Nutanix, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter of 2022, the three months ended January 31, 2022; year-to-date figures cover the six months ended that date. Financial statements are unaudited. Dollar amounts below are in millions unless stated otherwise.
Business context
Nutanix sells enterprise cloud software and cloud services for private, hybrid and multicloud environments. Sales are primarily through channel partners and OEMs. The company is transitioning toward subscription and SaaS offerings; subscription revenue represented the large majority of reported revenue.
Financial performance and liquidity
| Metric | Q2 FY22 | Q2 FY21 | Six months FY22 | Six months FY21 |
|---|---|---|---|---|
| Total revenue | $413.1 | $346.4 | $791.6 | $659.1 |
| Subscription revenue | $374.7 | $305.9 | $712.6 | $584.1 |
| Gross profit / gross margin | $333.1 / 80.6% | $275.4 / 79.5% | $630.2 / 79.6% | $520.2 / 78.9% |
| Operating loss | $(94.4) | $(156.2) | $(231.7) | $(338.3) |
| Net loss | $(115.1) | $(287.4) | $(534.9) | $(552.4) |
| Net loss per share, diluted | $(0.53) | $(1.42) | $(2.46) | $(2.72) |
| Billings (non-GAAP) | $464.5 | $385.5 | $862.6 | $720.5 |
| Operating cash flow | Not presented in the primary cash flow statement by quarter | Not presented | $32.7 | $(19.6) |
| Free cash flow (non-GAAP) | $17.2 | $(28.5) | $15.3 | $(44.8) |
Revenue increased 19% year over year in Q2 and 20% for the six-month period. Q2 product revenue rose 20% and support, entitlements and other services revenue rose 19%. Subscription billings were $427.4 million in Q2, up from $339.2 million. ARR was $1.04 billion, compared with $672.8 million a year earlier; run-rate ACV was $1.68 billion, versus $1.38 billion. These are company-defined performance measures, not GAAP metrics.
At January 31, 2022, cash and cash equivalents were $400.7 million and short-term investments were $891.0 million, totaling about $1.29 billion; restricted cash was $3.1 million. Total assets were $2.32 billion and total liabilities were $3.04 billion, leaving a stockholders’ deficit of $725.6 million. Deferred revenue totaled $1.39 billion. The company said available cash, cash equivalents and short-term investments should cover anticipated working-capital and capital-expenditure needs for at least 12 months, while noting operating and free cash flow may fluctuate.
Convertible notes had a combined net carrying value of $1.27 billion at quarter-end. Approximately $145.7 million principal of 0% notes due January 2023 was classified as current; other notes include $750 million principal due 2026 and $575 million principal due 2027. The company intends to settle principal on the 2023 and 2027 notes in cash. Contractual obligations also include $93.6 million of purchase commitments and $86.4 million of OEM guarantees.
Changes versus the prior comparable period
- Q2 GAAP gross margin improved 1.1 percentage points to 80.6%; six-month gross margin improved 0.7 points to 79.6%.
- Q2 operating loss narrowed to $94.4 million, supported by higher revenue and lower sales and marketing expense. Sales and marketing expense fell 7% year over year; R&D rose 4% and G&A rose 26%.
- Q2 net loss narrowed substantially, partly because the prior-year quarter included a large unfavorable fair-value change in the 2026 notes’ derivative liability. For the six-month comparison, net loss improved modestly; current-year results included a $64.9 million debt-extinguishment loss and a $198.0 million derivative fair-value charge.
- Six-month operating cash flow improved from use of $19.6 million to generation of $32.7 million, which management attributed primarily to increased cash collections. Investing cash flow shifted from use of $620.9 million to generation of $13.2 million, largely reflecting investment maturities and purchases.
- In September 2021, Nutanix exchanged $416.5 million principal of 2023 notes for $477.3 million principal of 2027 notes, issued additional 2027 notes for cash, and repurchased some 2023 notes and shares. The exchange and related transactions reduced 2023 notes outstanding to $145.7 million.
Outlook, commentary and risks
- No specific revenue or earnings guidance is provided in the supplied filing text. Management expects continued investment in growth and product development while improving cash flow through go-to-market efficiencies.
- The subscription transition may shift the timing of billings, revenue and cash receipts. Management reported a total average contract term of 3.1 years in Q2 FY22, down from 3.4 years in Q2 FY21, and noted that shorter terms or lower upfront payments could pressure these measures.
- Management cited higher-than-normal sales-representative attrition: about 76% of the global sales team was fully ramped at quarter-end, with the remainder still ramping. Replacing and training sales staff may take time and affect productivity.
- COVID-19 may affect demand, sales cycles, supply chains, component costs, product delivery and customer acceptance. The company also noted possible cybersecurity and product-roadmap impacts; the duration and overall financial effect remain uncertain.
- Sales-channel concentration is notable: one partner accounted for 34% of Q2 revenue and another for 14%. The company also depends on OEM and channel relationships.
- Two securities class actions remain pending, including an options class action. A mediation was scheduled; the company said it could not determine whether liabilities would result. The filing also discloses purchase commitments and OEM guarantees noted above.
- Unusual accounting items include adoption of convertible-debt accounting guidance, reclassification of the 2026 notes’ $698.2 million derivative liability to equity after the conversion price became fixed, and the $64.9 million debt-extinguishment loss. Stock-based compensation was $178.6 million for the six months.
Important facts for investors to verify
- Whether subscription growth, ARR and billings translate into sustained GAAP revenue growth and improved cash generation; review the company’s definitions and limitations for non-GAAP and performance measures.
- The cash settlement and refinancing implications of the $145.7 million 2023 notes due in January 2023, alongside the terms and conversion features of the 2026 and 2027 notes.
- Whether sales-team attrition, ramping and shorter subscription terms affect bookings, renewals, sales productivity or cash flow.
- The extent of exposure to major channel partners, OEM commitments and guarantees, and any changes in customer or partner concentration.
- Developments in the securities litigation and any resulting financial exposure.