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Nutanix aims to crack open the tech IPO window

Executives pose at the Nutanix IPO at the Nasdaq market site in New York, September 30, 2016.
Source: Nasdaq
Executives pose at the Nutanix IPO at the Nasdaq market site in New York, September 30, 2016.

Technology IPOs have shown some life in September after a brutally slow first eight months of the year.

The main event is Friday, with the Nasdaq debut of Nutanix.

After filing its IPO prospectus in December, Nutanix delayed its offering in the first quarter because of volatility in the stock market and a revaluing of cloud technology companies. Finally, on Thursday night, the San Jose, California-based company raised about $238 million, selling shares at $16 a piece, above the expected range of $13 to $15.

The stock soared 91 percent to $30.60 as of mid-day in New York.

Nutanix, whose data center technology combines computing, storage and networking into a single product, has Silicon Valley watching its every move. That's because Nutanix has the type of rapid growth model that became popular for emerging software start-ups in recent years — raise a ton of money, burn cash to expand quickly, repeat.

More than three-dozen software companies have been valued at $1 billion or more by venture capitalists, according to The Wall Street Journal. Wall Street has responded with a different message: No thank you.

In the past 12 to 18 months, "the Street really made a change and basically made it very clear that they want a path to profitability," said Matthew Howard, a managing partner at Norwest Venture Partners and an investor in enterprise technology start-ups. "If you look at most key metrics, the lines seem to be converging."

VC-backed IPOs

Company Type Offer date Amount raised
Nutanix infrastructure Sept. 29 $238 mln
Apptio software Sept. 22 $110 mln
Trade Desk ad-tech Sept. 20 $97 mln
Everbridge software Sept. 15 $104 mln
Twilio software June 22 $160 mln
Source: Company filings

Those lines for Nutanix are gross profit and expenses, with the latter currently much larger than the former.

Revenue jumped 84 percent in the past year to $445 million. Its gross profit from that was $274 million, while operating expenses were $439 million. Add it all up, and Nutanix reported a net loss of $168 million.

However, billings more than doubled, an indication that there's no slowdown in revenue growth in the near future. Also, three-quarters of customers make repeat purchases, so all of those upfront costs associated with sales and marketing show a return on investment over time.

Founded in 2009, Nutanix has been going up against some of the biggest names in the data center, from VMware and EMC to Cisco and Hewlett Packard Enterprise. Developing technology that combines all that functionality — what's known as hyperconvergence — and getting the market to understand, test and adopt it has required a massive investment.

Nutanix raised about $400 million in private financing, including an equity round in mid-2014 at close to a $2 billion valuation. In order to maintain a strong cash position while it waited to go public, Nutanix raised $75 million in debt in June.

"People are using legacy products and they need to be tutored on the advantages of hyperconvergence," said Mohit Aron, a co-founder who left in 2013 to start his own back-up company called Cohesity. "Once you can convert a customer you don't have to do much sales and marketing on that customer."

Nutanix's roster of clients includes Aflac, Best Buy, eBay and Honda.

Customers typically want the types of computing speed and efficiency offered by big cloud vendors, like Amazon Web Services and Microsoft Azure. But as large enterprises, it's not practical or desirable to push all of their data and computing to the public cloud.

Nutanix enables them to run so-called private clouds or keep some of their data in-house and outsource other pieces to the cloud.

"There's a tectonic shift going on in the world of computing," Nutanix CEO Dheeraj Pandey, said in an interview with CNBC after the stock opened for trading.

At $16 a share, the IPO valued the company at close to $2.2 billion. Nutanix's last private round over two years ago was at a share price of $13.40. By contrast, Amazon has more than doubled in value over that stretch. Despite the rapid growth and obvious market demand, Nutanix still has to deal with the new realities of the market.

Twilio, the marquee tech IPO of the year, has more than quadrupled since its debut three months ago. But unlike Nutanix, Twilio is a pure software company and operates at about breakeven.

Three venture-backed U.S. tech companies went public earlier this month. Trade Desk, an advertising technology company, is up 61 percent over its IPO price, emergency software provider Everbridge has gained 36 percent, and business management software vendor Apptio has climbed 35 percent.

Nutanix is bigger than those three companies combined. Start-ups and venture capitalists need it to perform well, so public market investors will show an appetite for more businesses that have been lining up with no place to go.

Norwest's Howard expects plenty of companies to follow in the next year or two. He says that investment banks are actively scouring Silicon Valley for attractive late-stage start-ups, and that companies are focusing on operating leverage, which means improving gross margins and reeling in costs.

"That's the buzzword in every board meeting," Howard said. "A lot of companies have been working on this, and Nutanix is one of the first out of the shoot."