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 %SW as totalrevenue 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. On the other hand, new forms of challenges by playing in the IT are being tested and deployed driven by the on-demand consumption model, most area of hyperconvergence. In notably the public cloud. To address this, we believe Enterprises will adopt a hybrid the long term it also has an architecture. However, no matter how the architecture evolves, there will be a need for opportunity to disrupt the budgets to both sustain today's infrastructure and support next-generation applications virtualization market, (e.g., e-commerce, mobile, and social media), which are expected to grow ~70% per possibly providing an annum. As such, we believe Nutanix enters the scene at an interesting time, as we believe it is one of a very select few companies that can address today's IT challenges by playing alternative to the public in the area of hyperconvergence. The company also has a strategy to address the cloud virtualization market in the near term and provides a long-term alternative to the public cloud. NTNX is supported by a proven sales organization, with the opportunity to address a major TAM (as much as $32bn), and we see robust revenue growth long term to $1.1bn, with potential upside to $1.4bn. We initiate with an Outperform rating and a $38 TP. Why Traditional IT Won't Survive. The Time of Hyperconvergence: The traditional IT infrastructure can no longer meet the demands of today's fast-changing business world. IT professionals reside in the silos of server, storage, networking and software with very low visibility into each other's activity. As this model lacks a concerted effort in planning and Traditional IT infrastructure procurement, it incurs high opex and capex, putting a serious strain on IT budgets. What is can no longer meet the worse, modern enterprises increasingly demand that IT infrastructure support business demands of today's fast- innovation and market competition with agility and reliability. Traditional IT architecture will changing business world. IT not survive this trend, and a complete new architecture is much needed. professionals reside in the Hyperconvergence enters the scene to address these issues. A hyperconverged system silos of server, storage, combines server and storage in the form of an appliance. On top of that, it has a networking and software distributed software stack to accomplish virtualization and workload management. In turn, this means it could compress a large part of today's IT spend, offering savings as high as with very low visibility of 58%, and could address a long-term market opportunity of $32bn. We would note that each other's activity software here becomes the core piece of the solution:  Appliance: To achieve linearity of performance, hyperconvergence integrates server and storage into one chassis as a building block. In contrast to converged systems such as VCE's vBlock, each building block is intended to perform as part of a distributed server and storage fabric, enabled and orchestrated by the software. This modular approach allows a buy-as-you-grow consumption model, making it very scalable.  Software Stack: Hyperconvergence software is the core piece of the solution. First, similar to server virtualization, the software virtualizes storage by pooling the storage resources of each chassis into a distributed storage fabric. All virtual machines (VMs) can access the same storage pool. The software usually provides a distributed file system. Second, the software works with either the native hypervisor or a third-party hypervisor to harness the compute resources. Third, some hyperconvergence software also provides a private cloud management platform. An example for Nutanix is its Prism management console. NTNX has multiple levers to Multiple Levers to Drive Sales Growth: One aspect of the Nutanix business model that drive robust sales growth we find attractive is that it has multiple levers to drive robust sales growth with decent with decent visibility. We visibility. Specifically, we have built a proprietary model, which looks at the revenue have built a proprietary opportunity from two different angles. The first is based upon customer growth (count model to look at both the today stands at 3,768, up 110% yoy) and deal sizes, which then converts to billings. The customer growth and the other looks at the sales productivity model and how their various salespeople mature over sales productivity. We expect time. The conclusion from both of the analyses is that the company can grow billings by the company to achieve LT 60%/40%yoy to $1.0bh/$1.4bn in FY17/FY18, and grow revenues by 67%/50%yoy to revenue of $1.1bn with $745mn/$1.1bn in FY17/FY18 (see Figure 7). As of F4Q16, the company had only penetrated 15% of the Global 2000 companies, leaving significant room for growth in this upside potential to $1.4bn. space. These customers make larger purchases in each order, almost 2x more than the average customer. The company has recognized the value of this space and has been investing in sales and support accordingly.

Nutanix Inc. (NTNX) 4 25 October 2016

Nutanix sales could potentially reach upside to $1.4bn LT. While we have Nutanix's sales growing ~60% per year from FY16 and FY18 as aforementioned, we believe our estimates could still prove highly conservative. Based on the upside scenario of our sales productivity model, Nutanix's sales could grow by 79%/79% yoy, to $1.4bn long term.

Figure 7: NTNX is expected to generate LT sales of $1.1bn with upside to $1.4bn US$ in millions, unless otherwise stated FY14 FY15 FY16 FY17 FY18 Base case: Total billings 151 307 638 1,018 1,423 yoy growth 104% 108% 60% 40% Total revenue 127 241 445 745 1,121 yoy growth 90% 84% 67% 50% Software revenue 0.0 2.9 24.4 78.9 160.2 As % of Total revenue 0% 1% 5% 11% 14% Gross profit 67 142 276 460 701 Gross margin 52.3% 58.6% 61.9% 61.8% 62.5% Operating income -72.5 -101.6 -144.9 -144.4 -94.4 OP margin -57.0% -42.1% -32.6% -19.4% -8.4% Net Income -78 -109 -148 -153 -105 Share count 142 161 EPS ($) -1.08 -0.65 FCF -65 -49 -39 65 126

Upside case: Total billings 151 307 638 1,117 1,931 yoy growth 104% 108% 75% 73% Total revenues 127 241 445 794 1,423 yoy growth 83% 79% 76% 74% Source: Company data, Credit Suisse estimates

We see the software A Growing Software Business Model: The one concern that investors perpetually hold contribution in billings and for IT Hardware companies is that of commoditization. After all, while Nutanix has perhaps revenues gradually rising one of the most disruptive technologies for IT infrastructure today, it is hard to say whether from 5% of FY16 to 33% of the same will hold in three or five years. Here, we believe what makes Nutanix attractive is sales, which enables scope the company's software business model. With its software platforms, Nutanix's solution is for GM leverage or an essentially software that resides on top of the commoditized x86 hardware. We see the effective means to keep software contribution in billings and revenues gradually rising due to OEM relationships appliance price points with Dell and Lenovo, Meet-In-The-Field with Super Micro and Cisco, and direct sale of the disruptive to drive adoption advanced tiers of Acropolis and Prism. Long term, we see the software contribution rising from 5% of sales in FY16 to 33%, which allows scope for GM leverage or enables an effective means to drive adoption by keeping appliance price points disruptive. A Comprehensive Strategy Has Been Put in Place: We believe Nutanix aims to become more than a pure storage/server vendor and has put in place what we believe is a long-term comprehensive strategy through three specific acts. Nutanix's Act I is essentially a software defined storage solution on top of a hypervonerged appliance. Nutanix's Act II is to make virtualization invisible with its own proprietary Acropolis hypervisor. Finally, Act III is to make Cloud invisible by bridging private and public Clouds with centralized management delivered through its Prism. The hard part for Nutanix Valuation: The hard part for Nutanix shares remains valuation. While the company shares remains valuation…. remains in investment mode, it has already achieved operating cash flow breakeven In an upside scenario with thanks to fast growth in deferred revenue. We expect the company to achieve FCF $1.4bn of LT revenue, the breakeven by F1Q17, which bodes well for further investment in the sales organization. stock could be worth $49 per We believe the company can comfortably deliver revenue of $1.1bn by FY18 and could share, or ~60% upside reach upside to $1.4bn. Based on DCF and comparable peers methods, we believe the company could be worth $38 per share, giving ~25% upside. In an upside scenario with $1.4bn of LT revenue, the stock could be worth $49 per share, or ~60% upside.

Nutanix Inc. (NTNX) 5 25 October 2016

Financials—Strong Growth to Continue

Figure 8: Nutanix Mini P&L—Strong growth momentum to continue FY14 FY15 FY16 FY17 FY18 Product billings 118 218 418 662 925 Support billings 33 89 219 356 498 Total billings 151 307 638 1,018 1,423 yoy growth 104% 108% 60% 40% Software billings 2 23 92 170 269 As % of Total billings 2% 7% 14% 17% 19%

Product revenue 114 201 351 563 807 Support revenue 14 41 94 182 314 Total revenue 127 241 445 745 1,121 yoy growth 90% 84% 67% 50% Software revenues 0.0 2.9 24.4 78.9 160.2 As % of Total revenues 0% 1% 5% 11% 14%

Gross profit 67 142 276 460 701 Gross margin 52.3% 58.6% 61.9% 61.8% 62.5% Operating income -72.5 -101.6 -144.9 -144.4 -94.4 OP margin -57.0% -42.1% -32.6% -19.4% -8.4% Net Income -78 -109 -148 -153 -105 Share count 142 161 EPS ($) -1.08 -0.65 FCF -65 -49 -39 65 126 Source: Company data, Credit Suisse estimates

Nutanix has had tremendous growth in billings and revenues over the past several years, and we expect the strong momentum to continue. In FY17/FY18, we estimate the revenue to grow by 67%/50% yoy to $745mn/$1.1bn (see Figure 8). Specifically, we believe the company has multiple levers to pull that will drive financial performance ahead. Proven Sales Productivity Model: The company is operating on a proven sales productivity model that enables both fast top-line growth and solid profitability. For example, a typical salesperson can generate sufficient billings to support NTNX's LT FCF target after their fifth quarter of employment. The company reported that its sales team has repeatedly generated billings that exceeded internal plans. Customer Base Still Has Room to Grow: The company acquired 1,969 new customers (110% yoy growth) last year, ending F4Q16 with a total customer base of 3,768 customers. However, we believe there is still room for the company to grow its customer base. We note the company's current penetration of the Global 2000 is only 15%. These customers are especially valuable as their life time value is twice of the average customer. Repeat Purchases Drive Strong Growth in the Top Line and Are Highly Profitable: Nutanix's products are very sticky, with the total life time value at 3.6x the initial purchase for customers older than 18 months. For the Global 2000 customers, the total life time value is 7.2x the initial buy. In addition, $1 of spend in S&M generates about $3 of gross profit in repeat purchases (vs. $1 in the initial buy), well above NTNX's LT FCF target. Software Developing in Early Innings: The company's product offering is essentially a piece of software with 100% GM and is offered through OEM and software-only distribution. In F4Q16, we estimate software contributed 7.5% of revenue and 16% of total billings. Longer term, we believe one-third of revenues or billings could come from software, driving GM above 70%.

Nutanix Inc. (NTNX) 6 25 October 2016

Deferred Revenues Generate Strong Cash Flow: While the operating income is still negative, the company has reported positive operating cash flow of $9mn for the past three quarters due to strong growth in deferred revenue. We expect the company to achieve positive FCF by F1Q17 with full year's estimate of $65mn. Proven Sales Model Drives Strong Revenue Growth Nutanix is currently operating on a strong sales productivity model, which makes it possible to achieve fast revenue growth and strong profitability.

Figure 9: Repeat purchases very profitable Figure 10: Sales team achieve LT FCF target

$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 Quarterly Revenue by Sales Team FY15 Customer Cohort FY16 Customer Cohort Source: Company data, Credit Suisse estimates. Source: Company data, Credit Suisse estimates.

The company disclosed that with $1 of spend on S&M, a typical sales team could generate $1 of gross profit from the initial deal (see Figure 9). At this stage, the company could still generate operating losses due to other spend such as R&D and G&A. However, the sales team could equally generate FCF well above the LT target for any of the repeat purchases, as gross profit is about 3x the S&M spend. As the company matures and increases the penetration rate of the market, we believe more and more billings will come from the existing customer base. Per our estimate, billings from the existing customer base stood at 65% of the total billings in F4Q16. Another way to look at this is to look at the ramping path of a typical new salesperson. The company reported that a typical salesperson could generate enough billings to support the LT FCF target after the 5th quarter of employment (see Figure 10). The strong profitability demonstrated by these points provides a strong incentive for the company to expand the salesforce as fast as it can to achieve both its revenue growth and its long-term profitability target. Effective Sales Organization and Solid Go-to-Market The company's tremendous sales growth relies on its effective sales strategy. From its inception, the company has taken a methodical approach to build the sales organization, emphasizing both a horizontal and vertical presence. Each sales team consists of sales personnel, an account manager, and at least one system engineer to make sure sales and engineers are in sync. This is important for a company that blazes trails with its disruptive technology.

Nutanix Inc. (NTNX) 7 25 October 2016

Figure 11: Sales team repeatedly exceed goals Figure 12: Non-ramped salespeople could add ~40%

125% $350 111% 106% 105% 100% $300 100% $250

75% $200

$150 50%

$100 Bookings as a % of Plan of % a as Bookings

25% $50

$0

0% 1 2 3 4 5 6 7 8 9 10 11 12 13 Fiscal Week Q3-2014 Q4-2014 Q1-2015 Q2-2015 Q3-2015 Projected Billings Fully ramped Productivity

Source: Company data, Credit Suisse estimates. Source: Company data, Credit Suisse estimates.

Effective Salesforce: Nutanix has built an effective salesforce to convert market demand to billings. The excellent sales execution has been a factor in helping the company meet its planned target. For example, in 2Q15, the company met its quarterly target about ten days before quarter end, and the total bookings of that quarter exceeded the planned target by 11% (see Figure 11). One can see, as shown in the figure above, that there is a 30-40% productivity gap from the non-ramped sales capacity. The ramp-up period is usually three to five quarters depending on the account size. Since its inception, the company has been aggressively hiring salespeople, which we believe is an effective driver to grow billings (see Figure 12).

Figure 13: Nutanix sales organization—Strong international presence Sudheesh Nair SVP WW Sales & BD

Sales Americas US Federal EMEA APAC OEM Sales BD & Alliances Operations & Inside Sales

Key Roles in Field

Territory Manager

Major Account Manager

Regional Director

Theater VP

Sales Engineering

Inside Sales

Channel Sales

Source: Company.

Strong International Presence: Nutanix has focused on building its international sales presence (see Figure 13 and Figure 14). Not only has the company opened sales offices across the globe in its early-stages of development, but many channel partners have also been signed to promote its solution outside of the United States. Horizontally, the sales organization has seven divisions including geographic regions such as EMEA, APAC and US Federal. The company reported that 46% of accounts were based in EMEA, APAC, and Japan in 2015.

Nutanix Inc. (NTNX) 8 25 October 2016

Figure 14: 37% of rev. from international customers Figure 15: Healthy mix of revenue across verticals Professional Communications Services, 5% /SP, 4%

Other, 6%

Federal Government, 23% International Retail, 8% 37% Healthcare, 10% Financial US Services, 14% 63% Heavy Industry, 10% SLED, 10% Technology,

11% Source: Company data, Credit Suisse estimates. Source: Company data, Credit Suisse estimates.

The Company Also Developed a Healthy Mix in Verticals: Nutanix now sells products to companies in a wide range of sectors including financials, retail, technology, and energy. As it takes time to develop a deep bench of professionals with sector know-how, the company could develop a platform for further IT service offerings. As of 2015, deals from Federal, financial, and technology accounted for 23%, 14%, and 11% of sales respectively (see Figure 15).

Figure 16: Nutanix's global support network

Amsterdam

San Jose Tokyo Durham

Bangalore

Support Centers Sydney

6 11 9.8 90 ~70 Customer Satisfaction Net Promoter Support Centers Countries Languages Score

24x7x365 ~20K 1K Annual 40+ Servers Replacement Spare Parts “Follow the Sun” Supported Part Shipments support Depots

Source: Company data, Credit Suisse estimates.

Solid Go-to-Market Strategy: The company implemented a fast sales cycle to address the problem of a prolonged procurement process in the traditional model. On average, the company completes the cycle within 110 days of the initial leads for new customers and only 60 days for existing customers. In addition, the company has built a global support network to provide a three-tier support service according to the emergency level. Our checks show that the company's post-sales service is highly praised in the field, evidenced by its 1% churn rate (see Figure 16). Fast delivery and post-sales support enable the company to enjoy an 80% conversion rate from POC trials and a 75% repeat purchase rate within a year.

Nutanix Inc. (NTNX) 9 25 October 2016

Ecosystem Formed by Channels and Partners: The company heavily leverages channels for market leads. In doing so, Nutanix can acquire new customers with a limited scale of salesforce at the start-up stage. The company launched its partner network in 2013. Since then, Nutanix has built a global channel ecosystem including around 600 partners in EMEA and 425 in APAC. Nutanix is committed to channels with virtually all deals fulfilled through channels (except OEM deals). In addition, the company continues to strengthen channel relationship by conceding a certain percentage of margin to channels. Customer Acquisition Has Room to Grow The company has experienced strong customer growth, which we believe will continue over the next few years driven by international expansion and workload diversification. The company had 211 customers as of 1Q13, which has since grown to 3,768 as of F4Q16 (see Figure 17). We forecast the total customer base to reach 8,518 by F4Q18.

Figure 17: Strong customer adoption to continue Figure 18: 43% customers from outside of the U.S.

4,000 3,768 300%

3,500 3,100 250% 3,000 International 2,638 200% 15% 2,500 2,144 2,000 1,799 150% International 43% 1,412 US 1,500 1,168 100% 57% 923 1,000 782 US 583 85% 426 50% 500 211 287 0 0%

2013 2015 Total customer Customer growth (yoy)

Source: Company data, Credit Suisse estimates. Source: Company data, Credit Suisse estimates.

Strong International Presence to Drive Growth: In 1Q of FY14, international customers constituted only 15% of its total customer base, which grew to 43% in FY15 (see Figure 18). As the company is growing into a credible IT infrastructure vendor, we believe the share of the international market will continue to expand. Workload Diversification—An Important Driver for Customer Acquisition: Workload diversification will attract new customers to test and purchase the company's product. The type of workload running on Nutanix's solution has diversified to Tier 1 applications such as SAP, Oracle, SQL server and business analytics. Partnership with Dell and Lenovo Could Accelerate Nutanix's Customer Acquisition: Nutanix and Dell announced a partnership in June 2014, with Dell later extending the partnership to 2021. The Dell OEM offering is composed of Nutanix software and Dell's PowerEdge server. As an incumbent IT vendor, Dell has a global presence and strong support system. Nutanix signed its 2nd OEM partnership with Lenovo last year. We estimate both OEMs now contribute about 15% of Nutanix's total billings. Growth in Global 2000 Would Be Sizable: The company has penetrated only 15% of the Global 2000 companies as of 4Q16, leaving plenty of room to grow in this space (see Figure 19). In addition, the Global 2000 are more valuable than average customers as these customers make larger purchases in each order, yielding 2x that of the average customer (see Figure 20). As customer acquisitions can fluctuate and eventually slow down, repeat purchases will make up an increasingly greater part of the sales. The company has recognized the value of this space and has been investing in sales and support accordingly.

Nutanix Inc. (NTNX) 10 25 October 2016

Figure 19: 15% Penetration of Global 2000… Figure 20: … that have a much higher life time value 350 310 7.2x 300 285 255 6.1x 250 226 200 4.7x 200 165 147 3.6x 150 118 3.2x 100 2.7x 100 79 64 50 40 19 25 8 11 0

6+ Months 12+ Months 18+ Months

G2000 Customers All customers G2000

Source: Company data, Credit Suisse estimates. Source: Company data, Credit Suisse estimates.

Reinvest Gross Margin to Grow Customer Adoption: The core of Nutanix's product is its XCP software stack. As the company takes more software-only revenues in the form of OEM partnerships (such as with Dell and Lenovo) and ELAs, the gross margin is bound to increase as software is essentially a 100% gross margin product. However, the company has chosen to reinvest the gross margin gain by lowering its hardware prices to channels and customers to drive product adoption. Therefore, we forecast the business's GM to stay between 60%-65% for the foreseeable future. Repeat Purchase Bodes Well for Revenue Growth As aforementioned, the company heavily leverages channel partners and OEM partners for new customer acquisitions. Once the lead is identified, their sales team moves fast to deliver the POC box, with the conversion rate from the POC box reportedly at 80% due to its advantageous technology. Repeat purchases from the existing customers are equally important, as new customer acquisitions will eventually slow down. The company has adopted the land-and-expand sales model to driver sell-in into the existing customer base. Specifically, the existing customers already accounted for almost 65% of the total billings in 4Q of FY16, up from only 30% in 4Q of FY13 (see Figure 21).

