What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-09-21 compared with 2020-09-23 · 234 added, 303 removed, 378 unchanged (59% of the section changed)

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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’ hybrid cloud and multicloud strategies.

We seek to provide an enterprise cloud platform that empowers our customers to unify various clouds - private, public, distributed - into one seamless cloud, allowing enterprises to choose the right cloud for each application.

Our enterprise cloud platform allows enterprises to simplify the complexities of a multicloud environment with automation, cost governance and compliance.

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 is delivered or sold alongside configured-to-order appliances with a license term equal to the life of the associated appliance.

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 directly from Nutanix.

Our enterprise cloud platform is typically purchased with one or more years of support and entitlements, which includes the right to software upgrades and enhancements as well as technical support.

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.

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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.

NUTANIX, INC.

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

We had a broad and diverse base of approximately 20,130 end customers as of July 31, 2021, including approximately 980 Global 2000 enterprises.

We define the number of end customers as the number of end customers for which we have received an order by the last day of the period, excluding partners to which we have sold products for their own demonstration purposes.

A single organization or customer may represent multiple end customers for separate divisions, segments or subsidiaries.

A single organization or customer may represent multiple end customers for separate divisions, segments or subsidiaries, and the total number of end customers may contract due to mergers, acquisitions, or other consolidation among existing end customers.

Since shipping our first product in fiscal 2012, our end customer base has grown rapidly.

The number of end customers grew from approximately 14,180 as of July 31, 2019 to approximately 17,360 as of July 31, 2020.

Our solutions are primarily sold through channel partners, including distributors, resellers and OEMs, and delivered directly to our end customers.

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We also sell to service providers, who utilize our enterprise cloud platform to provide a variety of cloud-based services to their customers.

NUTANIX, INC.

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

We continue to invest in the growth of our business, including the development of our solutions, hiring for critical roles in our global teams, projects to increase the demand for our solutions and other sales and marketing initiatives.

The number of our full-time employees increased from approximately 5,340 as of July 31, 2019 to approximately 6,170 as of July 31, 2020.

We have an engineering team focused on distributed systems and IT infrastructure technologies at our San Jose, California headquarters and at our research and development centers in India, North Carolina, Washington, Serbia and Germany.

We have in the past also expanded our international sales and marketing presence by continuing to build out our global teams and continuing to invest in sales and marketing initiatives, such as additional demand generation spending to increase pipeline growth.

We plan to, in the long term, invest in our global engineering team to enhance the functionality of our enterprise cloud platform, including our newer subscription-based products, introduce new products and features to build upon our technology leadership, as well as expand our global sales and marketing teams in the long term.

However, as discussed further in the "Impact of the COVID-19 Pandemic" and "Factors Affecting Our Performance" sections below, in response to the ongoing and rapidly evolving COVID-19 pandemic, we have proactively taken steps to manage our expenses.

We continue to invest in the growth of our business over the long-run, including the development of our solutions and investing in sales and marketing to capitalize on our market opportunities, while improving our operating cash flow performance by focusing on go-to-market efficiencies.

By maintaining this balance, we believe we can drive toward our high growth potential without sacrificing our overall financial health.

As discussed further in the "Impact of the COVID-19 Pandemic" and "Factors Affecting Our Performance" sections below, both in response to the ongoing and rapidly evolving COVID-19 pandemic and as part of our overall efforts to improve our operating cash flow performance, we have proactively taken steps to manage our expenses.

As a result, our overall spending on such efforts will fluctuate, and may decline, from quarter to quarter in the near-term.

Impact of the COVID-19 Pandemic

The ongoing and rapidly evolving COVID-19 pandemic has significantly curtailed the movement of people, goods and services worldwide, imposed unprecedented strains on governments, health care systems, educational institutions, businesses and individuals around the world, including in nearly all of the regions in which we operate, and has resulted in significant volatility and uncertainty in the global economy.

In response to the pandemic, authorities, businesses, and individuals have implemented numerous unprecedented measures, including travel bans and restrictions, quarantines, shelter-in-place, stay-at-home, remote work and social distancing orders, and shutdowns, which have impacted and will continue to impact our workforce and operations, as well as those of our customers, vendors, suppliers, and partners.

In response to the COVID-19 pandemic, we have also been required – or have deemed it necessary – to take a number of actions to protect and assist our employees, customers, and partners, including:

The ongoing and rapidly evolving pandemic caused by the COVID-19 virus (collectively with any variants or related strains thereof, "COVID-19" and the ongoing pandemic caused thereby, the "COVID-19 pandemic") has significantly curtailed the movement of people, goods and services worldwide, imposed unprecedented strains on governments, health care systems, educational institutions, businesses and individuals around the world, including in nearly all of the regions in which we operate, and has resulted in significant volatility and uncertainty in the global economy.

Even as efforts to contain the pandemic have made progress and some restrictions have relaxed, new variants of the virus are causing additional outbreaks.

The COVID-19 pandemic has impacted and will continue to impact our workforce and operations, as well as those of our customers, vendors, suppliers, partners, and communities, and there is substantial uncertainty in the nature and degree of its continued effects over time.

NUTANIX, INC.

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

In response to the COVID-19 pandemic, we have also taken a number of actions to protect and assist our employees, customers, and partners, including:

temporarily closing all of our offices (including our California headquarters) around the world;

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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, including our 2020 .NEXT customer and partner events, our 2020 Investor Day, and our fiscal 2021 sales kick off;

and offering extended payment terms of up to 60 days to certain partners through July 2020.

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:

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delays in or abandonment of planned or future purchases;

lengthened payment terms;

lengthened sales cycles, particularly with new customers and partners who do not have prior experience with our solutions;

supply chain disruptions;

increased cybersecurity risks or other security challenges;

delays or disruptions to our product roadmap and our ability to deliver new products, features, or enhancements;

and voluntary and involuntary delays in the ability to ship, and the ability of our end customers to accept delivery of, the hardware platforms on which our software solutions run.

We also expect the reduced manufacturing capacity caused by the pandemic to result in increases in the prices of certain components used to manufacture such hardware platforms, which may increase the price of those hardware platforms for our end customers.

The travel bans, shutdowns, social distancing restrictions and remote work policies have also made 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.

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.

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.

Furthermore, we have taken, and expect to continue to take, a number of proactive actions to manage our operating expenses in light of the uncertainty caused by the COVID-19 pandemic, including:

effecting a global hiring pause outside of a small number of critical roles;

implementing a 10% reduction in executive salaries, effective April 2020;

pausing all merit salary increases and bonus payments;

and implementing two, non-consecutive, mandatory one-week furloughs for our employees in the U.S., along with two, non-consecutive, voluntary one-week unpaid leave periods for our employees outside the U.S.

Although the full impact of these actions is uncertain, they have resulted in a reduction in our operating expenses, including sales and marketing expenses.

