Nutanix, Inc. 10-K

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition, results of operations and cash flows should be read in conjunction with the consolidated financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K. The last day of our fiscal year is July 31. Our fiscal quarters end on October 31, January 31, April 30 and July 31. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under "Risk Factors" or in other parts of this Annual Report on Form 10-K. See also "Special Note Regarding Forward-Looking Statements" above. Overview Nutanix, Inc. ("we," "us," "our" or "Nutanix") provides a leading enterprise cloud platform, which we call the Nutanix Cloud Platform, that consists of software solutions and cloud services that power our customers’ enterprise infrastructure. Our solutions deliver a consistent cloud operating model across edge, private-, hybrid- and multicloud environments for all applications and their data. Our solutions allow organizations to simply move their workloads, including enterprise applications, high-performance databases, end-user computing and virtual desktop infrastructure ("VDI") services, container-based modern applications, and analytics applications, between on-premises and public clouds. Our goal is to provide a single, simple, open software platform for all hybrid and multicloud applications and their data. The Nutanix Cloud Platform can be deployed on-premises at the edge or in data centers, running on a variety of qualified hardware platforms, in popular public cloud environments such as AWS (currently generally available) and Microsoft Azure (currently in public preview and expected to become generally available in the future) through Nutanix Cloud Clusters, or, in the case of our cloud-based software and software-as-a-service ("SaaS") offerings, via hosted service. Non-portable software licenses for our platform are delivered or sold alongside configured-to-order appliances, with a license term equal to the life of the associated appliance. Our subscription term-based licenses are sold separately, or can also be sold alongside configured-to-order appliances. Our subscription term-based licenses typically have terms ranging from one to five years. Our cloud-based SaaS subscriptions have terms extending up to five years. Configured-to-order appliances, including 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. Purchases of term-based licenses and SaaS subscriptions have support and entitlements included within the subscription fees and are not sold separately. Purchases of non-portable software are typically accompanied by the purchase of separate support and entitlements. 63 Table of Contents NUTANIX, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Product revenue is generated primarily from the licensing of our solutions. Support, entitlements and other services revenue is primarily derived from the related support and maintenance contracts. Prior to fiscal 2019, we delivered most of our solutions on an appliance, thus our revenue included the revenue associated with the appliance and the included non-portable software, which lasts for the life of the associated appliance. However, starting in fiscal 2018, as a result of our business model transition toward software-only sales, more of our customers began buying appliances directly from our OEMs while separately buying licenses for our software solutions from us or one of our channel partners. In addition, starting in fiscal 2019, as a result of our transition towards a subscription-based business model, more of our customers began purchasing separately sold subscription term-based licenses that could be deployed on a variety of hardware platforms. As we continue our transition to a subscription-based business model, we expect a greater portion of our products to be delivered through subscription term-based licenses or cloud-based SaaS subscriptions. We had a broad and diverse base of over 22,000 end customers as of July 31, 2022, including approximately 980 Global 2000 enterprises. We define the number of end customers as the number of end customers for which we have received an order by the last day of the period, excluding partners to which we have sold products for their own demonstration purposes. A single organization or customer may represent multiple end customers for separate divisions, segments, or subsidiaries, and the total number of end customers may contract due to mergers, acquisitions, or other consolidation among existing end customers. Our solutions are primarily sold through channel partners and OEMs and delivered directly to our end customers. Our solutions serve a broad range of workloads, including enterprise applications, databases, virtual desktop infrastructure, unified communications and big data analytics, and we support both virtualized and container-based applications. We have end customers across a broad range of industries, such as automotive, consumer goods, education, energy, financial services, healthcare, manufacturing, media, public sector, retail, technology, and telecommunications. We also sell to service providers, who utilize our enterprise cloud platform to provide a variety of cloud-based services to their customers. We continue to invest in the growth of our business over the long-run, including the development of our solutions and investing in sales and marketing to capitalize on our market opportunities, while improving our operating cash flow performance by focusing on go-to-market efficiencies. By maintaining this balance, we believe we can drive toward profitable growth. As discussed further in the "Impact of the COVID-19 Pandemic" and "Factors Affecting Our Performance" sections below, both in response to the ongoing and