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 deliver a consistent cloud operating model across edge, private-, hybrid- and multicloud environments for all applications and their data. Our solutions allow organizations to simply move their workloads, including enterprise applications, high-performance databases, end-user computing and virtual desktop infrastructure ("VDI") services, container-based modern applications, and analytics applications, between on-premises and public clouds. Our goal is to provide a single, simple, open software platform for all hybrid and multicloud applications and their data. The Nutanix Cloud Platform can be deployed on-premises at the edge or in data centers, running on a variety of qualified hardware platforms, in popular public cloud environments such as AWS (currently generally available) and Microsoft Azure (currently in public preview and expected to become generally available in the future) through Nutanix Cloud Clusters, or, in the case of our cloud-based software and software-as-a-service ("SaaS") offerings, via hosted service. Non-portable software licenses for our platform are delivered or sold alongside configured-to-order appliances, with a license term equal to the life of the associated appliance. Our subscription term-based licenses are sold separately, or can also be sold alongside configured-to-order appliances. Our subscription term-based licenses typically have terms ranging from 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, 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. Purchases of term-based licenses and SaaS subscriptions have support and entitlements included within the subscription fees and are not sold separately. Purchases of non-portable software are typically accompanied by the purchase of separate support and entitlements. 63
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Management’s discussion and analysis of financial condition and results
Operations (Continued) 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 over 22,000 end customers as ofJuly 31, 2022 , 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. Our solutions are primarily sold through channel partners 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 profitable growth. 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 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. 64
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Management’s discussion and analysis of financial condition and results
Operations (Continued)
Effects of the COVID-19 pandemic
The ongoing and 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") 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 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 have caused additional outbreaks. The COVID-19 pandemic has impacted and may continue to impact our workforce and operations, as well as those of our customers, vendors, suppliers, partners, and communities, and there is substantial uncertainty in the nature and degree of its continued effects over time. In response to the COVID-19 pandemic, we took 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; encouraging 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. While we have generally reopened our offices around the world, for so long as the pandemic continues, our employees may continue to be exposed to health and safety risks, and governmental protocols may require us to again close those offices that have since been reopened. The COVID-19 pandemic and the measures taken in response to the pandemic, including our own measures, have already caused, and may continue to cause, various adverse effects on the global economy and our business, 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. Reduced manufacturing capacity caused by the pandemic, together with measures taken in response to the pandemic, have led to increased supply chain challenges with increased hardware supply chain delays resulting in an increasing percentage of orders having start dates in future quarters and certain customers delaying their purchase of our software pending availability of the hardware on which our software runs. 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. 65
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Management’s discussion and analysis of financial condition and results
Operations (Continued)
We have also quickly adapted to the new work environment, leveraging digital,
video, and other collaborative tools to enable our teams to stay connected with
each other, and our sales, marketing and support teams to continue to engage
with and remain responsive to our partners and end customers. Additionally, we
have seen a reduction in our operating expenses in recent quarters, including
sales and marketing expenses, some of which is due to a number of proactive
actions that we took to manage our operating expenses in light of the
uncertainty caused by the COVID-19 pandemic, and some of which is a natural
result of the continued restrictions on travel and in-person events from the
pandemic. Although the full impact of these actions is uncertain, some of these
cost savings measures are temporary. While we do expect to see some of our
operating expenses increase from the suppressed levels in recent quarters as
some of the proactive cost savings measures expire and some level of travel and
other related expenses return, we are focused on improving our operating cash
flow performance and we do not expect that travel or other related expenses will
return to pre-pandemic levels. See the section titled "Risk Factors" 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 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.
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Management’s discussion and analysis of financial condition and results
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,
2020 2021 2022
(in thousands, except percentages and end customer
count)
Total revenue $ 1,307,682 $ 1,394,364 $ 1,580,796
Year-over-year percentage increase 5.8 % 6.6 % 13.4 %
Subscription revenue $ 1,030,180 $ 1,243,621 $ 1,433,773
Total billings $ 1,580,092 $ 1,521,096 $ 1,708,641
Subscription billings $ 1,276,413 $ 1,354,155 $ 1,563,560
Annual contract value ("ACV") billings $ 505,179 $ 594,292 $ 756,326
Annual recurring revenue ("ARR") $ 481,250 $ 878,733 $ 1,202,438
Run-rate ACV $ 1,219,965 $ 1,535,360 $ 1,797,423
Gross profit $ 1,020,993 $ 1,102,458 $ 1,259,640
Non-GAAP gross profit $ 1,063,655 $ 1,147,730 $ 1,311,662
Gross margin 78.1 % 79.1 % 79.7 %
Non-GAAP gross margin 81.3 % 82.3 % 83.0 %
Operating expenses $ 1,849,914 $ 1,763,240 $ 1,717,084
Non-GAAP operating expenses $ 1,518,697 $ 1,428,760 $ 1,397,473
Total deferred revenue $ 1,183,441 $ 1,312,923 $ 1,445,538
Net cash (used in) provided by operating
activities $ (159,885 ) $ (99,810 ) $ 67,543
Free cash flow $ (249,373 ) $ (158,457 ) $ 18,485
Total end customers (1) 17,360 20,130 22,600
(1)
End customer totals reflect standard adjustments/consolidations of certain customer accounts within our system of record and are rounded to the nearest 10.