See the section titled "Risk Factors" in Part II, Item 1A of this Form 10-Q for further discussion of the possible impact of these actions on our business and financial performance.

Additionally, we have seen a reduction in our operating expenses in recent quarters, including sales and marketing expenses, some of which is due to a number of proactive actions that we took to manage our operating expenses in light of the uncertainty caused by the COVID-19 pandemic, and some of which is a natural result of the continued restrictions on travel and in-person events from the pandemic.

Although the full impact of these actions is uncertain, some of these cost savings measures are temporary.

While we do expect to see some of our operating expenses increase from the suppressed levels in recent quarters as some of the proactive cost savings measures expire and some level of travel and other related expenses return, we are focused on improving our operating cash flow performance and we do not expect that travel or other related expenses will return to pre-pandemic levels.

See the section titled "Risk Factors" for further discussion of the possible impact of these actions on our business and financial performance.

The duration, scope and ultimate impact of the COVID-19 pandemic on the global economy and our business remain highly fluid and cannot be predicted with certainty, and the full effect of the pandemic and the actions we have taken in response may not be fully reflected in our results of operations and financial performance until future periods.

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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 II, Item 1A of this Form 10-Q 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.

See the section titled "Risk Factors" for further discussion of the possible impact of the COVID-19 pandemic, as well as the actions we have taken in response, on our business and financial performance.

NUTANIX, INC.

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

Key Financial and Performance Metrics

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As of and for the Fiscal Year Ended July 31,

2018 2019 2020

(in thousands, except percentages)

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Subscription revenue

Software and support revenue (TCV revenue) $ 898,143 $ 1,130,822 $ 1,284,227

Total billings

Subscription billings

Software and support billings (TCV billings) $ 1,160,170 $ 1,409,339 $ 1,556,637

ACV billings $ 328,811 $ 428,564 $ 505,179

Run-rate ACV $ 650,166 $ 944,444 $ 1,219,965

Gross profit $ 769,427 $ 932,015 $ 1,020,993

Annual contract value ("ACV") billings

Annual recurring revenue ("ARR")

Adjusted gross profit

Gross margin 66.6 % 75.4 % 78.1 %

Adjusted gross margin

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Total end customers

NUTANIX, INC.

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

Disaggregation of Revenue and Billings

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Fiscal Year Ended July 31,

2018 2019 2020

(in thousands)

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Total billings

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 ("SaaS") offerings.

• Ratable — We recognize revenue from software entitlement and support subscriptions and SaaS offerings ratably over the contractual service period, the substantial majority of which relate to software entitlement and support subscriptions.

NUTANIX, INC.

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

Subscription revenue —

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

Ratable —

We recognize revenue from software entitlement and support subscriptions and SaaS offerings ratably over the contractual service period, the substantial majority of which relate to software entitlement and support subscriptions.

These offerings represented approximately $376.4 million, $508.8 million and $639.3 million of our subscription revenue for fiscal 2019, 2020 and 2021, respectively.

• Upfront — Revenue from our subscription software licenses is generally recognized upfront upon transfer of control to the customer, which happens when we make the software available to the customer.

Upfront —

Revenue from our subscription software licenses is generally recognized upfront upon transfer of control to the customer, which happens when we make the software available to the customer.

These subscription software licenses represented approximately $272.0 million, $521.3 million and $604.3 million of our subscription revenue for fiscal 2019, 2020 and 2021, respectively.

Non-portable software revenue — Non-portable software revenue includes sales of our enterprise cloud platform when delivered on a configured-to-order appliance by us or one of our OEM partners.

The software licenses associated with these sales are typically non-portable and have a term equal to the life of the appliance on which the software is delivered.

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 we deliver the hardware appliance, we consider ourselves to be the principal in the transaction and we record revenue and costs of goods sold on a gross basis.

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.

Professional services revenue —

We also sell professional services with our products.

We recognize revenue related to professional services as they are performed.

NUTANIX, INC.

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

Non-GAAP Financial Measures and Key Performance Measures

We regularly monitor total billings, subscription billings, professional services billings, software and support billings (TCV billings), ACV billings, run-rate ACV, adjusted gross profit, adjusted gross margin, free cash flow and non-GAAP operating expenses, which are non-GAAP financial measures and key performance measures, to help us evaluate our growth and operational efficiencies, measure our performance, identify trends in our sales activity and establish our budgets.

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

We evaluate these measures because they:

• are used by management and the Board of Directors to understand and evaluate our performance and trends, as well as to provide a useful measure for period-to-period comparisons of our core business;

are used by management and the Board of Directors to understand and evaluate our performance and trends, as well as to provide a useful measure for period-to-period comparisons of our core business, particularly as we progress through our transition to a subscription-based business model;

are widely used as a measure of financial performance to understand and evaluate companies in our industry;

are used by management to prepare and approve our annual budget and to develop short-term and long-term operational and compensation plans, as well as to assess our actual performance against our goals.

Total billings is a performance measure which we believe provides useful information to investors, as it represents the dollar value under binding purchase orders received and billed during a given period.

Subscription billings and professional services billings are performance measures that we believe provide useful information to our management and investors as they allow us to better track the growth of the subscription-based portion of our business, which is a critical part of our business plan.

TCV billings is a performance measure that we believe provides useful information to our management and investors as it allows us to better track the true growth of our software business by excluding the amounts attributable to the pass-through hardware sales that we use to deliver our solutions.

ACV billings and run-rate ACV are performance measures that we believe provide useful information to our management and investors, in particular as we progress further on our subscription-based business model transition, as they allow us to better track the top-line growth of our business during our transition to a subscription-based business model because they take into account variability in term lengths.

NUTANIX, INC.

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

Total billings is a performance measure which we believe provides useful information to our management and investors, as it represents the dollar value under binding purchase orders received and billed during a given period.

Subscription billings is a performance measure that we believe provides useful information to our management and investors as it allows us to better track the growth of the subscription-based portion of our business, which is a critical part of our business plan.

ACV billings and run-rate ACV are performance measures that we believe provide useful information to our management and investors as they allow us to better track the topline growth of our business during our transition to a subscription-based business model because it takes into account variability in term lengths.

ARR is a performance measure that we believe provides useful information to our management and investors as it allows us to better track the topline growth of our subscription business because it only includes non-life-of-device contracts and takes into account variability in term lengths.

Free cash flow is a performance measure that we believe provides useful information to management and investors about the amount of cash used in or generated by the business after necessary capital expenditures.

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We use these non-GAAP financial and key performance measures for financial and operational decision-making and as a means to evaluate period-to-period comparisons.

Total billings, subscription billings, professional services billings, software and support billings (TCV billings), ACV billings, run-rate ACV, adjusted gross profit, adjusted gross margin, free cash flow and non-GAAP operating expenses have limitations as analytical tools and they should not be considered in isolation or as substitutes for analysis of our results as reported under generally accepted accounting principles in the United States.

