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HCI market grows as storage, servers shrink

Dell EMC and Hewlett Packard Enterprise say their storage and server revenues declined sharply last quarter, while hyper-converged infrastructure sales keep growing.

Storage and server revenue keep declining sharply. Much of that money is going to public clouds but also to hyper-converged infrastructure systems that combine storage and servers.

Dell EMC, NetApp and Hewlett Packard Enterprise (HPE) all reported declines in storage revenue for their most recent quarters. IBM storage inched up 3% after quarters of decline. Pure Storage grew revenue 17% last quarter, but that's a far cry from its growth in the 30% range as recently as mid-2018.

Naveen Chhabra, Forrester Research senior analyst for servers and operations, said the cloud and hyper-converged infrastructure (HCI) are taking a toll on traditional storage.

"The entire storage market is in trouble," Chhabra said. "Every storage vendor has declining revenue. The only one that has shown growth is Pure. Storage investment is happening in the cloud, and the rest of storage is under tremendous pressure."

Chhabra said he expects the HCI market will remain strong and continue to eat into storage and server sales. "There's no stopping that," he said. "Everything, including storage, eventually ends up deployed on the server."

Dell and HPE sell servers and storage, and best show the trend from those technologies to hyper-converged.

The entire storage market is in trouble.
Naveen ChhabraSenior analyst, Forrester Research

HCI market remains extensive

Dell EMC's storage revenue fell 3% to $4.5 billion last quarter, and servers and networking declined 19% to $4.3 billion. However, COO Jeff Clarke said hyper-converged revenue grew by more than 10%, mainly thanks to its VMware vSAN-powered VxRail product.

HPE storage declined 0.5% to $1.25 billion and compute fell 10% to $3 billion, but its SimpliVity HCI revenue ticked up by 6%.

At the same time, the leading HCI software vendors increased revenue.

Nutanix revenue grew 21% since last year to $347 million, and its billings increased 4% to $428 million. Dell-owned VMware's vSAN bookings increased "in the mid-teens" according to the vendor. Both Nutanix and VMware claim they would have grown HCI revenue more, but they have switched to subscription licensing that decreases upfront revenue.

HPE actually picked up more HCI hardware customers through Nutanix, which now sells its software stack on HPE ProLiant servers as part of an OEM deal signed in 2019.

Nutanix said its DX Series consisting of Nutanix software on HPE servers accounted for 117 new customers in its first full quarter of the partnership. Nutanix CEO Dheeraj Pandey said those deals included a $4 million subscription deal with a financial services company, and $1 million deal with another financial services firm.

"HPE is becoming a pretty substantial portion" of Nutanix business, Pandey said. "It's looking like a win-win for both sides."

HPE is also offering Nutanix software-as-a-service through its GreenLake program, but it has not disclosed any numbers of those deals.

Pandey said while Nutanix sells HPE servers with its software, many deals come through recommendations from HPE. The Nutanix software stack includes something HPE's SimpliVity HCI software lacks: a built-in hypervisor. Nutanix's AHV hypervisor gives customers an alternative to VMware virtualization.

"We have big customers out there who like HPE, and they'd like to consume Nutanix software on HPE servers," Pandey said. "We're one of the few companies that deliver the full stack, including HCI, databases, end-user computing and automation. Our largest customers are AHV customers; they're full-stack customers on Nutanix. We can run on top of Dell servers, HPE servers, our own white box servers, and we can take our software to the public cloud."

Dell, VMware HCI market leaders

According to the most recent IDC hyper-converged market tracker for the third quarter of 2019, Dell led in systems revenue with a 35.1% share, followed by Nutanix at 13%, Cisco with 5.4%, HPE at 4.6% and Lenovo at 4.5%. IDC recognizes HCI software separately, with VMware at No. 1 with 38% share followed by Nutanix at 27.2%.

Dell still sells Nutanix software on PowerEdge servers as part of a deal that predates Dell's acquisition of EMC (which included VMware) but focuses more on pushing VxRail systems with vSAN.

Chhabra said Dell recognized the HCI trend well before HPE and rode that to the HCI market lead. He said he sees Nutanix and HPE growing closer to help battle the Dell-VMware HCI combination.

"How does HPE compete with Dell plus VMware?" he said. "Here comes a strong partner in Nutanix, which can give HPE a like-to-like competitor to Dell. Do you have a hypervisor, do you have infrastructure, do you have storage? That's what the Dell-VMware combination is, and now HPE has that."

Dell CFO Thomas Sweet said he expects HCI to continue as Dell EMC's fastest growing storage segment through this year.

"We've had great success with our VxRail product," Sweet said on Dell's earnings call last week. "We've seen softness in the core [storage] array business. That infrastructure space has been soft."

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