Disaggregation of receipts and billing
The table below shows the breakdown of earnings and billings by type, consistent with how we assess our financial performance:
Fiscal Year Ended July 31,
2020 2021 2022
(in thousands)
Disaggregation of revenue:
Subscription revenue $ 1,030,180 $ 1,243,621 $ 1,433,773
Non-Portable Software Revenue 208,158 71,390 49,694 Hardware Revenue
23,455 6,259
5,585
Professional services revenue 45,889 73,094 91,744 Total revenue$ 1,307,682 $ 1,394,364 $ 1,580,796 Disaggregation of billings: Subscription billings$ 1,276,413 $ 1,354,155 $ 1,563,560
Accounts for non-portable software 208,158 71,390 49,694 Accounts for hardware
23,455 6,259
5,585
Professional services billings 72,066 89,292 89,802 Total billings$ 1,580,092 $ 1,521,096 $ 1,708,641 67
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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$508.8 million ,$639.3 million and$770.4 million of our subscription revenue for fiscal 2020, 2021 and 2022, respectively.
•
Upfront - Revenue from our subscription software licenses is generally recognized upfront upon transfer of control to the customer, which happens when we make the software available to the customer. These subscription software licenses represented approximately$521.3 million ,$604.3 million and$663.4 million of our subscription revenue for fiscal 2020, 2021 and 2022, 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 provided.
Non-GAAP financial and key performance indicators
We regularly monitor total billings, subscription billings, ACV billings, ARR, run-rate ACV, non-GAAP gross profit, non-GAAP gross margin, non-GAAP operating expenses, free cash flow, and total end customers, 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 commonly 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 operating and compensation plans, as well as to evaluate our actual performance against our targets.
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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 they take into account variability in term lengths. ARR is a performance measure that we believe provides useful information to our management and investors as it allows us to better track the topline growth of our subscription business because it only includes non-life-of-device contracts and takes into account variability in term lengths. Non-GAAP gross profit, non-GAAP gross margin and non-GAAP operating expenses are performance measures which we believe provide useful information to investors, as they provide meaningful supplemental information regarding our performance and liquidity by excluding certain expenses and expenditures, such as stock-based compensation expense, that may not be indicative of our ongoing core business operating results. Free cash flow is a performance measure that we believe provides useful information to management and investors about the amount of cash used in or generated by the business after necessary capital expenditures. We use these non-GAAP financial and key performance measures for financial and operational decision-making and as a means to evaluate period-to-period comparisons. Total billings, subscription billings, ACV billings, ARR, run-rate ACV, non-GAAP gross profit, non-GAAP gross margin, non-GAAP operating expenses, and free cash flow have limitations as analytical tools and they should not be considered in isolation or as substitutes for analysis of our results as reported under generally accepted accounting principles inthe United States . Total billings, subscription billings, non-GAAP gross profit, non-GAAP gross margin, non-GAAP operating expenses, and free cash flow are not substitutes for total revenue, subscription revenue, gross profit, gross margin, operating expenses, or cash provided by (used in) operating activities, respectively. There is no GAAP measure that is comparable to 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 measures and key performance indicators 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 Statements – We calculate subscription statements by adding the change in accrued subscription revenue between the beginning and end of the period to the reported subscription revenue for 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.
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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.
Non-GAAP gross profit and non-GAAP gross margin - We calculate non-GAAP gross
margin as non-GAAP gross profit divided by total revenue. We define non-GAAP
gross profit as gross profit adjusted to exclude stock-based compensation
expense, amortization of acquired intangible assets, impairment of lease-related
assets, and costs associated with other non-recurring transactions. Our
presentation of non-GAAP gross profit should not be construed as implying that
our future results will not be affected by any recurring expenses or any unusual
or non-recurring items that we exclude from our calculation of this non-GAAP
financial measure.
Non-GAAP operating expenses - We define non-GAAP operating expenses as total
operating expenses adjusted to exclude stock-based compensation expense,
impairment of lease-related assets, costs associated with business combinations,
such as amortization of acquired intangible assets, revaluation of contingent
consideration and other acquisition-related costs and costs associated with
other non-recurring transactions. Our presentation of non-GAAP operating
expenses should not be construed as implying that our future results will not be
affected by any recurring expenses or any unusual or non-recurring items that we
exclude from our calculation of this non-GAAP financial measure.
Free cash flow - We calculate free cash flow as net cash provided by (used in)
operating activities less purchases of property and equipment, which measures
our ability to generate cash from our business operations after our capital
expenditures.
Total end customers - 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.