Total billings, subscription billings, professional services billings, software and support billings (TCV billings), adjusted gross profit, adjusted gross margin, free cash flow and non-GAAP operating expenses are not substitutes for total revenue, subscription revenue, professional services revenue, software and support revenue (TCV revenue), gross profit, gross margin, cash provided by (used in) operating activities, or GAAP operating expenses, respectively.

There is no GAAP measure that is comparable to either ACV billings or run-rate ACV, so we have not reconciled either ACV billings or run-rate ACV numbers included in this Annual Report on Form 10-K to any GAAP measure.

Total billings, subscription billings, ACV billings, ARR, run-rate ACV, adjusted gross profit, adjusted gross margin, free cash flow and non-GAAP operating expenses have limitations as analytical tools and they should not be considered in isolation or as substitutes for analysis of our results as reported under generally accepted accounting principles in the United States.

Total billings, subscription billings, adjusted gross profit, adjusted gross margin, free cash flow and non-GAAP operating expenses are not substitutes for total revenue, subscription revenue, gross profit, gross margin, cash provided by (used in) operating activities, or GAAP operating expenses, respectively.

There is no GAAP measure that is comparable to either ACV billings, ARR or run-rate ACV, so we have not reconciled either ACV billings, ARR or run-rate ACV numbers included in this Annual Report on Form 10-K to any GAAP measure.

In addition, other companies, including companies in our industry, may calculate non-GAAP financial measures and key performance measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures and key performance measures as tools for comparison.

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

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

NUTANIX, INC.

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

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

Professional services billings — We calculate professional services billings by adding the change in professional services deferred revenue, net of acquisitions, between the start and end of the period to professional services revenue recognized in the same period.

Software and support billings (TCV billings) — We calculate software and support billings, also referred to as TCV billings, by adding the change in software and support deferred revenue (TCV deferred revenue), net of acquisitions, between the start and end of the period to software and support revenue (TCV revenue), recognized in the same period.

Software and support revenue and billings (TCV revenue and billings) include software and support, entitlements and other services revenue and billings.

ACV billings — We calculate ACV billings as the sum of the ACV for all contracts billed during the period.

Total billings —

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

Subscription billings —

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

ACV billings —

We calculate ACV billings as the sum of the ACV for all contracts billed during the period.

ACV is defined as the total annualized value of a contract, excluding amounts related to professional services and hardware.

We calculate the total annualized value for a contract by dividing the total value of the contract by the number of years in the term of the contract, using, where applicable, an assumed term of five years for contracts that do not have a specified term.

As there is no GAAP measure that is comparable to ACV billings, we have not reconciled ACV billings numbers to any GAAP measure.

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.

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.

NUTANIX, INC.

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

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.

As there is no GAAP measure that is comparable to run-rate ACV, we have not reconciled run-rate ACV numbers to any GAAP measure.

Adjusted gross profit and adjusted gross margin — We calculate adjusted gross margin as adjusted gross profit divided by total revenue.

Adjusted gross profit and adjusted gross margin —

We calculate adjusted gross margin as adjusted gross profit divided by total revenue.

We define adjusted gross profit as gross profit adjusted to exclude stock-based compensation expense, the amortization of acquired intangible assets and costs associated with other non-recurring transactions.

Our presentation of adjusted gross profit should not be construed as implying that our future results will not be affected by any recurring expenses or any unusual or non-recurring items that we exclude from our calculation of this non-GAAP financial measure.

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

Non-GAAP operating expenses — We define non-GAAP operating expenses as total operating expenses adjusted to exclude stock-based compensation expense, costs associated with business combinations, such as amortization of acquired intangible assets, revaluation of contingent consideration and other acquisition-related costs and costs associated with other non-recurring transactions.

Free cash flow —

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

Non-GAAP operating expenses —

We define non-GAAP operating expenses as total operating expenses adjusted to exclude stock-based compensation expense, costs associated with business combinations, such as amortization of acquired intangible assets, revaluation of contingent consideration and other acquisition-related costs and costs associated with other non-recurring transactions.

Our presentation of non-GAAP operating expenses should not be construed as implying that our future results will not be affected by any recurring expenses or any unusual or non-recurring items that we exclude from our calculation of this non-GAAP financial measure.

NUTANIX, INC.

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

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

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

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

Fiscal Year Ended July 31,

2018 2019 2020

(in thousands, except percentages)

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Total billings (non-GAAP)

Gross profit $ 769,427 $ 932,015 $ 1,020,993

Stock-based compensation

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Impairment of lease-related assets

Other — 163 —

Adjusted gross profit (non-GAAP)

Gross margin 66.6 % 75.4 % 78.1 %

Stock-based compensation

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Impairment of lease-related assets

Other — (204) (1,499)

Operating expenses (non-GAAP)

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Free cash flow (non-GAAP)

NUTANIX, INC.

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

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

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

Fiscal Year Ended July 31,

2018 2019 2020

(in thousands)

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Professional services billings

Software revenue $ 630,675 $ 727,098 $ 742,367

Hardware revenue 257,314 105,321 23,455

Product revenue 887,989 832,419 765,822

Support, entitlements and other services revenue 267,468 403,724 541,860

Total revenue $ 1,155,457 $ 1,236,143 $ 1,307,682

Software and support revenue (TCV revenue) (1)

$ 898,143 $ 1,130,822 $ 1,284,227

Change in software and support deferred revenue (TCV deferred revenue), net of acquisitions 262,027 278,517 272,410

Software and support billings (TCV billings) (1)

$ 1,160,170 $ 1,409,339 $ 1,556,637

(1) Software and support revenue and billings (TCV revenue and billings) include software and support, entitlements and other services revenue and billings.

NUTANIX, INC.

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

Factors Affecting Our Performance

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If we are unable to address these challenges, our business and operating results could be materially and adversely affected.

NUTANIX, INC.

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

Investment in Growth

We plan to, in the long term, invest in sales and marketing so that we can capitalize on our market opportunity, including growing our sales and marketing teams, continuing our focus on opportunities with major accounts and large deals, which we define as transactions over $500,000, expanding our focus on opportunities in commercial accounts, as well as other sales and marketing initiatives, such as demand generation spending to increase our pipeline growth.

Historically, we have significantly increased our sales and marketing personnel, which grew by approximately 17% from July 31, 2019 to July 31, 2020.

However, as discussed above in the section titled "Impact of the COVID-19 Pandemic," in response to the COVID-19 pandemic we have proactively taken steps to reduce our expenses and, as a result, our overall investments in growth and the size of our sales and marketing teams will fluctuate, and may decline, in the near term.

We continue to invest in our growth over the long-run, while improving our operating cash flow performance by focusing on go-to-market efficiencies.

By maintaining this balance, we believe we can drive toward our high growth potential without sacrificing our overall financial health.

