Nutanix 'let chaos reign', groans CEO as shares tumble more than 20% amid dismal forecast

Nutanix is staring down the barrel of virtually no growth for the next quarter, an admission that sent its share price into a tailspin as analysts grilled the HCI vendor over inadequate marketing spend and sales hires.

The company last night reported financial for Q2 ended 31 January of fiscal '19 with revenues up 17 per cent year-on-year to $335.4m and a net loss widening to $122.8m from a net loss of $62.6m a year ago.

• Customer count: Up 920 in the quarter to reach 12,410
• Cash and equivalents: $965.5m, up from $918.3m a year ago
• Billings: $413.4 million, up from $355.9 million in the second quarter of fiscal 2018
• Software and support revenue: $297.4m growing 42 per cent year-on-year from $208.7m
• Gross Margin: 74.4 per cent up from 62.2 per cent a year ago
• Free cash flow: Use of $4.1m, compared to $32.4m last year
• Subscriptions: 57 per cent of Nutanix billings came from subscription, up from 38 per cent a year ago
• Subscription revenue: Up 112 per cent year-over-year to $157m

Which doesn't sound too bad, only that third quarter guidance is for revenues between $290m and $300m; a mere 1.9 per cent higher than a year ago and well below Nutanix's usual growth rate. Analyst consensus had been higher at $348m and as such Nutanix shares fell 21.4 per cent to $39.50 in after-hours trading.

Nutanix CFO Duston Williams said: "Looking ahead, our third quarter guidance reflects the impact of inadequate marketing spending for pipeline generation and slower than expected sales hiring. We took a critical look at these areas and have taken actions to address them."

The earnings call

In the earnings call, CEO Dheeraj Pandey said: "We recognised these [lead pipeline] imbalances in Q2 and have adjusted our lead generation spend accordingly... our Q3 guidance reflects the short-term impact of these imbalances."

Williams expanded on this: "In fiscal 2018, we reallocated some of our lead generation spending to other priorities. As a result, there was a four quarter period from Q4 2017 to Q3 2018 that we basically kept lead generation spend flat, all while the company continued to perform quite well."

The reallocated spend went to recruting engineering and new product development.

Nutanix reallocated some lead spending during this fiscal year too so the sales pipeline didn't get filled as much as the HCI maker expected. It relied too much on repeat business from existing customers.

Win rates were steady, even rising a bit, so the lowered guidance due to a smaller lead pipeline is probably not due to competitive factors.

Williams added: "Our pipeline targets were further impacted by a shortage of sales reps in the first half of the fiscal year, resulting in an under-spend by several million dollars.".

Pandey admitted: "We have not kept pace with our bullish sales hiring goals."

He also mentioned sales management changes. Nutanix has promoted Chris Kaddaras, head of EMEA sales, to lead both the Americas and EMEA sales organisations. These represent 80-85 per cent of its business.

Let chaos reign

Pandey said Nutanix had "let chaos reign" in the first half of the year with a product portoflio that lacked "crisp messaging".

William Blair analyst Jason Ader said: "We believe the larger issue here is sales execution, which has been disrupted by three major events: 1) the business model shift from hardware to software, 2) the model shift from license to subscription, and 3) the launch of a dozen or so new products on top of the core HCI offering.

"We believe these issues must have been building up for several quarters, and in this past quarter they came to a head, as seen by the dramatically reduced pipeline." ®