Nutanix, Inc. — FY2021 Form 10-K
Period clarification: The filing covers the fiscal year ended July 31, 2021, not 2020 Q4 as indicated in the request metadata. Financial amounts below are in U.S. dollars.
Business context
Nutanix provides enterprise-cloud software and services for private, hybrid and multicloud infrastructure. It sells primarily through channel partners and OEMs and is transitioning from hardware-associated, life-of-device licenses toward software subscriptions. Subscription billings were 89% of total billings in FY2021. The company reported approximately 20,130 end customers, including about 980 Global 2000 enterprises.
Key financial metrics
| Metric | FY2021 | FY2020 |
|---|---|---|
| Total revenue | $1.394 billion | $1.308 billion |
| Subscription revenue | $1.244 billion | $1.030 billion |
| Total billings (non-GAAP) | $1.521 billion | $1.580 billion |
| Gross profit / gross margin | $1.102 billion / 79.1% | $1.021 billion / 78.1% |
| Operating loss | $661 million | $829 million |
| Net loss | $1.034 billion | $873 million |
| Operating cash flow | $(100) million | $(160) million |
| Free cash flow (non-GAAP) | $(158) million | $(249) million |
Revenue grew 6.6% year over year; subscription revenue increased 20.7%, while total billings declined 3.7%. Product revenue fell 8% to $706 million, as support, entitlements and services revenue rose 27% to $689 million. Product gross margin was 92.2%; support and services gross margin was 65.6%. FY2021 operating expenses were $1.763 billion, including $557 million in R&D and $1.053 billion in sales and marketing. GAAP operating and net margins were approximately negative 47.3% and negative 74.1%, respectively.
At July 31, 2021, cash and cash equivalents were $286 million and short-term investments were $928 million. Current assets were $1.562 billion versus current liabilities of $928 million. Convertible notes had $1.334 billion of principal, including $575 million due 2023 and $759 million of 2026 notes including accrued PIK interest. The company reported a $500 million derivative liability associated with the 2026 notes and a stockholders’ deficit of $1.012 billion.
Material changes and unusual items
- Subscription revenue continued to expand, but product revenue and total billings declined. Average contract term shortened from 3.8 years to 3.4 years, which management attributed in part to the subscription transition and ACV-based sales compensation.
- Gross margin improved by 1.0 percentage point. Sales and marketing expense fell 9%, while R&D was roughly flat and general and administrative expense rose 13%.
- Other expense, net increased to $355 million, primarily reflecting a $269 million non-cash increase in the fair value of the embedded derivative in the 2026 notes and additional note-related interest expense. The derivative was expected to be reclassified to equity after the conversion price became fixed in September 2021.
- FY2021 financing cash flow included $724 million of net proceeds from the 2026 notes and $125 million of share repurchases. The repurchase program was completed.
- Subsequent to year-end, Nutanix announced an exchange of approximately $416 million principal of 2023 notes for 2027 notes, a cash subscription for additional 2027 notes, and repurchases of 2023 notes. The filing said the exchange was expected to result in a material debt-extinguishment loss; completion and final accounting were not yet established in this filing.
Outlook, commentary and risks
Management provided no quantified revenue or earnings guidance in the supplied filing text. It expected operating and free cash flow to remain negative over the next 12 months, while stating that cash, cash equivalents and short-term investments should cover anticipated working-capital and capital-expenditure needs for at least that period. Management plans to invest in product development and growth while improving go-to-market efficiency, including emphasizing lower-cost renewals.
Management cited COVID-19-related uncertainty, variable customer spending and sales cycles, remote-work operating effects, supply-chain constraints and a global chip shortage. Other significant risks include the subscription transition’s effect on billings, revenue and cash generation; customer renewal and churn; competition from established infrastructure vendors and public-cloud providers; reliance on distributors and OEMs; and continued operating losses. Arrow Electronics and Tech Data accounted for 32% and 15% of FY2021 revenue, respectively. A securities class action remained ongoing; management said it could not determine any resulting liability. Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting.
Investor verification priorities
- Track subscription renewals, churn, term lengths, upfront payment behavior, and the relationship between subscription revenue, billings and deferred revenue.
- Verify progress toward better cash generation and profitability against management’s stated cost-efficiency plans and continued expected cash outflows.
- Review the final terms, closing status and accounting impact of the 2027-note exchange and related 2023-note repurchases announced after year-end.
- Assess the cash burden, dilution and conversion provisions of both convertible-note series, including the 2026 notes’ PIK interest and derivative accounting.
- Monitor distributor and OEM concentration, chip availability and other supply-chain constraints, as well as developments in the securities litigation.