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Nutanix CEO plans to step down, search for successor begins

Nutanix CEO Dheeraj Pandey declared his intent to retire, pending the appointment of his replacement, following a $750 million investment from Bain Capital Private Equity.

Nutanix CEO Dheeraj Pandey said he wants to leave on a high note.

Hyper-converged infrastructure (HCI) vendor Nutanix Thursday said Pandey plans to retire from his CEO position. Citing a desire to spend more time with his family, reading and writing, Pandey said he will continue to lead the company until Nutanix finds his successor. Afterward, he will continue to serve as a member of the Nutanix board of directors. Nutanix's board has started looking for a new CEO but has no timeline for when one will be chosen.

On the same day as Pandey's retirement announcement, Nutanix held an earnings call to report its fourth quarter and fiscal year 2020 financial results, and revealed it was getting a $750 million investment from Bain Capital Private Equity. Nutanix revenue for the quarter of $327.9 million increased 9% from the previous year, and its GAAP net loss of $185.3 million decreased from $194.3 million of Q4 fiscal 2019. Overall revenue for the 2020 fiscal year was $1.31 billion -- 6% higher than the previous year. However, GAAP net loss was $827.9 million, up from $621.2 million last year. Nutanix has never turned a profit, despite steady revenue growth.

heeraj Pandey, CEO of Nutanix Dheeraj Pandey

The earnings call heavily focused on Nutanix's progress on its transition to a subscription-based revenue model. Pandey said transforming to subscription was important because it gave customers flexibility on how they wanted to consume the product and made recurring revenue easier to predict. He said 87% of Nutanix's revenue last quarter came from subscriptions, up from 65% in Q4 2019. According to Pandey, his goal was 80% by the end of fiscal year 2020, so he is about one year ahead of schedule. He said the increase in subscription revenue coupled with the $750 million from Bain Capital puts Nutanix on very firm financial footing.

"We feel very comfortable about cash in the future," Pandey said during the call.

How the pandemic influenced the Nutanix CEO's decision

Pandey said he first thought of stepping down at the start of shelter-in-place caused by the COVID-19 pandemic. He said his time spent working from home, with his children attending school over Zoom, made him reflect on his life and family. Pandey wanted to spend more time with his family and found he couldn't do that while "devoting 110% to the company."

Nutanix announced Pandey's impending departure without a successor lined up. In a Q&A session with reporters after the earnings call, Pandey acknowledged that it might seem unusual, given how well Nutanix was doing, but he said it was according to plan. He said finding the right person to replace him would be difficult, and Nutanix hoped that by publicly revealing that the company was seeking a new CEO, it would attract top talent to the position.

"There's no better time to leave than on a high point," Pandey said.

The board has no one in mind yet, but Pandey said it is looking for someone who can take advantage of Bain Capital's investment to grow Nutanix. He added that whoever it was, his successor would also have to be very channel- and customer-focused, as he felt Nutanix's channel partner ecosystem is one of its greatest assets.

Pandey founded Nutanix in 2009, alongside Ajeet Singh and Mohit Aron, who is currently CEO and founder of backup and data management vendor Cohesity. Nutanix originally sold its HCI software on branded appliances through an OEM deal with Super Micro, and it also partners with server vendors Dell, Cisco, Lenovo and Hewlett Packard Enterprise.  In 2017, the company shifted its focus to software-only, and stopped counting revenue from its turnkey appliances business. Nutanix filed for an initial public offering in December 2015, which completed nine months later.

Eric Slack, a senior analyst at Evaluator Group, said it's possible Bain Capital's $750 million investment led to Pandey's departure. Slack said Pandey has historically plowed Nutanix's revenue back into growing the business and its products, which has done a good job growing Nutanix to where it is today. From a market perspective, it holds a comfortable position behind VMware vSAN. Slack added that even though it is sold at a higher price point than vSAN, the fact that Nutanix still holds its market position means customers believe the extra cost is worth it.

Slack said Pandey's push for continuous growth and product development may be a point of contention for some people. He could see how Bain Capital, now a large stakeholder in Nutanix, and the Nutanix board may be looking for leadership that will bring stakeholders a return on their investment.
"Nutanix has done a lot of things right, but it's been at the cost of profitability, and some would even say sustainability," Slack said.

Naveen Chhabra, a senior analyst at Forrester Research, shared a similar assessment. He described Nutanix as a company that burns through a lot of cash, investing heavily in R&D. Nutanix may compete most directly with VMware vSAN, but Chhabra said the company's actual goal is to become a VMware equivalent. The cost to develop the AHV hypervisor, Acropolis operating system and Mine data protection product could not have been cheap, and Pandey has been focused on these kinds of R&D investments instead of profitability. He pointed out that Nutanix's operating margin percentage has been negative for fiscal years 2019 and 2020.

Chhabra said he doesn't believe it's a coincidence that Bain Capital's $750 million investment happened at the same time Pandey announced his intent to retire. He said it's possible that the CEO, the board and the new investor all agreed it was time for new leadership as the company refocused on returns. With its investment, Bain gained two members on the Nutanix board.

"I suspect there is a relation between the two," Chhabra said about the news of Bain Capital's investment and Pandey's departure. "I suspect Bain will bring in one of its own."

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