


I’ve Turned Off My Ad Blocker
Edit Story

Punt On Nutanix And Keep Your Eye Out For Cohesity's IPO

Peter Cohan
This article is more than 3 years old.

Mohit Aron is a truly impressive entrepreneur. He cofounded Nutanix and left before its October 2016 IPO to found Cohesity, a maker of so-called hyperconverged secondary storage (HCSS) that just received a $90 million capital injection.

And despite trading at well-below half its peak price of $44 a share, Aron is bullish on Nutanix. By contrast, Cohesity board member and retired CEO and executive chairman of NetApp, Dan Warmenhoven, is far more optimistic about Cohesity than he is about Nutanix.

Warmenhoven makes the case that Nutanix will struggle to be profitable due to weak sales productivity. My takeaway is to punt on Nutanix and keep an eye out for Cohesity's IPO in a few years. (I have no financial interest in the companies mentioned in this post).

Before getting into that, let's discuss the distinction between primary and secondary storage. In concept the difference is simple: primary storage is used in a company's daily operations while secondary storage is non-operational -- used for functions such as backup, archiving, testing and development and analytics.

Nutanix is the leader in hyperconverged infrastructure (HCI), which combines several primary storage activities into a single appliance that runs specialized software on commodity hardware. Cohesity's HCSS product does the same thing for secondary storage.

Aron says that there's a $60 billion market opportunity for HCSS when you include backup hardware, software, analytics. and archiving. And Warmenhoven pointed out that Cohesity's competition is fragmented, including companies like Data Domain which EMC acquired in July 2009 -- snatching it away from NetApp -- and startups such as Rubrik.

Warmenhoven thinks Cohesity is winning because it delivers enterprise customers what they want. As he said, "Cohesity's breadth of vision gives enterprises a variety of functions in one product -- file sharing, a repository for unstructured data, backup, test and development, and network attached storage. That bundle drives down the cost of ownership and lowers both the cost and complexity of the staff and skills that companies need to manage secondary storage."

In addition he believes that Cohesity's technology makes it easier to balance what an enterprise stores in-house -- for example, test and development is better housed inside a company; whereas other functions are better in the cloud.

Warmenhoven is excited about the chance to mentor Aron, who has never been a CEO. As Warmenhoven explained, "Mohit is a world-renowned engineer -- he developed Google's file system. He is brilliant and was asking for advice on how to be successful as a CEO. He has a great personality, is anxious to learn and has a good heart -- he wants to help his people develop and create products that improve his customers' operations. He will be a great CEO."

Cohesity's $90 million capital-raise suggests that blue-chip investors relish the opportunity to invest in Aron and his vision. These include GV (formerly Google Ventures) and Sequoia Capital; Cisco Investments and Hewlett Packard Enterprise; Accel, ARTIS Ventures, Battery Ventures, DHVC (formerly Danhua Capital), Foundation Capital, Qualcomm Ventures, Trinity Ventures and Wing Venture Capital.

Cohesity, which has been growing at "triple digits for the last three or four quarters," plans to use the money to expand its product line and its geographic footprint. As Aron said, "The purpose of the $90 million is to scale sales and marketing in the U.S. and EMEA and to spend on R&D to add data protection and analytics to our product."

Warmenhoven thinks that Cohesity has a better business model than Nutanix, which generated $349 million in revenue in the last six months while losing $255 million, yielding a $697.2 million accumulated deficit according to Nutanix's latest 10Q.

As Warmenhoven explained, "Cohesity's revenue per sales rep per year is about $4 million whereas for Nutanix, the comparable figure is $2.5 million. The difference is that Cohesity has a high-volume product that targets the 70% of enterprise storage budgets that go to the core data centers. By contrast, Nutanix delivers specialized solutions to regional data centers, rather than the core."

Aron, who at its IPO owned 10.7 million shares of its common stock which represented 8.7% of its Class B shares, thinks that Nutanix -- whose stock has fallen 59% from its $44.46 a share high -- can become profitable by cutting back on the growth rate of its sales and marketing staff. He defended Nutanix's strategy by pointing out that when it got started investors were urging startups to treat sales and marketing as investments that would pay off by scaling more rapidly to the $100 million threshold needed to go public.

As I wrote, in the fall of 2015 there was a major sea change in Silicon Valley. Many money-losing enterprise technology companies were abruptly told that they would not be getting any more capital until they achieved cash-flow breakeven. Sadly the CEOs of these startups were better geared to fast growth than fast and profitable growth.

But Warmenhoven, who proudly told me that NetApp began to operate profitably when it hit $15 million in revenue, thinks that Nutanix's strategy is unsustainable since its sales and marketing expense ($323 million) is greater than its gross profit ($274 million).

Skip Nutanix shares and keep your eye on Cohesity.

Follow me on Twitter

