Rajiv Ramaswami On Nutanix Stock, New Chairman And Driving Profitability
CEO Rajiv Ramaswami explains his stance on Nutanix’s stock, the company’s new chairman of the board, and how Nutanix’s total addressable market will balloon to $61 billion.
Rajiv Ramaswami: Why Customers, Partners And Investors Should Be Bullish About Nutanix
Nutanix CEO Rajiv Ramaswami is thrilled about the future ahead with projections of massive sales growth, becoming cash flow positive in 2022 and the firm’s total addressable market (TAM) ballooning to $61 billion over the next few years.
With Nutanix’s stock up 62 percent over the past 12 months, Bain Capital injecting $750 million of funding into the company, and the global COVID-19 pandemic showcasing the critical importance of Nutanix’s technology, Ramaswami is focused on elevating the company to the next level.
“The combination of everything we’re doing will truly help us get to cash flow positivity by the end of calendar year 2022,” said Ramaswami in an interview with CRN.
Although Nutanix typically posts single to double-digit quarterly revenue growth, net losses have been recorded over the past several years due to its transformation into a subscription and SaaS company while completely leaving the IT hardware market. However, the San Jose, Calif.-based hyperconverged infrastructure and hybrid cloud superstar has shaken up its leadership team and positioned itself to become a global software leader in the new hybrid and multi-cloud world.
In an interview with CRN, Ramaswami talks about his stance on Nutanix’s stock, his company’s new chairman of the board, and how Nutanix’s TAM will increase from $39 billion in 2020 to $61 billion by 2025.
Many IT CEOs view their company’s stock in different ways. As the new CEO, do you care about Nutanix’s stock price on a day-to-day basis? Do you worry about it?
I’ll tell you, I don’t manage the company for day-to-day stock performance. The markets do what the markets do. Some days the stock is up, some days the stock is down. But what I need to focus on and what I’m focused on, is really making sure that we are in the best position to talk about what we are going to do in terms of our revenues and earnings, and then beat them. We want to have continued reporting that we beat them every quarter. Then we talk about our priority and goals and how we’re going to execute on those: build the right products for our customers, drive sales growth and drive growth profitability; then do the right thing for our customer. Ultimately, if we do the right things for our customer, then the rest will follow.
So look, my view is rather than talk about the day-to-day Nutanix stock price, it’s more about, ‘Let’s execute on our vision and the priorities we’ve laid out. The stock will find its path overtime.’
Nutanix says it will become a positive cash flow company by 2022, in part, by lowering sales and marketing costs. Does that mean more layoffs are ahead?
We certainly have no plans of additional layoffs. We did talk at our last earnings call about some reductions in our sales force, but the sales force and marketing efficiency [strategy] is all about getting leverage through renewals. We’re talking about how sales and marketing expenses as a function of revenue are coming down. For that coming down, we continue to drive productivity through having more bundled solutions versus individual products; scaling through channel partners; as well as the renewal business coming back up in a significant way. So those are the drivers for why our sales and marketing costs as a function of revenue are going down.
Keep in mind that the revenue is going up 25 percent. So we don’t need to increase our sales and marketing cost in proportion because a lot of that is just the fact that more and more of the business is coming through renewals, which means that we can keep hold of our sales and marketing cost, but you get a lot more leverage. That’s why the overall sales and marketing cost are lowering in the next few years compared to where we are at today. And again, lower as a percentage of Nutanix revenue, not in absolute terms. We are not reducing our absolute dollars that we spend on sales and marketing.
Nutanix is projecting 25 percent growth in annual contract value (ACV) billings through fiscal year 2025. But how does Nutanix get to a path of profitability by the end of calendar year 2022?
If you look at the growth, so far, most of our growth as we transition to the subscription business – it’s all been new business. As we sold those contracts and those contacts come up for renewal over the next few years, we have given our investors a modeling of what to expect from a renewal perspective.
