Nutanix Blames Revenue, Earnings Miss On Transition To Subscription Model

However, the hyper-converged infrastructure pioneer expects that transition to succeed, and that it has a head start on its competitors who will also have to go through their own painful transition.

Nutanix on Thursday blamed its transition to a subscription model for its pioneering hyper-converged infrastructure technology for a drop in revenue and increase in losses compared to a year ago.

However, the company said, it expects that transition to be a key to its success in the long run as it is undertaking the move ahead of its competitors.

San Jose, Calif.-based Nutanix reported that revenue for its third fiscal quarter of 2019, which ended April 30, was $287.6 million, down from the $289.4 million the company reported for its third fiscal 2018 quarter, and down from its prior guidance of $290 million. Billings for the quarter reached $46.0 million, down from last year's $351.2 million.

[Related: Nutanix Pushes Software As It Pulls Away From Hardware Biz]

However, software and support revenue rose 17 percent over last year to $265.8 million, while software and support billings rose 11 percent to $324.2 million, the company reported.

On a GAAP basis, Nutanix reported a net loss of $209.8 million, or $1.15 per share, compared to last year's loss of $85.7 million, or 51 cents per share.

Net loss on a non-GAAP basis reached $103.0 million, or 56 cents per share, compared to last year's loss of $34.6 million, or 21 cents per share.

Analysts had been expecting revenue of just over $297 million, GAAP loss per share of 94 cents, and non-GAAP earnings per share of 60 cents, according to Seeking Alpha.

Nutanix laid the blame on the lower-than-expected financial results squarely on the company's transition to a subscription model compounded by a long transition period for both its Americas and its worldwide sales force to meet the new model.

Even so, it could have been worse, said Dheeraj Pandey, Nutanix chairman, founder, and CEO, during the company's third fiscal quarter 2019 financial analyst conference call.

"Our transition to subscription is ahead of schedule," Pandey said.

About 65 percent of Nutanix's billings came from subscriptions in the third quarter, which was up 24 points over the same period as last year. That led to a total subscription revenue for the quarter of $168 million, up 110 percent year-over-year. Nutanix reported the average subscription contract was signed for 3.7 years during the quarter.

The transition to a subscription model will provide several benefits in the long term, said Duston Williams, Nutanix's chief financial officer. They include more predictable revenue for the company, the ability for customers to choose to pay for their technology over time, customer license portability, and lower marketing costs for Nutanix, Williams said.

However, he said, that transition also creates friction, Williams said. For instance, he said, the perceived duration of Nutanix products sold via traditional sales models is about five years, compared to about four years when sold via subscription, although he said Nutanix is working to make sure customers will sign for a fifth year in their subscription.

With subscription sales, revenue for the product and for support is deferred, causing a drop in up-front revenue, Williams said.

Nutanix is also experiencing a slowdown in its sales cycle as the company's reps, along with its distributors, channel partners, and customers will require education on the new model, although that will change as subscription pricing becomes the norm, Williams said.

Williams said Nutanix also expects it will take a couple of quarters to clear the impact caused by sales leadership changes in the Americas and worldwide.

As painful as the transition to subscription pricing is, at least Nutanix is on the path, Pandey said during the question and answer part of the conference call.

Nutanix's competitors are kicking the can down the road when it comes to the transition that Nutanix started on two years ago, he said. "That is something that is great in the long-term for Nutanix," he said.

Nutanix is also counting on its new relationship with Hewlett Packard Enterprise under which HPE channel partner can get HPE servers pre-configured with Nutanix HCI technology and can tie to the HPE GreenLake SaaS platform as a way to grow in the future, Pandey said.

"HPE channel partners are looking for a solution that can compete with Dell. … I think this will be a really great partnership," he said. "But right now there is inertia from at-rest."

When asked how the move by competitor VMware to introduce VMware Cloud on AWS might impact Nutanix, Pandey said that all cloud providers will eventually want to do deals with either VMware or "someone else," and that that someone else will be Nutanix, which is working to make sure it has the right systems and APIs in place to work with all cloud providers.

After another analyst asked whether HCI has a place in the enterprise given the strength large storage vendors have in that market, Pandey said that every year the HCI market grows and the number of vendors increases.

"There's a reason why NetApp wants to get into this space. … There's actually a lot of value in this," he said.

For the quarter, Nutanix signed 3,620 new customers compared to last year. The company now has 611 customers with between $1 million and $3 million in long-term contracts, 116 customers with between $3 million and $5 million, and 121 customers with over $5 million.

About 42 percent of Nutanix hardware nodes include the company's AHV hypervisor technology. About 23 percent of all deals include one or more of the company's Essentials or Enterprise offerings.