Nutanix, Inc. — Form 10-K Summary
Period clarification: The filing is the annual report for the fiscal year ended July 31, 2017, not a standalone 2016 Q4 filing. It also provides unaudited quarterly results, including the quarter ended July 31, 2017.
Business context and reporting period
Nutanix sells enterprise cloud infrastructure software, delivered with hardware appliances or as software-only, through distributors, resellers and OEM partners. Its platform combines server, virtualization, storage and networking capabilities and supports private- and public-cloud use cases. The company reported 7,051 end-customers at July 31, 2017, up from 3,768 a year earlier.
Financial performance and liquidity
| Metric | FY2016 | FY2017 |
|---|---|---|
| Revenue | $444.9 million | $766.9 million; up 72% |
| Product revenue | $350.8 million | $583.0 million |
| Support and other services revenue | $94.1 million | $183.9 million |
| GAAP gross margin | 62% | 57% |
| Operating loss | $165.0 million | $427.0 million |
| Net loss | $168.5 million | $458.0 million |
| Net cash from operating activities | $3.6 million | $13.8 million |
| Free cash flow (non-GAAP) | $(38.7) million | $(36.4) million |
| Billings (non-GAAP) | $637.8 million | $990.5 million |
FY2017 product gross margin was 57% (62% in FY2016); support and services gross margin was 58% (60%). Operating expenses rose to $866.5 million from $439.2 million, including $231.5 million of stock-based compensation, compared with $20.1 million in FY2016. Management attributed much of the sharp FY2017 expense increase to IPO-related performance awards, continued hiring and growth investment. The company reported a $3.57 GAAP net loss per share for FY2017, versus $3.83 in FY2016.
For the quarter ended July 31, 2017, revenue was $226.1 million and net loss was $90.7 million, compared with revenue of $139.8 million and net loss of $49.9 million in the quarter ended July 31, 2016.
At July 31, 2017, cash and cash equivalents were $138.4 million and short-term investments were $210.7 million, totaling $349.1 million. Current assets were $584.0 million and current liabilities were $374.2 million. The company had no outstanding borrowings; it repaid its $75.0 million senior notes in September 2016 and recorded a $3.3 million extinguishment loss. Deferred revenue was $526.1 million as reported. Contractual obligations totaled $163.3 million, including $72.6 million of contract-manufacturer purchase commitments and $58.4 million of operating leases.
Material changes and unusual items
- FY2017 revenue grew 72%, while gross margin fell five percentage points. Nutanix cited higher stock compensation and acquired-intangible amortization, as well as rising DRAM and NAND costs from supply constraints.
- Reported net loss widened substantially. IPO-related performance-award expense contributed to FY2017 stock-based compensation of $231.5 million; the filing records approximately $83.0 million of performance-award expense in the quarter ended October 31, 2016.
- Nutanix completed its October 2016 IPO, receiving $254.5 million in net proceeds after underwriting discounts and commissions, before $5.3 million of offering costs. It also acquired Calm and PernixData in the first quarter of FY2017.
- The company elected to adopt ASC 606 early, effective August 1, 2017, using full retrospective application. Under the new standard, FY2017 revenue would have been $845.9 million and net loss $379.6 million, versus reported revenue of $766.9 million and net loss of $458.0 million. The filing says adoption does not affect cash flows, but changes revenue and expense recognition and reduces deferred revenue.
- Two distributors were significant: Promark represented 22% of FY2017 revenue and Carahsoft 11%. No end-customer individually accounted for more than 10% of revenue.
Outlook, management commentary and risks
Management said it expects to continue investing in sales and marketing, research and development, and international expansion, with near-term profitability potentially pressured. Its sales strategy emphasizes major-account transactions over $500,000; at year-end, 59% of global sales personnel were considered fully productive and 41% were still ramping. Management expected continuing improvement in sales productivity over coming quarters, but provided no specific revenue or earnings guidance in the supplied filing text.
Nutanix expected DRAM and NAND cost pressure to continue into FY2018 while supply remained constrained. It described Nutanix Calm as expected in late 2017 and Nutanix Xi Cloud Services, initially focused on disaster recovery, as expected in 2018. Management stated that cash and short-term investments should cover anticipated working-capital and capital-expenditure needs for at least 12 months.
Key risks include persistent losses; intense competition from infrastructure vendors and public-cloud providers; dependence on OEMs, distributors and resellers; lengthy and unpredictable sales cycles and sales-team ramp; component cost and supply constraints; contract-manufacturer concentration and transition execution; product defects, cybersecurity and data-protection exposure; and international, regulatory, tax and intellectual-property risks. The filing also highlights dilution from equity compensation and the dual-class structure, under which Class B shares carry ten votes per share versus one vote for Class A shares. The company reported no material legal proceedings known to management.
Important facts for investors to verify
- Confirm the period being analyzed: the filing covers FY2017, while the request metadata refers to 2016 Q4.
- Reconcile reported FY2016 and FY2017 results with the ASC 606 retrospective figures and assess the impact on revenue comparability, deferred revenue and commissions.
- Assess the sustainability of growth and margins given component-cost inflation, continued operating investment and large reported stock-based compensation.
- Review channel and OEM concentration, especially Promark, Carahsoft and Dell, and the execution of manufacturing and sales-channel transitions.
- Monitor liquidity and cash conversion, including negative free cash flow, purchase commitments, and management’s 12-month cash sufficiency assertion.
- Evaluate sales-force productivity, adoption of announced products, and dilution and voting-control implications of equity awards and the dual-class shares.