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Nutanix HCI position under fire due to sales slump

Nutanix CEO says HCI sales slowdown is temporary because its technology remains strong; in the meantime, Dell-VMware is pushing HCI deeper into the enterprise.

Nutanix took a big hit on Wall Street last week after it issued a poor revenue forecast. Now it is seeking to convince customers on Main Street that its products are still worthy of their hyper-converged infrastructure budgets.

Nutanix helped create the hyper-converged infrastructure (HCI) market, both from business and technology standpoints. It was among the first to sell HCI and the first to have great success with it, going from startup to public company to leader in a market that included server and storage giants. Nutanix and Dell-VMware dominate the market, combining for close to 70% of the share.

But last week Nutanix executives said after growing revenue 17% to $335 million last quarter, it expects only between $290 million and $300 million in revenue this quarter. That shows almost no increase from the $289 million in revenue in the same quarter in 2018. The Nutanix HCI slip comes as the overall market keeps growing, with VMware and Dell EMC expanding at record rates.

Dheeraj Pandey, CEO of NutanixDheeraj Pandey

Nutanix executives blame the impending slowdown on internal mistakes. The company, they said, diverted money from marketing to other areas over the past year, and that took a toll on its sales pipeline. In an interview Friday -- a day after the earnings call -- Nutanix CEO Dheeraj Pandey said he is convinced the sales slowdown is not due to his company's technology or his competitors improving. He is counting on an adjustment in marketing spending to fix the problem by getting Nutanix HCI products in front of more prospective customers.

Pandey said Nutanix HCI win rates remain the same. Investors aren't convinced, though. Nutanix lost almost one-third of its stock price on Friday, the day after its earnings report. Pandey expects customers to react more positively.

"Main Street wars are different than Wall Street wars," Pandey said. "On Main Street, fundamentally nothing has changed. We just need to be having more conversations on Main Street than we had in 2018."

Nutanix may have had the wrong conversations on Main Street in 2018. The company transformed to a software-centric business model that emphasizes selling its technology across any type of x86 hardware instead of focusing on the branded appliances that helped propel Nutanix. It also launched a bundle of complementary products --such as Beam, Era and Flow -- and Xi cloud services. Xi is considered a key piece of the Nutanix HCI future, but the company was late delivering it, and confusion remains about where it stands in the public and private cloud landscape.

We are a high-velocity company and sometimes we let chaos reign and then we go and rein in the chaos.
Dheeraj PandeyCEO, Nutanix

On the Nutanix earnings call, Pandey quoted former Intel CEO Andy Grove's philosophy of "Let chaos reign, then rein in chaos." Nutanix did the first part in 2018. Now can it rein in chaos?

"We are a high-velocity company and sometimes we let chaos reign and then we go and rein in the chaos," Pandey said.

Pandey said chaos came in part from lack of "crisp messaging," and failure to show customers the roles the new products play in the Nutanix Core (HCI), Essentials (private cloud) and Enterprise (multi-cloud, services) packaging.

Pandey said Nutanix still resonates with enterprises -- 51 $1 million-plus deals last quarter -- but needs to do a better job attracting more midrange customers. He said the slowdown this year will push back Nutanix's goal of hitting $3 billion in revenue by late 2021 by a half-year or so. It will also delay Nutanix from profitability. The company lost $123 million last quarter after dropping $63 million a year ago.

VMware riding high-speed VxRail

While Nutanix paints its HCI strategy as pure software, Dell comes at HCI from three directions: It has VMware vSAN software, Dell PowerEdge servers and Dell EMC's storage technology.

While Nutanix HCI sales are slowing, Dell reports booming HCI sales from VMware and Dell EMC. It took VMware a few revs of vSAN to get all the functionality and packaging right, but it has momentum now. VMware reported more than 60% year-over-year growth in vSAN license bookings last quarter.

While VMware continues to sell vSAN with other vendors' servers, it is increasingly focused on Dell EMC VxRail appliances. Dell said VxRail sales more than doubled last quarter over the previous year.

Unlike Nutanix, though, Dell's new HCI customers aren't always new to the company. In many cases, they are moving from Dell storage and server products to HCI.

"Any customer who wants to refresh their servers looks at hyper-converged. Any customer who wants to refresh storage looks at hyper-converged," said Chad Dunn, Dell EMC vice president of product management for hyper-converged infrastructure. "We're even replacing a lot of our own converged infrastructure. VxBlock comes up for a refresh, often they'll land on our HCI. If they're a VMware user, they're probably going to select VxRail."

Dell EMC's HCI portfolio also includes XC products with Nutanix software and VxRack Flex with EMC's ScaleIO software. Dunn said when those sales are combined, Dell EMC is the HCI market leader.

"Nutanix is second and everyone else is a distant third at this point," he said. "Dell EMC and Nutanix are almost always in deals."

Where are Cisco, HPE, NetApp?

In the latest published IDC numbers, Dell EMC's main server competitors Cisco and Hewlett Packard Enterprise were around 5% of the HCI market. Neither seems to have made up much ground since then. HPE did report an HCI increase of nearly 70% with its SimpliVity HCI portfolio but still has a long way to go to catch Dell and Nutanix. Cisco said its HyperFlex HCI product revenue increased but gave no details.

NetApp also gave no concrete numbers for its NetApp HCI -- a relative newcomer to hyper-convergence -- in its most recent earnings report.

The only other HCI vendor to provide a sales update from the end of 2018 was privately held Pivot3, which said revenue grew more than 40% in the fourth quarter over 2017. Like Nutanix and VMware, Pivot3 said its growth comes from large enterprises adopting HCI.

"We're battling daily against Dell EMC and VMware," Pivot3 chief marketing officer Bruce Milne said.

Nutanix has fought HCI daily battles from the start. It helped educate people about HCI, and now has to try to calm any customer trepidation over the negative attention over its recent forecast.

Pandey said he is not worried about what people say about Nutanix.

"The more they talk about us, the better it is for us," Pandey said. "People will say, 'How can I get a good deal from Nutanix?' Customers are more sophisticated than people think.'"

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