Figure 21: Existing accounts contribution rising Figure 22: Land and expand to drive sell-in

70% 65% 66% 65% VDI 63% 62% 59% 60% 1 60% 55% 54% Branch 50% 49% DR 50% 46% Office

40% 30% 30% 3 2 Enterprise Apps Test/Dev 20%

10%

0%

3Q14 4Q14 4Q13 1Q14 2Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16

Big Data

%Existing customer billings

Source: Company data, Credit Suisse estimates. Source: Company.

Land-and-Expand Sales Strategy: Nutanix's solution is sticky due to its scalability and ease of use. A buyer would usually start with just a few nodes for a specific project such

Nutanix Inc. (NTNX) 11 25 October 2016

as VDI deployment. Over time, however, more nodes could be sold into the same account. In addition, the buyer may test other use cases beyond the original project. The goal is to eventually support a wide spectrum of workloads and to become the de facto standard (see Figure 22).

Figure 23: Sticky products drive repeat purchases Figure 24: Repeat purchases are very profitable

$3.50 80% 80% 78% 74% 74% $3.00

LT Model $2.50 60% 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

6+ Months 12+ Months 18+ Months Average Customer Cohort FY13 Customer Cohort FY14 Customer Cohort All customers G2000 FY15 Customer Cohort FY16 Customer Cohort Source: Company data, Credit Suisse estimates. Source: Company data, Credit Suisse estimates.

Repeat Purchase Pattern Bodes Well for Revenue Growth: Nutanix's existing customer base has a favorable repeat purchase pattern. First, 75% of new customers on average become repeat purchasers within a year. This number grows to 80% after 18 months. This high repeat rate shows the stickiness of the solution (see Figure 23). Global 2000 companies tend to come back to make purchases more often than the average customer. Second, the repeat purchase multiple shows that customers tend to come back to buy more than their initial purchase. For example, on average a customer purchases 3.6x their initial purchase to scale out the solution. Again, Global 2000 customers tend to make larger ticket purchases than the average customer, almost two-thirds more than average customers within a year. We note the repeat purchases are 3x profitable compared with the initial purchases (see Figure 24).

Figure 25: Strong repeat purchase pattern of the top 25 customers 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 Customer 1 Customer 2 Customer 3 Customer 4 Customer 5 Customer 6 Customer 7 Customer 8 Customer 9 Customer 10 Customer 11 Customer 12 Customer 13 Customer 14 14.1x Customer 15 Customer 16 Customer 17 7.2x Customer 18 Customer 19 3.6x Customer 20 1.0x Customer 21 Customer 22 Initial Buy Customers G2000 Top 25 Customer 23 >18 months Customers Customer 24 >18 months Customer 25 Source: Company data, Credit Suisse estimates.

A Close-up Look of the Top 25 Customers: Not all customers are created equal. Some customers are more valuable than others. For example, a Global 2000 company typically brings in twice the revenue of an average customer. Here we take a close look at the top 25 customers, a valuable part of Nutanix's customer base (see Figure 25). First, 80% of customers come back to make repeat purchases within six months. That rate increases to

Nutanix Inc. (NTNX) 12 25 October 2016

100% if the measured period extends to 12 months. Second, the amount of the repeat purchase is 14.1x the initial purchase through the lifetime, while an average customer's repeat purchase is 3.6x their initial purchase. These customers are worth a larger investment for the company to retain them. Strong Momentum in Billings and Revenue Growth We believe that the challenge for a company such as Nutanix remains how to model revenue growth. On the one hand, the company has acquired a large enough customer base with plenty of sell-in and sell-up opportunities. On the other hand, it is still in a start- up mode, in which customer acquisition is an equally important driver. We have developed a unique model to forecast revenue growth based on the following factors: customer growth, deal size growth, and total billings. To derive total billings, we further segment it into new customer contributions and old customer contributions. Product (Hardware and Software): Currently, Nutanix sells products primarily in the appliance form. Each appliance has 1, 2, or 4 nodes in a 2-U appliance (see Figure 26). Acropolis software is offered in different tiers. First is the Starter pack, designed for single- site deployment and a single workload. Each appliance comes with this essential starter kit for the core functionalities. Starter software is inseparable from the hardware and is therefore fully priced into the hardware. The next tie is Pro, which includes enhanced data services along with a higher level of resilience and more management features. The next level is Ultimate, which includes the complete suite of software capabilities including app mobility and is designed for multi-site deployment and the most demanding infrastructure requirements. Both Pro and Ultimate are for software-only distribution. Currently, Prism Starter is included in the Acropolis, and the company intends to license a separate version, Prism Pro, in a software-only fashion.

Figure 26: Nutanix appliance offerings

NX-1000 NX-3000 NX-6000 NX-7000 NX-8000 NX-9000 Xpress Series Series Series Series Series Series Per Node Per Node Per Node Per Node Per Node Per Node Per Node (4 per appliance) (4 per appliance) (1 or 4 per (2 per appliance) (1 per appliance) (1 or 2 per (2 per appliance) appliance) appliance)

Dual CPU Single & Dual CPU Dual CPU Single & Dual CPU Dual CPU Dual CPU Dual CPU 16 + 20 Cores Total 6->16 Cores Total 16->36 Cores Total 6->20 Cores Total 20 Cores Total 8->28 Cores Total 20 Cores Total

1.7->2.4GHz 2.0->2.8GHz 2.3->2.8 GHz 2.4->3.0GHz 2.8GHz 2.5->3.5GHz 3.0Ghz Compute

2x HDD 2x HDD 2x or 4x HDD 4x or 5x HDD 6x HDD 4x or 20x HDD n/a

Hard Hard 4TB-> 12TB Total 2TG-> 12TB Total 4TB->12TB Total 16TB->30TB Total 6 TB Total 16TB->24TB Total Drives

1x SSD 1x SSD 2x SSD 1x or 2x SSD 2x SSD 2x or 4x SSD 6x SSD

480GB-> 19TB 200GB-> 1.2TB 800GB -> 3.2TB 480GB-> 1.6TB Total 800GB Total 960GB-> 6.4TB Total 4.8TB-> 9.6TB Total

Flash Devices Devices

64GB -> 512GB 32GB -> 512GB 128GB -> 768GB 32GB -> 512GB 128 or 256GB 128-> 512GB 256 or 512GB Memory

Source: Company data.

Support: The sales of products usually come with support including software support and hardware support. There are three levels in the support program: Basic, Product, and Mission Critical, depending on criticality of the customers' workload. Production and

Nutanix Inc. (NTNX) 13 25 October 2016

Mission Critical services include 24 hour call services. Professional services is also a small part of Support revenue.

Figure 27: Strong growth in billings to continue Figure 28: Product/Support to reach 65%/35% LT 1,600 250% 100% 22% 1,400 25% 29% 34% 35% 35% 200% 80% 1,200 498

1,000 150% 60% 356 800

100% 40% 600 75% 78% Billings Billings ($mn) 71% 219 66% 65% 65% 925 400 662 50% 20% 89 200 418 12 33 218 118 0 36 0% 0% FY13 FY14 FY15 FY16 FY17E FY18E FY13 FY14 FY15 FY16 FY17E FY18E

Product Support %yoy %Product billings %Support billings

Source: Company data, Credit Suisse estimates. Source: Company data, Credit Suisse estimates.

Total Billings: Total billings is the most important metric in measuring a customer's demand for the company's technology. It is the very source of revenues that is recognized over time according to accounting rules. The ultimate driver of the growth in billings is the product including appliance and software. Support can be viewed as a value-added service proportional to Product. As the business grows, we forecast 65% of billing will come from Product and 35% from Support. We forecast total billings to reach $1.0bn/$1.4bn (+60%/+40% yoy) in FY17/FY18 (see Figure 27 and Figure 28). Customer Growth: We assume the company continues to acquire new customers to increase its customer base. We saw an uptick in 4Q16, which we believe was in part due to the Dell and Lenovo OEM partnership. Here, we model the customer growth rate to slowly ramp down from 109% of FY16 to 58%/43% yoy of FY17/FY18. We forecast the customer base to grow to 8,518 by the end of FY18.

Figure 29: Deal size slightly down over time… Figure 30: …due to rising SMB customer share 250 94%

92% 92% 200 91% 90% 90% 89% 89% 150 88% 88% 87% 87% 87% 86% 100 86%

86% 85% Deal Deal size (in $'000) 50 84%

0 82%

2Q15 2Q14 3Q14 4Q14 1Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16

1Q14 80%

1Q18E 2Q17E 3Q17E 4Q17E 2Q18E 3Q18E 4Q18E 1Q17E 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 New customer deal size Existing customer deal size SMB customers as % of total customers

Source: Company data, Credit Suisse estimates. Source: Company data, Credit Suisse estimates.

Deal Size Growth: As shown in the previous section, the dynamics of sales to the existing customer base is different from sales to the new customers. We estimate the deal sizes from existing customers is 20-30% larger than the deal size of new customers in the same period. This is due to the fact that Nutanix often gives promotions to prospective customers. We forecast new deal sizes to decline from $108K in F4Q16 to $103K in FY17 and to $102K in FY18 owing to a growing share of Small-Middle-Business customers in

Nutanix Inc. (NTNX) 14 25 October 2016

the total customer base (see Figure 29 and Figure 30). The deal size of existing customers is expected to decline from $144K in 4Q16 to $130K in 4Q17 and $129K in 4Q18. However, this could prove conservative given the impact of Global 2,000 companies, whose deal sizes could be 2x that of the average customer.

Figure 31: Revenue recognition timing varies for different Product/Service

Base Appliance (HW) Upon Delivery (Includes Starter Software) Acropolis (Distributed Pro and Ultimate Editions Product Storage Fabric and Application (SW) (Added Features and Upon Delivery (apprpx. 70-75% Functionality ) of bookings) Mobility Fabric) Per Node Includes base Prism Over the Software-only (SW) Support (OEM / ELA/ MITF) Period

Prism Prism Pro (SW) Upon Delivery

Basic/Production/ Support Over Support Period % of Product Support Mission Critical Billings And Other Services (approx. 25-30% Education/ As Services Are Professional Per Service / of bookings) Consulting/ Performed Services Deliverable Customer Advocacy Source: Company.

Revenue Timing: As shown in Figure 31, billings are trickled down to revenues and deferred revenues. There are certain accounting rules to dictate when the company should recognize revenues from the billings (see Figure 31 and Figure 32). In general, product revenue is recognized upon the product delivery except in certain cases. Support is recognized over the contracted period. We forecast Product billing will reach about 65% of total billing over time, with support billings making up the other 35%.

Figure 32: Total billings trickle down to the top line and deferred revenue

1Q16 2Q16 3Q16 4Q16 1Q17E 2Q17E 3Q17E 4Q17E 1Q18E 2Q18E 3Q18E 4Q18E FY 2016 FY 2017E FY 2018E

Product billings 85.8 94.6 103.7 134.3 157.6 155.6 173.0 175.5 224.2 221.9 238.0 241.0 418.4 661.6 925.1 %product 67% 66% 65% 65% 65% 65% 65% 65% 65% 65% 65% 65% 66% 65% 65%

Support billings 42.2 48.7 55.8 72.3 84.8 83.8 93.1 94.5 120.7 119.5 128.2 129.8 219.1 356.3 498.2 %support 33% 34% 35% 35% 35% 35% 35% 35% 35% 35% 35% 35% 34% 35% 35%

Total billings 128.3 143.4 159.5 206.6 242.4 239.4 266.1 270.0 344.9 341.3 366.2 370.8 637.8 1,017.9 1,423.3 yoy growth 115% 102% 99% 115% 89% 67% 67% 31% 42% 43% 38% 37% 108% 60% 40%

Software billings 15.4 20.1 23.9 33.1 39.5 39.7 44.7 46.2 60.4 63.0 71.0 75.1 92.5 170.1 269.5 %Total billings 12.0% 14.0% 15.0% 16.0% 16.3% 16.6% 16.8% 17.1% 17.5% 18.5% 19.4% 20.3% 14.5% 16.7% 18.9%

Product revenue 70.4 81.2 90.0 109.2 127.5 133.8 147.1 154.5 188.4 196.6 207.8 214.2 350.8 563.0 807.1

%product 80% 79% 78% 78% 77% 76% 75% 74% 74% 73% 72% 70% 79% 76% 72% Support revenue 17.4 21.5 24.7 30.6 37.1 42.6 48.5 53.6 67.1 74.4 82.3 89.9 94.2 181.8 313.7

%support 20% 21% 22% 22% 23% 24% 25% 26% 26% 27% 28% 30% 21% 24% 28% Total revenue 87.8 102.7 114.7 139.8 164.6 176.4 195.6 208.2 255.5 271.0 290.2 304.1 445.0 744.8 1,120.9

yoy growth 91% 81% 78% 89% 88% 72% 71% 49% 55% 54% 48% 46% 84% 67% 50% Software revenue 2.2 4.2 7.5 10.5 14.1 17.6 21.6 25.6 32.2 36.9 42.9 48.3 24.4 78.9 160.2

%Total revenue 2.5% 4.1% 6.5% 7.5% 8.6% 10.0% 11.0% 12.3% 12.6% 13.6% 14.8% 15.9% 5.5% 10.6% 14.3% Deferred revenue 144 185 230 296 374 437 508 570 659 729 805 872 296 570 872 Deferred rev. chg 40.2 40.7 44.8 66.8 77.8 63.1 70.5 61.8 89.4 70.3 76.0 66.7 192.5 273.1 302.4 Source: Company data, Credit Suisse estimates.

Nutanix Inc. (NTNX) 15 25 October 2016

Product: There are four revenue deliverables: appliances with starter software, software- upgrades to Acropolis Pro and Ultimate, direct sales of Prism Pro, and software-only distribution including OEM/ELAs/MITF. Revenues are recognized when the product is delivered except for when distributed via OEM/ELAs/MITF, for which revenues are recognized over the supporting period (one to five years, typically three years). As the OEM/ELAs/MITF portion grows, we expect a higher share of product billings will be deferred and then recognized over time. In addition, more OEM/ELAs/MITF will significantly help gross margin, which Nutanix would reinvest by lowering appliance prices to drive adoption. The product is priced by the number of nodes upon which the product is deployed. We expect the product billings for FY17/FY18 of $662mn/$925mn (+58%/+40%yoy) and the revenues of $563mn/$807mn (+60%/+43%yoy), respectively (see Figure 33). Support: Support is further segmented into regular Support and a small percentage of Professional Services. We estimate part of the support is recognized upfront related to installation and system deployment, but the majority is deferred over the support period. We expect the support billings of FY17/18 to be $356mn/$498mn (+63%/+40%yoy) and the revenues of $182mn/$314mn (+93%/+73%yoy) , respectively (see Figure 33).

Figure 33: Strong revenue growth to continue Figure 34: Deferred Revenue to reach $872mn in FY18 1,200 350% 1,000 900 872 300% 805 1,000 800 314 729 250% 700 659 800 600 570 200% 508 182 500 600 437 150% 400 374 296 Revenue Revenue ($mn) 400 94 807 300 100% Deferred revenue (in $mn) 230 563 185 200 144 200 41 104 351 50% 65 83 14 100 51 2 201 114 0 0 29 0% FY13 FY14 FY15 FY16 FY17 FY18

Product revenue Support revenue %yoy Deferred revenue

Source: Company data, Credit Suisse estimates. Source: Company data, Credit Suisse estimates.

Deferred Revenue: The billings not recognized in the quarter are deferred to a later period. Therefore, deferred revenue is another important metric of customer demand. We forecast the deferred revenue to reach $570mn/$872mn in FY17/FY18, respectively (see Figure 34). GM at target levels, we see upside & OM leverage The company has two revenue lines: Product and Support. Product is sold in the appliance form as well as in the software-only/ELAs/MITF/OEM form. The margins of the appliance and the software are significantly different. Support revenues are from post- contract customer support and other professional services such as installation and training. The gross margin profile of support is heavily hinged on the personnel expense. We detail the gross margin dynamics below. Product GM Reinvested for Footprint Expansion The product gross margin depends on the mix of appliance and software/OEM/ELAs. We estimate hardware has a relatively low gross margin of between 40%-50%, as the appliance is built on a commodity x86 server. However, the GM of ELAs, MITF, and OEM should be close to 100%. The company's strategy is to reinvest the margin of software to drive hardware adoption.

Nutanix Inc. (NTNX) 16 25 October 2016

Hardware COGS: The company contracts Super Micro and Avnet to manufacture appliances. At the same time, the company hires a group of partners to provide essential functionalities to support operation and logistics. The cost of revenue include both personnel cost like salaries and benefits and allocated cost such as depreciation of proof- of-concept boxes. From a hardware perspective, the appliance is built on a commodity x86 server with compute and storage enclosed. As shown in Figure 35, the CPU from Intel accounts for 20% of cost with Memory and SSD accounting for 8% and 7%, respectively. We believe, like other x86 servers, the appliance has a low gross margin profile. In addition, the company has lowered the appliance price to drive adoption, which may further depress gross margins.

Figure 35: Key components of the appliance, implying GMs of around 50%...

Others, 3%

Seagate Hitachi HDD, 5%

Intel CPU, 20% Supermicro Chassis, 5%

Intel,Toshiba SSD, 7%

Samsung Hynix MEM, 8% Source: Company data, Credit Suisse estimates.

Operating Leverage: The company maintains a minimum level of inventory, mainly for repair parts and proof of concept boxes. While this inventory policy makes the company exposed to the pricing volatility of various parts, it also enables the company to maintain a low level of fixed costs with improved operating leverage.

Figure 36: Corporate GM now close to LT Target Figure 37: GM still has plenty of room to optimize

70% 65% F4Q16 Rev. LT Rev. Target 60% 55%

50% Software %GM 45% Support 40% Support Software 35%

30%

3Q15 4Q15 2Q14 3Q14 4Q14 1Q15 2Q15 1Q16 2Q16 3Q16 4Q16 1Q17E 2Q17E 3Q17E 4Q17E 1Q14 Hardware

Hardware Product Support Overall LT target

Source: Company data, Credit Suisse estimates. Source: Company data, Credit Suisse estimates.

Nutanix Inc. (NTNX) 17 25 October 2016

Support and Service Gross Margins Has Reached LT Target Already The company targets a long-term gross margin for Support and Service to be about 60%. Over FY16, the gross margin was 62%, already higher than its LT target (see Figure 36). We believe the group margin could above 70% over time, as the software support contribution could rise to 1/3 of the total revenues (see Figure 37). Operating Leverage Improving with Growing Sales The company is seeing the benefit of better operating leverage, as the top line has grown 80-90% yoy for four consecutive years. Opex per head count per quarter has come down from $86k per person to $71k/76k per person in F3Q/4Q16 (see Figure 38). Specifically, the non-GAAP expense per S&M headcount per quarter has decreased by 23% and G&A has gone down by 13% over the past two years. The opex to sales ratio has gone down from 121% in F1Q14 to 92% in F4Q16. Specifically, the S&M/sales has gone down from 79.3% in F1Q14 to 61.5% in F4Q16, and R&D/sales has gone down from 30.5% in F1Q14 to 24.1% in F4Q16. We believe opex to sales could go down to 70.2% by the end of FY18 (see Figure 39).

Figure 38: Opex per person per quarter has come down Figure 39: Overall opex to sales approaching LT target

3,500 90 140% 3,000 120% 2,500 100% 80 2,000 80% 1,500 60%

Head Head count 70 1,000 %Opex/sales 40%

500 opex/headcount ($'000) 20%

0 60 0%

1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16

1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16

4Q17E 1Q18E 1Q17E 2Q17E 3Q17E 2Q18E 3Q18E 4Q18E

1Q17E 2Q17E 3Q17E 4Q17E 1Q18E 2Q18E 3Q18E 4Q18E

S&M R&D G&A Opex per head count Opex/sales LT target (opex/sales)

Source: Company data, Credit Suisse estimates. Source: Company data, Credit Suisse estimates.

While the operating income is still negative, the operating margin trend is improving. In F1Q14, the non-GAAP operating margin was -71.4%, and in F4Q16, the margin had improved to -30.9%. For FY17/F18, we expect operating income of -$144mn/-$94mn, or OM of -19%/-8% vs -42%/-33% in FY15/FY16, respectively (see Figure 40).

