Hyper-converged pioneer Nutanix has a history of rapid revenue growth and wide losses. For last quarter, both of those were larger than expected.
Nutanix revenue grew 41% year-over-year to $289 million — $9 million above the top end of its previous forecast. Nutanix also lost $35 million, larger than expected and much more than the $20 million loss a year ago.
For this quarter, Nutanix forecasted revenue from $295 million and $300 million but heavier losses than analysts expected.
In an interview following the earnings call last Thursday, Nutanix CEO Dheeraj Pandey said the company’s move to a software-centric business model was partly to blame for the earnings miss. Nutanix is two quarters into the model, which no longer credits revenue from partners’ hardware sold with Nutanix software. Nutanix had $12 more in deferred revenue than expected last quarter due to the accounting change. Pandey said changes in the billing to revenue ratio makes it harder to accurately forecast revenue during the transition.
“That’s part of the software transition,” he said. “We don’t fully have an exact view of billings to revenue as we go through this transition.”
Nutanix also went on a hiring spree, adding more employees than in any previous quarter. CFO Duston Williams called it a “full court press” on hiring. That included the addition of 60 sales teams and 85 new employees through acquisitions of Netsil and Minjar. That helped run Nutanix’s expenses to $232 million in the quarter, $12 million above its guidance.
Nutanix remains in a growth stage, hoping to take advantage of the still rapidly expanding hyper-converged infrastructure (HCI) market. According to IDC, the hyper-converged market expanded 69.4% year-over-year for the fourth quarter of 2017. That should leave plenty of room for future Nutanix revenue increases.
“We are still discovering the total addressable market (TAM) of this architecture,” Pandey said. “Five years ago, nobody gave hyper-convergence a $100 million TAM but now it’s already close to $10 billion. A lot of the TAM expansion depends on category creators like Nutanix. We go and expand workloads, geographies, different kinds of mission critical applications, hardware plans on which we run. We keep expanding that, and the TAM should continue to grow.”
Much of that expansion is due to traditional storage systems becoming hyper-converged. Pandey said about 65% to 70% of Nutanix deals come from converting traditional storage products to HCI.
“Other HCI competitors don’t have that much HCI focus,” he said, referring to server vendors that have moved into HCI. “They have other three-tier products that they still sell, while we have conviction in our architecture.”
Despite its losses, Nutanix has more than $900 million in cash. Pandey said the vendor will continue to increase spending to add features and new products from internal development and acquisitions. The acquisition strategy will continue to focus on small deals that add key pieces of technology rather than large established companies.
“We’re not in the business of buying growth,” Pandey said. “We won’t just go and buy a customer base. We’re looking for companies that have great technology and awesome people that want to build this company into something bigger.”
Nutanix AHV hypervisor adoption is growing, although it doesn’t directly add to revenue because it is part of the Acropolis software stack. Nutanix claims 33% of its HCI nodes sold last quarter used AHV compared to 30% in the previous quarter. Pandey said AHV saves people from having to buy VMware licenses, but new features also sway customers.
“Well, I think we don’t lead with cheap,” he said on the earnings call. “Nutanix is not that cheap of a product. If anything, we get a lot of flak for being a premium product, but we lead with ease of use and that our stuff works.”
“We’re making microsegmentation simple to use, so you don’t have to pay for NSX,” he said, referring to VMware’s software-defined networking product. “Our microsegmentation is one-click, and one node at a time.”