Nutanix, Inc. Form 10-Q Summary
Reporting period: The filing covers the quarter ended April 30, 2020 (Nutanix fiscal Q3 2020), with nine-month results through that date. This differs from the request metadata’s “2019 Q3.” Amounts below are in U.S. dollars; financial statement amounts are rounded to millions unless stated otherwise.
Business context and reporting period
Nutanix sells enterprise cloud platform software, subscriptions, support and, in some transactions, hardware. It relies primarily on channel partners, distributors, resellers and OEMs. The company continued shifting from appliance and life-of-device sales toward software-only and subscription sales. The unaudited statements are prepared under U.S. GAAP.
Key financial metrics
| Metric | Three months ended Apr. 30, 2020 | Year-over-year change | Nine months ended Apr. 30, 2020 | Year-over-year change |
|---|---|---|---|---|
| Total revenue | $318.3 million | Up 10.7% | $979.8 million | Up 4.7% |
| Subscription revenue | $261.0 million | Up 55.0% | $745.4 million | Up 64.6% |
| Product revenue | $180.8 million | Down 2% | $586.7 million | Down 9% |
| Support, entitlements and other services revenue | $137.5 million | Up 34% | $393.1 million | Up 35% |
| GAAP gross margin | 77.3% | Up 3.4 percentage points | 77.6% | Up 2.7 percentage points |
| GAAP operating loss | $230.2 million | Greater loss than prior year | $657.6 million | Greater loss than prior year |
| GAAP net loss | $240.7 million | Greater loss than prior year | $687.5 million | Greater loss than prior year |
| Operating cash flow | Use of $84.9 million | Prior-year use of $36.5 million | Use of $163.5 million | Prior-year generation of $51.8 million |
| Free cash flow (non-GAAP) | Use of $117.5 million | Prior-year use of $58.9 million | Use of $235.6 million | Prior-year use of $43.0 million |
| Total billings (non-GAAP) | $383.5 million | Up from $346.0 million | $1,191.6 million | Up from $1,143.0 million |
Subscription growth and support revenue growth were offset in part by lower product revenue, principally as customers increasingly bought hardware directly from OEMs and the company shifted to subscription licenses. Product gross margin improved as software made up a larger share of product revenue. Sales and marketing expense rose 22% for the quarter and 37% for the nine-month period, contributing to operating losses; total nine-month operating expenses were $1,417.7 million.
At April 30, 2020, cash and cash equivalents were $262.3 million and short-term investments were $469.8 million, totaling $732.1 million. Current assets were $1,095.2 million and current liabilities were $713.4 million. The company reported a $2.34 billion accumulated deficit and negative stockholders’ equity of $184.0 million.
Convertible notes had $575 million principal outstanding, zero stated interest and a January 2023 maturity; the balance-sheet carrying amount, net of discount and issuance costs, was approximately $482.2 million. No principal payments are required before maturity. Operating lease liabilities totaled $157.8 million.
Deferred revenue was $1,122.1 million, up from $910.0 million at July 31, 2019. Contracted revenue not yet recognized was approximately $1,133.6 million; the company expected to recognize about 45% within 12 months. Most contracted but not invoiced performance obligations were subject to cancellation terms.
Material changes versus the prior comparable period
- Quarterly revenue increased 10.7%, while nine-month revenue increased 4.7%; subscription revenue grew substantially as the business-model transition advanced.
- Product revenue declined, including a sharp reduction in hardware revenue. For the nine months, support and services growth more than offset the product decline.
- Gross margin improved in both comparison periods, reflecting a higher software mix. Operating expenses and GAAP losses increased substantially.
- Cash from operations shifted from a $51.8 million source in the prior-year nine months to a $163.5 million use. Free cash flow use widened to $235.6 million.
- Cash, cash equivalents and short-term investments declined from $908.8 million at July 31, 2019 to $732.1 million at April 30, 2020. The company adopted the new lease standard in fiscal 2020, recognizing operating lease assets and liabilities; the prior-year balance sheet was not restated.
Outlook, management commentary, risks and unusual items
- Outlook and liquidity: Nutanix expected operating and free cash flow to remain negative over the next 12 months, but believed available cash, cash equivalents and short-term investments would cover anticipated needs for at least that period. The filing provides no numerical revenue or earnings guidance.
- COVID-19: Management cited potential lower IT spending, delayed or abandoned purchases, longer sales cycles, collection delays, supply-chain and shipping disruptions, and difficulty delivering on-site services. Demand for virtual desktop and end-user computing solutions increased. Offices were temporarily closed, employees worked remotely, travel and events were curtailed, and certain partners received extended payment terms.
- Expense actions: The company instituted a broad hiring pause outside critical roles, a 10% executive salary reduction, paused merit increases and bonus payments, and employee furlough or unpaid-leave measures. Management said spending and investment levels could fluctuate or decline near term.
- Business-model risks: Shorter subscription terms and customers paying only the first year upfront could pressure billings and cash flow. Subscription revenue recognition, renewal rates, sales-force productivity and the transition in sales compensation were identified as important uncertainties.
- Concentration and execution: Two partners represented 29% and 14% of quarterly revenue, respectively. The company also cited competition, reliance on channel partners and OEMs, sales-force ramping, and hardware component availability and cost as risks.
- Commitments and contingencies: As of April 30, 2020, the company disclosed approximately $76.9 million of purchase obligations and other commitments, plus $121.5 million of guarantees to contract manufacturers and OEMs. Securities class-action and shareholder derivative litigation remained at early stages; the company could not determine potential liabilities.
- Unusual item: A $3.0 million impairment charge was recorded for lease-related assets after the company ceased using certain Bangalore office space. Management noted additional impairment charges could occur.
- Other risks: Foreign-currency exposure, cybersecurity, privacy and regulatory compliance, competition, and the ability to repay or settle convertible notes were among the risks described. A hypothetical 10% weakening of the U.S. dollar was estimated to increase nine-month operating loss by approximately $33.5 million.
Important facts for investors to verify
- Confirm the intended period: the submitted filing is for fiscal Q3 2020, not 2019 Q3.
- Track subscription revenue, billings, deferred revenue and renewal performance, and assess how much contracted revenue is cancellable or remains unbilled.
- Monitor operating cash flow, free cash flow, liquidity and the company’s stated expectation of continued cash burn.
- Review whether COVID-19 effects, expense reductions and sales-force changes alter demand, customer collections, supply availability or execution.
- Assess the $575 million note principal due in 2023, lease liabilities, purchase commitments and manufacturer guarantees against future liquidity.
- Follow developments in the securities and derivative litigation, and confirm whether any material liabilities or additional lease impairments arise.