We plan to invest in sales and marketing so that we can capitalize on our market opportunity, including investing in our sales and marketing teams, continuing our focus on opportunities with major accounts, large deals, and commercial accounts, as well as other sales and marketing initiatives to increase our pipeline growth.

As part of our overall efforts to improve our operating cash flow performance, we have also proactively taken steps to increase our go-to-market productivity and over time, we intend to reduce our overall sales and marketing spend as a percentage of revenue.

These measures include improving the efficiency of our demand generation spend, focusing on lower cost renewals, increasing leverage of our channel partners, and optimizing headcount in geographies based on market opportunities.

We have also recently seen higher than normal attrition among our sales representatives, and while we are actively recruiting additional sales representatives, it will take time to replace, train, and ramp them to full productivity.

As a result, our overall sales and marketing expense will fluctuate, and may decline, in the near term.

For example, we recently decreased our global headcount by 2.5%, primarily in sales and marketing, as part of our continued refinement of our go-to-market model.

We estimate, based on past experience, that our average sales team members typically become fully ramped up around the start of their fourth quarter of employment with us, and as our newer employees ramp up, we expect their increased productivity to contribute to our revenue growth.

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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, may further increase, potentially significantly, the time it takes for our sales team members to become fully productive.

Furthermore, the effects of the COVID-19 pandemic and the measures we have implemented in response, including postponing, cancelling or making virtual-only certain in-person corporate events at which our sales team members have historically received in-person sales enablement and related trainings, as well as some of the measures implemented as part of our overall efforts to improve our operating cash flow performance and the recent increase in attrition of sales representatives, may impact the productivity of our sales teams in the near-term.

We are focused on actively managing these realignments and potential effects.

We also intend, in the long term, to grow our global research and development and engineering teams to enhance our solutions, including our newer subscription-based products, improve integration with new and existing ecosystem partners and broaden the range of technologies and features available through our platform.

However, as discussed above in the section titled "Impact of the COVID-19 Pandemic," in response to the COVID-19 pandemic we have effected a global hiring pause outside of a small number of critical roles and, as a result, the overall growth in our global research and development and engineering teams will fluctuate, and may decline, from quarter to quarter in the near-term.

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.

NUTANIX, INC.

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

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

Transition to Subscription

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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 are beginning to compensate 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.

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 3 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K and "Critical Accounting Estimates" later in this "Management’s Discussion and Analysis of Financial Condition and Results of Operations" section.

For additional information on revenue recognition, see Note 2 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K and "Critical Accounting Estimates" later in this "Management’s Discussion and Analysis of Financial Condition and Results of Operations" section.

Market Adoption of Our Products

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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 ("HCI") 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.

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.

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Our business and operating results will be significantly affected by the degree to and speed with which organizations adopt our enterprise cloud platform.

NUTANIX, INC.

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

Leveraging Channel Partners and OEMs

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Our business and results of operations will be significantly affected by our success in leveraging and expanding our network of channel partners and OEMs.

NUTANIX, INC.

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

Customer Retention and Expansion

4 unchanged sentences

As of July 31, 2021, approximately 70% of our end customers who have been with us for 18 months or longer have made a repeat purchase, which is defined as any purchase activity, including renewals of term-based licenses or software entitlement and support subscription renewals, after the initial purchase.

Additionally, end customers who have been with us for 18 months or longer have total lifetime orders, including the initial order, in an amount that is more than 4.2x greater, or 4.6x greater excluding the value of hardware purchases, on average, than their initial order.

This number increases to approximately 12.4x, or 13.9x excluding hardware, on average, for Global 2000 end customers who have been with us for 18 months or longer as of July 31, 2020.

Additionally, end customers who have been with us for 18 months or longer have total lifetime orders, including the initial order, in an amount that is more than 6.3x greater, on average, than their initial order.

This number increases to approximately 16.4x, on average, for Global 2000 end customers who have been with us for 18 months or longer as of July 31, 2021.

These multiples exclude the effect of one end customer who had a very large and irregular purchase pattern that we believe is not representative of the purchase patterns of all of our other end customers.

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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.

needs and requirements, and optimally price our solutions in light of marketplace conditions, competition, our costs and customer demand.

Furthermore, our ongoing transition to a subscription-based business model may cause concerns among our customer base, including concerns regarding changes to pricing over time, and may also result in confusion among new and existing end customers, for example, regarding our pricing models.

Such concerns and/or confusion can slow adoption and renewal rates among our current and future customer base.

Therefore, as we continue our transition, we may need to enhance our efforts to educate our end customers and as a result incur higher sales and marketing costs.

Components of Our Results of Operations

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 is delivered or sold alongside configured-to-order appliances with a license term equal to the life of the associated appliance.

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.

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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 directly from Nutanix.

Our enterprise cloud platform is typically purchased with one or more years of support and entitlements, which includes the right to software upgrades and enhancements as well as technical support.

Our platform is primarily sold through channel partners, including distributors, resellers and OEMs.

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.

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

Configured-to-order appliances, including our Nutanix-branded NX hardware line, can be purchased from one of our channel partners, OEMs or in limited cases, directly from Nutanix.

Our platform is primarily sold through channel partners, including distributors, resellers and OEMs.

Product revenue —

Product revenue consists of software and hardware revenue.

A majority of our product revenue is generated from the sale of our enterprise cloud operating system.

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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 we deliver the hardware appliance, 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.

Support, entitlements and other services revenue —

We generate our support, entitlements and other services revenue primarily from software entitlement and support subscriptions, which include the right to software upgrades and enhancements as well as technical support.

The majority of our product sales are sold in conjunction with software entitlement and support subscriptions, with terms ranging from one to five years.

Occasionally, we also sell professional services with our products.

We recognize revenue from software entitlement and support contracts ratably over the contractual service period.

The service period typically commences upon transfer of control of the corresponding products to the customer.

We recognize revenue 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.

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.

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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.

NUTANIX, INC.

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

Sales and marketing —

Sales and marketing expense consists primarily of personnel costs.

Sales and marketing expense also includes sales commissions, costs for promotional activities and other marketing costs, travel costs and costs associated with demonstration units, including depreciation and allocated costs.

Commissions are deferred and recognized as we recognize the associated revenue.

We expect sales and marketing expense to continue, in the long term, to increase in absolute dollars as part of our long-term plans to increase the size of our global sales and marketing organizations.

However, as discussed above in the section titled "Impact of the COVID-19 Pandemic," in response to the COVID-19 pandemic we have proactively taken steps to reduce our expenses, including (i) effecting a global hiring pause outside of a small number of critical roles;

(ii) implementing travel restrictions prohibiting all non-essential business travel;

and (iii) postponing, cancelling, withdrawing from, or converting to virtual-only experiences (where possible and appropriate) our in-person sales and marketing events, including our 2020 .NEXT customer and partner events and our fiscal 2021 sales kick off.

We expect sales and marketing expense to continue, in the long term, to increase in absolute dollars as part of our long-term plans to invest in our growth.

