NUTANIX, INC. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition, results of operations and cash flows should be read in conjunction with (1) the unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and (2) the audited consolidated financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the fiscal year endedJuly 31, 2021 filed onSeptember 21, 2021 . The last day of our fiscal year isJuly 31 . Our fiscal quarters end onOctober 31 ,January 31 ,April 30 andJuly 31 . This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under the heading "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year endedJuly 31, 2021 and in Part II, Item 1A of this Quarterly Report on Form 10-Q. See also "Special Note Regarding Forward-Looking Statements" above.
Overview
Nutanix, Inc. ("we," "us," "our" or "Nutanix") provides a leading enterprise cloud platform, which we call the Nutanix Cloud Platform, that consists of software solutions and cloud services that power our customers' enterprise infrastructure. Our solutions run across private-, hybrid- and multicloud environments, and allow organizations to seamlessly "lift and shift" their workloads, including enterprise applications, high-performance databases, end-user computing and virtual desktop infrastructure ("VDI") services, cloud native workloads, and analytics applications, between different cloud environments. Our goal is to provide a single, simple, open software platform for all hybrid and multicloud applications and data - a true hybrid cloud infrastructure. Our enterprise cloud platform can be deployed on a variety of qualified hardware platforms or, in the case of our cloud-based software and software as a service ("SaaS") offerings, via hosted service or delivered pre-installed on an appliance that is configured to order. Non-portable software licenses are delivered or sold alongside configured-to-order appliances and can be used over the life of the associated appliance. Our subscription term-based licenses are sold separately, or can be sold alongside configured-to-order appliances. Configured-to-order appliances, including ourNutanix -branded NX hardware line, can be purchased from one of our channel partners, original equipment manufacturers ("OEMs") or in limited cases, directly fromNutanix . Our enterprise cloud platform typically includes one or more years of support and entitlements, which provides customers with the right to software upgrades and enhancements as well as technical support. Product revenue is generated primarily from the licensing of our solutions. Support, entitlements and other services revenue is primarily derived from the related support and maintenance contracts. Prior to fiscal 2019, we delivered most of our solutions on an appliance and thus our revenue included the revenue associated with the appliance and the included non-portable software, which lasts for the life of the associated appliance. However, starting in fiscal 2018, as a result of our business model transition toward software-only sales, more of our customers began buying appliances directly from our OEMs while separately buying licenses for our software solutions from us or one of our channel partners. In addition, starting in fiscal 2019, as a result of our transition towards a subscription-based business model, more of our customers began purchasing separately sold subscription term-based licenses that could be deployed on a variety of hardware platforms. As we continue our transition to a subscription-based business model, we expect a greater portion of our products to be delivered through subscription term-based licenses or cloud-based SaaS subscriptions. We had a broad and diverse base of approximately 21,980 end customers as ofApril 30, 2022 , including approximately 970 Global 2000 enterprises. We define the number of end customers as the number of end customers for which we have received an order by the last day of the period, excluding partners to which we have sold products for their own demonstration purposes. A single organization or customer may represent multiple end customers for separate divisions, segments or subsidiaries, and the total number of end customers may contract due to mergers, acquisitions, or other consolidation among existing end customers. Since shipping our first product in fiscal 2012, our end customer base has grown rapidly. 37
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NUTANIX, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Our solutions are primarily sold through channel partners, including
distributors, resellers and OEMs, and delivered directly to our end customers.
Our solutions serve a broad range of workloads, including enterprise
applications, databases, virtual desktop infrastructure, unified communications
and big data analytics, and we support both virtualized and container-based
applications. We have end customers across a broad range of industries, such as
automotive, consumer goods, education, energy, financial services, healthcare,
manufacturing, media, public sector, retail, technology and telecommunications.
We also sell to service providers, who utilize our enterprise cloud platform to
provide a variety of cloud-based services to their customers.
We continue to invest in the growth of our business over the long-run, including
the development of our solutions and investing in sales and marketing to
capitalize on our market opportunities, while improving our operating cash flow
performance by focusing on go-to-market efficiencies. By maintaining this
balance, we believe we can drive toward our high growth potential without
sacrificing our overall financial health. As discussed further in the "Impact of
the COVID-19 Pandemic" and "Factors Affecting Our Performance" sections below,
both in response to the ongoing and continuously evolving COVID-19 pandemic and
as part of our overall efforts to improve our operating cash flow performance,
we have proactively taken steps to manage our expenses. As a result, our overall
spending on such efforts will fluctuate, and may decline, from quarter to
quarter in the near-term.
Late in the fiscal quarter ended April 30, 2022 , we saw an unexpected impact
from increased supply chain challenges with increased hardware supply chain
delays resulting in an increasing percentage of orders having start dates in
future quarters and certain customers delaying their purchase of our software
pending availability of the hardware on which our software runs. This impact
affected both our ACV billings and revenue for the fiscal quarter ended April
30, 2022 , and we expect this trend to continue in the fiscal quarter ending July
31, 2022 and potentially beyond.
Impact of the COVID-19 Pandemic
The ongoing and continuously evolving pandemic caused by the COVID-19 virus (collectively with any new variants or related strains thereof, "COVID-19" and the ongoing pandemic caused thereby, the "COVID-19 pandemic") has significantly curtailed the movement of people, goods and services worldwide, imposed unprecedented strains on governments, health care systems, educational institutions, businesses and individuals around the world, including in nearly all of the regions in which we operate, and has resulted in significant volatility and uncertainty in the global economy. In response to the pandemic, authorities, businesses, and individuals have vacillated between implementing and lifting numerous unprecedented measures, including travel bans and restrictions, quarantines, shelter-in-place, stay-at-home, remote work and social distancing orders, and shutdowns, depending on the severity of the pandemic. The COVID-19 pandemic has impacted and may continue to impact our workforce and operations, as well as those of our customers, vendors, suppliers, partners, and communities, and there is substantial uncertainty in the nature and degree of its continued effects over time. In response to the COVID-19 pandemic, we have also taken a number of actions to protect and assist our employees, customers, and partners, including: temporarily closing all of our offices (including ourCalifornia headquarters) around the world; requiring our employees to work remotely; implementing travel restrictions that allow only the most essential business travel; and postponing, cancelling, withdrawing from, or converting to virtual-only experiences (where possible and appropriate) our in-person customer, industry, analyst, investor, and employee events. As a result of such actions, as well as the general effects of the COVID-19 pandemic, our business and operations have experienced and may continue to experience numerous negative impacts, including: curtailed demand for certain of our solutions; reduced IT spending; delays in or abandonment of planned or future purchases; lengthened sales cycles, particularly with new customers and partners who do not have prior experience with our solutions; supply chain disruptions; increased cybersecurity risks or other security challenges; delays or disruptions to our product roadmap and our ability to deliver new products, features, or enhancements; and voluntary and involuntary delays in the ability to ship, and the ability of our end customers to accept delivery of, the hardware platforms on which our software solutions run. We also expect the reduced manufacturing capacity caused by the pandemic to result in increases in the prices of certain components used to manufacture such hardware platforms, which may increase the price of those hardware platforms for our end customers, or delay the availability of hardware platforms that our customers use to operate our software. Travel bans, shutdowns, social distancing restrictions and remote work policies also make it difficult or impossible to deliver on-site services to our partners and end customers, and to meet with our current and potential end customers in person. We have also seen positive impacts, including increased demand for our virtual desktop, desktop-as-a-service, and end-user computing solutions as a result of our end customers enabling their employees to work remotely. 38
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Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
We have also quickly adapted to the new work environment, leveraging digital,
video, and other collaborative tools to enable our teams to stay connected with
each other, and our sales, marketing and support teams to continue to engage
with and remain responsive to our partners and end customers. Additionally, we
have seen a reduction in our operating expenses in recent quarters, including
sales and marketing expenses, some of which is due to a number of proactive
actions that we took to manage our operating expenses in light of the
uncertainty caused by the COVID-19 pandemic, and some of which is a natural
result of the continued restrictions on travel and in-person events from the
pandemic. Although the full impact of these actions is uncertain, some of these
cost savings measures are temporary. While we do expect to see some of our
operating expenses increase from the suppressed levels in recent quarters as
some of the proactive cost savings measures expire and some level of travel and
other related expenses return, we are focused on improving our operating cash
flow performance and we do not expect that travel or other related expenses will
return to pre-pandemic levels. See the section titled "Risk Factors" in Part I,
Item 1A of our Annual Report on Form 10-K for the fiscal year ended July 31,
2021 for further discussion of the possible impact of these actions on our
business and financial performance.
