Nutanix, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended January 31, 2018 (fiscal 2018 Q2). The request metadata says “2017 Q2,” but the filing covers the period ended January 31, 2018. Financial statements are unaudited. Prior-year comparisons are recast for early adoption of ASC 606.
Business context
Nutanix sells enterprise cloud infrastructure software, delivered either on appliances or as software-only, along with support and services. Sales are primarily through channel partners and OEMs. The company began transitioning toward software-only sales in fiscal Q1 2018 and expected the transition to take about a year and a half. It reported more than 8,800 end-customers at January 31, 2018, up from more than 5,300 a year earlier.
Key financial results
| Metric | Three months ended Jan. 31, 2018 | Year-over-year | Six months ended Jan. 31, 2018 | Year-over-year |
|---|---|---|---|---|
| Total revenue | $286.7 million | +44% | $562.3 million | +45% |
| Product revenue | $223.2 million | +41% | $442.2 million | +42% |
| Support and other services revenue | $63.6 million | +55% | $120.1 million | +58% |
| Gross profit / gross margin | $178.2 million / 62% | 61% margin prior year | $345.1 million / 61% | 62% margin prior year |
| Operating loss | $59.9 million | $75.4 million prior year | $118.9 million | $189.9 million prior year |
| Net loss | $62.6 million | $76.4 million prior year | $124.1 million | $216.7 million prior year |
| Net loss per share | $0.39 | $0.54 prior year | $0.78 | $2.00 prior year |
All figures are in U.S. dollars; losses and loss per share are negative. Operating expenses for the quarter were $238.1 million, including $151.2 million in sales and marketing, $70.9 million in research and development, and $15.9 million in general and administrative expenses. For the six-month period, total operating expenses were $464.0 million.
Cash flow, debt, and liquidity
- Six-month operating cash flow was $56.5 million, versus $23.9 million in the prior-year period. Free cash flow, a non-GAAP measure, was $24.5 million, compared with an outflow of $0.7 million.
- Cash and cash equivalents were $610.4 million and short-term investments were $307.8 million at January 31, 2018, totaling $918.3 million. Management said available cash and investments were expected to cover working capital and capital expenditures for at least 12 months.
- Current assets were $1.163 billion and current liabilities were $374.6 million. Total deferred revenue was $478.0 million, up from $369.1 million at July 31, 2017.
- In January, Nutanix issued $575.0 million principal amount of 0% convertible senior notes due 2023. Their balance-sheet carrying amount, net of discount and issuance costs, was $415.7 million. There are no required principal payments before maturity. The company paid $143.2 million for note hedges and received $88.0 million from warrant sales; the notes’ initial conversion price is approximately $48.85 per share and the warrant strike price is $73.46.
- Six-month investing cash outflow was $130.2 million, including $32.0 million of property and equipment purchases and net purchases of investments. Financing cash inflow was $545.8 million, primarily reflecting the notes offering and related transactions.
Material changes and management commentary
- Revenue grew substantially and losses narrowed year over year. Six-month revenue growth was broad, but particularly strong in the U.S. (+67%); Asia-Pacific grew 9%, while Other Americas declined 24%.
- For the quarter, management estimated product revenue would have been $14.0 million higher if Nutanix had sold hardware in transactions where customers instead purchased it directly from contract manufacturers. The company anticipated selling less hardware as it moved toward software-only transactions.
- DRAM and NAND costs rose sharply amid supply constraints. The company said those components represented approximately 28% of product cost in the six months ended January 31, 2018, versus 18% a year earlier; their combined cost increased 152% for that six-month comparison. Management expected continued DRAM cost pressure and said elevated NAND pricing could also affect margins.
- Sales and marketing expense increased 24% for the six-month period, while management continued investing in sales, engineering, and international growth. Approximately 65% of global sales personnel were considered fully productive; the remainder were ramping. Management noted that a focus on major accounts and large deals could lengthen sales cycles and affect productivity, while expecting improvement over coming quarters.
- ASC 606 was adopted early using the full retrospective method. It accelerated recognition of certain software-license revenue and changed the timing of commission costs. The filing says adoption did not affect net cash flows; it materially recast comparative revenue and prior-period results.
Outlook, risks, and unusual items
- The filing provides no specific numerical revenue or earnings guidance. Management described continued investment and a shift to software-only sales, which generally carry higher gross margins but lower reported revenue per sale because hardware revenue is excluded. The company cautioned that the transition could slow revenue growth or cause revenue to decline if software sales do not replace hardware revenue.
- Key operating risks include uncertain and lengthy sales cycles, sales-team ramp and productivity, reliance on channel partners and OEMs, competition from public cloud and established infrastructure vendors, and execution of the software-only transition. Certain partners represented significant portions of revenue; the filing identifies partner concentration as a risk.
- Component supply constraints and price increases may pressure product margins. Nutanix also relies on contract manufacturers and suppliers, including for key hardware components. At January 31, 2018, it disclosed $19.3 million of non-cancelable purchase commitments and $53.0 million of other purchase obligations with contract manufacturers.
- The company has a history of losses and an accumulated deficit of $855.1 million. It maintained a valuation allowance against U.S. federal and state deferred tax assets. Management said the initial impact of the U.S. Tax Cuts and Jobs Act was immaterial to tax expense, but continued evaluating certain provisions.
- Subsequent to quarter-end, Nutanix agreed to acquire Minjar for approximately $23.8 million in cash, subject to customary conditions, and agreed to acquire Netsil for consideration primarily in shares, with an expected issuance of approximately 1.21 million to 1.42 million Class A shares, subject to adjustments and conditions. The CEO’s investment in Netsil creates a related-party consideration disclosed in the filing.
- The company reported no material legal proceedings and concluded its disclosure controls were effective at a reasonable assurance level. It also disclosed foreign-currency exposure and does not hedge that exposure; a hypothetical 10% U.S. dollar weakening would have increased six-month operating loss by an estimated $13.7 million.
Important facts for investors to verify
- Whether software-only sales replace appliance revenue quickly enough to sustain growth, and how the mix shift affects reported revenue and gross margin.
- Whether DRAM and NAND availability and pricing stabilize, and whether component inflation can be offset through pricing, product mix, or sourcing.
- Trends in billings, deferred revenue, contracted-not-recognized revenue ($519.9 million at January 31, 2018), and the cancellation terms attached to future performance obligations.
- Sales-team productivity, large-deal timing, customer repeat purchases, and the durability of growth in support revenue.
- Channel and OEM concentration, including any changes in partner relationships or sales dependence; assess the filing’s partner disclosures alongside current-period results.
- The cash, dilution, accounting, and conversion implications of the 2023 notes, note hedges, and warrants, as well as the completion and integration risks of the Minjar and Netsil acquisitions.
- The filing’s reported share counts and dual-class voting structure: Class B shares carry ten votes per share, concentrating voting control.