Our renewal business is going at about a 50 percent CAGR through our fiscal year 2025. Now that renewal business is already contracts that we sold to our customers, and when the terms end, they come up for renewal. We can prosecute that renewal business at a much lower cost compared to new business. So what we said was, the cost to get a renewal is 80 percent lower than the cost to get new business. So as that renewal business grows, that creates a lot of leverage from an expense modeling perspective. We’re able to grow that space without spending more money to get that business. That’s one big driver of cash flow positivity.
What’s the other?
The other big driver is, look, we still have new business growing and that continues to grow very nicely. We are continuing to work on improvements on sales force productivity around how we can bring our products together and solutions, and better leverage our partners going forward more so than we have in the past. All of that helps in terms of providing more scale and more efficiency in our go-to-market machine. So that combination is really helping us get to cash flow positivity by the end of calendar 2022.
What does a Nutanix out of the red look like? What changes will you be able to make?
Ultimately, any business at the end of the day needs to do two things: deliver value to our investors and shareholders, and delight our customers. We’re already delighting our customers and will keep doing that going forward. Now as we’ve gone through these transitions, we are now really poised to get the benefits of moving to the subscription business model and becoming a company that not only grows, but also drives growth with profitability along with it.
What that allows us to do over time is: it helps us continue to grow healthily, and it continues to help us reinvest in the business without having to raise additional cash. We don’t have to go out there to raise more equity or raise more cash once we get to that sustainability cash flow positive, operating income positive – then the business itself is steady. It continues to build up.
It gives us a lot more freedom in terms of what we can do and the ability to expand the business adjacently down the road. So all in all, it helps position Nutanix to be a long, significant enterprise software company that our customers can depend on and we can help them on their journey to the cloud.
Nutanix predicts its total addressable market (TAM) to increase from $39 billion in 2020 to $61 billion in 2025. Where is that coming from and what specific markets are you excited about?
I’m excited about almost every element of our growing TAM. Starting with our core business, let’s not forget that the bulk of our revenue is coming from our core HCI [hyperconverged infrastructure]. We pioneered and are the market leader in HCI. There’s still a lot of room for growth in terms of HCI easing in to capture all enterprise workloads. So right there in our core business, I’m excited about the fact that we can continue to grow with HCI into the existing markets that we’re playing in. While at the same time extending HCI as we know it today, to become this hybrid, multi-cloud platform. So that extension and taking it to be the true hybrid cloud platform is a big opportunity for us. So we’re excited about that.
On top of that we talked about some of these emerging products and new areas that we’re playing in. I’m quite excited about database automation and database-as-a-service. That’s a relatively new area for us with our Nutanix Era product. It’s doing very well. We’re focused on scaling that business and tapping into a large market opportunity for us. That’s a good one.
Unified storage, the ability to manage all sets of data on top of our platform is big. Both aligned with our platform, but also standalone with file and object – I think that’s a good market.
Cloud management is another one. It’s got to be done right: operations, automation – everybody has to do that. It’s a nice attach on top of the core platform and gives us some incremental ability to upsell and sell a fuller stack.
Disaster recovery as-a-service. We have that as-a-service that’s been operating. It’s relatively small for us now, but we see a lot of opportunity for growth. And also extending Disaster recovery as-a-service to the public cloud.
So these are all quite substantially opportunities for us with a lot of headroom. So that’s where that $61 billion market opportunity that we talked about came from. Fundamentally, we are not limited by the size of the market. It’s just about how quickly and how fast we can executive to grow into those markets.
Talk about the decision in selecting Virginia Gambale as Nutanix’s new chairman of the board.
She joined the board last year, then became the lead independent director in December as we went through the CEO transition and Dheeraj stepped off the board. Over the last six months, I’ve gotten to know her really well. We worked together very well.
She was a former customer as she was in the financial services industry for awhile, and a former CIO. So she understands our business, she understands our relevance to customers and the market. Then she was also technology investor so she understands the tech industry and the landscape very well.
So in the past six months, we’ve been working quite closely together and she’s been helping us put structure and governance on the board and working with us at Nutanix as we go forward with our strategy and execution. All of the board, including myself, believe she’s the correct next person to chair the board and bring us together on this journey forward. I’m thrilled to be working with her.