Nutanix, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and first half ended January 31, 2021; comparisons are to the periods ended January 31, 2020. The filing is unaudited. Amounts below are in millions of U.S. dollars unless stated otherwise.
Business context
Nutanix sells enterprise cloud software and services for private, hybrid and multicloud environments, primarily through channel partners and OEMs. It is shifting from appliance-associated, life-of-device licenses toward subscription software and SaaS. At January 31, 2021, it reported approximately 18,770 end customers, including approximately 950 Global 2000 enterprises.
Financial and operating metrics
| Metric | Three months ended Jan. 31, 2021 | Six months ended Jan. 31, 2021 | Prior-year comparable |
|---|---|---|---|
| Total revenue | $346.4 | $659.1 | $346.8; $661.5 |
| Subscription revenue | $305.9 | $584.1 | $266.5; $484.4 |
| Gross profit / gross margin | $275.4 / 79.5% | $520.2 / 78.9% | $271.5 / 78.3%; $514.1 / 77.7% |
| Operating loss | $(156.2) | $(338.3) | $(207.1); $(427.4) |
| Net loss | $(287.4) | $(552.4) | $(217.6); $(446.9) |
| Net loss per share | $(1.42) | $(2.72) | $(1.13); $(2.34) |
| Operating cash flow | $(15.6) | $(19.6) | $(52.5); $(78.7) |
| Free cash flow, non-GAAP | $(28.5) | $(44.8) | $(73.7); $(118.1) |
Quarterly and six-month total revenue were approximately flat year over year. Product revenue fell 18% in the quarter and 19% for the half, while support, entitlements and services revenue rose 29% in both comparisons. Subscription revenue grew, but total billings declined to $385.5 million for the quarter from $428.1 million and to $720.5 million for the half from $808.1 million. Run-rate ACV increased to $1.385 billion from $1.081 billion; ACV billings were $159.2 million for the quarter and $286.0 million for the half.
Operating losses narrowed as operating expenses fell, particularly sales and marketing. Net losses widened, principally because of higher other expense, including the remeasurement of the 2026 Notes’ embedded derivative. The six-month derivative fair-value charge was $166.4 million; the derivative liability was $397.3 million at period-end. Stock-based compensation was $173.7 million for the half.
Liquidity, debt and capital
- At January 31, 2021, cash and cash equivalents were $298.7 million and short-term investments were $990.1 million; restricted cash was $3.2 million. Cash, cash equivalents and short-term investments totaled $1.289 billion.
- Current assets were $1.616 billion and current liabilities were $849.6 million. Deferred revenue totaled $1.246 billion, including $578.7 million current.
- Convertible notes had $1.325 billion aggregate principal: $575 million of 0% notes due 2023 and $750 million of 2.5% notes due 2026. Their combined net carrying amount was $1.012 billion, excluding the separately recorded $397.3 million derivative liability. The 2026 Notes were issued to a Bain Capital affiliate and accrue interest in kind while held by Bain.
- During the half, Nutanix received $723.6 million net from the 2026 Notes and repurchased 5.2 million shares for $125.0 million. The buyback authorization was fully used and expired; management said it did not plan further repurchases in the foreseeable future.
Changes, outlook and risks
- The product-revenue decline reflects the subscription transition, shorter average contract terms and customers increasingly buying hardware directly from OEMs. Average contract term was 3.4 years in the quarter, versus 3.9 years a year earlier.
- Management expects operating and free cash flow to remain negative during the next 12 months, but believes available cash and short-term investments are sufficient for anticipated needs for at least that period. The filing provides no specific revenue or earnings guidance.
- COVID-19 effects included uncertain demand, longer sales cycles, possible purchase delays, supply-chain and hardware-delivery constraints, and pressure on component prices. Remote-work demand supported virtual desktop and end-user computing offerings. The company reduced costs and restricted travel; it expected some expenses to rise from depressed levels but not return to pre-pandemic levels.
- Management cited ongoing execution risks in the subscription transition, sales productivity and ramp-up, customer adoption, partner/OEM reliance, and retention and expansion. The CEO transition and ability to attract and retain key employees were also identified as risks.
- One channel partner represented 34% of quarterly revenue; another represented 13%. A single partner accounted for 33% of receivables at period-end.
- Contingencies include a securities class action alleging misleading statements related to new-customer growth and sales productivity; the company said the litigation remained at an early stage and potential liability could not be determined. Federal derivative litigation was dismissed with prejudice as to plaintiffs’ standing to pursue demand-futility claims. OEM guarantees were approximately $66.9 million, in addition to up to $61.4 million of non-cancelable purchase obligations and other commitments.
- The company recorded $2.8 million of lease-related impairment charges in the first half and said further impairment charges could occur. Disclosure controls were assessed as effective at a reasonable-assurance level, with no material change to internal control over financial reporting reported.
Key facts for investors to verify
- Whether subscription growth and rising run-rate ACV translate into improved billings and revenue, given lower total billings and shorter contract terms.
- Whether operating cash flow improves while management invests in growth and continues the subscription transition.
- The impact of the 2026 Notes’ derivative valuation and future conversion terms on reported earnings, balance-sheet liabilities and potential dilution.
- Whether cost reductions are sustainable and whether sales-team productivity, customer renewals and partner concentration develop as expected.
- Developments in the securities class action, OEM commitments and guarantees, and any further lease impairments.