Nutanix lowers outlook for fiscal ’22 amid server delays and sale rep departures

Hyperconverged infrastructure software vendor Nutanix is warning that supply chain issues and sales reps leaving for pastures new will result in weaker-than-expected sales for the remainder of its financial year.

Revenues in the company’s Q3 of fiscal 2020 ended April 30 were $404 million, up 17 percent year-on-year, beating the company’s own forecasts of between $395 million to $400 million. It reported a net loss of $111.6 million, versus a net loss of $123.6 million in the year ago period. 

President and CEO Rajiv Ramaswami said during an earnings call: “Our third quarter reflected continued solid execution, demonstrating strong year-over-year top and bottom line improvement.

“Late in the third quarter, we saw an unexpected impact from challenges that limited our upside in the quarter and affected our outlook for the fourth quarter. Increased supply chain delays with our hardware partners account for the significant majority of the impact to our outlook, and higher-than-expected sales rep attrition in the third quarter was also a factor. We don’t believe these challenges reflect any change in demand for our hybrid multicloud platform, and we remain focused on mitigating the impact of these issues and continuing to execute on the opportunity in front of us.”

Full FY22 revenues are now forecast to be $1.55 billion, an 11.2 percent year-on-year increase. Nutanix had predicted a revenue range of $1.625 billion to $1.63 billion three months ago.

Nutanix financial chart
Significant net loss improvement in the two most recent quarters

Customers run Nutanix software on third-party server hardware and shipping delays impacted revenues and orders. Rukmini said: “We saw these supply chain challenges impact us late in Q3, which limited our upside in Q3, and we expect these trends to continue in Q4.”

It won’t be just a short-lived issue, Ravaswami said: “We expect that these challenges in the supply chain are likely to persist for multiple quarters.“ He added that Nutanix wasn’t seeing any change in underlying demand.

Annual Recurring Revenue of $1.1 billion was up 46 percent on the year.

CFO Rukmin Sivaraman, said: “Q3 sales productivity was in line with our expectations… We saw rep attrition worse than in Q3, resulting in lower-than-expected rep headcount entering Q4. Under the leadership of our new Chief Revenue Officer, Dom Delfino, our sales leaders remain focused on getting rep headcount to our target level via both better retention and increased hiring efforts.”

Nutanix’s prior CRO, Chris Kaddaras, left in October 2021 to join startup Transmit Security, just seven months after starting at Nutanix. Delfino was hired from Pure, commencing his role in December 2021. Five months in and he’s losing sales reps. They are going, Ramaswami said, to startups with “the promise of quick IPO riches.”

Ramaswami suggested things would start to improve after the next quarter. Delfino is working on increasing sales rep productivity, “doubling down on training and enablement,” as well as “improved territory coverage and [a] higher level of quota attainment.” 

Wells Fargo analyst Aaron Rakers told subscribers that sales reps had left for other start-up opportunities because they were “unable to make quotas,” and said: “We believe this could take a few quarters to rectify.”

The customer count rose by 586 in the quarter to 21,980. This is down on the 660 added a year ago and the 700 in the prior quarter. Nutanix says it saw a year-over-year improvement in win rates against VMware and other competitors. 

Free cash flow was minus $20.1 million. Ramaswami said Nutanix was working to change this: “We continue to prioritize working towards sustainable free cash flow generation in FY ’23.”

The fourth-quarter outlook is for a growth of between $340-$360 million, weighed down by customer order delays due to server hardware availability and the lower-than-expected sales rep headcount. At the $350 million mid-point, this is a 10.4 percent decrease on the year-ago Q4. William Blair analyst Jason Ader told subscribers this is “an eye-popping $89 million below consensus.”

Ramaswami said: “We don’t believe our reduced outlook is a reflection of any change in our market opportunity or demand for our solutions. That said, we are focused on mitigating the impact of these challenges and continuing to drive towards profitable growth. “