Nutanix, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended October 31, 2021; comparisons are with the three months ended October 31, 2020, unless stated otherwise. Financial statements are unaudited. Nutanix provides enterprise cloud software and services, primarily through channel partners and OEMs.
Financial performance and liquidity
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Revenue | $378.5 million | $312.8 million | +21% |
| Subscription revenue | $337.9 million | $278.2 million | +21% |
| Gross profit / margin | $297.1 million / 78.5% | $244.8 million / 78.3% | Margin +0.2 percentage points |
| Operating expenses | $434.3 million | $426.9 million | +2% |
| Operating loss | $(137.3) million | $(182.1) million | Loss narrowed |
| Net loss | $(419.9) million | $(265.0) million | Loss widened |
| Operating cash flow / free cash flow | $6.9 million / $(1.9) million | $(4.1) million / $(16.3) million | Improved |
| Cash, cash equivalents and short-term investments | $1.276 billion | — | As of October 31, 2021 |
| Deferred revenue | $1.333 billion | $1.206 billion | +11% |
Other expense, net was $278.5 million, versus $78.7 million a year earlier. The current-quarter amount principally reflected a $198.0 million increase in the fair value of the 2026 Notes’ embedded derivative before its reclassification to equity, and a $64.9 million loss on extinguishment of 2023 Notes. These items materially increased the GAAP net loss.
At quarter-end, convertible senior notes had a net carrying value of $1.262 billion. Contractual principal obligations totaled approximately $1.489 billion, with maturities primarily in 2026 and 2027. The company reported $904.8 million of current liabilities, including $662.5 million of current deferred revenue. Cash and investments were held for general corporate purposes.
Material changes and business trends
- Support, entitlements and other services revenue rose 26% to $198.4 million; product revenue rose 16% to $180.1 million. Subscription revenue represented most revenue, consistent with Nutanix’s continuing transition to term subscriptions and SaaS.
- Total billings increased 19% to $398.0 million; subscription billings rose 22% to $359.3 million. ACV billings were $183.3 million, ARR was $952.6 million and run-rate ACV was $1.590 billion. These are company-defined performance measures, not GAAP measures.
- Gross margin improved slightly, with management attributing the product-margin increase to a greater mix of software-only transactions and improved services margin to revenue growing faster than related personnel costs.
- Sales and marketing expense fell 3% to $250.0 million, while R&D rose 6% to $144.3 million and general and administrative expense rose 19% to $40.0 million. Sales and marketing headcount was down 13% year over year; management reported higher-than-normal sales representative attrition and said 74% of sales team members were fully ramped.
- End customers increased to approximately 20,700 from 18,040. The largest channel partner represented 31% of quarterly revenue; a second represented 14%, indicating meaningful partner concentration.
Outlook, commentary and risks
- Management expects operating and free cash flow to remain negative during the next 12 months, but believes available cash and short-term investments will meet anticipated working-capital and capital-expenditure needs for at least that period. The filing provides no specific revenue or earnings guidance.
- Management intends to invest in product development and growth while improving cash flow through go-to-market efficiencies. It expects expense levels to fluctuate; sales and marketing spending may decline near term, while some pandemic-related cost savings and restrictions may unwind.
- The subscription transition may affect billings, revenue and cash flow because subscription terms may be shorter than life-of-device licenses, and customers may choose shorter terms or pay only the initial year upfront. Average contract term billed declined to 3.1 years from 3.5 years.
- COVID-19-related uncertainties include sales-cycle delays, reduced IT spending, supply-chain and component-cost pressures, shipping or delivery disruptions, cybersecurity exposure and potential product-roadmap delays. Remote-work demand also supported certain end-user computing offerings.
- In September 2021, Nutanix exchanged $416.5 million of 2023 Notes for $477.3 million of 2027 Notes, issued another $97.7 million principal amount of 2027 Notes for cash, repurchased $12.8 million of 2023 Notes and repurchased $58.5 million of common stock. Adoption of ASU 2020-06 also changed convertible-note accounting and reduced opening stockholders’ equity by a cumulative $48.0 million.
- A securities class action and a related options class action remain pending. The company said the cases are in early stages and it cannot determine any resulting liability. It also disclosed up to $86.4 million of purchase and other commitments and $105.7 million of OEM guarantees.
Important facts for investors to verify
- Whether billings, ARR and deferred revenue growth convert into recognized revenue and sustainable cash generation as subscription mix increases.
- The drivers and future effects of the large non-cash derivative remeasurement and debt-extinguishment loss on reported earnings.
- Sales-team attrition, hiring and ramp productivity, and whether go-to-market cost reductions affect growth or customer acquisition.
- Convertible-note principal, settlement terms and maturity-related cash requirements, alongside liquidity and management’s negative cash-flow outlook.
- Channel-partner concentration, COVID-19 and supply-chain exposure, and developments in the securities and options litigation.