NUTANIX, INC. The following discussion and analysis of our financial condition, results of operations and cash flows should be read in conjunction with the consolidated financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K. 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 "Risk Factors" or in other parts of this Annual Report on Form 10-K. 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, 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. 63
--------------------------------------------------------------------------------
Table of Contents
NUTANIX, INC. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
We had a broad and diverse base of approximately 20,130 end customers as of July
31, 2021 , including approximately 980 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.
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 rapidly 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.
Impact of the COVID-19 Pandemic
The ongoing and rapidly evolving pandemic caused by the COVID-19 virus
(collectively with any 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 implemented numerous unprecedented
measures, including travel bans and restrictions, quarantines, shelter-in-place,
stay-at-home, remote work and social distancing orders, and shutdowns. Even as
efforts to contain the pandemic have made progress and some restrictions have
relaxed, new variants of the virus are causing additional outbreaks. The
COVID-19 pandemic has impacted and will 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.
64--------------------------------------------------------------------------------
Table of Contents
NUTANIX, INC. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
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 our California 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. 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.
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" 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" 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.
65--------------------------------------------------------------------------------
Table of Contents
NUTANIX, INC. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Key Financial and Performance Metrics
We monitor the following key financial and performance metrics:
As of and for the Fiscal Year Ended July 31,
2019 2020 2021
(in thousands, except percentages)
Total revenue $ 1,236,143 $ 1,307,682 $ 1,394,364
Year-over-year percentage increase 7.0 % 5.8 % 6.6 %
Subscription revenue $ 648,415 $ 1,030,180 $ 1,243,621
Total billings $ 1,514,660 $ 1,580,092 $ 1,521,096
Subscription billings $ 916,000 $ 1,276,413 $ 1,354,155
Annual contract value ("ACV") billings $ 428,564 $ 505,179 $ 594,292
Annual recurring revenue ("ARR") $ 217,566 $ 481,250 $ 878,733
Run-rate ACV $ 944,444 $ 1,219,965 $ 1,535,360
Gross profit $ 932,015 $ 1,020,993 $ 1,102,458
Adjusted gross profit $ 965,287 $ 1,063,655 $ 1,147,730
Gross margin 75.4 % 78.1 % 79.1 %
Adjusted gross margin 78.1 % 81.3 % 82.3 %
Total deferred revenue $ 910,044 $ 1,183,441 $ 1,312,923
Net cash provided by (used in)
operating activities $ 42,168 $ (159,885 ) $ (99,810 )
Free cash flow $ (76,284 ) $ (249,373 ) $ (158,457 )
Non-GAAP operating expenses $ 1,239,567 $ 1,518,697 $ 1,428,760
Total end customers 14,180 17,360 20,130
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:
Fiscal Year Ended July 31,
2019 2020 2021
(in thousands)
Disaggregation of revenue:
Subscription revenue $ 648,415 $ 1,030,180 $ 1,243,621 Non-portable software revenue 449,131 208,158 71,390 Hardware revenue
105,321 23,455 6,259
Professional services revenue 33,276 45,889 73,094 Total revenue$ 1,236,143 $ 1,307,682 $ 1,394,364 Disaggregation of billings: Subscription billings$ 916,000 $ 1,276,413 $ 1,354,155
Non-portable software billings 449,131 208,158 71,390 Hardware billings
105,321 23,455 6,259
Professional services billings 44,208 72,066 89,292 Total billings$ 1,514,660 $ 1,580,092 $ 1,521,096 66
--------------------------------------------------------------------------------
Table of Contents
NUTANIX, INC. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
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$376.4 million ,$508.8 million and$639.3 million of our subscription revenue for fiscal 2019, 2020 and 2021, 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$272.0 million ,$521.3 million and$604.3 million of our subscription revenue for fiscal 2019, 2020 and 2021, respectively. 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.
Non-GAAP Financial Measures and Key Performance Measures
We regularly monitor total billings, subscription billings, ACV billings, ARR, run-rate ACV, adjusted gross profit, adjusted gross margin, free cash flow and non-GAAP operating expenses, 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.