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Operations (Continued)
The following table presents a reconciliation of total billings, non-GAAP gross
profit, non-GAAP gross margin, non-GAAP operating expenses and free cash flow to
the most directly comparable GAAP financial measures, for each of the periods
indicated:
Fiscal Year Ended July 31,
2020 2021 2022
(in thousands, except percentages)
Total revenue $ 1,307,682 $ 1,394,364 $ 1,580,796
Change in deferred revenue 272,410 126,732 127,845
Total billings (non-GAAP) $ 1,580,092 $ 1,521,096 $ 1,708,641
Gross profit $ 1,020,993 $ 1,102,458 $ 1,259,640
Stock-based compensation 27,348 30,483 38,225
Amortization of intangible assets 14,777 14,776
13,579
Restructuring charges - - 218 Impairment of lease-related assets 537 13 - Non-GAAP gross profit$ 1,063,655 $ 1,147,730 $ 1,311,662 Gross margin 78.1 % 79.1 % 79.7 % Stock-based compensation 2.1 % 2.2 % 2.4 % Amortization of intangible assets 1.1 % 1.0 % 0.9 % Non-GAAP gross margin 81.3 % 82.3 % 83.0 % Operating expenses$ 1,849,914 $ 1,763,240 $ 1,717,084 Stock-based compensation (324,650 ) (328,062 ) (305,021 ) Amortization of intangible assets (2,603 ) (2,604 ) (2,604 ) Restructuring charges - - (10,957 ) Impairment and early exit of lease-related assets (2,465 ) (1,407 ) (597 ) Other (1,499 ) (2,407 ) (432 ) Non-GAAP operating expenses$ 1,518,697 $ 1,428,760
Net cash (used in) provided by operating activities$ (159,885 ) $ (99,810 ) $ 67,543 Purchases of property and equipment (89,488 ) (58,647 ) (49,058 ) Free cash flow (non-GAAP)$ (249,373 ) $ (158,457 ) $ 18,485
The following table shows a reconciliation of subscription and professional services statements to the most directly comparable GAAP financial measures for each of the periods shown:
Fiscal Year Ended July 31,
2020 2021 2022
(in thousands)
Subscription revenue $ 1,030,180 $ 1,243,621 $ 1,433,773
Change in subscription deferred revenue 246,233 110,534 129,787
Subscription billings $ 1,276,413 $ 1,354,155 $ 1,563,560
Professional services revenue $ 45,889 $ 73,094 $ 91,744
Change in professional services deferred revenue 26,177 16,198 (1,942 )
Professional services billings $ 72,066 $ 89,292 $ 89,802
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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 profitable growth
We continue to invest in our long-term growth while improving our operational cash flow performance by focusing on efficiencies at go-to-market. By maintaining this balance, we believe we can drive profitable growth.
Investment in Sales and Marketing - Our ability to achieve billings and revenue growth depends, in large part, on our ability to capitalize on our market opportunity, including our ability to recruit, train and retain sufficient numbers of ramped sales personnel to support our growth. As part of our investment in our growth over the long-run, we plan to invest in sales and marketing, including investing in our sales and marketing teams and continuing our focus on opportunities with major accounts, large deals, and commercial accounts, as well as other sales and marketing initiatives to increase our pipeline growth. However, we have recently seen higher-than-normal attrition among our sales representatives and our overall sales headcount being below our targets, which may negatively impact our billings and revenue growth. While we are actively recruiting additional sales representatives, it will take time to replace, train, and ramp them to full productivity. As a result, our overall sales and marketing expense may fluctuate, and may decline, in the near term. We estimate, based on past experience, that our average sales team members typically become fully ramped up around the start of their fourth quarter of employment with us, and as our newer employees ramp up, we expect their increased productivity to contribute to our revenue growth. As ofJuly 31, 2022 , we considered approximately 73% of our global sales team members to be fully ramped, while the remaining approximately 27% 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 , as well as some of the measures implemented as part of our overall efforts to improve our operating cash flow performance and the continued higher-than-normal attrition rates of sales representatives, may impact the productivity of our sales teams in the near term. We are focused on actively managing these realignments and potential effects. As part of our overall efforts to improve our free cash flow performance, we have also proactively taken steps to increase our go-to-market productivity and over time, we intend to reduce our overall sales and marketing spend as a percentage of revenue. These measures include improving the efficiency of our demand generation spend, focusing on lower cost renewals, increasing leverage of our channel partners, and optimizing headcount in geographies based on market opportunities. 72
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Operations (Continued) Investment in Research and Development and Engineering - We also intend, in the long term, to grow our global research and development and engineering teams to enhance our solutions, including our newer subscription-based products, improve integration with new and existing ecosystem partners and broaden the range of technologies and features available through our platform. However, as discussed above in the section titled "Impact of the COVID-19 Pandemic," in response to the COVID-19 pandemic we had previously effected a global hiring pause outside of a small number of critical roles and, while the hiring pause is no longer in effect, the overall growth in our global research and development and engineering teams may fluctuate from quarter to quarter in the near term.
