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Be careful what you wish for: Nutanix wanted subscribers, just not that many all at once

Mad dash stalled growth and screwed revenue targets

Subscriptions is the nirvana that tech vendors are trying to journey towards since investors love predictability. For hyperconverged bigwig Nutanix, it has proved to be something of a challenge but for all the wrong reasons.

Nutanix's prior quarter results were poor, with falling revenue growth, and its latest numbers, disclosed this week, were also grim – as customers taking up subscriptions more quickly than expected punished the firm's projections.

Also suffering US sales execution issues, the hyperconverger's third 2019 fiscal quarter, ended 30 April, saw revenues decline 0.6 per cent year-on-year to $287.6m, below guidance of $290m-300m.

Missing the target sent losses deeper to $209.8m, compared to the year-ago $85m.

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Basically, Nutanix mis-read how fast its customers would flood into subscriptions, and flood they did, with a global big-four accounting firm signing a near-$6m subscription deal. It also underestimated the effect this would have on its revenues for the quarter.

William Blair analyst Jason Ader calculated that subscriptions bring in about 30 per cent less upfront revenue than Nutanix's traditional licensing model.

Nutanix wants to move to a subscription model to achieve more predictable revenue streams but is suffering unpredictable ones during the transition.

Unexpectedly, subscription sales also have the potential to slow down and extend sales cycles as the vendor sales reps, channel reps and the customer must all be, ahem, "educated" about subscription benefits versus the old world way of device licensing structure.

CEO and co-founder Dheeraj Pandey was keen to focus attention on the future, saying: "Successful businesses are built over time on a bedrock of exceptional products, outstanding customer support and talented and committed employees. With solid sales hiring in Q3 and increased adoption of our AHV hypervisor, indicating a strong product and enthusiastic customers, I truly believe Nutanix has that foundation in place."

Well, he would say that, wouldn't he.

Souping up sales

In the earnings call, Pandey and CFO Duston Williams bigged up the sales pipeline, with Pandey saying: "We executed well on the strong plan to ramp lead generation and thus improved sales execution... We continue to believe our actions to address this will drive improved business into FY '20 as these changes take a couple of quarters to show results."

However, William Blair's Ader advised: "We do not expect year-over-year top-line re-acceleration in the business to occur for another three quarters."

Pandey added: "Much needs to be done in the coming quarters as we flush through our pipeline and sales execution issues and leverage the new subscription model to improve profitability and sales leverage... The sales leadership changes that have occurred at a worldwide and Americas level have also clearly impacted the results for the quarter."

Nutanix's main competitor, Dell EMC, had a solid quarter with its VxRail HCI business growing triple digits, which increased competitive pressure on Nutanix.

Ader commented: "We see Nutanix as a highly strategic asset with the potential for takeout interest from larger players that desire a best-of-breed private cloud/HCI platform."

The outlook for the next quarter is revenue between $280m and $310m – $295m at the mid-point – which would be a 2.9 per cent fall from a year ago, making three crap quarters in a row. Full FY '19 revenues would be $1.23bn, a mere 6.1 per cent rise on the year, not at all what Nutanix is used to. The FY '17 to '18 annual revenue jump was 37.1 per cent. Those days may well be over. ®

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