evolving COVID-19 pandemic and as part of our overall efforts to improve our operating cash flow performance, we have proactively taken steps to manage our expenses. As a result, our overall spending on such efforts will fluctuate, and may decline, from quarter to quarter in the near term. 64 Table of Contents NUTANIX, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Impact of the COVID-19 Pandemic The ongoing and evolving pandemic caused by the COVID-19 virus (collectively with any variants or related strains thereof, "COVID-19" and the ongoing pandemic caused thereby, the "COVID-19 pandemic") significantly curtailed the movement of people, goods and services worldwide, imposed unprecedented strains on governments, health care systems, educational institutions, businesses and individuals around the world, including in nearly all of the regions in which we operate, and has resulted in significant volatility and uncertainty in the global economy. In response to the pandemic, authorities, businesses, and individuals implemented numerous unprecedented measures, including travel bans and restrictions, quarantines, shelter-in-place, stay-at-home, remote work and social distancing orders, and shutdowns. Even as efforts to contain the pandemic have made progress and some restrictions have relaxed, new variants of the virus have caused additional outbreaks. The COVID-19 pandemic has impacted and may continue to impact our workforce and operations, as well as those of our customers, vendors, suppliers, partners, and communities, and there is substantial uncertainty in the nature and degree of its continued effects over time. In response to the COVID-19 pandemic, we took a number of actions to protect and assist our employees, customers, and partners, including: temporarily closing all of our offices (including our California headquarters) around the world; encouraging our employees to work remotely; implementing travel restrictions that allow only the most essential business travel; and postponing, cancelling, withdrawing from, or converting to virtual-only experiences (where possible and appropriate) our in-person customer, industry, analyst, investor, and employee events. While we have generally reopened our offices around the world, for so long as the pandemic continues, our employees may continue to be exposed to health and safety risks, and governmental protocols may require us to again close those offices that have since been reopened. The COVID-19 pandemic and the measures taken in response to the pandemic, including our own measures, have already caused, and may continue to cause, various adverse effects on the global economy and our business, including: curtailed demand for certain of our solutions; reduced IT spending; delays in or abandonment of planned or future purchases; lengthened sales cycles, particularly with new customers and partners who do not have prior experience with our solutions; supply chain disruptions; increased cybersecurity risks or other security challenges; delays or disruptions to our product roadmap and our ability to deliver new products, features, or enhancements; and voluntary and involuntary delays in the ability to ship, and the ability of our end customers to accept delivery of, the hardware platforms on which our software solutions run. Reduced manufacturing capacity caused by the pandemic, together with measures taken in response to the pandemic, have led to increased supply chain challenges with increased hardware supply chain delays resulting in an increasing percentage of orders having start dates in future quarters and certain customers delaying their purchase of our software pending availability of the hardware on which our software runs. Travel bans, shutdowns, social distancing restrictions and remote work policies also make it difficult or impossible to deliver on-site services to our partners and end customers, and to meet with our current and potential end customers in person. We have also seen positive impacts, including increased demand for our virtual desktop, desktop-as-a-service, and end-user computing solutions as a result of our end customers enabling their employees to work remotely. 65 Table of Contents NUTANIX, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) We have also quickly adapted to the new work environment, leveraging digital, video, and other collaborative tools to enable our teams to stay connected with each other, and our sales, marketing and support teams to continue to engage with and remain responsive to our partners and end customers. Additionally, we have seen a reduction in our operating expenses in recent quarters, including sales and marketing expenses, some of which is due to a number of proactive actions that we took to manage our operating expenses in light of the uncertainty caused by the COVID-19 pandemic, and some of which is a natural result of the continued restrictions on travel and in-person events from the pandemic. Although the full impact of these actions is uncertain, some of these cost savings measures are temporary. While we do expect to see some of our operating expenses increase from the suppressed levels in recent quarters as some of the proactive cost savings measures expire and some level of travel and other related expenses return, we are focused on improving our operating cash flow performance and we do not expect that travel or other related expenses will return to pre-pandemic levels. See the section titled "Risk Factors" for further discussion of the possible impact of these actions on our business and financial performance. The duration, scope and ultimate impact of the COVID-19 pandemic on the global economy and our business remain highly fluid and cannot be predicted with