Nutanix Inc. (NTNX) Rating OUTPERFORM Price (24-Oct-16,US$) 29.77 INITIATION Target Price (US$) 38.00 52-Week Price Range 44.46 - 28.50
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25 October 2016 Americas/United States Equity Research IT Hardware Nutanix Inc. (NTNX) Rating OUTPERFORM Price (24-Oct-16,US$) 29.77 INITIATION Target price (US$) 38.00 52-week price range 44.46 - 28.50 Market cap (US$ m) 4,086.62 Disrupting in the right way *Stock ratings are relative to the coverage universe in each ■ Initiate with Outperform and $38 TP: We initiate coverage of Nutanix with analyst's or each team's respective sector. ¹Target price is for 12 months. an Outperform rating and a $38 target price. We believe the company has a [V] = Stock Considered Volatile (see Disclosure Appendix) unique technological advantage that will disrupt the IT infrastructure market, Research Analysts specifically in the form of hyperconvergence. A sizable TAM, an effective Kulbinder Garcha sales motion, and a well-considered business model that relies upon 212 325 4795 software IP should lead to strong and sustained financial performance. [email protected] ■ Hyperconvergence – A market driven by IT needs: In our view, today's IT Philip Wang budget pressures combined with rapid growth in next-generation applications 212 538 3458 mean that the traditional silos of servers, storage, and networking will need [email protected] to converge. Combining storage and compute into one and leveraging a William Chu software platform that is highly scalable, the Nutanix hyperconverged system 212 538 4993 enables agile deployment and can reduce the TCO by as much as ~58%. [email protected] ■ A significant TAM, as much as $32bn, effective sales strategy: We see Syed Talha Saleem multiple drivers growing the hyperconverged TAM. Specifically, major TCO 212 538 1428 savings on capex and opex as well as improved agility should all grow the [email protected] end-market opportunity. For Nutanix, we believe a proven sales model, Sami Badri strong customer growth, and an effective sales organization will drive robust 212 538 1727 revenue growth to $1.1bn by FY18 (67%/50% yoy in FY17/18); however, [email protected] based on our proprietary sales productivity analysis, the revenue could potentially reach upside to $1.4bn by FY18 (79%/79% yoy in FY17/18). ■ Attractive business model, rising software mix: We believe the company's forward-looking strategy extends to three acts: The first deals with hyperconvergence, which is the fusing of compute and storage; the second takes aim at virtualization; and the third deals with the integration of public and private cloud architectures. In addition, we see multiple levers driving an improved level of software content including OEM deals with Dell and Lenovo and meet in the field arrangements with Super Micro and Cisco. All of this should drive software contribution long-term to 33% of revenue from 7.5% in F4Q16, supporting GMs above 70% over time, by our estimates. ■ Valuation—Not for the faint of heart: Based on our comparable multiple valuation and DCF, we arrive at a $38 TP. In an upside scenario, we believe NTNX could be worth as much as $49 per share. We acknowledge there could be meaningful risk in near to medium term, as the stock is highly valued and market will closely watch its growth profile and margin dynamics. Share price performance Financial and valuation metrics Year 7/15A 7/16A 7/17E 7/18E EPS (Excl. ESO) (US$) -0.68 -0.86 -0.83 -0.51 EPS (CS adj., ) -0.91 -0.86 -0.83 -0.51 Prev. EPS (CS adj., US$) - - - - P/E (CS adj.) (x) -32.9 -34.5 -36.1 -58.1 P/E rel. (CS adj., %) - -187.9 -197.2 -358.9 Revenue (US$ m) 241.4 445.0 744.8 1,120.9 EBITDA (US$ m) -85.0 -118.5 -105.4 -37.2 Net Debt (US$ m) -68 -26 -91 -218 On 24-Oct-2016 the S&P 500 INDEX closed at 2151.33 OCFPS (US$) -0.16 0.02 0.67 1.04 Daily Sep30, 2016 - Oct24, 2016, 09/30/16 = US$37.0 P/OCF (x) - - 44.3 28.6 Quarterly EPS Q1 Q2 Q3 Q4 Number of shares (m) 137.27 Price/Sales (x) 10.20 2016A -0.19 -0.17 -0.24 -0.26 BV/share (Next Qtr., US$) -.7 P/BVPS (x) -45.4 2017E -0.20 -0.20 -0.20 -0.22 Net debt (Next Qtr., US$ m) -41.0 Dividend (current, US$) - 2018E -0.13 -0.14 -0.13 -0.11 Dividend yield (%) - Source: Company data, Thomson Reuters, Credit Suisse estimates DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. 25 October 2016 Table of contents Key Charts 3 Executive Summary 4 Financials—Strong Growth to Continue 6 Proven Sales Model Drives Strong Revenue Growth .............................................. 7 Effective Sales Organization and Solid Go-to-Market .............................................. 