Nutanix, Inc. — Form 10-K Summary
Period clarification: The supplied filing is the annual report for the fiscal year ended July 31, 2019, not a standalone 2018 Q4 filing. It also reports unaudited quarterly results, including the quarter ended July 31, 2019.
Business context and reporting period
Nutanix provides enterprise cloud infrastructure software, including hyperconverged infrastructure and hybrid-cloud products. It sells mainly through distributors, resellers and OEMs. The company continued shifting from appliance and life-of-device sales toward software-only and subscription offerings. Subscription billings reached 60.5% of total billings in fiscal 2019, up 19 percentage points from fiscal 2018.
Key financial metrics
| Metric | FY2019 | FY2018 |
|---|---|---|
| Total revenue | $1,236.1 million | $1,155.5 million |
| Product revenue | $832.4 million | $888.0 million |
| Support, entitlements and services revenue | $403.7 million | $267.5 million |
| Subscription revenue | $648.4 million | $330.6 million |
| Gross profit / gross margin | $932.0 million / 75.4% | $769.4 million / 66.6% |
| Operating loss | $(598.0) million | $(280.4) million |
| Net loss | $(621.2) million | $(297.2) million |
| Net cash from operating activities | $42.2 million | $92.5 million |
| Free cash flow (non-GAAP) | $(76.3) million | $30.2 million |
- Total revenue grew 7.0%; total billings rose to $1.515 billion from $1.417 billion. Subscription billings increased to $916.0 million from $581.9 million.
- Product revenue declined 6%, while support, entitlements and services revenue rose 51%. Software-only sales and lower hardware revenue contributed to the product decline.
- Gross margin improved 8.8 percentage points, primarily reflecting a larger mix of higher-margin software sales. Adjusted gross margin, a non-GAAP measure, was 78.1%, versus 68.1%.
- Operating expenses increased to $1.530 billion from $1.050 billion, reflecting continued investment in sales and marketing and research and development. Stock-based compensation was $306.7 million.
- At July 31, 2019, cash and cash equivalents were $396.7 million and short-term investments were $512.2 million, totaling $908.8 million. Current assets were $1.275 billion and current liabilities $599.3 million.
- Convertible notes had $575 million principal, a 0% stated interest rate and a January 2023 maturity; their balance-sheet carrying value was $458.9 million. No principal payments were due before maturity.
- Deferred revenue was $910.0 million. The company reported an accumulated deficit of $1.649 billion.
Material changes and quarterly results
- Revenue growth slowed from 36.6% in fiscal 2018 to 7.0% in fiscal 2019. Management attributed the slowdown in part to the transitions from hardware to software-only sales and from life-of-device licenses to subscriptions.
- For the quarter ended July 31, 2019, revenue was $299.9 million versus $303.7 million in the year-earlier quarter. Quarterly net loss widened to $194.3 million from $87.4 million; operating loss was $182.5 million versus $79.2 million.
- Fiscal 2019 operating cash flow fell to $42.2 million, and free cash flow turned negative, primarily as operating spending and capital expenditures increased. Capital expenditures were $118.5 million.
- Customer count increased from approximately 10,610 to 14,180. Arrow represented 24% of fiscal 2019 revenue and Tech Data 13%, creating significant channel concentration.
Outlook, risks and unusual items
- The filing gives no specific numerical revenue or earnings guidance. Management expects to continue investing in product development, sales and marketing, and global expansion, and states that available cash and short-term investments should cover anticipated needs for at least 12 months.
- Management cautions that subscription conversion may pressure near-term billings, revenue and cash flow; term licenses can have shorter durations than appliance-life licenses, while SaaS revenue is generally recognized over time. Renewal rates, sales-force productivity and channel adoption are important uncertainties.
- The company remains loss-making and says it expects net losses for the foreseeable future. Competition from public-cloud providers, established infrastructure vendors and OEM partners, as well as component and manufacturing dependencies, are material risks.
- Several securities class actions and shareholder derivative suits followed the February 2019 earnings-related share-price decline. The claims seek unspecified damages, are at an early stage, and the company says it cannot determine potential liability.
- Nutanix acquired Mainframe2 (Frame) in August 2018 for approximately $130 million; the acquisition added $97.3 million of goodwill and $38.2 million of intangible assets. The auditor identified valuation of Frame-developed technology and revenue recognition as critical audit matters. The financial statement and internal-control audit opinions were unqualified; internal control over financial reporting was deemed effective.
Important facts for investors to verify
- Confirm the pace and economics of the subscription transition using subscription billings, revenue, deferred revenue, renewal rates and cash flow—not billings alone.
- Assess whether expense growth, particularly sales and marketing and R&D, can be matched by durable revenue growth and a path to lower losses.
- Review cash conversion and capital spending, and the company’s ability to meet the $575 million note maturity in 2023.
- Monitor distributor and OEM concentration, including Arrow and Tech Data, and any changes in partner priorities or sales-channel structure.
- Track the securities and derivative litigation, acquisition-related estimates and the significant stock-based compensation burden.