67--------------------------------------------------------------------------------
Table of Contents
NUTANIX, INC. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
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 it takes
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. 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. Adjusted
gross profit, adjusted 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. 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, adjusted
gross profit, adjusted gross margin, free cash flow and non-GAAP operating
expenses 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 in the United States . Total billings,
subscription billings, adjusted gross profit, adjusted gross margin, free cash
flow and non-GAAP operating expenses are not substitutes for total revenue,
subscription revenue, gross profit, gross margin, cash provided by (used in)
operating activities, or GAAP operating expenses, respectively. There is no GAAP
measure that is comparable to either ACV billings, ARR or run-rate ACV, so we
have not reconciled either ACV billings, ARR or run-rate ACV numbers included in
this Annual Report on Form 10-K 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, net of acquisitions, 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, net of acquisitions, between the start and end
of the period to subscription revenue recognized in the same period.
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.
68
--------------------------------------------------------------------------------
Table of Contents
NUTANIX, INC. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
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.
Adjusted gross profit and adjusted gross margin - We calculate adjusted gross
margin as adjusted gross profit divided by total revenue. We define adjusted
gross profit as gross profit adjusted to exclude stock-based compensation
expense, the amortization of acquired intangible assets and costs associated
with other non-recurring transactions. Our presentation of adjusted 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.
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.
Non-GAAP operating expenses - We define non-GAAP operating expenses as total
operating expenses adjusted to exclude stock-based compensation expense, 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.
69--------------------------------------------------------------------------------
Table of Contents
NUTANIX, INC. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
The following table presents a reconciliation of total billings, adjusted gross
profit, adjusted gross margin, non-GAAP operating expenses and free cash flow to
the most directly comparable GAAP financial measures, for each of the periods
indicated:
Fiscal Year Ended July 31,
2019 2020 2021
(in thousands, except percentages)
Total revenue $ 1,236,143 $ 1,307,682 $ 1,394,364
Change in deferred revenue, net of
acquisitions 278,517 272,410 126,732
Total billings (non-GAAP) $ 1,514,660 $ 1,580,092 $ 1,521,096
Gross profit $ 932,015 $ 1,020,993 $ 1,102,458
Stock-based compensation 18,861 27,348 30,483
Amortization of intangible assets 14,248 14,777 14,776
Impairment of lease-related assets - 537
13
Other 163 -
-
Adjusted gross profit (non-GAAP)$ 965,287 $ 1,063,655 $ 1,147,730 Gross margin 75.4 % 78.1 % 79.1 % Stock-based compensation 1.5 % 2.1 % 2.2 % Amortization of intangible assets 1.2 % 1.1 % 1.0 % Adjusted gross margin (non-GAAP) 78.1 % 81.3 % 82.3 % Operating expenses$ 1,530,056 $ 1,849,914 $ 1,763,240 Stock-based compensation (287,868 ) (324,650 ) (328,062 ) Change in fair value of contingent consideration 832 -
-
Amortization of intangible assets (2,528 ) (2,603 ) (2,604 ) Acquisition-related costs (721 ) -
-
Impairment of lease-related assets - (2,465 ) (1,407 ) Other (204 ) (1,499 ) (2,407 ) Operating expenses (non-GAAP)$ 1,239,567 $ 1,518,697
Net cash provided by (used in) operating activities$ 42,168 $ (159,885 ) $ (99,810 ) Purchases of property and equipment (118,452 ) (89,488 ) (58,647 ) Free cash flow (non-GAAP)$ (76,284 ) $ (249,373 ) $ (158,457 )
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:
Fiscal Year Ended July 31,
2019 2020 2021
(in thousands)
Subscription revenue $ 648,415 $ 1,030,180 $ 1,243,621
Change in subscription deferred revenue,
net of acquisitions 267,585 246,233 110,534
Subscription billings $ 916,000 $ 1,276,413 $ 1,354,155
Professional services revenue $ 33,276 $ 45,889 $ 73,094
Change in professional services deferred
revenue 10,932 26,177 16,198
Professional services billings$ 44,208 $ 72,066 $ 89,292 70
--------------------------------------------------------------------------------
Table of Contents
NUTANIX, INC. 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" for details. If we are unable to address these challenges, our business and operating results could be materially and adversely affected.
Investment in 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. We plan to invest in sales and marketing so that we can capitalize on our market opportunity, including investing in our sales and marketing teams, 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. 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. 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. 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 overall sales and marketing expense will fluctuate, and may decline, in the near term. For example, we recently 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 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 ofJuly 31, 2021 , we considered approximately 75% of our global sales team members to be fully ramped, while the remaining approximately 25% 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 recent increase in attrition 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. 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.