7 Customer Acquisition Has Room to Grow .............................................................. 10 Repeat Purchase Bodes Well for Revenue Growth ............................................... 11 Strong Momentum in Billings and Revenue Growth .............................................. 13 GM at Target levels, We See Upside & OM Leverage........................................... 16 FCF Is Expected to Be Positive by F1Q17 ............................................................. 19 Software growth could be material 20 LT GM Could Reach Above 70% ........................................................................... 21 Software Contribution Rising .................................................................................. 22 Multiple Software Revenue Streams ...................................................................... 22 Valuation—$38 TP, Outperform rating 24 The Company Could Achieve $1.4bn LT Revenue ................................................ 24 Nutanix Worth $38 per Share with Potential Upside to $49 ................................... 27 Hyperconvergence, What's the Need? 31 Defining Hyperconvergence ................................................................................... 32 IT Trends—Time to Support Business Performance ............................................. 33 The Traditional Way Won't Survive ........................................................................ 34 Convergence vs. Hyperconvergence ..................................................................... 35 Nutanix—Unique IP 36 Nutanix's Vision ...................................................................................................... 37 The Strategy—The Three Acts ............................................................................... 37 Act III and Enterprise Cloud Platform ..................................................................... 45 A TAM as much as $32bn 52 Baseline TAM of $18bn from Integrated Systems.................................................. 52 Hyperconverged TAM of $3.2bn in the Medium Term ........................................... 53 The Full Evolution of a ~$32bn TAM ...................................................................... 53 Justifying the Solution—TCO & ROI 59 Seasoned executive team & stable owner base 62 Seasoned executive team and experienced board ................................................ 62 Stable owner base & favorable investor policy ...................................................... 62 Risks 64 Nutanix Inc. (NTNX) 2 25 October 2016 Key Charts Figure 1: Total billings to continue strong growth Figure 2: Revenue growth strong as well 1,600 250% 1,200 350% 1,400 1,000 300% 200% 314 1,200 498 250% 1,000 150% 800 356 200% 800 182 600 100% 600 Billings Billings ($mn) 150% 219 925 400 Revenue ($mn) 400 94 807 662 50% 100% 89 200 418 563 12 33 218 200 41 118 351 50% 0 36 0% 14 2 201 FY13 FY14 FY15 FY16 FY17E FY18E 114 0 29 0% Product Support %yoy FY13 FY14 FY15 FY16 FY17 FY18 Product revenue Support revenue %yoy Source: Company data, Credit Suisse estimates. Source: Company data, Credit Suisse estimates. Figure 3: LT GM Could Reach above 70%... Figure 4: …with 1/3 Revenue from Software 35% 72.3% 75% 30% LT Rev. Target 70% 25% 64% 20% 65% 33% 15% 60% Support Software 10% Gross margin 14.3% 55% 5% 10.6% %SW as total revenue 5.5% 0% 1.2% 50% FY14 FY15 FY16 FY17E FY18E LT SW % Hardware %Software/revenue Gross margin LT target GM LT potential Source: Company data, Credit Suisse estimates. Source: Company data, Credit Suisse estimates. Figure 5: Repeat purchases generate strong FCF Figure 6: Sales team to generate FCF above LT goal $3.50 $3.00 LT FCF Target LT Model $2.50 FCF Target $2.00 $1.50 Billings-based $1.00 Contriubtion Margin Break Even (based on $0.50 $1 of S&M Expense) $0.00 Initial Customer Purchase Repeat Customer Purchases 1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th Quarterly Change in Deferred Revenue by Sales Team Average Customer Cohort FY13 Customer Cohort FY14 Customer Cohort FY15 Customer Cohort FY16 Customer Cohort Quarterly Revenue by Sales Team Source: Company data, Credit Suisse estimates. Source: Company data, Credit Suisse estimates. Nutanix Inc. (NTNX) 3 25 October 2016 Executive Summary We believe Nutanix is one of As we have articulated in several of our previous reports, the IT infrastructure market a very select few companies remains in a degree of flux. On one hand, IT budgets remain under pressure and the that can address today's IT existing IT infrastructure will continue for a period of time.