Form 10-Q Nutanix, Inc. For: Apr 30

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended April 30, 2022

OR

 

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from to

Commission File Number: 001-37883

 

NUTANIX, INC.

(Exact name of registrant as specified in its charter)

 

Delaware		27-0989767
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

1740 Technology Drive, Suite 150

San Jose, CA 95110

(Address of principal executive offices, including zip code)

 

(408) 216-8360

(Registrant's telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class		Trading symbol(s)		Name of each exchange on which registered
Class A Common Stock, $0.000025 par value per share		NTNX		Nasdaq Global Select Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer		☒	Accelerated Filer		☐
Non-accelerated Filer		☐	Smaller Reporting Company		☐
			Emerging Growth Company		☐

 

 

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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of May 31, 2022, the registrant had 224,293,991 shares of Class A common stock, $0.000025 par value per share, outstanding.

 

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TABLE OF CONTENTS

			PAGE
PART I.		FINANCIAL INFORMATION
	Item 1	Financial Statements (Unaudited)	6
	Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	37
	Item 3	Quantitative and Qualitative Disclosures About Market Risk	57
	Item 4	Controls and Procedures	57
PART II.		OTHER INFORMATION
	Item 1	Legal Proceedings	58
	Item 1A	Risk Factors	58
	Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	58
	Item 3	Defaults Upon Senior Securities	58
	Item 4	Mine Safety Disclosures	58
	Item 5	Other Information	59
	Item 6	Exhibits	59
EXHIBIT INDEX			60
SIGNATURES			61

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains express and implied forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which statements involve substantial risks and uncertainties. Other than statements of historical fact, all statements contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations and financial position, our business strategy and plans and our objectives for future operations, are forward-looking statements. The words "believe," "may," "will," "potentially," "estimate," "continue," "anticipate," "plan," "intend," "could," "would," "expect," or words or expressions of similar substance or the negative thereof, that convey uncertainty of future events or outcomes are intended to identify forward-looking statements. Forward-looking statements included in this Quarterly Report on Form 10-Q include, but are not limited to, statements regarding:

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We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives and financial needs in light of the information currently available to us. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described under the heading "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended July 31, 2021 and in Part II, Item 1A of this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment and new risks emerge from time to time. It is not possible for us to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained or implied in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and trends discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, performance, or events and circumstances reflected in the forward-looking statements will be achieved or will occur. The forward-looking statements in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation, and expressly disclaim any obligation, to update, alter or otherwise revise or publicly release the results of any revision to these forward-looking statements to reflect new information or the occurrence of unanticipated or subsequent events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements.

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

 

	Page
Condensed Consolidated Balance Sheets as of July 31, 2021 and April 30, 2022	7
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended April 30, 2021 and 2022	8
Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended April 30, 2021 and 2022	9
Condensed Consolidated Statements of Stockholders' Deficit for the Three and Nine Months Ended April 30, 2021 and 2022	10
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended April 30, 2021 and 2022	12
Notes to Condensed Consolidated Financial Statements	13
Note 1: Overview and Basis of Presentation	13
Note 2: Revenue, Deferred Revenue and Deferred Commissions	15
Note 3: Fair Value Measurements	18
Note 4: Balance Sheet Components	21
Note 5: Convertible Senior Notes	23
Note 6: Leases	29
Note 7: Commitments and Contingencies	31
Note 8: Stockholders' Equity	32
Note 9: Equity Incentive Plans	32
Note 10: Income Taxes	35
Note 11: Net Loss Per Share	35
Note 12: Segment Information	36

 

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NUTANIX, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

		As of
		July 31, 2021				April 30, 2022
		(in thousands, except per share data)
Assets
Current assets:
Cash and cash equivalents		$	285,723			$	386,721
Short-term investments			928,006				913,901
Accounts receivable, net of allowances of $892 and $633, respectively			180,781				180,386
Deferred commissions—current			110,935				109,043
Prepaid expenses and other current assets			56,816				86,328
Total current assets			1,562,261				1,676,379
Property and equipment, net			131,621				117,494
Operating lease right-of-use assets			105,903				83,427
Deferred commissions—non-current			232,485				244,754
Intangible assets, net			32,012				19,848
Goodwill			185,260				185,260
Other assets—non-current			27,954				28,731
Total assets		$	2,277,496			$	2,355,893
Liabilities and Stockholders’ Deficit
Current liabilities:
Accounts payable		$	47,056			$	53,438
Accrued compensation and benefits			162,337				123,106
Accrued expenses and other current liabilities			39,404				48,039
Deferred revenue—current			636,421				721,853
Operating lease liabilities—current			42,670				44,171
Convertible senior notes, net—current			—				145,308
Total current liabilities			927,888				1,135,915
Deferred revenue—non-current			676,502				710,127
Operating lease liabilities—non-current			86,599				54,373
Convertible senior notes, net			1,055,694				1,146,050
Derivative liability			500,175				—
Other liabilities—non-current			42,679				31,294
Total liabilities			3,289,537				3,077,759
Commitments and contingencies (Note 7)
Stockholders’ deficit:
Preferred stock, par value of $0.000025 per share— 200,000 shares    authorized as of July 31, 2021 and April 30, 2022; no shares    issued and outstanding as of July 31, 2021 and April 30, 2022			—				—
Common stock, par value of $0.000025 per share—1,200,000     (1,000,000 Class A, 200,000 Class B) and 1,042,004 (1,000,000 Class A,    42,004 Class B) shares authorized as of July 31, 2021 and April 30, 2022,    respectively; 214,210 (208,579 Class A and 5,631 Class B) and    224,285 (224,285 Class A and zero Class B) shares issued and    outstanding as of July 31, 2021 and April 30, 2022, respectively (1)			5				5
Additional paid-in capital			2,615,317				3,501,311
Accumulated other comprehensive loss			(8	)			(6,146	)
Accumulated deficit			(3,627,355	)			(4,217,036	)
Total stockholders’ deficit			(1,012,041	)			(721,866	)
Total liabilities and stockholders’ deficit		$	2,277,496			$	2,355,893

 

 

See the accompanying notes to condensed consolidated financial statements.

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NUTANIX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

		Three Months Ended April 30,								Nine Months Ended April 30,
		2021				2022				2021				2022
		(in thousands, except per share data)
Revenue:
Product		$	172,308			$	199,616			$	502,858			$	588,872
Support, entitlements and other services			172,200				204,042				500,786				606,384
Total revenue			344,508				403,658				1,003,644				1,195,256
Cost of revenue:
Product			12,896				13,739				39,494				43,056
Support, entitlements and other services			61,578				66,110				173,893				198,208
Total cost of revenue			74,474				79,849				213,387				241,264
Gross profit			270,034				323,809				790,257				953,992
Operating expenses:
Sales and marketing			263,358				234,530				781,719				726,196
Research and development			144,917				142,075				416,292				427,949
General and administrative			42,332				39,552				111,140				123,871
Total operating expenses			450,607				416,157				1,309,151				1,278,016
Loss from operations			(180,573	)			(92,348	)			(518,894	)			(324,024	)
Other income (expense), net			61,352				(15,676	)			(143,381	)			(309,557	)
Loss before provision for income taxes			(119,221	)			(108,024	)			(662,275	)			(633,581	)
Provision for income taxes			4,419				3,611				13,803				12,967
Net loss		$	(123,640	)		$	(111,635	)		$	(676,078	)		$	(646,548	)
Net loss per share attributable to Class A and Class B    common stockholders—basic and diluted (1)		$	(0.60	)		$	(0.50	)		$	(3.31	)		$	(2.95	)
Weighted average shares used in computing net loss    per share attributable to Class A and Class B    common stockholders—basic and diluted (1)			207,715				222,473				204,407				218,888

 

 

See the accompanying notes to condensed consolidated financial statements.

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NUTANIX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

 

		Three Months Ended April 30,								Nine Months Ended April 30,
		2021				2022				2021				2022
		(in thousands)
Net loss		$	(123,640	)		$	(111,635	)		$	(676,078	)		$	(646,548	)
Other comprehensive loss, net of tax:
Change in unrealized loss on available-for-sale    securities, net of tax			(465	)			(3,711	)			(1,938	)			(6,138	)
Comprehensive loss		$	(124,105	)		$	(115,346	)		$	(678,016	)		$	(652,686	)

 

See the accompanying notes to condensed consolidated financial statements.

