NTNX - Nutanix: A Sustained Improvement In Profitability Coupled With Notable Growth Despite Macro Headwinds

2023-06-02 11:40:33 ET

Summary

• Nutanix has shown impressive sales momentum and expense management, with competitive success against rival VMware.
• The company's transition to a SaaS deployment model and focus on hybrid multi-cloud offerings positions it well for sustained growth.
• Nutanix's valuation remains reasonable, and its potential to benefit from the AI revolution could further boost its growth prospects.

Nutanix: Impressive sales momentum; more impressive expense management

It is hard to believe, but once upon a time, Nutanix ( NTNX ) was considered to be a high growth IT company with an aspirational goal of $3 billion in annual revenues for this current calendar year and an investor pleasing business model. The shares back in that prehistoric time actually reached over $60/share … and that was back in 2018. Since then, Nutanix shareholders have been treated to a series of almost endless and excruciating disappointments as the company pivoted, first from selling hardware/software, to a pure software company, and then from a perpetual license model to the current incarnation of the business model which mainly offers a SaaS deployment.

Along the way, the company faced issues with regards to workload migration to the cloud, server supply chain problems, and a feared liquidity crunch, along with elevated sales turnover and a mixed pattern of sales execution. And finally, just when the company’s operational performance seemingly had turned the corner, the company discovered a cost recognition error that prevented it from releasing full financials for the January 2023 ending quarter. Product innovations and competitive success has been consistent; but profitability has been long in coming.

Nutanix is anything but a popular stock as those things go - although the shares have gone up more than 80% over the past year. At this point, most holders are institutions. From what I can tell, retail investor interest in the company isn’t great. And that 80% appreciation was despite a mediocre analysis rating which has a below average in terms of the consensus and which embodies a consensus price target of just 15% above the current share price.

So, why buy shares in this company now? Sales momentum and profit generation finally seem to be reaching consistent levels, with competitive success against rival VMware (VMW). Last quarter’s blip of an accounting irregularity has been resolved. And despite a 16% share price bump in the wake of the earnings report, valuation has remained at reasonable levels - 4X EV/S with a free cash flow margin now reaching 10%. Dare I think that one of the rarest of all sightings, a working turnaround, taking flight?

This is a reaffirmation of my past recommendation to buy the shares; there is more sustained evidence that the company, after multiple transitions and miscues, is finally starting to achieve some of the potential inherent in its leadership in the hyper-converged infrastructure space . While conditions have changed hugely since the shares were considered as a high growth stalwart, the reality today is far better for Nutanix than it was back five years ago with attractive valuation, a solid growth rate despite macro headwinds, and expense discipline that is bringing consistent non-GAAP profitability and cash flow generation.

AI and generative AI have become an investor focus and that, of course, has been reinforced by the extraordinary results and forward guidance recently reported by NVIDIA (NVDA) . I have thought for years, literally, that AI would ultimately have impacts on IT demand growth - and now that appears to be the case. Generative AI is apparently reinforcing demand growth for apps as it enhances user outcomes and experiences. Generative AI seems likely to cause a demand inflection for compute and storage. Presumably that is why NVIDIA showed such a significant demand spike. Many investors are speculating that this demand inflection will carry through to other vendors of IT hardware.

In the wake of NVIDIA’s results, some companies, particularly including Super Micro Computer ( SMCI ) have seen massive share price appreciation. So far, Nutanix has not been seen as an AI company. In fact, its conference call was the only one I listened to in the last 60 days which did not include a discussion of AI and its potential impact on revenue growth. I doubt if that omission will be seen next time around. I really don’t know just how a spike in demand for servers and storage will impact demand for hyper-converged solutions. But in this market environment, it is worth noting.

