater ambitions though and also provides a kind of "virtualization of virtualization" where they embed their own virtualization controller (the "CVM" in the picture below).
Once Nutanix software (they call it Prism) is "injected" into the on-premise infrastructure it achieves a kind of "uber controller" position. However, this is only the first step. Organizations use public clouds like AWS and Azure strategically now so they have to work seamlessly with the "private cloud" of the new on-premise IT infrastructure.
So in Step Two pictured below, Nutanix brings access to public clouds with their second piece of software "AHV" which is their Acropolis Hyper Visor.
From a functional and a product perspective, the picture below shows Prism and Acropolis together and which functions each delivers. Prism is really the glue that binds all the infrastructure pieces together and Acropolis provides the more powerful management functions.
Hopefully these pictures and our commentary provides a feel for what Nutanix is doing and how their products fit into both the private clouds enterprises are building themselves and the massive public clouds like AWS and Azure that are being used to provide improved delivery and more flexible "on-demand" infrastructure.
What is driving the market?
As everything in our world speeds up, the pressure on an already overburdened IT organization increases. They already are facing massive and increasing costs of management and support so they have to implement a new architecture and solution. We've got some figures and quotes sourced from IDC that quantify some of this.
"We needed two days with Nutanix to deploy. The old way, it would take 1-2 months for a new storage system — we'd have to buy storage separately, then buy the compute separately, and then buy networking gear, and only then could we plug it all together”
IT Manager, Government (USA)
"The complexity of doing disaster recovery in a traditional model is harder and it takes more time. But the savings is more about cost, because we're buying expensive SAN solutions. We'd probably have to buy another SAN at the second site. . . We'd be at a million dollars total of additional SAN costs." IT Manager, US company, Services
Here are the motivations customers cite in shifting to Hyper Converged Infrastructure (HCI).
In terms of benefits, the first are in the form of hard dollars from reduced capital spending.
Then there are staff costs which while "soft" are just as real, especially when demands are increasing and staff is fixed.
We did find one example where a Nutanix customer allowed them to publish a TCO study. Here are the numbers. (Sourced from a NTNX but which cited a real customer.)
Finally, in terms of market momentum - it's strong. IDC has a bunch of numbers, but from this survey it's clear that customers have strong intentions to continue to move to HCI. This data is over one year old, but is based on 566 responses of very qualified IT managers so remains a reliable indicator.
Nutanix is no secret. Their private round of funds in 2014 was already at a $2B valuation. Now two years later they have priced the IPO at $16 which is a $2.2B valuation. Of course the shares will open up sharply this morning so we have yet to see where the public market value will settle out.
Our QDIV analysis suggests a $62/share price if investors afford NTNX the full benefit of their growth potential over the next few years. One thing investors should remember is that the market does go through periods where these high-growth wonders get sold off because they are years away from profitability. Most see companies like TWLO and NTNX as wise to gain share today which will result in a profitable "lock" on the market as it grows.
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