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NUTANIX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

(Unaudited)

 

		Nine Months Ended April 30, 2021
		Common Stock								Additional Paid-In				Accumulated Other Comprehensive				Accumulated				Total Stockholders’
		Shares				Amount				Capital				Income				Deficit				Deficit
		(in thousands)
Balance - July 31, 2020			201,949			$	5			$	2,245,180			$	2,030			$	(2,522,192	)		$	(274,977	)
Issuance of common stock through employee equity    incentive plans			3,117				—				1,631				—				—				1,631
Issuance of common stock from ESPP purchase			1,456				—				18,070				—				—				18,070
Repurchase and retirement of common stock			(5,176	)			—				(54,176	)			—				(70,903	)			(125,079	)
Stock-based compensation			—				—				89,198				—				—				89,198
Other comprehensive loss			—				—				—				(1,150	)			—				(1,150	)
Net loss			—				—				—				—				(265,048	)			(265,048	)
Balance - October 31, 2020			201,346				5				2,299,903				880				(2,858,143	)			(557,355	)
Issuance of common stock through employee equity    incentive plans			2,892				—				2,222				—				—				2,222
Stock-based compensation			—				—				84,454				—				—				84,454
Other comprehensive loss			—				—				—				(323	)			—				(323	)
Net loss			—				—				—				—				(287,390	)			(287,390	)
Balance - January 31, 2021			204,238				5				2,386,579				557				(3,145,533	)			(758,392	)
Issuance of common stock through employee equity    incentive plans			4,769				—				8,340				—				—				8,340
Issuance of common stock from ESPP purchase			2,524				—				32,097				—				—				32,097
Stock-based compensation			—				—				95,286				—				—				95,286
Other comprehensive loss			—				—				—				(465	)			—				(465	)
Net loss			—				—				—				—				(123,640	)			(123,640	)
Balance - April 30, 2021			211,531			$	5			$	2,522,302			$	92			$	(3,269,173	)		$	(746,774	)

 

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		Nine Months Ended April 30, 2022
		Common Stock								Additional Paid-In				Accumulated Other Comprehensive				Accumulated				Total Stockholders’
		Shares				Amount				Capital				Loss				Deficit				Deficit
		(in thousands)
Balance - July 31, 2021			214,210			$	5			$	2,615,317			$	(8	)		$	(3,627,355	)		$	(1,012,041	)
Adoption of ASU 2020-06			—				—				(148,598	)			—				100,585				(48,013	)
2026 Notes derivative liability reclassification			—				—				698,213				—				—				698,213
Issuance of common stock through employee equity    incentive plans			2,809				—				1,352				—				—				1,352
Issuance of common stock from ESPP purchase			1,309				—				28,786				—				—				28,786
Repurchase and retirement of common stock			(1,369	)			—				(14,852	)			—				(43,718	)			(58,570	)
Unwinding of 2023 Notes hedges			—				—				39,880				—				—				39,880
Unwinding of 2023 Notes warrants			—				—				(18,390	)			—				—				(18,390	)
Stock-based compensation			—				—				90,547				—				—				90,547
Other comprehensive loss			—				—				—				(651	)			—				(651	)
Net loss			—				—				—				—				(419,852	)			(419,852	)
Balance - October 31, 2021			216,959				5				3,292,255				(659	)			(3,990,340	)			(698,739	)
Issuance of common stock through employee equity    incentive plans			3,580				—				1,914				—				—				1,914
Stock-based compensation			—				—				88,045				—				—				88,045
Other comprehensive loss			—				—				—				(1,776	)			—				(1,776	)
Net loss			—				—				—				—				(115,061	)			(115,061	)
Balance - January 31, 2022			220,539				5				3,382,214				(2,435	)			(4,105,401	)			(725,617	)
Issuance of common stock through employee equity    incentive plans			2,228				—				744				—				—				744
Issuance of common stock from ESPP purchase			1,518				—				33,847				—				—				33,847
Stock-based compensation			—				—				84,506				—				—				84,506
Other comprehensive loss			—				—				—				(3,711	)			—				(3,711	)
Net loss			—				—				—				—				(111,635	)			(111,635	)
Balance - April 30, 2022			224,285			$	5			$	3,501,311			$	(6,146	)		$	(4,217,036	)		$	(721,866	)

 

See the accompanying notes to condensed consolidated financial statements.

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NUTANIX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Nine Months Ended April 30,
		2021				2022
		(in thousands)
Cash flows from operating activities:
Net loss		$	(676,078	)		$	(646,548	)
Adjustments to reconcile net loss to net cash (used in) provided by    operating activities:
Depreciation and amortization			70,609				67,123
Stock-based compensation			268,938				263,098
Change in fair value of derivative liability			81,353				198,038
Loss on debt extinguishment			—				64,910
Amortization of debt discount and issuance costs			46,178				29,929
Operating lease cost, net of accretion			25,818				27,496
Impairment of lease-related assets			2,822				—
Non-cash interest expense			11,331				14,408
Other			7,025				7,181
Changes in operating assets and liabilities:
Accounts receivable, net			102,029				4,193
Deferred commissions			(94,034	)			(10,377	)
Prepaid expenses and other assets			(4,375	)			(31,723	)
Accounts payable			542				4,159
Accrued compensation and benefits			17,523				(46,379	)
Accrued expenses and other liabilities			4,039				4,509
Operating leases, net			(26,864	)			(35,743	)
Deferred revenue			87,964				115,265
Net cash (used in) provided by operating activities			(75,180	)			29,539
Cash flows from investing activities:
Maturities of investments			486,640				778,914
Purchases of investments			(1,145,335	)			(794,180	)
Sales of investments			70,055				17,999
Purchases of property and equipment			(41,111	)			(34,279	)
Net cash used in investing activities			(629,751	)			(31,546	)
Cash flows from financing activities:
Payments of debt extinguishment costs			—				(14,709	)
Proceeds from unwinding of convertible note hedges			—				39,880
Payments for unwinding of warrants			—				(18,390	)
Proceeds from sales of shares through employee equity    incentive plans			62,343				66,644
Proceeds from the issuance of convertible notes, net of    issuance costs			723,617				88,687
Repurchases of common stock			(125,079	)			(58,570	)
Payment of finance lease obligations			—				(626	)
Net cash provided by financing activities			660,881				102,916
Net (decrease) increase in cash, cash equivalents and restricted cash		$	(44,050	)		$	100,909
Cash, cash equivalents and restricted cash—beginning of period			321,991				288,873
Cash, cash equivalents and restricted cash—end of period		$	277,941			$	389,782
Restricted cash (1)			3,265				3,061
Cash and cash equivalents—end of period		$	274,676			$	386,721
Supplemental disclosures of cash flow information:
Cash paid for income taxes		$	13,220			$	17,101
Supplemental disclosures of non-cash investing and    financing information:
Purchases of property and equipment included    in accounts payable and accrued and other liabilities		$	12,583			$	20,026
Finance lease liabilities arising from obtaining right-of-use    assets		$	5,769			$	11,159

 

See the accompanying notes to condensed consolidated financial statements.

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NUTANIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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NUTANIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

 

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NUTANIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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NUTANIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

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NUTANIX, INC.

Management's Discussion and Analysis of Financial Condition and Results of Operations

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition, results of operations and cash flows should be read in conjunction with (1) the unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and (2) the audited consolidated financial statements and notes thereto and "Management’s Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the fiscal year ended July 31, 2021 filed on September 21, 2021. The last day of our fiscal year is July 31. Our fiscal quarters end on October 31, January 31, April 30 and July 31. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under the heading "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended July 31, 2021 and in Part II, Item 1A of this Quarterly Report on Form 10-Q. See also "Special Note Regarding Forward-Looking Statements" above.

Overview

Nutanix, Inc. ("we," "us," "our" or "Nutanix") provides a leading enterprise cloud platform, which we call the Nutanix Cloud Platform, that consists of software solutions and cloud services that power our customers’ enterprise infrastructure. Our solutions run across private-, hybrid- and multicloud environments, and allow organizations to seamlessly "lift and shift" their workloads, including enterprise applications, high-performance databases, end-user computing and virtual desktop infrastructure ("VDI") services, cloud native workloads, and analytics applications, between different cloud environments. Our goal is to provide a single, simple, open software platform for all hybrid and multicloud applications and data — a true hybrid cloud infrastructure.

Our enterprise cloud platform can be deployed on a variety of qualified hardware platforms or, in the case of our cloud-based software and software as a service ("SaaS") offerings, via hosted service or delivered pre-installed on an appliance that is configured to order. Non-portable software licenses are delivered or sold alongside configured-to-order appliances and can be used over the life of the associated appliance. Our subscription term-based licenses are sold separately, or can be sold alongside configured-to-order appliances. Configured-to-order appliances, including our Nutanix-branded NX hardware line, can be purchased from one of our channel partners, original equipment manufacturers ("OEMs") or in limited cases, directly from Nutanix. Our enterprise cloud platform typically includes one or more years of support and entitlements, which provides customers with the right to software upgrades and enhancements as well as technical support.