71--------------------------------------------------------------------------------
Table of Contents
NUTANIX, INC. 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 Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K and "Critical Accounting Estimates" later in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" section.
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.
72
--------------------------------------------------------------------------------
Table of Contents
NUTANIX, INC. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
We plan to continue to strengthen and expand our network of channel partners and OEMs to increase sales to both new and existing end customers. 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 business and results of operations will be significantly affected by our success in leveraging and expanding our network of channel partners and OEMs.
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 ofJuly 31, 2021 , approximately 70% 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 6.3x greater, on average, than their initial order. This number increases to approximately 16.4x, on average, for Global 2000 end customers who have been with us for 18 months or longer as ofJuly 31, 2021 . 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 products 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 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.
73--------------------------------------------------------------------------------
Table of Contents
NUTANIX, INC. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Configured-to-order appliances, including our Nutanix -branded NX hardware line,
can be purchased from one of our channel partners, OEMs or in limited cases,
directly from Nutanix . 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.
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.
74--------------------------------------------------------------------------------
Table of Contents
NUTANIX, INC. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
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, we recently
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.
Additionally, given our transition to a subscription-based business model,
including our continued emphasis on ACV, during the fiscal quarter ended October
31, 2020 , we adjusted the compensation structure of our sales force, which has
led to a higher proportion of commissions expense being deferred, and a decrease
in commissions expense and overall sales and marketing expenses as a percentage
of revenue and on an absolute basis, as compared to fiscal periods prior to
October 31, 2020 . For additional information, refer to Note 2 of Notes to
Consolidated Financial Statements included in Part II, Item 8 of this Annual
Report on Form 10-K.
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 discount and issuance costs
associated with our 0% convertible senior notes, due 2023, (the "2023 Notes")
and our 2.50% convertible senior notes, due 2026, (the "2026 Notes"), changes in
the fair value of the derivative liability associated with the 2026 Notes,
non-cash interest expense on the 2026 Notes, interest income related to our
short-term investments, and foreign currency exchange gains or losses.
75--------------------------------------------------------------------------------
Table of Contents
NUTANIX, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
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 in the
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.
Results of Operations
The following tables set forth our consolidated results of operations in dollars
and as a percentage of total revenue for the fiscal years presented. The
period-to-period comparison of results is not necessarily indicative of results
for future periods.
Fiscal Year Ended July 31,
2019 2020 2021
(in thousands)
Revenue:
Product $ 832,419 $ 765,822 $ 705,804
Support, entitlements and other services 403,724 541,860 688,560
Total revenue 1,236,143 1,307,682 1,394,364
Cost of revenue:
Product (1)(2) 143,078 71,312 55,287
Support, entitlements and other services
(1) 161,050 215,377 236,619
Total cost of revenue 304,128 286,689 291,906
Gross profit 932,015 1,020,993 1,102,458
Operating expenses:
Sales and marketing (1)(2) 909,750 1,160,389 1,052,508
Research and development (1) 500,719 553,978 556,950
General and administrative (1) 119,587 135,547 153,782
Total operating expenses 1,530,056 1,849,914 1,763,240
