Nutanix, Inc. — Form 10-Q Summary
Period note: The supplied filing is for the quarter ended April 30, 2017 (Nutanix fiscal Q3 2017), not 2016 Q3 as stated in the request metadata. The financial statements are unaudited. Amounts below are in U.S. dollars unless noted.
Business context and reporting period
Nutanix sells an enterprise cloud platform that combines server, virtualization and storage capabilities, primarily through distributors and resellers. Products are sold as appliances or software-only; support and maintenance contracts generate recurring services revenue. The company reported 6,172 end-customers, including 521 Global 2000 enterprises, at April 30, 2017, versus 3,111 a year earlier.
During the nine-month period, Nutanix completed its October 2016 IPO, raising $254.5 million net of underwriting discounts and commissions, and acquired Calm and PernixData. The acquisitions added goodwill and acquired intangible assets and expanded the business into container/DevOps automation and data acceleration and analytics.
Financial results and key metrics
| Metric | Three months ended April 30, 2017 | Year-over-year change | Nine months ended April 30, 2017 | Year-over-year change |
|---|---|---|---|---|
| Total revenue | $191.8 million | +67% | $540.8 million | +77% |
| Product revenue | $143.1 million | +59% | $411.3 million | +70% |
| Support and other services revenue | $48.6 million | +97% | $129.5 million | +104% |
| GAAP gross margin | 57% | Down from 62% | 58% | Down from 62% |
| Operating loss | $109.7 million | Prior-year loss: $44.7 million | $338.3 million | Prior-year loss: $117.1 million |
| Net loss | $112.0 million | Prior-year loss: $46.8 million | $367.4 million | Prior-year loss: $118.6 million |
| Billings (non-GAAP) | $234.1 million | Up from $159.5 million | $701.3 million | Up from $431.2 million |
| Free cash flow (non-GAAP) | $(29.2) million | Prior-year outflow: $11.0 million | $(29.9) million | Prior-year outflow: $32.1 million |
Quarterly operating cash flow was an outflow of $16.0 million, compared with an inflow of $2.4 million in the prior-year quarter. For the nine months, operating cash flow was positive $7.9 million, versus $1.3 million in the prior-year period. The nine-month cash-flow statement shows $37.8 million of property and equipment purchases.
At April 30, 2017, cash and cash equivalents were $200.8 million and short-term investments were $149.6 million, totaling $350.3 million. Current assets were $587.3 million and current liabilities $356.7 million. Deferred revenue totaled $463.0 million, including $207.0 million current. The company had no outstanding borrowings: it repaid its $75.0 million senior notes in September 2016 and recorded a $3.3 million debt-extinguishment loss. Accumulated deficit was $809.2 million.
Material changes and unusual items
- Revenue growth reflected increased domestic and international demand, a doubling of the end-customer count, and expansion of support contracts. International revenue represented 41% of nine-month revenue, versus 37% a year earlier.
- Gross margin declined as DRAM and NAND shortages raised hardware costs; the company reported an 8% net increase in hardware costs in the quarter compared with the quarter ended January 31, 2017. Higher discounting also weighed on product margin.
- Operating expenses rose sharply with growth investments, employee expansion, acquisition-related costs and public-company costs. Nine-month stock-based compensation was $193.7 million, compared with $15.4 million a year earlier, including expense associated with performance-based awards following the IPO.
- Nine-month other expense included a $21.1 million charge from the change in fair value of preferred-stock warrant liabilities and the $3.3 million debt-extinguishment loss. IPO-related conversion of preferred stock and warrants eliminated those liabilities.
- Operating cash flow benefited from higher billings and collections, but quarter-specific cash usage and negative free cash flow indicate that revenue growth did not translate into positive free cash flow.
Outlook, risks and contingencies
Management said existing cash, cash equivalents and short-term investments were expected to meet working-capital and capital-expenditure needs for at least the next 12 months. The filing provides no specific revenue, earnings or margin guidance. Management plans continued investment in global sales and marketing, engineering and research and development, and acknowledged that such investment may weigh on near-term profitability.
- Sales-force productivity is a key execution risk: 57% of the global sales team was considered fully productive and 43% was still ramping. Management said a sales-force realignment toward major accounts and large deals had temporarily affected North American productivity, with improvement expected over coming quarters.
- Management expected DRAM and NAND cost pressure to continue in the quarter ending July 31, 2017, while supply remains constrained. Component shortages, contract-manufacturer execution and purchase commitments are material risks.
- The company reported $48.5 million of operating lease obligations, $23.8 million of other purchase commitments and $58.3 million of contract-manufacturer purchase commitments. PernixData contingent consideration was subject to operating milestones; the amount ultimately payable may vary.
- Competition, unpredictable sales cycles, reliance on channel partners and OEM relationships, adoption of public cloud, and the ability to sustain customer renewals and expansion could affect results. Dell’s acquisition of EMC raised the risk that Dell may favor its own products over Nutanix products, despite its OEM relationship with Nutanix.
- The filing identifies intellectual-property claims by IBM concerning at least five U.S. patents; Nutanix said it believed it had meritorious defenses. Management reported no material legal proceedings and no known litigation matter expected to have a material adverse impact.
- Other disclosed risks include international and foreign-exchange exposure, cybersecurity and product defects, regulatory and tax uncertainty, and execution/integration risks from acquisitions. The company cited a prior European consulting-partner referral-program matter and said it had terminated the program and implemented remedial steps.
Nutanix reported disclosure controls and procedures effective at a reasonable assurance level and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the correct period: the filing covers fiscal Q3 2017 and the nine months ended April 30, 2017.
- Track whether revenue and billings growth can continue while GAAP gross margin remains pressured by component costs and discounting.
- Assess the trajectory of stock-based compensation, operating expenses, net losses and dilution from equity awards and sell-to-cover tax withholding.
- Monitor cash conversion: quarterly operating cash flow and free cash flow were negative despite positive nine-month operating cash flow.
- Review sales-team ramp and large-deal execution, channel/OEM concentration, and the effects of the Dell/EMC relationship.
- Follow manufacturing transition to Flextronics, DRAM/NAND availability and prices, and fulfillment of purchase commitments.
- Track PernixData milestone payments, acquisition integration, and the status and potential consequences of IBM’s patent allegations.