Nutanix, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended January 31, 2020. The filing is unaudited; amounts below are in U.S. dollars unless stated otherwise.
Business context
Nutanix sells enterprise cloud platform software, support and related services, primarily through channel partners and OEMs. It is shifting from appliance and life-of-device software sales toward software-only and subscription offerings. The filing reports one operating segment.
Financial performance
| Metric | Three months ended Jan. 31, 2020 | Prior-year quarter | Six months ended Jan. 31, 2020 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $346.8 million | $335.4 million | $661.5 million | $648.6 million |
| Gross margin | 78.3% | 74.4% | 77.7% | 75.3% |
| Operating loss | $207.1 million | $116.2 million | $427.4 million | $211.3 million |
| Net loss | $217.6 million | $122.8 million | $446.9 million | $217.0 million |
| Operating cash flow | $(52.5) million | $38.5 million | $(78.7) million | $88.3 million |
| Free cash flow, non-GAAP | $(73.7) million | $(4.1) million | $(118.1) million | $15.9 million |
Quarterly revenue grew 3.4%; subscription revenue rose to $266.5 million from $157.4 million. Product revenue fell 10% to $213.5 million, while support, entitlements and other services revenue grew 35% to $133.2 million. For the six-month period, subscription revenue increased 70.4% to $484.4 million. Total billings were $428.1 million for the quarter and $808.1 million for six months; deferred revenue was $1.057 billion at period-end.
Gross margin improved mainly from a greater software mix and lower recognized hardware sales as customers increasingly bought hardware directly from OEMs. Operating expenses rose sharply: quarterly sales and marketing expense increased 43% to $304.9 million, R&D increased 13% to $139.1 million, and G&A increased 20% to $34.6 million. Stock-based compensation was $85.6 million for the quarter and $167.0 million for six months.
Balance sheet, liquidity and debt
At January 31, 2020, cash and cash equivalents were $211.7 million and short-term investments were $607.3 million, totaling $819.0 million; restricted cash was $3.1 million. Current assets were $1.192 billion and current liabilities were $724.7 million. Total liabilities of $1.929 billion exceeded total assets of $1.863 billion, leaving a stockholders’ deficit of $66.1 million. Deferred revenue totaled $1.057 billion.
The company had $575 million principal amount of unsecured, 0% convertible notes due January 2023, with no required principal payments before maturity. Their net carrying value was $474.3 million. Management said cash, cash equivalents and short-term investments should cover anticipated working-capital and capital-expenditure needs for at least 12 months.
Changes, outlook and risks
- Business-model transition: Subscription mix continued to rise, while product and hardware-related revenue declined. Management cautioned that shorter subscription terms and ratable SaaS recognition can weigh on reported revenue and billings relative to historical life-of-device sales. Average contract term was approximately 3.9 years, versus 4.1 years in the prior-year periods.
- Spending and staffing: In February 2020, the company paused a significant portion of planned second-half FY2020 hiring outside sales and selected roles, citing COVID-19 uncertainty and the need to integrate approximately 1,400 employees hired over the prior year. Management expects near-term spending to fluctuate and stated that long-term growth investment may weigh on profitability. No numerical revenue or earnings guidance is provided in the filing.
- COVID-19 and demand: Management said the Asia Pacific and Japan region’s performance was expected to be negatively affected for at least the remainder of FY2020. The filing warns of potential customer delays, longer sales cycles, event cancellations, supply-chain disruption and reduced ability to forecast results.
- Contingencies and commitments: Securities class actions and shareholder derivative cases remained in early stages; the company said it could not determine potential liabilities. At January 31, purchase obligations and other commitments were up to $95.7 million, with $134.9 million in guarantees to contract manufacturers and OEMs. Operating lease liabilities were $161.1 million; additional uncommenced lease commitments were approximately $4.9 million.
- Other notable items: The company recorded a $3.0 million impairment after ceasing use of certain Bangalore office space; further impairment charges were possible. Adoption of the new lease standard added operating lease assets and liabilities to the balance sheet. Customer and channel concentration is relevant: one partner represented 32% of quarterly revenue, and Arrow Electronics and Tech Data represented 30% and 13%, respectively, of six-month revenue.
Most important facts for investors to verify
- Whether subscription growth and deferred revenue translate into sustained revenue and billings growth as legacy product revenue declines.
- Whether expense growth, especially sales and marketing, can be moderated and whether the headcount pause affects execution or growth.
- Cash burn, free cash flow, liquidity and the company’s ability to fund operations through continued losses.
- COVID-19 effects on Asia Pacific and Japan, customer purchasing, OEM supply and sales-cycle timing.
- Customer and channel concentration, renewal trends, and the status or potential cost of the securities and derivative litigation.
- Potential obligations under the 2023 convertible notes, manufacturer guarantees, purchase commitments and leases.