Chit Chat Stocks - Nutanix (Ticker: NTNX) with Sean Emory

Episode Date: September 7, 2023

Nutanix, Inc. (NTNX) is a technology company that provides cloud computing software and services, offering solutions for hyper-converged infrastructure and hybrid cloud management to businesses, and navigating a competitive landscape in the cloud computing industry. Listen as Brett and Ryan ask questions about the company, its business model, and valuation. Enjoy the show! ***************************** Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney  Subscribe to our Substack to receive free show notes and charts that go along with every episode: https://chitchatmoney.substack.com/ Interested to see more of Sean's work? Find their Twitter here: https://twitter.com/_SeanDavid?s=20 Contact us: [e-mail] Timestamps Nutanix | (2:20) Competitive Advantage | (11:16) Financials | (21:28) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. This is our Thursday deep dive episode where we interview an analyst or investor to discuss a single stock or industry. And today we are talking with Sean Emery. He is the Chief Investment Officer at Avery & Co. And we're talking about Nutanix, a pretty interesting business. And I think I'm surprised after talking with Sean, we're recording this intro after the interview. I'm very surprised that Nutanix has not talked about more because it's a relatively large business in the cloud, basically the cloud landscape where you would think a lot of people would talk about it considering it's growing booking so quickly. Anyways, I don't want to spoil it all, but it is a really interesting business and Sean gives a really good illustration

of everything that they do. But before we get to that, I should remind listeners that Sean or Avery & Co owns Nutanix. You can look at their website for their full disclosure. You can also look up their 13F online if you want to see all of their holdings, but just keep that in mind. Without further ado, here's our interview with Sean Emery. Welcome to Chit Chat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, to chat money is a CCM media group podcast. Ryan and Brett are also general partners at Arch Capital and Arch Capital may have positions in the securities discussed in this podcast.

Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or recommendation. Now, please enjoy this episode. All right. Welcome in. Today, we are joined by, I believe, fourth or fifth time guest at this point and now I guess we could just call it recurring guest, Sean Emery. He is the founder and chief investment officer at Avery & Co. We will include links to Avery & Co.'s website in the show notes. So if you like this interview and you want to hear more about it, feel free to go check it out. There's a lot of good research on there. Today, we're talking about Nutanix, which we were discussing this before. It's not really a household name or it's not the kind of thing

that I would imagine any of our listeners really interface with. So how did you even come across it to begin with? Yeah. So what's up guys? I'm glad to be back for whatever, I guess, fourth or fifth. I guess I'll go back after, but, you know, so I guess the origin really for me was following the infrastructure space pretty closely, hardware and software, everything from, you know, Citrix with their NetScaler product, ShareFile, Citrix, Workspace, some of the things you hear now. Eventually, they were acquired by Vista. You have someone like VMware out there, which just got acquired by Broadcom recently. So I followed this space pretty closely. And then here came Nutanix. They came to the public market in 2016 or so.

They came out with some excitement. Really, that excitement pertained to the solution they were selling or the value I think they were creating called HCI or hyper converged infrastructure. Again, not something that's, there's a reason why it's not a household name because that terminology to begin with. And I can explain a little bit about hyper converged just for people, but it seemed like an ideal path forward for companies in terms of managing their infrastructure and looking to streamline and simplify that. But if you want, i can again continue on with you know hci yeah let's dig into that a little more how does what is hci what kind of services do they provide to customers and then where do they fit in general

within kind of the landscape of cloud computing sure yeah so so hyper converged infrastructure yeah ironically i mean it kind of is what it sounds like um where so if you just picture a data center uh whether it's you know very large you know think of some of the big companies that exist out there or smaller ones. Think of the closet in the back of an office where you have server racks going. Companies have to essentially house their apps, their data, their emails, file sharing, CRM data, information, you name it, right? Now, traditional data centers, they used to use and still do today, use what's called three-tier architecture. So there you have networking, storage, and compute. So networking being like connecting