Why? Hyper converged infrastructure, the technology that NTNX sells, is one that optimizes the usage and performance of servers and storage. Like many other analysts, I am reluctant to suggest that a server boom is at hand. I would like to see more evidence from more than a couple of vendors. But should it be that the wide scale adoption of AI means that there is to be a boom in demand for servers and storage, then it seems to me that companies whose technology optimizes the usage of servers and enhances their performance, their security, and their scalability are likely to see stronger demand as well. It would be lagniappe for Nutanix if it happens that way, but certainly demand growth for HCI based on AI alone is not a necessary pillar for the Nutanix investment case.

It has been almost 9 months since I last wrote about Nutanix for SA, although subscribers have seen updates. The shares, after their recent bounce, are up 30% or so, since my last article despite the bumpy performance of the software and cloud ETFs such as the IGV and the WCLD.

The last time the company reported it was unable to report a complete report because of issues with recording the cost of software which was supposed to be used for evaluation purposes but was instead used for interoperability testing, validation and proof of concept demonstrations. But some metrics were released at that time including ACV billings growth of 23%, and a strong free cash flow performance, with a free cash flow margin for the period of almost 24%.

The quarter just reported is typically seasonally weaker than fiscal Q2, but ACV billings growth of 17%, and a 32% increase in ARR were well above expectations. The company had forecast ACV billings of $223 million, while the actual result was $240 million. A little bit of the upside was apparently caused by the end of server shortages which had delayed the deployment and revenue recognition of some past sales. The company didn’t forecast operating income metrics last quarter because of the indeterminate costs of the accounting reclassification. The company wound up exceeding its reported revenue target despite a contraction in terms which impacts reported revenue. Non-GAAP EPS was $0.04; the consensus expectation had been $0.03.

The company’s guidance reflects some level caution due to the macro headwinds. In particular, while the company beat prior period ACV billings growth by $17 million, it raised its full year billings growth estimate by just $10 million, although that was still greater than the prior consensus. The CEO has indicated that the company is concerned that macro headwinds have, and will continue to impact the company’s ability to close large new deals at the full potential of the company. It is a prudent forecast, and makes sense in this environment.

The company did wind up increasing its revenue guidance for the current quarter by about 3% compared to its prior projection, and increased its forecast for margins and free cash flow generation - after adjustment for some discrete, non-recurring items. The company CEO, Rajiv Ramaswami said that the macro headwinds were a modest inhibitor to growth in new ACV - but there was no attempt at quantifying that amount. The basic take-away was that while sales of ACV to new customers was somewhat below trends and expectations, the company has been able to over-attain in terms of renewals and expansions. That is a more comfortable place in which to be in the current environment.

Can Nutanix keep it up?

Nutanix has experienced a checkered pattern when it comes to growth. That said, the last several quarters have seen sustained growth in ACV billings of greater than 20%. Much of the checkered growth pattern in terms of reported revenues has been a function of its transitions from hardware/software to pure software, followed by a transition to a SaaS based model. But along the way, the company suffered through sales turnover and sales execution issues as well. At one time the company had projected it would reach $3 billion in revenues this calendar year. At this point, expectations in terms of revenue for the current calendar year are for $2 billion in revenues. So, a question that is part of the company’s valuation anomaly, is can the company achieve consistent and predictable levels of strong revenue growth?

One of the reasons to anticipate that Nutanix should be able to sustain mid-twenty percent growth for several years is that it is a leader in what is still a high growth space. Most third party analysis anticipates that HCI will achieve a CAGR of 25% through the end of the decade. I have presented a link to such an analysis.

Another part of the answer, at least in the short term, is basically mechanical. The company keeps adding ACV which essentially turns into a revenue waterfall. That is part of the reason why the company’s revenue growth estimate for Q4 has grown from 11% to 24%. The increase in terms of the company's forecast for reported revenues compared to the prior consensus is essentially based on the cumulative impact of past additions to the base of ACV coupled with high renewal rates.

Currently, the published 1 ^st Call consensus for Nutanix revenue growth for the next fiscal year is 14%. That is probably an unlikely number simply because of the growth of ACV and the upsell opportunities into the renewal base.