Figure 40: Op margin is gradually improving Figure 41: Operating CF positive already

3Q17E 4Q18E 1Q17E 2Q17E 4Q17E 1Q18E 2Q18E 3Q18E

2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q15 80 60 0 0% 40 -5 -10 20

-15 -20% ($mn) 0 -20 -20 -25 -30 -40 -40%

-35 margin OP (%) -60

2Q15 2Q16 1Q15 3Q15 4Q15 1Q16 3Q16 4Q16 1Q17E 2Q17E 3Q17E 4Q17E 1Q18E 2Q18E 3Q18E 4Q18E Op income Opincome ($mn) -40 -45 -50 -60% Net income Operating CF Op income OP margin

Source: Company data, Credit Suisse estimates. Source: Company data, Credit Suisse estimates.

Nutanix Inc. (NTNX) 18 25 October 2016

FCF Is Expected to Be Positive by F1Q17 We note Nutanix has already reached positive operating cash flow over the past three quarters, and we expect the company to be FCF positive in F1Q17. In FY16, the company generated Operating CF of $3.7mn vs -$45.7mn/-$25.7mn in FY14/FY15 (see Figure 41). FCF has improved to -$39mn in FY16 from -$65mn/-$49mn in FY14/FY15. We expect the company to generate $65mn/$126mn of FCF in FY17/FY18 (see Figure 42). Behind the improvement of operating CF and FCF are two main drivers: operating performance driven by operating leverage and strong growth of deferred revenue. Cash generation is also dependent on the impact to cash conversion cycle by account receivables, account payables, and others to a less extent at this stage.

Figure 42: Nutanix could be FCF positive by F1Q17 1Q17E 2Q17E 3Q17E 4Q17E 1Q18E 2Q18E 3Q18E 4Q18E FY2017 FY2018 Revenue 164.6 176.4 195.6 208.2 255.5 271.0 290.2 304.1 745 1,121 yoy 87.5% 71.7% 70.6% 48.9% 55.2% 53.7% 48.3% 46.1% 67.4% 50.5% Op Income -31.9 -35.5 -36.0 -41.0 -24.0 -25.5 -24.0 -20.9 -144.4 -94.4 Op margin -19.4% -20.1% -18.4% -19.7% -9.4% -9.4% -8.3% -6.9% -19.4% -8.4% Net Income (non-GAAP) -34.0 -37.6 -38.1 -43.1 -26.6 -28.1 -26.6 -23.5 -153 -105 Net margin -20.6% -21.3% -19.5% -20.7% -10.4% -10.4% -9.2% -7.7% -20.5% -9.3% Chg of deferred rev. 77.8 63.1 70.5 61.8 89.4 70.3 76.0 66.7 273.1 302.4 Chg of A/R -19.7 -9.3 -12.6 -2.9 -35.3 -20.5 -5.3 -10.4 44.5 71.5 Operating CF 29.9 28.1 37.3 29.3 48.8 47.2 62.4 54.0 124.5 212.4 Capex -14.8 -14.1 -14.7 -15.6 -20.4 -21.1 -22.1 -22.5 -59.2 -86.1 FCF 15.1 14.0 22.6 13.7 28.4 26.1 40.4 31.5 65.3 126.3 Source: Company data, Credit Suisse estimates

Operating Results Trending Better: Net income has improved along with operating income, as the net margin improved to -32% of F4Q16 vs -55% of F1Q15. We expect margins to further improve to -20.5% by the end of FY17 (see Figure 42).

Figure 43: Deferred rev. drives strong cash flow Figure 44: CF of 4Q16 could be $25mn higher

900 250% 120 80 800 70 100 700 200% 60 600 150% 80 500 50 400 60 40 100%

300 AR($mn) 30 40 DSO (days) 200 50% 20 Deferred Deferred revenue ($mn) 100 20 10 0 0%

0 0

2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16

1Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16

1Q17E 2Q17E 3Q17E 4Q17E 1Q18E 2Q18E 3Q18E 4Q18E

Deferred revenue yoy growth AR DSO (days) Average

Source: Company data, Credit Suisse estimates. Source: Company data, Credit Suisse estimates.

Deferred Revenue Growth Strong: Deferred revenue had significant growth and reached $296.5mn (+186% yoy) by the end of FY16. We believe deferred revenue will continue to support cash flow for operations as a large of billings will be deferred (see Figure 43). Account Receivables Could Generate More Cash in F4Q16: Account receivables have been growing along with sales. We note days sales outstanding (DSO) was about 56 days on average over the past three years. In F4Q16, DSO came in at about 72 days. If DSO in F4Q16 were at normal levels, cash flow from operation could have been $25mn higher (see Figure 44).

Nutanix Inc. (NTNX) 19 25 October 2016

Software growth could be material Nutanix's solution is essentially a piece of software that resides on top of x86 commoditized hardware. We see the software contribution in billings and revenues gradually rising owing to OEM relationships with Dell and Lenovo, Meet-in-the-Field with Super Micro and Cisco, and Software upgrades of Acropolis Pro/Ultimate and Prism Pro. We believe over time software could drive group gross margin to above 70%, as software will contribute 1/3 of revenues and billings LT and has a gross margin of 100% (see Figure 45).

Figure 45: Software could drive group GM to above 70% long term US$ in millions, unless otherwise stated FY14 FY15 FY16 FY17 FY18 Long term Software billings 2.5 22.8 92.5 170.1 269.5 - As % of total billings 1.6% 7.4% 14.5% 16.7% 18.9% 1/3 Software revenue 0.0 2.9 24.4 78.9 160.2 - As % of total revenue 0.0% 1.2% 5.5% 10.6% 14.3% 1/3 Group gross margin 52.3% 58.6% 61.9% 61.8% 62.5% 72% Source: Company data, Credit Suisse estimates

Here we detail some dynamics of Nutanix's software portfolio: Software Portfolio

Nutanix's portfolio includes two parts: Acropolis and Prism (see Figure 46 and Figure 47). From a functional perspective, Acropolis includes Distributed Storage Fabric (DSF), Application Mobility Fabric (AMF), and Acropolis Hypervisor (AHV). Prism includes capacity planning, performance monitoring, and VM provisioning for IT operations, featuring one-click upgrade and search functions. Both parts are priced based on the number of nodes deployed. Nutanix Acropolis—Three-Tier Offering Starter Is Priced in Hardware Appliance: The Acropolis starter edition offers a core set of functionalities for smaller-scale deployment. It comes with the Nutanix hardware and is priced in each appliance. In the software-only distribution, the Prism starter pack is included with the Acropolis starter pack. Pro Offers More Functionalities and Requires a Separate License: Acropolis Pro offers enhanced data service with a higher level of resilience and is designed for running multiple applications for large-scale deployment. Acropolis Pro is priced independently on a per-node basis, and the license revenue is recognized upon delivery. Ultimate Offers the Complete Set of Features and Requires a Separate License: Acropolis Ultimate offers the complete suite of capabilities intended for multi-site deployment for the most demanding infrastructure requirements. Customers can purchase separate license to access these features. The Acropolis Ultimate is priced independently on a per-node basis, and revenue is recognized upon delivery.

Nutanix Inc. (NTNX) 20 25 October 2016

Figure 46: Acropolis abstracts IT infrastructure to support upper stack consumption

Nutanix App. Hypervisor Workload Stateful Cloud Mobility Choice Migration Containers Mobility Acropolis Fabric

Distributed Virtual Workload Bare Metal File and Object Storage API Storage Workload Storage Storage Services Fabric

Unified Compute Non-disruptive Platform Storage and Upgrades + Built-in Security Services Network Scaling Management

Source: Company.

Nutanix Prism—Two-Tier Offering Starter Is Priced in Hardware Appliance: The Starter offers system management functionality including streamlined administration of all compute, virtualization, and storage services. In the software-only distribution, the Prism starter pack is included in the Acropolis starter pack. Pro Requires a Separate License for Additional Features: This version adds functionalities such as capacity planning, one-click capacity optimization and search functions. Prism Pro is priced independently on a per-node basis, and license revenue is recognized upon delivery.

Figure 47: Prism offers system management and IT operation capabilities

1-click 1-click 1-click 1-click Nutanix Prism Automation Automation Planning Updates

Continuous Proactive Predictive Rapid Machine Trouble- API Operation Remediation Learning shooting

Instant Personalized Customizable Desired State Search and Experience Dashboard Specification Action

Source: Company. LT GM Could Reach Above 70% Software contribution has been increasing over the past few years from virtually none in 2014 to 7.5% by 4Q16, and we expect it to reach 16% by F4Q18. Long term, the company estimates software could constitute 1/3 of total revenue. As software GMs are almost 100%, Nutanix's group gross margin could rise to above 70% over time (see Figure 48 and Figure 49).

Nutanix Inc. (NTNX) 21 25 October 2016

Figure 48: LT GM could reach above 70%... Figure 49: …with 1/3 of revenues from software

35% 72% 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 %SW as totalrevenue 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. Software Contribution Rising Nutanix has a number of software revenue streams as we previously detailed. As the company's IP mostly resides in the software and its software is in a late binding state with hardware, software-only distribution becomes more and more prominent. At the beginning of FY13, software contribution to total billings was essentially none. However, since the Dell OEM agreement, software's contribution to billing has had significant growth (see Figure 50). We expect software to contribute at least 17%/19% of total billings in FY17/FY18. As the majority of the software billings will be in the form of OEM, MITF, and ELA, a large portion of billings will be deferred revenue. In revenue terms, software contribution is expected reach 11%/14% of total revenue in FY17/FY18 (see Figure 51).

Figure 50: Software as % of billings increasing Figure 51: Software revenue share growing as well

18.0% 14.0% 64.0% 16.0% 12.0% 63.0% 14.0% 10.0% 62.0% 12.0% 10.0% 8.0% 61.0% 8.0% 6.0% 60.0% 6.0% 4.0% 59.0% 4.0% 2.0% 2.0% 58.0%

0.0% 0.0% 57.0%

1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16

1Q17E 2Q17E 3Q17E 4Q17E

Software as % of total billings Software as % of Product Product GM

Source: Company data, Credit Suisse estimates. Source: Company data, Credit Suisse estimates. Multiple Software Revenue Streams The core IP of Nutanix is in software comprising of Acropolis and Prism. As Acropolis and Prism do not require specific hardware (i.e., a late binding state), the company can sell the software in several ways. (See Figure 52.)

Nutanix Inc. (NTNX) 22 25 October 2016

Figure 52: Nutanix partnerships now reach ~40% of x86 server market Date Announced Relevant Server Revenues ($mn) Server Market Share (%) Relationship Dell 24-Jun-14 9,670 21.5% OEM Lenovo 4-Nov-15 4,105 9.1% OEM Cisco 19-Aug-16 3,571 7.9% Meet in the channel Super Micro 16-May-14 2,216 - Meet in the field Nutanix partners 19,562 38.5% Source: Company data, Credit Suisse estimates. OEMs with Dell and Lenovo OEMs with Dell Has Been Highly Successful: Dell XC series combines Dell's x86 PowerEdge Server and Global Services & Support with Nutanix's software solution including both Acropolis and Prism. Since the inception of the partnership in November 2014, the OEM relationship has proven very successful. The products were well received and Nutanix has become a credible IT infrastructure vendor as a result. While customers are concerned that Dell may move away from Nutanix to support EMC's VxRAIL solution, Dell appears to be committed to this win-win OEM relationship. This June, Dell chose to extend the OEM relationship to 2021. We estimate the OEM relationship with Dell now contributes 11-15% of total billings. Of this, two-thirds of the billings are booked as Product while the rest of the one-third as Support. In addition, the OEM billings are deferred through the support period, which is about three years on average. OEM with Lenovo: Nutanix also signed an OEM partnership with Lenovo in November of 2015. Lenovo now offers an HX series product line, which integrates its hardware with Nutanix's software. As part of the partnership, Nutanix has committed dedicated sales personnel to support HX sales. The OEM relationship expires in October 2018 and will automatically renew for two successive years thereafter unless one party chooses to terminate with a six-month prior notice. We believe the Lenovo OEM relationship may currently contribute a low single digit percentage of total billings. Direct Software Sales Advanced Tiers of Acropolis and Prism: While Starter pack for both Acropolis and Prism are priced in the appliance or the OEM product, Acropolis Pro/Ultimate and Prism Pro require independent licenses, and the revenue is recognized upon delivery. Meet in the Field and Meet in the Channel Meet in the field or meet in the channel gives the company flexibility to recognize revenue on a software-only basis. The software revenue is recognized over the support period. Meet in the Field with Super Micro: Currently, the company contracts Super Micro to manufacture its Nutanix hardware appliance. In terms of revenue recognition, Nutanix has the flexibility to either recognize as appliance sales inclusive of both hardware and software, or recognize software only revenue (called Meet in the field) to boost margins. Meet in the Channel with Cisco UCS: Cisco has 8% market share in the x86 server market, which ranks them the fifth according to IDC. Cisco UCS is the core component of EMC Vblock and NetApp's FlexPod and is widely used for datacenter virtualization. Since there is not an OEM agreement in place, Nutanix created a software-only distribution model for UCS. Enterprise License Agreement (ELA) Nutanix plans to sign ELAs with customers that are interested in deploying Nutanix software on a large scale. For ELAs, software revenue is recognized over the support period.

Nutanix Inc. (NTNX) 23 25 October 2016

Valuation—$38 TP, Outperform rating We focus our valuation on two methods: EV/sales multiple valuation (comparing EV/sales with peers) and discounted cash flow (DCF) analysis. We apply these two methods to the estimates previously detailed to derive our $38 TP and initiate coverage of the company with an Outperform rating (see Figure 53).

Figure 53: Nutanix is worth $38 per share with potential upside to $49

Base case scenario Upside case scenario Method Equity value ($) Value/Share ($) Equity value ($) Value/Share ($) EV/sales valuation 6,498 37.6 8,158 47.2 DCF Analysis 6,484 37.5 8,713 50.4 Blended Average 6,491 $38 8,436 $49

Source: Company data, Credit Suisse estimates.

Upside Valuation of $49 Supported by LT Revenue Potential of $1.4bn While there is material upside implied in our PT of $38, we increasingly feel our estimates may fall on the conservative side given Nutanix's highly effective salesforce and the stickiness of its product. Therefore, we analyzed an upside scenario where the sales team increases headcount and ramps productivity at a faster rate than we assume in our base case. This scenario yields a LT revenue upside of $1.4bn. We apply the two valuation methods here and conclude the company has potential upside to $49 per share (see Figure 53). The Company Could Achieve $1.4bn LT Revenue Over the past year, management communicated that its financial performance has repeatedly exceeded its internal plans. We acknowledge that it is difficult to forecast the business given the changing landscape, expanding partnerships, and visionary roadmap. We increasingly feel our aforementioned forecast could fall on the conservative side.

Figure 54: Sales team achieve LT FCF target Figure 55: Non-ramped sales could add ~30% capacity

LT FCF Target $60

$267 $207

1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th

Quarterly Change in Deferred Revenue by Sales Team F4Q16 Billings Additional Billings Fully-Ramped Billings Quarterly Revenue by Sales Team Capacity

Source: Company data, Credit Suisse estimates. Source: Company data, Credit Suisse estimates.

We believe that our estimates could prove conservative for two reasons: The company is operating on a very profitable sales productivity model. Each salesperson can support the LT FCF target after five quarters of employment (see Figure 54), which means the salespeople will not only sustain themselves, but their profitability will also support other un-ramped sales people as well as the rest of the operation. Once the un-ramped salespeople mature, these salespeople will be able to support more hiring

Nutanix Inc. (NTNX) 24 25 October 2016

to grow the sales organization, which then starts a positive loop to expand the overall sales capacity. We note the company expanded its salesforce by 70% yoy in FY16. Non-ramped sales personnel represent 30-40% higher in total billings. The company estimated total billings of F4Q16 could have been $60mn higher (~30%) than the reported $207mn, if non-ramped sales were fully ramped (see Figure 55). We believe the company could reach LT revenue of $1.4bn by FY17/FY18 with an ~80% growth rate per year (see Figure 56). We believe this could be achieved by expanding its salesforce by 57%/50% yoy in FY17/FY18 and increasing productivity by 6.6%/11.8% yoy over the next two years.

Figure 56: Upside scenario suggests $1.4bn LT revenue potential US$ in millions, unless otherwise stated FY15 FY16 FY17E FY18E Sales productivity upside case: Total billings 307 638 1,117 1,931 yoy 104% 108% 75% 73% S&M headcount 565 958 1,508 2,258 yoy chg 292 393 550 750 %yoy growth 107% 70% 57% 50% Equivalent full capacity sales headcount 317.6 637.8 1,047.9 1,619.6 yoy chg 178 320 410 572 Productivity per full capacity headcount (in $'000) 966.5 1,000.0 1,066.1 1,192.1 yoy -10.5% 3.5% 6.6% 11.8% Total revenue 241 445 794 1,423 yoy 90% 84% 79% 79%

Base case: Total billings 307 638 1,018 1,423 yoy 104% 77% 52% 45% S&M headcount 565 958 1,343 1,743 yoy chg 292 393 385 400 %yoy growth 107% 70% 40% 30% Equivalent full capacity sales headcount 317.6 637.8 1,016.1 1,402.2 yoy chg 178 320 378 386 Productivity per full capacity headcount (in $'000) 967 1,000 1,020 1,040 yoy -10.5% 3.5% 2.0% 2.0% Total revenue 241 445 745 1,121 yoy 90% 84% 67% 50%

Sales Organization Could Expand 57%/50% YoY in FY17/FY18 We believe that in order to address strong demand in the market, it is important to hire sufficient sales personnel to translate the demand into billings and revenues. In FY16, the company initiated a sales search to accelerate the expansion of their sales team, with headcount increasing by 70% yoy. We believe it is viable for the sales organization to hire 550/750 people a year in FY17/FY18, an expansion of 57%/50%, respectively (see Figure 57). Large Part of Sales Organization Is Not Ramped A fresh sales person produces a fraction of that of a sales person who is fully ramped. In 4Q16, 46% of the total salesforce was not fully ramped, which we believe is going to be the case in the foreseeable future. We estimate the headcount addition of 550/750 in FY17/FY18 will be effectively equivalent to the addition of 410/572 of fully ramped sales people. Below is how we make the estimate:

Nutanix Inc. (NTNX) 25 25 October 2016

We estimate the productivity of a salesperson hired in the same quarter to be at 12% of full capacity, those hired last quarter to be at 25% of full capacity, those hired the quarter before that to be at 75% of full capacity, and those hired three quarters ago to be at full capacity. Using this calculation, the headcount addition of 550/750 in FY17/FY18 will be effectively equivalent to 410/572 fully ramped sales people.

Figure 57: Sales organization could expand by 57%/50% YoY in FY17/FY18

2,500 160% 144% 2,258 (upside)

2,000 120% 107% 1,508 (upside) 1,500 70% 80%

958 57%

1,000 %yoy growth

S&M headcount 50% 40% 565 30% 40% 500 273 112

0 0% FY13 FY14 FY15 FY16 FY17E FY18E

S&M headcount %yoy (upside scenario) %yoy (base case)

Source: Company data, Credit Suisse estimates. Productivity Could Be Further Optimized by 6.6%/12% in FY17/FY18 Salesforce productivity is measured by total billings divided by the equivalent full capacity sales headcount. The company has a strong sales team evidenced by a thoughtful ramping path and outstanding performance in generating billings (see Figure 58 and Figure 59). We believe this number should increase as customers increasingly use Nutanix solutions for a wider range of workloads and the company becomes increasingly recognized as a credible IT infrastructure vendor. In our upside scenario, we believe the company can increase the productivity by 6.6%/11.8% yoy in FY17/FY18.

Figure 58:Thoughtful productivity ramping path… Figure 59: …drives billings to repeatedly exceed plans

125% 111% 100% 106% 105% productivity 100% model 100%

75%

50% Bookings as a % of Plan of % a as Bookings

25%

4th Qtr 5th Qtr 6th Qtr 7th Qtr 8th Qtr 0% 1 2 3 4 5 6 7 8 9 10 11 12 13 Fiscal Week Q3-2014 Q4-2014 Q1-2015 Q2-2015 Q3-2015 Source: Company data, Credit Suisse estimates. Source: Company data, Credit Suisse estimates.