Product revenue is generated primarily from the licensing of our solutions. Support, entitlements and other services revenue is primarily derived from the related support and maintenance contracts. Prior to fiscal 2019, we delivered most of our solutions on an appliance and thus our revenue included the revenue associated with the appliance and the included non-portable software, which lasts for the life of the associated appliance. However, starting in fiscal 2018, as a result of our business model transition toward software-only sales, more of our customers began buying appliances directly from our OEMs while separately buying licenses for our software solutions from us or one of our channel partners. In addition, starting in fiscal 2019, as a result of our transition towards a subscription-based business model, more of our customers began purchasing separately sold subscription term-based licenses that could be deployed on a variety of hardware platforms. As we continue our transition to a subscription-based business model, we expect a greater portion of our products to be delivered through subscription term-based licenses or cloud-based SaaS subscriptions.

We had a broad and diverse base of approximately 21,980 end customers as of April 30, 2022, including approximately 970 Global 2000 enterprises. We define the number of end customers as the number of end customers for which we have received an order by the last day of the period, excluding partners to which we have sold products for their own demonstration purposes. A single organization or customer may represent multiple end customers for separate divisions, segments or subsidiaries, and the total number of end customers may contract due to mergers, acquisitions, or other consolidation among existing end customers. Since shipping our first product in fiscal 2012, our end customer base has grown rapidly.

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NUTANIX, INC.

Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Our solutions are primarily sold through channel partners, including distributors, resellers and OEMs, and delivered directly to our end customers. Our solutions serve a broad range of workloads, including enterprise applications, databases, virtual desktop infrastructure, unified communications and big data analytics, and we support both virtualized and container-based applications. We have end customers across a broad range of industries, such as automotive, consumer goods, education, energy, financial services, healthcare, manufacturing, media, public sector, retail, technology and telecommunications. We also sell to service providers, who utilize our enterprise cloud platform to provide a variety of cloud-based services to their customers.

We continue to invest in the growth of our business over the long-run, including the development of our solutions and investing in sales and marketing to capitalize on our market opportunities, while improving our operating cash flow performance by focusing on go-to-market efficiencies. By maintaining this balance, we believe we can drive toward our high growth potential without sacrificing our overall financial health. As discussed further in the "Impact of the COVID-19 Pandemic" and "Factors Affecting Our Performance" sections below, both in response to the ongoing and continuously evolving COVID-19 pandemic and as part of our overall efforts to improve our operating cash flow performance, we have proactively taken steps to manage our expenses. As a result, our overall spending on such efforts will fluctuate, and may decline, from quarter to quarter in the near-term.

Late in the fiscal quarter ended April 30, 2022, we saw an unexpected impact from increased supply chain challenges with increased hardware supply chain delays resulting in an increasing percentage of orders having start dates in future quarters and certain customers delaying their purchase of our software pending availability of the hardware on which our software runs. This impact affected both our ACV billings and revenue for the fiscal quarter ended April 30, 2022, and we expect this trend to continue in the fiscal quarter ending July 31, 2022 and potentially beyond.

Impact of the COVID-19 Pandemic

The ongoing and continuously evolving pandemic caused by the COVID-19 virus (collectively with any new variants or related strains thereof, "COVID-19" and the ongoing pandemic caused thereby, the "COVID-19 pandemic") has significantly curtailed the movement of people, goods and services worldwide, imposed unprecedented strains on governments, health care systems, educational institutions, businesses and individuals around the world, including in nearly all of the regions in which we operate, and has resulted in significant volatility and uncertainty in the global economy. In response to the pandemic, authorities, businesses, and individuals have vacillated between implementing and lifting numerous unprecedented measures, including travel bans and restrictions, quarantines, shelter-in-place, stay-at-home, remote work and social distancing orders, and shutdowns, depending on the severity of the pandemic. The COVID-19 pandemic has impacted and may continue to impact our workforce and operations, as well as those of our customers, vendors, suppliers, partners, and communities, and there is substantial uncertainty in the nature and degree of its continued effects over time.

In response to the COVID-19 pandemic, we have also taken a number of actions to protect and assist our employees, customers, and partners, including: temporarily closing all of our offices (including our California headquarters) around the world; requiring our employees to work remotely; implementing travel restrictions that allow only the most essential business travel; and postponing, cancelling, withdrawing from, or converting to virtual-only experiences (where possible and appropriate) our in-person customer, industry, analyst, investor, and employee events. As a result of such actions, as well as the general effects of the COVID-19 pandemic, our business and operations have experienced and may continue to experience numerous negative impacts, including: curtailed demand for certain of our solutions; reduced IT spending; delays in or abandonment of planned or future purchases; lengthened sales cycles, particularly with new customers and partners who do not have prior experience with our solutions; supply chain disruptions; increased cybersecurity risks or other security challenges; delays or disruptions to our product roadmap and our ability to deliver new products, features, or enhancements; and voluntary and involuntary delays in the ability to ship, and the ability of our end customers to accept delivery of, the hardware platforms on which our software solutions run. We also expect the reduced manufacturing capacity caused by the pandemic to result in increases in the prices of certain components used to manufacture such hardware platforms, which may increase the price of those hardware platforms for our end customers, or delay the availability of hardware platforms that our customers use to operate our software. Travel bans, shutdowns, social distancing restrictions and remote work policies also make it difficult or impossible to deliver on-site services to our partners and end customers, and to meet with our current and potential end customers in person. We have also seen positive impacts, including increased demand for our virtual desktop, desktop-as-a-service, and end-user computing solutions as a result of our end customers enabling their employees to work remotely.

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NUTANIX, INC.

Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

We have also quickly adapted to the new work environment, leveraging digital, video, and other collaborative tools to enable our teams to stay connected with each other, and our sales, marketing and support teams to continue to engage with and remain responsive to our partners and end customers. Additionally, we have seen a reduction in our operating expenses in recent quarters, including sales and marketing expenses, some of which is due to a number of proactive actions that we took to manage our operating expenses in light of the uncertainty caused by the COVID-19 pandemic, and some of which is a natural result of the continued restrictions on travel and in-person events from the pandemic. Although the full impact of these actions is uncertain, some of these cost savings measures are temporary. While we do expect to see some of our operating expenses increase from the suppressed levels in recent quarters as some of the proactive cost savings measures expire and some level of travel and other related expenses return, we are focused on improving our operating cash flow performance and we do not expect that travel or other related expenses will return to pre-pandemic levels. See the section titled "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended July 31, 2021 for further discussion of the possible impact of these actions on our business and financial performance.

The duration, scope and ultimate impact of the COVID-19 pandemic on the global economy and our business remain highly fluid and cannot be predicted with certainty, and the full effect of the pandemic and the actions we have taken in response may not be fully reflected in our results of operations and financial performance until future periods. Our management team is focused on guiding our company through the emerging challenges presented by COVID-19 and remains committed to driving positive business outcomes. Although we do not currently expect the pandemic to affect our financial reporting systems, internal control over financial reporting or disclosure controls and procedures, the continued impact of the pandemic on our business and financial performance will be highly dependent upon numerous factors, many of which are beyond our control. See the section titled "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended July 31, 2021 for further discussion of the possible impact of the COVID-19 pandemic, as well as the actions we have taken in response, on our business and financial performance.

Key Financial and Performance Metrics

We monitor the following key financial and performance metrics:

 

		As of and for the
		Three Months Ended April 30,								Nine Months Ended April 30,
		2021				2022				2021				2022
		(in thousands, except percentages)
Total revenue		$	344,508			$	403,658			$	1,003,644			$	1,195,256
Year-over-year percentage increase			8.2	%			17.2	%			2.4	%			19.1	%
Subscription revenue		$	307,332			$	370,496			$	891,443			$	1,083,141
Total billings		$	371,147			$	447,955			$	1,091,608			$	1,310,521
Subscription billings		$	330,774			$	412,720			$	963,865			$	1,199,447
Annual contract value ("ACV") billings		$	159,919			$	204,724			$	430,747			$	577,519
Annual recurring revenue ("ARR")		$	762,024			$	1,114,420			$	762,024			$	1,114,420
Run-rate ACV		$	1,447,274			$	1,728,620			$	1,447,274			$	1,728,620
Gross profit		$	270,034			$	323,809			$	790,257			$	953,992
Non-GAAP gross profit		$	281,356			$	336,314			$	823,942			$	993,297
Gross margin			78.4	%			80.2	%			78.7	%			79.8	%
Non-GAAP gross margin			81.7	%			83.3	%			82.1	%			83.1	%
Operating expenses		$	450,607			$	416,157			$	1,309,151			$	1,278,016
Non-GAAP operating expenses		$	361,486			$	341,715			$	1,056,256			$	1,041,626
Total deferred revenue		$	1,274,036			$	1,431,980			$	1,274,036			$	1,431,980
Net cash (used in) provided by operating activities		$	(55,551	)		$	(3,167	)		$	(75,180	)		$	29,539
Free cash flow		$	(71,494	)		$	(20,056	)		$	(116,291	)		$	(4,740	)
Total end customers			19,430				21,980				19,430				21,980

 

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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 April 30,								Nine Months Ended April 30,
		2021				2022				2021				2022
		(in thousands)
Disaggregation of revenue:
Subscription revenue		$	307,332			$	370,496			$	891,443			$	1,083,141
Non-portable software revenue			16,741				9,368				58,445				38,247
Hardware revenue			975				1,329				3,025				5,245
Professional services revenue			19,460				22,465				50,731				68,623
Total revenue		$	344,508			$	403,658			$	1,003,644			$	1,195,256
Disaggregation of billings:
Subscription billings		$	330,774			$	412,720			$	963,865			$	1,199,447
Non-portable software billings			16,741				9,368				58,445				38,247
Hardware billings			975				1,329				3,025				5,245
Professional services billings			22,657				24,538				66,273				67,582
Total billings		$	371,147			$	447,955			$	1,091,608			$	1,310,521

 

Subscription revenue — Subscription revenue includes any performance obligation which has a defined term and is generated from the sales of software entitlement and support subscriptions, subscription software licenses and cloud-based software as a service offerings.

