Nutanix, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2019, the three months ended October 31, 2018; comparative figures are for the three months ended October 31, 2017. Financial statements are unaudited. Nutanix provides an enterprise cloud platform, sold through channel and OEM partners, and reports one operating segment.
Financial performance
| Metric | Q1 FY2018 | Q1 FY2019 | Change / context |
|---|---|---|---|
| Total revenue | $275.6 million | $313.3 million | Up 13.7% |
| Subscription revenue | $62.4 million | $127.0 million | Up about 104% |
| Product revenue | $219.1 million | $224.3 million | Up 2%; hardware revenue fell as customers increasingly bought hardware through OEMs |
| Gross profit / margin | $166.9 million / 60.6% | $239.2 million / 76.3% | Margin up 15.7 percentage points |
| Operating expenses | $226.0 million | $334.4 million | Up 48%; sales and marketing, R&D, and G&A all increased |
| Operating loss | $59.0 million | $95.2 million | Loss widened |
| Net loss / diluted loss per share | $61.5 million / $0.39 | $94.3 million / $0.54 | Loss widened; share count also increased |
| Operating cash flow | $10.1 million | $49.8 million | Higher billings and collections were principal drivers |
| Free cash flow (non-GAAP) | $(7.9) million | $20.0 million | Improved; operating cash flow less property and equipment purchases |
| Total billings (non-GAAP) | $315.3 million | $383.6 million | Up about 22% |
Management also reported adjusted gross margin of 78.6% versus 61.9% and non-GAAP operating expenses of $272.1 million versus $192.6 million. These non-GAAP measures exclude specified items and should be considered alongside GAAP results.
Liquidity, debt, and balance sheet
- At October 31, 2018, cash and cash equivalents were $399.8 million, restricted cash was $1.1 million, and short-term investments were $565.2 million, totaling approximately $965.0 million in cash, cash equivalents, and short-term investments.
- Current assets were $1.277 billion and current liabilities $470.9 million. Total liabilities were $1.342 billion; stockholders’ equity was $431.3 million.
- Convertible notes had $575 million principal, 0% stated interest, and mature January 2023. Their balance-sheet carrying value was $436.7 million, net of discount and issuance costs. No principal payments are required before maturity. The company intends to settle principal in cash upon conversion; conversion and repurchase terms may create liquidity needs.
- Deferred revenue increased to $701.8 million from $631.2 million at July 31, 2018. Contracted revenue not yet recognized was approximately $719.7 million; about 45% was expected to be recognized over the next 12 months. Most contracted but uninvoiced performance obligations are cancellable.
- Contractual obligations totaled $905.1 million, including $143.5 million of operating leases, $60.0 million of other purchase commitments, and $126.6 million of contract-manufacturer guarantees. Management said available cash and investments should cover anticipated needs for at least 12 months.
Material changes and business developments
- The business mix shifted toward software-only and subscription offerings. Subscription revenue rose sharply, while hardware revenue fell to $32.5 million from $80.8 million. Management estimated product revenue would have been about $104 million higher in Q1 FY2019 if Nutanix had sold the hardware in transactions where customers instead sourced it elsewhere. Software-only sales generally bring higher gross margins but lower reported revenue per transaction.
- Deferred revenue and subscription billings increased, alongside the transition to subscription and term-based software sales. Revenue timing differs by offering: support and SaaS are generally recognized over the service term, while certain software licenses are recognized when made available.
- Operating costs grew substantially as the company expanded. Headcount rose to approximately 4,380 from 3,010 a year earlier. Sales and marketing increased 35%, R&D 71%, and G&A 70%. Stock-based compensation was $65.9 million, compared with $35.5 million.
- Nutanix acquired Mainframe2 (Frame) on August 24, 2018 for preliminary consideration of approximately $129.7 million, comprising about $26.7 million cash and $103.0 million in stock. The acquisition added approximately $97.1 million of goodwill and $38.2 million of amortizable intangible assets. A further $43.3 million of employee holdbacks is conditional on continued service and is accounted for as compensation over three years.
- Revenue rose 46.1% in the prior-year quarter but grew 13.7% in Q1 FY2019. International revenue was about 42% of total revenue in the current quarter, with U.S. revenue down 3% and EMEA and Asia Pacific revenue up 46% and 50%, respectively.
Outlook, commentary, and key risks
- No specific revenue, earnings, or margin guidance for the next quarter or fiscal year is provided in the supplied filing text. Management expects continued investment in sales, marketing, engineering, and R&D, which may weigh on near-term profitability.
- Management said approximately 58% of the global sales team was fully ramped, with 42% still ramping. A greater focus on major accounts and large deals may lengthen sales cycles and affect sales productivity; management expects continuing improvement over coming quarters.
- Management expects growth in software-only and subscription sales to continue. This shift can change revenue timing and reported revenue, and may cause margin fluctuations; subscription arrangements also carry renewal, cancellation, and customer-acceptance risks.
- The company has a history of losses and expects losses to continue for the foreseeable future. Q1 net loss increased despite higher revenue and gross margin, as operating expenses rose faster than sales.
- Risks highlighted include reliance on channel/OEM partners and hardware manufacturers, competition from established IT vendors and public cloud providers, sales-cycle and customer-adoption uncertainty, component supply and purchase commitments, rapid growth and employee ramp-up, cybersecurity and product defects, international and regulatory exposure, and the ability to execute the business-model transition.
- Additional matters to note: operating lease commitments exceeded $100 million and will largely be recognized as lease liabilities and right-of-use assets when the company adopts the lease standard in fiscal 2020; the company anticipated a material balance-sheet impact. No material legal proceedings were reported. Disclosure controls were deemed effective, and no material change in internal control over financial reporting was identified.
Important facts for investors to verify
- Whether subscription growth and billings convert into recognized revenue and durable cash generation, given deferred revenue and cancellation terms.
- Whether revenue growth can improve as Nutanix shifts away from hardware sales, and how the transition affects reported revenue, gross margin, and sales productivity.
- Whether expense growth, including stock-based compensation and acquisition-related costs, can be managed while the company pursues growth and a path to profitability.
- The conversion, cash-settlement, dilution, and maturity implications of the $575 million notes, including the note hedges and warrants.
- The execution and integration of the Frame acquisition, including preliminary purchase-price allocation and employee retention arrangements.
- Exposure to significant channel partners, OEMs, and manufacturers, including the $126.6 million of contract-manufacturer guarantees and other purchase commitments.
- Whether liquidity remains sufficient as the business grows, capital spending continues, and contractual obligations come due.