Nutanix Inc. (NTNX) 26 25 October 2016

Sales Productivity Upside Scenario Suggests 75%/73% YoY Growth in Billings With our assumption of 550/750 employees added to the salesforce in FY17/FY18 and productivity growth of 6.6%/11.8% yoy, total billings could grow by 75%/73% yoy to $1.1bn/$1.9bn in FY17/FY18, which will trickle down to revenues of $0.8bn/$1.4bn in FY17/FY18. Nutanix Worth $38 per Share with Potential Upside to $49 We focus our valuation on a two-pronged approach: EV/sales multiple valuation (comparing EV/sales with peers) and a discounted cash flow (DCF) analysis. Our approach suggests that the company is worth $38 per share in our base-case estimate and could reach $49 per share in an upside scenario (Figure 60).

Figure 60: Nutanix is worth $38 per share with potential upside to $49

Base case scenario Upside case scenario Method Equity value ($) Value/Share ($) Equity value ($) Value/Share ($) EV/sales valuation 6,498 37.6 8,158 47.2 DCF Analysis 6,484 37.5 8,713 50.4 Blended Average 6,491 37.5 8,436 48.8

Source: Company data, Credit Suisse estimates EV/Sales Multiple Suggests a $38 TP and for our Upside Case a $47 TP The company has shown significant growth with a 141% CAGR over the past three years. As such, we believe the company deserves an EV/sales multiple of 5.5x. For our base- case scenario with LT revenue of $1.1bn, we believe the company should be valued at $38 per share. In our upside scenario, in which we believe LT revenue could reach $1.4bn, the company could be valued at $47 per share (see Figure 61).

Figure 61: An EV/sales multiple of 5.5x yields TPs of $38/$47, respectively Nutanix EV/Sales Valuation Computation Upside Case Base Case Nutanix Detail Current Market Price ($) 29.99 29.99 Diluted Share Count (mil) 173.00 173.00 Market Cap ($mil) 5,188 5,188 Net Cash ($mil) 333.0 333.0 Enterprise Value ($mil) 4,855 4,855 Nutanix Current EV/Sales Multiple (x) 3.4 4.3

Peer Groups (EV/Sales '17 Comps) Next-Generation Datacenter (x) 4.0 4.0

Valuation Calculation Calculated Enterprise Value ($mil) 7,825 6,166 Nutanix Sales (Long-term Sales, $mil) 1,423 1,121 EV/Sales Multiple (x) 5.5 5.5 Net Cash ($mil) 333 333 Market Cap ($mil) 8,158 6,499 FV per share for Nutanix ($) 47.2 37.6

Upside/Dow nside from Current Market Price (%) 57% 25%

Source: Company data, Credit Suisse estimates.

We Apply an EV/Sales Multiple of 5.5x Based on Comps: To assign a fair EV/Sales multiple for Nutanix, we looked at the EV/sales multiples of its peers. We formed a peer group of comparable companies that comprise next-generation datacenter companies

Nutanix Inc. (NTNX) 27 25 October 2016

including Salesforce, Red Hat, VMware, Citrix, Splunk, Hortonworks, Pure Storage, and others. The average multiple of these peers is 4x. Given that Nutanix is still growing rapidly and has the profitability of a software company, we believe the company deserves a 5.5x EV/sales multiple. We apply this multiple to both the base case and the upside case, which yields a PT of $38 for the base case and $47 for the upside case. DCF Yields a $38 TP for the Base Case and a $50 TP for the Upside Case Our discounted cash flow analysis for Nutanix suggests a fair value of $38 per share for the base case and $50 for the upside case (see Figure 62 and Error! Reference source not found.). This is based on the following assumptions: Base Case DCF Yields $38 per Share ■ Strong Revenue Growth Could Be Sustained for Several Years: For 2017 and 2018, we expect Nutanix to see strong revenue growth of 67% and 50%, respectively, driven by continued sales to enterprise customers, increased penetration of Global 2000 accounts, and ramping the international sales. Beyond fiscal 2021, we expect revenue growth to moderate to around 20% before stabilizing at 3% long term.

■ EBIT Margins Could Grow to 23.5% in the Long Term: Driven by strong product momentum, we believe Nutanix’s gross margin will increase to above 62% by FY18. This in turn will likely drive operating margins toward positive territory in the coming two years. Long term, we expect gross margins could reach 70% and EBIT margins could eventually reach 23.5% as the company scales and increases its revenue stream. Upside Case DCF Yields $50 per Share ■ Strong Revenue Growth Could Be Sustained for Several Years: For 2017 and 2018, we expect Nutanix to see strong revenue growth of 79% and 79%, respectively, driven by continued sales to enterprise customers, increased penetration to Global 2000 accounts, and ramping its international sales. Beyond fiscal 2021, we expect revenue growth to moderate to around 20% before stabilizing at 3% long term.

■ EBIT Margins Could Grow to 28% in the Long Term: Driven by strong product momentum, we believe Nutanix’s gross margin will increase to above 62% in 2017 and 2018. This in turn will likely drive operating margins toward being positive in the coming two years. We expect the operating margin to turn positive by FY19. Long term, we expect gross margins could reach 73% and EBIT margins could eventually reach 28% as the company scales up and increases its revenue stream.

Nutanix Inc. (NTNX) 28

(NTNX) Inc. Nutanix Figure 62: Base-case DCF suggests the company is worth $37.5 per share

FY2014 FY2015 FY2016 FY2017 FY2018 FY2019 FY2020 FY2021 FY2022 FY2023 FY2024 FY2025 FY2026 in $ millions Revenue Product Revenue 114 201 351 563 807 1,130 1,525 1,937 2,364 2,718 3,044 3,349 3,550

Support Revenue 14 41 94 182 314 461 646 807 969 1,133 1,303 1,433 1,519

Group revenue 127 241 445 745 1,121 1,591 2,171 2,744 3,332 3,851 4,347 4,782 5,069 Y/Y change, % 301.2% 89.9% 84.3% 67.4% 50.5% 42.0% 36.4% 26.4% 21.4% 15.6% 12.9% 10.0% 6.0% Gross profit Total gross profit (non-GAAP) 67 142 276 460 701 1,002 1,390 1,784 2,199 2,580 2,956 3,300 3,548 Gross margin, % 52.3% 58.6% 61.9% 61.8% 62.5% 63.0% 64.0% 65.0% 66.0% 67.0% 68.0% 69.0% 70.0% Operating expenses Research and development (non-GAAP) 36 68 110 162 202 247 326 398 466 520 565 622 659 % of sales 28.2% 28.2% 24.8% 21.8% 18.0% 15.5% 15.0% 14.5% 14.0% 13.5% 13.0% 13.0% 13.0% Sales and marketing (non-GAAP) 91 155 280 401 538 668 868 1,015 1,066 1,155 1,261 1,387 1,470 % of sales 71.5% 64.3% 63.0% 53.9% 48.0% 42.0% 40.0% 37.0% 32.0% 30.0% 29.0% 29.0% 29.0% General and administrative (non-GAAP) 12 20 30 41 55 72 98 124 150 173 196 215 228 % of sales 9.7% 8.2% 6.7% 5.5% 4.9% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% Total opex 139 243 420 605 795 987 1,292 1,537 1,683 1,849 2,022 2,224 2,357 Operating profit (PF) -72 -102 -145 -144 -94 16 98 247 516 732 935 1,076 1,191 Operating margin, % -57.0% -42.1% -32.6% -19.4% -8.4% 1.0% 4.5% 9.0% 15.5% 19.0% 21.5% 22.5% 23.5% Add D&A 12 17 26 39 57 80 113 151 183 212 239 263 279 % of sales 9.1% 6.9% 5.9% 5.2% 5.2% 5.0% 5.2% 5.5% 5.5% 5.5% 5.5% 5.5% 5.5% EBITDA (PF) (61) 32 (119) (105) (37) 95 211 398 700 944 1,174 1,339 1,470 EBITDA margin (%) -47.9% 13.4% -26.6% -14.2% -3.3% 6.0% 9.7% 14.5% 21.0% 24.5% 27.0% 28.0% 29.0% Less capex (19) (23) (42) (59) (86) (119) (152) (178) (200) (212) (239) (263) (279) % of sales -15.0% -9.7% -9.5% -7.9% -7.9% -7.5% -7.0% -6.5% -6.0% -5.5% -5.5% -5.5% -5.5% Add/ Less chg in w orking capital 14 (68) (124) (239) (259) (204) (235) (210) (203) (167) (155) (130) (81) Assets 43 66 164 233 342 477 651 823 1,000 1,155 1,304 1,435 1,521 % of sales 34.2% 27.3% 36.8% 31.3% 30.5% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% Liabilities ex-deferred rev. 30 53 82 118 183 255 347 439 533 616 696 765 811 % of sales 23.5% 21.9% 18.5% 15.8% 16.3% 16.0% 16.0% 16.0% 16.0% 16.0% 16.0% 16.0% 16.0% Chg of deferred rev. 67.1 192.9 273.1 302.4 267.1 316.5 289.9 285.4 240.0 224.0 191.3 121.7 % of sales 27.8% 43.3% 36.7% 27.0% 17% 15% 11% 9% 6% 5% 4% 2% Total CF before tax (64) (47) (36) 70 133 180 294 429 703 899 1,089 1,206 1,273 Cash taxes 1 2 2 4 6 13 17 43 90 128 164 188 208 Tax rate, % -0.8% -1.5% -1.5% -3.0% -6.8% 80.0% 17.5% 17.5% 17.5% 17.5% 17.5% 17.5% 17.5%

Free cash flow (65) (49) (39) 65 126 167 277 386 613 771 926 1,018 1,064

Assumptions Summary WACC 12.2% PV of Free Cash Flow 2,386 Beta 1.60 Terminal Value 11,909 Risk free rate 3.5% PV of Terminal Value 3,765 Equity Risk Premium 6.0% Enterprise Value 6,151 Cost of Equity 13.1% Plus: Cash & ST Investments 333 Avg cost of debt (pre tax) 5.0% Less: Debt 0 Avg cost of debt (post tax) 4.1% Less: Other 0 Perpetual growth rate 3.0% Equity Value 6,484

25 October 2016 25 October Tax rate 17.5% Value per share $37.5 Source: Company data, Credit Suisse estimates.

29

(NTNX) Inc. Nutanix Figure 63: Upside-case DCF suggests the company is worth $50.4 per share

FY2014 FY2015 FY2016 FY2017 FY2018 FY2019 FY2020 FY2021 FY2022 FY2023 FY2024 FY2025 FY2026 in $ millions Revenue Product Revenue 114 201 351 606 1,054 1,528 2,033 2,521 3,025 3,539 3,999 4,319 4,449 Support Revenue 14 41 94 189 369 535 722 917 1,127 1,342 1,543 1,682 1,732

Group revenue 127 241 445 794 1,423 2,063 2,755 3,437 4,152 4,881 5,542 6,001 6,181

Y/Y change, % 301.2% 89.9% 84.3% 78.6% 79.1% 45.0% 33.5% 24.8% 20.8% 17.5% 13.5% 8.3% 3.0% Gross profit Total gross profit (non-GAAP) 67 142 276 493 907 1,300 1,777 2,251 2,782 3,343 3,879 4,321 4,512 Gross margin, % 52.3% 58.6% 61.9% 62.1% 63.7% 63.0% 64.5% 65.5% 67.0% 68.5% 70.0% 72.0% 73.0% Operating expenses Research and development (non-GAAP) 36 68 110 162 202 320 413 498 581 659 709 750 773 % of sales 28.2% 28.2% 24.8% 20.4% 14.2% 15.5% 15.0% 14.5% 14.0% 13.5% 12.8% 12.5% 12.5% Sales and marketing (non-GAAP) 91 155 280 434 661 866 1,102 1,272 1,329 1,464 1,579 1,680 1,731 % of sales 71.5% 64.3% 63.0% 54.6% 46.4% 42.0% 40.0% 37.0% 32.0% 30.0% 28.5% 28.0% 28.0% General and administrative (non-GAAP) 12 20 30 44 67 93 124 155 187 220 249 270 278 % of sales 9.7% 8.2% 6.7% 5.6% 4.7% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% Total opex 139 243 420 640 930 1,279 1,639 1,925 2,097 2,343 2,538 2,700 2,781 Operating profit (PF) -72 -102 -145 -147 -23 21 138 327 685 1,001 1,341 1,620 1,731 Operating margin, % -57.0% -42.1% -32.6% -18.5% -1.6% 1.0% 5.0% 9.5% 16.5% 20.5% 24.2% 27.0% 28.0% Add D&A 12 17 26 39 64 103 143 189 249 317 388 450 464 % of sales 9.1% 6.9% 5.9% 5.0% 5.0% 5.0% 5.2% 5.5% 6.0% 6.5% 7.0% 7.5% 7.5% EBITDA (PF) (61) 32 (119) (107) 40 124 281 516 934 1,318 1,729 2,070 2,194 EBITDA margin (%) -47.9% 13.4% -26.6% -13.5% 2.8% 6.0% 10.2% 15.0% 22.5% 27.0% 31.2% 34.5% 35.5% Less capex (19) (23) (42) (63) (109) (155) (207) (258) (311) (366) (416) (450) (464) % of sales -15.0% -9.7% -9.5% -7.9% -7.9% -7.5% -7.5% -7.5% -7.5% -7.5% -7.5% -7.5% -7.5% Add/ Less chg in w orking capital 14 (68) (124) (258) (276) (336) (279) (252) (253) (248) (214) (139) (51) Assets 43 66 164 275 493 640 854 1,066 1,287 1,513 1,718 1,860 1,916 % of sales 34.2% 27.3% 36.8% 34.6% 34.6% 31.0% 31.0% 31.0% 31.0% 31.0% 31.0% 31.0% 31.0% Liabilities 30 53 82 138 260 371 496 619 747 879 998 1,080 1,113 % of sales 23.5% 21.9% 18.5% 17.4% 18.3% 18.0% 18.0% 18.0% 18.0% 18.0% 18.0% 18.0% 18.0% Chg of deferred revenue 67 193 313 372 371.3 369.3 340.8 345.5 342.5 300.4 198.7 74.2 % of sales 27.8% 43.3% 39.4% 26.1% 18.0% 13.4% 9.9% 8.3% 7.0% 5.4% 3.3% 1.2% Total CF before tax (64) (47) (36) 81 203 305 354 510 875 1,200 1,528 1,759 1,781 Cash taxes 1 2 2 4 6 17 24 57 120 175 235 284 303 Tax rate, % -0.8% -1.5% -1.5% -3.0% -27.3% 80.0% 17.5% 17.5% 17.5% 17.5% 17.5% 17.5% 17.5%

Free cash flow (65) (49) (39) 77 196 288 330 453 755 1,024 1,293 1,476 1,479

Assumptions Summary (in $mn) WACC 12.3% PV of Free Cash Flow 3,219 Beta 1.60 Terminal Value 16,422 Risk free rate 3.5% PV of Terminal Value 5,160 Equity Risk Premium 6.0% Enterprise Value 8,380 Cost of Equity 13.2% Plus: Cash & ST Investments 333 Avg cost of debt (pre tax) 5.0% Less: Debt 0 Avg cost of debt (post tax) 4.1% Less: Other 0 Perpetual growth rate 3.0% Equity Value 8,713

Tax rate 17.5% Value per share $50.4 2016 25 October Source: Company data, Credit Suisse estimates

30

25 October 2016

Hyperconvergence, What's the Need? As we have articulated in several of our previous reports, the IT infrastructure market remains in a degree of flux. On the one hand, IT budgets remain under pressure, with limited real growth; on the other hand, IT spend needs to sustain today's infrastructure and focus on the next-generation applications (such as e-commerce, mobile, and social media), which are expected to grow at a rate of ~70% per annum. The light weight next-gen app is expected to cost about one-tenth of the traditional ones (see Figure 64 and Figure 65).

Figure 64: Next-Gen Apps—tremendous growth ahead Figure 65: …with the cost around 1/10 of traditional ones 80% ’12-’16E CAGR $12,000 Estimated per-application cost in 2016 70% $10,000 Next-gen apps nearly 1/10th 60% the cost of traditional apps

50% $8,000

40% $6,000

30% $4,000 20%

$2,000 10%

0% $0 Enteprise spending Traditional apps Next-gen cloud apps Traditional applications Next-generation applications Source: IDC, Credit Suisse estimates. Source: IDC, Credit Suisse estimates.

Why Traditional IT Won't Survive?: Traditional IT infrastructure can no longer meet the demands of a fast-changing business world. IT professionals reside in the silos of server, storage, networking and software with very low visibility into each other's activity. Without a concerted effort in planning and procurement, this model incurs high opex and capex, putting a serious strain on IT budgets. What is worse, modern enterprises increasingly demand IT infrastructure to support business innovation and market competition with agility and reliability. Traditional IT architecture will not survive this trend, and we believe a completely new architecture is needed. What Is the Difference Between Convergence and Hyperconvergence: Converged and hyperconverged architectures emerged to address the needs previously detailed (a converged system is also called an integrated system). From a hardware perspective, while they share the standardized modular form factor that can be stacked on a rack in datacenters, converged systems maintain the three-tier hardware architecture, named server, storage and networking. Outside of the physical difference, there are three other key differences. First, the hyperconverged system natively collapses compute and storage to achieve data locality and scalability. Second, while the converged system is designed in a hardware-centric approach, the essence of the hyperconverged system lies on the software stack that aims to virtualize the entire infrastructure and provides a platform to support the upper stack applications. Third, as most of the converged systems follow certain reference architectures, they are preconfigured for a specific workload, which makes it difficult to repurpose when the workload needs to be wound down at later period. However, a hyperconverged system provides a software defined fabric for almost all workloads, and therefore can protect investment (see Figure 66). Why Hyperconvergence: Hyperconvergence enables agility, scalability, and reliability through its sophisticated software stack. First, the appliance that encloses compute and storage makes the procurement cheaper and deployment faster. Second, the software- defined approach provides flexibility and resilience much needed in the modern IT infrastructure. Third, as the control plane is increasingly separated from the data plane, the

Nutanix Inc. (NTNX) 31 25 October 2016

strength of hyperconvergence is manifested as a platform to support the fast development and deployment of upper stack applications.

Figure 66: Hyperconvergence vs. traditional architecture Traditional Model Converged System Hyperconverged system

APP APP APP APP Servers Servers OS OS OS OS

Storage Switch Distributed software Storage Switch

Storage Array Storage Array

Pre-configured System Appliance

Source: Company data, Credit Suisse estimates. Defining Hyperconvergence Given the growing influence of the public Cloud, IT architecture has started evolving over the past several years toward more agility, scalability and reliability. It is against this backdrop that the new area of hyper-convergence has emerged as a compelling IT solution. At its essence, it is aimed to deliver ease of deployment, high availability and simplified management. A hyper-converged system comprises server and storage in the form of appliance and, on top of that, a distributed software stack. Software here is actually the core piece of the solution.

■ Appliance: To achieve linearity of performance, hyper-convergence integrates server and storage into one chassis as a building block. In contrast to the converged system , each building block is intended to perform as part of a distributed fabric of compute and storage resources.

■ Software Stack: Hyper-convergence software is the core piece of the solution. First, similar to the server virtualization, the software virtualizes the storage of all boxes of a cluster (or nodes) to form a distributed storage fabric. The software often provides a distributed file system, and all virtual machines (VMs) over the cluster are operating on the storage fabric. Second, the software works with hypervisors that pool the compute resources of the cluster and create VMs. To manage the usage of the resources, a control VM is designated on each node for workload distribution and orchestration. Third, some hyperconvergence solutions provide higher level features such as supporting app mobility and managing containers.

Nutanix Inc. (NTNX) 32 25 October 2016

IT Trends—Time to Support Business Performance Modern enterprises increasingly demand IT infrastructure to support business innovation and market competition with limited budget. Agility, scalability, and manageability are the key metrics to measure whether a IT system can live up to the requirements. Modern Business Put New Demand on IT: In the traditional IT paradigm, IT infrastructure was constructed to support basic internal operations, where time to value and budget were not given much consideration. Increasingly, however, IT infrastructure is asked to support new business plans to boost business performance. For example, many retailers like Wal- Mart and Home Depot rely on their IT systems to optimize supply chain management and determine merchandise pricing based on the real-time market intelligence. According to Gartner, more than 27% of IT budget comes from outside of the IT department to support functions like marketing and business innovation in 2014, while that number was just above 15% in 2013 (see Figure 67). Such is a trend that enterprises demand IT infrastructure to do more in a faster pace. The rapid spread of DevOps model also testifies to this trend.

