Nutanix, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2018, the three months ended October 31, 2017. Financial statements are unaudited. Comparisons are to the three months ended October 31, 2016, restated under the company’s early adoption of ASC 606.
Business context
Nutanix sells enterprise cloud infrastructure software, delivered on appliances or as software-only, primarily through channel and OEM partners. Management began shifting toward software-only sales in Q1 FY2018 and expected the transition to take about a year and a half. The company reported 7,813 end-customers, including 608 Global 2000 enterprises, up from 4,473 a year earlier.
Financial and operating metrics
| Metric | Q1 FY2017 | Q1 FY2018 | Change or context |
|---|---|---|---|
| Revenue | $188.6 million | $275.6 million | Up 46% |
| Product revenue | $153.5 million | $219.1 million | Up 43% |
| Support and services revenue | $35.0 million | $56.5 million | Up 61% |
| Gross profit / gross margin | $118.8 million / 63% | $166.9 million / 61% | Margin declined 2 percentage points |
| Operating loss | $114.5 million | $59.0 million | Loss narrowed |
| Net loss | $140.3 million | $61.5 million | Loss narrowed; loss per share was $0.39 versus $1.89 |
| Operating cash flow | $4.2 million | $10.1 million | Improved |
| Free cash flow | $(7.8) million | $(7.9) million | Remained negative |
| Billings (non-GAAP) | $239.8 million | $315.3 million | Up about 32% |
| Deferred revenue | $275.7 million | $408.8 million | Period-end balance |
Software revenue was $138.2 million and hardware revenue was $80.8 million in Q1 FY2018. Cash and cash equivalents were $132.5 million, with $233.5 million in short-term investments, totaling $365.9 million. Current assets were $592.9 million and current liabilities $319.0 million. The balance sheet lists no debt; the $75.0 million senior notes were repaid in the prior-year quarter. Management said available cash and investments should cover anticipated working capital and capital expenditure needs for at least 12 months.
Capital expenditures were $18.0 million. The company had an accumulated deficit of $792.5 million. Stock-based compensation was $35.5 million, down from $90.7 million, largely because the prior-year quarter included a substantial cumulative charge tied to the IPO.
Changes, accounting, and management commentary
- Revenue growth reflected increased demand and a larger customer base; U.S. revenue rose 76%, while Asia-Pacific revenue was nearly flat and Other Americas declined 47%.
- Product gross margin fell to 61% from 66%, principally due to higher DRAM and NAND costs from supply constraints, partly offset by a higher software mix. Management expected further DRAM cost pressure in the quarter ending January 31, 2018 and while supply remains constrained.
- Support and services gross margin improved to 58% from 50%, which management attributed to support-organization efficiencies and costs growing more slowly than revenue.
- Management expects the shift to software-only sales to raise gross margins but can reduce reported revenue per transaction because hardware revenue is excluded. It warned that revenue growth may slow during the transition and that sales productivity, margins, and forecasts may be affected.
- ASC 606 was adopted early, effective August 1, 2017, using full retrospective application. It accelerated recognition of certain software license revenue and changed the timing of commission expense. For Q1 FY2017, adoption increased reported revenue by $21.8 million and reduced the reported net loss by $21.9 million. It did not materially affect cash flows.
Risks, contingencies, and unusual items
- The company continued to incur losses and said it expected losses to continue for the foreseeable future. It plans continued investment in sales, marketing, engineering, and international operations, which may weigh on near-term profitability. Only 63% of its global sales team was considered fully productive.
- Channel concentration is notable: two partners identified in the filing represented 17% and 28% of Q1 FY2018 revenue. No end-customer represented 10% or more of revenue. Dell is both an OEM partner and a competitor, creating potential partner and sales risk.
- Contract-manufacturer commitments included approximately $79.0 million of purchase commitments and $23.6 million of other purchase obligations. Component availability and pricing, including DRAM and NAND, may affect fulfillment and margins.
- Other principal risks include competition from infrastructure and public-cloud providers, long and unpredictable sales cycles, successful execution of the software-only transition, customer adoption and renewals, OEM and channel relationships, product defects or security incidents, international and foreign-exchange exposure, and regulatory and intellectual-property matters.
- The filing reported no material legal proceedings and no off-balance-sheet arrangements. Management concluded disclosure controls were effective at a reasonable assurance level.
Most important facts for investors to verify
- Whether software-only adoption replaces appliance revenue quickly enough to sustain growth, and how the mix shift affects gross margin.
- Whether hardware component cost pressures persist and whether Nutanix can mitigate them without harming demand or margins.
- Whether sales-team ramping and the focus on large deals improve productivity, given longer sales cycles and the disclosed partner concentration.
- How reported revenue, deferred revenue, and billings trend under ASC 606; prior-period comparisons were retrospectively adjusted.
- Whether cash generation improves: operating cash flow was positive, but free cash flow remained negative after capital expenditures.
- The potential effect of outstanding equity awards and dilution: $272.6 million of unrecognized stock-based compensation was expected to be recognized over approximately 2.2 years; the company also granted about 7.3 million RSUs after quarter-end.