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, ACV billings, ARR, run-rate ACV, non-GAAP gross profit, non-GAAP gross margin, non-GAAP operating expenses, and free cash flow, which are non-GAAP financial measures and key performance measures, to help us evaluate our growth and operational efficiencies, measure our performance, identify trends in our sales activity and establish our budgets. We evaluate these measures because they:

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 in the United States. Total billings, subscription billings, non-GAAP gross profit, non-GAAP gross margin, non-GAAP operating expenses and free cash flow are not substitutes for total revenue, subscription revenue, gross profit, gross margin, operating expenses or cash provided by (used in) operating activities, respectively. There is no GAAP measure that is comparable to either ACV billings, ARR or run-rate ACV, so we have not reconciled ACV billings, ARR or run-rate ACV numbers included in this Quarterly Report on Form 10-Q to any GAAP measure. In addition, other companies, including companies in our industry, may calculate non-GAAP financial measures and key performance measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures and key performance measures as tools for comparison. We urge you to review the reconciliation of our non-GAAP financial measures and key performance measures to the most directly comparable GAAP financial measures included below and not to rely on any single financial measure to evaluate our business.

We calculate our non-GAAP financial and key performance measures as follows:

Total billings — We calculate total billings by adding the change in deferred revenue between the start and end of the period to total revenue recognized in the same period.

Subscription billings — We calculate subscription billings by adding the change in subscription deferred revenue between the start and end of the period to subscription revenue recognized in the same period.

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NUTANIX, INC.

Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

ACV billings — We calculate ACV billings as the sum of the ACV for all contracts billed during the period. ACV is defined as the total annualized value of a contract, excluding amounts related to professional services and hardware. We calculate the total annualized value for a contract by dividing the total value of the contract by the number of years in the term of such contract, using, where applicable, an assumed term of five years for contracts that do not have a specified term.

ARR — We calculate ARR as the sum of ACV for all non-life-of-device contracts in effect as of the end of a specific period. For the purposes of this calculation, we assume that the contract term begins on the date a contract is booked, unless the terms of such contract prevent us from fulfilling our obligations until a later period, and irrespective of the periods in which we would recognize revenue for such contract.

Run-rate ACV — We calculate run-rate ACV as the sum of ACV for all contracts that are in effect as of the end of the period. For the purposes of this calculation, we assume that the contract term begins on the date a contract is booked, irrespective of the periods in which we would recognize revenue for such contract.

Non-GAAP gross profit and non-GAAP gross margin — We calculate non-GAAP gross margin as non-GAAP gross profit divided by total revenue. We define non-GAAP gross profit as gross profit adjusted to exclude stock-based compensation expense, amortization of acquired intangible assets, impairment of lease-related assets, and costs associated with other non-recurring transactions. Our presentation of non-GAAP gross profit should not be construed as implying that our future results will not be affected by any recurring expenses or any unusual or non-recurring items that we exclude from our calculation of this non-GAAP financial measure.

Non-GAAP operating expenses — We define non-GAAP operating expenses as total operating expenses adjusted to exclude stock-based compensation expense, impairment of lease-related assets, costs associated with business combinations, such as amortization of acquired intangible assets, revaluation of contingent consideration and other acquisition-related costs and costs associated with other non-recurring transactions. Our presentation of non-GAAP operating expenses should not be construed as implying that our future results will not be affected by any recurring expenses or any unusual or non-recurring items that we exclude from our calculation of this non-GAAP financial measure.

Free cash flow — We calculate free cash flow as net cash provided by (used in) operating activities less purchases of property and equipment, which measures our ability to generate cash from our business operations after our capital expenditures.

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NUTANIX, INC.

Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

The following table presents a reconciliation of total billings, non-GAAP gross profit, non-GAAP gross margin, non-GAAP operating expenses and free cash flow to the most directly comparable GAAP financial measures, for each of the periods indicated:

 

		Three Months Ended April 30,								Nine Months Ended April 30,
		2021				2022				2021				2022
		(in thousands, except percentages)
Total revenue		$	344,508			$	403,658			$	1,003,644			$	1,195,256
Change in deferred revenue			26,639				44,297				87,964				115,265
Total billings (non-GAAP)		$	371,147			$	447,955			$	1,091,608			$	1,310,521
Gross profit		$	270,034			$	323,809			$	790,257			$	953,992
Stock-based compensation			7,628				9,137				22,316				29,093
Amortization of intangible assets			3,694				3,368				11,082				10,212
Impairment of lease-related assets			—				—				287				—
Non-GAAP gross profit		$	281,356			$	336,314			$	823,942			$	993,297
Gross margin			78.4	%			80.2	%			78.7	%			79.8	%
Stock-based compensation			2.2	%			2.3	%			2.2	%			2.4	%
Amortization of intangible assets			1.1	%			0.8	%			1.1	%			0.9	%
Impairment of lease-related assets			—	%			—	%			0.1	%			—	%
Non-GAAP gross margin			81.7	%			83.3	%			82.1	%			83.1	%
Operating expenses		$	450,607			$	416,157			$	1,309,151			$	1,278,016
Stock-based compensation			(87,658	)			(75,369	)			(246,622	)			(234,005	)
Amortization of intangible assets			(651	)			(651	)			(1,953	)			(1,953	)
Impairment of lease-related assets			—				—				(2,535	)			—
Other			(812	)			1,578				(1,785	)			(432	)
Non-GAAP operating expenses		$	361,486			$	341,715			$	1,056,256			$	1,041,626
Net cash (used in) provided by operating activities		$	(55,551	)		$	(3,167	)		$	(75,180	)		$	29,539
Purchases of property and equipment			(15,943	)			(16,889	)			(41,111	)			(34,279	)
Free cash flow (non-GAAP)		$	(71,494	)		$	(20,056	)		$	(116,291	)		$	(4,740	)

The following table presents a reconciliation of subscription billings and professional services billings to the most directly comparable GAAP financial measures, for each of the periods indicated:

 

		Three Months Ended April 30,								Nine Months Ended April 30,
		2021				2022				2021				2022
		(in thousands)
Subscription revenue		$	307,332			$	370,496			$	891,443			$	1,083,141
Change in subscription deferred revenue			23,442				42,224				72,422				116,306
Subscription billings		$	330,774			$	412,720			$	963,865			$	1,199,447
Professional services revenue		$	19,460			$	22,465			$	50,731			$	68,623
Change in professional services deferred revenue			3,197				2,073				15,542				(1,041	)
Professional services billings		$	22,657			$	24,538			$	66,273			$	67,582

 

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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 the fiscal year ended July 31, 2021 and the section titled "Risk Factors" in Part II, Item 1A of this Quarterly Report on Form 10-Q for details. If we are unable to address these challenges, our business and operating results could be materially and adversely affected.

Investment in Profitable Growth

We continue to invest in our growth over the long-run, while improving our operating cash flow performance by focusing on go-to-market efficiencies. By maintaining this balance, we believe we can drive toward our high growth potential without sacrificing our overall financial health.