Figure 67: IT budget increasingly controlled by non-IT units Other, 20%

Marketing Budget, 7% IT Budget, 73%

Question: What percentage of your enterprise/business unit/government entity's total spending on technology is covered by the IT budget? (n=2,339)

Source: Gartner (Oct 2014).

IT Budget Is Under Strain: Enterprises had been generous in investing in their IT infrastructure for a period of time. However, since the financial crisis of 2008, weak economic prospect has put strain on IT budgets, and IT Opex and Capex have been put under crosshairs. Essentially, CIOs are asked to do more with less. Vendors have already rolled out offerings that feature buy-as-you-grow, plug-and-play, and optimized cooling and power consumption. These offerings are increasingly benchmarked with the metrics like agility, scalability, and manageability. Cloud Is Reshaping IT Consumption: Public cloud provides a cheaper alternative for IT resource consumption. Cloud first has become a reality in IT project planning. However, private datacenters are bound to exist for an extended period of time, owing to performance requirements from certain mission-critical apps and security concerns. We believe the hybrid Cloud will become the prevalent IT solution ultimately. Hyperscalers such as AWS, Microsoft, and Google now have direct influence on hardware configuration, software API standardization, and infrastructure architecture design. Cloud interoperability should be an important consideration for any emerging IT architecture. Software Defined Is Going to Dominate: As business demands agility and reliability from IT infrastructure, software defined becomes the only viable solution. The economic enabler is the commoditization of x86 server that now forms the backbone of most of datacenters. Over the past decade, enterprise IT has migrated from the traditional client server/desktop

Nutanix Inc. (NTNX) 33 25 October 2016

era to the virtualization era. A new era has just started featuring Cloud and software-defined datacenters. In the following text, we detail the evolution of IT infrastructure from the traditional architecture to the converged system and then to the hyperconverged system. Each architecture is benchmarked against the metrics like scalability, availability, management features, and opex/capex performance. The Traditional Way Won't Survive In the traditional IT model, IT engineers reside in silos named server, storage, networking, and software. Each silo maintains an independent budget and has its own go-to vendors. Due to lacking of scale, the silos often overpay for what they purchase. We believe this is one of main causes of bloated IT budgets (see Figure 68).

Figure 68: Evolution of IT infrastructure

Hyperconvergence

Source: Company data, Credit Suisse estimates.

Traditional Architecture Is Not Agile: It usually takes a year for a IT department to go through the process of request for proposal, placement of order, and receiving product from vendors. This painful process is followed by other painful ones such as deploying hardware and software and contracting post-sale services. The traditional model cannot support business innovation because its time-to-value is slow. Reliability Is Another Weak Pain Point: The traditional model features a centralized system that needs to scale up when new capacity is needed. This type of system is susceptible to a single point of failure. Also, whenever software needs to be upgraded or hardware capacity is added, the entire system has to be taken down. Service disruption not only affects engineer productivity but also causes casualties on business outcome. For example, as more retailors move sales to online stores, down time is essentially equal to the revenue loss. In addition, nowadays most mission-critical data is stored in IT infrastructure, and so the loss of these data could have serious implications. Lacking of Scalability Puts Strain on Both Capex and Opex: From a capex perspective, more capacity has to be planned than actually needed, as it is difficult to forecast future

Nutanix Inc. (NTNX) 34 25 October 2016

needs. From an opex perspective, 70% of valuable engineering time is spent on system configuration and reacting to disruptive events rather than real innovation. Convergence vs. Hyperconvergence Converged System: To simplify IT architecture and improve agility, the industry has developed the converged system. A converged system puts server, storage, and networking functions into standardized boxes like Lego blocks and is preconfigured for a certain workload. The boxes can slide in and be mounted on an industry standard rack integrated with a power and cooling system. The converged system is essentially taking a hardware-focus approach following certain reference structures. Virtually all traditional IT vendors like HP, Dell, and IBM have rolled out their converged offerings, but the notable player in this space is VCE controlled by Dell-EMC with Cisco providing UCS compute unit (see Figure 69).

Figure 69: Product offerings from major integrated system vendors

Cisco EMC(VCE) HP Dell IBM/Lenovo

Producte offering/ IBM PureFlex System/ UCS/NetAppFlexPod Vblock/VxBlocks HP Converged System Dell Active Sytem Ref. architrecture Lenovo Converged System

HP ProLiant/ Server Cisco UCS server Cisco UCS server PowerEdge Flex Compute Node HP BladeSytem

Storage NetApp storage EMC storage HP 3Part StoreServ Dell Storage IBM Storwize

Cisco Nexsus/ HP Networking/ Networking Cisco Nexus Dell ToR Networking Flex Scalable Switches VMware NSX Cisco Nexus

vSphere/Hyper-V Virtualization vSphere/Hyper-V VMware vSphere vSphere/Hyper-V vSphere/Hyper-V HP OneView (mgmt) Source: Company data, Credit Suisse estimates.

■ The Pros of Converged System: The system enables the IT department to make purchases from one vendor, and they can leverage scale to negotiate for favorable pricing. Typically, this also enables a buy-as-you-grow model with the same vendor coordinating support and maintenance. The converged system has significantly streamlined the installation and implementation processe, freeing up resources for software development and application innovation. Therefore, the converged system has eased the strain on IT budgets compared with the traditional systems.

■ The Drawbacks of Converged Systems: This solution, however, is still taking a hardware-centric approach. In order to fully mitigate downtime and support application innovation in an agile manner, software defined is the only viable solution. The converged system does not provide a clear roadmap to bridge this hardware-centric architecture to cloud-like infrastructure. Hyperconverged System: From a hardware perspective, the hyperconverged system is like the converged system except for collapsing server and storage into one to make the appliance truly scalable. However, the central piece of this solution is the distributed software that manages virtualized resources and supports the upper level applications. With this solution, the IT department can upgrade software without taking down services. The software-defined feature has transformed the IT infrastructure to support business innovation and market competition.

Nutanix Inc. (NTNX) 35 25 October 2016

Nutanix—Unique IP Nutanix was founded in 2009 by a team that has built scalable systems such as Google File System and Oracle Exadata. The company is the leading vendor in the hyperconvergence space with a visionary roadmap and outstanding execution. Their hyperconverged offering is available in the appliance form bundled with a software stack that provides server and storage virtualization, Virtual Machine management, and hybrid cloud integration. We believe Nutanix provides one of the best platforms in the IT infrastructure market to achieve the software-defined datacenter vision. The Nutanix Vision: Nutanix's vision is to make IT infrastructure invisible so that IT resources may be truly dedicated to business outcome and market competition (see Figure 70). First, Nutanix solution is web-scale, which theoretically enables the system to scale infinitely. In so doing, the solution helps customers to realize savings on both opex and capex. Second, the management is simple. As a datacenter is growing larger, IT operation management becomes more complex and expensive. Simplified management means opex reduction and productivity gain. Third, their solution aims to bridge the private cloud with the public cloud to maximize cost effectiveness of overall IT infrastructure. The vision is realized in three stages described in the following text.

Figure 70: Nutanix's Xtreme Computing Platform

Multi-Tier

Management VM

Server Server

Storage Storage

VM VM Ops

Server Server Ops

Storage Storage Ops

Management

Management Management

Hypervisors Hypervisors

Xtreme Computing Platform Servers Prism

App Mobility Fabric

V

-

ESXi

AWS

Azure

Hyper

Acropolis Acropolis Hypervisor Storage Switch Containers Distributed Storage Fabric

Invisible Infrastructure Storage Array Web-Scale. Consumer-Grade. Just Works.

Source: Company data, Credit Suisse estimates.

Act I: Nutanix's Act I is essentially a software-defined storage solution that is well compatible with ESXi and Hyper-V. Like server virtualization, Nutanix's distributed file system (NDFS) virtualizes the storage within each Nutanix appliance to form a storage fabric with advanced storage services. The NDFS coupled with the appliance form factor makes the foundation of the Nutanix solution. Act II: Nutanix's Act II is to make virtualization invisible with its own proprietary Acropolis hypervisor. This Act has two pillars: Distributed Storage Fabric (DSF) and App Mobility Fabric (AMF). These two fabrics support workloads at the VM level through data locality and application mobility. Acropolis hypervisor is built based on the open-sourced KVM that is compatible with the mainstream hypervisors like ESXi and Hyper-V. As value moves from hardware to software then to upper layer apps, we believe hypervisors will be increasingly commoditized.

Nutanix Inc. (NTNX) 36 25 October 2016

Act III: Act III is to make the cloud invisible by managing both the private cloud and the public cloud on a single interface named Prism. We believe the ultimate form of IT infrastructure is a hybrid cloud that balances security and performance with flexibility and cost-effectiveness. In this Act, Prism provides a simplified yet very powerful management console. Nutanix's Vision The vision of Nutanix is to make infrastructure invisible so that IT professionals may focus on application innovation and drive business outcome. Web-Scale IT: Web-scale IT was developed by Facebook and Google to enable rapid app development and deployment on a commoditized x86 farm. Web-scale IT employs modular hardware and virtualization software to form a data fabric over a distributed cluster. Nutanix's software virtualizes the server-side storage and forms a distributed storage fabric shared by all virtual machines. The web-scale IT enables IT infrastructure to start small and scale out as the demand grows. This concept is well suited for companies that need to contain capex and opex in IT and at the same time require business innovation. Also, because the system is constructed over a cluster, the web-scale system may possess self- healing capabilities to minimize service interruptions. Consumer Grade Management: Virtualization has separated software from hardware. In a similar notion, control planes have become increasingly separated from data planes. IT operation will increasingly be managed in a centralized manner. Simplified management not only frees up resources from basic implementation and configuration, but also reduces accidents caused by human errors. We believe this vision will eventually lead to a-single- pane-of- glass management. Cloud Ready: As the public cloud has demonstrated a better IT consumption model, the hybrid cloud architecture will become the prevalent form of next-generation IT to achieve flexibility and lower cost. By making the public cloud invisible, Nutanix's offering addresses this demand in a very unique and efficient manner. The Strategy—The Three Acts Nutanix's architecture is the embodiment of its vision, and it was rolled out in three phases, named Three Acts. In the following text, we detail the architecture in accordance with the Three Acts. Act I—Making Infrastructure Invisible Nutanix's solution brings simplicity to enterprise datacenters with its software-defined storage (SDS) solution. For the IT department, storage management is a pain point owing to the complex SAN architecture. Nutanix's SDS solution pools the server side storage on each node to form a Distributed Storage Fabric to support VMs created on each node, circumventing the need to build a dedicated SAN. Nutanix XCP Appliance: Each Nutanix appliance is essentially an x86 server. Nutanix's offering is heavily hinged on the sophisticated software, but the appliance form factor is equally important. First, the modular form factor is designed to optimize datacenter space utilization and power consumption. Second, the appliance form factor also enables buy-as- you-grow model that allows customers to start small and then make incremental purchases. Clustered System, Distributed Computing: Essentially, Nutanix's hyperconvergence is a software-defined solution over an x86 server cluster to construct a fabric to support all VMs. For a specific workload, the execution is carried out in a distributed manner, meaning many tasks of an application are carried out on different physical nodes at the same time. Nutanix architecture leverages a number of open source projects for the cluster applications. Fabric: With the Nutanix solution, fabric is a layer of functional resources of computing power and storage. On the fabric, data can move around to support VMs based on need.

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Fabric not only hides the underlying infrastructure, but serves a platform for further automation and innovation (see Figure 71).

Figure 71: Distributed software solution enables uniform fabric over a cluster

Source: Company.

Control Virtual Machine (CVM)—The Core IP: CVM is one of the most important IPs of Nutanix's offering. On each node, there resides a CVM to manage storage I/Os and storage resources. It plays a similar role for storage virtualization as a hypervisor for server virtualization. Each node also has a hypervisor to harness the compute power to create and support VMs. Nutanix's solution is compatible with industry-standard hypervisors like ESXi or Hyper-V and provides its own KVM hypervisor as well.

Figure 72: Nutanix Node Architecture—CVM to Virtualize Storage

Source: Company.

CVM is the linchpin of Nutanix's software-defined solution. First, each CVM organizes the storage resource on the node to form a shared storage pool across the entire cluster, named the Acropolis Distributed Storage Fabric (DSF). Second, it serves as vDisk to local VMs or neighboring VMs to reduce latency. Third, it enables data to traverse across nodes to allow data mobility. On each node, CVM typically takes four cores of CPU with the rest available for VMs.

Nutanix Inc. (NTNX) 38 25 October 2016

Figure 73: Nutanix Distributed Storage Fabric

Source: Company.

Distributed Storage Fabric (DSF): The Nutanix solution clusters the storage resources to form a storage pool, and on the top of it, implements the Nutanix Distributed File System (NDFS) to form the Acropolis Distributed Storage Fabric (DSF). Fabric is extremely easy to scale out and on the fabric, data is made mobile, which is the essence of web-scale IT. In the following text, we review the Nutanix I/O path and then detail the storage services enabled on the DSF such as deduplication, compression, data locality, and disaster recovery. Figure 8 is an example of data tiering on the DSF performed by the information lifecycle management. Hot data is kept at the faster storage tier or Flash, and cold data is stored at the HDD tier devices.

Figure 74: Nutanix Data Tiering on Information Lifecycle Management (ILM) on NDFS

Source: Company.

I/O Path: In order to understand how Nutanix enables the storage services, it is helpful to understand the NDFS I/O path controlled by CVM. First, NDFS leverages three tiers of storage media: memory/cache, SSD and HDD, which can be extended to Cloud and NAS. The OpLog that resides in SSD serves as the writing buffer. When data is written into OpLog, it is fingerprinted. Subsequently, the data is drained into the extent store that bridges both SSD and HDD for persistent storage. Second, content cache that spans SSD and memory plays a central role for reading option. Content cache analyzes the fingerprint of data to make sure only single copy of data is stored. Content cache performs the tiering operation to make sure hot data is stored in cache or memory, so the data is ready for apps to use.

Nutanix Inc. (NTNX) 39 25 October 2016

Figure 75: Nutanix I/O Path Figure 76: Data Tiering for Read I/O

Source: Company. Source: Company.

Deduplication: Deduplication is an important storage service that boosts the storage efficiency, which is carried out by the Elastic Dedupe Engine feature of NDFS. In contrast to traditional deduplication operation, Nutanix performs deduplication (fingerprinting) at the data ingest step to avoid the performance overhead caused by the background scan. Data with the same fingerprint are deduplicated. Deduplication is performed both at capacity level such as the HDD tier and the SSD/memory tier to boost the performance. NDFS ensures that only a single copy of each data is presented in the content cache to support maximal amount of applications.

Figure 77: Nutanix Deduplication Storage Service

Source: Company.

Compression: Compression is another important storage service to increase storage efficiency. The compression process is accomplished through Nutanix Capacity Optimization Engine (COE). There are two types of compression: inline compression and post-process compression. With inline compression, large writing I/O will be compressed with COE directly in memory and write into the extent store. For small I/O, data will be coalesced at OpLog before compression.

Nutanix Inc. (NTNX) 40 25 October 2016

Figure 78: Nutanix Compression Storage Service—The Inline Flavor

Source: Company.

Post-process compression kicks in when a set of data becomes less frequently accessed and ILM moves data to the HDD tier from the SSD tier. Then COE would compress the cold data and store it in HDD. Meanwhile, if a set of compressed data is more frequently accessed, COE decompress the data and then ILM move the data into the SSD tier ready for read I/O. Both of the processed are shown in the Figure 79 and Figure 80.

Figure 79: The Post-Process Compression Figure 80: Nutanix Decompression for Read I/O

Source: Company. Source: Company.

Nutanix Networking I/O and Data Locality: We previously touched upon Nutanix networking I/O a bit. Here, we discuss it with more details and illustrate data locality. There are two types of networking in hypervisor: internal private networking and external public

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networking, and both of them are located in hypervisor. The private network handles storage I/O between hypervisor and CVM. For a read I/O, if data is available in the local node, CVM locates the data and sends them to hypervisor, and so there is no need to traverse the public networking. It is worth noting that the public networking is at least 100x slower than the private networking. The public networking is needed when data is not available in the local node or CVMs forward data to other nodes to comply with replication factors. Clearly, data locality can greatly boost performance.

Figure 81: Nutanix Networking I/O—Internal Private Networking vs. External Public Networking

Source: Company.

High Availability and Multi-Site Disaster Recovery: For the purpose of data protection, each set of data has a number of replicas in the cluster depending on the replication factor (RF). For example, if the replication factor (RF) is 3, any data on a node has 2 replicas on other nodes within the cluster. If the disk of the node fails, CVM directs all I/Os to one of the replicas to ensure availability until the disk is repaired. For the purpose of multi-sites disaster recovery, Cerebro is used to manage the replication process and disaster recovery process to ensure high availability, and the entire process is VM centric. Figure 82 shows how Nutanix manages replication process to achieve high availability. Metro cluster availability is enabled upon this capability.

Figure 82: Replication Architecture to Enable Multi-Sites Disaster Recovery

Source: Company.

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Act II—Making Virtualization Invisible Server virtualization has drastically increased the capacity utilization of physical servers. Virtualization is realized when a hypervisor harnesses the compute power of a server and then makes it available to VMs. Virtualization has helped CIOs realize the economic benefit of the commoditization of x86 servers. Nutanix's Act II is designed to make virtualization invisible, by bringing together server virtualization, storage virtualization and IT operation management on a single platform. The Acropolis hypervisor (AHV) is the landing point of this Act. Why Another Hypervisor? There are four hypervisors in the market: VMware's ESXi within vSphere with ~50% market share, Microsoft's Hyper-V with ~30% market share, Xen adopted by Citrix and Oracle, and open-source KVM (see Figure 83). The Acropolis hypervisor is an open-source hypervisor based on the open-source KVM with added features such as security, automation, and maintenance. But is it just another hypervisor? The significance of Acropolis Hypervisor is not to be the best in breed but to accelerate the inevitable commoditization of hypervisors. First, Acropolis Hypervisor subsumes previous hypervisors including ESXi and Hyper-V to enable VMs to freely move across different hypervisors. Essentially, Acropolis Hypervisor enables customers to break the lock-in effect of ESXi and allocate more resources for app innovation. Second, Acropolis hypervisor is native to the Nutanix XCP platform, so with it Nutnaix's software can better hide the virtualization layer.

Figure 83: Hypervisor market share Figure 84: AHV – A landing point of Act II Critrix Red Hat 6% 2% Acropolis

Other 10% App Mobility Fabric

Acropolis VMware ESXi Hyper-V Hypervisor 51% (KVM based) Microsoft 31%

Distributed Storage Fabric

Source: Company. Source: Company.

Economic Benefit of Acropolis Hypervisor: Server virtualization increases the capacity utilization of x86 servers, but it comes with a cost of hypervisors like ESXi. VMware's pricing model is on a per processor basis plus vCenter and other services. Before the launch of Acropolis hypervisor (AHV), customers had to purchase an independent vSphere license in addition to the Nutanix solution. Now, customers can use AHV for free (see Figure 84). Nutanix estimate buyers could save up to 80% with their free AHV. We believe the commoditization of the hypervisors is inevitable as value is now moving to the upper stack. App Mobility Fabric (AMF): In the near and midium term, Nutanix's value proposition resides in the DSF and AMF. DSF saves IT professionals from building and maintaining SAN. In a similar way, AMF simplifies the management of various hypervisors. One key feature of AMF is to convert VM from ESXi to Acropolis Hypervisor and then convert it back. Workload Mobility: Workload mobility on AMF is equal to VM mobility, which means VMs are able to move across physical nodes. VMware pioneered the workload mobility feature with their vMotion (see Figure 85). vMotion is the foundation of disaster recovery, data protection, and high availability. Nutanix leverages vMotion to realize VM mobility on its AMF. Now the company has developed its own solution to convert VMs across ESXi, Hyper-V and AHV.

Nutanix Inc. (NTNX) 43 25 October 2016

Figure 85: VMware's vMotion enables live migration of VMs

Source: Company.