all your emails together and having that network capability, storage being exactly what it sounds like, storage. And compute is basically the type of computing resources, computational resources to actually interact with all the stuff that you're using. Now, the angle for Nutanix here was hardware, too much hardware, three-tier architecture, not ideal. How can you make this easier. So what HyperConverge did or Nutanix did is they led the way here. They took what's called a x86 commodity server. So think of Supermicro, you know, many of the other HPEs and Dells sell similar things, combine both storage and compute. So two of those essentially three tiers into one device, one actual hardware device, and then just use software to almost act

as if it's, you know, hardware, right? So that was the magic at the time was taking converging infrastructure. And then the second element to this is what you call a hypervisor. And what a hypervisor is, and that's where probably the hyper, I believe, comes from,

is an operating system that's sitting on top of that hardware that really allows for companies to spin up or create virtual machines inside of this hardware. So virtual machines, exactly what it sounds like again. If you're trying to run five different apps using the same hardware, but you want to separate the resources that that machine could possibly produce, you basically create different little virtual machines inside of this. And you'll have JetBlue's app running in one virtual machine.

You'll have their website running on another. And you just have dedicated resources. And that's what a hypervisor acts as. And ultimately, putting this all together is, you know, it's software defined infrastructure, less hardware, less personnel, you know, run a software anywhere you want, and essentially be able to interact with your machines. Nutanix continued to take share in this place, it became a duopoly, you know, the hypervisor, Nutanix is Acropolis, VMware is vSphere. And that's ultimately what, you know, got our Our, you know, blood boiling around, you know, the opportunity here, which was, you know, leaders in their space, duopoly, you know, long term, you know, customer relationships, what they offer today.

And it's kind of like it's been the next step of the journey for Nutanix is really around hybrid cloud infrastructure. And when a lot of people hear the term cloud, they think of just public cloud, but there's public cloud and private cloud. And that private aspect can be, you know, you host your own data centers, right? you you you basically put your hardware inside of you know facilities like co-location facilities um there's publicly traded ones out there that you know do this for a living and they'll basically manage secure uh cool your your servers and all of your your hardware and you can have you know your software essentially interact with your hardware inside these facilities um but you know hybrid cloud is what it sounds like again you're not only on premise you're not only in the public

cloud you're not in only the private cloud um you're almost anywhere where your apps you know where you think it's best to you know run store your apps um anyways i'll step back there there's obviously product sets that Nutanix has or have um that also i think are are interesting um in terms of their suites again you can hear from like the the the opening um you know this isn't duolingo you know learn learn english spanish french um so no it's a it's a helpful illustration i'm curious on the go-to market for these guys so is it like who are they selling into who are they talking to at with potential customers how do they kind of get in the door yeah um And you're obviously speaking to, you know, CTO, CISO, security officers, you know, CIO.

You're getting a lot of that in the same suite, right? Obviously, in this environment, you're talking more to the CFO as well to, you know, articulate total cost of ownership and really drive that message. But, you know, in general, you're actually just selling into, this is super foundational to a company, right? So this is ultimately what is, you know, provisioning your apps. You know, this is something that you're using for governance. It expands wide.

You can have virtual desktops that are essentially being managed by this. They used to have, you know, Nutanix Frame, which are the acquired frame and then sold frame, but essentially having, you know, desktops as a service as well. So anything that is, you know, the infrastructure database as a service, they have a database offering. offering. If you have databases in the cloud, databases on-prem, you can actually manage, govern, and have clear oversight of your various databases through one system. They're selling to the IT team at the end of the day. That can go as high up to

the CTO all the way down to the engineers and developers. Today's episode is presented by the Science of Hitting Investment Research Service. The Science of Hitting was founded by Alex Morris, who spent a decade working as a buy-side equities analyst before launching his own service in early 2021. You've heard him here on the show a number of times, but Alex produces really, really high quality equity research. And in addition, he provides 100% transparency into all his portfolio decision-making. we were early subscribers to the science of hitting research service and we genuinely believe that alex produces research that is on par with top wall street analysts at a fraction of the