Investment in Sales and Marketing – Our ability to achieve billings and revenue growth depends, in large part, on our ability to capitalize on our market opportunity, including our ability to recruit, train and retain sufficient numbers of ramped sales personnel to support our growth. As part of our investment in our growth over the long-run, we plan to invest in sales and marketing, including investing in our sales and marketing teams and continuing our focus on opportunities with major accounts, large deals, and commercial accounts, as well as other sales and marketing initiatives to increase our pipeline growth. However, we have recently seen higher-than-normal attrition among our sales representatives and our overall sales headcount being below our targets, which may negatively impact our billings and revenue growth. While we are actively recruiting additional sales representatives, it will take time to replace, train, and ramp them to full productivity. As a result, our overall sales and marketing expense may fluctuate, and may decline, in the near term. We estimate, based on past experience, that our average sales team members typically become fully ramped up around the start of their fourth quarter of employment with us, and as our newer employees ramp up, we expect their increased productivity to contribute to our revenue growth. As of April 30, 2022, we considered approximately 72% of our global sales team members to be fully ramped, while the remaining approximately 28% of our global sales team members are in the process of ramping up. As we continue to focus some of our newer and existing sales team members on major accounts and large deals, and as we continue our transition toward a subscription-based business model, it may take longer, potentially significantly, for these sales team members to become fully productive, and there may also be an impact to the overall productivity of our sales team. Furthermore, the effects of the COVID-19 pandemic and the measures we have implemented in response, including postponing, cancelling or making virtual-only certain in-person corporate events at which our sales team members have historically received in-person sales enablement and related trainings, as well as some of the measures implemented as part of our overall efforts to improve our operating cash flow performance and the continued higher-than-normal attrition rates of sales representatives, may impact the productivity of our sales teams in the near-term. We are focused on actively managing these realignments and potential effects. As part of our overall efforts to improve our free cash flow performance, we have also proactively taken steps to increase our go-to-market productivity and over time, we intend to reduce our overall sales and marketing spend as a percentage of revenue. These measures include improving the efficiency of our demand generation spend, focusing on lower cost renewals, increasing leverage of our channel partners, and optimizing headcount in geographies based on market opportunities.

Investment in Research and Development and Engineering – We also intend, in the long term, to grow our global research and development and engineering teams to enhance our solutions, including our newer subscription-based products, improve integration with new and existing ecosystem partners and broaden the range of technologies and features available through our platform. However, as discussed above in the section titled "Impact of the COVID-19 Pandemic," in response to the COVID-19 pandemic we had previously effected a global hiring pause outside of a small number of critical roles and, while the hiring pause is no longer in effect, the overall growth in our global research and development and engineering teams may fluctuate from quarter to quarter in the near-term.

We believe that these investments will contribute to our long-term growth, although they may adversely affect our profitability in the near term.

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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.

Leveraging Partners

We plan to continue to leverage our relationships with our channel and OEM partners and expand our network of cloud and ecosystem partners, all of which help to drive the adoption and sale of our solutions with our end customers. We sell our solutions primarily through our partners, and our solutions primarily run on hardware appliances which are purchased from our OEM partners. We believe that increasing channel leverage, particularly as we expand our focus on opportunities in commercial accounts, by investing in sales enablement and co-marketing with our partners and OEMs in the long term will extend and improve our engagement with a broad set of end customers. Our reliance on manufacturers, including our OEM partners, to produce the hardware appliances on which our software runs exposes us to supply chain delays, which impair our ability to provide services to end customers in a timely manner. Our business and results of operations will be significantly affected by our success in leveraging our relationships with our channel and OEM partners and expanding our network of cloud and ecosystem partners.

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NUTANIX, INC.

Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Customer Retention and Expansion

Our end customers typically deploy our technology for a specific workload initially. After a new end customer's initial order, which includes the product and associated software entitlement and support subscription and services, we focus on expanding our footprint by serving more workloads. We also generate recurring revenue from our software entitlement and support subscription renewals, and given our transition to a subscription-focused business model, software and support renewals will have an increasing significance for our future revenue streams as existing subscriptions come up for renewal. We view continued purchases and upgrades as critical drivers of our success, as the sales cycles are typically shorter as compared to new end customer deployments, and selling efforts are typically less. As of April 30, 2022, approximately 72% of our end customers who have been with us for 18 months or longer have made a repeat purchase, which is defined as any purchase activity, including renewals of term-based licenses or software entitlement and support subscription renewals, after the initial purchase. Additionally, end customers who have been with us for 18 months or longer have total lifetime orders, including the initial order, in an amount that is more than 6.9x greater, on average, than their initial order. This number increases to approximately 19.9x, on average, for Global 2000 end customers who have been with us for 18 months or longer as of April 30, 2022. These multiples exclude the effect of one end customer who had a very large and irregular purchase pattern that we believe is not representative of the purchase patterns of all of our other end customers.

Our business and operating results will depend on our ability to retain and sell additional solutions to our existing and future base of end customers. Our ability to obtain new and retain existing customers will in turn depend in part on a number of factors. These factors include our ability to effectively maintain existing and future customer relationships, continue to innovate by adding new functionality and improving usability of our solutions in a manner that addresses our end customers’ needs and requirements, and optimally price our solutions in light of marketplace conditions, competition, our costs and customer demand. Furthermore, our ongoing transition to a subscription-based business model and ongoing product transitions may cause concerns among our customer base, including concerns regarding changes to pricing over time, and may also result in confusion among new and existing end customers, for example, regarding our pricing models. Such concerns and/or confusion can slow adoption and renewal rates among our current and future customer base.

Components of Our Results of Operations

Revenue

We generate revenue primarily from the sale of our enterprise cloud platform, which can be deployed on a variety of qualified hardware platforms or, in the case of our cloud-based SaaS offerings, via hosted service or delivered pre-installed on an appliance that is configured to order. Non-portable software licenses are delivered or sold alongside configured-to-order appliances and can be used over the life of the associated appliance.

Our subscription term-based licenses are sold separately, or can be sold alongside configured-to-order appliances. Our subscription term-based licenses typically have a term of one to five years. Our cloud-based SaaS subscriptions have terms extending up to five years.

Configured-to-order appliances, including our Nutanix-branded NX hardware line, can be purchased from one of our channel partners, OEMs or in limited cases, directly from Nutanix. Our enterprise cloud platform typically includes one or more years of support and entitlements, which provides customers with the right to software upgrades and enhancements as well as technical support. Our platform is primarily sold through channel partners, including distributors, resellers and OEMs.

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NUTANIX, INC.

Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Product revenue — Product revenue consists of software and hardware revenue. A majority of our product revenue is generated from the sale of our enterprise cloud operating system. We also sell renewals of previously purchased software licenses and SaaS offerings. Revenue from our software products is generally recognized upon transfer of control to the customer, which is typically upon shipment for sales including a hardware appliance, upon making the software available to the customer when not sold with an appliance or as services are performed with SaaS offerings. In transactions where the hardware appliance is purchased directly from Nutanix, we consider ourselves to be the principal in the transaction and we record revenue and costs of goods sold on a gross basis. We consider the amount allocated to hardware revenue to be equivalent to the cost of the hardware procured. Hardware revenue is generally recognized upon transfer of control to the customer.

Support, entitlements and other services revenue — We generate our support, entitlements and other services revenue primarily from software entitlement and support subscriptions, which include the right to software upgrades and enhancements as well as technical support. The majority of our product sales are sold in conjunction with software entitlement and support subscriptions, with terms ranging from one to five years. Occasionally, we also sell professional services with our products. We recognize revenue from software entitlement and support contracts ratably over the contractual service period, which typically commences upon transfer of control of the corresponding products to the customer. We recognize revenue related to professional services as they are performed.

Cost of Revenue

Cost of product revenue — Cost of product revenue consists of costs paid to third-party OEM partners, hardware costs, personnel costs associated with our operations function, consisting of salaries, benefits, bonuses and stock-based compensation, cloud-based costs associated with our SaaS offerings, and allocated costs, consisting of certain facilities, depreciation and amortization, recruiting and information technology costs allocated based on headcount.

Cost of support, entitlements and other services revenue — Cost of support, entitlements and other services revenue includes personnel and operating costs associated with our global customer support organization, as well as allocated costs. We expect our cost of support, entitlements and other services revenue to increase in absolute dollars as our support, entitlements and other services revenue increases.

Operating Expenses

Our operating expenses consist of sales and marketing, research and development and general and administrative expenses. The largest component of our operating expenses is personnel costs. Personnel costs consist of wages, benefits, bonuses and, with respect to sales and marketing expenses, sales commissions.

Sales and marketing — Sales and marketing expense consists primarily of personnel costs. Sales and marketing expense also includes sales commissions, costs for promotional activities and other marketing costs, travel costs and costs associated with demonstration units, including depreciation and allocated costs. Commissions are deferred and recognized as we recognize the associated revenue. We expect sales and marketing expense to continue, in the long term, to increase in absolute dollars as part of our long-term plans to invest in our growth. However, as part of our overall efforts to improve our operating cash flow performance, we have also proactively taken steps to increase our go-to-market productivity and over time, we intend to reduce our overall sales and marketing spend as a percentage of revenue. For example, during the fourth quarter of fiscal 2021, we decreased our global headcount by 2.5%, primarily in sales and marketing, as part of our continued refinement of our go-to-market model. We have also recently seen higher-than-normal attrition among our sales representatives, and while we are actively recruiting additional sales representatives, it will take time to replace, train, and ramp them to full productivity. As a result, our sales and marketing expense will fluctuate, and may decline, in the near-term.