Clearly, DSF and AMF are software-defined fabrics. Adding computing and storage is now extremely easy and fast. On the top of that, Prism makes the IT operation management much simpler with an elegant interface. With these three features, Nutanix believe its solution can truly make the virtualization invisible. Prism—Leads to Single Pane of Glass Management As the control plane is increasingly decoupled from the data plane, value migrates to the upper stack. The key enabler is a-single-pane-of-glass interface that manages the entire IT infrastructure. Prism is designed with this philosophy. Complexity is impressive, but simplicity is genius. Simplified IT infrastructure means more resources can be allocated for business innovation, which will eventually translate to growth in top-line and bottom-line.

Figure 86: Prism—Leads to single pane of glass management

1-click 1-click 1-click 1-click Nutanix Prism Automation Automation Planning Updates

Continuous Proactive Predictive Rapid Machine Trouble- API Operation Remediation Learning shooting

Instant Personalized Customizable Desired State Search and Experience Dashboard Specification Action

Source: Company.

One Click for Consumer Grade User Experience: One-click automation is designed with intent to make IT administration as simple as possible (see Figure 86). For example, IT admins can now provision a batch of VMs in a couple of minutes on Prism. It is worth nothing that Nutanix's Prism is made with HTML5 language, which can be run on most of the mainstream web browsers. Predictive Operation for Proactive Infrastructure Management: Prism enables proactive infrastructure management by employing machine learning and predictive analytics. This

Nutanix Inc. (NTNX) 44 25 October 2016

can help to minimize the system downtime. Figure 87 shows that the storage capacity planning is now very simple on the Prism interface.

Figure 87: Prism makes storage planning simple on a user friendly interface

Source: Company. Act III and Enterprise Cloud Platform Act III—Making Cloud Invisible In the Act III phase, Nutanix is building an Enterprise Cloud Platform to make the cloud invisible. The public cloud has demonstrated a very powerful IT consumption model. However not everything can go on the public cloud. Many enterprises are concerned with data sovereignty and lock-in issues. Many of them choose to build a cloud-like private infrastructure, or a private cloud, and then connect it to the public cloud. Nutanix's vision in Act III is to provide both the building blocks and the management console for this type of hybrid architecture. Pubic Cloud Set Benchmark for IT Spend The public cloud has introduced a new and advantageous IT consumption model that truly allows for faster go-to-market and seamless scalability. In addition, the cost structure is very attractive compared with the traditional IT model. Essentially, the public cloud has set up a new benchmark for modern IT consumption. According to Gartner, 88% of organizations using cloud services (or planning to use cloud services in the near future) now have a cloud-first strategy. The following text shows some key characteristics. Continuous Innovation Drives Continuous Consumption: In the cloud, value is delivered through the features. Cloud service providers continuously innovate and make new features available, and users and developers continuously adopt and consume them. Nutanix's product offerings in fact meet this benchmark with its web-scale architecture. For example, within 100 days of release of version 4.6, over 40% of the installed base has upgraded to the newest version, which is a stunning achievement given that system upgrade is often fraught with errors (see Figure 88). Another example is the IOPS improvement with the 4.6 version. On the same box, with the new software features delivered in the version 4.6, the hybrid node's IOPS can be improved to ~2.5x from 125k/120k read/write per second to 320k/170k. For the all Flash node, the improvement is about ~4x.

Nutanix Inc. (NTNX) 45 25 October 2016

Figure 88: 43% of the installed base upgraded to 4.6 within 100 days

50%

40%

30%

20%

10%

0% 3.x 4.0.x 4.1.x 4.5 4.6.x

7 days 14 days 22 days 38 days 55 days 77 days 84 days 98 days 100 days

Source: Company data, Credit Suisse estimates. Private Cloud Addresses Some Concerns Around Public Cloud and Is Cheaper Sometimes The public cloud has transformed the way people consume IT resources. However, many enterprises are not ready to move everything to the public cloud. The following text shows some key concerns.

Figure 89: Security and data sovereignty are top concerns for public cloud

70% 60% 50% 40% 30% 20% 10% 0%

Source: Company data, Credit Suisse estimates.

Security and Data Sovereignty: According to our IT survey, security and data sovereignty are the top two concerns for the public cloud (see Figure 89). Nutanix Solution 30%-40% Cheaper than Public Cloud for Predictable Workloads: Nutanix believes the private cloud is actually cheaper than the public cloud if workload is predictable as the private cloud can better address requirements for performance and security. In a study, the company showed that Nutanix's solution could help to save 30-40% of total opex for the workloads with good visibility, compared with the public cloud. In addition, the company believe 75-80% of enterprise workload is predictable and should be hosted on the private cloud (see Figure 92).

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Nutanix—A Platform for Enterprise Cloud Nutanix's roadmap ultimately leads to a platform for Enterprise Cloud. An enterprise cloud platform should include the following features and functions (see Figure 90).

Figure 90: Nutanix roadmap ultimately leads to a platform for enterprise cloud

Source: Company.

Support a Wide Range of Enterprise Applications: These applications include both light weight web-based apps as well as heavy weight traditional apps like ERP and DBMS. The company first started with supporting the mainstream virtual Apps like XenDesktop, Splunk, and SharePoint. Over the past six to nine months, Nutanix moved to support all virtual applications including SAP, SQL Server, and MS Exchange. These apps are mission critical. In the 2016 .NEXT conference, Nutanix released the Acropolis Block Service (ABS) to support traditional applications and DBMS such as IBM DB2 and Oracle RAC. These traditional apps are typically running on bare-metals (see Figure 91).

Figure 91: Nutanix now supports all enterprise workloads with ABS supporting traditional workloads

Source: Company.

Any Hypervisors and Any Run-Time: Nutanix claims to be the only web-scale fabric that supports all three main stream hypervisors: ESXi, Hyper-V, and KVM. With the 4.6 version, Nutanix made available one-click hypervisor conversion feature that can convert ESXi VM to Acropolis VM and then convert it back to ESXi again. The use case for this could be that customers can maintain a production environment with ESXi, but at the same time they can use AHV for their DR sites to save the virtualization cost. In the 4.7 version, customers will be able to provision ESXi VMs on Prism instead of using vCenter (see Figure 93 and Figure 94).

Nutanix Inc. (NTNX) 47

(NTNX) Inc. Nutanix Figure 92: Nutanix 30%-40% cheaper than public cloud for predictable workloads

Option 1: Option 2: Option 3: Option 4: 60 Month OpEx spend Nutanix solution 30%-40% cheaper... AWS Azure Nutanix Nutanix Lease Users Supported 600,000 600,000 600,000 600,000 20.0 $18.4

VM Supported 300 300 300 300 $15.6 16.0

Operating Costs: $11.4 $11.5 12.0 Depreciation $0 $0 $1,442,005 $1,442,005 Maintenance $0 $0 $975,274 $975,274 8.0

Interest expense $0 $0 $0 $163,028 Opex (in $mn) Power & Cooling $0 $0 $517,187 $517,187 4.0 Data center expense $0 $0 $34,286 $34,286 0.0 Sub-Total Operating Costs $0 $0 $2,968,752 $3,131,780 AWS Azure Nutanix Nutanix lease People Costs: People cost Cloud cost Op Cost Full time equivalenet@$210k $8,400,000 $8,400,000 $8,400,000 $8,400,000 Sub-Total People Costs $8,400,000 $8,400,000 $8,400,000 $8,400,000 . Nutanix solution ~30% cheaper than AWS. Nutanix compared the opex of their own solutions for predictable workloads with AWS’s Cloud Costs: public cloud services. While people cost are the Compute $3,666,060 $8,672,400 $0 $0 same to manage the same number of VMs, Storage $1,152,000 $334,200 $0 $0 Nutanix’s operating costs are significantly Bandwidth costs $2,141,925 $963,866 $0 $0 cheaper than AWS’s cloud costs. AWS support (one-time) $0 $0 $0 $0 . Nutanix solution ~40% cheaper than AWS support (monthly) $215,700 $60,000 $0 $0 Azure. While both solutions require the same Sub-Total Cloud Costs $7,175,685 $10,030,466 $0 $0 amount of people costs, Nutanix’s operating cost is meaningfully cheaper than Azure.

Total Opex $15,575,685 $18,430,466 $11,368,752 $11,531,780 . Predictable workload is the key. The key Monthly Cost per VM $865 $1,024 $632 $641 assumption here is workload is predictable, and Monthly Cost per user $0.43 $0.51 $0.32 $0.32 there is good visibility of workloads growth.

Source: Company data, Credit Suisse estimates

25 October 2016 25 October

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Figure 93: Nutanix AMF features multi-hypervisor management and one-click hypervisor conversion

Source: Company.

Acropolis Container Services—Native Support for Docker: Nutanix plans to release Acropolis Container Services (ACS) with features like Docker Support and Persistent Portable Storage Volumes in version 4.7. Containerization has become vastly popular recently because it simplifies the transition between development and production and truly empowers the DevOps model. In addition, containerization is designed to virtualize operation systems, a level above the hypervisors. The hyperscalers (including AWS and Azure) have demonstrated strong interest in containerization. Nutanix's vision is to build a platform support a wide range of applications, hypervisors, and run-times including containerization.

Figure 94: Nutanix support wide range of hypervisors, run-time, and apps

Source: Company

One-Click Self Service Empowers True Private Cloud: Nutanix plans to provide one-click self-service in the upcoming 4.7 version OS. With this feature, service personnel from non-IT departments can provision and manage VMs that they need (see Figure 95). This can truly speed up IT resource delivery to drive business innovation.

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Figure 95: One-click self-service empowers invisible IT resource delivery

Source: Company.

We believe as the private cloud is increasing measured against the public cloud, self- service will become an essential feature. According to Gartner's Cloud adoption survey, while 42% of organizations claim to use the private cloud internally, only 7% of organization deployed the cloud with all three required attributes: automated orchestration, metered usage, and self-service (see Figure 96).

Figure 96: Only 7% of organizations deployed true private cloud

42% using IaaS 55% Self-Service - use wihtout or internal 31% true cloud: invervention of private cloud automated, IT since 2015 orchestrated, (or 7% of total) or earlier metered

Source: Company data, Credit Suisse estimates.

Cloud Interoperability for Hybrid Cloud Many organizations have adopted the cloud-first strategy. However, a good number of existing workloads are not ready to move on the public cloud. The hybrid architecture naturally becomes a viable choice. In this architecture, cloud interoperability is the key. Nutanix is in the process of rolling out some key products or features to address the interoperability issue. From Cloud Backup to Workload Bursting: Nutanix solution now has Cloud Connect feature that can back up data to the public cloud like AWS and Azure. However, in the long term, people are looking for the capability of workload bursting, which is essentially workload mobility across the hybrid cloud.

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Figure 97: Nutanix-Microsoft Hybrid Cloud Solution Figure 98: Azure Pack architecture overview

Windows Azure Pack (+ Azure Cloud) System Center 2012 R2 Windows Server 2012 R2

Nutanix Prism Nutanix Acropolis

Source: Company. Source: Company.

Microsoft CPS on Nutanix Platform: In June 2016, Nutanix expanded the relationship with Microsoft to jointly engineer a hybrid cloud solution. With the partnership, Nutanix will ship the nodes with Microsoft CPS preinstalled and pre-configured (see Figure 97). The solution will deliver a Microsoft Azure-consistent environment within enterprise datacenters. We believe this partnership will allow Nutanix to attract Azure Cloud customers to use its solution for the private cloud deployment. Here, we also highlight that Azure pack includes a slew of cloud management functions like Self-Service, similar to the features Nutanix plans to deliver with its version 4.7 (see Figure 98).

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A TAM as much as $32bn The emergence of hyperconvergence can be tracked back to 2009-2010, when small start- ups like Nutanix and SimpliVity released their storage virtualization offering. The profile of hyperconvergence started to rise in 2013, and the turning point came in 2014 and 2015, when VMware released vSAN5.5 and vSAN6 and other heavyweight vendors quickly followed suit (for example, HP's CS 250 StoreVirtual and Dell's XC series). In order to forecast the growth prospects of hyperconvergence, we segment the drivers in three areas: (1) modular server form factor shared with other integrated systems or converged systems; (2) workload diversification from VDI to other mission critical applications; and (3) geographical expansion to international markets. Baseline TAM Of $18bn in the Long Term: Integrated systems put server, storage and networking into standardized boxes that can be mounted on datacenter racks. The boxes are made according to certain reference architectures and are usually preconfigured for a specific workload. Integrated systems have gained vast popularity owing to ease of deployment and faster time to value compared with the traditional IT architecture. IDC forecasts that the integrated system market will continue to grow at a ~20% CAGR to $18bn in 2018. The use cases of integrated systems include both general-purpose IT infrastructure, named integrated infrastructure systems, and specialized integrated platform such as Oracle Exadata Database Machine and IBM's PureData. Hyperconverged TAM of $3.2bn in the Medium Term: Hyperconvergence found early success in Virtual Desktop Infrastructure (VDI) deployment because it is scalable and relatively inexpensive. Now it is branching out to other workloads. In the medium term, hyperconvergence is expected to grow to $3.2bn by 2018 with a CAGR of ~70%. Long-Term TAM as much as ~$32bn: We see Nutanix positioned well to address a $32bn TAM long term. In addition to the $18bn integrated system market, it is ready to tackle the $7bn server virtualization software market as well as the $7bn Cloud Systems Management market. Baseline TAM of $18bn from Integrated Systems Hyperconvergence initially emerged as a variant of the converged system or integrated system due to the similar modular form factor. The integrated system has experienced dramatic growth over the past few years. IDC forecasts the integrated system market will continue to grow at a ~20% CAGR to $18bn by 2018 (see Figure 99). There are two reasons for this. The first is enterprise datacenters increasingly demand faster deployment and simpler post-sale support due to pressured IT budgets. Second, IT infrastructure is required to support cutting-edge business innovation such as market intelligence and real- time response. We believe these drivers are tailwinds for the hyperconverged system as well. Hyperconvergence differentiates itself with a complete software stack that is designed to support upper stack applications.

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Figure 99: Integrated system grows at ~20% CAGR from 2014-2018 in millions, unless otherwise stated 2012 2013 2014 2015 2016 2017 2018 CAGR '14-'18 Revenue ($M) Integrated infrastructure 2,010 4,001 6,410 8,852 10,870 12,294 13,191 20% % yoy growth 99% 60% 38% 23% 13% 7% Integrated platforms 2,892 3,282 3,608 3,896 4,164 4,415 4,662 7% % yoy growth 13% 10% 8% 7% 6% 6% Total integrated system 4,902 7,283 10,018 12,747 15,033 16,708 17,853 16% % yoy growth 49% 38% 27% 18% 11% 7%

Shipment Integrated infrastructure 5,899 14,767 22,341 31,580 39,483 45,152 49,487 22% % yoy growth 150% 51% 41% 25% 14% 10% Integrated platforms 5,684 6,760 7,718 8,485 9,263 9,971 10,680 8% % yoy growth 19% 14% 10% 9% 8% 7% Total 11,583 21,527 30,059 40,065 48,746 55,123 60,167 19% % yoy growth 86% 40% 33% 22% 13% 9%

Source: IDC. Hyperconverged TAM of $3.2bn in the Medium Term The Hyperconverged system has gained tremendous traction in datacenters as a viable solution for various workloads with faster deployment and lower cost of ownership. Many heavyweight vendors started to jump on the bandwagon in 2014 and 2015. The major catalyst we believe was the release of vSAN 6.0 by VMware. Compared with the previous versions, vSAN 6.0 made available some important features like support for all-flash architecture, rack awareness, and VM awareness. In addition, VMware released EVO:RAIL to complete its hyperconvergence offering. However, so far the market response to EVO:RAIL has not been as enthusiastic as VMware had hoped. IDC forecasts the hyperconvergence market to grow at a CAGR of 71% to $3.2bn by 2018 (see Figure 100). Figure 100: Hyperconverged system—a $3.2bn market in medium term in millions, unless otherwise stated CAGR 2013 2014 2015 2016 2017 2018 '14-'18 Revenue 142 373 807 1,567 2,383 3,198 71% Growth (%) 162% 116% 94% 52% 34% Source: IDC.

As previously described, a hyperconverged solution has two delivery models: appliance or software only. Products like VMware's vSAN and Microsoft's Storage Space are delivered in the software-only form. The revenues from software-only distribution are therefore outside of the purview of this estimate. The Full Evolution of a ~$32bn TAM Nutanix's three acts have expanded the use cases significantly beyond the initial VDI deployment and software-defined storage, allowing the company to address an additional $14bn opportunity in the virtualization software and the cloud management software. Virtualization Software Market ~$7bn: Act II is aimed at making virtualization invisible with the KVM-based Acropolis hypervisor as the landing point. In doing so, the company essentially makes inroads into the server virtualization software market. IDC forecasts the virtualization software market to grow at 15% per annum to reach $7bn by 2015 (see Figure 101).

Nutanix Inc. (NTNX) 53 25 October 2016

Figure 101: Acropolis taps into ~$7bn virtualization software market in millions, unless otherwise stated CAGR Operating Environment 2013 2014 2015 2016 2017 2018 '14-'18 Linux/other open source 743 905 1,094 1,323 1,595 1,911 21% Windows 32/64 2,708 3,072 3,493 3,951 4,474 5,080 13% Total 3,451 3,976 4,587 5,274 6,069 6,991 15% Source: IDC.

Cloud Management System ~$7bn: Nutanix progresses into the cloud management field with its Act III, in which it aims to make the cloud invisible. The core of this strategic move is the cloud management console with functionalities like workload scheduling and automation, configuration management, and event management. According to IDC, this segment is to grow 29% per annum to ~$7bn in 2018 (see Figure 102). Figure 102: Cloud management presents a ~$7bnTAM in millions, unless otherwise stated Functionality 2014 2015 2016 2017 2018 CAGR '14-'18 Workload scheduling/automation 1,113 1,386 1,695 2,012 2,479 22% Performance/event mgmt. 682 924 1,287 1,739 2,329 36% Configuration/problem mgmt. 599 833 1,103 1,488 1,846 33% Total 2,394 3,144 4,085 5,239 6,654 29% Source: IDC.

From a $3.2bn TAM in hyperconverged systems in the medium term to a ~$32bn long-term TAM, we believe the company can tackle this addressable market in two ways: workload diversification and geographic expansion (see Figure 103).

Figure 103: Small base but big opportunity 35,000

30,000 6,654 Cloud mgmt Software 25,000 6,991 20,000 Virtualization Software 15,000

17,853 Integrated

Revenue Revenue (in $mn) 10,000 system 5,000 3,198 807 0 Nutanix product Hyperconvergence- TAM-long term revenue medium term

Source: Company data, Credit Suisse estimates.

Workloads Diversify Beyond VDI to Mission Critical Applications Most testimonials of early adopters of the hyperconverged system are about Virtual Desktop Infrastructure (VDI) deployment. There are two reasons. First, VDI is usually rolled out in batches, which starts small but needs to scale incrementally. Second, the compute and storage are usually scaled out in lock-steps. Hyperconverged solutions address these two needs nicely with natively integrated compute and storage in one box, plus automated provisioning enabled by its software stack.

Nutanix Inc. (NTNX) 54 25 October 2016

Figure 104: Nutanix to diversify workload

Enterprise Microsoft Applications Applications

Private & Hybrid Clouds VDI

Data Protection & Big Data Disaster Recovery

Branch Office

Source: Company.

The applications supported by hyperconvergence have expanded beyond VDI. Actually, hyperconvergence vendors are increasingly aiming at mission critical applications. For example, one major online electronics retailer has been employing Nutanix's solution for web hosting since 2013. Last year, the company started to use the Nutanix solution for business processing applications, business intelligence, and even its database management systems. Workload diversification enables the company to increase sell-in to the existing customers as part of its land-and-expand strategy (see Figure 104 and Figure 105).

Figure 105: Workload diversification—An important driver for growth

App/SW Decision App/SW development support development Web 1% infrastructure 5% 2% 6% Web Decision infrastructure support 4% Business 12% processing 12% IT infrastructure Business 38% Collaborative IT infrastructure processing 15% 61% 24%

Collaborative 20%

2014 2019

Source: IDC.

Geographic Expansion—An Important Driver Server virtualization is ubiquitous now, but storage virtualization has just raised awareness in the international market recently. The hyperconvergence vendors have been expanding their international presence. For example, more than 40% of the Nutanix customers are from outside of the U.S. (see Figure 106).

