Nutanix and the 'messy middle' of the subscription software model

The hyperconvergence vendor moved from selling hardware to subscription software and took a hit to revenues in the process

Moving to a new licensing model always carries a degree of risk. For hyperconvergence vendor Nutanix, the change to a subscription software vendor was more radical than for the many software vendors that have taken that route, in that Nutanix went public three years ago as a hardware vendor. It is, perhaps, the only enterprise vendor to go directly from hardware to subscription software, according to VP investor relations Tonya Chin.

The company moved to the software subscription model two years ago and finally stopped selling hardware appliances altogether in 2018.

With long-term deals replaced by recurring short-term ones, revenues have taken a hit, and with them the firm's stock. Shares in Nutanix plummeted 35 per cent in May, although they have stabilised somewhat since then.

Speaking at a media briefing during the .NEXT event in Copenhagen this month, Chin put the dip down to a number of factors. First, revenues for a three-year subscription contract will be realised three years later with than an equivalent up-front deal, so in the short-term income will inevitably decline.

The move has also thrown some technology and financial analysts who follow Nutanix, many of whom have expertise in hardware rather than the software market, Chin said. The confusion has been amplified by discrepancies in the way the major analyst houses size the hyperconverged infrastructure (HCI) market. While Gartner uses a straightforward split between hardware and software, IDC's system gives much more weight to hardware, to the detriment of Nutanix which now only sells software.

Had the leap from hardware to subscription software proved controversial internally before it was announced? Not at all said Chin, insisting that customers appreciate the flexibility as they move to multi-cloud and hybrid architectures.

"The benefits are clear, not only to us but to our customers. So, I don't think there was any controversy, but it creates a messy middle that we need to go through," she said, pointing out that companies like Adobe followed a similar trajectory when they adopted the subscription model.

For Nutanix the logic is clear. The company has expanded outwards from the datacentre to support multiple cloud platforms, with platform-agnostic software products that cover disaster recovery, virtual data centre replication and container orchestration, therefore licensing software to one device, as it did as an appliance vendor, no longer makes sense.

The company offers one-, three- and five-year licences on its software which are portable across hardware platforms. The one-year licence costs about 40 per cent of the three-year one, and there's a similar rate of discounting for customers who commit to five years. The average subscription is 3.5 years, according to Chin.

As we've diversified our business we're happy to put our software on any box - Tonya Chin

"As we've diversified our business, we're happy to put our software on any box. We're not pushing any brand, which means that we often are sold on HP or Cisco - or Dell for that matter," Chin said.

VMware, of which Dell EMC is a majority shareholder, is Nutanix' biggest competitor. According to Chin, Nutanix commands 50 per cent of the HCI software market compared with VMware's 41 per cent, although as usual analysts' figures vary widely depending on definitions.

Chin forecasts that company will get through its ‘messy middle', becoming a fully-fledged subscription software company within the next two years.

"Last quarter 71 per cent of our billings were from subscription and we'll end this year north of 75 per cent so we're about three quarters of the way through in two years. It's hard to predict how long the last bit will take but maybe a year or two," she said.

Roy Illsley, distinguished analyst for infrastructure solutions at Ovum, believes that Dell EMC will be slower to move to the subscription model.

"I think this move is well understood in the market. I do think that Dell will move that way, but it's more cautious as it does not want to disrupt its revenue and it tends not to rush into trends," he said.