Nutanix, Inc. — FY2018 Form 10-K summary
Period note: The supplied filing is the annual report for the fiscal year ended July 31, 2018, not a 2017 Q4 filing. Financial figures below are in U.S. dollars; prior-year figures are as adjusted for ASC 606 where indicated.
Business context and reporting period
Nutanix sells enterprise-cloud infrastructure software, support and services, with solutions available on appliances or separately for qualified hardware. Sales are primarily through distributors, resellers and OEM partners. The company reported more than 10,600 end customers at fiscal year-end, up from 7,050 a year earlier, and operated as one reportable segment.
Key financial metrics
| Metric | FY2018 | FY2017 |
|---|---|---|
| Total revenue | $1,155.5 million | $845.9 million |
| Product revenue | $888.0 million | $673.3 million |
| Support, entitlements and services revenue | $267.5 million | $172.6 million |
| Gross profit / gross margin | $769.4 million / 66.6% | $518.6 million / 61.3% |
| Operating loss | $(280.4) million | $(348.4) million |
| Net loss | $(297.2) million | $(379.6) million |
| Net loss per share, basic and diluted | $(1.81) | $(2.96) |
| Operating cash flow | $92.6 million | $13.8 million |
| Free cash flow, non-GAAP | $30.2 million | $(36.4) million |
| Billings, non-GAAP | $1,417.5 million | $990.5 million |
At July 31, 2018, cash and cash equivalents were $306.0 million and short-term investments were $628.3 million, totaling $934.3 million. Current assets were $1,263.1 million and current liabilities were $458.2 million. Deferred revenue totaled $631.2 million. Convertible senior notes had a $575.0 million principal amount and a $429.6 million net carrying value; the notes carry a 0% coupon and mature in 2023. The filing reports no required principal payments before maturity.
Material changes versus the prior comparable year
- Revenue grew 36.6%, slower than FY2017 growth of 68.0%. Support and services revenue increased 55.0%; product revenue increased 31.9%.
- Gross margin rose 5.3 percentage points to 66.6%, primarily attributed to a greater mix of software sales and improved support-operation efficiencies. DRAM and NAND price increases remained a cost risk.
- Net loss narrowed by $82.5 million, while operating expenses increased 21.1% to $1,049.8 million. Stock-based compensation declined to $177.9 million from $231.5 million, including the prior year’s substantial IPO-related performance-award expense.
- Operating cash flow and free cash flow improved; capital expenditures increased to $62.4 million from $50.2 million.
- Deferred revenue rose from $369.1 million to $631.2 million, and billings increased 43.1%. Management cautions that billings is a non-GAAP measure, not a substitute for revenue or cash flow.
Outlook, commentary, risks and unusual items
- The filing gives no specific numerical revenue or earnings guidance. Management expects continued investment in sales, marketing, research and development, and international expansion, with near-term profitability potentially affected.
- Nutanix is shifting toward software-only sales and, over time, subscription and cloud services. Management warns this transition may reduce recognized revenue in the near term, make revenue growth and margins less predictable, and require sales-force retraining. The weighted-average term for separately purchased software licenses was about 3.5 years in FY2018.
- Management expected Xi Cloud Services and Nutanix Era to become available in late calendar 2018; these were forward-looking expectations, not reported results.
- Customer and channel concentration is notable: Promark represented 20% of FY2018 revenue and Carahsoft 10%. Dell’s revenue share was 9%; the company also identifies Dell as a competitor and OEM partner.
- Significant risks include ongoing losses, intense competition (including public-cloud providers), uncertain sales cycles and sales-team productivity, dependence on channel/OEM partners and component suppliers, cybersecurity and product-defect exposure, and execution of the business-model transition. The company had approximately $23.1 million of contract-manufacturer component guarantees and $36.7 million of other purchase commitments.
- The company issued $575.0 million of 0% convertible notes in January 2018. It purchased note hedges and sold warrants; the warrant strike price is $73.46 per share. Note carrying value includes a substantial unamortized discount, and FY2018 included $14.7 million of non-cash interest expense from amortization of debt discount and issuance costs.
- Nutanix adopted ASC 606 retrospectively, materially changing the timing of revenue recognition and recasting prior-year results. In August 2018, after year-end, it acquired Frame for an announced preliminary purchase price of approximately $129.7 million, including cash and shares.
- The company reported no material legal proceedings known to management. Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Confirm the filing period: this is FY2018, ended July 31, 2018, rather than 2017 Q4.
- Review revenue growth, billings, deferred revenue and cash conversion together, especially as software-only and subscription sales change revenue timing and mix.
- Assess the sustainability of improved gross margins against component-cost exposure and the ongoing operating loss.
- Check the convertible notes’ cash-settlement, conversion and potential dilution terms, including the interaction of note hedges and warrants.
- Monitor dependence on key distributors and OEMs, sales-team ramp productivity, and adoption and monetization of new services.
- Consider the effect of the ASC 606 recast when comparing with figures reported before adoption, and the funding, integration and dilution implications of the post-year-end Frame acquisition.