Nutanix Inc. (NTNX) 55 25 October 2016

Figure 106: International customers account for more than 40% total in 2015

International 15%

International 43% US 57% US 85%

2013 2015

Source: Company data, Credit Suisse estimates. Competitive Landscape Hyperconvergence is a nascent market since its inception in 2009-2010, pioneered by start- ups like Nutanix and SimpliVity. The space is becoming more crowded as more incumbent IT vendors are rolling out their own hyperconvergence solutions. However, we believe in the medium term the competition is focused on the new features like advanced data services and workload mobility, rather than pricing. In this space, there are three prominent product offerings: Nutanix's XCP, SimpliVity's Data Virtualization Engine, and VMware's EVO:RAIL based on vSphere and vSAN (see Figure 107). We note there are other players in this space, either acting as OEMs of these three players or are currently focused on niche applications. Nutanix Stands Out with Strong Vision and Technological Prowess Nutanix is probably the most prominent player in the hyperconverged space. With the Extreme Compute Platform composed of Acropolis and Prism, the company is essentially providing a full stack of IT infrastructure management solution.

■ Product Offerings: NX series with Extreme Compute Platform

■ Software-Defined Storage: Control VMs federate storage across the cluster providing advanced storage services like deduplication and compression

■ Hypervisor: Proprietary Acropolis hypervisor to break hypervisor lock-in; well compatible with vSphere, Hyper-V, and KVM (CentOS)

■ Management Feature: Prism one-click management

■ Cloud Readiness: Cloud API and Prism managing VM on or off Cloud

■ Key Features: Metro stretched cluster, data locality, load balancing, and data mobility

■ Sales Model: Appliance, software-only, OEM with Dell and Lenovo, and MITF with Super Micro and Cisco SimpliVity Excels with Data Efficiency SimpliVity is another credible player in this space. The OminiStack features both sophisticated storage virtualization and a highly innovative PCIe card–OminiStack Accelerator. The PCIe card handles the most important storage services like inline deduplication and compression.

■ Product Offerings: OminiCube appliance or OEM appliance with OminiStack software

Nutanix Inc. (NTNX) 56 25 October 2016

■ Software-Defined Storage: Data Virtualization Platform with PCIe card to offload advanced data services like inline deduplication and compression

■ Hypervisor: Compatible with vSphere

■ Management Feature: Heavily reliant on vCenter

■ Cloud Readiness: Cloud API for Cloud storage

■ Key Features: Load balancing, data mobility, and site stretched cluster

■ Sales Model: OminiCube, OEM with Cisco and Lenovo SimpliVity has been focused on workload diversification and international expansion. For example, it has moved beyond the initial VDI deployment by adding high availability with the site stretched cluster function. The company has signed OEM partnerships with Cisco and Lenovo, eyeing on their international distribution. The company is also investing to improve technological innovations. For example, while OminiStack supports vSphere, it is not quite compatible with Hyper-V and KVM yet, on which the company is making progress now. VMware—The Catalyst of Hyperconvergence Market VMware's server virtualization revolutionized the IT industry, and it has been an early advocate of the hyperconvergd system. Almost all hyperconvergence solutions are made to be compatible with vSphere because ESXi commands the lion's share in the hypervisor market. In 2015, the company released vSAN 6.0 (VMware's own SDS solution), which has been well-received. VMware's EVO:RAIL is a noteworthy product that competes against Nutanix's solution. The software includes vSphere, vSAN and other management features. However, customers have to pay for the vSphere licensing separately on the top of EVO:RAIL licensing. Therefore, many customers see it as too expensive to deploy. EVO:RAIL has greatly raised market awareness of the hyperconvergence market due to the central role VMware has played in the server virtualization. VMware has a strong vision and a clear roadmap to provide a complete solution for the next-generation IT infrastructure, also known as Software Defined Datacenters. For example, VMware has released EVO:RACK with NSX integrated recently. NSX is its proprietary software-defined networking solution.

■ Product Offerings: Software only, EVO:RAIL/vSAN

■ Software-Defined Storage: VSAN that is embedded in vSphere with limited support for advanced data services like inline deduplication and compression

■ Hypervisor: Compatible with vSphere only

■ Management Feature: vCenter and EVO Management web client

■ Cloud Readiness: Not available

■ Key Features: vMotion and Storage vMotion to enable data mobility; stretched cluster

■ Sales Model: Software only or pre-installed in other vendors' appliances We note vMotion is an important feature that enables VM mobility and high availability. This feature is heavily used in both Nutanix's and SimpliVity's solutions.

Nutanix Inc. (NTNX) 57 25 October 2016

Figure 107: Nutanix product provides complete features

Representative product NX Series/XCP Ominicube/OminiStack vSAN/EVO:RAIL

Dell, Fujitsu, SuperMicro, OEM partner Dell/SuperMicro Cisco/Lenovo EMC, Hitachi HDS

Delivery method Appliance/Software Appliance Software only

Minimum nodes/ Start with 3 nodes, Start with 1 node, Start 4 nodes (1 block), Scaling method 1 node each time 1 node each time 4 nodes each time

Maximum nodes per cluster Unlimited 32 nodes 32 nodes (4 Block)

Storage virtualizaiton Ominitack Vritual Controller vSAN embedded in vSphere Control VM on each node architecture (OVC) on each node kernel

Caching/Write (OpLog for Caching/write Flash use Caching smaller random data) (for all writes)

ESXi/Hyper-V/KVM Compatible hypervisors Focus on ESXi ESXi only Acropolis Hypervisor

Cloud interoperativity Replicate backups to AWS Replicate backups to AWS Not available

Majority data kept/moved ajacent Data locality Not available Not available to VM Inline for Flash Inline for all data, offload to PCIe Deduplication and post-process for capacity Not available card tier Inline for large sequential data, Compression post process for smaller random Inline for all data Not available data

API support REST API, Java SDK No API, cmd line for VSA Extension of vSphere API

Data protection/ Resiliency Factor (RF) based/ RAID based/ vSphere backup API/ High availability Block awarenss No rack awarenss Rack awareness

Integrated using snapshot Integrated, stored in local Not integrated, rely on Integrated VM backup based on RF replicated to remote sites vSphere API

Available via vCenter Multi Cluster Mgmt Available via Prism Central Not available when clusters are linked

VM snapshot replication/ VM snapshot replication/ Multi-site disaster recovery Not available global deduplication global deduplication

Software upgrade One click, non-disruptive Manual Tied to vSphere upgrade

Data locality, data tiering, Other features Data teiring, load balance Data teiring, load balance load balance

Oministack Accelerator Comments Software defined Hypervisor lock-in PCIe card

Source: Company data, Credit Suisse estimates.

Nutanix Inc. (NTNX) 58 25 October 2016

Justifying the Solution—TCO & ROI Up until now, we have detailed why there is a need for hyperconvergence and what the Nutanix technology offers. The key issues that IT CIOs face when implementing any new IT solution are its economics and benefits. We see Nutanix's solution compelling for the following reasons. Direct TCO Savings and Improved ROI: As we detail in the following text, Nutanx's solution can lower TCO by as much as 60%, with key savings coming from infrastructure cost reduction and gains in business productivity. The ROI can be improved to 510% in 5 years. The Indirect Benefits: By employing hyperconvergence solutions, IT organizations can now free up more resources for application development and business innovation. Below is how an IT manager described the impact of Nutanix's solution in his organization: "With Nutanix, we are doing far more projects for our business units… instead of spending 65% of our time running things, we are spending 65% working on the business… So we are become an enabler rather than a hindrance." In order to benchmark both the cost and the benefit of the Nutanix solution, we cite below a survey done by IDC, sponsored by Nutanix and Dell. We believe this study could help to illuminate the value of the Nutanix solution. Survey Background In the study, the business value is benchmarked in terms of total cost of ownership (TCO) and ROI. The survey interviewed 13 organizations: ten organizations using Nutanix's XCP solution and three using Dell XC web-scale appliances. Figure 108 summarizes some key characteristics of these organizations. On average, the Nutanix solution has helped organizations to achieve 58% in TCO savings and a 510% ROI. Figure 108: Nutanix solutions environment of interviewed organizations Average Median Range # of users 2350 400 45-18,000 # of business apps 31 15 1-150 # of sites 2.2 2 1-5 # of clusters 3.3 3 1-8 # of nodes 25.5 14 4-150 # of virtual servers 277 232 0-850 # of terabytes (data) 128 64 8-500 Source: IDC. In the survey, the cost/benefit analysis was quantified in four areas, and the total cost savings and additional benefits are around $94,321 per 100 users as summarized in Figure 109.

Nutanix Inc. (NTNX) 59 25 October 2016

Figure 109: Average cost savings and additional benefits per 100 users 100,000 90,000 80,000 70,000 60,000 50,000 40,000

30,000 $ per per $ 100 users 20,000 10,000 0 IT IT staff Risk mitigation- Business Total Benefit infrastructure productivity user productivity cost reduction benefits productivity benefits benefits

Source: IDC .

■ IT Infrastructure Cost Reduction: Nutanix's solution is able to scale in a linear fashion. In doing so, IT organizations may avoid overprovisioning. In addition, the company's solution can reduce both its client's datacenter footprint and its operational overhead such as power consumption and cooling.

■ IT Staff Productivity Benefit: Deployment time is reduced as the appliances are in a modular form like Lego pieces. An IT manager is now able to reduce the deployment time from 1-2 months to two days with the Nutanix solution. In addition, the Prism management console has significantly increased the efficiency of IT operation management.

Figure 110: Nutanix TCO 58% lower than traditional solutions over five years 250,000

200,000 58% lower

150,000

100,000 $ per per $ 100 users

50,000

0 Traditional solutions Nutanix solutions

Datacenter HW & OPEX Nutanix deployment--staff time Nutanix management--staff time Nutanix support--staff time User productivity --unplanned downtime

Source: Company data, Credit Suisse estimates.

■ User Productivity Benefit—Risk Mitigation: The disaster recovery feature significantly reduces both the unplanned and planned downtime. For organizations,

Nutanix Inc. (NTNX) 60 25 October 2016

downtime not only consumes engineering time for disruption resolution but also causes revenue loss during that period.

■ Business Productivity Benefit: Nutanix's hyperconverged solution enables IT organizations to proactively respond to business needs by freeing up meaningful amounts of IT resources of business innovation. Figure 110 shows that on average the Nutanix solution can help the organization to reduce $136,000 per 100 users over five years, approximately a 58% reduction. The next benchmark is the ROI of the project investment. We believe ROI is an important factor as IT projects are increasingly used to bring in revenues and boost the bottom line. The methodology in this study was to calculate the additional economic benefit generated by the Nutanix solution through a five-year period or a three-year period, and then discount them at 12%. For the interviewed organizations, average NPV was $279,000 per 100 users over five years or $155,000 per 100 users over three years, which implies a 510% five-year ROI or a 302% three-year ROI (see Figure 111). Figure 111: ROI analysis of Nutanix solution 5-yr avg 5-yr avg 3-yr avg 3-yr avg

per organization per 100 users per organization per 100 users Benefit (discounted) 784,622,700 333,882 486,029,350 206,821 Investment (discounted) 128,545,000 54,700 120,829,950 51,417 NPV 656,077,700 279,182 365,199,400 155,404 ROI 510% 510% 302% 302% Payback period 7.5 7.5 7.5 7.5 Discount rate 12% 12% 12% 12% Source: IDC.

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Seasoned executive team & stable owner base We believe Nutanix now have a highly incentivized executive team as well as an experienced board that enables the company to continue the fast growth in a highly competitive market. The company also has a stable owner base and has adopted favorable investor policy to support the management to carry out their long term strategy. In addition, substantially all of the owners entered into the lock-up agreement for not selling within 180 days of IPO. Seasoned executive team and experienced board The company has an experienced management team who are incentivized to grow the company to create long term value (see Figure 112). Here we highlight a few of them.

Figure 112: Seasoned management and experienced board of directors Ownership Voting Power Name Position(s) Shares (%) (%) Executive Officers: Dheeraj Pandey Chief Executive Officer and Chairman 11,347,592 8.1 9.0 Duston M. Williams Chief Financial Officer * * * Sudheesh Nair Vadakkedath President 1,817,500 1.3 1.4 Rajiv Mirani Senior Vice President, Engineering * * * Sunil Potti Chief Product and Development Officer * * * David Sangster Executive Vice President, Operations * * * Howard Ting Chief Marketing Officer * * * Non-Employee Directors: Steven J. Gomo Director * * * John McAdam Director * * * Ravi Mhatre Director 27,978,979 20.3 22.4 Jeffrey T. Parks Director 6,174,108 4.5 4.9 Michael P. Scarpelli Director 275,000 * * Bipul Sinha Director * * * Source: Company data, Credit Suisse estimates

Dheeraj Pandey: Mr. Pandey is the co-founder and CEO of Nutanix. He served as Vice President of Engineering at Aster Data Systems (now Teradata Corp.) before founding Nutanix. Mr. Pandey now owns 8.2% of the company with 9% of the voting right. Duston Williams: Mr. Williams serves as CFO of Nutanix. Prior to joining Nutanix, he was CFO of Gigamon, a high growth networking company. Sudheesh Nair Vadakkedath: Mr. Vadakkedath serves as President of Nutanix and serviced as SVP of the sales organization. Before joining Nutanix, he worked as Consulting Storage Architect of IBM. Ravi Mhatre: Mr. Mhatre is a co-founder and managing partner of Lightspeed Venture. Lightspeed is now the largest shareholder of Nutanix. Their investment track record includes Riverbed and Vrisa (acquired by SAP). John McAdam: Mr. McAdam joined Nutanix board since August 2015. He has served as the President and CEO of F5 Networks. Stable owner base & favorable investor policy Nutanix also has a stable shareholder base (see Figure 113). For example, Lightspeed Venture Partners owns 20.3% of the outstanding stock with 22.4% of the voting rights, and is the largest shareholder. Fidelity has 5.4% of ownership with 6% of the voting rights. In

Nutanix Inc. (NTNX) 62 25 October 2016

addition, substantially all of the owners entered into the lock-up agreement for not selling within 180 days of IPO.

Figure 113: Nutanix has a stable shareholder base Name Shares Ownership (%) Voting Power (%) Lightspeed Venture Partners 27,978,979 20.3 22.4 Khosla Ventures 13,274,060 9.6 10.6 Dheeraj Pandey 11,347,592 8.1 9.0 Mohit Aron 10,749,524 7.8 8.6 Blumberg Capital II, L.P 6,997,095 5.1 5.6 Fidelity 7,464,697 5.4 6.0 Riverwood Capital Partners 6,174,108 4.5 4.9 Jeffrey T. Parks 6,174,108 4.5 4.9 Other Class B 32,797,320 23.8 26.8 Floating Class A 14,870,000 10.8 1.2 Source: Company data, Credit Suisse estimates

The company has adopted an investor policy to give the management and pre-IPO owners superior control of the company. Now the company has two classes of equity: Class A offered in IPO and Class B for the pre-IPO shareholders (see Figure 114 and Figure 115).

Figure 114: Stable ownership base with ~10% floating Figure 115: Class B owners have superior control

Floating Class A, 1% Floating Class A, Lightspeed Lightspeed 11% Venture, 20% Venture, 22% Other Class B, 27% Other Class B, Khosla 24% Ventures, 10% Khosla Jeffrey T. Ventures, 11% Parks, 5% Dheeraj Pandey, 8% Mohit Jeffrey T. Riverwood Aron, Dheeraj Parks, 5% Mohit Aron, 8% Capital, 5% 9% Pandey, 9% Riverwood Blumberg Fidelity, 6% Blumberg Capital, 5% Fidelity, 5% Capital, 5% Capital, 6% Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Class B has superior voting rights. The company designated that each Class B share has 10 voting rights vs one voting right of each Class A share. Both classes have the same economic right. The voting rights for all Class A owners are less than 1% of total voting rights. Class B is essentially non-transferable. The company designated that any Class B share that is transferred under normal circumstances will be forced to convert to Class A share, which essentially will lose 9 voting rights upon the transaction.

Nutanix Inc. (NTNX) 63 25 October 2016

Risks Nutanix is a highly valued company with a market cap of ~$5bn despite that the business is still loss making. While we see the stock could be worth $38 per share in our base case scenario, we equally point out there could be meaningful amount of volatility in near and medium term. The company is still loss making for now. We note the company ended F4Q16 with $43mn of operating loss and is expected to generate operating loss for the next two years. However, we believe it is very important for investors to recognize that the company is reinvesting gross margins to expand footprint and that a large part of billings is now recognized on balance sheet instead of P&L. The company is competing with major IT vendors. The company is a leader in the hyperconvergence space and has become a credible IT infrastructure vendor. However, the company is now competing with major IT vendors like Dell-EMC, HPE, VMware and NetApp. We note HPE has become active in the hyperconvergence space with a sharper focus after shedding off ES and Software. The market is becoming more competitive now. OEM partnership with Dell is complicated by the Dell-EMC consolidation. Nutanix's partnership with Dell is highly successful. We estimate Dell now contribute about 11-15% of Nutanix's total billings. Nutanix's Software Defined Storage (SDS) solution and hyperconvergence directly compete with EMC and VMware's offerings. Now after the close of Dell-EMC deal, EMC is a part of Dell and Dell has the majority ownership in VMware. The good news is Dell seems to be committed to the OEM partnership and has extended the partnership to 2021. TAM is evolving over time. Last year, the company claimed a TAM of $32bn and this year they are aiming at a $100bn TAM with all x86 server market included. We think TAM could be changing fast, especially under the influence of the public cloud, which could impact the company's positioning over time. Valuation could be volatile in response to the short term growth profile and profitability. Obviously Nutanix is a highly valued stock helped by its fast growth and good cash flow generation. However, as market is closely looking for the business performance, there could be meaningful volatility ahead.

