NTNX: one new concern

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:

  1. 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?

  1. 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.

Chris

80 Likes

I do not know if this has relevance to your analysis or not, but the figure you cited from me is from Q4 2017. Duma found a more recent number for Q1 (perhaps Q2, but probably around May of 2018) where VMware increased their marketshare lead to now 5 points over Nutanix, thus gaining 11% marketshare on Nutanix in the last 6 months or year (I forget the comparator point).

The two together, however, gained a few points of marketshare against everyone else. Thus VMWare’s gains are not all against Nutanix, but VMWare clearly has the momentum in the market in regard to gaining marketshare.

Some say that VMWare is playing loose with numbers to exaggerate their gains (and I have no information in regard, not the methodology used in the third party study that gave us the numbers, but they are not VMWare/DEll/EMC related).

Becoming #2 to someone who came from behind is often cause of drag on share price, but that is no reason to sell Nutanix. VMWare, to what may be Pivotal’s benefit, has an easier time selling into their extremely large customer base (which is almost anyone who is not Red Hat customer) than Nutanix has selling to an otherwise VMWare shop (that Nutanix obviously has done well in doing so in the past).

For what it is worth, that is the best snapshot of marketshare information that we have that is recent. The numbers indicate VMWare doing exactly as it promised (as EMC did the same i 2016-2017). The Dell/EMC/VMWare group obviously has a very refined and effective sales group. Which makes Nutanix’s accomplishments more spectacular. Whether this trend of marketshare gain is accurate, or continues, TBD. If it continues as it is that cannot help but be a negative for NTNX. NTNX may very well stop it in its tracks or turn it around. But HCI is just one battle, as NTNX has its future products to roll out, which create much excitement and risk.

I have no opinion at all on the matter. I have blocked Nutanix from my vision as I had NTNX as a baby stock but let it go in preference for ANET and SHOP and NVDA (not a bad trade off) but I do not like to relive what might have been. I can just relay the best numbers we have in the market. My interest and knowledge of VMWare and EMC comes from my interest in PURE and Pivotal.

Tinker

13 Likes

However, it will not be noticeable for a while, maybe in 2020 assuming the trend of slower Global 2000 continues.
Many institutional mutual fund managers don’t think more than 6 months ahead, but a significant number of them do. So I think the trend you so nicely noticed (good post)will suppress NTNX price increases. We will not be the only ones to see that.
One point, one can only wonder at the lower size limit of companies that will get benefit from the solutions offered by both NTNX and VM Ware .And how much actual growth is left in early adapters of the software.
I have reduced my NTNX holdings to underweight. But I am definitely a Pony Express type investor.

Chris, Do you think that you are taking into account all the new areas that Nutanix is expanding into, which gives them even more room for land and expand?

Saul

3 Likes

then 2/3s of the market is captured, leaving only 1/3 left to capture. It is something to watch.


Taking out vmware is part of their target market.

From that viewpoint, 2/3rds of market is still in front of them.

Also - the spend within the g2k will not be static as more and more modernize and transform their IT Infrastructure and leverage multi-cloud solutions.

The initial sale can be difficult as it is disruptive, but vmware has enjoyed a near monopoly like cisco and clients are happy to get out from under the vmware licensing costs. Once nutanix is in, the land and expand opp is huge.

Finally - we are not talking about 1 product. Virtualization and hyoervisors is one thing. Hci is another. Automation and orchestration is another (Calm vs vRealize), network virt and microsegmentation is another (nsx vs Flow), Beam for cloud governance, Xi for Cloud-based DR, etc etc

Reality is Nutanix and Vmware can and will coexist in same accounts, especially larger enterprises. Just like those clients can have a mix of hpe dell cisco etc…

I am at their sales kickoff. This is an impressive and motivated sales culture. Honestly - that is just about the most important factor.

Dreamer

30 Likes

the spend within the Global Two Thousand will not be static as more and more modernize and transform their IT Infrastructure and leverage multi-cloud solutions.

The initial sale can be difficult as it is disruptive, but vmware has enjoyed a near monopoly like cisco and clients are happy to get out from under the vmware licensing costs. Once nutanix is in, the land and expand opp is huge.

Finally - we are not talking about 1 product. Virtualization and hyoervisors is one thing. Hci is another. Automation and orchestration is another (Calm vs vRealize), network virt and microsegmentation is another (nsx vs Flow), Beam for cloud governance, Xi for Cloud-based DR, etc etc

Thanks Dreamer, that’s what I was trying to say a few posts back, and you said it so much better.
Saul

4 Likes

Guys - the other point to consider when looking at the head to head market shares between VMWare and Nutanix is to what degree the two are building future revenues. Nutanix may appear to be slipping in current market value share but… Nutanix is building deferred revenues and billings at a pace that has almost never been seen - whilst at the same time growing current revenues at a pretty staggering rate.

If we are going to fret about the VMW vs NTNX market shares I would be looking at how they compete at total value creation - ie current recognised revenue value share as well as future revenues via billings and deferred revenues.

Is VMW building their deferred revenues and billings at anything like the rate of Nutanix?

Nutanix has spent the last year taking 25% of its revenues out of the equation in exiting hardware. At the same time it is preparing itself to be a SAAS subscription model with deferred revenues and future SAAS offerings like BEAM and Xi. These aren’t just new product developments these are business model shifts which probably aren’t reflected in market share comparisons with VMW’s current sales.

A

23 Likes
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?

I often post about the “S” curve which does not apply to single companies as much as to technologies. The bottom curve happens at around 15% market penetration and the top curve at around 85%. You are estimating 67% penetration between NTNX and VWWare. Add a few percent for minor players and you are getting close to that 85%.

Not only does it look like a declining trend, there is an explanation for it. :wink:

Denny Schlesinger

10 Likes