Nutanix, Inc. — Form 10-Q Summary
Period: Fiscal second quarter and six months ended January 31, 2019. The request metadata labels this “2018 Q2,” but the filing reports the quarter ended January 31, 2019.
Business context
Nutanix sells enterprise cloud platform software and related support, services, and, in some transactions, hardware, primarily through channel and OEM partners. It is shifting toward software-only and subscription sales. The company reported approximately 12,410 end customers, including approximately 760 Global 2000 enterprises.
Financial results
| Metric | Three months ended Jan. 31, 2019 | Six months ended Jan. 31, 2019 |
|---|---|---|
| Revenue | $335.4 million; up 17% year over year | $648.6 million; up 15.4% |
| Gross profit / gross margin | $249.4 million / 74.4% | $488.6 million / 75.3% |
| Operating expenses | $365.5 million | $699.9 million |
| Operating loss | $116.2 million | $211.3 million |
| Net loss | $122.8 million; $0.68 per share | $217.0 million; $1.22 per share |
| Operating cash flow | $38.5 million | $88.3 million |
| Free cash flow (non-GAAP) | $(4.1) million | $15.9 million |
Quarterly revenue included $157.4 million of subscription revenue, $131.6 million of non-portable software, $37.9 million of hardware, and $8.5 million of professional services. Total billings, a company-defined non-GAAP measure, were $413.4 million for the quarter and $797.0 million for the six months. Software and support revenue for the six months was $578.2 million, up 43.3% year over year.
At January 31, 2019, cash and cash equivalents were $466.0 million and short-term investments were $499.9 million. Current assets were $1.30 billion versus current liabilities of $509.4 million. Deferred revenue totaled $779.9 million; contracted revenue not yet recognized was approximately $787.3 million, with about 44% expected to be recognized within 12 months.
The company had $575.0 million principal amount of 0% convertible notes due in 2023, carried net at $444.0 million. There are no scheduled principal payments before maturity. The notes’ estimated fair value was $709.4 million. Reported interest expense from amortizing the debt discount and issuance costs was $14.4 million for the six-month period.
Changes versus the prior comparable period
- Quarterly revenue growth slowed to 17% from 43.9% a year earlier; six-month growth was 15.4% versus 45.0%.
- Subscription revenue more than doubled in the quarter, while hardware revenue fell to $37.9 million from $78.0 million. Management attributed the hardware decline to more customers buying appliances from OEMs and a shift toward software-only sales.
- Gross margin rose to 74.4% for the quarter from 62.2%, primarily because software-only transactions carry higher margins than hardware sales. Support and services gross margin was 59.3%, slightly lower year over year.
- Operating expenses increased 53% in the quarter to $365.5 million, with higher sales and marketing, research and development, and general and administrative costs. Net loss widened year over year.
- Six-month operating cash flow increased to $88.3 million from $56.5 million, but free cash flow declined to $15.9 million from $24.5 million, reflecting higher capital expenditures.
Outlook, commentary, risks, and unusual items
- Management expects continued investment in global sales and marketing, engineering, research and development, and product development. It cautioned that these investments may weigh on near-term profitability. Approximately 39% of sales staff were still ramping; management said major-account focus can extend sales cycles and delay productivity.
- The company stated that cash, cash equivalents, and short-term investments should cover anticipated needs for at least the next 12 months. It did not provide numerical revenue or earnings guidance in the supplied filing text.
- Management expects further growth in software-only and subscription transactions. This mix shift can alter reported revenue timing and gross margins; subscription revenue may be recognized over contract terms, and customer renewals or adoption are not assured.
- Key risks include sustained losses, competition from established infrastructure vendors and public cloud providers, uncertain and lengthy sales cycles, dependence on OEMs and channel partners, sales-team productivity, hardware supply commitments, and cybersecurity, privacy, and regulatory exposures.
- In August 2018, Nutanix acquired Frame for preliminary consideration of $129.6 million, including approximately $26.6 million cash and $103.0 million in stock. The allocation included $97.0 million of goodwill and $38.2 million of amortizable intangible assets. Employee holdbacks totaling approximately $43.3 million are service-contingent compensation over three years.
- A March 2019 OEM agreement, entered after the reporting date, includes minimum revenue achievement commitments; shortfall payments could range from $0 to $73 million over 27 months.
- Operating lease commitments were $150.7 million. The company expected adoption of the new lease standard in fiscal 2020 to materially increase reported assets and liabilities. Non-cancelable purchase commitments and contract-manufacturer guarantees totaled approximately $57.4 million and $75.1 million, respectively.
- Management reported effective disclosure controls and procedures and no material change in internal control over financial reporting during the six months.
Most important facts for investors to verify
- Whether software and subscription growth can offset slower overall revenue growth and declining hardware sales, while sustaining billings and renewals.
- Whether spending growth and sales-team ramp translate into improved operating leverage; GAAP operating expenses exceeded revenue in the quarter.
- Cash generation after capital expenditures, and the liquidity impact of operating commitments, the 2023 notes, and the new OEM shortfall provision.
- The final purchase-price allocation and ongoing costs or integration outcomes for Frame, including service-based employee holdbacks.
- The distinction between GAAP results and company-defined non-GAAP measures such as billings, adjusted gross margin, and free cash flow.