Nutanix, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2020, the three months ended October 31, 2019; comparisons are with the three months ended October 31, 2018 unless noted. Amounts are in U.S. dollars.
Business context
Nutanix provides enterprise cloud platform software, sold primarily through channel partners and OEMs. The company is shifting from appliance and life-of-device sales toward software-only and subscription offerings. Its customer base grew to approximately 14,960 end customers, from 11,490 a year earlier.
Key financial metrics
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Total revenue | $314.8 million | $313.3 million | +0.5% |
| Subscription revenue | $217.9 million | $127.0 million | +71.6% |
| Product revenue | $192.4 million | $224.3 million | -14% |
| Support, entitlements and other services revenue | $122.3 million | $88.9 million | +38% |
| Gross profit / gross margin | $242.6 million / 77.1% | $239.2 million / 76.3% | Margin +0.8 percentage points |
| Operating expenses | $462.9 million | $334.4 million | +38% |
| Loss from operations | $(220.3) million | $(95.2) million | Loss widened |
| Net loss / diluted loss per share | $(229.3) million / $(1.21) | $(94.3) million / $(0.54) | Loss widened |
| Operating cash flow | $(26.2) million | $49.8 million | Turned to use of cash |
| Free cash flow (company-defined) | $(44.4) million | $20.0 million | Turned to use of cash |
| Total billings (non-GAAP) | $380.0 million | $383.6 million | -0.9% |
Subscription growth reflected both ratable subscription/support revenue and upfront-recognized subscription software licenses. Non-portable software revenue declined to $77.6 million from $146.6 million, while hardware revenue fell to $9.7 million from $32.5 million. Management attributed the product mix shift partly to customers buying hardware directly from OEMs and to the subscription transition. Company-defined software and support billings rose to $370.3 million from $351.0 million.
Adjusted gross profit was $252.1 million and adjusted gross margin was 80.1%, versus $246.2 million and 78.6%. These non-GAAP measures exclude specified items. Stock-based compensation expense was $81.4 million, compared with $65.9 million.
Liquidity, debt and balance sheet
- At October 31, 2019, cash and cash equivalents were $233.8 million and short-term investments were $655.6 million, totaling $889.4 million; restricted cash was an additional $3.1 million. Cash plus short-term investments were $908.8 million at July 31, 2019.
- Current assets were $1.218 billion and current liabilities were $655.2 million. Deferred revenue totaled $975.3 million, up from $910.0 million at July 31, 2019.
- Convertible notes had $575.0 million principal, 0% stated interest and a January 2023 maturity; their net carrying amount was $466.5 million. No principal payments are required before maturity. Management said available cash and investments should cover anticipated needs for at least 12 months.
- Operating lease liabilities were $148.4 million. Adoption of the new lease standard on August 1, 2019 added lease right-of-use assets and liabilities to the balance sheet; prior-period balances were not restated.
- Accumulated deficit was $1.9 billion and stockholders’ equity was $63.5 million at quarter-end.
Changes, outlook and risks
- Revenue was nearly flat despite strong subscription growth. The shift in sales mix and shorter average contract terms may affect reported revenue and billings; average contract term was 3.9 years versus 4.2 years a year earlier.
- Operating expenses rose substantially, principally from increased personnel and stock-based compensation. Sales and marketing expense increased 49%, R&D 25%, and G&A 20%. Headcount grew to approximately 5,770 from 4,380; management said it expects continued investment in sales, marketing and R&D, which may weigh on near-term profitability.
- Management provided no specific numerical revenue or earnings guidance in the supplied filing text. It identified sales-force productivity and ramping, market adoption, channel and OEM relationships, subscription renewals, competition, and execution of the business-model transition as important uncertainties.
- Cash used in investing activities was $160.4 million, mainly reflecting purchases of short-term investments; purchases of property and equipment were $18.2 million. The company reported $78.6 million of other purchase commitments and $152.7 million of guarantees to contract manufacturers and OEMs.
- Several securities class actions and shareholder derivative actions were pending. The company said these matters were at an early stage and it could not determine whether liabilities would result.
- Other risks include a history of losses, reliance on channel partners and OEMs, foreign-exchange exposure, product/security risks, and regulatory and privacy requirements. Management reported disclosure controls were effective at a reasonable-assurance level.
Important facts for investors to verify
- Whether subscription and software/support billings growth can offset declines in appliance-related revenue and support sustainable total revenue growth.
- Whether operating-expense growth and cash burn moderate as the expanded sales force becomes productive.
- Renewal rates, customer retention, contract terms, and the timing of subscription revenue recognition.
- Liquidity and cash-flow trends, including the timing and terms of the 2023 convertible notes and lease commitments.
- Developments in the securities and derivative litigation, OEM/channel concentration, and the company’s disclosed purchase guarantees and commitments.