Nutanix, which sells specialized networking equipment and software, has just proven that a downturn can be turned around – spending more on ongoing problems will sometimes make that happen.
Last February, Netanix, which has been working to transition more of their software business to a cloud model based on subscriptions, reported problems with its salesforce in being able to close deals, which unsurprisingly impacted projected growth rates. Needless to say, the shares tanked at this news. Thus, the company elected to throw a great deal of money at the problem over the past two quarters and was able to report this week that revenue was coming ahead of expectations, projecting the fiscal year forecast to come in at 19% growth. This news sent shares up 26%. So, how were they able to effect such a dramatic turn-around, exactly? By expending 85% of revenue on sales and marketing efforts for the past two quarters (ref WSJ). Clearly, the thinking has been (and, so far, rightly so) that if there are problems with their sales and marketing contingent, then getting those big deals closed by providing better resources is the way to go about reversing problems in that area. During its prior eight quarters, the company had averaged 58% expenditures on sales and marketing. And, this compares to an average of 43% of revenue for the sector. Nutanix executives seem aware that those sort of expenditures can’t continue over the long term. CFO Duston Williams has said the company plans to “transition its cost structure to a more efficient model,” so that it looks more like other subscription-based software companies. Nutanix is a young company that has yet to record an operating profit. Because the increased spend rate has pushed the profit target out further, analysts are expecting adjusted operating losses to be declared for the current fiscal year. Nutanix shares are less than half their value of a year ago and trade at over three times forward sales – a fraction of what most cloud companies command (ref. WSJ). It will definitely be interesting to follow future outcomes.