NUTANIX, INC. 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 for the fiscal year endedJuly 31, 2020 included in our Annual Report on Form 10-K filed onSeptember 23, 2020 . 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 our fiscal year endedJuly 31, 2020 . 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 Hybrid Cloud Platform, that consists of software solutions and cloud services that power our customers' hybrid cloud and multicloud strategies. 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 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 is typically purchased with one or more years of support and entitlements, which includes 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. We had a broad and diverse base of approximately 19,430 end customers as ofApril 30, 2021 , including approximately 960 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. The number of end customers grew from approximately 16,580 as ofApril 30, 2020 to approximately 19,430 as ofApril 30, 2021 . 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. 35
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NUTANIX, INC. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
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 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, which have impacted and will continue to impact our workforce and operations, as well as those of our customers, vendors, suppliers, and partners. 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 payment terms; 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. We have also 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 our fiscal year endedJuly 31, 2020 for further discussion of the possible impact of these actions on our business and financial performance. 36
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NUTANIX, INC. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
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 our fiscal year ended July 31, 2020 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,
2020 2021 2020 2021
(in thousands, except percentages)
Total revenue $ 318,273 $ 344,508 $ 979,808 $ 1,003,644
Year-over-year percentage increase 10.7 % 8.2 % 4.7 % 2.4 %
Subscription revenue $ 260,963 $ 307,332 $ 745,403 $ 891,443
Total billings $ 383,507 $ 371,147 $ 1,191,582 $ 1,091,608
Subscription billings $ 321,100 $ 330,774 $ 935,780 $ 963,865
ACV billings $ 135,267 $ 159,919 $ 382,375 $ 430,747
Run-rate ACV $ 1,154,888 $ 1,447,274 $ 1,154,888 $ 1,447,274
Gross profit $ 245,979 $ 270,034 $ 760,090 $ 790,257
Adjusted gross profit $ 256,999 $ 281,356 $ 791,496 $ 823,942
Gross margin 77.3 % 78.4 % 77.6 % 78.7 %
Adjusted gross margin 80.7 % 81.7 % 80.8 % 82.1 %
Total deferred revenue $ 1,122,060 $ 1,274,036 $ 1,122,060 $ 1,274,036
Net cash used in operating activities $ (84,861 ) $ (55,551 ) $ (163,515 ) $ (75,180 )
Free cash flow $ (117,483 ) $ (71,494 ) $ (235,588 ) $ (116,291 )
Non-GAAP operating expenses $ 390,259 $ 361,486 $ 1,172,912 $ 1,056,256
Total end customers 16,580 19,430 16,580 19,430
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NUTANIX, INC. 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,
2020 2021 2020 2021
(in thousands)
Disaggregation of revenue:
Subscription revenue $ 260,963 $ 307,332 $ 745,403 $ 891,443
Non-portable software revenue 41,917 16,741 178,619 58,445
Hardware revenue 3,786 975 22,052
3,025
Professional services revenue 11,607 19,460 33,734
50,731
Total revenue $ 318,273 $ 344,508 $ 979,808 $ 1,003,644
Disaggregation of billings:
Subscription billings $ 321,100 $ 330,774 $ 935,780 $ 963,865
Non-portable software billings 41,917 16,741 178,619 58,445
Hardware billings 3,786 975 22,052
3,025
Professional services billings 16,704 22,657 55,131
66,273
Total billings $ 383,507 $ 371,147 $ 1,191,582 $ 1,091,608
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 $129.2 million and
$367.9 million of our subscription revenue for the three and nine months ended
April 30, 2020 and approximately $159.5 million and $466.5 million of our
subscription revenue for the three and nine months ended April 30, 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 $131.8 million and $377.5 million of our
subscription revenue for the three and nine months ended April 30, 2020 and
approximately $147.8 million and $424.9 million of our subscription revenue for
the three and nine months ended April 30, 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 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.
