Nutanix, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended October 31, 2016. The financial statements are unaudited and compare the three months ended October 31, 2016 with the same period in 2015. Nutanix sells an enterprise cloud platform, primarily through distributors and resellers. It completed its IPO and acquired Calm.io and PernixData during the quarter.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2017 |
|---|---|---|
| Revenue | $87.8 million | $166.8 million, up 90% |
| Product revenue | $70.4 million | $129.7 million, up 84% |
| Support and services revenue | $17.4 million | $37.2 million, up 114% |
| GAAP gross margin | 60% | 58% |
| Adjusted gross margin (non-GAAP) | 60% | 61% |
| Operating loss | $37.2 million | $136.4 million |
| Net loss | $38.5 million | $162.2 million |
| Billings (non-GAAP) | $128.3 million | $239.8 million |
| Deferred revenue | $144.1 million | $375.4 million |
| Operating cash flow | $(5.6) million | $4.2 million |
| Free cash flow (non-GAAP) | $(15.3) million | $(7.8) million |
At October 31, 2016, cash and cash equivalents were $225.5 million and short-term investments were $121.6 million. Current assets were $530.5 million against current liabilities of $258.1 million. The company had no outstanding borrowings after repaying its $75 million senior notes in September; repayment and extinguishment costs contributed to a $3.3 million loss on debt extinguishment. Operating cash flow was supported by higher billings and collections; capital expenditures were $11.9 million.
Material changes and unusual items
- Net loss widened substantially year over year. Q1 2017 included an $83.0 million cumulative catch-up of stock-based compensation for performance awards, with total stock-based compensation expense of $90.7 million versus $5.4 million a year earlier.
- Other expense was $25.7 million, mainly reflecting a $21.1 million increase in the fair value of preferred-stock warrants before their conversion and reclassification to equity at the IPO, plus the $3.3 million debt-extinguishment loss.
- Sales and marketing expense rose 120% to $128.8 million; research and development rose 216% to $75.3 million; general and administrative expense rose 298% to $29.4 million. The filing attributes increases to performance-award compensation, hiring, expansion, and public-company costs.
- Calm was acquired for $7.7 million net of cash, and PernixData for approximately $23.0 million, principally in stock and contingent consideration. PernixData contingent purchase consideration had a reported fair value of $2.6 million at quarter-end; additional payments may depend on milestones and service conditions.
- The IPO sold 17.1 million Class A shares at $16 per share. The filing reports $254.5 million net proceeds after underwriting discounts and commissions in its operating discussion, while the use-of-proceeds disclosure reports $249.4 million after estimated issuance costs as well. Investors should note the different cost bases.
Outlook, risks, and contingencies
Management expects to continue investing in sales, marketing, research, development, and international expansion, which may weigh on near-term profitability. It stated that cash and short-term investments should cover anticipated working-capital and capital-expenditure needs for at least 12 months. No specific revenue or earnings guidance was provided. Management reported 4,473 end-customers, including 376 Global 2000 companies; 76% of customers with at least 18 months’ tenure had made a repeat purchase.
- Key risks include continued losses, uncertain adoption and unpredictable sales cycles, competition from established infrastructure vendors and public-cloud providers, and the need to scale and ramp a rapidly growing sales force.
- Sales-channel concentration is material: one partner represented 22% of quarterly revenue; the filing also identifies risks from dependence on channel partners and OEM relationships.
- Hardware manufacturing and key component supply depend on a limited number of third parties. The company reported $19.5 million of other purchase commitments, $19.8 million of contract-manufacturer purchase commitments, and $47.8 million of operating lease obligations.
- The filing describes IBM allegations that Nutanix products infringe at least five U.S. patents; the company says it believes it has meritorious defenses. Management reported no material litigation proceedings and was not aware of matters expected to materially harm the company.
- Class B shares carry ten votes per share versus one vote for Class A, concentrating voting control. The company also cited risks involving cybersecurity, international operations, regulation, and the integration of acquisitions.
- Management concluded disclosure controls were effective at a reasonable-assurance level; no material change in internal control over financial reporting was identified during the quarter.
Investor verification priorities
- Assess how much of reported losses and expense growth reflects the $83.0 million performance-award compensation catch-up, and the extent of continuing stock-based compensation.
- Reconcile IPO proceeds across disclosures, including underwriting discounts, offering costs, and cash-flow presentation.
- Track billings, deferred revenue, collections, and free cash flow alongside GAAP revenue and gross margin.
- Monitor customer and partner concentration, sales-force productivity, and the effects of appliance versus software-only sales mix.
- Review acquisition integration, contingent consideration milestones, and the status and potential cost of the IBM patent allegations.