Loss from operations (598,041 ) (828,921 ) (660,782 )
Other expense, net (15,019 ) (26,300 ) (354,991 )
Loss before provision for income taxes (613,060 ) (855,221 ) (1,015,773 )
Provision for income taxes 8,119 17,662 18,487
Net loss $ (621,179 ) $ (872,883 ) $ (1,034,260 )
(1) Includes stock-based compensation
expense as
follows:
Product cost of revenue$ 3,535 $ 5,334 $ 6,023 Support, entitlements and other services cost of revenue 15,326 22,014 24,460 Sales and marketing 107,751 126,015 122,815 Research and development 140,519 153,252 150,856 General and administrative 39,598 45,383 54,391
Total stock-based compensation expense
(2) Includes amortization of intangible assets as follows: Product cost of revenue$ 14,248 $ 14,777 $ 14,776 Sales and marketing 2,528 2,603 2,604
Total amortization of intangible assets
$ 17,380 76
--------------------------------------------------------------------------------
Table of Contents
NUTANIX, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Fiscal Year Ended July 31,
2019 2020 2021
(as a percentage of total revenue)
Revenue:
Product 67.3 % 58.6 % 50.6 %
Support, entitlements and other services 32.7 % 41.4 % 49.4 %
Total revenue 100.0 % 100.0 % 100.0 %
Cost of revenue:
Product 11.6 % 5.4 % 3.9 %
Support, entitlements and other services 13.0 % 16.5 % 17.0 %
Total cost of revenue 24.6 % 21.9 % 20.9 %
Gross profit 75.4 % 78.1 % 79.1 %
Operating expenses:
Sales and marketing 73.6 % 88.7 % 75.5 %
Research and development 40.5 % 42.4 % 39.9 %
General and administrative 9.7 % 10.4 % 11.0 %
Total operating expenses 123.8 % 141.5 % 126.4 %
Loss from operations (48.4 )% (63.4 )% (47.3 )%
Other expense, net (1.2 )% (2.0 )% (25.5 )%
Loss before provision for income taxes (49.6 )% (65.4 )% (72.8 )%
Provision for income taxes 0.7 % 1.4 % 1.3 %
Net loss (50.3 )% (66.8 )% (74.1 )%
Revenue
Fiscal Year Ended Fiscal Year Ended
July 31, Change July 31, Change
2019 2020 $ % 2020 2021 $ %
(in thousands, except percentages)
Product $ 832,419 $ 765,822 $ (66,597 ) (8 )% $
765,822
and other services 403,724 541,860 138,136 34 %
541,860 688,560 146,700 27 %
Total revenue
Fiscal Year Ended Fiscal Year Ended
July 31, Change July 31, Change
2019 2020 $ % 2020 2021 $ %
(in thousands, except percentages)
U.S. $ 682,340 $ 706,110 $ 23,770 3 %
East and
277,489 320,837 43,348 16 %
271,712 265,092 (6,620 ) (2 )% 265,092 260,637 (4,455 ) (2 )% Other Americas
43,735 58,991 15,256 35 %
58,991 54,762 (4,229 ) (7 )%
Total revenue
Product revenue decreased year-over-year for both fiscal 2020 and fiscal 2021
due primarily to our continued transition to selling subscription term-based
licenses, as these licenses generally have a shorter average term than those
that can be used over the life of the associated appliance. The decrease in
product revenue was also impacted by a decrease in hardware revenue, as more
customers are purchasing hardware directly from our OEMs. The total average
contract term was approximately 4.1 years, 3.8 years and 3.4 years for fiscal
2019, 2020 and 2021, 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.
77--------------------------------------------------------------------------------
Table of Contents
NUTANIX, INC. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Support, entitlements and other services revenue increased year-over-year for
both fiscal 2020 and fiscal 2021 in conjunction with the growth of our end
customer base and the related software entitlement and support subscription
contracts. Our total end customer count increased from approximately 14,180 as
of July 31, 2019 to approximately 17,360 as of July 31, 2020 and to
approximately 20,130 as of July 31, 2021 .
Cost of Revenue and Gross Margin
Fiscal Year Ended Fiscal Year Ended
July 31, Change July 31, Change
2019 2020 $ % 2020 2021 $ %
(in thousands, except percentages)
Cost of productrevenue$ 143,078 $ 71,312 $ (71,766 ) (50 )%$ 71,312 $ 55,287 $ (16,025 ) (22 )% Product gross margin 82.8 % 90.7 % 90.7 % 92.2 % Cost of support, entitlements and other services revenue$ 161,050 $ 215,377 $ 54,327 34 %$ 215,377 $ 236,619 $ 21,242 10 % Support, entitlements and other services gross margin 60.1 % 60.3 % 60.3 % 65.6 % Total gross margin 75.4 % 78.1 % 78.1 % 79.1 % Cost of product revenue
Cost of product revenue decreased year-over-year for both fiscal 2020 and fiscal 2021 due primarily to the decreases in hardware revenue resulting from our continued focus on more software-only transactions.