More than a few vendors have seen their revenue growth projections impacted by cloud optimization projects on the part of users. For Nutanix, that focus cuts two ways. On the one hand, users are more reluctant to replace aging hardware with HCI, almost regardless of the payback period. On the other hand, as users try to optimize their cloud usage, one strategy for doing so is to build a hybrid cloud model . Nutanix has substantial competitive strength and specialization in its hybrid cloud offerings. The CEO, on the conference call called out several deals that had been materially influenced by the desire of users to optimize their cloud spend, and had done so by implementing hybrid cloud solutions.

In my view, one of the principal pillars of the Nutanix investment thesis relates to its ability to see sustained levels of significant growth - noticeably above a 20% CAGR for revenues over at least the next 3 years and probably longer. In that regard, Nutanix stands out significantly from other IT infrastructure vendors where the current IT growth slowdown has really ripped through their growth rates. At this point, a significant component of the growth upside that the company has been achieving relates to the strong performance of renewals; while the company doesn’t quantify either churn, or net expansion rates on every conference call, at least in qualitative terms, it has indicated that expansion rates have remained consistent and renewal rates have been a bit stronger than had been expected. The company said on the call that its renewal cohort was greater in the 2 ^nd half of the calendar year and was part of the reason for its visibility and its confidence in increasing its forecast despite the current macro environment.

The more significant question I believe, beyond the mechanical effects of ACV generation, relates to the company’s ability to achieve sustained and rapid growth in ACV billings. I do expect to see Nutanix achieve sustained growth in new ACV at rates that support long-term revenue growth in the mid-20% range. Nutanix started life as the best of breed hyper-converged solution. That is still the core of the company’s business. Hyper-converged solutions have 4 tightly integrated software components. These include storage virtualization, compute virtualization, networking virtualization and advanced management/automation functionality. Sometimes networking is not part of the package. HCI can be used to replace older architectures that require lots of space, cooling and power consumption. It is often used these days to build a private cloud, but it can be used in an as-a service option or, as is most often these days it is part of a hybrid cloud solution.

The cost of ownership advantages of HCI are literally enormous. Because it is built on commodity hardware that can be procured from many suppliers, the upfront hardware costs are much lower than is the case for older technologies. It is easy to scale and to some extent, disaster recovery can be built in. But equally there are advantages in terms of performance. The linked analysis above show 11 discrete advantages that HCI offers compared to older technologies. Part of the growth of HCI is because for many users their converged infrastructure has become legacy and has many functional drawbacks.

So when it comes to evaluating the growth potential for Nutanix one cornerstone is that it is one of the two leading companies in the HCI space. But a significant adjunct to the growth story is beyond HCI. These days, a significant component of the Nutanix growth has come from its products beyond HCI infrastructure. For example, Nutanix offers what it calls Nutanix Cloud Clusters of NC2 . It is software that reduces the operational complexity of hybrid cloud deployment and management. This is a very popular offering because it permits a user to automatically scale and to move applications, workloads and software licenses across different clouds, wherever they are required. While of course storage is part of an HCI solution, Nutanix offers a unified storage capability which makes administration far easier, and offer integrated ransomware protection and auditing and is uniquely scalable for unstructured data requirements.

For years now, one of the principal concerns investors have had about sustainable growth for Nutanix has been the migration of workloads from on-prem to the cloud. This has been a factor in constraining the growth rate for the company, but it seems to be abating. There is still migration of workloads to the public cloud, and will be for years to come. But the concept of moving everything to the public cloud has obviously hit a roadblock this year as users have reconsidered the cadence of their replatforming activity and are changing their direction to the advantage of Nutanix, and others in the HCI market. I have presented here a relatively lengthy selection from this latest conference call on this specific point. This is really the heart of the investment debate on Nutanix. I think the case made by the CEO is a good one, and this is really why the shares ought to be able to work over the next several years:

Jason Ader

Yes. Thank you. I wanted to just follow up on that last question asked to Rajiv. In terms of what you've seen over the last five years, let's say, the kind of the pace of customers shifting workloads to the public cloud, refactoring applications, a lot of initiatives around that over the last five years. In this environment of cost optimization, have you seen enterprises sort of take a step back and say, you know what, maybe we were moving a little bit too quickly and give things a little more evaluation and thought and you talked about TCO, so maybe just kind of paint a picture for us in terms of this last, I don't know, 12 months versus what you've seen in the prior four years?