We believe these investments will contribute to our long-term growth, although they may impact our profitability in the short-term.
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.
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Operations (Continued)
market acceptance of our products
The public cloud and, more recently, hybrid cloud paradigms, have changed IT buyer expectations about the simplicity, agility, scalability, portability and pay-as-you-grow economics of IT resources, which represent a major architectural shift and business model evolution. A key focus of our sales and marketing efforts is creating market awareness about the benefits of our enterprise cloud platform. This includes our newer products outside of our core hyperconverged infrastructure offering, both as compared to traditional datacenter architectures as well as the public cloud, particularly as we continue to pursue large enterprises and mission critical workloads and transition toward a subscription-based business model. The broad nature of the technology shift that our enterprise cloud platform represents, the relationships our end customers have with existing IT vendors, and our transition toward a subscription-based business model sometimes lead to unpredictable sales cycles. We hope to compress and stabilize these sales cycles as market adoption increases, as we gain leverage with our channel partners, as we continue to educate the market about our subscription-based business model and as our sales and marketing efforts evolve. Our business and operating results will be significantly affected by the degree to and speed with which organizations adopt our enterprise cloud platform.
We plan to continue to leverage our relationships with our channel and OEM partners and expand our network of cloud and ecosystem partners, all of which help to drive the adoption and sale of our solutions with our end customers. We sell our solutions primarily through our partners, and our solutions primarily run on hardware appliances which are purchased from our channel or OEM partners. We believe that increasing channel leverage, particularly as we expand our focus on opportunities in commercial accounts, by investing in sales enablement and co-marketing with our channel and OEM partners in the long term will extend and improve our engagement with a broad set of end customers. Our reliance on manufacturers, including our channel and OEM partners, to produce the hardware appliances on which our software runs exposes us to supply chain delays, which impair our ability to provide services to end customers in a timely manner. Our business and results of operations will be significantly affected by our success in leveraging our relationships with our channel and OEM partners and expanding our network of cloud and ecosystem partners.
Customer Retention and Extension
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, 2022 , approximately 73% of our end customers who have been with us for 18 months or longer have made a repeat purchase, which is defined as any purchase activity, including renewals of term-based licenses or software entitlement and support subscription renewals, after the initial purchase. Additionally, end customers who have been with us for 18 months or longer have total lifetime orders, including the initial order, in an amount that is more than 6.9x greater, on average, than their initial order. This number increases to approximately 20.9x, on average, for Global 2000 end customers who have been with us for 18 months or longer as ofJuly 31, 2022 . These multiples exclude the effect of one end customer who had a very large and irregular purchase pattern that we believe is not representative of the purchase patterns of all of our other end customers. 74
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NUTANIX, INC.
Management’s discussion and analysis of financial condition and results
Operations (Continued) Our business and operating results will depend on our ability to retain and sell additional solutions to our existing and future base of end customers. Our ability to obtain new and retain existing customers will in turn depend in part on a number of factors. These factors include our ability to effectively maintain existing and future customer relationships, continue to innovate by adding new functionality and improving usability of our solutions in a manner that addresses our end customers' needs and requirements, and optimally price our solutions in light of marketplace conditions, competition, our costs and customer demand. Furthermore, our ongoing transition to a subscription-based business model and ongoing product transitions, such as our updated pricing and packaging to simplify our product portfolio, 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 earnings situation
revenue
We generate revenue primarily from the sale of our enterprise cloud platform, which can be deployed on a variety of qualified hardware platforms or, in the case of our cloud-based SaaS offerings, via hosted service or delivered pre-installed on an appliance that is configured to order. Non-portable software licenses are delivered or sold alongside configured-to-order appliances and can be used over the life of the associated appliance. Our subscription term-based licenses are sold separately, or can be sold alongside configured-to-order appliances. Our subscription term-based licenses typically have a term of one to five years. Our cloud-based SaaS subscriptions have terms extending up to five years. Configured-to-order appliances, including ourNutanix -branded NX hardware line, can be purchased from one of our channel partners, OEMs or, in limited cases, directly fromNutanix . Our enterprise cloud platform typically includes one or more years of support and entitlements, which provides customers with the right to software upgrades and enhancements as well as technical support. Our platform is primarily sold through channel partners and OEMs. Revenue is recognized net of sales tax and withholding tax. 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 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. 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. 75
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NUTANIX, INC.