Product gross margin increased by 7.9 percentage points, from 82.8% in fiscal 2019 to 90.7% in fiscal 2020, and by 1.5 percentage points, to 92.2% in fiscal 2021, due primarily to the higher mix of 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 year-over-year for both fiscal 2020 and fiscal 2021 due primarily to higher personnel-related costs, resulting from growth in our global customer support organization, as well as higher outside services costs. The increases in personnel-related costs were driven by increases in our customer support, entitlements and other services headcount of 19% fromJuly 31, 2019 toJuly 31, 2020 and 3% fromJuly 31, 2020 toJuly 31, 2021 .
Support, entitlements and other services gross margin increased by 0.2 percentage points, from 60.1% in fiscal 2019 to 60.3% in fiscal 2020, and by 5.3 percentage points to 65.6% in fiscal 2021, due primarily to support, entitlements and other services revenue growing at a higher rate than personnel-related costs.
Operating Expenses
Sales and marketing
Fiscal Year Ended Fiscal Year Ended
July 31, Change July 31, Change
2019 2020 $ % 2020 2021 $ %
(in thousands, except percentages)
Sales and
marketing $ 909,750 $ 1,160,389 $ 250,639 28 % $ 1,160,389 $ 1,052,508 $ (107,881 ) (9 )%
Percent of total
revenue 73.6 % 88.7 % 88.7 % 75.5 %
78
--------------------------------------------------------------------------------
Table of Contents
NUTANIX, INC. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Sales and marketing expense increased year-over-year for fiscal 2020 due
primarily to higher personnel-related costs and sales commissions, as our sales
and marketing headcount increased year-over-year by 17% in fiscal 2020, as well
as increased sales and marketing activities related to demand generation, brand
awareness, promotions, trade shows and partner programs as part of our efforts
to penetrate and expand in global markets.
Sales and marketing expense decreased year-over-year for fiscal 2021 due
primarily to lower marketing costs, travel and entertainment expenses and
personnel-related costs as a result of the COVID-19 pandemic, as discussed in
the "Impact of the COVID-19 Pandemic" section above. In addition, the decrease
in sales and marketing expense was aided by the changes to our sales
compensation plans beginning in fiscal 2021, resulting from our transition to a
subscription-based business model, including our continued emphasis on ACV,
which resulted in more expense being deferred to later periods.
Research and development
Fiscal Year Ended Fiscal Year Ended
July 31, Change July 31, Change
2019 2020 $ % 2020 2021 $ %
(in thousands, exceptpercentages)
Research and
development$ 500,719 $ 553,978 $ 53,259 11 %$ 553,978 $ 556,950 $ 2,972 1 % Percent of total revenue 40.5 % 42.4 % 42.4 % 39.9 % Research and development expense increased year-over-year for fiscal 2020 due primarily to higher personnel-related costs, as our R&D headcount increased year-over-year by 13% in fiscal 2020 in an effort to continue the expansion of our product development activities.
Research and development expense remained relatively flat for fiscal 2021, as we continued to focus on innovation, while managing the impact of the COVID-19 pandemic, as discussed in the "Impact of the COVID-19 Pandemic" section above.
General and administrative
Fiscal Year Ended Fiscal Year Ended
July 31, Change July 31, Change
2019 2020 $ % 2020 2021 $ %
(in thousands, except percentages)
General and
administrative $ 119,587 $ 135,547 $ 15,960 13 % $135,547$ 153,782 $ 18,235 13 % Percent of total revenue 9.7 % 10.4 % 10.4 % 11.0 % General and administrative expense increased year-over-year for fiscal 2020 due primarily to increases in personnel-related expenses, resulting from growth in our G&A headcount, which increased by 10% year-over-year. General and administrative expense increased year-over-year for fiscal 2021 due primarily to increases in stock-based compensation expense and other personnel-related costs, partially offset by the impact of our response to the COVID-19 pandemic, as discussed in the "Impact of the COVID-19 Pandemic" section above, as well as lower outside services costs. 79
--------------------------------------------------------------------------------
Table of Contents
NUTANIX, INC. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Other Expense, Net
Fiscal Year Ended Fiscal Year Ended
July 31, Change July 31, Change
2019 2020 $ % 2020 2021 $ %
(in thousands, except percentages)
Interest income,
net $ 17,346 $ 13,453 $ 3,893 22 % $ 13,453 $ 4,067 $ 9,386 70 %
Change in fair
value of
derivative
liability - - - 0 % - (269,265 ) 269,265 100 %
Amortization of
debt
discount and
issuance
costs and
non-cash
interest
expense (29,312 ) (31,312 ) 2,000 7 % (31,312 ) (79,932 ) 48,620 155 %
Other (3,053 ) (8,441 ) 5,388 176 % (8,441 ) (9,861 ) 1,420 17 %
Other expense,
net $ (15,019 ) $ (26,300 ) $ 11,281 75 % $ (26,300 ) $ (354,991 ) $ 328,691 1,250 %
The increase in other expense, net for fiscal 2020 was due primarily to higher
foreign currency losses, primarily related to operating expenses denominated in
foreign currencies and our increasing foreign business, as well as lower
interest income from our investments.
