Nutanix, Inc. — Form 10-Q Summary
Reporting period: The filing covers the quarter ended January 31, 2017, Nutanix’s fiscal second quarter, and the six months ended January 31, 2017. This differs from the request metadata’s “2016 Q2.” Financial amounts below are in U.S. dollars; amounts described as millions are rounded.
Business context
Nutanix sells an enterprise cloud platform that combines server, virtualization and storage capabilities, generally through distributors and resellers. Products are sold as appliances or software; support and maintenance revenue is generally recognized over the contract term. At quarter-end, the company reported 5,382 end-customers, including 473 Global 2000 enterprises, versus 2,638 end-customers a year earlier.
Financial performance and liquidity
| Metric | Three months ended Jan. 31 | Six months ended Jan. 31 |
|---|---|---|
| Total revenue, 2017 | $182.2 million | $349.0 million |
| Total revenue, 2016 | $102.7 million | $190.5 million |
| Revenue growth year over year | 77% | 83% |
| Gross margin, 2017 / 2016 | 58% / 63% | 58% / 62% |
| Adjusted gross margin, 2017 / 2016 | 60% / 63% | 60% / 62% |
| Net loss, 2017 | $93.2 million | $255.4 million |
| Net loss, 2016 | $33.2 million | $71.8 million |
For the six-month period, product revenue was $268.2 million, up 77%, and support and other services revenue was $80.8 million, up 108%. Operating expenses rose to $431.1 million from $189.8 million, including substantial IPO-related stock-based compensation. Stock-based compensation was $143.3 million for the six months, compared with $10.3 million a year earlier. Six-month GAAP operating loss was $228.7 million, versus $72.4 million.
Operating cash flow was $23.9 million for the six months, compared with cash use of $1.1 million in the prior-year period. Free cash flow, a non-GAAP measure defined as operating cash flow less property and equipment purchases, was negative $0.7 million, versus negative $21.2 million. Management noted that current-period operating cash flow included $13.3 million of employee ESPP contributions. For the quarter alone, operating cash flow was $19.8 million and free cash flow was positive $7.1 million.
At January 31, 2017, cash and cash equivalents were $226.0 million and short-term investments were $129.1 million, totaling $355.2 million. Total deferred revenue was $420.6 million. The company had no outstanding borrowings after repaying its $75.0 million senior notes in September 2016; total assets were $670.7 million. Management said available cash and investments were expected to meet working-capital and capital-expenditure needs for at least 12 months.
Material changes and notable items
- The October 2016 IPO generated $254.5 million in net proceeds after underwriting discounts and commissions, before $5.2 million of offering costs. Preferred stock converted into Class B common stock; the company now has dual-class shares, with Class B carrying ten votes per share and Class A one vote per share.
- Nutanix acquired Calm.io and PernixData during the first half. The PernixData acquisition included contingent payments tied to operating milestones; up to $11.5 million of potential payments require future employee service and are expected to be compensation expense. The filing also discloses a related-party interest in the acquisition involving Lightspeed-affiliated entities.
- Repayment of senior notes resulted in a $3.3 million debt-extinguishment loss. Fair-value changes in preferred-stock warrant liabilities and the debt-extinguishment loss contributed to six-month other expense of $26.1 million. The warrant liability was reclassified to equity at the IPO.
- The reported loss includes recognition of performance-based stock compensation after the IPO made vesting conditions probable. The filing reports $272.6 million of unrecognized stock-based compensation expected to be recognized over a weighted-average period of approximately 1.9 years.
Outlook, management commentary and risks
The filing provides no numerical revenue or earnings guidance. Management expects continued investment in sales, marketing, research and development, and international expansion, which may weigh on near-term profitability. It reported that 46% of global sales-team members were still ramping, and that realignment toward major accounts and large deals had temporarily reduced North American sales productivity and the portion of billings from large deals; management expected productivity to improve over the following quarters.
Gross margin fell year over year amid increased discounting, higher component costs and stock-based compensation. DRAM and NAND supply shortages increased hardware costs, and management expected further gross-margin pressure in the quarter ending April 30, 2017, with component costs remaining elevated while supply was constrained.
Key risks include continued losses and uncertain path to profitability; unpredictable sales cycles and dependence on channel partners; competition from established infrastructure vendors and public-cloud alternatives; execution and ramping of a rapidly expanded sales force; component shortages, supplier and contract-manufacturer concentration; and product, cybersecurity, intellectual-property and regulatory risks. The filing describes correspondence with IBM alleging infringement of at least five U.S. patents; Nutanix said it believes it has meritorious defenses. Management reported no material legal proceeding it believed would adversely affect the company. The filing also identifies $48.6 million of operating-lease obligations, $20.7 million of other purchase commitments, $18.6 million of contract-manufacturer commitments and acquisition-related contingent consideration.
Most important facts for investors to verify
- Whether revenue growth can continue as sales-team realignment and new-hire ramping affect productivity, large deals and sales cycles.
- Whether gross margins stabilize or decline further under component-cost pressure, discounting and changes in appliance/software sales mix.
- How much of operating cash generation is recurring, given deferred-revenue growth and the $13.3 million of ESPP contributions included in the period’s cash flows.
- The future expense and dilution impact of performance awards, other equity compensation, and the sell-to-cover approach described for vesting awards.
- Progress integrating Calm and PernixData, achievement of PernixData milestones, and related contingent-payment and compensation obligations.
- Developments in the IBM patent allegations, channel/OEM relationships, and exposure to major partners and component suppliers.