Management’s discussion and analysis of financial condition and results
Operations (Continued) Cost of Revenue Cost of product revenue - Cost of product revenue consists of costs paid to third-party OEM partners, hardware costs, personnel costs associated with our operations function, consisting of salaries, benefits, bonuses and stock-based compensation, cloud-based costs associated with our SaaS offerings, and allocated costs, consisting of certain facilities, depreciation and amortization, recruiting and information technology costs allocated based on headcount. Cost of support, entitlements and other services revenue - Cost of support, entitlements and other services revenue includes personnel and operating costs associated with our global customer support organization, as well as allocated costs. We expect our cost of support, entitlements and other services revenue to increase in absolute dollars as our support, entitlements and other services revenue increases. Operating Expenses Our operating expenses consist of sales and marketing, research and development and general and administrative expenses. The largest component of our operating expenses is personnel costs. Personnel costs consist of wages, benefits, bonuses and, with respect to sales and marketing expenses, sales commissions. Sales and marketing - Sales and marketing expense consists primarily of personnel costs. Sales and marketing expense also includes sales commissions, costs for promotional activities and other marketing costs, travel costs and costs associated with demonstration units, including depreciation and allocated costs. Commissions are deferred and recognized as we recognize the associated revenue. We expect sales and marketing expense to continue, in the long term, to increase in absolute dollars as part of our long-term plans to invest in our growth. However, as part of our overall efforts to improve our operating cash flow performance, we have also proactively taken steps to increase our go-to-market productivity and over time, we intend to reduce our overall sales and marketing spend as a percentage of revenue. For example, inAugust 2022 , we announced that we will be decreasing our global headcount by approximately 4%, primarily in sales and marketing, as part of our continued effort to drive toward sustainable profitable growth. 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. 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. 76
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NUTANIX, INC.
Management’s discussion and analysis of financial condition and results
Operations (Continued)
General and administrative - General and administrative ("G&A") expense consists
primarily of personnel costs, which include our executive, finance, human
resources and legal organizations. G&A expense also includes outside
professional services, which consists primarily of legal, accounting and other
consulting costs, as well as insurance and other costs associated with being a
public company and allocated costs. We expect G&A expense, in the long term, to
increase in absolute dollars, particularly due to additional legal, accounting,
insurance and other costs associated with our growth, although G&A expense may
fluctuate as a percentage of total revenue and, on an absolute basis, from
quarter to quarter.
Other income (expense), net
Other income (expense), net consists primarily of interest income and expense, which includes the amortization of the debt issuance costs associated with our 0% convertible senior notes due 2023 (the "2023 Notes"), our 2.50% convertible senior notes due 2026 (the "2026 Notes") and our 0.25% convertible senior notes due 2027 (the "2027 Notes"), changes in the fair value of the derivative liability associated with the 2026 Notes, non-cash interest expense on the 2026 Notes, the amortization of the debt discount on the 2026 Notes, interest expense on the 2027 Notes, debt extinguishment costs, interest income related to our short-term investments, and foreign currency exchange gains or losses.
Provision for income taxes
Provision for income taxes consists primarily of income taxes for certain foreign jurisdictions in which we conduct business and state income taxes inthe United States . We have recorded a full valuation allowance related to our federal and state net operating losses and other net deferred tax assets and a partial valuation allowance related to our foreign net deferred tax assets due to the uncertainty of the ultimate realization of the future benefits of those assets. 77
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NUTANIX, INC.
Management’s discussion and analysis of financial condition and results
Operations (Continued)
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,
2020 2021 2022
(in thousands)
Revenue:
Product $ 765,822 $ 705,804 $ 757,623
Support, entitlements and other services 541,860 688,560 823,173
Total revenue 1,307,682 1,394,364 1,580,796
Cost of revenue:
Product (1)(2) 71,312 55,287 55,602
Support, entitlements and other services
(1) 215,377 236,619 265,554
Total cost of revenue 286,689 291,906 321,156
Gross profit 1,020,993 1,102,458 1,259,640
Operating expenses:
Sales and marketing (1)(2) 1,160,389 1,052,508 978,704
Research and development (1) 553,978 556,950 571,962
General and administrative (1) 135,547 153,782 166,418
Total operating expenses 1,849,914 1,763,240 1,717,084
Loss from operations (828,921 ) (660,782 ) (457,444 )
Other expense, net (26,300 ) (354,991 ) (320,830 )
Loss before provision for income taxes (855,221 ) (1,015,773 ) (778,274 )
Provision for income taxes 17,662 18,487 19,264
Net loss $ (872,883 ) $ (1,034,260 ) $ (797,538 )
(1) Includes stock-based compensation
expense as
follows:
Product cost of revenue$ 5,334 $ 6,023 $ 7,379 Support, entitlements and other services cost of revenue 22,014 24,460 30,846 Sales and marketing 126,015 122,815 104,592 Research and development 153,252 150,856 143,759 General and administrative 45,383 54,391 56,670
Total stock-based compensation expense
(2) Includes amortization of intangible assets as follows: Product cost of revenue$ 14,777 $ 14,776 $ 13,579 Sales and marketing 2,603 2,604 2,604
Total amortization of intangible assets
$ 16,183 78
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NUTANIX, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Fiscal Year Ended July 31,
2020 2021 2022
(as a percentage of total revenue)
Revenue:
Product 58.6 % 50.6 % 47.9 %
Support, entitlements and other services 41.4 % 49.4 % 52.1 %
Total revenue 100.0 % 100.0 % 100.0 %
Cost of revenue:
Product 5.4 % 3.9 % 3.5 %
Support, entitlements and other services 16.5 % 17.0 % 16.8 %
Total cost of revenue 21.9 % 20.9 % 20.3 %
Gross profit 78.1 % 79.1 % 79.7 %
Operating expenses:
Sales and marketing 88.7 % 75.5 % 61.9 %
Research and development 42.4 % 39.9 % 36.2 %
General and administrative 10.4 % 11.0 % 10.5 %
Total operating expenses 141.5 % 126.4 % 108.6 %
Loss from operations (63.4 )% (47.3 )% (28.9 )%
Other expense, net (2.0 )% (25.5 )% (20.3 )%
Loss before provision for income taxes (65.4 )% (72.8 )% (49.2 )%
Provision for income taxes 1.4 % 1.3 % 1.2 %
Net loss (66.8 )% (74.1 )% (50.4 )%
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NUTANIX, INC.
Management’s discussion and analysis of financial condition and results
Operations (Continued)
Comparison of the closed financial years
Revenue
Fiscal Year Ended Fiscal Year Ended
July 31, Change July 31, Change
2020 2021 $ % 2021 2022 $ %
(in thousands, except percentages)
Product $ 765,822 $ 705,804 $ (60,018 ) (8 )% $ 705,804 $ 757,623 $ 51,819 7 %
Support,
entitlements
and other
services 541,860 688,560 146,700 27 % 688,560 823,173 134,613 20 %
Total revenue $ 1,307,682 $ 1,394,364 $ 86,682 7 % $ 1,394,364 $ 1,580,796 $ 186,432 13 %
Fiscal Year Ended Fiscal Year Ended
July 31, Change July 31, Change
2020 2021 $ % 2021 2022 $ %
(in thousands, except percentages)
U.S. $ 706,110 $ 758,128 $ 52,018 7 %
east and
320,837 374,186 53,349 17%
265,092 260,637 (4,455 ) (2 )% 260,637 274,373 13,736 5 % Other Americas 58,991 54,762 (4,229 ) (7 )%
54,762 45,096 (9,666 ) (18 ) % Total Revenue
Product revenue decreased year-over-year for 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. Product revenue increased year-over-year for fiscal 2022 due primarily to increases in software revenue resulting from an increased adoption of our products, as well as growth in software renewals due to our transition to selling subscription term-based licenses, partially offset by the impact of the shorter average contract terms resulting from this transition. The total average contract term was approximately 3.8 years, 3.4 years and 3.2 years for fiscal 2020, 2021 and 2022, 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 year-over-year for both fiscal 2021 and fiscal 2022 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 17,360 as ofJuly 31, 2020 to approximately 20,130 as ofJuly 31, 2021 and to approximately 22,600 as ofJuly 31, 2022 . 80
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NUTANIX, INC.
Management’s discussion and analysis of financial condition and results
Operations (Continued)
Cost of Sales and Gross Margin
Fiscal Year Ended
fiscal year ended
July 31, Change July 31, Change
2020 2021 $ % 2021 2022 $ %
(in thousands, except percentages)
Cost of product
revenue$ 71,312 $ 55,287 $ (16,025 ) (22 )%$ 55,287 $ 55,602 $ 315 1 % Product gross margin 90.7 % 92.2 % 92.2 % 92.7 %
Cost of support, entitlements and other services revenue$ 215,377 $ 236,619 $ 21,242 10 %$ 236,619 $ 265,554 $ 28,935 12 % Support, entitlements and other services gross margin 60.3 % 65.6 %
65.6 % 67.7 % Total gross margin 78.1 % 79.1 % 79.1 % 79.7 % Cost of product revenue Cost of product revenue decreased year-over-year for fiscal 2021 due primarily to the decreases in hardware revenue resulting from our continued focus on more software-only transactions. Cost of product revenue remained relatively flat year-over-year for fiscal 2022 due primarily to the fact that hardware revenue was also relatively flat. Slight fluctuations in hardware revenue and cost of product revenue are anticipated, as we expect to continue selling small amounts of hardware for the foreseeable future. Product gross margin increased by 1.5 percentage points, from 90.7% in fiscal 2020 to 92.2% in fiscal 2021, and by 0.5 percentage points, to 92.7% in fiscal 2022, 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.
Costs for support, entitlements and other income from services
Support, entitlements and other service revenue expenses increased year-over-year in both fiscal 2021 and fiscal 2022, primarily due to higher personnel-related costs resulting from the growth of our global customer support organization.
Support, claims and other services gross margin increased 5.3 percentage points from 60.3% in fiscal 2020 to 65.6% in fiscal 2021 and 2.1 percentage points to 67.7% in fiscal 2022 primarily due to growth of revenue from support, claims and other services at a higher rate than personnel costs.
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NUTANIX, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Operating Expenses
Sales and marketing
Fiscal Year Ended Fiscal Year Ended
July 31, Change July 31, Change
2020 2021 $ % 2021 2022 $ %
(in thousands, except percentages)
Sales and
marketing $ 1,160,389 $ 1,052,508 $ (107,881 ) (9 )% $ 1,052,508 $ 978,704 $ (73,804 ) (7 )%
Percent of
total revenue 88.7 % 75.5 % 75.5 % 61.9 %
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.
Sales and marketing expense decreased year-over-year for fiscal 2022 due
primarily to lower marketing costs resulting from decreased spending and
increased efficiencies, as well as lower headcount-related costs, driven by the
2% decrease in sales and marketing headcount from July 31, 2021 to July 31,
2022 . The overall decrease in sales and marketing expense was partially offset
by severance and other termination benefit costs accrued in August 2022 related
to the reduction in force announced in the first quarter of fiscal 2023, savings
in the prior year period due to the company-wide furlough week during the first
quarter of fiscal 2021, and an increase in commissions expense as a result of
the increase in revenue.
Research and development
Fiscal Year Ended
fiscal year ended
July 31, Change July 31, Change
2020 2021 $ % 2021 2022 $ %
(in thousands, except percentages)
Research and
development $ 553,978 $ 556,950 $ 2,972 1 % $ 556,950 $ 571,962 $ 15,012 3 %
Percent of
total revenue 42.4 % 39.9 % 39.9 % 36.2 %
Research and development expenses were relatively flat in 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.
Research and development expense increased year-over-year for fiscal 2022 due primarily to higher personnel-related costs resulting from growth in our R&D headcount, which grew 13% fromJuly 31, 2021 toJuly 31, 2022 , partially offset by lower stock-based compensation expense resulting from terminations during the period and lower technical costs. 82
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NUTANIX, INC.
Management’s discussion and analysis of financial condition and results
Operations (Continued)
General and administrative
Fiscal Year Ended
fiscal year ended
July 31, Change July 31, Change
2020 2021 $ % 2021 2022 $ %
(in thousands, except percentages)
General and
administrative $ 135,547 $ 153,782 $ 18,235 13 % $ 153,782 $ 166,418 $ 12,636 8 %
Percent of total
revenue 10.4 % 11.0 % 11.0 % 10.5 %
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.
General and administrative expense increased year-over-year for fiscal 2022 due
primarily to an increase in personnel-related costs resulting from growth in our
G&A headcount, which grew 17% from July 31, 2021 to July 31, 2022 .
Other expenses, net
Fiscal Year Ended Fiscal Year Ended
July 31, Change July 31, Change
2020 2021 $ % 2021 2022 $ %
(in thousands, except percentages)
Interest income,
net $ 13,453 $ 4,067 $ 9,386 70 % $ 4,067 $ 4,765 $ (698 ) (17 )%
Change in fair
value of
derivative
liability - (269,265 ) 269,265 100 % (269,265 ) (198,038 ) (71,227 ) (26 )%
Amortization of
debt
discount and
issuance
costs and
interest
expense (31,312 ) (79,932 ) 48,620 155 % (79,932 ) (60,734 ) (19,198 ) (24 )%
Debt
extinguishment
costs - - - 0 % - (64,911 ) 64,911 100 %
Other (8,441 ) (9,861 ) 1,420 17 %
(9,861 ) (1,912 ) (7,949 ) (81 ) % Other expenses, net
$ (26,300 ) $ (354,991 ) $ 328,691 1,250 %
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. The decrease in other expense, net for fiscal 2022 was due primarily to the change in the fair value of the derivative liability related to the 2026 Notes, which was reclassified to equity during the first quarter of fiscal 2022, partially offset by the debt extinguishment costs resulting from the exchange of$416.5 million in aggregate principal amount of the 2023 Notes for$477.3 million in aggregate principal amount of the 2027 Notes. 83
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NUTANIX, INC.