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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NUTANIX, INC. 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, professional services billings, ACV billings, 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; ? 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 investors, as it represents the dollar value under binding purchase orders received and billed during a given period. Subscription billings and professional services billings are performance measures that we believe provide useful information to our management and investors as they allow 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, in particular as we progress further on our subscription-based business model transition, as they allow us to better track the top-line growth of our business during our transition to a subscription-based business model because they take 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, professional services billings, ACV billings, 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 inthe United States . Total billings, subscription billings, professional services billings, adjusted gross profit, adjusted gross margin, free cash flow and non-GAAP operating expenses are not substitutes for total revenue, subscription revenue, professional services 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 or run-rate ACV, so we have not reconciled either ACV billings 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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NUTANIX, INC. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Professional services billings - We calculate professional services billings by
adding the change in professional services deferred revenue between the start
and end of the period to professional services 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 the contract, using, where
applicable, an assumed term of five years for contracts that do not have a
specified term.
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.
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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:
Three Months Ended Nine Months Ended
April 30, April 30,
2020 2021 2020 2021
(in thousands, except percentages)
Total revenue $ 318,273 $ 344,508 $ 979,808 $ 1,003,644
Change in deferred revenue 65,234 26,639 211,774 87,964
Total billings (non-GAAP) $ 383,507 $ 371,147 $ 1,191,582 $ 1,091,608
Gross profit $ 245,979 $ 270,034 $ 760,090 $ 790,257
Stock-based compensation 7,326 7,628 19,787 22,316
Amortization of intangible assets 3,694 3,694 11,082 11,082
Impairment of lease-related assets - - 537 287
Adjusted gross profit (non-GAAP) $ 256,999 $ 281,356 $ 791,496 $ 823,942
Gross margin 77.3 % 78.4 % 77.6 % 78.7 %
Stock-based compensation 2.3 % 2.2 % 2.0 % 2.2 %
Amortization of intangible assets 1.1 % 1.1 % 1.1 % 1.1 %
Impairment of lease-related assets - % - % 0.1 % 0.1 %
Adjusted gross margin (non-GAAP) 80.7 % 81.7 % 80.8 % 82.1 %
Operating expenses $ 476,152 $ 450,607 $ 1,417,659 $ 1,309,151
Stock-based compensation (84,770 ) (87,658 ) (239,350 ) (246,622 )
Amortization of intangible assets (651 ) (651 ) (1,953 ) (1,953 )
Impairment of lease-related assets - - (2,465 ) (2,535 )
Other (472 ) (812 ) (979 ) (1,785 )
Operating expenses (non-GAAP) $ 390,259 $ 361,486 $ 1,172,912 $ 1,056,256
Net cash used in operating activities $ (84,861 ) $ (55,551 ) $ (163,515 ) $ (75,180 )
Purchases of property and equipment (32,622 ) (15,943 ) (72,073 ) (41,111 )
Free cash flow (non-GAAP) $ (117,483 ) $ (71,494 ) $ (235,588 ) $ (116,291 ) 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,
2020 2021 2020 2021
(in thousands)
Subscription revenue $ 260,963 $ 307,332 $ 745,403 $ 891,443
Change in subscription deferred revenue 60,137 23,442 190,377 72,422
Subscription billings $ 321,100 $ 330,774 $ 935,780 $ 963,865
Professional services revenue $ 11,607 $ 19,460 $ 33,734 $ 50,731
Change in professional services deferred
revenue 5,097 3,197 21,397 15,542
Professional services billings $ 16,704 $ 22,657 $ 55,131 $ 66,273
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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" in Part I, Item 1A of our Annual Report on Form 10-K for our fiscal year endedJuly 31, 2020 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 reduce our expenses and increase our go-to-market productivity, including improving the efficiency of our demand generation spend, 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 most of the attrition has been non-regrettable and 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 ofApril 30, 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.
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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 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 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.
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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, 2021 , approximately 69% 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 6.1x greater, on average, than their initial order. This number increases to approximately 16.2x, on average, for Global 2000 end customers who have been with us for 18 months or longer as ofApril 30, 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. 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 is typically purchased with one or more years of support and entitlements, which includes 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. 44
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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. The service
period 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 reduce our expenses
and increase our go-to-market productivity. 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 most of
the attrition has been non-regrettable and 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. We expect this trend to continue for the duration of fiscal
2021. For additional information, refer to Note 2 of Part I, Item 1 of this
Quarterly Report on Form 10-Q.
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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. 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. In addition, as discussed above in the section
titled "Impact of the COVID-19 Pandemic," in response to the COVID-19 pandemic
we have effected a global hiring pause outside of a small number of critical
roles and, as a result, our R&D expense will fluctuate, and may decline, from
quarter to quarter in the near-term.