The increase in other expense, net for fiscal 2021 was due primarily to
additional expense resulting from the new 2026 Notes, including the change in
the fair value of the derivative liability and interest expense associated with
the amortization of the debt discount and issuance costs for the 2026 Notes.
Provision for Income Taxes
Fiscal Year Ended Fiscal Year Ended
July 31, Change July 31, Change
2019 2020 $ % 2020 2021 $ %
(in thousands, except percentages)
Provision for
income taxes
The year-over-year increase in the provision for income taxes in fiscal 2020 and fiscal 2021 was due primarily to higher foreign taxes as a result of higher taxable earnings in foreign jurisdictions, as we continued our global expansion. The provision for income taxes in fiscal 2019 was partially offset by a one-timeU.S. valuation allowance release related to a business combination and a one-time tax benefit related to the change in tax law. We continue to maintain a full valuation allowance on ourU.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 ofJuly 31, 2021 , we had$285.7 million of cash and cash equivalents,$3.2 million of restricted cash and$928.0 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 . There are no required principal payments prior to the maturity of the 2023 Notes. For additional information, see Note 5 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K. 80
--------------------------------------------------------------------------------
Table of Contents
NUTANIX, INC. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
In August 2020 , we entered into an investment agreement with BCPE Nucleon (DE)
SVP, LP , an entity affiliated with Bain Capital, LP ("Bain") relating to the
issuance and sale to Bain of $750.0 million in aggregate principal amount of
2.50% convertible senior notes due 2026. For additional information, see Note 5
of Notes to Consolidated Financial Statements included in Part II, Item 8 of
this Annual Report on Form 10-K.
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 be negative 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:
Fiscal Year Ended July 31,
2019 2020 2021
(in thousands)
Net cash provided by (used in) operating
activities $ 42,168 $ (159,885 ) $ (99,810 )
Net cash (used in) provided by investing
activities (16,850 ) 24,559 (597,153 )
Net cash provided by financing activities 67,104 57,797 663,845
Net increase (decrease) in cash, cash equivalents and restricted cash$ 92,422 $ (77,529 )
Cash Flows from Operating Activities
Net cash generated from operating activities was$42.2 million for fiscal 2019 and net cash used in operating activities was$159.9 million and$99.8 million for fiscal 2020 and 2021, respectively, representing decreases of$50.4 million and$202.1 million and an increase of$60.1 million , respectively, as compared to the respective prior year periods. The decreases in cash generated from operating activities during fiscal 2019 and 2020 were due primarily to our increasing net loss from operations. The increase in cash generated from operating activities for fiscal 2021 was due primarily to a decrease in our net loss from operations.
Cash Flows from Investing Activities
Net cash used in investing activities of
Net cash provided by investing activities of$24.6 million for fiscal 2020 consisted of$645.8 million of maturities of short-term investments and$75.4 million of sales of short-term investments, partially offset by$607.2 million of short-term investment purchases and$89.5 million of purchases of property and equipment. Net cash used in investing activities of$597.2 million for fiscal 2021 consisted of$1.4 billion of short-term investment purchases and$58.6 million of purchases of property and equipment, partially offset by$784.2 million of maturities of short-term investments and$70.1 million of sales of short-term investments. 81
--------------------------------------------------------------------------------
Table of Contents
NUTANIX, INC. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Cash Flows from Financing Activities
Net cash provided by financing activities of$67.1 million for fiscal 2019 primarily consisted of$69.2 million of net proceeds from the sale of shares through employee equity incentive plans, partially offset by a$1.0 million acquisition-related contingent consideration payment and a$1.0 million debt payment in conjunction with a business combination.
