Nutanix surprised Wall Street in 2020 by hiring a new chief executive. But since Rajiv Ramaswami's arrival as CEO in December that year, Nutanix stock has roughly doubled after rebounding from a low set in May 2022 amid business model changes.
Nutanix's "hyperconvergence" software manages network, storage and server infrastructure within internal company data centers as well as cloud-computing platforms.
In an interview with Investor's Business Daily, Ramaswami talks about how U.S. companies are evaluating investments in cloud computing, generative artificial intelligence and other technologies.
Nutanix's main rival, VMware, was sold by Dell Technologies to Broadcom in November.
Also, Hewlett Packard Enterprise in late 2022 shot down speculation it was in acquisition talks with Nutanix.
Nutanix's software runs on servers from HPE, Dell, Lenovo, Cisco and commodity hardware. Cisco in 2023 forged a marketing deal with Nutanix. Also, Nutanix has partnered with cloud-computing service providers Amazon.com and Microsoft but not yet Alphabet's Google.
Having been a high-level executive at VMware, Broadcom and Cisco, Ramaswami knows the competitive landscape.
Recently, Nutanix reported fiscal Q3 results that topped estimates. Management's conservative outlook disappointed investors, sending Nutanix stock down. Shares have clawed back to near Nutanix's 50-day moving average.
This interview was edited for brevity and clarity.
Big Changes In Nutanix's Business Model
IBD: Nutanix has evolved as a company. Its business model changed after the IPO in 2016. You arrived as CEO in late 2020. Where do things stand?
Ramaswami: The company started out as a pioneer in what we called hyperconvergence, which simplified how companies could operate inside of the data centers and run their applications. They sold both hardware and software embedded together as an appliance.
After the company went public, there were two business models changes that happened. The second is just basically being completed right now. The first was to move away from selling hardware, and only sell software. Customers could get a software license from us and keep it as long as they had the hardware (purchased from a computer server maker).
Shift To Subscription Software Licenses
The second change that we're just completing is the changeover to a subscription model. We moved from selling life-of-device software licenses as we called them, or essentially long-duration licenses, to selling subscription licenses. With subscription licenses, customers could opt in for whatever duration they like — one year, two years, three years. Our average contract duration is close to three years at this point.
IBD: How did those changes impact the company's performance?
Ramaswami: When you do a pivot like that in the short term your revenue goes down, your free cash flow goes down. The company raised $750 million in a convertible from Bain to make sure that we have sufficient cash to get through our journey.
Back in late 2020, right after the investment had been raised, was around the time I came in. For me, the set of priorities that we articulated at that point was to complete this subscription business model transformation as a company because that impacts every facet of the company. It impacts how we build product, all of that. We are in the final phase of that subscription transformation. We are getting the leverage that we want from the renewals underlying the business.
Nutanix Stock: Hybrid Cloud Taking Over?
The next priority for me was to simplify our product portfolio and establish a long-term vision for the company, which is for us to be a platform of the future that enables customers to run all their modern applications, including generative AI, and manage all the data right across their data centers, (network) edges and public clouds.
IBD: How does Nutanix fit in as companies mull investments in on-premises infrastructure versus buying cloud-computing services? Many companies now seem focused on a hybrid computing.
Ramaswami: If you sort of go back five years ago, even before Covid, the mindset of CIOs at companies was this big sort of push to go get things done in the public cloud. During Covid, of course, that trend accelerated. But then, as people came out of Covid and looked at the economic realities, they realized that public cloud is a very expensive place to operate at steady state. They realized they could be much more cost effective if they were to run their own operations inside their own data centers.
So now companies are being much, much more careful about saying, "Should I take this to the public cloud or not, or am I better off running it on prem (on premises)." So this has led to a hybrid cloud model, which is you're going to have a mix. You are going to have some workloads in the public cloud.
But companies are investing in on-prem modernization. They want to run and build modern applications on-prem. A lot of enterprise, sensitive information is going to be remaining in data centers.
Nutanix Stock: AI Infrastructure
IBD: How is the emergence of generative AI going to impact company investment decisions? It seems like only the biggest companies can invest in data-center liquid-cooling technologies like the cloud-computing giants. How will companies launch custom AI projects using their proprietary data?
Ramaswami: There's going to be a small number of companies that are able to actually make massive investments to go train these (large language) models and invest in these massive server farms with computer clusters and so forth. The vast majority of enterprise customers, in my view, cannot do that.
So AI will have significant usage inside of data centers and edges. Not all enterprise data is going to be in the public cloud.
If you're a manufacturing company, you're getting a lot of data out of your machines. If you're a retail company, you're getting a lot of checkout information sitting at the very edges. And if you're a mining company, you're analyzing data from mining sites.
What (companies) can do is to take models that are already pre-trained and fine-tune these models using their own data on much smaller server clusters. So they will also not necessarily go with the largest models there are.
There is a resurgence of interest in smaller, pre-trained models, because smaller models are actually more computer cost effective. I think in the enterprise it's going to be more about this fine-tuning and inferencing on the edge, not about training these massive models, which only a few companies can do.
Nutanix Stock: Dell, Cisco Marketing Deals
IBD: What are the dynamics of the hyperconvergence market given that Dell has sold VMware to Broadcom? Nutanix has forged marketing deals with Cisco and Dell, but both partnerships have issues, according to analysts.
Ramaswami: So Cisco is all-in with us. Their share of the server market is relatively small but they are looking at this as an opportunity for them to gain additional share in the market. So the good news is that they are done with a competing offering in the market. We are very happy about that.
Dell's philosophy has been to offer choice to their customers.
Keep in mind that Dell is one of the largest players in data storage. It is not necessarily in their best interest to go replace those storage arrays with modern architectures, which will reduce their margin.
For Nutanix Stock, Is Red Hat Friend Or Foe?
When it comes to this hyperconvergence, they will offer a VMware version and a Nutanix version and they will let the customer decide.
IBD: Another data-center player is IBM's Red Hat. How much synergy or competition is there between Nutanix and Red Hat?
Ramaswami: Both of us believe very much in this hybrid multicloud vision. They are focused on the higher layers of the stack when it comes to the modern applications, and we are focused in the lower layers of the stack.
When I say lower layers, I mean infrastructure and Kubernetes (software container technology). Red Hat has some Kubernetes, which is where the overlap is. But they also move further up the chain in terms of focusing and catering to developers which we do not. So there is very much synergy. Red Hat is completely certified and fully interoperable with our platform.
Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on artificial intelligence, cybersecurity and cloud computing.