certainty, and the full effect of the pandemic and the actions we have taken in response may not be fully reflected in our results of operations and financial performance until future periods. Our management team is focused on guiding our company through the challenges presented by COVID-19 and remains committed to driving positive business outcomes. Although we do not currently expect the pandemic to affect our financial reporting systems, internal control over financial reporting or disclosure controls and procedures, the continued impact of the pandemic on our business and financial performance will be highly dependent upon numerous factors, many of which are beyond our control. See the section titled "Risk Factors" for further discussion of the possible impact of the COVID-19 pandemic, as well as the actions we have taken in response, on our business and financial performance. 66 Table of Contents NUTANIX, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Key Financial and Performance Metrics We monitor the following key financial and performance metrics: As of and for the Fiscal Year Ended July 31, 2020 2021 2022 (in thousands, except percentages and end customer count) Total revenue $ 1,307,682 $ 1,394,364 $ 1,580,796 Year-over-year percentage increase 5.8 % 6.6 % 13.4 % Subscription revenue $ 1,030,180 $ 1,243,621 $ 1,433,773 Total billings $ 1,580,092 $ 1,521,096 $ 1,708,641 Subscription billings $ 1,276,413 $ 1,354,155 $ 1,563,560 Annual contract value ("ACV") billings $ 505,179 $ 594,292 $ 756,326 Annual recurring revenue ("ARR") $ 481,250 $ 878,733 $ 1,202,438 Run-rate ACV $ 1,219,965 $ 1,535,360 $ 1,797,423 Gross profit $ 1,020,993 $ 1,102,458 $ 1,259,640 Non-GAAP gross profit $ 1,063,655 $ 1,147,730 $ 1,311,662 Gross margin 78.1 % 79.1 % 79.7 % Non-GAAP gross margin 81.3 % 82.3 % 83.0 % Operating expenses $ 1,849,914 $ 1,763,240 $ 1,717,084 Non-GAAP operating expenses $ 1,518,697 $ 1,428,760 $ 1,397,473 Total deferred revenue $ 1,183,441 $ 1,312,923 $ 1,445,538 Net cash (used in) provided by operating activities $ (159,885 ) $ (99,810 ) $ 67,543 Free cash flow $ (249,373 ) $ (158,457 ) $ 18,485 Total end customers (1) 17,360 20,130 22,600 (1) The total end customer count reflects standard adjustments/consolidation to certain customer accounts within our system of record and is rounded to the nearest 10. Disaggregation of Revenue and Billings The following table depicts the disaggregation of revenue and billings by type, consistent with how we evaluate our financial performance: Fiscal Year Ended July 31, 2020 2021 2022 (in thousands) Disaggregation of revenue: Subscription revenue $ 1,030,180 $ 1,243,621 $ 1,433,773 Non-portable software revenue 208,158 71,390 49,694 Hardware revenue 23,455 6,259 5,585 Professional services revenue 45,889 73,094 91,744 Total revenue $ 1,307,682 $ 1,394,364 $ 1,580,796 Disaggregation of billings: Subscription billings $ 1,276,413 $ 1,354,155 $ 1,563,560 Non-portable software billings 208,158 71,390 49,694 Hardware billings 23,455 6,259 5,585 Professional services billings 72,066 89,292 89,802 Total billings $ 1,580,092 $ 1,521,096 $ 1,708,641 67 Table of Contents NUTANIX, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Subscription revenue — Subscription revenue includes any performance obligation which has a defined term and is generated from the sales of software entitlement and support subscriptions, subscription software licenses and cloud-based software as a service offerings. • Ratable — We recognize revenue from software entitlement and support subscriptions and SaaS offerings ratably over the contractual service period, the substantial majority of which relate to software entitlement and support subscriptions. These offerings represented approximately $508.8 million, $639.3 million and $770.4 million of our subscription revenue for fiscal 2020, 2021 and 2022, respectively. • Upfront — Revenue from our subscription software licenses is generally recognized upfront upon transfer of control to the customer, which happens when we make the software available to the customer. These subscription software licenses represented approximately $521.3 million, $604.3 million and $663.4 million of our subscription revenue for fiscal 2020, 2021 and 2022, respectively. Non-portable software revenue — Non-portable software revenue includes sales of our enterprise cloud platform when delivered on a configured-to-order appliance by us or one of our OEM partners. The software licenses associated with these sales are typically non-portable and can be used over the life of the appliance on which the software is delivered. Revenue from our non-portable software products is generally recognized upon transfer of control to the customer. Hardware revenue — In transactions where the hardware appliance is purchased directly from Nutanix, we consider ourselves to be the principal in the transaction and we record revenue and costs of goods sold on a gross basis. We consider the amount allocated to hardware revenue to be equivalent to the cost of the hardware procured. Hardware revenue is generally recognized upon transfer of control to the customer. Professional services revenue — We also sell professional services with our products. We recognize revenue related to professional services as they are performed. Non-GAAP Financial Measures and Key Performance Measures We regularly monitor total billings, subscription billings, ACV billings, ARR, run-rate ACV, non-GAAP gross profit, non-GAAP gross margin, non-GAAP operating expenses, free cash flow, and total end customers, which are non-GAAP financial measures and key performance measures, to help us evaluate our growth and operational efficiencies, measure our performance, identify trends in our sales activity and establish our budgets. We evaluate these measures because they: • are used by management and the Board of Directors to understand and evaluate our performance and trends, as well as to provide a useful measure for period-to-period comparisons of our core business, particularly as we progress through our transition to a subscription-based business model; • are widely used as a measure of financial performance to understand and evaluate companies in our industry; and • are used by management to prepare and approve our annual budget and to develop short-term and long-term operational and compensation plans, as well as to assess our actual performance against our goals. 