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. In addition, as discussed above in the section titled
"Impact of the COVID-19 Pandemic," in response to the COVID-19 pandemic we have
effected a global hiring pause outside of a small number of critical roles and,
as a result, our G&A expense will fluctuate, and may decline, from quarter to
quarter in the near-term.
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 in January 2023 , (the "2023
Notes") and our 2.5% convertible senior notes, due in 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.
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. 46
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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,
2020 2021 2020 2021
(in thousands)
Revenue:
Product $ 180,756 $ 172,308 $ 586,747 $ 502,858
Support, entitlements and other
services 137,517 172,200 393,061 500,786
Total revenue 318,273 344,508 979,808 1,003,644
Cost of revenue:
Product (1)(2) 15,990 12,896 57,899 39,494
Support, entitlements and other
services (1) 56,304 61,578 161,819 173,893
Total cost of revenue 72,294 74,474 219,718 213,387
Gross profit 245,979 270,034 760,090 790,257
Operating expenses:
Sales and marketing (1)(2) 299,162 263,358 895,936 781,719
Research and development (1) 141,346 144,917 418,640 416,292
General and administrative (1) 35,644 42,332 103,083 111,140
Total operating expenses 476,152 450,607 1,417,659 1,309,151
Loss from operations (230,173 ) (180,573 ) (657,569 ) (518,894 )
Other (expense) income, net (5,640 ) 61,352 (16,543 ) (143,381 )
Loss before provision for income taxes (235,813 ) (119,221 ) (674,112 ) (662,275 )
Provision for income taxes 4,858 4,419 13,423 13,803
Net loss $ (240,671 ) $ (123,640 ) $ (687,535 ) $ (676,078 )
(1) Includes stock-based compensation
expense as
follows:
Product cost of revenue$ 1,367 $ 1,291 $ 3,937 $ 4,454 Support, entitlements and other services cost of revenue 5,959 6,337 15,850 17,862 Sales and marketing 33,177 30,743 92,137 93,001 Research and development 39,462 40,802 113,484 114,747 General and administrative 12,131 16,113
33,729 38,874
Total stock-based compensation expense
(2) Includes amortization of intangible assets as follows: Product cost of revenue$ 3,694 $ 3,694 $ 11,082 $ 11,082 Sales and marketing 651 651 1,953 1,953 Total amortization of intangible assets$ 4,345 $ 4,345 $ 13,035 $ 13,035 47
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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,
2020 2021 2020 2021
(as a percentage of total revenue)
Revenue:
Product 56.8 % 50.0 % 59.9 % 50.1 %
Support, entitlements and other services 43.2 % 50.0 % 40.1 % 49.9 %
Total revenue 100.0 % 100.0 % 100.0 % 100.0 %
Cost of revenue:
Product 5.0 % 3.7 % 5.9 % 3.9 %
Support, entitlements and other services 17.7 % 17.9 % 16.5 % 17.3 %
Total cost of revenue 22.7 % 21.6 % 22.4 % 21.3 %
Gross profit 77.3 % 78.4 % 77.6 % 78.7 %
Operating expenses:
Sales and marketing 94.0 % 76.4 % 91.4 % 77.9 %
Research and development 44.4 % 42.1 % 42.7 % 41.5 %
General and administrative 11.2 % 12.3 % 10.5 % 11.1 %
Total operating expenses 149.6 % 130.8 % 144.6 % 130.4 %
Loss from operations (72.3 )% (52.4 )% (67.0 )% (51.7 )%
Other (expense) income, net (1.8 )% 17.8 % (1.7 )% (14.3 )%
Loss before provision for income taxes (74.1 )% (34.6 )% (68.7 )% (66.0 )%
Provision for income taxes 1.5 % 1.3 % 1.4 % 1.4 %
Net loss (75.6 )% (35.9 )% (70.1 )% (67.4 )%
Comparison of the Three and Nine Months Ended
Revenue
Three Months Ended Nine Months Ended
April 30, Change April 30, Change
2020 2021 $ % 2020 2021 $ %
(in thousands, except percentages)
Product $ 180,756 $ 172,308 $ (8,448 ) (5 )% $
586,747
other services 137,517 172,200 34,683 25 % 393,061 500,786 107,725 27 %
Total revenue
Three Months Ended Nine Months Ended
April 30, Change April 30, Change
2020 2021 $ % 2020 2021 $ %
(in thousands, except percentages)
U.S.$ 166,780 $ 184,392 $ 17,612 11 %$ 533,919 $ 543,766 $ 9,847 2 %Europe , the Middle East and Africa 71,907 82,106 10,199 14 % 204,301 228,147 23,846 12 % Asia Pacific 65,726 64,687 (1,039 ) (2 )% 196,851 190,472 (6,379 ) (3 )% Other Americas 13,860 13,323 (537 ) (4 )% 44,737 41,259 (3,478 ) (8 )% Total revenue$ 318,273 $ 344,508 $ 26,235 8 %$ 979,808 $ 1,003,644 $ 23,836 2 % 48
