NTNX is my largest holding at 18.7% of my portfolio. The business results numbers have been amazing and much of their business success is masked as they still transition to their SW only model. Some recent information presented by Tinker got me thinking. It is the one thing that is currently nagging me about NTNX. Here’s what Tinker wrote:
VMWare 32.4%, Nutanix 29.5%. Pretty close.
Those are the market share numbers. The number in itself is not a bad thing. NTNX is doing great and so is VMWare. So what did I notice?
I track NVDA’s penetration into the Global 2000 companies. These are the world’s largest firms. They are the source of most of the revenue available in the market. Below is NTNX’s penetration into the Global 2000 companies:
Q313 41 Q413 66 Q114 82 Q214 109 Q314 127 Q414 159 Q115 177 Q215 214 Q315 242 Q415 281 Q116 318 Q216 372 Q316 424 Q416 473 Q117 521 Q217 559 Q317 608 Q417 642 Q118 670
NTNX has been rapidly penetrating the world’s largest 2000 companies. Pretty sweet, right? But as of last quarter, NTNX had captured 33.5% of the Global 2000 companies. If VWWare has a roughly equal share of these market and this market represents most of the revenue and profit opportunity then 2/3s of the market is captured, leaving only 1/3 left to capture. It is something to watch.
I don’t believe that there is an immediate (next few quarters) concern for the following reasons:
- VMWare has been gaining on NTNX and has had equal market share for the past 5 quarters at least. That would mean that VMWare captured about 150 of the Global 2000 companies in that past 15 months that we reported (Jan 2017 through Mar 2018). What was VMWare’s market share prior to 2017? Since VMWare has been gaining on NTNX, I might assume that VMWare started going after hyper converged market in the Global 2000 companies later than NTNX which would mean that VMWare has less than 670 companies penetrated. If true this would mean that there is more than 2/3 available. But NTNX and VMWare together have 62% of the market share, meaning that the other smaller competitors have share too. How much? How much of the Global 2000 market is still available? Is the switching cost high if most of the Global 2000 market already have a hyper converged solution? If the market is saturated and switching costs are high then we would expect to see NTNX’s quarterly additions to slow down. Here are the additions by NTNX to the Global 2000 companies:
Q313 41 Q413 66 Q114 82 +16 Q214 109 +27 Q314 127 +18 Q414 159 +32 Q115 177 +18 Q215 214 +37 Q315 242 +28 Q415 281 +39 Q116 318 +37 Q216 372 +54 Q316 424 +52 Q416 473 +49 Q117 521 +48 Q217 559 **+38** Q317 608 +49 Q417 642 **+34** Q118 670 **+28**
Does this look like a declining trend? It sort of looks that way. The addition of new large customers is a very important growth driver for NTNX. If it is slowing then their future growth will also slow. Will the slowing trend continue? Is it slowing because the market is getting saturated?
- Why did I say that there is not an immediate concern for worry? Two reasons. First, land and expand. There is a lag between landing a huge customer and when they really start spending. The initial purchase is small for NTNX customers. After 18 months, customers spend on average 4x their initial purchase. The big dropped in new Global 2000 customers occurred in Q4 2017, 2 quarters ago. Therefore, the effect of the past 2 quarters’ adds probably won’t be noticed in the revenue numbers for a while, especially since the install base is large compared to the new adds. Second, NTNX is still transitioning to the SW only model so there is still unmasking of the hidden growth occurring. There is also another driver to slower growth; it is that as the install base grows and the number of new adds does not increase there is a percentage decline in new adds:
Q313 41 Q413 66 Q114 82 +16 +24% (seq) Q214 109 +27 +33% Q314 127 +18 +17% Q414 159 +32 +25% Q115 177 +18 +11% Q215 214 +37 +21% Q315 242 +28 +13% Q415 281 +39 +16% Q116 318 +37 +13% Q216 372 +54 +17% Q316 424 +52 +14% Q416 473 +49 +12% Q117 521 +48 +10% Q217 559 +38 **+7%** Q317 608 +49 +9% Q417 642 +34 **+6%** Q118 670 +28 **+4%**
Single digit sequential growth since Q2 2017.
My conclusion is that we need to keep an eye on slowing additions to the net Global 2000 companies captured by NTNX. This could foretell slowing growth in a couple of years. However, it will not be noticeable for a while, maybe in 2020 assuming the trend of slower Global 2000 continues. As I said, I think we have another few quarters not to worry about this, but after Q4 2018 results might be a good time to lighten the position.