However, as part of our overall efforts to improve our operating cash flow performance, we have also proactively taken steps to increase our go-to-market productivity and over time, we intend to reduce our overall sales and marketing spend as a percentage of revenue.

For example, we recently decreased our global headcount by 2.5%, primarily in sales and marketing, as part of our continued refinement of our go-to-market model.

As a result, our sales and marketing expense will fluctuate, and may decline, in the near-term.

Additionally, as we continue our transition to a subscription-based business model, we anticipate needing to adjust the compensation structure of our sales force, which may lead to fluctuations in our commissions expense and overall sales and marketing expense as a percentage of revenue and on an absolute basis.

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.

Additionally, given our transition to a subscription-based business model, including our continued emphasis on ACV, during the fiscal quarter ended October 31, 2020, we adjusted the compensation structure of our sales force, which has led to a higher proportion of commissions expense being deferred, and a decrease in commissions expense and overall sales and marketing expenses as a percentage of revenue and on an absolute basis, as compared to fiscal periods prior to October 31, 2020.

For additional information, refer to Note 2 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

Research and development —

Research and development ("R&D") expense consists primarily of personnel costs, as well as other direct and allocated costs.

We have devoted our product development efforts primarily to enhancing the functionality and expanding the capabilities of our solutions.

R&D costs are expensed as incurred.

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.

In addition, as discussed above in the section titled "Impact of the COVID-19 Pandemic," in response to the COVID-19 pandemic we have effected a global hiring pause outside of a small number of critical roles and, as a result, our R&D expense will fluctuate, and may decline, from quarter to quarter in the near-term.

General and administrative — General and administrative ("G&A") expense consists primarily of personnel costs, which include our executive, finance, human resources and legal organizations.

General and administrative —

General and administrative ("G&A") expense consists primarily of personnel costs, which include our executive, finance, human resources and legal organizations.

G&A expense also includes outside professional services, which consists primarily of legal, accounting and other consulting costs, as well as insurance and other costs associated with being a public company and allocated costs.

We expect G&A expense, in the long term, to increase in absolute dollars, particularly due to additional legal, accounting, insurance and other costs associated with our growth, although G&A expense may fluctuate as a percentage of total revenue and, on an absolute basis, from quarter to quarter.

In addition, as discussed above in the section titled "Impact of the COVID-19 Pandemic," in response to the COVID-19 pandemic we have effected a global hiring pause outside of a small number of critical roles and, as a result, our G&A expense will fluctuate, and may decline, from quarter to quarter in the near-term.

Other Income (Expense), Net

Other income (expense), net consists primarily of interest income and expense, which includes the amortization of the debt discount and issuance costs associated with our 0% Convertible Senior Notes, due in 2023 (the "2023 Notes"), interest income related to our short-term investments and foreign currency exchange gains or losses.

During fiscal 2019 and fiscal 2020, we recognized $29.3 million and $31.3 million, respectively, of interest expense related to the amortization of the debt discount and issuance costs associated with the 2023 Notes.

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

NUTANIX, INC.

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

Provision for Income Taxes

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The period-to-period comparison of results is not necessarily indicative of results for future periods.

NUTANIX, INC.

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

Fiscal Year Ended July 31,

2018 2019 2020

(in thousands)

Product $ 887,989 $ 832,419 $ 765,822

Support, entitlements and other services

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Product (1)(2)

276,127 143,078 71,312

Support, entitlements and other services (1)

109,903 161,050 215,377

Total cost of revenue

Gross profit 769,427 932,015 1,020,993

Operating expenses:

Sales and marketing (1)(2)

649,657 909,750 1,160,389

Research and development (1)

313,777 500,719 553,978

General and administrative (1)

86,401 119,587 135,547

Total operating expenses

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Loss before provision for income taxes

(289,714) (613,060) (855,221)

Provision for income taxes

Net loss $ (297,161) $ (621,179) $ (872,883)

(1) Includes stock-based compensation expense as follows:

Fiscal Year Ended July 31,

2018 2019 2020

(in thousands)

Cost of revenue:

Product $ 2,580 $ 3,535 $ 5,334

Support, entitlements and other services 8,945 15,326 22,014

Total cost of revenue 11,525 18,861 27,348

(1) Includes stock-based compensation expense as

Product cost of revenue

Support, entitlements and other services cost of revenue

Sales and marketing

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Total stock-based compensation expense

$ 177,868 $ 306,729 $ 351,998

(2) Includes amortization of intangible assets as follows:

Fiscal Year Ended July 31,

2018 2019 2020

(in thousands)

Product cost of revenue

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Total amortization of intangible assets

$ 6,555 $ 16,776 $ 17,380

NUTANIX, INC.

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

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

Fiscal Year Ended July 31,

2018 2019 2020

(as a percentage of total revenue)

Product 76.9 % 67.3 % 58.6 %

Support, entitlements and other services

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Cost of revenue:

Product 23.9 % 11.6 % 5.4 %

Support, entitlements and other services

Total cost of revenue

Gross profit 66.6 % 75.4 % 78.1 %

Operating expenses:

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Loss before provision for income taxes

(25.1) % (49.6) % (65.4) %

Provision for income taxes

Net loss (25.7) % (50.3) % (66.8) %

Fiscal Year Ended July 31, Change Fiscal Year Ended July 31, Change

2018 2019 $ % 2019 2020 $ %

Fiscal Year Ended

(in thousands, except percentages)

Product $ 887,989 $ 832,419 $ (55,570) (6) % $ 832,419 $ 765,822 $ (66,597) (8) %

Support, entitlements and other services

267,468 403,724 136,256 51 % 403,724 541,860 138,136 34 %

Support, entitlements

and other services

Total revenue

Total revenue by bill-to-location was as follows:

Fiscal Year Ended July 31, Change Fiscal Year Ended July 31, Change

2018 2019 $ % 2019 2020 $ %

Fiscal Year Ended

(in thousands, except percentages)

$ 648,805 $ 682,340 $ 33,535 5 % $ 682,340 $ 706,110 $ 23,770 3 %

240,247 271,712 31,465 13 % 271,712 265,092 (6,620) (2) %

Europe, the Middle East and Africa

224,392 238,356 13,964 6 % 238,356 277,489 39,133 16 %

Europe, the Middle

East and Africa

Other Americas

Total revenue

NUTANIX, INC.

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

Product revenue decreased year-over-year for fiscal 2019 and fiscal 2020 due primarily to the decrease in hardware revenue, as more and more customers are purchasing hardware directly from our OEMs.

In addition, our product revenue has been impacted by our continued transition to selling subscription term-based licenses, as these licenses generally have had an average term of approximately four years, while those with a duration equal to the life of the associated appliance have an estimated life of approximately five years.

Product revenue decreased year-over-year for both fiscal 2020 and fiscal 2021 due primarily to our continued transition to selling subscription term-based licenses, as these licenses generally have a shorter average term than those that can be used over the life of the associated appliance.