Net cash provided by financing activities of
Net cash provided by financing activities of$663.8 million for fiscal 2021 consisted of$723.6 million of proceeds from the issuance of the 2026 Notes, net of issuance costs, and$65.8 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 and$0.5 million of payments for finance leases. Contractual Obligations The following table summarizes our contractual obligations as ofJuly 31, 2021 : Payments Due by Period Less than 1 Year to 3 to More than Total 1 Year 3 Years 5 Years 5 Years (in thousands) Principal amount payable on convertible senior notes (1)$ 1,333,906 $ -$ 575,000 $ -$ 758,906 Paid-in-kind interest on convertible senior notes (1) 7,167 - - - 7,167 Operating leases (undiscounted basis) (2) 144,358 49,241 82,307 10,194 2,616 Other commitments (3) 72,677 63,779 5,937 2,961 - Guarantees with OEMs 48,001 48,001 - - - Total$ 1,606,109 $ 161,021 $ 663,244 $ 13,155 $ 768,689 (1) For additional information regarding our convertible senior notes, refer to Note 5 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K. (2) For additional information regarding our operating leases, refer to Note 6 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K. (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 ofJuly 31, 2021 , we had accrued liabilities related to uncertain tax positions, which are reflected on our consolidated balance sheet. These accrued liabilities are not reflected in the contractual obligations disclosed in the table above, as it is uncertain if or when such amounts will ultimately be settled. Uncertain tax positions are further discussed in Note 11 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K. 82
--------------------------------------------------------------------------------
Table of Contents
NUTANIX, INC. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Off-Balance Sheet Arrangements
As ofJuly 31, 2021 , 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 consolidated financial statements are prepared in accordance withU.S. GAAP. The preparation of these 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 consolidated financial statements, which, in turn, could change the results from those reported. The critical accounting estimates, assumptions and judgments that we believe have the most significant impact on our consolidated financial statements are described below. Revenue Recognition Some of our contracts with customers contain multiple performance obligations. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. For these contracts, we account for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price ("SSP") basis. For deliverables that we routinely sell separately, such as software entitlement and support subscriptions on our core offerings, we determine SSP by evaluating the standalone sales over the trailing 12 months. For those that are not sold routinely, we determine SSP based on our overall pricing trends and objectives, taking into consideration market conditions and other factors, including the value of our contracts, the products sold and geographic locations. If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative SSP. We determine SSP based on the price at which the performance obligation is sold separately. If the SSP is not observable through past transactions, we estimate the SSP, taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations. Refer to Note 1 and Note 2 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional information on revenue recognition. 83
--------------------------------------------------------------------------------
Table of Contents
NUTANIX, INC. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Income Taxes
The objectives of accounting for income taxes are to recognize the amount of
taxes payable or refundable for the current year and deferred tax liabilities
and assets for the future tax consequences of events that have been recognized
in an entity's financial statements or tax returns. We recognize the tax benefit
from an uncertain tax position only if it is more likely than not that the tax
position will be sustained on examination by the taxing authorities, based on
the technical merits of the position. We recognize uncertain tax positions only
if it is more likely than not to be sustained based solely on its technical
merits as of the reporting date. We consider many factors when evaluating and
estimating our tax positions and tax benefits, which may require periodic
adjustments and which may not accurately anticipate actual outcomes. Judgment is
required in assessing the future tax consequences of events that have been
recognized in our consolidated financial statements or tax returns. Variations
in the actual outcome of these future tax consequences could materially impact
our consolidated financial statements.
Stock-Based Compensation
We measure and recognize compensation expense for all stock-based awards,
including stock options and purchase rights issued to employees under our 2016
Employee Stock Purchase Plan ("2016 ESPP"), based on the estimated fair value of
the awards on the grant date. We use the Black-Scholes-Merton ("Black-Scholes")
option pricing model to estimate the fair value of stock options and 2016 ESPP
purchase rights. The fair value of restricted stock units ("RSUs") is measured
using the fair value of our common stock on the date of the grant. The fair
value of stock options and RSUs is recognized as expense on a straight-line
basis over the requisite service period, which is generally four years. For
stock-based awards granted to employees with a performance condition, we
recognize stock-based compensation expense using the graded vesting attribution
method over the requisite service period when management determines it is
probable that the performance condition will be satisfied. The fair value of the
2016 ESPP purchase rights is recognized as expense on a straight-line basis over
the offering period. We account for forfeitures of all share-based awards when
they occur.