cost i mean the fact that you also get complete portfolio transparency and 100 accountability is just icing on the cake effectively you're outsourcing a full-time equities analyst role for just 349 dollars per year brett and i both pay for the service on our own and we can tell you that it's honestly worth the money. Some of the companies that Alex covers includes Microsoft, Netflix, Meta, Roku, Costco, Match Group, Berkshire, tons of others. So if you're interested, check out the TSOH Investment Research Service today at thescienceofhitting.com. Right. Yeah, right. And so they're not self-serving. They're mainly going after these large enterprise clients. I think one thing as, say, someone who's not an expert on this

industry would think about a first tier is you have the big hyperscalers out there, Amazon, Google, Microsoft, a few others. Where does Nutanix fit in with them? I think the big, I guess, confusion would be, okay, what do they provide that a hyperscaler can't? Why Why is someone wanting to go to Nutanix for multi-cloud or hybrid cloud? Yeah, so there's a couple of different ways to think about it. So one, they've already had a user base, right? So there's the public cloud. The reality is to re-architect your app for the public cloud

is a decent amount of lift and do so. And then that's question number one is, can we re-architect it for the public cloud? yay, nay. Also, does it make sense to have this in the public cloud or is on-prem or private cloud make a lot of sense? So those are some of the questions. And then you add the layer of financials, TCO, does this actually drive savings? Does it drive innovation? Does it drive some of the business outside of just public or private? In addition, it's thinking about why people have been buying public cloud to begin with. And the main three reasons is really around

the speed to get going. You don't actually have to go buy a server and figure out how to have capacity to even do something. So the ease of getting going, that's number one. Number two is the cost structure and not the actual cost of it, but actually the way you pay for it. So on-prem, private typically is a CapEx heavy model where you would buy the servers in every four or three, four or five years. You would reinvest in CapEx and rebuild out your data center, parts of your data center. The public cloud is operating expenses. So it's an OpEx model versus the CapEx model. And then the last one is really around flexibility of resources where you're, I don't know, Macy's and it's the day before Christmas and you don't know how many

people are going to hit your servers or, I don't know, Mother's Day and you're 1-800-Flowers or something. So those are the three elements. Now, what has been happening over the last several years, is really Nutanix, HPE, Dell, and some of the more on-prem-ish players have been adapting to that model and essentially recreating a public cloud operating model in your own private data center. So HPE has HPE GreenLake, which is as a service. So you're basically renting out compute resources, and it's flexible. It's almost pay-as-you-go. It becomes an operating expense of a CapEx budget. Number two is really around capacity constraints. So if you care about where your data is localized, some people international or non-international or city and state lines,

where do you want to run these apps, security of the actual underlying data and personal information, you may want to have that internal and not actually have it exposed potentially to to the public cloud. You can keep that internal, but then have burst capacity. And actually, you know, that's where the hybrid comes in, where you can have a relationship. So Nutanix has multiple relationships with now all the vendors, you know, they just had, number one was with AWS, and you could actually use your Nutanix credits in AWS. So let's say you have your own on-prem stuff, and you also wanted to run, you know, some of your applications in the cloud. You could use your Nutanix credits to buy AWS credits or vice versa.

And they just launched Microsoft Azure as well. So again, you have a central place where you can manage your infrastructure as opposed to being essentially isolated into the various other dashboards, let's say. I don't know if you read the Andreessen Horowitz a year ago. they put out a piece on the underlying cost of public cloud. And they did a bunch of studies, or some studies, I guess, in terms of how much they've spent on the public cloud, in terms of some of their investment, their companies. And the finding was a lot of money, probably way more money than if it was a private cloud. And you have companies like Dropbox, You have companies like Zoom. You have others, plenty of others out there that continue to build out their own, you know, data centers themselves, while also having, you know, the public cloud element where they can, you know, if you have COVID, you know, Zoom spins up to AWS and make sure they have capacity for everyone.

um so anyways that's kind of like the nuances of all of them obviously aws and so and and the hyperscalers have did a really good job over the last decade of really selling the idea of you know start fast innovate fast um and you know pay as you go and i think we're coming to that point where people are starting to understand there is a cost to this ease of use and you know you can a decision based off that and um you know that's kind of like the general thoughts around the public cloud versus you know on-prem it's adapting they're evolving and and uh i think there's a lot of satisfaction there yeah it seems like they're a bit of a frenemy situation uh similar to maybe how snowflake is where you're providing them a lot of demand but uh it's just it's a it's a

unique relationship. But if I look at Nutanix's IR documents, a lot of the times they always talk about, you know, okay, there's going to be a big growth in multi-cloud, hybrid cloud. I forget what the, I get confused on the exact terms they use. Why is that? Do you believe in that? Is that part of the thesis here? Is there going to be growing, growing, growing demand for the niche that Nutanix serves? So I think the overarching of like the usage of, you know, infrastructure is just going to continue to increase, right? You know, more apps, more people using it, more devices. The whole concept of edge computing, right?

Where, you know, everything's going to be connected and those are all going to be different, you know, siloed, you know, mini data centers, right? And, you know, whether that's, you know, two years from now, 10 years from now, it's like, you know, that's definitely a favorable trend just as a, you know, back. Now, the trend of hybrid,

Um, it makes a lot of sense that, you know, if you can have a model where there's flexibility involved, which is most people try to build in, you know, some sort of flexibility in their business while also understanding at the end of the day, like if, if you can understand your demand for your applications, you can build out your infrastructure for that demand. And ultimately, obviously that's going to be the most productive asset. But if you think of AWS built their, not AWS, but Amazon actually built their physical commerce warehousing for demand during COVID. And now they have to somewhat slow that down and improve productivity.

It's almost the same thing, but that's more just like physical, super physical. If you can build out to your demand, you'll be the most productive. And so if you can do that while building in some form of flexibility, which is where the public cloud can come in for some of these operations. And again, the public cloud is going to win a lot when it comes to, you know, net new business. But as those businesses mature further, you know, they're going to have the ability and resources to do so. And then you ask the question of like, you know, HPE building out GreenLake, you know, they're getting a lot of traction there. Nutanix is that was their, they won partner of the year last year, where

Nutanix and HPE would go to market, you know, you'd get HPE hardware, you get Nutanix software, It would be as a service. So if you were a mid-sized company or an enterprise, you could have that same flexibility. For me, it makes a lot of sense. And then if you can match the total cost of ownership, and this is a trusted company. I mean, if you look at net promoter scores for Nutanix, it's 90 plus for seven years straight. So it's very sticky. You talk to anyone that's ever used Nutanix, they love the product. They love this innovation spirit that Nutanix has always had from day one, really. So there's a lot to like about that hybrid model, and it makes a lot of sense. Also, just to be clear, Google is really well known for ML capabilities and some of

the analytics. So GCP will be for that. And then you'll have something for, you're running Azure just to manage all of your, let's say, your enterprise stuff through 365. And you're using AWS for some other skill that they bring to the table while then storing maybe some of your most sensitive data on-premise. So if you think of that world, that's where someone like Nutanix, independent and agnostic to the other vendors, they have something like cloud cost management so they can actually oversee where's the best to run all your apps from a cost perspective. Do you really think AWS...

I mean, you would think so, but AWS being that agent of saying, hey, it's cheaper to running an AWS versus cloud or GCP versus on-prem. So, you know, it's a hybrid world. And the more you hear like CTOs and CISOs, like that's the more and more you hear is bringing it back to that hybrid world. So. Yeah. Okay. Let's get into the financials. I think the big thing that pops out, gave the financials a quick glance before recording this episode is that if we look at their last fiscal year, they had a gap operating loss of $200 million, give or take, but they generated 200 million dollars in positive free cash flow you talked about the business model transition um you know why is there this discrepancy there maybe take us through the

income statement you know what kind of margins do you think they can get to all that good stuff well um yeah let me and i'll step back for a second because i there is a business model transition they did go through which i think was so i level set on like you know what are some of the elements of the industry and you know uh the makeup of kind of what it looks like and what they're attacking, uh, who the customers could be, um, and are, I guess, uh, they have 20,000 plus customers, but if you go back like four years ago, they went through, so they used to sell the hardware that, that X 86 server with a Nutanix logo on it and sell the software with it. That was like, I mean, that was forever until like four or five years ago. Um, that came with

zero gross margin. Um, about four or five years ago, they said, you know, let's be agnostic to server, and let's just sell our hardware. That was step one. That was 50% or so of their revenue, 0% gross margin. So what you saw was obviously a sharp deceleration in revenue, if not declines, and yet gross margin went from 60 to 80 pretty quickly. So that was step one. At the same time, they folded in a business model transition from, again, trying to match where consumption and trends were going was around the fact that they were trying to sell subscriptions versus term license. So they were selling software, right? They went from hardware to software only. Software, they used to sell term licenses, sell a five-year contract,

you know, we'll come back and knock on your door in five years. We get the, you know, $10 million today, revenue and cashflow, bam, you know, deal's done. And, you know, think of how we all bought Microsoft CD-ROMs, you know, years ago, they would knock on our door every three years and try to make that sale again, they'd have to market against us, right? It costs you money to try to get that renewal. So they essentially in two and a half, three years ago, they started to go through subscription transformation. So going from, again, term license to subscription, that did two things. Number one, revenue was recognized radibly over that time period now. So it wasn't recognized upfront. Cashflow was starting to be deferred.

But at the same time, when you do a subscription model, what you tended to see was contract durations would start to tighten. So you went from five-year terms to like we're sitting at three-year terms. So, you know, ultimately what you're seeing is cash flow falling, revenue falling, margins rising. At the same time, and this is where we are today here in the last like year, is really around renewals. So the renewal on a subscription comes at a 90% discount to what they used to be in the initial land. So as this subscription model really starts to spin its wheels, they're getting these automatic renewals at a fraction of the cost.

So that's why you've seen sales and marketing go from 90% of revenue to 46% of revenue, of which we, and this is GAAP, where we think this thing can get to 30, 25. They've cut 20% in two years. you know, we see a path towards, you know, another 20% over the next, you know, a little bit. So back to your original question, I think that was important to like set the foundation because you have this, you know, this industry that is somewhat, you know, ambiguous to people, number one. Number two, you have a economic model that changed in multiple directions. So you can imagine, you know, the average, you know, investor not even, you know,

not wanting to look at this too much until the numbers start to show up and then you start getting interested. And so last year, it was roughly $272 million, I think, in operating cashflow. And like you said, negative operating income. And a lot of that is stock-based comp. So they do have the SPC stock-based comp, add back in operating cashflow. That's the bulk of it. Now, the key there is that SBC has gone from, if you think of the last two, three years, I was looking at this, the earnings report, which was, they essentially went from $1.4 to $1.6 and a half billion of revenue over the last two years, an increase of $200, $250 million of added revenue.

And stock-based comp in percent and dollar terms, dollar terms, it's down 50, 60 million. And percent terms, it's down to like 12 million from 24 million. I mean, 12% from 24%, sorry. We think that trend will continue. Why? Because, you know, two things, the renewals on that marketing, we think will limit a lot of that, you know, marketing, sales and marketing, stock-based comp. So anyways, we see that continue to decline.

If you add back some of the pieces, just to get to the comment around, you know, the discrepancy between, you know, the negative and the positive, last year alone in 2023, which is their calendar, fiscal 23, they're entering fiscal 24 right now, is you had roughly like $60 million of these one-time items and truly one-time, which are, one was a litigation, one was a software. They were using a software that they shouldn't have been using. They had to go back and see how much they were using it and pay extra fees around that. There was things like restructuring charges in 2022, calendar 2022, fiscal 23 for them, and then some smaller ones that added up. So if you look at the pure operating cash flow of this business last year,

you're talking about $30 million, well below the $200. But again, going forward, we talked about some of the things I was talking about where we think SPC contracts from 10 to below 10, I mean, 14 to below 10. We also think sales and marketing leverage has another 20% gap trajectory there. And it's pretty clear to how you get there. If you just look at how much leverage they've already shown here, one checkmark for us this past quarter was they added the most amount of customers, 500 this past quarter in four quarters, yet they spent roughly $50 million less in sales and marketing over that timeframe. So they're being more productive and their dollar based retention is 120, 115. So you're getting these upsells. Anyways, for us, we think

this is a 20% gap, free cash flow business. And how we think about that is super strong customer retention. They have some of the best retention. Why? Because they're so central to a business in terms of managing infrastructure. It's not something you change overnight. Contracts are three years in land, sometimes more. The average is three. So you can, you know, some are five, some are two, some are one. So you have this, you know, switching cost effect that's embedded, you know, happy customers, 90 net promoter score for, you know, seven plus years. They're a meaningful, you know, they've done a meaningful change in their business model where, you know, they are positioned well for where the world is headed. And that's kind of like

our research mission at Avery. And anyways, that's kind of how we, you know, piece it all together you know through words um but um that's how we're thinking about it uh today and then where we think they're they're headed we think there's a 500 million dollar cash flow business um so yeah yeah it's always we always struggle trying to talk through all the financials but you did a really good job there i wanted to talk before we get to kind of the valuation to tie the whole financial picture together i want to talk about the competition because i don't We may have kind of glossed over that, but who, is there anyone that competes with them directly and what's kind of their, I guess, competitive differentiator or what's their

pitch to customers in terms of why a customer should choose them? Yeah. So they, they're, so if you just look up a Gartner, you know, hyper-converged infrastructure, you'll see basically Nutanix and VMware in the top right and everyone's gone, right? HPE bought SimpliVity years back. That didn't work. IBM has Red Hat, but now Red Hat and Nutanix are friends now. Dell used to own VMware. They got rid of VMware and now there's more business to do with Dell. It's really a two-horse race. This is truly a duopoly. They're the only pure play that's left as a standalone in the, in the markets today. Um, it's why you often hear drum

mums or like, you know, drummings of, of, uh, potential takeouts of them, you know, cause they are a kind of, they have 20,000 customers that no one else has in a space that, you know, they're the only ones. Um, VMware is there. So like, like not to discredit that, but like VMware is there. Um, they're a good player. They've been high, they're highly entrenched inside of organizations. The key though, for, and what we continue to watch is that hypervisor, which is ultimately like the operating system, like five years ago, the amount of customers using Nutanix as hypervisor was like, you know, 15, 20%, meaning the customers were using like end to end Nutanix.

um and now today that's you know 60 65 almost 70 percent of customers using their hypervisor so end to end once you're in like you're using the hypervisor you're understanding the operating system it's almost like you're apple or uh you know or a windows um user and you know that is a pretty big deal because that that your engineers are getting trained you know using this type of you know, software. So that's really it. Duopoly. VMware is now owned by Broadcom. Broadcom is known for stripping assets to pieces. You've already heard, you know, Nutanix, one of their largest deals ever. And I believe it was a VMware customer because VMware customers right now are a little bit, you know, scattered to figure out what's going to happen next with the Broadcom acquisition.

So there's a lot of, you know, extra pipeline that's coming from that, from people we've spoken to in the field to you just hearing, you know, Rajiv talk about it. And, you know, the bread and butter is product, you know, it's total cost of ownership. It's some of those main elements that you would hear of, but it's a duopoly, right? So you're either one or the other for the most part, or you're, you know, you're just a hundred percent in the public cloud. And that's ultimately the three players, I would say. Right. Now, a quick follow-up. A lot of people have talked about lately. You mentioned even how the CFO is in conversations now where the tightening of the IT budgets, things may have gotten out of hand for a lot of companies over the last few years.

How has that impacted Nutanix? And if I maybe kind of in the context of the revenue growth, because I'm seeing, and correct me if this is wrong, that they kind of hit an all-time, or not an all-time high. Over the last maybe six or eight quarters, the most recent one, the revenue growth was the fastest it's been in a while. Yeah. So Billings growth, I mean, have it here, which was a 44% and billings is ultimately, you know, a leading indicator. Um, and that's the highest I can see on my charts. Um, and again, so this is a model that's evolved and changed. Um, and you know, the question was really around, you know, revenue growth or what was the, uh, the underlying question there, uh, in the context of the

tightening of the it, but does that make you even more optimistic given that they're doing so well right now yeah so you're seeing a lot of companies like continue to work with what they work with right um so they've explicitly have said you know we're getting a lot of renewals we're getting a lot of you know uh little less upsells but we're we're winning within our base um new logos is the hardest thing to do because you know there's there's cost of change but yet you just saw you know their strongest you know customer wins in two quarters so that or three quarters that's where like there was some happiness around the investor base where you saw a step up in customer additions. So tightening the belts, again, it goes back to total cost of ownership, change agent.

At the same time, these are important projects. They're infrastructure technology. They're literally the backbones of these companies. You're either going to adapt and evolve or not. right? So you're seeing some kind of either, whether it's compression of duration, meaning people are willing to not go out five years or four years or two years. So term compression, they'll call it. And then lastly, sales cycles extending a little bit. They called that out, but nothing material. They have investor day coming up in two, three weeks. I'll be there in New York, but I'm assuming, and I have more to talk about that, but there'll be a lot to hopefully unpack after that as well. Okay. And we've got a couple of questions

around capital allocation, valuation, management. I might try to throw it all into one here. So the market cap today, about $8.3 billion. First things first, do you see the stock as cheap? I mean, you guys own it. So I think my, I would assume the answer is yes. But then on top of that, what do you think of management and their capital allocation philosophy i know there's buyback program outstanding how does that all tie in yeah um so rajiv ramasamy he's the you know ceo he came on you know in the midst of this transition um uh d rush panday was the founder you know ceo not that long ago uh really liked him you know good energy good spirit um you know we've talked to him on, you know, on our side on certain channels, but, um, the, uh, you know,

Rajiv has done a really good job. Um, I didn't mention before, but Bain came in, you know, two, two, three years ago, maybe three and a half years ago at prices just below this took a pretty meaningful size, you know, $750 million investment. Um, and, you know, sits on the board and really, you know, this company was a hyper growth company at one time to something that, you know, they needed to rein in and operationalize. So they brought Rajiv Ramasamy, who was at VMware. He came over, obviously knows the space, knows the customers, knows the business really well, knows the selling point from its competitor. And he's done an incredible job at really just taking down some of the line items that we were talking about before.

Capital allocation. So they just announced a $350 million buyback. They do have quite a bit of cash on their balance sheet. And now, you know, from a cashflow perspective, they're generating cashflow, some of that is stock-based comp, and then they're wiping out some of that stock-based comp through, you know, potential buybacks. I think it was just a vote of confidence that, you know, hey, we're done with, you know, much of the transition. Now we're, you know, either a breakeven gap or, you know, a non-gap with some adjustments, you know, generating, you know, 20, 30, in this case, like 237 million or 73 million in operating cashflow over the last 12 months. So it's just a vote of confidence, I believe. And you take an asset that is trading at

three and a half times sales, I guess, on 80% margins, on 20% margins that we can assume with billions growing at 44% and ARR at 30%. It's starting to get interesting if you think some of those line items can continue to, I guess, lever sales and marketing and stock-based comp continue to fall at the same rate in dollar terms and then therefore margin from a percent perspective, it'll fall even faster. So yeah, it's a pretty good recipe for success. And I guess unless there's any other follow-ups, I think we like to close out typically, you've heard this question before with the pre-mortem. So what could go wrong here? What risks are you watching? Why do you think an investment in Nutanix could go poorly? It's execution. I mean, you've had

small things here and there that could... I know you ask this every time and I try to think about it on the spot, but again, it comes down to execution at the end of the day because the opportunity is ripe for them to continue to execute here. And that's almost like any company you know, that's doing pretty well. Um, it's execution, you know, it's like the last year with the not having the, like not understanding that some of your organization was using a software you're not spending on. I mean, and then now you have to, you know, recoup some of that. They obviously got it done pretty quickly and moved on, but it's one of those things where, you know, that could take you off the eight ball for a second. Now, from like a industry standpoint,

um, here's the thing is like AWS has outpost, you know, uh, Azure has their, has their version of you know outpost is their on-prem version right they're trying to make like an on-prem ish type of uh product and so did uh uh microsoft you know but that's been there for a while uh you have um microsoft or google at google cloud next you know last week you know they they had a couple products that one called anthos which was essentially supposed to you know four years ago everyone's like oh that's going to replace you know nutanix trying to be like the hybrid cloud portal, I guess. And sure enough, four or five years later, they just changed the name of it. So it's not necessarily something... I don't think that's going to be the angle of

failure. I think it's more simply execution and just not having a clear roadmap of selling. But everyone we speak to, channel partners, continue to sell a lot of Nutanix. And so steady drumbeat of just execution, we think this thing can compound for a while from a top line perspective. And then operational execution that they've done over the last three years, I think has been pretty stellar. So that's kind of some of that. I mean, those are like the main things we're thinking about.

Those are really the only areas you can really think about competitive and also self-inflicted wins. So that's that for me. Yeah, I'm kind of surprised I haven't heard more about Nutanix. In terms of revenue, it's not a small business and it seems like just a huge runway in terms of addressable market. But, um, that is all the questions we have, I guess, for listeners that are maybe first time listeners to you, where can they find you?

Where can they follow along? I'll plug right now. The inside scoop podcast, Avery and co has their own podcast and newsletter, right? Same name or yeah. Yeah. That one, uh, is the, the data newsletter for Friday. I love that. I like that one a lot.

So yeah. Cool. Awesome. That's a yeah. Inside scoop and data newsletter. I'm only on threads. No, I'm just kidding. but, uh, on Twitter, uh, you know, at underscore Sean David. Oh yeah. She's, uh, at underscore

Sean David. I'm going to be calling this thing Twitter for the rest of my life. And, uh, yeah, lots of, yeah. Tweet and tweet and tons of good, uh, data points and stuff that you guys are finding. So really, really enjoy following you. Yeah. I'm here. I love you. I love what you guys do. So I'm plugging your plug. So thank you. All right. Well, uh, we should throw a disclosure on this before we sign off. Uh, Brett and I are not financial advisors. Anything we say or discuss here on chitchat money is not formal advice or recommendation we are however general partners at arch capital so clients may have positions in the securities discussed in this podcast thank you all for listening uh thank you sean for joining the show again and

john you got a disclosure too yeah i totally forgot to say at the beginning you know we're investors in nutanix so like obviously we have our own opinion there but um you know invest with your own uh caution invest something called evolved risk all right thanks everyone for tuning in We'll see you next time.