Nutanix, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended April 30, 2018 (Nutanix fiscal 2018 third quarter), not 2017 Q3. Financial statements are unaudited. Prior-year figures were recast for adoption of ASC 606 using the full retrospective method.
Business context and reporting period
Nutanix provides enterprise cloud infrastructure software, sold as standalone software or with hardware appliances, primarily through channel and OEM partners. Management was transitioning the business toward software-only sales, which generally carry higher gross margins but lower reported revenue per transaction than appliance sales. The company reported 9,689 end customers, up from 6,172 a year earlier.
Key financial metrics
| Metric | Three months ended April 30, 2018 | Year-over-year | Nine months ended April 30, 2018 | Year-over-year |
|---|---|---|---|---|
| Revenue | $289.4 million | +41% | $851.7 million | +43.5% |
| Gross profit / GAAP gross margin | $193.8 million / 67.0% | Margin +7.5 percentage points | $538.9 million / 63.3% | Margin +2.0 percentage points |
| Operating loss | $82.3 million | Prior-year loss: $94.5 million | $201.2 million | Prior-year loss: $284.4 million |
| Net loss | $85.7 million; $0.51 per share | Prior-year loss: $96.8 million; $0.67 per share | $209.8 million; $1.30 per share | Prior-year loss: $313.5 million; $2.62 per share |
| Billings (non-GAAP) | $351.2 million | +50% | $1,022.4 million | +46% |
| Operating cash flow | $13.3 million | Prior-year use: $16.0 million | $69.8 million | Prior-year inflow: $7.9 million |
| Free cash flow (non-GAAP) | $(0.8) million | Prior-year use: $29.2 million | $23.7 million | Prior-year use: $29.9 million |
Revenue included product sales of $221.1 million and support, entitlements and services of $68.3 million for the quarter. Non-GAAP adjusted gross margin was 68.4% for the quarter and 64.6% for the nine-month period. These non-GAAP measures exclude specified items and are not substitutes for GAAP results.
At April 30, 2018, cash and cash equivalents were $376.8 million and short-term investments were $546.7 million, totaling $923.5 million. Current assets were $1.185 billion and current liabilities were $388.0 million. Deferred revenue was $539.9 million; contracted revenue not yet recognized was approximately $567.1 million, of which the company expected to recognize about 46% within 12 months.
The company issued $575.0 million of 0% convertible senior notes due 2023. Their net carrying amount was $422.6 million after unamortized discount and issuance costs; estimated fair value was $714.5 million. The notes have no required principal payments before maturity. The company purchased note hedges and sold warrants, with an intended effective conversion price of $73.46 per share.
Material changes versus the prior comparable period
- Quarterly revenue rose 41%; nine-month revenue increased 43.5%. Support and services revenue grew 50% for the quarter and 55% for the nine months.
- GAAP gross margin improved, primarily as software-only transactions contributed a larger share of sales. Management noted that software-only transactions can reduce reported revenue even as margins improve.
- DRAM and NAND supply constraints raised component costs: their combined share of product cost increased to 32% for the quarter and 30% for the nine months. Reported DRAM and NAND prices were up approximately 47% and 107%, respectively, for the quarter and nine months compared with the corresponding prior-year periods.
- Operating cash flow and free cash flow improved substantially, with nine-month free cash flow turning positive.
- Operating expenses increased in total. Sales and marketing rose 34% for the quarter and 27% for the nine months, while nine-month R&D and G&A declined, partly because the prior-year periods included substantial cumulative stock-based compensation related to pre-IPO awards.
- ASC 606 changed the timing of recognition for certain software licenses and commissions. It increased recast prior-year nine-month revenue by $52.7 million and reduced deferred revenue at July 31, 2017 by $157.0 million; reported comparisons use adjusted prior periods.
Outlook, commentary, risks and unusual items
- No specific revenue or earnings guidance for future periods is provided in the supplied filing. Management expected cash, cash equivalents and short-term investments to cover anticipated working-capital and capital-expenditure needs for at least 12 months.
- The software-only transition began in fiscal 2018 Q1, with management expecting it to take approximately 1.5 years. The filing warns that the transition may slow revenue growth or cause revenue to decline, even as it supports higher gross margins.
- Management planned continued investment in R&D, engineering, sales and marketing. Approximately 57% of the global sales team was considered fully ramped; the remaining 43% was still ramping. Large-account selling may lengthen sales cycles and affect sales productivity.
- Two acquisitions closed in March 2018: Minjar, for approximately $19.9 million, and Netsil, for approximately $67.5 million. Preliminary purchase-price allocation included $71.7 million of goodwill and $25.9 million of amortizable intangible assets. Acquisition integration and final purchase accounting remain considerations.
- Commitments included $105.6 million of operating lease payments, $25.4 million of other purchase commitments and $54.7 million of guarantees to contract manufacturers. The company also reported operating lease commitments exceeding $100 million and expected lease accounting changes to materially increase reported assets and liabilities upon adoption.
- Key risks include dependence on channel and OEM partners, competition from traditional infrastructure vendors and public cloud providers, uncertain and lengthy sales cycles, execution of the software-only transition, component cost and supply pressures, and international and foreign-exchange exposure. Two partners each represented 10% or more of nine-month revenue; no end customer individually accounted for 10% or more.
- The company reported no material legal proceedings. Management concluded disclosure controls and procedures were effective at a reasonable assurance level; internal-control changes during the quarter related to implementing ASC 606 controls.
Important facts for investors to verify
- Confirm the reporting-period discrepancy: the request labels the filing “2017 Q3,” while the filing covers the quarter ended April 30, 2018.
- Track software-only mix alongside both revenue and gross margin, and assess whether software growth offsets reduced appliance hardware revenue.
- Review billings, deferred revenue, contracted-not-recognized revenue and cancellations; a majority of contracted but not invoiced performance obligations were subject to cancellation terms.
- Monitor cash generation against operating losses, the $575.0 million note principal due in 2023, and the notes’ conversion, cash-settlement and warrant-dilution features.
- Assess whether sales-team ramping, large-account cycles, partner concentration and DRAM/NAND costs affect growth, margins or forecast reliability.
- Follow acquisition integration and final purchase-price allocations, lease-accounting adoption, and potential dilution from equity awards and acquisition-related shares.