Rajiv Ramaswami

Yes, Jason, I will say this dialogue has definitely changed over the last year on this topic. I think they've got a set of customers who said, we are going to refactor, let's go move everything to the public cloud. And I think they ran into two issues. One was that it actually was pretty expensive for them to refactor in the first place. And then second, once they did refactor and ran everything into the public cloud, and they're starting to operate at scale, I mean, it's an easy on ramp, right, in the sense that upfront is very easy, you like the ease of use and so forth.

But then as you start using a lot of the services, then you start seeing your bill going up and you soon realize that there's a significant premium there compared to what you were doing before. And so that consciousness is now very much cost optimization is very much a key part of many of our customers thinking. And so now like I mentioned to Meta's question, there is definitely – it's not a close my eyes, let me refactor everything more to the public cloud. That's no longer the conversation at all, right. I think it's much more about, okay, I'm going to have a process for figuring out what I'm going to go footwear.

And in fact, I heard one customer mention that as they're establishing a target state architecture approach for every app that they have in their portfolio, and they're going to then decide what to do about that app. It is going to be running the data center. Does it make sense to refactor it et cetera. So I think people are being much more careful about managing their application portfolio now than they were before.

Jason Ader

Got you. And then just as a quick follow-up on that. As I think about things like NC2 and VMware and AWS, the pushback that we always got on that as well, that's great and it's an easy lift and shift, but it's sort of a stop gap, right? Ultimately, you want to have the app refactored. And I guess if a customer does go that route and use NC2, what's the risk in your mind that refactoring is just sort of an inevitable step on that app and then potentially you lose the app?

Rajiv Ramaswami

Yes. I think first of all, two points. Yes, customers can lift and ship and take it easily to the public cloud Jason, no doubt about it. Now as they refactor and start creating a cloud-native version of the app, one of the things that's a little less understood about NC2 is that even in that scenario, we can actually help run that app very efficiently, right. Even for a pure cloud-native app, you can take our cloud native app that's been fully refactored and run it on NC2 on bare metal say, in AWS or Azure and get significant advantages, both in terms of potentially cost savings, but also in terms of ease of management, and the ability to have one team manage their on-prem and their cloud environments with a single set of tools. So those are sustainable.

We've also seen examples of where we can deliver depending on the application itself, quite substantial cost savings in terms of ongoing runtime costs as well. So that combination plus as we look at our future, when you look at things like Project Beacon, where people cannot build these cloud-native apps using a portable set of center data services, and then they can decide where they want to land them. So for us, we don't think of NC2 as a temporary, hey, migrate and then you're out of the picture. We actually think is migrate and operate. And if you also look at it from a cloud provider's perspective, if you're an AWS on Amazon or Azure, what you really care about is customers consuming our services. It doesn't matter whether they're using Nutanix or not, as long as those apps are running in the hyperscaler environment. So there's not a – so this combination is what makes NC2 quite sticky over time.

The big product news at Nutanix these days is Project Beacon. It is the company’s vision for a hybrid multi cloud platform-as-a-service offering either on Nutanix or in the public cloud. Beacon is not yet a set of solutions that will create revenue in the immediate term. It is basically an aspirational vision of what Nutanix will be selling over the next several years. Currently, the company’s unified storage offering is a precursor of where the company’s product evolution is going. As Beacon evolves my expectation would be that it should help the company generate demand growth beyond the next year or 18 months. As additional pieces, beyond Nutanix Unified Storage become available, the quantitative growth dynamics will presumably become increasingly visible.