Management’s discussion and analysis of financial condition and results
Operations (Continued)
Provision for income taxes
Fiscal Year Ended Fiscal Year Ended
July 31, Change July 31, Change
2020 2021 $ % 2021 2022 $ %
(in thousands, except percentages)
Provision for income taxes
The year-over-year increase in the provision for income taxes in fiscal 2021 and fiscal 2022 was due primarily to higher foreign taxes as a result of higher taxable earnings in foreign jurisdictions, as we continued to grow our business internationally. 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, 2022 , we had$402.9 million of cash and cash equivalents,$3.0 million of restricted cash and$921.4 million of short-term investments, which were held for general corporate purposes. Our cash, cash equivalents and short-term investments primarily consist of bank deposits, money market accounts and highly rated debt instruments of theU.S. government and its agencies and debt instruments of highly rated corporations. InJanuary 2018 , we issued convertible senior notes with a 0% interest rate for an aggregate principal amount of$575.0 million . InSeptember 2021 , we entered into privately negotiated exchange and note repurchase transactions, after which$145.7 million in aggregate principal amount of 2023 Notes remains outstanding. There are no required principal payments on the 2023 Notes prior to their maturity. We intend to settle the principal amount of the 2023 Notes in cash upon maturity inJanuary 2023 . 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. InSeptember 2020 , we issued$750.0 million in aggregate principal amount of 2.50% convertible senior notes due 2026 toBCPE Nucleon (DE) SVP, LP , an entity affiliated withBain Capital, LP . For additional information, see Note 5 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K. InSeptember 2021 , we issued convertible senior notes with a 0.25% interest rate for an aggregate principal amount of$575.0 million due 2027, of which$477.3 million in principal amount was issued in exchange for approximately$416.5 million principal amount of the 2023 Notes and the remaining$97.7 million in principal amount was issued for cash. There are no required principal payments on the 2027 Notes prior to their maturity. 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 fluctuate during the next 12 months. Notwithstanding that fact, we believe that our cash and cash equivalents and short-term investments will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. Our future capital requirements will depend on many factors, including our growth rate, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced product and service offerings, the continuing market acceptance of our products, the impact of COVID-19 pandemic on our business, our end customers and partners, and the economy, and the timing of and extent to which our customers transition to shorter-term contracts or request to only pay for the initial term of multi-year contracts as a result of our transition to a subscription-based business model. 84
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NUTANIX, INC.
Management’s discussion and analysis of financial condition and results
Operations (Continued) Cash Flows
The following table summarizes our cash flows for the periods presented:
Fiscal Year Ended July 31,
2020 2021 2022
(in thousands)
Net cash (used in) provided by operating
activities $ (159,885 ) $ (99,810 ) $ 67,543
Net cash provided by (used in) investing
activities 24,559 (597,153 ) (54,189 )
Net cash provided by financing activities 57,797 663,845
103,635
Net (decrease) increase in cash, cash equivalents and restricted cash$ (77,529 ) $ (33,118 )
The cash flow from operating activities
Net cash used in operating activities was$159.9 million and$99.8 million for fiscal 2020 and fiscal 2021, respectively, and net cash provided by operating activities was$67.5 million for fiscal 2022, representing improvements of$60.1 million and$167.4 million , respectively, as compared to the respective prior year periods. The increases in cash generated from operating activities for fiscal 2021 and fiscal 2022 were due primarily to decreases in our net loss from operations.
Cash flows from investing activities
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. Net cash used in investing activities of$54.2 million for fiscal 2022 consisted of$1.1 billion of short-term investment purchases and$49.1 million of purchases of property and equipment, partially offset by$1.1 billion of maturities of short-term investments and$18.0 million of sales of short-term investments.
Cash flows from financing activities
Net inflow from 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 is 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. Net cash provided by financing activities of$103.6 million for fiscal 2022 consisted of$88.7 million of proceeds from the issuance of the 2027 Notes in the subscription transactions that closed inSeptember 2021 , net of issuance costs,$67.8 million of proceeds from the sale of shares through employee equity incentive plans, and$39.9 million of proceeds from the termination of portions of the convertible note hedge transactions previously entered into in connection with the 2023 Notes, partially offset by$58.6 million of repurchases of our Class A common stock,$18.4 million of payments for the termination of portions of the warrant transactions previously entered into in connection with the 2023 Notes, and$14.7 million of debt extinguishment costs. 85
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NUTANIX, INC.
Management’s discussion and analysis of financial condition and results
Operations (Continued)
Significant Cash Requirements and Other Commitments
The table below summarizes our key cash requirements and other commitments as of today
Payments Due by Period
Less than 1 Year to 3 to More than
Total 1 Year 3 Years 5 Years 5 Years
(in thousands)
Principal amount payable on
convertible
senior notes (1) $ 1,498,701 $ 145,704 $ - $ 777,997 $ 575,000
Interest on convertible senior
notes (1) 7,823 475 - 7,348 -
Operating leases (undiscounted
basis) (2) 160,847 44,089 49,802 28,202 38,754
Other commitments (3) 88,679 80,242 6,050 2,387 -
Guarantees with contract
manufacturers 82,275 82,275 - - -
Total $ 1,838,325 $ 352,785 $ 55,852 $ 815,934 $ 613,754
(1)
Includes accrued paid-in-kind interest on the 2026 Notes and accrued interest on
the 2027 Notes. For additional information regarding our convertible senior
notes, refer to Note 5 of Notes to 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 contract manufacturers 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 July 31, 2022 , 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 12 of Notes to
Consolidated Financial Statements included in Part II, Item 8 of this Annual
Report on Form 10-K.
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. 86
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NUTANIX, INC.
Management’s discussion and analysis of financial condition and results
Operations (Continued)
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.
income tax
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.
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NUTANIX, INC.
Management’s discussion and analysis of financial condition and results
Operations (Continued)
Our use of the Black-Scholes option pricing model requires the input of
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 on our 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.
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's 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.
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. 88
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NUTANIX, INC.
Management’s discussion and analysis of financial condition and results
Operations (Continued)
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.
Current 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.
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