Nutanix, Inc. — Form 10-Q Summary
Period clarification: The filing covers the quarter ended April 30, 2019, Nutanix’s fiscal 2019 third quarter—not 2018 Q3 as stated in the request metadata. Comparisons below are against the corresponding prior-year periods. Financial amounts are in U.S. dollars.
Business context
Nutanix sells an enterprise cloud platform primarily through channel partners and OEMs. It is shifting toward software-only and subscription offerings from appliance-based sales. The unaudited filing reports results for the three and nine months ended April 30, 2019.
Financial results and key metrics
| Metric | Q3 FY2019 | Q3 FY2018 | Nine months FY2019 | Nine months FY2018 |
|---|---|---|---|---|
| Revenue | $287.6 million | $289.4 million | $936.3 million | $851.7 million |
| Gross profit / margin | $212.5 million / 73.9% | $193.8 million / 67.0% | $701.1 million / 74.9% | $538.9 million / 63.3% |
| Operating loss | $204.2 million | $82.3 million | $415.5 million | $201.2 million |
| Net loss | $209.8 million | $85.7 million | $426.8 million | $209.8 million |
| Operating cash flow | $(36.5) million | $13.3 million | $51.8 million | $69.8 million |
| Free cash flow (non-GAAP) | $(58.9) million | $(0.8) million | $(43.0) million | $23.7 million |
Q3 revenue was nearly flat year over year, while nine-month revenue rose 9.9%. In Q3, subscription revenue increased to $168.4 million from $80.1 million; support, entitlements and other services revenue rose 51% to $102.8 million; and product revenue fell 16% to $184.8 million. For the nine months, subscription revenue more than doubled to $452.8 million. Total billings were $346.0 million in Q3, down from $351.2 million; nine-month billings rose to $1.14 billion from $1.02 billion.
Gross margin expanded as software-only sales made up more of the mix and hardware-related revenue and costs declined. Operating expenses rose substantially: Q3 sales and marketing was $245.7 million, research and development $138.0 million, and general and administrative $33.0 million. Stock-based compensation totaled $94.8 million in Q3 and $233.3 million for the nine months.
At April 30, 2019, cash and cash equivalents were $445.1 million and short-term investments were $495.6 million, for $940.8 million combined; restricted cash was $1.1 million. Current assets were $1.30 billion and current liabilities $539.1 million. Deferred revenue totaled $838.3 million, up from $631.2 million at July 31, 2018. The company reported $575 million principal amount of 0% convertible notes due in 2023; their net carrying value was $451.4 million. Total liabilities were $1.50 billion and stockholders’ equity $305.4 million.
Material changes, outlook and risks
- Business-model transition: Management expects software-only and subscription sales to continue increasing. This mix can change the timing and amount of reported revenue and billings; certain subscription revenue is recognized over the service term.
- Growth investment and sales execution: Headcount grew to approximately 4,930 from 3,710 a year earlier. Management said 58% of the global sales team was fully ramped, with the remainder still ramping, and expected productivity to improve over coming quarters. Continued investment may weigh on near-term profitability.
- Liquidity outlook: Management said cash, cash equivalents and short-term investments should cover anticipated working-capital and capital-expenditure needs for at least 12 months. No quantitative revenue or earnings guidance is provided in the supplied filing text.
- Commitments: Contractual obligations totaled $939.8 million, including $175.7 million of operating lease payments, $53.4 million of non-cancelable purchase commitments and $135.7 million of guarantees to contract manufacturers and OEMs. The $575 million note principal is due in 2023.
- Contingency: Several securities class actions filed beginning March 29, 2019 name the company and two officers and seek unspecified damages. The cases were at an early stage, and the company said it could not determine whether liabilities would result.
- Other risks: The filing highlights persistent losses, competition, uncertain sales cycles and customer adoption, reliance on channel partners and OEMs, execution of the subscription transition, product and cybersecurity risks, foreign-currency exposure, and potential conversion or cash-settlement obligations on the notes.
- Acquisition: Nutanix acquired Frame in August 2018 for preliminary consideration of approximately $130.0 million, including cash and shares. Approximately $43.3 million of employee holdbacks are contingent on continued service and are treated as post-combination compensation.
Important facts for investors to verify
- Confirm the reporting period: the filing is for Q3 FY2019, ended April 30, 2019.
- Track subscription growth alongside total revenue, billings, deferred revenue and the timing of revenue recognition as the business model shifts.
- Assess whether sales-team ramp and operating-expense growth translate into improved revenue growth, cash generation and a path toward profitability.
- Review liquidity against capital spending, contractual commitments and the notes’ $575 million principal due in 2023.
- Monitor developments in the securities litigation, Frame acquisition accounting and the company’s disclosed manufacturing and OEM guarantees.