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NUTANIX, INC. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
The decrease in product revenue for the three and nine months ended April 30,
2021 was 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. For both the
three and nine months ended April 30, 2020 , the total average contract term was
approximately 3.8 years, and 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. 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, 2021 , as compared to the prior year period, 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
2020 2021 $ % 2020 2021 $ %
(in thousands, except percentages)
Cost of product
revenue $ 15,990 $ 12,896 $ (3,094 ) (19 )% $ 57,899 $ 39,494 $ (18,405 ) (32 )%
Product gross
margin 91.2 % 92.5 % 90.1 % 92.1 %
Cost of support,
entitlements and
other services revenue$ 56,304 $ 61,578 $ 5,274 9 %$ 161,819 $ 173,893 $ 12,074 7 % Support, entitlements and other services gross margin 59.1 % 64.2 % 58.8 % 65.3 % Total gross margin 77.3 % 78.4 % 77.6 % 78.7 % Cost of product revenue Cost of product revenue decreased for the three and nine months endedApril 30, 2021 , as compared to the prior year periods, due primarily to the decreases in hardware revenue resulting from our continued focus on more software-only transactions.
Product gross margin increased by 1.3 percentage points and 2.0 percentage
points for the three and nine months ended
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, 2021 , as compared to the prior year periods, due primarily to higher personnel-related costs, resulting from growth in our global customer support organization. The increase in personnel-related costs was driven primarily by a 6% increase in our customer support, entitlements and other services headcount fromApril 30, 2020 toApril 30, 2021 .
Support, entitlements and other services gross margin increased by 5.1
percentage points and 6.5 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
2020 2021 $ % 2020 2021 $ %
(in thousands, except percentages)
Sales and
marketing $ 299,162 $ 263,358 $ (35,804 ) (12 )% $895,936$ 781,719 $ (114,217 ) (13 )% Percent of total revenue 94.0 % 76.4 % 91.4 % 77.9 % Sales and marketing expense decreased for the three and nine months endedApril 30, 2021 , as compared to the prior year periods, 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, as well as the 9% decrease in sales and marketing headcount fromApril 30, 2020 toApril 30, 2021 . 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
Three Months Ended Nine Months Ended
April 30, Change April 30, Change
2020 2021 $ % 2020 2021 $ %
(in thousands, except percentages)
Research and
development $ 141,346 $ 144,917 $ 3,571 3 % $418,640$ 416,292 $ (2,348 ) (1 )% Percent of total revenue 44.4 % 42.1 % 42.7 % 41.5 % R&D expense increased for the three months endedApril 30, 2021 , as compared to the prior year period, due primarily to higher personnel-related costs, resulting from growth in our R&D headcount, which grew 9% fromApril 30, 2020 toApril 30, 2021 . R&D expense decreased for the nine months endedApril 30, 2021 , as compared to the prior year period, due primarily to lower headcount-related overhead costs as a result of our response to the COVID-19 pandemic, as discussed in the "Impact of the COVID-19 Pandemic" section above, as well as the impact of the lease-related asset impairment recorded during the three months endedJanuary 31, 2020 , partially offset by increases in personnel-related costs resulting from the increase in headcount.
General and administrative
Three Months Ended Nine Months Ended
April 30, Change April 30, Change
2020 2021 $ % 2020 2021 $ %
(in thousands, except percentages)
General and
administrative $ 35,644 $ 42,332 $ 6,688 19 % $ 103,083 $ 111,140 $ 8,057 8 %
Percent of total
revenue 11.2 % 12.3 % 10.5 % 11.1 %
G&A expense increased for the three and nine months ended April 30, 2021 , as
compared to the prior year periods, due primarily to increases in
personnel-related expenses, resulting from growth in our G&A headcount, which
grew 16% from April 30, 2020 to April 30, 2021 , 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.