Nutanix Inc. (NTNX) 64

(NTNX) Inc. Nutanix Figure 116: CS Nutanix model

FY Ending: July 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17E 2Q17E 3Q17E 4Q17E 1Q18E 2Q18E 3Q18E 4Q18E FY 2014 FY 2015 FY 2016 FY 2017E FY 2018E In millions except EPS Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Revenue Product revenue 17.8 29.4 32.2 34.1 39.1 48.1 53.6 60.0 70.4 81.2 90.0 109.2 127.5 133.8 147.1 154.5 188.4 196.6 207.8 214.2 113.6 200.8 350.8 563.0 807.1 Support revenue 2.0 2.8 3.8 5.0 6.9 8.7 10.9 14.1 17.4 21.5 24.7 30.6 37.1 42.6 48.5 53.6 67.1 74.4 82.3 89.9 13.6 40.6 94.2 181.8 313.7 Total revenues 19.8 32.2 36.0 39.1 46.1 56.8 64.5 74.1 87.8 102.7 114.7 139.8 164.6 176.4 195.6 208.2 255.5 271.0 290.2 304.1 127.1 241.4 445.0 744.8 1,120.9 %Product revenue 90% 91% 89% 87% 85% 85% 83% 81% 80% 79% 78% 78% 77% 76% 75% 74% 74% 73% 72% 70% 89% 83% 79% 76% 72%

%Support revenue 10% 9% 11% 13% 15% 15% 17% 19% 20% 21% 22% 22% 23% 24% 25% 26% 26% 27% 28% 30% 11% 17% 21% 24% 28% Y/Y % change 296.3% 437.1% 414.2% 185.6% 132.4% 76.3% 79.2% 89.6% 90.7% 80.8% 77.8% 88.6% 87.5% 71.7% 70.6% 48.9% 55.2% 53.7% 48.3% 46.1% 301% 90% 84% 67% 50%

Q/Q % change 44.8% 62.6% 11.7% 8.6% 17.8% 23.3% 13.6% 14.9% 18.5% 17.0% 11.7% 21.9% 17.8% 7.1% 10.9% 6.4% 22.7% 6.1% 7.1% 4.8%

Product COGS (non-GAAP) 8.8 14.3 15.0 14.2 15.7 19.1 21.6 24.2 27.5 29.9 33.3 42.4 49.3 51.1 55.9 57.4 71.9 73.5 75.9 76.3 52.3 80.5 133.2 213.7 297.6 Support COGS (non-GAAP) 1.2 1.9 2.3 3.0 4.0 4.5 5.0 5.8 7.1 7.7 9.7 11.7 14.5 16.6 18.9 20.9 26.2 29.0 32.1 35.1 8.3 19.3 36.3 70.9 122.4 Total COGS (non-GAAP) 9.9 16.2 17.3 17.2 19.7 23.6 26.7 30.0 34.7 37.6 43.1 54.1 63.8 67.7 74.8 78.3 98.0 102.5 108.0 111.4 60.6 99.9 169.4 284.6 419.9

Total gross profit (non-GAAP) 9.9 16.1 18.7 21.9 26.4 33.2 37.8 44.1 53.1 65.1 71.6 85.7 100.8 108.6 120.8 129.9 157.5 168.6 182.2 192.7 66.5 141.6 275.5 460.2 700.9 Total gross profit (GAAP) 9.9 16.0 18.6 21.7 26.2 33.0 37.5 43.8 52.7 64.8 71.3 85.4 99.1 106.6 118.5 127.3 154.1 164.9 178.2 188.7 66.2 140.5 274.2 451.5 685.9 Gross margin (non-GAAP) 49.9% 49.8% 51.9% 56.0% 57.3% 58.5% 58.7% 59.5% 60.5% 63.4% 62.5% 61.3% 61.2% 61.6% 61.8% 62.4% 61.6% 62.2% 62.8% 63.4% 52.3% 58.6% 61.9% 61.8% 62.5% Gross margin (GAAP) 49.7% 49.7% 51.6% 55.6% 57.0% 58.1% 58.1% 59.1% 60.0% 63.1% 62.2% 61.1% 60.2% 60.5% 60.6% 61.2% 60.3% 60.8% 61.4% 62.0% 52.1% 58.2% 61.6% 60.6% 61.2%

Research and development (non-GAAP) 6.0 7.4 10.2 12.2 13.2 15.4 18.4 21.1 22.2 24.4 29.9 33.6 35.6 38.7 42.1 45.9 47.2 50.4 53.2 51.3 35.8 68.1 110.1 162.3 202.2 % of revenues (non-GAAP) 30.5% 22.8% 28.4% 31.1% 28.6% 27.2% 28.5% 28.5% 25.3% 23.8% 26.0% 24.1% 21.6% 21.9% 21.5% 22.0% 18.5% 18.6% 18.3% 16.9% 28.2% 28.2% 24.8% 21.8% 18.0% Y/Y % change (non GAAP) 117.8% 109.7% 80.2% 73.3% 68.9% 58.1% 62.2% 59.5% 60.3% 58.6% 41.0% 36.4% 32.4% 30.3% 26.4% 11.9% - 90.3% 61.7% 47.4% 24.5% Stock based compensation Expense (R&D) 0.4 0.4 0.7 0.8 1.141 1.281 1.391 1.598 1.629 1.612 1.519 1.499 2.5 2.6 2.9 3.1 3.8 4.1 4.4 4.6 2.2 5.4 6.3 11.2 16.8 Research and development (GAAP) 6.4 7.8 10.9 13.0 14.3 16.7 19.8 22.7 23.9 26.0 31.4 35.1 38.1 41.4 45.1 49.0 51.0 54.5 57.6 55.9 38.0 73.5 116.4 173.5 219.0 R&D % of revenues (GAAP) 32.3% 24.1% 30.2% 33.3% 31.1% 29.4% 30.7% 30.6% 27.2% 25.3% 27.4% 25.1% 23.1% 23.4% 23.0% 23.5% 20.0% 20.1% 19.8% 18.4% 29.9% 30.4% 26.2% 23.3% 19.5% Y/Y % change (GAAP) 123.6% 115.7% 82.1% 74.3% 66.8% 55.7% 58.5% 54.9% 59.7% 58.9% 43.5% 39.5% 33.9% 31.8% 27.8% 14.1% - 93.3% 58.3% 49.1% 26.2%

Sales and marketing (non-GAAP) 15.7 20.2 25.0 30.0 32.0 35.7 40.9 46.7 56.5 64.2 73.8 86.0 88.1 95.7 104.2 113.5 121.9 130.4 138.8 147.3 90.9 155.4 280.5 401.4 538.3 % of revenues 79.3% 62.6% 69.4% 76.7% 69.6% 62.9% 63.4% 63.0% 64.3% 62.5% 64.4% 61.5% 53.5% 54.3% 53.2% 54.5% 47.7% 48.1% 47.8% 48.4% 71.5% 64.3% 63.0% 53.9% 48.0% Y/Y % change (non GAAP) 103.9% 77.3% 63.7% 76.3% 79.5% 80.6% 84.2% 56.0% 49.2% 41.1% 31.9% 38.4% 36.2% 33.3% 29.8% - 71.0% 80.5% 43.1% 34.1% Stock based compensation Expense (Sales & Mkting) 0.3 0.3 0.6 0.9 1.090 1.408 1.908 2.068 2.118 1.964 2.029 1.895 3.3 3.5 3.9 4.2 5.1 5.4 5.8 6.1 2.1 6.5 8.0 14.9 22.4 Sales and marketing (GAAP) 16.0 20.5 25.6 30.9 33.1 37.2 42.8 48.8 58.6 66.1 75.8 87.9 91.4 99.2 108.1 117.6 127.0 135.8 144.6 153.3 93.0 161.8 288.5 416.3 560.7 % of revenues 80.9% 63.6% 71.0% 79.1% 71.9% 65.4% 66.3% 65.8% 66.7% 64.4% 66.1% 62.9% 55.5% 56.3% 55.2% 56.5% 49.7% 50.1% 49.8% 50.4% 73.2% 67.0% 64.8% 55.9% 50.0% Y/Y % change (GAAP) 106.7% 81.2% 67.4% 57.7% 76.9% 78.0% 77.3% 80.3% 56.0% 50.1% 42.5% 33.8% 39.0% 36.8% 33.8% 30.4% - 74.0% 78.3% 44.3% 34.7%

General and administrative (non-GAAP) 2.3 2.4 3.8 3.8 4.5 4.3 5.4 5.6 6.1 6.8 7.6 9.3 9.0 9.7 10.6 11.5 12.4 13.3 14.1 15.0 12.3 19.7 29.8 40.9 54.8 % of revenues 11.5% 7.5% 10.6% 9.8% 9.8% 7.5% 8.3% 7.5% 7.0% 6.6% 6.6% 6.6% 5.4% 5.5% 5.4% 5.5% 4.9% 4.9% 4.9% 4.9% 9.7% 8.2% 6.7% 5.5% 4.9% Y/Y % change (non GAAP) 98.0% 76.8% 39.9% 35.6% 59.5% 41.6% 46.1% 43.0% 39.6% 24.3% 38.4% 36.2% 33.3% 29.8% - 59.7% 51.2% 36.9% 34.1% Stock based compensation Expense (G&A) 0.1 0.2 0.3 0.6 0.859 1.038 1.017 1.260 1.237 1.029 1.168 0.998 1.6 1.8 2.0 2.1 2.6 2.7 2.9 3.0 1.1 4.2 4.4 7.4 11.2 General and administrative (GAAP) 2.4 2.6 4.1 4.4 5.4 5.3 6.4 6.8 7.4 7.8 8.8 10.3 10.6 11.5 12.6 13.6 15.0 16.0 17.0 18.0 13.5 23.9 34.3 48.3 66.0 % of revenues 12.1% 8.0% 11.5% 11.2% 11.7% 9.3% 9.9% 9.2% 8.4% 7.6% 7.6% 7.4% 6.4% 6.5% 6.4% 6.5% 5.9% 5.9% 5.9% 5.9% 10.6% 9.9% 7.7% 6.5% 5.9% Y/Y % change (GAAP) 123.8% 105.5% 54.6% 37.0% 47.7% 37.3% 43.9% 46.7% 43.3% 32.5% 41.0% 38.9% 35.6% 32.3% 77.1% 43.4% 41.0% 36.6% Total operating expenses (non-GAAP) 24.0 29.9 39.0 46.0 49.7 55.4 64.7 73.3 84.8 95.4 111.3 128.9 132.7 144.2 156.9 170.9 181.5 194.1 206.2 213.6 139.0 243.2 420.5 604.6 795.3 % of revenues (Non GAAP) 121.3% 92.9% 108.4% 117.6% 108.0% 97.6% 100.2% 99.0% 96.6% 92.9% 97.0% 92.2% 80.6% 81.7% 80.2% 82.1% 71.0% 71.6% 71.0% 70.2% 109.3% 100.7% 94.5% 81.2% 71.0% Total operating expenses (GAAP) 24.8 30.8 40.6 48.3 52.8 59.2 68.9690 78.3 89.8 100.0 116.0000 133.3 140.1 152.1 165.7 180.3 193.0 206.3 219.2 227.3 144.5 259.2 439.2 638.2 845.7 % of revenues 125.3% 95.7% 112.7% 123.6% 114.7% 104.2% 106.9% 105.6% 102.3% 97.4% 101.1% 95.4% 85.1% 86.2% 84.7% 86.6% 75.5% 76.1% 75.5% 74.7% 113.7% 107.4% 98.7% 85.7% 75.5% Total stock based compensation expense 0.8 0.9 1.6 2.5 3.3 4.0 4.7 5.3 5.4 5.0 5.0 4.7 9.2 9.9 11.2 11.9 14.9 15.8 17.0 17.8 5.5 16.1 18.7 33.5 50.4 % of revenues 4.1% 2.9% 4.5% 6.3% 7.1% 7.0% 7.2% 7.1% 6.1% 4.8% 4.4% 3.3% 5.6% 5.6% 5.7% 5.7% 5.8% 5.8% 5.9% 5.8% 4.4% 6.7% 4.2% 4.5% 4.5%

Total operating expenses (non-GAAP) Y/Y % change 106.8% 85.2% 65.7% 59.5% 70.6% 72.0% 72.1% 75.8% 56.4% 51.1% 41.0% 32.5% 36.8% 34.6% 31.4% 25.0% 75.0% 72.9% 43.8% 31.5% Total operating expenses (GAAP) Y/Y % change 112.7% 91.9% 70.0% 62.0% 70.1% 69.0% 68.2% 70.3% 56.0% 52.1% 42.8% 35.2% 37.7% 35.6% 32.3% 26.1% 79.4% 69.4% 45.3% 32.5%

Operating income (non-GAAP) -14.2 -13.9 -20.3 -24.1 -23.3 -22.2 -26.8 -29.3 -31.7 -30.3 -39.7 -43.3 -31.9 -35.5 -36.0 -41.0 -24.0 -25.5 -24.0 -20.9 -72.5 -101.6 -144.9 -144.4 -94.4 Operating margin (non-GAAP) -71.4% -43.1% -56.5% -61.6% -50.7% -39.1% -41.6% -39.5% -36.1% -29.5% -34.6% -30.9% -19.4% -20.1% -18.4% -19.7% -9.4% -9.4% -8.3% -6.9% -57.0% -42.1% -32.6% -19.4% -8.4% Operating income (GAAP) -15.0 -14.8 -22.0 -26.6 -26.6 -26.2 -31.5 -34.5 -37.1 -35.2 -44.7 -47.929 -41.0 -45.5 -47.2 -52.9 -38.9 -41.3 -41.0 -38.6 -78.3 -118.8 -165.0 -186.6 -159.9 Operating margin (GAAP) -75.6% -46.0% -61.0% -67.9% -57.7% -46.1% -48.8% -46.6% -42.3% -34.3% -39.0% -34.3% -24.9% -25.8% -24.1% -25.4% -15.2% -15.3% -14.1% -12.7% -61.6% -49.2% -37.1% -25.1% -14.3%

EBITDA (non-GAAP) -12.0 -11.4 -17.0 -20.5 -19.7 -18.2 -22.7 -24.4 -26.2 -24.0 -32.5 -35.8 -23.8 -26.1 -25.7 -29.8 -12.0 -11.9 -8.9 -4.4 -60.9 -85.0 -118.5 -105.4 -37.2 EBITDA margin (non-GAAP)

Other income/expense (non-GAAP) -0.2 -0.9 -1.4 -2.6 -1.7 -1.3 -0.7 -2.2 -0.9 2.6 -2.1 -1.0 -1.0 -1.0 -1.0 -1.0 -1.0 -1.0 -1.0 -1.0 -5.1 -5.8 -1.3 -4.0 -4.0 Other income/expense (GAAP) -0.2 -0.9 -1.4 -2.6 -1.7 -1.3 -0.7 -2.2 -0.9 2.6 -2.1 -1.0 -1.0 -1.0 -1.0 -1.0 -1.0 -1.0 -1.0 -1.0 -5.1 -5.8 -1.3 -4.0 -4.0

Pre-tax income (Non GAAP) -14.4 -14.8 -21.7 -26.7 -25.0 -23.5 -27.5 -31.4 -32.6 -27.6 -41.8 -44.2 -32.9 -36.5 -37.0 -42.0 -25.0 -26.5 -25.0 -21.9 -77.5 -107.4 -146.2 -148.4 -98.4 % of revenues -72.7% -45.9% -60.3% -68.2% -54.3% -41.3% -42.6% -42.4% -37.1% -26.9% -36.4% -31.6% -20.0% -20.7% -18.9% -20.2% -9.8% -9.8% -8.6% -7.2% -61.0% -44.5% -32.9% -19.9% -8.8% Pre-tax income (GAAP) -15.2 -15.7 -23.3 -29.1 -28.3 -27.5 -32.1 -36.7 -38.0 -32.6 -46.8 -48.9 -42.0 -46.5 -48.2 -53.9 -39.9 -42.3 -42.0 -39.6 -83.4 -124.6 -166.3 -190.6 -163.9

Income tax expense (non GAAP) 0.1 0.1 0.2 0.3 0.2 0.4 0.5 0.5 0.5 0.6 0.0 1.0 1.1 1.1 1.1 1.1 1.6 1.6 1.6 1.6 0.6 1.5 2.2 4.4 6.4 Tax Rate (Non GAAP) -0.5% -0.5% -0.7% -1.1% -1.0% -1.5% -1.7% -1.5% -1.6% -2.2% 0.0% -2.4% Income tax expense (GAAP) 0.1 0.1 0.2 0.3 0.2 0.4 0.5 0.5 0.5 0.6 0.0 1.0 1.1 1.1 1.1 1.1 1.6 1.6 1.6 1.6 0.6 1.5 2.2 4.4 6.4 Tax rate (GAAP) -0.5% -0.5% -0.6% -1.0% -0.9% -1.3% -1.5% -1.3% -1.4% -1.9% 0.0% -2.1%

Net income (non-GAAP) -14.5 -14.9 -21.9 -27.0 -25.3 -23.8 -28.0 -31.9 -33.1 -28.3 -41.8 -45.3 -34.0 -37.6 -38.1 -43.1 -26.6 -28.1 -26.6 -23.5 -78.1 -109.0 -148.4 -152.8 -104.8 Net income (GAAP) -15.3 -15.8 -23.5 -29.4 -28.5 -27.8 -32.6 -37.2 -38.5 -33.2 -46.8 -49.9 -43.1 -47.6 -49.3 -55.0 -41.5 -43.9 -43.6 -41.2 -82.8 -123.0 -164.1 -186.2 -157.5 Net margin (non-GAAP) -73.0% -46.1% -60.7% -69.0% -54.9% -42.0% -43.3% -43.1% -37.7% -27.5% -36.4% -32.4% -20.6% -21.3% -19.5% -20.7% -10.4% -10.4% -9.2% -7.7% -61.5% -45.1% -33.4% -20.5% -9.3%

Diluted Non-GAAP EPS -0.19 -0.17 -0.24 -0.26 -0.20 -0.20 -0.20 -0.22 -0.13 -0.14 -0.13 -0.11 -0.91 -0.86 -0.83 -0.51 Basic Non-GAAP EPS -0.24 -0.22 -0.30 -0.32 -0.26 -0.26 -0.26 -0.29 -0.17 -0.18 -0.16 -0.14 -0.68 -1.08 -1.08 -0.65 Diluted GAAP EPS -0.22 -0.20 -0.27 -0.29 -0.25 -0.26 -0.26 -0.29 -0.21 -0.22 -0.21 -0.20 -0.98 -1.05 -0.83 Basic GAAP EPS -0.28 -0.25 -0.34 -0.36 -0.33 -0.33 -0.34 -0.37 -0.27 -0.27 -0.27 -0.25 -1.22 -1.37 -1.05

Basic shares outstanding 138.3 131.3 139.3 140.0 129.9 143.0 144.5 150.0 156.4 159.8 163.3 166.7 120.289 137.7 142.1 161.3 Diluted shares outstanding 172.8 165.8 173.8 174.5 173.0 186.1 187.6 193.1 199.5 202.9 206.4 209.8 160.489 172.2 185.2 204.4 Source: Company data, Credit Suisse estimates

25 October 2016 25 October

65

25 October 2016

Companies Mentioned (Price as of 24-Oct-2016) Amazon com Inc. (AMZN.OQ, $838.09) Cisco Systems Inc. (CSCO.OQ, $30.46) Citrix Systems Inc. (CTXS.OQ, $86.17) Commvault Systems Inc. (CVLT.OQ, $53.75) F5 Networks (FFIV.OQ, $118.76) Gartner Inc (IT.N, $88.36) Hewlett Packard Enterprise (HPE.N, $21.68) Hortonworks, Inc. (HDP.OQ, $7.98) Intellia Therapeutics, Inc. (NTLA.OQ, $15.05) Interactive Data (IDC.N^G10, $33.84) nternational Business Machines Corp. (IBM.N, $150.57) Juniper Networks (JNPR.N, $23.66) Lenovo Group Ltd (0992.HK, HK$5.13) Microsoft Corporation (MSFT.OQ, $61.0) Nutanix Inc. (NTNX.OQ, $29.77, OUTPERFORM[V], TP $38.0) Oracle Financial (ORCL.NS, Rs3228.5) Pure Storage (PSTG.N, $12.44) SAP (SAPG.F, €81.386) Salesforce.com Inc. (CRM.N, $75.06) Samsung Electronics (005930.KS, W1,608,000) Splunk (SPLK.OQ, $60.0) Super Micro Comp (SMCI.OQ, $21.7) Toshiba (6502.T, ¥378) VMware Inc. (VMW.N, $73.97)

Disclosure Appendix Important Global Disclosures I, Kulbinder Garcha, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms repre senting the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 1 2-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, wh ich was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products. Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

Nutanix Inc. (NTNX) 66 25 October 2016

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 53% (56% banking clients) Neutral/Hold* 30% (24% banking clients) Underperform/Sell* 17% (47% banking clients) Restricted 0% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors. Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and- analytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

Target Price and Rating Valuation Methodology and Risks: (12 months) for Nutanix Inc. (NTNX.OQ) Method: We rate Nutanix as an Outperform at $38, using a blended valuation of EV/sales based peers' market valuation, and DCF. Blending the two valuation methods, we reach Nutanix PT of $38. We acknowledge that Nutanix is highly valued and subject to volatility, as it is trading on an EV/revenue multiple of 5x. However, In an upside scenario, we see the company could be worth $49 per share. Risk: Risk to our $38 TP and Outperform rating include macro-economic weakness leading to weak IT spend, increased competition, and failure to cross-sell support services and loss of traction in international markets.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections. See the Companies Mentioned section for full company names The subject company (NTNX.OQ) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (NTNX.OQ) within the next 3 months. Please visit https://credit-suisse.com/in/researchdisclosure for additional disclosures mandated vide Securities And Exchange Board of India (Research Analysts) Regulations, 2014 Credit Suisse may have interest in (ORCL.NS) For date and time of production, dissemination and history of recommendation for the subject company(ies) featured in this report, disseminated within the past 12 months, please refer to the link: https://rave.credit-suisse.com/disclosures/view/report?i=264761&v=5bnqaa3fkirm7gf52a7ci0tan . Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit- suisse.com/sites/disclaimers-ib/en/canada-research-policy.html. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. This research report is authored by: Credit Suisse Securities (USA) LLC ...... Kulbinder Garcha ; Philip Wang ; Sami Badri ; William Chu For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit- suisse.com/disclosures or call +1 (877) 291-2683.

Nutanix Inc. (NTNX) 67 25 October 2016

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