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Hyper-converged infrastructure watchers mull losses and layoffs

So what if many top vendors in the hyper-converged infrastructure market aren't profitable? Customers mostly care whether the technology is useful for their data centers.

IT pros continue to snap up hyper-converged infrastructure products amid an increasingly crowded market with scrutiny of some of the leading vendors' performance and stability.

Hyper-converged infrastructure (HCI) has become a popular way to simplify data center hardware and management, finding a home within some of the largest enterprises down to small and medium-sized businesses since it emerged about five years ago. But how is the sector handling its growing pains?

IDC Research Inc. offers a view of hyper-convergence's popularity: A recent report pegs growth at 137.5% year over year during the second quarter of 2016 -- totaling $480.62 million in revenue. That accounted for 16.2% of the total market revenue for integrated systems, excluding support and maintenance contract revenue.

HCI buyers are satisfied and satisfaction levels are increasing, according to surveys and interviews conducted by Krista Macomber, an analyst at Technology Business Research Inc. (TBR) in Hampton, N.H.

"Already there is some strong loyalty being seeded," she said.

While market-leading Nutanix Inc. of San Jose, Calif. is reporting "fairly significant operating losses," the company is spending money to build its portfolio and sales efforts, and Macomber thinks Nutanix will eventually see "significant revenue returns."

That support was amplified last week with the long-awaited initial public offering (IPO) from Nutanix, whose stock surged 178% over its initial price of $16 per share. That success was hailed as important in showing that hyper-converged infrastructure is its own differentiated technology, more than merely next-generation storage.

It is not uncommon for a customer to ask to talk to my CFO to understand where we are.
Jeff ReadyCEO, Scale Computing Inc.

Customers probably don't pay much attention to their IT vendors' stock prices -- but what about other indicators of their IT vendor's financial health? Also revealed in Nutanix's IPO filing were fairly significant losses: $168 million in 2016 on $445 million in sales, which Macomber attributed to spending money on building its portfolio and sales efforts.

Many end users won't be swayed much by that, but it's probably "in the back of their [minds]," Macomber said.

"It is not uncommon for a customer to ask to talk to my CFO to understand where we are" regarding the company's profitability and longer-term prospects, said Jeff Ready, CEO of Scale Computing Inc., headquartered in Indianapolis, Ind. On the other hand, Doron Kempel, CEO of No. 2-ranked HCI supplier SimpliVity Corp. in Westborough, Mass., said he has only been asked two or three times this year out of about 1,000 deals to explain the company's financials to prospective buyers before they make a decision.

Race to the bottom?

Growing interest in hyper-converged infrastructure has lured a crowd of vendors new and old who are seeking a slice of the action. For legacy vendors such as Hewlett Packard Enterprise, Dell and Lenovo, HCI is a way to continue selling hardware into enterprise data centers to host on-premises applications. Many of the HCI leaders, however, are new vendors in the IT world; in the latest Forrester Wave report from Forrester Research Inc., the top three hyper-converged infrastructure companies entered the market for the first time with HCI and are not longstanding IT vendors with an array of data center products.

With so many potential vendors, especially very large ones, there are fears the industry may be in a race to the bottom.

"The market has been flooded with companies trying to get their product in front of customers," said a former employee at one HCI vendor, who requested anonymity. "They are all desperate enough to get a piece of the pie, so they are all dropping their prices."

Tracking a company's financial stability may not be as important to customers, but managing risk certainly is -- and "incumbent vendors" may play the "risk card" against startups, said Jason Anderson, chief architect at Datalink Corp., a data center services and solutions provider in Eden Prairie, Minn.

He noted there have been a few highly visible casualties in the hyper-converged space, including EMC's VSPEX BLUE and the EVO:RAIL-based products from VMware.

Another vendor health indicator that buyers may consider, in addition to the losses and "burn rate" of startups, is layoffs and consolidation. SimpliVity has had three rounds of layoffs this year, SearchDataCenter has learned: These impacted sales, customer support and marketing, while engineering and development teams were spared after the first round, according to the former HCI employee who was laid off this summer.

The company's support metrics had consistently risen until the most recent quarter, when it dropped by a few percentage points, the source said: "Based on resources being cut, it started to have an impact."

Kempel told SearchDataCenter that SimpliVity's fast growth has meant hiring a lot of people quickly, and it needs to constantly rearrange to make sure the company is efficient as it continues to aggressively hire new workers. The company's headcount is 750 employees with 100 added in the first half of 2016, he said, with 30 openings in engineering and 30 spots globally in sales and product management.

"From time to time, we take a look at how we're organized," he said. "We need to make sure we have the right people on the bus."

Keep innovating to survive

In the end, customers' satisfaction with HCI could still be threatened in several ways, according to TBR's Macomber. Vendors will need to continue to add capabilities to their products to allow enhanced scalability and further simplify deployment.

Simplicity and fast time-to-value are primary reasons IT pros go to hyper-converged infrastructure, but if they want to upgrade their environment and have challenges scaling, that could hinder further purchases.

"As long as customers are seeing consistent innovation, that will help offset concerns," she said.

Robert Gates covers data centers, data center strategies, server technologies, converged and hyper-converged infrastructure, and open source operating systems for SearchDataCenter. Follow him on Twitter @RBGatesTT or email him at [email protected].

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