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NUTANIX, INC. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Other (Expense) Income, Net
Three Months Ended Nine Months Ended
April 30, Change April 30, Change
2020 2021 $ % 2020 2021 $ %
(in thousands, except percentages)
Interest income,
net $ 2,950 $ 940 $ 2,010 68 % $ 11,627 $ 3,418 $ 8,209 71 %
Change in fair
value of
derivative
liability - 85,027 (85,027 ) 100 % - (81,353 ) 81,353 100 %
Amortization of
debt
discount and
issuance
costs and
non-cash
interest
expense (7,892 ) (22,098 ) 14,206 180 % (23,289 ) (57,508 ) 34,219 147 %
Other (698 ) (2,517 ) 1,819 261 %
(4,881 ) (7,938 ) 3,057 63 %
Other (expense)
income, net
The fluctuations in other (expense) income, net for the three and nine months endedApril 30, 2021 , as compared to the prior year periods, were 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 Three Months Ended Nine Months Ended April 30, Change April 30, Change 2020 2021 $ % 2020 2021 $ % (in thousands, except percentages) Provision for income taxes$ 4,858 $ 4,419 $ (439 ) (9 )%$ 13,423 $ 13,803 $ 380 3 % The decrease in the income tax provision for the three months endedApril 30, 2021 , as compared to the prior year period, was due primarily to accrued interest related to taxes on our international operations in fiscal 2020. The increase in the income tax provision for the nine months endedApril 30, 2021 , as compared to the prior year period, was due primarily to an increase in foreign taxes, as we continued our global expansion. 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 ofApril 30, 2021 , we had$274.7 million of cash and cash equivalents,$3.3 million of restricted cash and$980.1 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 Part I, Item 1 of this Quarterly Report on Form 10-Q. InAugust 2020 , we entered into an investment agreement withBCPE Nucleon (DE) SVP, LP , an entity affiliated withBain Capital, LP ("Bain") relating to the issuance and sale to Bain of$750.0 million in aggregate principal amount of 2.5% convertible senior notes due in 2026. For additional information, see Note 5 of Part I, Item 1 of this Quarterly Report on Form 10-Q. 51
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NUTANIX, INC. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
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:
Nine Months Ended
April 30,
2020 2021
(in thousands)
Net cash used in operating activities $ (163,515 ) $ (75,180 )
Net cash used in investing activities (27,152 ) (629,751 )
Net cash provided by financing activities 56,515 660,881
Net decrease in cash, cash equivalents and restricted cash
$ (44,050 )
Cash Flows from Operating Activities
Net cash used in operating activities was$75.2 million for the nine months endedApril 30, 2021 , compared to cash used in operating activities of$163.5 million for the nine months endedApril 30, 2020 . The decrease in cash used in operating activities for the nine months endedApril 30, 2021 was due primarily to lower operating expenses as a result of the COVID-19 pandemic, as discussed in the "Impact of the COVID-19 Pandemic" section above, as well as higher cash collections due to the timing of billings.
Cash Flows from Investing Activities
Net cash used in investing activities of$27.2 million for the nine months endedApril 30, 2020 included$524.6 million of short-term investment purchases and$72.1 million of purchases of property and equipment, partially offset by$498.6 million of maturities of short-term investments and$70.9 million of sales of short-term investments.
Net cash used in investing activities of
Cash Flows from Financing Activities
Net cash provided by financing activities of$56.5 million for the nine months endedApril 30, 2020 consisted of net proceeds from the sale of shares through employee equity incentive plans. 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. 52
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NUTANIX, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Contractual Obligations
The following table summarizes our contractual obligations as of April 30, 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) 2,424 - - - 2,424
Operating leases (undiscounted
basis) (2) 156,316 49,997 90,427 12,909 2,983
Other commitments (3) 66,367 59,461 4,774 2,132 -
Guarantees with OEMs 66,432 66,432 - - -
Total $ 1,625,445 $ 175,890 $ 670,201 $ 15,041 $ 764,313
(1)
For additional information regarding our convertible senior notes, refer to Note
5 of 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
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, 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 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.
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 Part I, Item 1 of this Quarterly Report on Form 10-Q for a full description of recent accounting pronouncements.
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