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NUTANIX, INC.

Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Research and development — Research and development ("R&D") expense consists primarily of personnel costs, as well as other direct and allocated costs. We have devoted our product development efforts primarily to enhancing the functionality and expanding the capabilities of our solutions. R&D costs are expensed as incurred, unless they meet the criteria for capitalization. We expect R&D expense, in the long term, to increase in absolute dollars as part of our long-term plans to invest in our future products and services, including our newer subscription-based products, although R&D expense may fluctuate as a percentage of total revenue and, on an absolute basis, from quarter to quarter.

General and administrative — General and administrative ("G&A") expense consists primarily of personnel costs, which include our executive, finance, human resources and legal organizations. G&A expense also includes outside professional services, which consists primarily of legal, accounting and other consulting costs, as well as insurance and other costs associated with being a public company and allocated costs. We expect G&A expense, in the long term, to increase in absolute dollars, particularly due to additional legal, accounting, insurance and other costs associated with our growth, although G&A expense may fluctuate as a percentage of total revenue and, on an absolute basis, from quarter to quarter.

Other Income (Expense), Net

Other income (expense), net consists primarily of interest income and expense, which includes the amortization of the debt issuance costs associated with our 0% convertible senior notes due 2023 (the "2023 Notes"), our 2.50% convertible senior notes due 2026 (the "2026 Notes") and our 0.25% convertible senior notes due 2027 (the “2027 Notes”), changes in the fair value of the derivative liability associated with the 2026 Notes, non-cash interest expense on the 2026 Notes, the amortization of the debt discount on the 2026 Notes, interest expense on the 2027 Notes, debt extinguishment costs, interest income related to our short-term investments, and foreign currency exchange gains or losses.

Provision for Income Taxes

Provision for income taxes consists primarily of income taxes for certain foreign jurisdictions in which we conduct business and state income taxes in the United States. We have recorded a full valuation allowance related to our federal and state net operating losses and other net deferred tax assets and a partial valuation allowance related to our foreign net deferred tax assets due to the uncertainty of the ultimate realization of the future benefits of those assets.

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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 April 30,								Nine Months Ended April 30,
		2021				2022				2021				2022
		(in thousands)
Revenue:
Product		$	172,308			$	199,616			$	502,858			$	588,872
Support, entitlements and other services			172,200				204,042				500,786				606,384
Total revenue			344,508				403,658				1,003,644				1,195,256
Cost of revenue:
Product (1)(2)			12,896				13,739				39,494				43,056
Support, entitlements and other services (1)			61,578				66,110				173,893				198,208
Total cost of revenue			74,474				79,849				213,387				241,264
Gross profit			270,034				323,809				790,257				953,992
Operating expenses:
Sales and marketing (1)(2)			263,358				234,530				781,719				726,196
Research and development (1)			144,917				142,075				416,292				427,949
General and administrative (1)			42,332				39,552				111,140				123,871
Total operating expenses			450,607				416,157				1,309,151				1,278,016
Loss from operations			(180,573	)			(92,348	)			(518,894	)			(324,024	)
Other income (expense), net			61,352				(15,676	)			(143,381	)			(309,557	)
Loss before provision for income taxes			(119,221	)			(108,024	)			(662,275	)			(633,581	)
Provision for income taxes			4,419				3,611				13,803				12,967
Net loss		$	(123,640	)		$	(111,635	)		$	(676,078	)		$	(646,548	)
(1) Includes stock-based compensation expense as    follows:
Product cost of revenue		$	1,291			$	1,830			$	4,454			$	5,529
Support, entitlements and other services cost of revenue			6,337				7,307				17,862				23,564
Sales and marketing			30,743				25,463				93,001				80,975
Research and development			40,802				35,467				114,747				109,709
General and administrative			16,113				14,439				38,874				43,321
Total stock-based compensation expense		$	95,286			$	84,506			$	268,938			$	263,098
(2) Includes amortization of intangible assets as follows:
Product cost of revenue		$	3,694			$	3,368			$	11,082			$	10,212
Sales and marketing			651				651				1,953				1,953
Total amortization of intangible assets		$	4,345			$	4,019			$	13,035			$	12,165

 

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NUTANIX, INC.

Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

		Three Months Ended April 30,								Nine Months Ended April 30,
		2021				2022				2021				2022
		(as a percentage of total revenue)
Revenue:
Product			50.0	%			49.5	%			50.1	%			49.3	%
Support, entitlements and other services			50.0	%			50.5	%			49.9	%			50.7	%
Total revenue			100.0	%			100.0	%			100.0	%			100.0	%
Cost of revenue:
Product			3.7	%			3.4	%			3.9	%			3.6	%
Support, entitlements and other services			17.9	%			16.4	%			17.3	%			16.6	%
Total cost of revenue			21.6	%			19.8	%			21.3	%			20.2	%
Gross profit			78.4	%			80.2	%			78.7	%			79.8	%
Operating expenses:
Sales and marketing			76.4	%			58.1	%			77.9	%			60.8	%
Research and development			42.1	%			35.2	%			41.5	%			35.8	%
General and administrative			12.3	%			9.8	%			11.1	%			10.4	%
Total operating expenses			130.8	%			103.1	%			130.4	%			107.0	%
Loss from operations			(52.4	)%			(22.9	)%			(51.7	)%			(27.2	)%
Other income (expense), net			17.8	%			(3.9	)%			(14.3	)%			(25.9	)%
Loss before provision for income taxes			(34.6	)%			(26.8	)%			(66.0	)%			(53.1	)%
Provision for income taxes			1.3	%			0.9	%			1.4	%			1.1	%
Net loss			(35.9	)%			(27.7	)%			(67.4	)%			(54.2	)%

 

Comparison of the Three and Nine Months Ended April 30, 2021 and 2022

Revenue

 

		Three Months Ended April 30,								Change								Nine Months Ended April 30,								Change
		2021				2022				$				%				2021				2022				$				%
		(in thousands, except percentages)
Product		$	172,308			$	199,616			$	27,308				16	%		$	502,858			$	588,872			$	86,014				17	%
Support, entitlements    and other services			172,200				204,042				31,842				18	%			500,786				606,384				105,598				21	%
Total revenue		$	344,508			$	403,658			$	59,150				17	%		$	1,003,644			$	1,195,256			$	191,612				19	%

 

		Three Months Ended April 30,								Change								Nine Months Ended April 30,								Change
		2021				2022				$				%				2021				2022				$				%
		(in thousands, except percentages)
U.S.		$	184,392			$	227,195			$	42,803				23	%		$	543,766			$	670,782			$	127,016				23	%
Europe, the Middle    East and Africa			82,106				96,551				14,445				18	%			228,147				278,129				49,982				22	%
Asia Pacific			64,687				67,991				3,304				5	%			190,472				208,518				18,046				9	%
Other Americas			13,323				11,921				(1,402	)			(11	)%			41,259				37,827				(3,432	)			(8	)%
Total revenue		$	344,508			$	403,658			$	59,150				17	%		$	1,003,644			$	1,195,256			$	191,612				19	%

 

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NUTANIX, INC.

Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

The increase in product revenue for the three and nine months ended April 30, 2022 was due primarily to increases in software revenue resulting from an increased adoption of our products, as well as growth in software renewals due to our transition to selling subscription term-based licenses, partially offset by the impact of the shorter average contract terms resulting from this transition. For the three and nine months ended April 30, 2021, the total average contract term was approximately 3.3 years and 3.4 years, respectively. For the three and nine months ended April 30, 2022, the total average contract term was approximately 3.2 years and 3.1 years, respectively. Total average contract term represents the dollar-weighted term across all subscription and life-of-device contracts billed during the period, using an assumed term of five years for licenses without a specified term, such as life-of-device licenses.

Support, entitlements and other services revenue increased for the three and nine months ended April 30, 2022, as compared to the prior year periods, in conjunction with the growth of our end customer base and the related software entitlement and support subscription contracts.

Cost of Revenue and Gross Margin

 

		Three Months Ended April 30,								Change								Nine Months Ended April 30,								Change
		2021				2022				$				%				2021				2022				$				%
		(in thousands, except percentages)
Cost of product revenue		$	12,896			$	13,739			$	843				7	%		$	39,494			$	43,056			$	3,562				9	%
Product gross margin			92.5	%			93.1	%											92.1	%			92.7	%
Cost of support,    entitlements and    other services revenue		$	61,578			$	66,110			$	4,532				7	%		$	173,893			$	198,208			$	24,315				14	%
Support, entitlements    and other services    gross margin			64.2	%			67.6	%											65.3	%			67.3	%
Total gross margin			78.4	%			80.2	%											78.7	%			79.8	%

 

Cost of product revenue

Cost of product revenue increased for the three and nine months ended April 30, 2022, as compared to the prior year periods, due primarily to a corresponding increase in hardware revenue. Slight fluctuations in hardware revenue and cost of product revenue are anticipated, as we expect to continue selling small amounts of hardware for the foreseeable future.