The duration, scope and ultimate impact of the COVID-19 pandemic on the global
economy and our business remain highly fluid and cannot be predicted with
certainty, and the full effect of the pandemic and the actions we have taken in
response may not be fully reflected in our results of operations and financial
performance until future periods. Our management team is focused on guiding our
company through the emerging challenges presented by COVID-19 and remains
committed to driving positive business outcomes. Although we do not currently
expect the pandemic to affect our financial reporting systems, internal control
over financial reporting or disclosure controls and procedures, the continued
impact of the pandemic on our business and financial performance will be highly
dependent upon numerous factors, many of which are beyond our control. See the
section titled "Risk Factors" in Part I, Item 1A of our Annual Report on Form
10-K for the fiscal year ended July 31, 2021 for further discussion of the
possible impact of the COVID-19 pandemic, as well as the actions we have taken
in response, on our business and financial performance.
Key Financial and Performance Metrics
We monitor the following key financial and performance metrics:
As of and for the
Three Months Ended Nine Months Ended
April 30, April 30,
2021 2022 2021 2022
(in thousands, except percentages)
Total revenue $ 344,508 $ 403,658 $ 1,003,644 $ 1,195,256
Year-over-year percentage increase 8.2 % 17.2 % 2.4 % 19.1 %
Subscription revenue $ 307,332 $ 370,496 $ 891,443 $ 1,083,141
Total billings $ 371,147 $ 447,955 $ 1,091,608 $ 1,310,521
Subscription billings $ 330,774 $ 412,720 $ 963,865 $ 1,199,447
Annual contract value ("ACV")
billings $ 159,919 $ 204,724 $ 430,747 $ 577,519
Annual recurring revenue ("ARR") $ 762,024 $ 1,114,420 $ 762,024 $ 1,114,420
Run-rate ACV $ 1,447,274 $ 1,728,620 $ 1,447,274 $ 1,728,620
Gross profit $ 270,034 $ 323,809 $ 790,257 $ 953,992
Non-GAAP gross profit $ 281,356 $ 336,314 $ 823,942 $ 993,297
Gross margin 78.4 % 80.2 % 78.7 % 79.8 %
Non-GAAP gross margin 81.7 % 83.3 % 82.1 % 83.1 %
Operating expenses $ 450,607 $ 416,157 $ 1,309,151 $ 1,278,016
Non-GAAP operating expenses $ 361,486 $ 341,715 $ 1,056,256 $ 1,041,626
Total deferred revenue $ 1,274,036 $ 1,431,980 $ 1,274,036 $ 1,431,980
Net cash (used in) provided by
operating activities $ (55,551 ) $ (3,167 ) $ (75,180 ) $ 29,539
Free cash flow $ (71,494 ) $ (20,056 ) $ (116,291 ) $ (4,740 )
Total end customers 19,430 21,980 19,430 21,980
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Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)Disaggregation of Revenue and Billings
The following table depicts the disaggregation of revenue and billings by type, consistent with how we evaluate our financial performance:
Three Months Ended Nine Months Ended
April 30, April 30,
2021 2022 2021 2022
(in thousands)
Disaggregation of revenue:
Subscription revenue $ 307,332 $ 370,496 $ 891,443 $ 1,083,141
Non-portable software revenue 16,741 9,368 58,445 38,247
Hardware revenue 975 1,329 3,025
5,245
Professional services revenue 19,460 22,465 50,731
68,623
Total revenue $ 344,508 $ 403,658 $ 1,003,644 $ 1,195,256
Disaggregation of billings:
Subscription billings $ 330,774 $ 412,720 $ 963,865 $ 1,199,447
Non-portable software billings 16,741 9,368 58,445 38,247
Hardware billings 975 1,329 3,025
5,245
Professional services billings 22,657 24,538 66,273
67,582
Total billings $ 371,147 $ 447,955 $ 1,091,608 $ 1,310,521
Subscription revenue - Subscription revenue includes any performance obligation
which has a defined term and is generated from the sales of software entitlement
and support subscriptions, subscription software licenses and cloud-based
software as a service offerings.
•
Ratable - We recognize revenue from software entitlement and support subscriptions and SaaS offerings ratably over the contractual service period, the substantial majority of which relate to software entitlement and support subscriptions. These offerings represented approximately$159.5 million and$466.5 million of our subscription revenue for the three and nine months endedApril 30, 2021 , respectively, and$191.1 million and$565.5 million for the three and nine months endedApril 30, 2022 , respectively.
•
Upfront - Revenue from our subscription software licenses is generally
recognized upfront upon transfer of control to the customer, which happens when
we make the software available to the customer. These subscription software
licenses represented approximately
Non-portable software revenue - Non-portable software revenue includes sales of our enterprise cloud platform when delivered on a configured-to-order appliance by us or one of our OEM partners. The software licenses associated with these sales are typically non-portable and can be used over the life of the appliance on which the software is delivered. Revenue from our non-portable software products is generally recognized upon transfer of control to the customer. Hardware revenue - In transactions where the hardware appliance is purchased directly fromNutanix , we consider ourselves to be the principal in the transaction and we record revenue and costs of goods sold on a gross basis. We consider the amount allocated to hardware revenue to be equivalent to the cost of the hardware procured. Hardware revenue is generally recognized upon transfer of control to the customer.
Professional services revenue - We also sell professional services with our products. We recognize revenue related to professional services as they are performed.