Our use of the Black-Scholes option pricing model requires the input of highly
subjective assumptions, including the fair value of the underlying common stock,
expected term of the option, expected volatility of the price of our common
stock, risk-free interest rates and the expected dividend yield of our common
stock. The assumptions used in our option pricing model represent management's
best estimates. These estimates involve inherent uncertainties and the
application of management's judgment. If factors change and different
assumptions are used, our stock-based compensation expense could be materially
different in the future.
Derivative Liability
We evaluate convertible notes or other contracts to determine if those contracts
or embedded components of those contracts qualify as derivatives to be
separately accounted for under the relevant sections of Accounting Standards
Codification ("ASC") 815-40, Derivatives and Hedging: Contracts in Entity's Own
Equity. The result of this accounting guidance could result in the fair value of
a financial instrument being classified as a derivative instrument and recorded
at fair market value at each balance sheet date and recorded as a liability. In
the event that the fair value is recorded as a liability, the change in fair
value is recorded in the consolidated statements of operations as other income
or other expense. Once the criteria for conversion is fixed, the derivative
instrument is marked to fair value and reclassified to equity.
84--------------------------------------------------------------------------------
Table of Contents
NUTANIX, INC. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
We use the binomial model to estimate the fair value of the embedded derivative
at each period-end. Our use of the binomial model requires the input of highly
subjective assumptions, including expected volatility of our common stock,
risk-free interest rates, and estimated conversion price ratios based on
forecasted financial metrics. The assumptions used in the binomial model
represent management best estimates. These estimates involve inherent
uncertainties and the application of management's judgment. If factors change
and different assumptions are used, the fair value of the embedded derivative
liability could be materially different in the future.
As a result of our early adoption of Accounting Standards Update ("ASU") 2020-06
on August 1, 2021 , and once the conversion price of the convertible notes
becomes fixed in September 2021 , the embedded conversion option will no longer
require bifurcation. Once the conversion price becomes fixed, the derivative
liability will be marked to fair value and reclassified to equity within the
consolidated balance sheet. For additional details on our adoption of ASU
2020-06, refer to Note 1 of Notes to Consolidated Financial Statements included
in Part II, Item 8 of this Annual Report on Form 10-K.
Goodwill represents the excess of the purchase price over the fair value of the assets acquired and liabilities assumed, if any, in a business combination, and is allocated to our single reporting unit. We review our goodwill and other intangible assets determined to have an indefinite useful life for impairment at least annually, during the fourth quarter, or more frequently whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.Goodwill is tested for impairment by comparing the reporting unit's carrying value, including goodwill, to the fair value of the reporting unit. We operate under one reporting unit and for our annual goodwill impairment test, we determine the fair value of our reporting unit based on our enterprise value. We may elect to utilize a qualitative assessment to determine whether it is more likely than not that the fair value of our reporting unit is less than its carrying value. If, after assessing the qualitative factors, we determine that it is more likely than not that the fair value of our reporting unit is less than its carrying value, an impairment analysis will be performed. We will compare the fair value of our reporting unit with its carrying amount and if the carrying value of the reporting unit exceeds its fair value, an impairment loss will be recognized. Assessing whether impairment indicators exist or if events or changes in circumstances have occurred, including market conditions, operating fundamentals, competition and general economic conditions, requires significant judgment. Additionally, changes in the technology industry occur frequently and quickly. Therefore, there can be no assurance that a charge to operating expenses will not occur as a result of future goodwill, intangible assets and other long-lived assets impairment tests. To date, we have not recorded any impairment charges related to our goodwill and intangible assets.
Legal and Other Contingencies
The outcomes of legal proceedings and claims brought against us are subject to significant uncertainty. An estimated loss from a loss contingency such as a legal proceeding or claim is accrued by a charge to income if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. In determining whether a loss should be accrued, we evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Changes in these factors could materially impact our consolidated financial statements.
Recent Accounting Pronouncements
Refer to "Recent Accounting Pronouncements" in Note 1 of Notes to Consolidated
Financial Statements included in Part II, Item 8 of this Annual Report on Form
10-K.
85
--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
