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HCI market: Dell and VMware gain, as Nutanix stumbles

HCI pioneer Nutanix's revenue slid last quarter, as it goes through a business transition and greater competition from Dell appliances and VMware HCI software.

Team Dell was a big winner in hyper-converged infrastructure last quarter, with Dell EMC VxRail appliances and VMware vSAN software far outgrowing sales from their main HCI rival, Nutanix.

No matter how you slice it, Dell Technologies gained HCI market share over Nutanix last quarter, according to the vendors' earnings reports last week. Dell reported Dell EMC VxRail more than doubled in year-over-year revenue, and VMware said vSAN license bookings grew more than 50%, while Nutanix revenue decreased nearly 1%.

Dell owns all the pieces of an HCI stack. VxRail appliances consist of Dell EMC PowerEdge servers, along with virtualization and vSAN HCI software from Dell-owned VMware. VMware also sells vSAN though other server partners.

Nutanix has the full HCI software stack, but relies on partners' hardware. Three months ago, Nutanix warned its revenue growth would slip because of a shrinking sales pipeline, but the slide was greater than expected. Nutanix reported revenue of $288 million -- $2 million below the low end of its guidance. It was the first time Nutanix failed to increase its year-over-year revenue.

Nutanix CEO Dheeraj Pandey blamed the low revenue on the vendor's transition to a subscription model from an appliance model. Nutanix executives said the subscription model has a shorter license length than appliances, costing them about 5% to 10% of revenue during the transition. But the hit has been more than 10%.

Nutanix averaged 23% year-over-year growth in the four previous quarters. It has never posted a profit, and its losses widened to $210 million last quarter. Nutanix still has $941 million in cash, but large losses and a decline in revenue are a dangerous combination.

"The growth we had before was based on hardware and software, all based on the life of the device," Pandey said. "In the last six months, we've gone through a subscription transformation, so you can't compare the oranges of last year to the apples of this year. We also last quarter talked about how it would take a quarter to build our sales pipeline, and we've done that. We should see the results over the next couple of quarters."

Nutanix will go through this transition without its chief product officer, Sunil Potti, who has resigned to join Google. Pandey said COO David Sangster and Rajiv Mirani, CTO of cloud platforms, will help fill Potti's role.

HCI market still growing

Even if Nutanix sales increase dramatically in a few quarters, a lot of HCI adoption will take place before that. Several vendors reported solid HCI growth last quarter. Besides Dell EMC and VMware, Hewlett Packard Enterprise (HPE) reported HCI revenue grew 25% last quarter.

The most recent HCI market share numbers from IDC cover the fourth quarter of 2018. IDC placed Dell No. 1 in branded revenue, with 28.6% of the $1.9 billion total market. Nutanix placed second, at 14.8%, and HPE was a distant third, at 5.4% Measuring the HCI market by software, IDC listed VMware first, with 38.1%, and Nutanix second, with 29.8%.

IDC competitor Gartner put Nutanix ahead of VMware in HCI software for the fourth quarter, however. Gartner credited Nutanix with 47.8% of the HCI software share, compared with VMware's 44.1%. But VMware had a better start to 2019 than Nutanix and claimed it now has more than 20,000 HCI customers.

Nutanix claims 13,190 customers, but its 780 new customers last quarter fell below the 820 customers it added in the same quarter a year ago. Pandey said Nutanix deals are generally larger than in the past, with eight deals worth more than $3 million apiece and more than 50 deals of at least $1 million.

With its new software subscription model, Nutanix is following VMware's strategy of partnering with as many server vendors as possible. Nutanix still partners with Dell, which packages Nutanix software on PowerEdge servers. But revenue from that partnership appears to be waning, as Dell pushes its own branded VxRail.

"There is no question about what we lead with," Jeff Clarke, Dell's vice chairman of products and operations, said last month during Dell Technologies World. "It's our own IP [intellectual property]. If customers want choice, we have choice. We will provide servers [for Nutanix software], but we will lead with VMware."

"It's us and VMware more than anyone else," Pandey said of the HCI software market. "That's where the operating system wars are, that's where the software stack is, [and] that's where people are talking about hybrid cloud. They're thinking about what it means to build a private cloud that gives them a hybrid experience."

Nutanix does have a new partnership with HPE, which will go into effect over the coming months. HPE also partners with Lenovo, IBM and Fujitsu.

Customer perspective

Paul Green, CIO of Angel MedFlight, based in Scottsdale, Ariz., said he picked vSAN over Nutanix and HPE SimpliVity last year when the air ambulance service hyper-converged its IT infrastructure. Green said VMware reps had the best understanding of his business needs, and the technology helped him future-proof his setup.

"VMware was interested in what we were trying to do as a business," he said. "Our goal is to build this for five years, so we wouldn't have to touch our hardware again during that time.  Last year, when we were going to redesign this, I really wanted something that was converged, something simple and something that took advantage of all new the features VMware would allow."

One positive for Nutanix is continued adoption growth of its AHV hypervisor. Nutanix claimed 42% of its shipped nodes over the past year run AHV, which competes with VMware's ESXi hypervisor.

Jose Bellas, CIO of Miami-based University Health Care, said AHV was a "big selling point for us" when the healthcare managed service organization implemented Nutanix in 2016. Unlike VMware, Nutanix does not charge a license for its hypervisor.

"We said, 'Why are we paying a premium on each node?'" for the hypervisor, Bellas said. "All the advanced features Nutanix had were rolling out exclusively for AHV or adopted on AHV first, so it made more sense to use AHV. There was nothing extra that VMware's hypervisor brought to the table."

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