The decrease in product revenue was also impacted by a decrease in hardware revenue, as more customers are purchasing hardware directly from our OEMs.

The total average contract term was approximately 4.1 years, 3.8 years and 3.4 years for fiscal 2019, 2020 and 2021, respectively.

Total average contract term represents the dollar-weighted term across all subscription and life-of-device contracts billed during the period, using an assumed term of five years for licenses without a specified term, such as life-of-device licenses.

NUTANIX, INC.

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

Support, entitlements and other services revenue increased year-over-year for both fiscal 2020 and fiscal 2021 in conjunction with the growth of our end customer base and the related software entitlement and support subscription contracts.

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Cost of Revenue and Gross Margin

Fiscal Year Ended July 31, Change Fiscal Year Ended July 31, Change

2018 2019 $ % 2019 2020 $ %

Fiscal Year Ended

(in thousands, except percentages)

Cost of product revenue

$ 276,127 $ 143,078 $ (133,049) (48) % $ 143,078 $ 71,312 $ (71,766) (50) %

Product gross margin

Cost of support, entitlements and other services revenue

$ 109,903 $ 161,050 $ 51,147 47 % $ 161,050 $ 215,377 $ 54,327 34 %

Support, entitlements and other services gross margin

58.9 % 60.1 % 60.1 % 60.3 %

Cost of support,

entitlements and

other services revenue

Support, entitlements

and other services

Total gross margin

66.6 % 75.4 % 75.4 % 78.1 %

Cost of product revenue

The year-over-year fluctuations in cost of product revenue are in line with the corresponding fluctuations in hardware revenue.

For fiscal 2019 and fiscal 2020, as compared to the respective prior year periods, the decreases in cost of product revenue were due primarily to the decreases in hardware revenue, as more and more customers are purchasing hardware directly from our OEMs.

Product gross margin increased by 13.9 percentage points, from 68.9% in fiscal 2018 to 82.8% in fiscal 2019, and by 7.9 percentage points, to 90.7% in fiscal 2020, due primarily to the higher mix of software revenue, as we continued to focus on more software-only transactions.

Cost of product revenue decreased year-over-year for both fiscal 2020 and fiscal 2021 due primarily to the decreases in hardware revenue resulting from our continued focus on more software-only transactions.

Product gross margin increased by 7.9 percentage points, from 82.8% in fiscal 2019 to 90.7% in fiscal 2020, and by 1.5 percentage points, to 92.2% in fiscal 2021, due primarily to the higher mix of software revenue, as we continued to focus on more software-only transactions, which have a higher margin as compared to hardware sales.

Cost of support, entitlements and other services revenue

Cost of support, entitlements and other services revenue increased year-over-year for both fiscal 2019 and fiscal 2020 due primarily to higher personnel-related costs, relating to growth in our global customer support organization, and other costs associated with supporting our growing end customer base.

The increases in personnel-related costs were driven primarily by increases in our customer support, entitlements and other services headcount of 40% from July 31, 2018 to July 31, 2019 and 19% from July 31, 2019 to July 31, 2020.

Support, entitlements and other services gross margin increased by 1.2 percentage points, from 58.9% in fiscal 2018 to 60.1% in fiscal 2019, and by 0.2 percentage points to 60.3% in fiscal 2020, due primarily to personnel-related costs growing at a slower rate than support, entitlements and other services revenue.

NUTANIX, INC.

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

Cost of support, entitlements and other services revenue increased year-over-year for both fiscal 2020 and fiscal 2021 due primarily to higher personnel-related costs, resulting from growth in our global customer support organization, as well as higher outside services costs.

The increases in personnel-related costs were driven by increases in our customer support, entitlements and other services headcount of 19% from July 31, 2019 to July 31, 2020 and 3% from July 31, 2020 to July 31, 2021.

Support, entitlements and other services gross margin increased by 0.2 percentage points, from 60.1% in fiscal 2019 to 60.3% in fiscal 2020, and by 5.3 percentage points to 65.6% in fiscal 2021, due primarily to support, entitlements and other services revenue growing at a higher rate than personnel-related costs.

Operating Expenses

Sales and marketing

Fiscal Year Ended July 31, Change Fiscal Year Ended July 31, Change

2018 2019 $ % 2019 2020 $ %

Fiscal Year Ended

(in thousands, except percentages)

Sales and marketing

$ 649,657 $ 909,750 $ 260,093 40 % $ 909,750 $ 1,160,389 $ 250,639 28 %

Percent of total revenue

56.2 % 73.6 % 73.6 % 88.7 %

Sales and marketing expense increased year-over-year both for fiscal 2019 and fiscal 2020 due primarily to higher personnel-related costs and sales commissions, as our sales and marketing headcount increased year-over-year by 36% in fiscal 2019 and 17% in fiscal 2020, as well as increased sales and marketing activities related to demand generation, brand awareness, promotions, trade shows and partner programs as part of our efforts to penetrate and expand in global markets.

NUTANIX, INC.

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

Sales and marketing expense increased year-over-year for fiscal 2020 due primarily to higher personnel-related costs and sales commissions, as our sales and marketing headcount increased year-over-year by 17% in fiscal 2020, as well as increased sales and marketing activities related to demand generation, brand awareness, promotions, trade shows and partner programs as part of our efforts to penetrate and expand in global markets.

Sales and marketing expense decreased year-over-year for fiscal 2021 due primarily to lower marketing costs, travel and entertainment expenses and personnel-related costs as a result of the COVID-19 pandemic, as discussed in the "Impact of the COVID-19 Pandemic" section above.

In addition, the decrease in sales and marketing expense was aided by the changes to our sales compensation plans beginning in fiscal 2021, resulting from our transition to a subscription-based business model, including our continued emphasis on ACV, which resulted in more expense being deferred to later periods.

Research and development

Fiscal Year Ended July 31, Change Fiscal Year Ended July 31, Change

2018 2019 $ % 2019 2020 $ %

Fiscal Year Ended

(in thousands, except percentages)

Research and development

$ 313,777 $ 500,719 $ 186,942 60 % $ 500,719 $ 553,978 $ 53,259 11 %

Percent of total revenue

27.2 % 40.5 % 40.5 % 42.4 %

Research and development expense increased year-over-year both for fiscal 2019 and fiscal 2020 due primarily to higher personnel-related costs, including stock-based compensation expense, as our R&D headcount increased year-over-year by 27% in fiscal 2019 and 13% in fiscal 2020 in an effort to continue the expansion of our product development activities, including new products.

For fiscal 2019, this increase includes additional headcount and stock-based compensation expense related to employees who joined the Company through acquisitions.

Research and development expense increased year-over-year for fiscal 2020 due primarily to higher personnel-related costs, as our R&D headcount increased year-over-year by 13% in fiscal 2020 in an effort to continue the expansion of our product development activities.