In the wake of the jaw-dropping results achieved by NVIDIA, there is even more a focus on everything AI than had been the case before. There are many companies whose shares have seen noticeable appreciation as investors seek out investment commitments that will benefit from the AI revolution. For example, Arista ( ANET ) shares have risen by over 20% in a couple of days based on its ultimate exposure to AI; shares of Pure Storage ( PSTG ) have risen by 30%, and shares of Super Micro ( SMCI ) have risen by 31%, again because of hoped or expected exposure to AI fostered demand. While obviously the NVIDIA earnings suggest that AI influenced demand is already a factor in some corners of the IT firmament, my own guess - and that is all it is - is that investors are probably a bit early in terms of speculating about when AI fostered demand shows up in the results of many IT companies.

With regards to Nutanix specifically, it would be difficult to imagine a boom in server demand, and presumably in demand for storage and networking demand as well, without seeing some positive impact on the demand for HCI solutions. Notionally, it is probably premature to speculate about how that might evolve since at this point there hasn’t been any overall boom in enterprise server demand. I am reluctant to suggest that I have specific insight in just how the advent of AI and generative AI are going to going to lead to a boom in server demand. A boom in server demand is certainly not at all baked into thoughts about HCI growth, or growth of Nutanix in the immediate future. But I do think it worth pointing out that if server demand, overall, really spikes, or if users looking to deploy generative AI solutions wind up increasing their hybrid cloud deployment, then Nutanix will see noticeable benefits. Don’t buy Nutanix shares specifically because of the AI revolution; do be aware that if the IT world evolves as some have speculated, Nutanix will be a beneficiary.

Competition for Nutanix

There are many vendors who offer HCI solutions of various levels of elaboration. Some are small, and others well known. In the latter category are Cisco ( CSCO ) and Hewlett Packard Enterprise (HPE). Microsoft ( MSFT ) Azure is often listed as an alternative to Nutanix. But of course the most notable competitor is VMware. As many readers are aware, VMware has reached an agreement to be acquired by Broadcom (AVGO). The agreement is being scrutinized by the EU and the UK competition authorities, and thus the deal closing has been postponed. The deal has been pending for more than a year now; while I find the issues raised by the regulators as less than credible, I have no way of knowing how the negotiations/reviews will finally evolve. I think the uncertainty that the pending merger has caused has probably helped Nutanix competitively; if the merger is completed, I think Nutanix will see a sustained tailwind with better win ratios and some takeaways as some users will not wish to deal with a company owned by Broadcom.

Nutanix has never been active in selling to service providers. This has started to change. Nutanix has some relatively large partners , and its ability to gain share is going to be a partially a function of how well those partnerships take shape.

I have linked here to some of 3 ^rd party analysis listing some of Nutanix competitors. Nutanix, as mentioned, has solutions well beyond traditional HCI, and that is a factor in some of the competitive reviews. HCI is a large space with rapid growth, and to me that means that there are likely to be more than a single winner. Nutanix is acknowledged by most as one of, if not the leader in the space.

As mentioned, the real competitive battle is between VMware and Nutanix. The most widely used guide to market share in the space is from IDC. IDCs numbers have issues in that VMware sells a package of hardware/software while Nutanix only sells software. And, the way IDC computes market share has penalized Nutanix because of its transition to software. The latest IDC figures only have been released through the 3 ^rd quarter of 2021, and are thus of little value in projecting current gains and losses in the space. And needless to say, the companies themselves make many unsubstantiated claims with regards to share gains and losses. I have linked here to an evaluation by a 3 ^rd party - in this case a reseller. I think it is fair to say that the reseller basically sees more features, ease of deployment, and flexibility with Nutanix. My guess is that the most important difference in the space is probably vision, and the potential role of Project Beacon in disrupting the space. I think at this point it is probably reasonable to believe that Nutanix is likely to be a share gainer in the space, and it ultimately might gain a significant amount of share vs. VMware depending on how the latter’s proposed merger with Broadcom is eventually resolved.

Nutanix: Finally generating cash and non-GAAP profitability while continuing its growth trajectory

Nutanix has finally reached non-GAAP profitability although the model still has substantial leverage as the company grows, expense discipline remains a mantra and as renewals become a more substantial component of revenue. Overall, the company is projecting revenues of $480 million this quarter, a fiscal Q4, up about 7% sequentially, and up by more than 24% year over year. The company does not report or project its net expansion ratio on a quarterly basis. During the call, as mentioned earlier in the article, the CFO indicated that net expansion rates have remained in the 121%-125% range. That level of expansion is a principal factor in driving ACV growth despite macro headwinds.

The company has made progress addressing its cost structure but there are certainly substantial cost remediation opportunities that the company is addressing by holding opex at current levels while revenues continue to grow. Here are the cost components and their trends:

The company’s gross margin last quarter was 84%, up 50 basis points year on year. I would not expect gross margins to improve any further. The company did not report expenses for the prior sequential quarter, although the recently filed 10Q does have a breakdown, but, of course, this reflects some of the onetime expenses in connection with the re-audit of prior year’s results to account for the mis-classified software item.

Sales and marketing expense fell on a GAAP basis year over year and were flat non-GAAP in dollar expense. The sales and marketing expense ratio for the quarter was still a very elevated 47% of revenues, but an improvement from the 52% ratio of the prior year.

Research and development spend was 26% of revenue, also a very elevated level, but a slight improvement when compared to the prior year. Very few companies of this scale have such an elevated research and development spend ratio. Part of the issue has been a function of the breadth and complexity of the Nutanix offering. Over time, I do expect to see rather substantial improvement in this spend ratio. I believe that by focusing on delivering products specific to the vision of Project Beacon, rather than by attempting to cover the infrastructure waterfront, the company will be better able to manage is research and development expense ratio, but also should be able to improve salesforce productivity and to better manage that expense ratio as well.

General and administrative expense was reported as 9% of revenue this past quarter. This compares to a reported non-GAAP G&A expense ratio of 6% reported the prior year. This kind of retrogression would be very disappointing except that G&A as reported reflects onetime costs associated with the extra accounting and legal expenses related to the reaudit of the company’s operations for prior periods. I think projecting a G&A expense ratio of 5% or thereabouts in future periods is basically a reasonable expectation.

Overall, non-GAAP operating expenses as reported were 81% of revenue in the quarter. That compares to 82% in the prior year. The actual improvement was greater than what was reported as the expenses related to analyzing and recalculating prior results to accurately account for misclassified software was really a onetime item, but was not eliminated as part of pro-forma reporting. Overall, the company reported non-GAAP operating margins for the quarter of about 2% compared to a 1.5% operating loss in the year earlier period.

The company is projecting non-GAAP operating margins of 9%-10% for the current quarter, and given the revenue forecast, the math implies that the company plans to hold opex at flat levels compared to this latest reported quarter. With gross margins of 84% there is a lot of potential leverage in this model in terms of potential earnings in the current quarter.

The consensus EPS estimate for next year fiscal year that starts 8/1, is $0.78 up from the current estimate of $.46 for this year. With an additional $320 million of revenue forecast by the consensus, and presumably an additional $250+ millions of gross margin, that is an exceptionally conservative earnings estimate. I would be surprised, given the comments of the CFO, if opex next year actually grew by as much as 10%, or by $150 million. If the revenue growth estimate in the consensus is achieved, and opex rises by 10%, that would yield an additional $.60 in EPS for the soon to start fiscal year, or EPS of more than $1. Of course, if revenue growth tracks at rates higher than the current consensus, the EPS upside would be even larger than just suggested by using a rather simplistic model.

Free cash flow as reported for last quarter was $42 million, or a free cashflow margin of 9%. Free cash flow for the quarter did not include a onetime payment of $31 million to settle the previous class action suit; this will be paid in the current quarter. On the other hand, there was a onetime cash payment for non-recurring tax obligations and a $6 million cash cost for legal and accounting expenses related to the 3 ^rd party software review. Overall, I have projected that Nutanix will be able to achieve a free cashflow margin of 15% over the next 12 months given the trending of expenses and eliminating some of the one-time costs that will be absorbed in the current quarter. Again, if revenue growth exceeds the current published consensus, it will have a visible impact on free cash flow margins.

Wrapping Up: Nutanix valuation and the case for the shares

Although Nutanix shares have appreciated by about 80% from their recent low, they have hardly reached elevated valuation levels. In fact, the shares now are about where they were 3 years ago when Bain Capital made a $750 million investment in Nutanix convertible notes.

Before discussing valuation, I will note that Nutanix does use stock-based compensation, and will continue to do so for the foreseeable future. Last quarter, SBC expense as reported was $73 million or about 16% of revenues, down from $85 million or 21% of revenue from the prior year. SBC expense has been falling consistently throughout the current fiscal year and the trend towards lower SBC has been modestly accelerating.

In looking at valuation, I consider the dilution based on increases in the outstanding share count. This company does project outstanding shares; it has projected an average weighted outstanding share count of 282 million for the current quarter. That estimate includes potential dilution from the conversion of the outstanding convertible and other potential dilution and is well above the 235 million outstanding shares reported last quarter. In the valuation metrics I calculate, which are based on 4 quarter forward projections, I use an outstanding share count of 290 million. I have projected revenues of just greater than $2 billion over the next 12 months and that yields an EV/S ratio of 4.1X. Cash flow, adjusted for some onetime items is starting to rise noticeably. I have projected a free cash flow margin of 15% over the next 4 quarters, after adjustment for some specifically identified onetime expenses such as payment for the shareholder lawsuit settlement and a catch up of payments to the employee stock purchase plan. It is interesting to note, that these days, a 15% free cash flow margin is only about average for the software/tech space. Overall, with 15% free cash flow margins and an estimated 3-year CAGR in the mid-twenty percent range, Nutanix shares are trading a bit lower than average for their growth cohort.

I am re-recommending shares of Nutanix based on the ability the company is demonstrating to achieve substantial growth in new ACV despite sustained macro headwinds. This sustained growth is a function of the company’s leadership in the HCI space which continues to grow rapidly. And it is also a function of the company’s offerings in adjacencies such its unified enterprise storage management solution. Nutanix has been a leader in promoting solutions that enable applications to run in a hybrid multi-cloud environment. That is one of the cornerstones of the company’s growth, and the company has bet its future on that paradigm. It seems to be resonating with users, even in the current environment.

Will Nutanix benefit from the revolution encompassing AI and specifically generative AI? Certainly no one is considering Nutanix to be linked to those trends at this point. There are going to be many beneficiaries, and of course, some losers in this on-going, but still nascent revolution. To the extent that generative AI leads to a spike in demand for compute and storage resources, then Nutanix is likely to be a beneficiary. That is a potential and my foresight is limited in terms of the realization of that potential. I certainly don’t suggest any reader to go out and buy Nutanix shares because they believe it will be the next Super Micro Computing.

I noted earlier that Bain Capital has a relatively large position in the shares with representative on the board. As free cash flow margins have improved, the shares now make much better sense for a potential PE transaction. There was, fairly recently, a rumor about a strategic transaction with Hewlett Packard Enterprise. That talk is in abeyance these days although there certainly are potential strategic buyers who could use what Nutanix has. I have in the past, speculated that Nutanix could be a prime acquisition candidate, and I still believe that, although of course that shouldn't be a primary reason to buy the shares.

I believe the ability of Nutanix to achieve profitable growth, despite macro headwinds is undervalued at this point. I think the debate about on-prem, hybrid and pure cloud is going in favor of what Nutanix is selling. Thus, even after the recent share price spike, I believe there is significant positive alpha in the shares over the next year and beyond.

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