Product gross margin increased by 0.6 percentage points for both the three and nine months ended April 30, 2022, as compared to the prior year periods, due primarily to increasing software revenue, as we continued to focus on more software-only transactions, which have a higher margin as compared to hardware sales.

Cost of support, entitlements and other services revenue

Cost of support, entitlements and other services revenue increased for the three and nine months ended April 30, 2022, as compared to the prior year period, due primarily to higher personnel-related costs, resulting from growth in our global customer support organization.

Support, entitlements and other services gross margin increased by 3.4 percentage points and 2.0 percentage points for the three and nine months ended April 30, 2022, respectively, as compared to the prior year periods, due primarily to support, entitlements and other services revenue growing at a higher rate than personnel-related 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

 

		Three Months Ended April 30,								Change								Nine Months Ended April 30,								Change
		2021				2022				$				%				2021				2022				$				%
		(in thousands, except percentages)
Sales and marketing		$	263,358			$	234,530			$	(28,828	)			(11	)%		$	781,719			$	726,196			$	(55,523	)			(7	)%
Percent of total revenue			76.4	%			58.1	%											77.9	%			60.8	%

Sales and marketing expense decreased for the three and nine months ended April 30, 2022, as compared to the prior year periods, due primarily to lower marketing costs resulting from decreased spending and increased efficiencies, as well as lower headcount-related costs, driven by the 9% decrease in sales and marketing headcount from April 30, 2021 to April 30, 2022. The overall decrease in sales and marketing expense was partially offset by savings in the prior year period due to the company-wide furlough week during the first quarter of fiscal 2021, as well as an increase in commissions expense as a result of the increase in revenue.

Research and development

 

		Three Months Ended April 30,								Change								Nine Months Ended April 30,								Change
		2021				2022				$				%				2021				2022				$				%
		(in thousands, except percentages)
Research and development		$	144,917			$	142,075			$	(2,842	)			(2	)%		$	416,292			$	427,949			$	11,657				3	%
Percent of total revenue			42.1	%			35.2	%											41.5	%			35.8	%

Research and development expense decreased for the three months ended April 30, 2022, as compared to the prior year period, due primarily to lower stock-based compensation expense resulting from terminations during the period.

Research and development expense increased for the nine months ended April 30, 2022, as compared to the prior year periods, due primarily to higher personnel-related costs resulting from growth in our R&D headcount, which grew 13% from April 30, 2021 to April 30, 2022, partially offset by lower stock-based compensation expense resulting from terminations during the period.

General and administrative

 

		Three Months Ended April 30,								Change								Nine Months Ended April 30,								Change
		2021				2022				$				%				2021				2022				$				%
		(in thousands, except percentages)
General and administrative		$	42,332			$	39,552			$	(2,780	)			(7	)%		$	111,140			$	123,871			$	12,731				11	%
Percent of total revenue			12.3	%			9.8	%											11.1	%			10.4	%

General and administrative expense decreased for the three months ended April 30, 2022, as compared to the prior year period, due primarily to lower legal and outside services costs as well as lower stock-based compensation expense resulting from terminations during the period, partially offset by an increase in personnel-related costs resulting from growth in our G&A headcount, which grew 14% from April 30, 2021 to April 30, 2022.

General and administrative expense increased for the nine months ended April 30, 2022, as compared to the prior year period, due primarily to an increase in personnel-related costs resulting from growth in our G&A headcount.

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NUTANIX, INC.

Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Other Expense, Net

 

		Three Months Ended April 30,								Change								Nine Months Ended April 30,								Change
		2021				2022				$				%				2021				2022				$				%
		(in thousands, except percentages)
Interest income, net		$	940			$	1,123			$	(183	)			(19	)%		$	3,418			$	2,199			$	1,219				36	%
Change in fair value of    derivative liability			85,027				—				85,027				100	%			(81,353	)			(198,038	)			116,685				143	%
Amortization of debt    discount and issuance    costs and interest    expense			(22,098	)			(15,325	)			(6,773	)			(31	)%			(57,508	)			(45,209	)			(12,299	)			(21	)%
Debt extinguishment costs			—				—				—				0	%			—				(64,911	)			64,911				100	%
Other			(2,517	)			(1,474	)			(1,043	)			(41	)%			(7,938	)			(3,598	)			(4,340	)			(55	)%
Other income (expense), net		$	61,352			$	(15,676	)		$	77,028				126	%		$	(143,381	)		$	(309,557	)		$	166,176				116	%

Other income (expense), net increased for the three months ended April 30, 2022, as compared to the prior year period, due primarily to the change in the fair value of the derivative liability related to the 2026 Notes, which was reclassified to equity during the first quarter of fiscal 2022.

Other income (expense), net increased for the nine months ended April 30, 2022, as compared to the prior year period, due primarily to the change in the fair value of the derivative liability related to the 2026 Notes and the debt extinguishment costs resulting from the exchange of $416.5 million in aggregate principal amount of the 2023 Notes for $477.3 million in aggregate principal amount of the 2027 Notes.

Provision for Income Taxes

 

		Three Months Ended April 30,								Change								Nine Months Ended April 30,								Change
		2021				2022				$				%				2021				2022				$				%
		(in thousands, except percentages)
Provision for income taxes		$	4,419			$	3,611			$	(808	)			(18	)%		$	13,803			$	12,967			$	(836	)			(6	)%

The decreases in the income tax provision for the three and nine months ended April 30, 2022, as compared to the prior year periods, were due primarily to tax benefits from the release of acquisition-related unrecognized tax positions, partially offset by an increase in foreign taxes from higher taxable earnings in foreign jurisdictions, as we continued to grow our business globally. We continue to maintain a full valuation allowance on our U.S. federal and state deferred tax assets and a partial valuation allowance related to our foreign net deferred tax assets.

Liquidity and Capital Resources

As of April 30, 2022, we had $386.7 million of cash and cash equivalents, $3.1 million of restricted cash and $913.9 million of short-term investments, which were held for general corporate purposes. Our cash, cash equivalents and short-term investments primarily consist of bank deposits, money market accounts and highly rated debt instruments of the U.S. government and its agencies and debt instruments of highly rated corporations.

In January 2018, we issued convertible senior notes with a 0% interest rate for an aggregate principal amount of $575.0 million. In September 2021, we entered into privately negotiated exchange and note repurchase transactions, after which $145.7 million in aggregate principal amount of 2023 Notes remains outstanding. There are no required principal payments prior to the maturity of the 2023 Notes. For additional information, see Note 5 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

In September 2020, we issued $750.0 million in aggregate principal amount of 2.50% convertible senior notes due 2026 to BCPE Nucleon (DE) SVP, LP, an entity affiliated with Bain Capital, LP. For additional information, see Note 5 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

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NUTANIX, INC.

Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

In September 2021, we issued convertible senior notes with a 0.25% interest rate for an aggregate principal amount of $575.0 million due 2027, of which $477.3 million was issued in exchange for approximately $416.5 million principal amount of the 2023 Notes and the remaining $97.7 million was issued for cash. There are no required principal payments prior to the maturity of the 2027 Notes. For additional information, see Note 5 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Due to investments in our business as well as the potential cash flow impacts resulting from our continued transition to a subscription-based business model, we expect our operating and free cash flow to continue to fluctuate during the next 12 months. Notwithstanding that fact, we believe that our cash and cash equivalents and short-term investments will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. Our future capital requirements will depend on many factors, including our growth rate, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced product and service offerings, the continuing market acceptance of our products, the impact of COVID-19 pandemic on our business, our end customers and partners, and the economy, and the timing of and extent to which our customers transition to shorter-term contracts or request to only pay for the initial term of multi-year contracts as a result of our transition to a subscription-based business model.

Cash Flows

The following table summarizes our cash flows for the periods presented:

 

		Nine Months Ended April 30,
		2021				2022
		(in thousands)
Net cash (used in) provided by operating activities		$	(75,180	)		$	29,539
Net cash used in investing activities			(629,751	)			(31,546	)
Net cash provided by financing activities			660,881				102,916
Net (decrease) increase in cash, cash equivalents and restricted cash		$	(44,050	)		$	100,909

 

Cash Flows from Operating Activities

Net cash provided by operating activities was $29.5 million for the nine months ended April 30, 2022, compared to net cash used in operating activities of $75.2 million for the nine months ended April 30, 2021. The increase in cash provided by operating activities for the nine months ended April 30, 2022 was due primarily to an increase in cash collections during the period.