Research and development expense remained relatively flat for fiscal 2021, as we continued to focus on innovation, while managing the impact of the COVID-19 pandemic, as discussed in the "Impact of the COVID-19 Pandemic" section above.

General and administrative

Fiscal Year Ended July 31, Change Fiscal Year Ended July 31, Change

2018 2019 $ % 2019 2020 $ %

Fiscal Year Ended

(in thousands, except percentages)

General and administrative

$ 86,401 $ 119,587 $ 33,186 38 % $ 119,587 $ 135,547 $ 15,960 13 %

Percent of total revenue

7.5 % 9.7 % 9.7 % 10.4 %

General and administrative expense increased year-over-year both for fiscal 2019 and fiscal 2020 due primarily to higher personnel-related costs, including stock-based compensation expense, as our G&A headcount increased year-over-year by 30% in fiscal 2019 and 10% in fiscal 2020 in order to support our growing business.

The increase in G&A expense was also impacted by higher depreciation and legal and outside services costs, in line with the general growth of the business.

General and administrative expense increased year-over-year for fiscal 2020 due primarily to increases in personnel-related expenses, resulting from growth in our G&A headcount, which increased by 10% year-over-year.

General and administrative expense increased year-over-year for fiscal 2021 due primarily to increases in stock-based compensation expense and other personnel-related costs, partially offset by the impact of our response to the COVID-19 pandemic, as discussed in the "Impact of the COVID-19 Pandemic" section above, as well as lower outside services costs.

NUTANIX, INC.

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

Other Expense, Net

Fiscal Year Ended July 31, Change Fiscal Year Ended July 31, Change

2018 2019 $ % 2019 2020 $ %

Fiscal Year Ended

(in thousands, except percentages)

Interest income, net

Change in fair value of

derivative liability

Amortization of debt

discount and issuance

costs and non-cash

interest expense

Other expense, net

The increase in other expense, net for fiscal 2019 was due primarily to interest expense associated with the amortization of the debt discount and issuance costs for the 2023 Notes, as the 2023 Notes were issued during the second quarter of fiscal 2018, partially offset by interest earned on short-term investments.

NUTANIX, INC.

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

The increase in other expense, net for fiscal 2020 was due primarily to higher foreign currency losses, primarily related to operating expenses denominated in foreign currencies and our increasing foreign business.

The increase in other expense, net was also impacted by lower interest income due primarily to sales of investments during fiscal 2020.

The increase in other expense, net for fiscal 2021 was due primarily to additional expense resulting from the new 2026 Notes, including the change in the fair value of the derivative liability and interest expense associated with the amortization of the debt discount and issuance costs for the 2026 Notes.

Provision for Income Taxes

Fiscal Year Ended July 31, Change Fiscal Year Ended July 31, Change

2018 2019 $ % 2019 2020 $ %

Fiscal Year Ended

(in thousands, except percentages)

Provision for income taxes

$ 7,447 $ 8,119 $ 672 9 % $ 8,119 $ 17,662 $ 9,543 118 %

The year-over-year increase in the provision for income taxes in fiscal 2020 and fiscal 2021 was due primarily to higher foreign taxes as a result of higher taxable earnings in foreign jurisdictions, as we continued our global expansion.

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For additional information, see Note 5 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

NUTANIX, INC.

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

In August 2020, we entered into an investment agreement with BCPE Nucleon (DE) SVP, LP, an entity affiliated with Bain Capital, LP ("Bain") relating to the issuance and sale to Bain of $750.0 million in aggregate principal amount of 2.50% convertible senior notes due 2026.

For additional information, see Note 5 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

Due to investments in our business as well as the potential cash flow impacts resulting from our continued transition to a subscription-based business model, we expect our operating and free cash flow to continue to be negative during the next 12 months.

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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.

On August 26, 2020, we entered into an investment agreement (the "Investment Agreement") with BCPE Nucleon (DE) SPV, LP ("Bain") relating to the issuance and sale to Bain of $750 million in an initial aggregate principal amount of 2.5% Convertible Senior Notes due 2026.

The transactions contemplated by the Investment Agreement are expected to close on or prior to September 24, 2020, subject to satisfaction of the customary closing conditions set forth in the Investment Agreement.

For additional details, refer to Note 15 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

NUTANIX, INC.

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

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

Fiscal Year Ended July 31,

2018 2019 2020

(in thousands)

Net cash provided by (used in) operating activities

$ 92,540 $ 42,168 $ (159,885)

Net cash (used in) provided by investing activities

Net cash provided by financing activities

578,616 67,104 57,797

Net increase (decrease) in cash, cash equivalents and restricted cash

$ 167,601 $ 92,422 $ (77,529)

We retrospectively adopted Accounting Standards Update ("ASU") 2016-18, Statement of Cash Flows (Topic 230):

Restricted Cash, which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents, effective August 1, 2018.

Our statement of cash flows for the fiscal year ended July 31, 2018 has been adjusted to conform to the new standard.

Cash Flows from Operating Activities

Net cash generated from operating activities was $92.5 million and $42.2 million and net cash used in operating activities was $159.9 million for fiscal 2018, 2019 and 2020, respectively, representing an increase of $77.8 million and decreases of $50.4 million and $202.1 million, respectively, as compared to the respective prior year periods.

The generation of cash during fiscal 2018 and 2019 was due primarily to increasing billings and collections, partially offset by higher operating expenses as we continue to invest in the long-term growth of our business.

The use of cash during fiscal 2020 was due primarily to our higher net loss from operations.

Net cash generated from operating activities was $42.2 million for fiscal 2019 and net cash used in operating activities was $159.9 million and $99.8 million for fiscal 2020 and 2021, respectively, representing decreases of $50.4 million and $202.1 million and an increase of $60.1 million, respectively, as compared to the respective prior year periods.

The decreases in cash generated from operating activities during fiscal 2019 and 2020 were due primarily to our increasing net loss from operations.

The increase in cash generated from operating activities for fiscal 2021 was due primarily to a decrease in our net loss from operations.

Cash Flows from Investing Activities

Net cash used in investing activities of $503.6 million for fiscal 2018 primarily consisted of $716.4 million of short-term investment purchases, using a significant portion of the proceeds from the 2023 Notes, $62.4 million of purchases of property and equipment and $22.2 million of net payments for business combinations, partially offset by $297.5 million of maturities of short-term investments.

Net cash used in investing activities of $16.9 million for fiscal 2019 primarily consisted of $468.1 million of short-term investment purchases, $118.5 million of purchases of property and equipment and $19.0 million of net payments for business combinations, partially offset by $588.8 million of maturities of short-term investments.

Net cash provided by investing activities of $24.6 million for fiscal 2020 primarily consisted of $645.8 million of maturities of short-term investments and $75.4 million of sales of short-term investments, partially offset by $607.2 million of short-term investment purchases and $89.5 million of purchases of property and equipment.