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Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)Non-GAAP Financial Measures and Key Performance Measures
We regularly monitor total billings, subscription billings, ACV billings, ARR, run-rate ACV, non-GAAP gross profit, non-GAAP gross margin, non-GAAP operating expenses, and free cash flow, which are non-GAAP financial measures and key performance measures, to help us evaluate our growth and operational efficiencies, measure our performance, identify trends in our sales activity and establish our budgets. We evaluate these measures because they:
•
are used by management and the Board of Directors to understand and evaluate our performance and trends, as well as to provide a useful measure for period-to-period comparisons of our core business, particularly as we progress through our transition to a subscription-based business model;
•
are widely used as a measure of financial performance to understand and evaluate companies in our industry; and
•
are used by management to prepare and approve our annual budget and to develop short-term and long-term operational and compensation plans, as well as to assess our actual performance against our goals.
Total billings is a performance measure which we believe provides useful information to our management and investors, as it represents the dollar value under binding purchase orders received and billed during a given period. Subscription billings is a performance measure that we believe provides useful information to our management and investors as it allows us to better track the growth of the subscription-based portion of our business, which is a critical part of our business plan. ACV billings and run-rate ACV are performance measures that we believe provide useful information to our management and investors as they allow us to better track the topline growth of our business during our transition to a subscription-based business model because they take into account variability in term lengths. ARR is a performance measure that we believe provides useful information to our management and investors as it allows us to better track the topline growth of our subscription business because it only includes non-life-of-device contracts and takes into account variability in term lengths. Non-GAAP gross profit, non-GAAP gross margin and non-GAAP operating expenses are performance measures which we believe provide useful information to investors, as they provide meaningful supplemental information regarding our performance and liquidity by excluding certain expenses and expenditures, such as stock-based compensation expense, that may not be indicative of our ongoing core business operating results. Free cash flow is a performance measure that we believe provides useful information to management and investors about the amount of cash used in or generated by the business after necessary capital expenditures. We use these non-GAAP financial and key performance measures for financial and operational decision-making and as a means to evaluate period-to-period comparisons. Total billings, subscription billings, ACV billings, ARR, run-rate ACV, non-GAAP gross profit, non-GAAP gross margin, non-GAAP operating expenses, and free cash flow have limitations as analytical tools and they should not be considered in isolation or as substitutes for analysis of our results as reported under generally accepted accounting principles inthe United States . Total billings, subscription billings, non-GAAP gross profit, non-GAAP gross margin, non-GAAP operating expenses and free cash flow are not substitutes for total revenue, subscription revenue, gross profit, gross margin, operating expenses or cash provided by (used in) operating activities, respectively. There is no GAAP measure that is comparable to either ACV billings, ARR or run-rate ACV, so we have not reconciled ACV billings, ARR or run-rate ACV numbers included in this Quarterly Report on Form 10-Q to any GAAP measure. In addition, other companies, including companies in our industry, may calculate non-GAAP financial measures and key performance measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures and key performance measures as tools for comparison. We urge you to review the reconciliation of our non-GAAP financial measures and key performance measures to the most directly comparable GAAP financial measures included below and not to rely on any single financial measure to evaluate our business.
We calculate our non-GAAP financial and key performance measures as follows:
Total billings - We calculate total billings by adding the change in deferred revenue between the start and end of the period to total revenue recognized in the same period.
Subscription billings - We calculate subscription billings by adding the change in subscription deferred revenue between the start and end of the period to subscription revenue recognized in the same period.
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Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
ACV billings - We calculate ACV billings as the sum of the ACV for all contracts
billed during the period. ACV is defined as the total annualized value of a
contract, excluding amounts related to professional services and hardware. We
calculate the total annualized value for a contract by dividing the total value
of the contract by the number of years in the term of such contract, using,
where applicable, an assumed term of five years for contracts that do not have a
specified term.
ARR - We calculate ARR as the sum of ACV for all non-life-of-device contracts in
effect as of the end of a specific period. For the purposes of this calculation,
we assume that the contract term begins on the date a contract is booked, unless
the terms of such contract prevent us from fulfilling our obligations until a
later period, and irrespective of the periods in which we would recognize
revenue for such contract.
Run-rate ACV - We calculate run-rate ACV as the sum of ACV for all contracts
that are in effect as of the end of the period. For the purposes of this
calculation, we assume that the contract term begins on the date a contract is
booked, irrespective of the periods in which we would recognize revenue for such
contract.
Non-GAAP gross profit and non-GAAP gross margin - We calculate non-GAAP gross
margin as non-GAAP gross profit divided by total revenue. We define non-GAAP
gross profit as gross profit adjusted to exclude stock-based compensation
expense, amortization of acquired intangible assets, impairment of lease-related
assets, and costs associated with other non-recurring transactions. Our
presentation of non-GAAP gross profit should not be construed as implying that
our future results will not be affected by any recurring expenses or any unusual
or non-recurring items that we exclude from our calculation of this non-GAAP
financial measure.
Non-GAAP operating expenses - We define non-GAAP operating expenses as total
operating expenses adjusted to exclude stock-based compensation expense,
impairment of lease-related assets, costs associated with business combinations,
such as amortization of acquired intangible assets, revaluation of contingent
consideration and other acquisition-related costs and costs associated with
other non-recurring transactions. Our presentation of non-GAAP operating
expenses should not be construed as implying that our future results will not be
affected by any recurring expenses or any unusual or non-recurring items that we
exclude from our calculation of this non-GAAP financial measure.
Free cash flow - We calculate free cash flow as net cash provided by (used in)
operating activities less purchases of property and equipment, which measures
our ability to generate cash from our business operations after our capital
expenditures.
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Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
The following table presents a reconciliation of total billings, non-GAAP gross
profit, non-GAAP gross margin, non-GAAP operating expenses and free cash flow to
the most directly comparable GAAP financial measures, for each of the periods
indicated:
Three Months Ended Nine Months Ended
April 30, April 30,
2021 2022 2021 2022
(in thousands, except percentages)
Total revenue $ 344,508 $ 403,658 $ 1,003,644 $ 1,195,256
Change in deferred revenue 26,639 44,297 87,964 115,265
Total billings (non-GAAP) $ 371,147 $ 447,955 $ 1,091,608 $ 1,310,521
Gross profit $ 270,034 $ 323,809 $ 790,257 $ 953,992
Stock-based compensation 7,628 9,137 22,316 29,093
Amortization of intangible assets 3,694 3,368 11,082 10,212
Impairment of lease-related assets - - 287 -
Non-GAAP gross profit $ 281,356 $ 336,314 $ 823,942 $ 993,297
Gross margin 78.4 % 80.2 % 78.7 % 79.8 %
Stock-based compensation 2.2 % 2.3 % 2.2 % 2.4 %
Amortization of intangible assets 1.1 % 0.8 % 1.1 % 0.9 %
Impairment of lease-related assets - % - % 0.1 % - %
Non-GAAP gross margin 81.7 % 83.3 % 82.1 % 83.1 %
Operating expenses $ 450,607 $ 416,157 $ 1,309,151 $ 1,278,016
Stock-based compensation (87,658 ) (75,369 ) (246,622 ) (234,005 )
Amortization of intangible assets (651 ) (651 ) (1,953 ) (1,953 )
Impairment of lease-related assets - - (2,535 ) -
Other (812 ) 1,578 (1,785 ) (432 )
Non-GAAP operating expenses $ 361,486 $ 341,715 $ 1,056,256 $ 1,041,626
Net cash (used in) provided by
operating activities $ (55,551 ) $ (3,167 ) $ (75,180 ) $ 29,539
Purchases of property and equipment (15,943 ) (16,889 ) (41,111 ) (34,279 )
Free cash flow (non-GAAP) $ (71,494 ) $ (20,056 ) $ (116,291 ) $ (4,740 ) The following table presents a reconciliation of subscription billings and professional services billings to the most directly comparable GAAP financial measures, for each of the periods indicated:
Three Months Ended Nine Months Ended
April 30, April 30,
2021 2022 2021 2022
(in thousands)
Subscription revenue $ 307,332 $ 370,496 $ 891,443 $ 1,083,141
Change in subscription deferred revenue 23,442 42,224 72,422 116,306
Subscription billings $ 330,774 $ 412,720 $ 963,865 $ 1,199,447
Professional services revenue $ 19,460 $ 22,465 $ 50,731 $ 68,623
Change in professional services deferred
revenue 3,197 2,073 15,542 (1,041 )
Professional services billings $ 22,657 $ 24,538 $ 66,273 $ 67,582
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Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)Factors Affecting Our Performance
We believe that our future success will depend on many factors, including those described below. While these areas present significant opportunity, they also present risks that we must manage to achieve successful results. See the section titled "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year endedJuly 31, 2021 and the section titled "Risk Factors" in Part II, Item 1A of this Quarterly Report on Form 10-Q for details. If we are unable to address these challenges, our business and operating results could be materially and adversely affected.
Investment in Profitable Growth
We continue to invest in our growth over the long-run, while improving our operating cash flow performance by focusing on go-to-market efficiencies. By maintaining this balance, we believe we can drive toward our high growth potential without sacrificing our overall financial health.
Investment in Sales and Marketing - Our ability to achieve billings and revenue growth depends, in large part, on our ability to capitalize on our market opportunity, including our ability to recruit, train and retain sufficient numbers of ramped sales personnel to support our growth. As part of our investment in our growth over the long-run, we plan to invest in sales and marketing, including investing in our sales and marketing teams and continuing our focus on opportunities with major accounts, large deals, and commercial accounts, as well as other sales and marketing initiatives to increase our pipeline growth. However, we have recently seen higher-than-normal attrition among our sales representatives and our overall sales headcount being below our targets, which may negatively impact our billings and revenue growth. While we are actively recruiting additional sales representatives, it will take time to replace, train, and ramp them to full productivity. As a result, our overall sales and marketing expense may fluctuate, and may decline, in the near term. We estimate, based on past experience, that our average sales team members typically become fully ramped up around the start of their fourth quarter of employment with us, and as our newer employees ramp up, we expect their increased productivity to contribute to our revenue growth. As ofApril 30, 2022 , we considered approximately 72% of our global sales team members to be fully ramped, while the remaining approximately 28% of our global sales team members are in the process of ramping up. As we continue to focus some of our newer and existing sales team members on major accounts and large deals, and as we continue our transition toward a subscription-based business model, it may take longer, potentially significantly, for these sales team members to become fully productive, and there may also be an impact to the overall productivity of our sales team. Furthermore, the effects of the COVID-19 pandemic and the measures we have implemented in response, including postponing, cancelling or making virtual-only certain in-person corporate events at which our sales team members have historically received in-person sales enablement and related trainings, as well as some of the measures implemented as part of our overall efforts to improve our operating cash flow performance and the continued higher-than-normal attrition rates of sales representatives, may impact the productivity of our sales teams in the near-term. We are focused on actively managing these realignments and potential effects. As part of our overall efforts to improve our free cash flow performance, we have also proactively taken steps to increase our go-to-market productivity and over time, we intend to reduce our overall sales and marketing spend as a percentage of revenue. These measures include improving the efficiency of our demand generation spend, focusing on lower cost renewals, increasing leverage of our channel partners, and optimizing headcount in geographies based on market opportunities. Investment in Research and Development and Engineering - We also intend, in the long term, to grow our global research and development and engineering teams to enhance our solutions, including our newer subscription-based products, improve integration with new and existing ecosystem partners and broaden the range of technologies and features available through our platform. However, as discussed above in the section titled "Impact of the COVID-19 Pandemic," in response to the COVID-19 pandemic we had previously effected a global hiring pause outside of a small number of critical roles and, while the hiring pause is no longer in effect, the overall growth in our global research and development and engineering teams may fluctuate from quarter to quarter in the near-term.
We believe that these investments will contribute to our long-term growth, although they may adversely affect our profitability in the near term.
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Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)Transition to Subscription
Starting in fiscal 2019, as a result of our transition towards a subscription-based business model, more of our customers began purchasing separately sold subscription term-based licenses that could be deployed on a variety of hardware platforms. As we continue our transition to a subscription-based business model, we expect a greater portion of our products to be delivered through subscription term-based licenses or cloud-based SaaS subscriptions. Shifts in the mix of whether our solutions are sold on a subscription basis have and could continue to result in fluctuations in our billings and revenue. Subscription sales consist of subscription term-based licenses and offerings with ongoing performance obligations, including software entitlement and support subscriptions and cloud-based SaaS offerings. Since revenue is recognized as performance obligations are delivered, sales with ongoing performance obligations may reflect lower revenue in a given period. In addition, other factors relating to our shift to selling more subscription term-based licenses may impact our billings, revenue and cash flow. For example, our term-based licenses generally have an average term of less than four years and thus result in lower billings and revenue in a given period when compared to our historical life of device license sales, which have a duration equal to the life of the associated appliance, which we estimate to be approximately five years. In addition, starting in fiscal 2021, we began compensating our sales force based on ACV instead of total contract value, and while we expect that the shift to an ACV-based sales compensation plan will incentivize sales representatives to maximize ACV and minimize discounts, it could also further compress the average term of our subscription term-based licenses. Furthermore, our customers may, including in response to the uncertainty caused by the COVID-19 pandemic, decide to purchase our software solutions on shorter subscription terms than they have historically, and/or request to only pay for the initial year of a multi-year subscription term upfront, which could negatively impact our billings, revenue and cash flow in a given period when compared to historical life-of-device or multiple-year term-based license sales. Revenue for our solutions, whether or not sold as a subscription term-based license, is generally recognized upon transfer of control to the customer. For additional information on revenue recognition, see Note 2 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Market Adoption of Our Products
The public cloud and, more recently, hybrid cloud paradigms, have changed IT buyer expectations about the simplicity, agility, scalability, portability and pay-as-you-grow economics of IT resources, which represent a major architectural shift and business model evolution. A key focus of our sales and marketing efforts is creating market awareness about the benefits of our enterprise cloud platform. This includes our newer products outside of our core hyperconverged infrastructure offering, both as compared to traditional datacenter architectures as well as the public cloud, particularly as we continue to pursue large enterprises and mission critical workloads and transition toward a subscription-based business model. The broad nature of the technology shift that our enterprise cloud platform represents, the relationships our end customers have with existing IT vendors, and our transition toward a subscription-based business model sometimes lead to unpredictable sales cycles. We hope to compress and stabilize these sales cycles as market adoption increases, as we gain leverage with our channel partners, as we continue to educate the market about our subscription-based business model and as our sales and marketing efforts evolve. Our business and operating results will be significantly affected by the degree to and speed with which organizations adopt our enterprise cloud platform.
We plan to continue to leverage our relationships with our channel and OEM
partners and expand our network of cloud and ecosystem partners, all of which
help to drive the adoption and sale of our solutions with our end customers. We
sell our solutions primarily through our partners, and our solutions primarily
run on hardware appliances which are purchased from our OEM partners. We believe
that increasing channel leverage, particularly as we expand our focus on
opportunities in commercial accounts, by investing in sales enablement and
co-marketing with our partners and OEMs in the long term will extend and improve
our engagement with a broad set of end customers. Our reliance on manufacturers,
including our OEM partners, to produce the hardware appliances on which our
software runs exposes us to supply chain delays, which impair our ability to
provide services to end customers in a timely manner. Our business and results
of operations will be significantly affected by our success in leveraging our
relationships with our channel and OEM partners and expanding our network of
cloud and ecosystem partners.
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NUTANIX, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)Customer Retention and Expansion
Our end customers typically deploy our technology for a specific workload initially. After a new end customer's initial order, which includes the product and associated software entitlement and support subscription and services, we focus on expanding our footprint by serving more workloads. We also generate recurring revenue from our software entitlement and support subscription renewals, and given our transition to a subscription-focused business model, software and support renewals will have an increasing significance for our future revenue streams as existing subscriptions come up for renewal. We view continued purchases and upgrades as critical drivers of our success, as the sales cycles are typically shorter as compared to new end customer deployments, and selling efforts are typically less. As ofApril 30, 2022 , approximately 72% of our end customers who have been with us for 18 months or longer have made a repeat purchase, which is defined as any purchase activity, including renewals of term-based licenses or software entitlement and support subscription renewals, after the initial purchase. Additionally, end customers who have been with us for 18 months or longer have total lifetime orders, including the initial order, in an amount that is more than 6.9x greater, on average, than their initial order. This number increases to approximately 19.9x, on average, for Global 2000 end customers who have been with us for 18 months or longer as ofApril 30, 2022 . These multiples exclude the effect of one end customer who had a very large and irregular purchase pattern that we believe is not representative of the purchase patterns of all of our other end customers. Our business and operating results will depend on our ability to retain and sell additional solutions to our existing and future base of end customers. Our ability to obtain new and retain existing customers will in turn depend in part on a number of factors. These factors include our ability to effectively maintain existing and future customer relationships, continue to innovate by adding new functionality and improving usability of our solutions in a manner that addresses our end customers' needs and requirements, and optimally price our solutions in light of marketplace conditions, competition, our costs and customer demand. Furthermore, our ongoing transition to a subscription-based business model and ongoing product transitions may cause concerns among our customer base, including concerns regarding changes to pricing over time, and may also result in confusion among new and existing end customers, for example, regarding our pricing models. Such concerns and/or confusion can slow adoption and renewal rates among our current and future customer base.
Components of Our Results of Operations
Revenue
We generate revenue primarily from the sale of our enterprise cloud platform, which can be deployed on a variety of qualified hardware platforms or, in the case of our cloud-based SaaS offerings, via hosted service or delivered pre-installed on an appliance that is configured to order. Non-portable software licenses are delivered or sold alongside configured-to-order appliances and can be used over the life of the associated appliance. Our subscription term-based licenses are sold separately, or can be sold alongside configured-to-order appliances. Our subscription term-based licenses typically have a term of one to five years. Our cloud-based SaaS subscriptions have terms extending up to five years. Configured-to-order appliances, including ourNutanix -branded NX hardware line, can be purchased from one of our channel partners, OEMs or in limited cases, directly fromNutanix . Our enterprise cloud platform typically includes one or more years of support and entitlements, which provides customers with the right to software upgrades and enhancements as well as technical support. Our platform is primarily sold through channel partners, including distributors, resellers and OEMs. 46
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NUTANIX, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Product revenue - Product revenue consists of software and hardware revenue. A
majority of our product revenue is generated from the sale of our enterprise
cloud operating system. We also sell renewals of previously purchased software
licenses and SaaS offerings. Revenue from our software products is generally
recognized upon transfer of control to the customer, which is typically upon
shipment for sales including a hardware appliance, upon making the software
available to the customer when not sold with an appliance or as services are
performed with SaaS offerings. In transactions where the hardware appliance is
purchased directly from Nutanix , we consider ourselves to be the principal in
the transaction and we record revenue and costs of goods sold on a gross basis.
We consider the amount allocated to hardware revenue to be equivalent to the
cost of the hardware procured. Hardware revenue is generally recognized upon
transfer of control to the customer.
Support, entitlements and other services revenue - We generate our support,
entitlements and other services revenue primarily from software entitlement and
support subscriptions, which include the right to software upgrades and
enhancements as well as technical support. The majority of our product sales are
sold in conjunction with software entitlement and support subscriptions, with
terms ranging from one to five years. Occasionally, we also sell professional
services with our products. We recognize revenue from software entitlement and
support contracts ratably over the contractual service period, which typically
commences upon transfer of control of the corresponding products to the
customer. We recognize revenue related to professional services as they are
performed.
Cost of Revenue
Cost of product revenue - Cost of product revenue consists of costs paid to
third-party OEM partners, hardware costs, personnel costs associated with our
operations function, consisting of salaries, benefits, bonuses and stock-based
compensation, cloud-based costs associated with our SaaS offerings, and
allocated costs, consisting of certain facilities, depreciation and
amortization, recruiting and information technology costs allocated based on
headcount.
Cost of support, entitlements and other services revenue - Cost of support,
entitlements and other services revenue includes personnel and operating costs
associated with our global customer support organization, as well as allocated
costs. We expect our cost of support, entitlements and other services revenue to
increase in absolute dollars as our support, entitlements and other services
revenue increases.
Operating Expenses
Our operating expenses consist of sales and marketing, research and development
and general and administrative expenses. The largest component of our operating
expenses is personnel costs. Personnel costs consist of wages, benefits, bonuses
and, with respect to sales and marketing expenses, sales commissions.
Sales and marketing - Sales and marketing expense consists primarily of
personnel costs. Sales and marketing expense also includes sales commissions,
costs for promotional activities and other marketing costs, travel costs and
costs associated with demonstration units, including depreciation and allocated
costs. Commissions are deferred and recognized as we recognize the associated
revenue. We expect sales and marketing expense to continue, in the long term, to
increase in absolute dollars as part of our long-term plans to invest in our
growth. However, as part of our overall efforts to improve our operating cash
flow performance, we have also proactively taken steps to increase our
go-to-market productivity and over time, we intend to reduce our overall sales
and marketing spend as a percentage of revenue. For example, during the fourth
quarter of fiscal 2021, we decreased our global headcount by 2.5%, primarily in
sales and marketing, as part of our continued refinement of our go-to-market
model. We have also recently seen higher-than-normal attrition among our sales
representatives, and while we are actively recruiting additional sales
representatives, it will take time to replace, train, and ramp them to full
productivity. As a result, our sales and marketing expense will fluctuate, and
may decline, in the near-term.
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NUTANIX, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Research and development - Research and development ("R&D") expense consists
primarily of personnel costs, as well as other direct and allocated costs. We
have devoted our product development efforts primarily to enhancing the
functionality and expanding the capabilities of our solutions. R&D costs are
expensed as incurred, unless they meet the criteria for capitalization. We
expect R&D expense, in the long term, to increase in absolute dollars as part of
our long-term plans to invest in our future products and services, including our
newer subscription-based products, although R&D expense may fluctuate as a
percentage of total revenue and, on an absolute basis, from quarter to quarter.
General and administrative - General and administrative ("G&A") expense consists
primarily of personnel costs, which include our executive, finance, human
resources and legal organizations. G&A expense also includes outside
professional services, which consists primarily of legal, accounting and other
consulting costs, as well as insurance and other costs associated with being a
public company and allocated costs. We expect G&A expense, in the long term, to
increase in absolute dollars, particularly due to additional legal, accounting,
insurance and other costs associated with our growth, although G&A expense may
fluctuate as a percentage of total revenue and, on an absolute basis, from
quarter to quarter.
Other Income (Expense), Net
Other income (expense), net consists primarily of interest income and expense, which includes the amortization of the debt issuance costs associated with our 0% convertible senior notes due 2023 (the "2023 Notes"), our 2.50% convertible senior notes due 2026 (the "2026 Notes") and our 0.25% convertible senior notes due 2027 (the "2027 Notes"), changes in the fair value of the derivative liability associated with the 2026 Notes, non-cash interest expense on the 2026 Notes, the amortization of the debt discount on the 2026 Notes, interest expense on the 2027 Notes, debt extinguishment costs, interest income related to our short-term investments, and foreign currency exchange gains or losses.
Provision for Income Taxes
Provision for income taxes consists primarily of income taxes for certain foreign jurisdictions in which we conduct business and state income taxes inthe United States . We have recorded a full valuation allowance related to our federal and state net operating losses and other net deferred tax assets and a partial valuation allowance related to our foreign net deferred tax assets due to the uncertainty of the ultimate realization of the future benefits of those assets. 48
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NUTANIX, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Results of Operations
The following tables set forth our condensed consolidated results of operations
in dollars and as a percentage of total revenue for the periods presented. The
period-to-period comparison of results is not necessarily indicative of results
for future periods.
Three Months Ended Nine Months Ended
April 30, April 30,
2021 2022 2021 2022
(in thousands)
Revenue:
Product $ 172,308 $ 199,616 $ 502,858 $ 588,872
Support, entitlements and other
services 172,200 204,042 500,786 606,384
Total revenue 344,508 403,658 1,003,644 1,195,256
Cost of revenue:
Product (1)(2) 12,896 13,739 39,494 43,056
Support, entitlements and other
services (1) 61,578 66,110 173,893 198,208
Total cost of revenue 74,474 79,849 213,387 241,264
Gross profit 270,034 323,809 790,257 953,992
Operating expenses:
Sales and marketing (1)(2) 263,358 234,530 781,719 726,196
Research and development (1) 144,917 142,075 416,292 427,949
General and administrative (1) 42,332 39,552 111,140 123,871
Total operating expenses 450,607 416,157 1,309,151 1,278,016
Loss from operations (180,573 ) (92,348 ) (518,894 ) (324,024 )
Other income (expense), net 61,352 (15,676 ) (143,381 ) (309,557 )
Loss before provision for income taxes (119,221 ) (108,024 ) (662,275 ) (633,581 )
Provision for income taxes 4,419 3,611 13,803 12,967
Net loss $ (123,640 ) $ (111,635 ) $ (676,078 ) $ (646,548 )
(1) Includes stock-based compensation
expense as
follows:
Product cost of revenue$ 1,291 $ 1,830 $ 4,454 $ 5,529 Support, entitlements and other services cost of revenue 6,337 7,307 17,862 23,564 Sales and marketing 30,743 25,463 93,001 80,975 Research and development 40,802 35,467 114,747 109,709 General and administrative 16,113 14,439
38,874 43,321
Total stock-based compensation expense
(2) Includes amortization of intangible assets as follows: Product cost of revenue$ 3,694 $ 3,368 $ 11,082 $ 10,212 Sales and marketing 651 651 1,953 1,953 Total amortization of intangible assets$ 4,345 $ 4,019 $ 13,035 $ 12,165 49
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NUTANIX, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Three Months Ended Nine Months Ended
April 30, April 30,
2021 2022 2021 2022
(as a percentage of total revenue)
Revenue:
Product 50.0 % 49.5 % 50.1 % 49.3 %
Support, entitlements and other services 50.0 % 50.5 % 49.9 % 50.7 %
Total revenue 100.0 % 100.0 % 100.0 % 100.0 %
Cost of revenue:
Product 3.7 % 3.4 % 3.9 % 3.6 %
Support, entitlements and other services 17.9 % 16.4 % 17.3 % 16.6 %
Total cost of revenue 21.6 % 19.8 % 21.3 % 20.2 %
Gross profit 78.4 % 80.2 % 78.7 % 79.8 %
Operating expenses:
Sales and marketing 76.4 % 58.1 % 77.9 % 60.8 %
Research and development 42.1 % 35.2 % 41.5 % 35.8 %
General and administrative 12.3 % 9.8 % 11.1 % 10.4 %
Total operating expenses 130.8 % 103.1 % 130.4 % 107.0 %
Loss from operations (52.4 )% (22.9 )% (51.7 )% (27.2 )%
Other income (expense), net 17.8 % (3.9 )% (14.3 )% (25.9 )%
Loss before provision for income taxes (34.6 )% (26.8 )% (66.0 )% (53.1 )%
Provision for income taxes 1.3 % 0.9 % 1.4 % 1.1 %
Net loss (35.9 )% (27.7 )% (67.4 )% (54.2 )%
Comparison of the Three and Nine Months Ended
Revenue
Three Months Ended Nine Months Ended
April 30, Change April 30, Change
2021 2022 $ % 2021 2022 $ %
(in thousands, except percentages)
Product$ 172,308 $ 199,616 $ 27,308 16 %$ 502,858 $ 588,872 $ 86,014 17 % Support, entitlements and other services 172,200 204,042 31,842 18 %
500,786 606,384 105,598 21 %
Total revenue
Three Months Ended Nine Months Ended
April 30, Change April 30, Change
2021 2022 $ % 2021 2022 $ %
(in thousands, except percentages)
U.S. $ 184,392 $ 227,195 $ 42,803 23 % $
543,766
East and
228,147 278,129 49,982 22 %
64,687 67,991 3,304 5 % 190,472 208,518 18,046 9 % Other Americas 13,323 11,921 (1,402 ) (11 )%
41,259 37,827 (3,432 ) (8 )%
Total revenue
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NUTANIX, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
The increase in product revenue for the three and nine months ended April 30,
2022 was due primarily to increases in software revenue resulting from an
increased adoption of our products, as well as growth in software renewals due
to our transition to selling subscription term-based licenses, partially offset
by the impact of the shorter average contract terms resulting from this
transition. For the three and nine months ended April 30, 2021 , the total
average contract term was approximately 3.3 years and 3.4 years, respectively.
For the three and nine months ended April 30, 2022 , the total average contract
term was approximately 3.2 years and 3.1 years, respectively. Total average
contract term represents the dollar-weighted term across all subscription and
life-of-device contracts billed during the period, using an assumed term of five
years for licenses without a specified term, such as life-of-device licenses.
Support, entitlements and other services revenue increased for the three and
nine months ended April 30, 2022 , as compared to the prior year periods, in
conjunction with the growth of our end customer base and the related software
entitlement and support subscription contracts.
Cost of Revenue and Gross Margin
Three Months Ended Nine Months Ended
April 30, Change April 30, Change
2021 2022 $ % 2021 2022 $ %
(in thousands, except percentages)
Cost of product
revenue $ 12,896 $ 13,739 $ 843 7 % $ 39,494 $ 43,056 $ 3,562 9 %
Product gross
margin 92.5 % 93.1 % 92.1 % 92.7 %
Cost of support,
entitlements
and
other services
revenue $ 61,578 $ 66,110 $ 4,532 7 % $ 173,893 $ 198,208 $ 24,315 14 %
Support,
entitlements
and other
services
gross margin 64.2 % 67.6 % 65.3 % 67.3 % Total gross margin 78.4 % 80.2 % 78.7 % 79.8 % Cost of product revenue Cost of product revenue increased for the three and nine months endedApril 30, 2022 , as compared to the prior year periods, due primarily to a corresponding increase in hardware revenue. Slight fluctuations in hardware revenue and cost of product revenue are anticipated, as we expect to continue selling small amounts of hardware for the foreseeable future. Product gross margin increased by 0.6 percentage points for both the three and nine months endedApril 30, 2022 , as compared to the prior year periods, due primarily to increasing software revenue, as we continued to focus on more software-only transactions, which have a higher margin as compared to hardware sales.
Cost of support, entitlements and other services revenue
Cost of support, entitlements and other services revenue increased for the three and nine months endedApril 30, 2022 , as compared to the prior year period, due primarily to higher personnel-related costs, resulting from growth in our global customer support organization.
Support, entitlements and other services gross margin increased by 3.4
percentage points and 2.0 percentage points for the three and nine months ended
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NUTANIX, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Operating Expenses Sales and marketing Three Months Ended
Nine Months Ended
April 30, Change April 30, Change
2021 2022 $ % 2021 2022 $ %
(in thousands, except percentages)
Sales and
marketing $ 263,358 $ 234,530 $ (28,828 ) (11 )% $ 781,719 $ 726,196 $ (55,523 ) (7 )%
Percent of
total revenue 76.4 % 58.1 % 77.9 % 60.8 %
Sales and marketing expense decreased for the three and nine months ended April
30, 2022 , as compared to the prior year periods, due primarily to lower
marketing costs resulting from decreased spending and increased efficiencies, as
well as lower headcount-related costs, driven by the 9% decrease in sales and
marketing headcount from April 30, 2021 to April 30, 2022 . The overall decrease
in sales and marketing expense was partially offset by savings in the prior year
period due to the company-wide furlough week during the first quarter of fiscal
2021, as well as an increase in commissions expense as a result of the increase
in revenue.
Research and development
Three Months Ended Nine Months Ended
April 30, Change April 30, Change
2021 2022 $ % 2021 2022 $ %
(in thousands, except percentages)
Research and
development $ 144,917 $ 142,075 $ (2,842 ) (2 )% $ 416,292 $ 427,949 $ 11,657 3 %
Percent of
total revenue 42.1 % 35.2 % 41.5 % 35.8 %
Research and development expense decreased for the three months ended April 30,
2022 , as compared to the prior year period, due primarily to lower stock-based
compensation expense resulting from terminations during the period.
Research and development expense increased for the nine months ended April 30,
2022 , as compared to the prior year periods, due primarily to higher
personnel-related costs resulting from growth in our R&D headcount, which grew
13% from April 30, 2021 to April 30, 2022 , partially offset by lower stock-based
compensation expense resulting from terminations during the period.
General and administrative
Three Months Ended Nine Months Ended
April 30, Change April 30, Change
2021 2022 $ % 2021 2022 $ %
(in thousands, except percentages)
General and
administrative $ 42,332 $ 39,552 $ (2,780 ) (7 )% $111,140$ 123,871 $ 12,731 11 % Percent of total revenue 12.3 % 9.8 % 11.1 % 10.4 % General and administrative expense decreased for the three months endedApril 30, 2022 , as compared to the prior year period, due primarily to lower legal and outside services costs as well as lower stock-based compensation expense resulting from terminations during the period, partially offset by an increase in personnel-related costs resulting from growth in our G&A headcount, which grew 14% fromApril 30, 2021 toApril 30, 2022 .
General and administrative expense increased for the nine months ended
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NUTANIX, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Other Expense, Net
Three Months Ended Nine Months Ended
April 30, Change April 30, Change
2021 2022 $ % 2021 2022 $ %
(in thousands, except percentages)
Interest income,
net $ 940 $ 1,123 $ (183 ) (19 )% $ 3,418 $ 2,199 $ 1,219 36 %
Change in fair
value of
derivative
liability 85,027 - 85,027 100 % (81,353 ) (198,038 ) 116,685 143 %
Amortization of
debt
discount and
issuance
costs and
interest
expense (22,098 ) (15,325 ) (6,773 ) (31 )% (57,508 ) (45,209 ) (12,299 ) (21 )%
Debt
extinguishment
costs - - - 0 % - (64,911 ) 64,911 100 %
Other (2,517 ) (1,474 ) (1,043 ) (41 )%
(7,938 ) (3,598 ) (4,340 ) (55 )%
Other income
(expense), net
Other income (expense), net increased for the three months endedApril 30, 2022 , as compared to the prior year period, due primarily to the change in the fair value of the derivative liability related to the 2026 Notes, which was reclassified to equity during the first quarter of fiscal 2022. Other income (expense), net increased for the nine months endedApril 30, 2022 , as compared to the prior year period, due primarily to the change in the fair value of the derivative liability related to the 2026 Notes and the debt extinguishment costs resulting from the exchange of$416.5 million in aggregate principal amount of the 2023 Notes for$477.3 million in aggregate principal amount of the 2027 Notes. Provision for Income Taxes Three Months Ended
Nine Months Ended
April 30, Change April 30, Change
2021 2022 $ % 2021 2022 $ %
(in thousands, except percentages)
Provision for
income taxes $ 4,419 $ 3,611 $ (808 ) (18 )% $ 13,803 $ 12,967 $ (836 ) (6 )%
The decreases in the income tax provision for the three and nine months ended
April 30, 2022 , as compared to the prior year periods, were due primarily to tax
benefits from the release of acquisition-related unrecognized tax positions,
partially offset by an increase in foreign taxes from higher taxable earnings in
foreign jurisdictions, as we continued to grow our business globally. We
continue to maintain a full valuation allowance on our U.S. federal and state
deferred tax assets and a partial valuation allowance related to our foreign net
deferred tax assets.
Liquidity and Capital Resources
As ofApril 30, 2022 , we had$386.7 million of cash and cash equivalents,$3.1 million of restricted cash and$913.9 million of short-term investments, which were held for general corporate purposes. Our cash, cash equivalents and short-term investments primarily consist of bank deposits, money market accounts and highly rated debt instruments of theU.S. government and its agencies and debt instruments of highly rated corporations. InJanuary 2018 , we issued convertible senior notes with a 0% interest rate for an aggregate principal amount of$575.0 million . InSeptember 2021 , we entered into privately negotiated exchange and note repurchase transactions, after which$145.7 million in aggregate principal amount of 2023 Notes remains outstanding. There are no required principal payments prior to the maturity of the 2023 Notes. For additional information, see Note 5 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. InSeptember 2020 , we issued$750.0 million in aggregate principal amount of 2.50% convertible senior notes due 2026 toBCPE Nucleon (DE) SVP, LP , an entity affiliated withBain Capital, LP . For additional information, see Note 5 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. 53
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NUTANIX, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
In September 2021 , we issued convertible senior notes with a 0.25% interest rate
for an aggregate principal amount of $575.0 million due 2027, of which $477.3
million was issued in exchange for approximately $416.5 million principal amount
of the 2023 Notes and the remaining $97.7 million was issued for cash. There are
no required principal payments prior to the maturity of the 2027 Notes. For
additional information, see Note 5 of Notes to Condensed Consolidated Financial
Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Due to investments in our business as well as the potential cash flow impacts
resulting from our continued transition to a subscription-based business model,
we expect our operating and free cash flow to continue to fluctuate during the
next 12 months. Notwithstanding that fact, we believe that our cash and cash
equivalents and short-term investments will be sufficient to meet our
anticipated cash needs for working capital and capital expenditures for at least
the next 12 months. Our future capital requirements will depend on many factors,
including our growth rate, the timing and extent of spending to support
development efforts, the expansion of sales and marketing activities, the
introduction of new and enhanced product and service offerings, the continuing
market acceptance of our products, the impact of COVID-19 pandemic on our
business, our end customers and partners, and the economy, and the timing of and
extent to which our customers transition to shorter-term contracts or request to
only pay for the initial term of multi-year contracts as a result of our
transition to a subscription-based business model.
Cash Flows
The following table summarizes our cash flows for the periods presented:
Nine Months Ended April 30,
2021 2022
(in thousands)
Net cash (used in) provided by operating activities
$ 29,539 Net cash used in investing activities (629,751 ) (31,546 ) Net cash provided by financing activities 660,881
102,916
Net (decrease) increase in cash, cash equivalents and restricted cash$ (44,050 ) $ 100,909
Cash Flows from Operating Activities
Net cash provided by operating activities was$29.5 million for the nine months endedApril 30, 2022 , compared to net cash used in operating activities of$75.2 million for the nine months endedApril 30, 2021 . The increase in cash provided by operating activities for the nine months endedApril 30, 2022 was due primarily to an increase in cash collections during the period.
Cash Flows from Investing Activities
Net cash used in investing activities of
Net cash used in investing activities of$31.5 million for the nine months endedApril 30, 2022 included$794.2 million of short-term investment purchases and$34.3 million of purchases of property and equipment, partially offset by$778.9 million of maturities of short-term investments and$18.0 million of sales of short-term investments.
Cash Flows from Financing Activities
Net cash provided by financing activities of$660.9 million for the nine months endedApril 30, 2021 consisted of$723.6 million of proceeds from the issuance of the 2026 Notes, net of issuance costs, and$62.3 million of proceeds from the sale of shares through employee equity incentive plans, partially offset by$125.1 million of repurchases of our Class A common stock. 54
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NUTANIX, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Net cash provided by financing activities of $102.9 million for the nine months
ended April 30, 2022 included $88.7 million of proceeds from the issuance of the
2027 Notes, net of issuance costs, $66.6 million of proceeds from the sale of
shares through employee equity incentive plans, and $39.9 million of proceeds
from the unwinding of convertible note hedges related to the 2023 Notes,
partially offset by $58.6 million of repurchases of our Class A common stock,
$18.4 million of payments for the unwinding of warrants related to the 2023
Notes, and $14.7 million of debt extinguishment costs.
Contractual Obligations
The following table summarizes our contractual obligations as ofApril 30, 2022 : Payments Due by Period Less than 1 Year to 3 to More than Total 1 Year 3 Years 5 Years 5 Years (in thousands) Principal amount payable on convertible senior notes (1)$ 1,498,701 $ 145,704 $ -$ 777,997 $ 575,000 Interest on convertible senior notes (1) 2,601 116 - 2,485 - Operating leases (undiscounted basis) (2) 107,282 49,573 52,014 5,695 - Other commitments (3) 99,147 89,811 6,263 3,073 - Guarantees with OEMs 89,627 89,627 - - - Total$ 1,797,358 $ 374,831 $ 58,277 $ 789,250 $ 575,000 (1) Includes accrued paid-in-kind interest on the 2026 Notes and accrued interest on the 2027 Notes. For additional information regarding our convertible senior notes, refer to Note 5 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. (2) For additional information regarding our operating leases, refer to Note 6 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. (3) Purchase obligations and other commitments pertaining to our daily business operations. From time to time, in the normal course of business, we make commitments with our OEMs to ensure them a minimum level of financial consideration for their investment in our joint solutions. These commitments are based on revenue targets or on-hand inventory and non-cancelable purchase orders for non-standard components. We record a charge related to these items when we determine that it is probable a loss will be incurred and we are able to estimate the amount of the loss. Our historical charges have not been material.
As of
Off-Balance Sheet Arrangements
As ofApril 30, 2022 , we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance withU.S. GAAP. The preparation of these condensed consolidated financial statements requires management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the applicable periods. We evaluate our estimates, assumptions and judgments on an ongoing basis. Our estimates, assumptions and judgments are based on historical experience and various other factors that we believe to be reasonable under the circumstances. Different assumptions and judgments would change the estimates used in the preparation of our condensed consolidated financial statements, which, in turn, could change the results from those reported. 55
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NUTANIX, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
There have been no material changes to our critical accounting policies and
estimates as compared to those described in our Annual Report on Form 10-K for
the fiscal year ended
Recent Accounting Pronouncements
See Note 1 of Notes to Condensed Consolidated Financial Statements included in
Part I, Item 1 of this Quarterly Report on Form 10-Q for a full description of
recent accounting pronouncements.
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