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Nutanix Pushes Software As It Pulls Away From Hardware Biz

Nutanix this year used multiple acquisitions and new product lines to prepare partners and customers work with the hyper-converged infrastructure pioneer as if it is a software company, and introduced a new financial structure to emphasize the change.

Hyper-converged infrastructure pioneer Nutanix executives are making clear that they have one big goal: start thinking of the company as a software firm instead of a hardware appliance provider.

During the company's fourth fiscal quarter 2018 earnings call, executives outlined an aggressive plan to marginalize its hardware sales while moving customers to purchase the company's technology as termed-based software and subscriptions.

The point was further emphasized when investors were told that, starting with the first fiscal quarter of 2019, the San Jose, Calif.-based company will completely change how it reports financials to emphasize its shift to a software business.

[Related: Nutanix Introduces Multi-Cloud Capabilities, Extends Hyper-Converged Infrastructure Across The Data Center To Cloud]

Nutanix in the fourth fiscal quarter 2018 saw software and support billings rise 66 percent over those of the fourth fiscal quarter 2017, while software and support revenue grew 49 percent, said Dheeraj Pandey, chairman, founder, and CEO of Nutanix.

For all of fiscal 2018, software and support billings rose 54 percent while software and support revenue grew 47 percent over last year, Pandey said.

For fiscal year 2018, the transition from hardware to software was nearly complete, with pass-through hardware revenue counting for less then 10 percent of Nutanix's total revenue in the fourth quarter of 2018, said Nutanix CFO Duston Williams.

"On our Q1 ‘18 call, we committed to a bold plan to eliminate a majority of our hardware pass-through revenue," Williams said. "Today, I'm happy to say we've [done so] based on our plan."

Because of the shift towards a software-based sales model, Nutanix starting in the first fiscal quarter of 2018 will start disclosing software sales similar to how any other software vendor would do, Williams said.

Sales revenue will be divided into four parts.

The first will be pass-through hardware, which will be similar to how Nutanix has traditionally reported pass-through hardware sales, Williams said.

The second will be non-portable software sales, or sales of the Nutanix operating system when delivered on a hardware platform, either by Nutanix, by an OEM partner, or by a channel partner. Such a sale is considered non-portable software because the license is attached to a specific piece of hardware, he said.

The third will be subscription software, including renewable software licenses, both term-based and cloud-based, Williams said.

The fourth will be professional services sales related to Nutanix's products, he said.

"We believe this new breakout will provide greater transparency on our business, particularly in regards to software," he said.

Pandey, addressing an analyst's question about where the breakeven point between what Nutanix makes on its future subscription pricing vs. what it makes on perpetual licenses, said that Nutanix never had perpetual license pricing.

Nutanix software instead has been licensed to the user for the lifetime of the hardware appliances, which are based on off-the-shelf servers and which customers typically refresh every four years or so.

Nutanix is now focused on selling software subscriptions with one-year, three-year, and five-year terms, with three-year terms expected to be most common, Pandey said. There will be no discounting on the one-year terms.

Nutanix is also staying away from enterprise licensing agreements, with all customers with one or two exceptions expected to purchase term licenses, he said. "As a company, we have avoided scorching the earth and pulling sales from the future," he said.

Many of Nutanix's recent acquisitions have or will become important parts of Nutanix's shift towards being known as a software company.

Nutanix earlier this month unveiled plans to acquire cloud-based desktop and application delivery specialist Mainframe2, known as Frame, as a way to improve its multi-cloud solutions and deliver desktop-as-a-service to customers.

The Frame acquisition, which features multi-cloud desktop virtualization technology for streaming virtual desktops through a browser, will help Nutanix address what has been a $3-billion market for virtual desktop infrastructure, Pandey said. "We think we can grow this market with our focus on instant delivery and end-user delight," he said.

When a financial analyst asked whether the Frame acquisition might bring Nutanix into competition with its long-term software vendor Citrix, which also owns a significant part of the virtual desktop market with its Citrix Apps and Citrix Desktop products, Pandey said Nutanix still has a lot of room to partner with Citrix.

"The whole goal is to make sure this is not a zero-sum game. … There is a massive opportunity for both Nutanix and Citrix to grow this market," he said.

Another important acquisition was Minjar, which Nutanix purchased in March. Minjar, now known as Nutanix Beam. Nutanix Beam in May was formally introduced as a new software-as-a-service offering multi-cloud governance. It is being integrated with Nutanix's Enterprise Cloud OS and Nutanix Calm management platform.

Nutanix in March also acquired Netsil, an application discovery and operations management startup, and now includes it as part of a virtual networking offering rebranded as Epoch, Pandey said.

Nutanix also plans to lean heavily on its Nutanix Xi multi-cloud technology for a software fabric that works across multi-vendor on-premises and cloud infrastructures, Pandey said. Many of the new capabilities outlined earlier, along with Leap, a new disaster recovery-as-a-service offering, will be part of the Xi platform when it becomes available by year-end, he said.

"We hope to truly blur the line between on-premises and clouds," he said.

Nutanix has also introduced a variety of new services for its platform, including Flow network security product, and an organic IoT platform called Sherlock, Pandey said.

For its fourth fiscal quarter 2018, which ended July 31, Nutanix reported revenue of $303.75 million, up from the $252.46 million the company reported for the fourth fiscal quarter 2017.

The company reported a net GAAP loss of $87.4 million, or 51 cents per share, compared to its loss last year of $66.1 million, or 43 cents per share. Net loss on a non-GAAP basis for the fourth quarter was $19.0 million, or 11 cents per share, compared to last year's loss of $26.0 million, or 17 cents per share.

For fiscal year 2018, Nutanix reported revenue of $1.16 billion, up from last year's $845.9 million.

For all of fiscal 2018, Nutanix reported a GAAP net loss of $297.2 million, or $1.81 per share, compared to its loss of $379.6 million, or $2.96 per share, in fiscal 2017. Net loss for the year on a non-GAAP basis was $101.5 million, or 62 cents per share, compared to last year's loss of $120.7 million, or 85 cents per share.

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