Nutanix, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended January 31, 2023. The company filed the report on May 24, 2023. Nutanix provides enterprise cloud software and services, sold primarily through channel partners and OEMs, and is transitioning toward subscription-based offerings.
Financial performance and position
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Three months ended Jan. 31, 2022 | Three months ended Jan. 31, 2023 | Six months ended Jan. 31, 2022 | Six months ended Jan. 31, 2023 |
|---|---|---|---|---|
| Revenue | $413.1 | $486.5 | $791.6 | $920.1 |
| Subscription revenue | $374.7 | $450.9 | $712.6 | $853.9 |
| Gross profit / gross margin | $333.1 / 80.6% | $399.7 / 82.2% | $630.2 / 79.6% | $750.8 / 81.6% |
| Operating loss | $(94.8) | $(56.5) | $(232.4) | $(137.2) |
| Net loss / loss per share | $(115.4) / $(0.53) | $(70.8) / $(0.31) | $(535.6) / $(2.47) | $(170.3) / $(0.74) |
| Operating cash flow | $25.8 | $74.1 | $32.7 | $139.6 |
| Free cash flow (non-GAAP) | $17.2 | $63.0 | $15.3 | $108.8 |
- Second-quarter revenue grew 17.8% year over year; six-month revenue grew 16.2%. Product revenue rose 20% and 18%, respectively, while support, entitlements and services revenue rose 16% and 15%.
- At January 31, 2023, cash and cash equivalents were $406.6 million and short-term investments were $904.8 million; restricted cash was $3.1 million. Total current assets were $1.692 billion and current liabilities were $1.112 billion.
- Convertible notes had a net carrying value of $1.187 billion at period-end. The remaining $145.7 million of 0% 2023 Notes was repaid at maturity in January 2023. The outstanding notes include $750 million principal of 2026 Notes bearing 2.5% interest (partly paid in kind) and $575 million principal of 2027 Notes bearing 0.25% interest.
- Deferred revenue was $1.526 billion. Contracted revenue not yet recognized was approximately $1.6 billion, with about 53% expected to be recognized over the following 12 months; some contracted obligations may be cancellable.
Changes versus the prior comparable period
- GAAP gross margin improved 1.6 percentage points in the quarter and 2.0 points over six months. Management attributed the improvement primarily to higher-margin software sales and improved support-service economics.
- Operating losses narrowed despite higher revenue. Sales and marketing expense decreased 5% in both comparison periods, while research and development expense increased 0% in the quarter and 2% over six months. General and administrative expense rose 90% in the quarter, primarily due to litigation-related charges.
- Cash generated from operations and free cash flow increased substantially year over year. Management cited improved cash collections as a principal reason for the operating cash flow increase.
- The prior-year six-month net loss included a $198.0 million non-cash change in fair value of the 2026 Notes derivative liability and a $64.9 million debt-extinguishment loss; these items were absent in the current six-month period. Thus, the improvement in reported net loss is not solely an operating comparison.
- Subscription revenue remained the dominant revenue category. Management said the transition to subscription terms can reduce recognized revenue and billings in a period versus life-of-device sales, and contract terms averaged approximately 3.0 years in the current periods versus 3.1 years in the prior-year periods.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides no specific quarterly or annual revenue or earnings guidance. Management expects operating and free cash flow to fluctuate over the next 12 months but believes cash, cash equivalents and short-term investments will meet anticipated needs for at least that period.
- Management is pursuing profitable growth through go-to-market efficiencies while continuing long-term investment in sales, marketing, research and development. It reported higher-than-normal sales-representative attrition; approximately 73% of global sales staff were considered fully ramped at January 31, 2023. Sales cycles, sales productivity and the pace of customer adoption remain uncertain.
- The company announced a reduction of approximately 270 employees, about 4% of headcount, in August 2022. It recorded $16.5 million of restructuring charges through January 31, 2023 and did not expect material additional charges from that reduction.
- Controls and investigation: The Audit Committee investigation found non-compliant use of evaluation software from two third-party providers over multiple years, including intentional misconduct by certain employees; certain employees were terminated. Management identified a material weakness in internal control over financial reporting and concluded disclosure controls were ineffective at January 31, 2023. The report was filed late. Management plans remediation; the weakness will not be considered resolved until controls operate effectively and are tested for a sufficient period.
- The company corrected prior-period expenses and accrued liabilities related to third-party software use. It characterized the error, which dates back to August 2014, as immaterial to previously issued statements and is correcting it prospectively. The software usage liability was $11.1 million at January 31, 2023; actual future payments may differ materially from estimates.
- Litigation: In February 2023, the company agreed to a $71.0 million settlement of previously pending securities class actions, accrued at January 31, 2023. A $39.9 million insurance receivable partially offsets the accrual; the company recorded $38.2 million of net settlement and legal charges in the quarter. Preliminary court approval followed in May 2023, with a final hearing scheduled for October 2023. Separate securities and derivative lawsuits filed in April and May 2023 were at an early stage, and potential liabilities were not determinable.
- Other risks include dependence on channel and OEM partners, supply-chain delays, customer concentration in receivables (one customer represented 24% of receivables at period-end), subscription-transition effects, and foreign-currency exposure. Partner B generated 33% of quarterly revenue. A hypothetical 10% U.S. dollar decline was estimated to increase six-month operating loss by approximately $18.5 million.
Important facts for investors to verify
- Track subscription billings, annual contract value billings, ARR, deferred revenue and renewal trends alongside GAAP revenue; these measures are not substitutes for GAAP results.
- Assess whether improved operating cash flow and free cash flow persist, given working-capital movements, investment needs and the subscription-model transition.
- Monitor remediation and independent testing of the material weakness, reporting timeliness, and any further corrections or regulatory developments.
- Confirm final approval, insurance recovery and payment of the $71.0 million settlement, and developments in the later-filed lawsuits.
- Review convertible-note repayment and conversion terms, future cash interest or PIK accruals, and the company’s liquidity relative to contractual commitments.