Cash Flows from Investing Activities

Net cash used in investing activities of $629.8 million for the nine months ended April 30, 2021 included $1,145.3 million of short-term investment purchases and $41.1 million of purchases of property and equipment, partially offset by $486.6 million of maturities of short-term investments and $70.1 million of sales of short-term investments.

Net cash used in investing activities of $31.5 million for the nine months ended April 30, 2022 included $794.2 million of short-term investment purchases and $34.3 million of purchases of property and equipment, partially offset by $778.9 million of maturities of short-term investments and $18.0 million of sales of short-term investments.

Cash Flows from Financing Activities

Net cash provided by financing activities of $660.9 million for the nine months ended April 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.

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NUTANIX, INC.

Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Net cash provided by financing activities of $102.9 million for the nine months ended April 30, 2022 included $88.7 million of proceeds from the issuance of the 2027 Notes, net of issuance costs, $66.6 million of proceeds from the sale of shares through employee equity incentive plans, and $39.9 million of proceeds from the unwinding of convertible note hedges related to the 2023 Notes, partially offset by $58.6 million of repurchases of our Class A common stock, $18.4 million of payments for the unwinding of warrants related to the 2023 Notes, and $14.7 million of debt extinguishment costs.

Contractual Obligations

The following table summarizes our contractual obligations as of April 30, 2022:

 

		Payments Due by Period
		Total				Less than 1 Year				1 Year to 3 Years				3 to 5 Years				More than 5 Years
		(in thousands)
Principal amount payable on convertible    senior notes (1)		$	1,498,701			$	145,704			$	—			$	777,997			$	575,000
Interest on convertible senior notes (1)			2,601				116				—				2,485				—
Operating leases (undiscounted basis) (2)			107,282				49,573				52,014				5,695				—
Other commitments (3)			99,147				89,811				6,263				3,073				—
Guarantees with OEMs			89,627				89,627				—				—				—
Total		$	1,797,358			$	374,831			$	58,277			$	789,250			$	575,000

 

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 April 30, 2022, we had accrued liabilities related to uncertain tax positions, which are reflected on our condensed 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.

Off-Balance Sheet Arrangements

As of April 30, 2022, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Critical Accounting Policies and Estimates

Our condensed consolidated financial statements are prepared in accordance with U.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.

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NUTANIX, INC.

Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

There have been no material changes to our critical accounting policies and estimates as compared to those described in our Annual Report on Form 10-K for the fiscal year ended July 31, 2021.

Recent Accounting Pronouncements

See Note 1 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for a full description of recent accounting pronouncements.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

We have operations both within the United States and internationally and we are exposed to market risk in the ordinary course of business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in foreign currency exchange rates and interest rates.

Foreign Currency Risk

Our condensed consolidated results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates. Historically, our revenue contracts have been denominated in U.S. dollars. Our expenses are generally denominated in the currencies in which our operations are located. To date, we have not entered into any hedging arrangements with respect to foreign currency risk or other derivative instruments. In the event our foreign sales and expenses increase, our operating results may be more significantly affected by foreign currency exchange rate fluctuations, which can affect our operating income or loss. The effect of a hypothetical 10% change in foreign currency exchange rates on our non-U.S. dollar monetary assets and liabilities would not have had a material impact on our historical condensed consolidated financial statements. Foreign currency transaction gains and losses and exchange rate fluctuations have not been material to our condensed consolidated financial statements.

A hypothetical 10% decrease in the U.S. dollar against other currencies would result in an increase in our operating loss of approximately $37.0 million and $43.8 million for the nine months ended April 30, 2021 and 2022, respectively. The increase in this hypothetical change is due to an increase in our expenses denominated in foreign currencies due to our continued global expansion. This analysis disregards the possibilities that rates can move in opposite directions and that losses from one geographic area may be offset by gains from another geographic area.

Interest Rate Risk

Our investment objective is to conserve capital and maintain liquidity to support our operations; therefore, we generally invest in highly liquid securities, consisting primarily of bank deposits, money market funds, commercial paper, U.S. government securities and corporate bonds. Such fixed and floating interest-earning instruments carry a degree of interest rate risk. The fair market value of fixed income securities may be adversely impacted by a rise in interest rates, while floating rate securities may produce less income than predicted if interest rates fall. Due to the short-term nature of our investment portfolio, we do not believe an immediate 10% increase or decrease in interest rates would have a material effect on the fair market value of our portfolio. Therefore, we do not expect our operating results or cash flows to be materially affected by a sudden change in interest rates.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this report. Based on management’s evaluation, our principal executive officer and principal financial officer concluded, as of the end of the period covered by this report, that our disclosure controls and procedures are effective at a reasonable assurance level.

In designing and evaluating our disclosure controls and procedures, management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the fiscal quarter ended April 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The information set forth under the "Legal Proceedings" subheading in Note 7 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q is incorporated herein by reference.

Item 1A. Risk Factors

You should carefully consider the risks and uncertainties described under the heading "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended July 31, 2021, together with all of the other information contained in this Quarterly Report on Form 10-Q, including our condensed consolidated financial statements and related notes, before making a decision to invest in our Class A common stock. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that affect our business. The risk factor below has been materially updated from the corresponding risk factor in our Annual Report on Form 10-K for the fiscal year ended July 31, 2021. There have been no additional material changes from the risks and uncertainties previously disclosed under the "Risk Factors" section in our Annual Report on Form 10-K for the fiscal year ended July 31, 2021.

Because we depend on manufacturers of hardware, including our OEM partners, to timely and cost-effectively produce and ship the hardware on which our software runs, we are susceptible to supply chain disruptions and delays and pricing fluctuations, which have adversely affected, and could further adversely affect, our business.

We rely on manufacturers, including our OEM partners, to produce the hardware appliances on which our software runs, including both our Nutanix-branded NX series appliances and the various third-party appliances that are included on our hardware compatibility list, which exposes us to direct and indirect risks beyond our control, including reduced control over quality assurance, product costs, product supply and timing, supply chain disruptions and delays, and potential reputational harm and brand damage. We may not be able to discover, manage, and/or remediate such risks successfully and in a timely manner. For example, key components of the hardware on which our software runs have been affected by the ongoing chip shortage. Late in the fiscal quarter ended April 30, 2022, we saw an unexpected impact from increased supply chain challenges with increased hardware supply chain delays resulting in an increasing percentage of orders having start dates in future quarters and certain customers delaying their purchase of our software pending availability of the hardware on which our software runs. Furthermore, our orders for NX series appliances represent a relatively small percentage of the overall orders received by such hardware manufacturers from their customers. Therefore, fulfilling our orders may not be a priority in guiding their business decisions and operational commitments. If we fail to manage our relationships with these manufacturers effectively, or if any of them continue to experience delays, disruptions or increased manufacturing lead times, component lead-time disruptions, capacity constraints or quality control problems in their operations or are unable to meet our or our end customers’ requirements for timely delivery, our ability to sell our solutions to our end customers could be severely impaired due to the lack of availability of certified hardware appliances, and our customers' ability, or willingness, to consume our software will be materially delayed, which may further adversely affect our business and operating results, competitive position, brand and reputation, as well as our relationships with affected customers.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Purchases of Equity Securities by the Issuer

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

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Item 5. Other Information

None.

Item 6. Exhibits

See the Exhibit Index below for a list of exhibits filed or furnished with this report, which Exhibit Index is incorporated herein by reference.

 

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EXHIBIT INDEX

 

		Incorporated by Reference
Number	Exhibit Title	Form	File No.	Exhibit	Filing Date	Filed Herewith
10.1+	First Amendment to Second Amended and Restated Outside Director Compensation					X
10.2+	Offer Letter between Nutanix, Inc. and Rukmini Sivaraman, dated April 10, 2022	8-K	001-37883	10.1	4/12/2022
10.3	Tenth Amendment, dated as of May 18, 2022, by and between Nutanix, Inc. and Hudson 1740 Technology, LLC					X
31.1	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002					X
31.2	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002					X
32.1*	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002					X
32.2*	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002					X
101.INS	XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XRBL tags are embedded within the Inline XBRL document					X
101.SCH	XBRL Taxonomy Extension Schema Document					X
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document					X
101.	XBRL Taxonomy Extension Definition					X
101.	XBRL Taxonomy Extension Label Linkbase					X
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document					X
104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)					X

 

+ Indicates a management contract or compensatory plan or arrangement.

 

* These exhibits are furnished with this Quarterly Report on Form 10-Q and are not deemed filed with the Securities and Exchange Commission and are

not incorporated by reference in any filing of Nutanix, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as

amended, whether made before or after the date hereof and irrespective of any general incorporation language contained in such filings.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

		NUTANIX, INC.
Date: June 2, 2022		/s/ Rukmini Sivaraman
		Rukmini Sivaraman
		Chief Financial Officer
		(Principal Financial Officer)

 

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