Net cash used in investing activities of $16.9 million for fiscal 2019 consisted of $468.1 million of short-term investment purchases, $118.5 million of purchases of property and equipment and $19.0 million of net payments for business combinations, partially offset by $588.8 million of maturities of short-term investments.

Net cash provided by investing activities of $24.6 million for fiscal 2020 consisted of $645.8 million of maturities of short-term investments and $75.4 million of sales of short-term investments, partially offset by $607.2 million of short-term investment purchases and $89.5 million of purchases of property and equipment.

Net cash used in investing activities of $597.2 million for fiscal 2021 consisted of $1.4 billion of short-term investment purchases and $58.6 million of purchases of property and equipment, partially offset by $784.2 million of maturities of short-term investments and $70.1 million of sales of short-term investments.

NUTANIX, INC.

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

Cash Flows from Financing Activities

Net cash provided by financing activities of $578.6 million for fiscal 2018 primarily consisted of $563.6 million of net proceeds from the 2023 Notes, after deducting the initial purchasers' discount and debt issuance costs, $88.0 million of proceeds from the sale of the warrants in connection with the 2023 Notes and $72.0 million of net proceeds from the sale of shares through employee equity incentive plans, partially offset by $143.2 million of cash used to purchase bond hedges in connection with the 2023 Notes and a $1.7 million debt payment in conjunction with a business combination.

Net cash provided by financing activities of $67.1 million for fiscal 2019 primarily consisted of $69.2 million of net proceeds from the sale of shares through employee equity incentive plans, partially offset by a $1.0 million acquisition-related contingent consideration payment and a $1.0 million debt payment in conjunction with a business combination.

NUTANIX, INC.

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

Net cash provided by financing activities of $57.8 million for fiscal 2020 consisted of proceeds from the sale of shares through employee equity incentive plans.

Net cash provided by financing activities of $663.8 million for fiscal 2021 consisted of $723.6 million of proceeds from the issuance of the 2026 Notes, net of issuance costs, and $65.8 million of proceeds from the sale of shares through employee equity incentive plans, partially offset by $125.1 million of repurchases of our Class A common stock and $0.5 million of payments for finance leases.

Contractual Obligations

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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)

$ 575,000 $ — $ 575,000 $ — $ —

Principal amount payable on convertible

senior notes (1)

Paid-in-kind interest on convertible senior

Operating leases (undiscounted basis) (2)

182,585 46,007 94,272 38,113 4,193

Other commitments (3)

62,453 59,722 2,131 600 —

Guarantees with OEMs

81,215 51,215 30,000 — —

Total $ 901,253 $ 156,944 $ 701,403 $ 38,713 $ 4,193

(1) For additional information regarding our convertible senior notes, refer to Note 5 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

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Uncertain tax positions are further discussed in Note 11 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

NUTANIX, INC.

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

Off-Balance Sheet Arrangements

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The critical accounting estimates, assumptions and judgments that we believe have the most significant impact on our consolidated financial statements are described below.

NUTANIX, INC.

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

Revenue Recognition

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Refer to Note 1 and Note 2 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional information on revenue recognition.

The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns.

NUTANIX, INC.

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

We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.

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The fair value of stock options and RSUs is recognized as expense on a straight-line basis over the requisite service period, which is generally four years.

For stock-based awards granted to employees with a performance condition, we recognize stock-based compensation expense using the accelerated attribution method over the requisite service period when management determines it is probable that the performance condition will be satisfied.

For stock-based awards granted to employees with a performance condition, we recognize stock-based compensation expense using the graded vesting attribution method over the requisite service period when management determines it is probable that the performance condition will be satisfied.

The fair value of the 2016 ESPP purchase rights is recognized as expense on a straight-line basis over the offering period.

1 unchanged sentence

Our use of the Black-Scholes option pricing model requires the input of highly subjective assumptions, including the fair value of the underlying common stock, expected term of the option, expected volatility of the price of our common stock, risk-free interest rates and the expected dividend yield of our common stock.

The assumptions used in our option pricing model represent management’s best estimates.

These estimates involve inherent uncertainties and the application of management’s judgment.

The assumptions used in our option pricing model represent management’s best estimates.

These estimates involve inherent uncertainties and the application of management’s judgment.

If factors change and different assumptions are used, our stock-based compensation expense could be materially different in the future.

Derivative Liability

We evaluate convertible notes or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under the relevant sections of Accounting Standards Codification ("ASC") 815-40, Derivatives and Hedging:

Contracts in Entity’s Own Equity.

The result of this accounting guidance could result in the fair value of a financial instrument being classified as a derivative instrument and recorded at fair market value at each balance sheet date and recorded as a liability.

In the event that the fair value is recorded as a liability, the change in fair value is recorded in the consolidated statements of operations as other income or other expense.

Once the criteria for conversion is fixed, the derivative instrument is marked to fair value and reclassified to equity.

NUTANIX, INC.

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

Business Combinations

We account for our acquisitions using the acquisition method.

Goodwill is measured at the acquisition date as the excess of the purchase price over the fair value of the assets acquired and liabilities assumed.

Significant estimates and assumptions are made by management to value such assets and liabilities.

Although we believe that those estimates and assumptions are reasonable and appropriate, they are inherently uncertain and subject to refinement.

Additional information related to the acquisition date fair value of acquired assets and assumed liabilities obtained during the measurement period, not to exceed one year, may result in changes to the recorded values of such assets and liabilities, resulting in an offsetting adjustment to the goodwill associated with the business acquired.

Uncertain tax positions and tax-related valuation allowances are initially established in connection with a business combination as of the acquisition date.

We continue to collect information and reevaluate these estimates and assumptions quarterly.

We will record any adjustments to our preliminary estimates to goodwill, provided that we are within the one-year measurement period.

Any contingent consideration payable is recognized at fair value at the acquisition date.

Liability-classified contingent consideration is remeasured each reporting period, with changes in fair value recognized in earnings until the contingent consideration is settled.

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

We use the binomial model to estimate the fair value of the embedded derivative at each period-end.

Our use of the binomial model requires the input of highly subjective assumptions, including expected volatility of our common stock, risk-free interest rates, and estimated conversion price ratios based on forecasted financial metrics.

The assumptions used in the binomial model represent management best estimates.

These estimates involve inherent uncertainties and the application of management’s judgment.

If factors change and different assumptions are used, the fair value of the embedded derivative liability could be materially different in the future.

As a result of our early adoption of Accounting Standards Update ("ASU") 2020-06 on August 1, 2021, and once the conversion price of the convertible notes becomes fixed in September 2021, the embedded conversion option will no longer require bifurcation.

Once the conversion price becomes fixed, the derivative liability will be marked to fair value and reclassified to equity within the consolidated balance sheet.

For additional details on our adoption of ASU 2020-06, refer to Note 1 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

Goodwill, Intangible Assets and Impairment Assessment

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis