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Nutanix IPO looks like a go

Nutanix took the last step before completing its initial public offering today when it set the target price range for its offering.

Nutanix filed an S-1 registration form with the Securities and Exchange Commission detailing plans to sell 14 million shares of Class A stock for between $11 and $13 per share. The hyper-converged market leader seeks to raise $209 million through the IPO. A Nutanix IPO price of $13 would make the company worth $1.8 billion. That falls below its $2 billion valuation at the time of its last funding round in 2015.

Nutanix first filed to go public last December, but the Nutanix IPO was stalled by a slow IPO market. There has only been a handful of tech IPOs in 2016.

One of Nutanix’s founders and its original CTO, Mohit Aron, said Nutanix executives and its investors likely were scared off by the poor IPO market. He said the current IPO market is less forgiving of a company still losing money despite strong revenue growth. Aron holds 10.7 million shares of shares of Nutanix common stock but no longer works for the vendor.

“Investors used to look at growth in past years,” Aron said. “This year, investor sentiment has turned and they’ve started looking for investors have started looking for profitability. Maybe Nutanix thought it would show a reduction in losses — which they’ve been showing — so investors would be more lenient towards looking at them.”

Aron said he expects Nutanix will do well in the long term. “Eventually, it’s about a technology that is ground-breaking, solves a real problem and customers are adopting it,” he said. “The technology makes sense. I see hyper-convergence getting adopted every day for primary and secondary storage. Markets go through temporary ups and downs. I think companies will do well when they have strong fundamentals.”

Aron calls Nutanix’s hyper-converged technology “my baby,” although he left in 2013 to start secondary data hyper-converged vendor Cohesity.

Nutanix investors will need patience if they want to see profit. In an SEC filing last week, Nutanix declared “we will continue to incur net losses for the foreseeable future.”

The company has lost a total of $442 million during its history, including losses of $84 million, $126 million and $169 million in the last three fiscal years. Nutanix lost $50 million last quarter after losing $49 million the previous quarter.

Those losses came despite impressive revenue growth. Its revenue increased 84% year-over-year to $445 million during the last fiscal year, which ended July 31. For the quarter that ended July 31, it reported $140 million in revenue – a 22% increase over the same quarter last year – and has $255 million of revenue in the first two quarters of this calendar year. Most of Nutanix’s expenses come from sales and marketing — $288 million of its $439 million in expenses last fiscal year and $88 million of its $133 million in the last quarter came from sales and marketing.

The Nutanix IPO filing indicated no plans to decrease that spending. Nutanix claimed: We intend to grow our base of 3,768 end-customers, which we believe represents a small portion of our potential end-customer base, by increasing our investment in sales and marketing, leveraging our network of channel partners and furthering our international expansion. One area of specific focus will be on expanding our position within the Global 2000, where we currently have approximately 310 end-customers.”

Aron said Nutanix needs to pursue a growth strategy if it is to hold off competitors such as Dell EMC, Hewlett Packard Enterprise and Cisco. That includes research and development as well as sales and marketing. Nutanix is expanding its technology to become a platform of choice for companies looking to build internal enterprise clouds.

“I think we all know no company can just rest on its laurels and milk a technology for a while,” Aron said. “Others catch up eventually. You have to keep innovating.

“I think if they want to become profitable, they can do it next year. If a company wants to, it can put a complete break on growth, but what’s the point of profitability if you’re not growing? So there’s a healthy balance a company has to juggle.”