68 Table of Contents NUTANIX, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Total billings is a performance measure which we believe provides useful information to our management and investors, as it represents the dollar value under binding purchase orders received and billed during a given period. Subscription billings is a performance measure that we believe provides useful information to our management and investors as it allows us to better track the growth of the subscription-based portion of our business, which is a critical part of our business plan. ACV billings and run-rate ACV are performance measures that we believe provide useful information to our management and investors as they allow us to better track the topline growth of our business during our transition to a subscription-based business model because they take into account variability in term lengths. ARR is a performance measure that we believe provides useful information to our management and investors as it allows us to better track the topline growth of our subscription business because it only includes non-life-of-device contracts and takes into account variability in term lengths. Non-GAAP gross profit, non-GAAP gross margin and non-GAAP operating expenses are performance measures which we believe provide useful information to investors, as they provide meaningful supplemental information regarding our performance and liquidity by excluding certain expenses and expenditures, such as stock-based compensation expense, that may not be indicative of our ongoing core business operating results. Free cash flow is a performance measure that we believe provides useful information to management and investors about the amount of cash used in or generated by the business after necessary capital expenditures. We use these non-GAAP financial and key performance measures for financial and operational decision-making and as a means to evaluate period-to-period comparisons. Total billings, subscription billings, ACV billings, ARR, run-rate ACV, non-GAAP gross profit, non-GAAP gross margin, non-GAAP operating expenses, and free cash flow have limitations as analytical tools and they should not be considered in isolation or as substitutes for analysis of our results as reported under generally accepted accounting principles in the United States. Total billings, subscription billings, non-GAAP gross profit, non-GAAP gross margin, non-GAAP operating expenses, and free cash flow are not substitutes for total revenue, subscription revenue, gross profit, gross margin, operating expenses, or cash provided by (used in) operating activities, respectively. There is no GAAP measure that is comparable to ACV billings, ARR or run-rate ACV, so we have not reconciled either ACV billings, ARR or run-rate ACV numbers included in this Annual Report on Form 10-K to any GAAP measure. In addition, other companies, including companies in our industry, may calculate non-GAAP financial measures and key performance measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures and key performance measures as tools for comparison. We urge you to review the reconciliation of our non-GAAP financial measures and key performance measures to the most directly comparable GAAP financial measures included below and not to rely on any single financial measure to evaluate our business. We calculate our non-GAAP financial and key performance measures as follows: Total billings — We calculate total billings by adding the change in deferred revenue between the start and end of the period to total revenue recognized in the same period. Subscription billings — We calculate subscription billings by adding the change in subscription deferred revenue between the start and end of the period to subscription revenue recognized in the same period. ACV billings — We calculate ACV billings as the sum of the ACV for all contracts billed during the period. ACV is defined as the total annualized value of a contract, excluding amounts related to professional services and hardware. We calculate the total annualized value for a contract by dividing the total value of the contract by the number of years in the term of such contract, using, where applicable, an assumed term of five years for contracts that do not have a specified term. 69 Table of Contents NUTANIX, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) ARR — We calculate ARR as the sum of ACV for all non-life-of-device contracts in effect as of the end of a specific period. For the purposes of this calculation, we assume that the contract term begins on the date a contract is booked, unless the terms of such contract prevent us from fulfilling our obligations until a later period, and irrespective of the periods in which we would recognize revenue for such contract. Run-rate ACV — We calculate run-rate ACV as the sum of ACV for all contracts that are in effect as of the end of the period. For the purposes of this calculation, we assume that the contract term begins on the date a contract is booked, irrespective of the periods in which we would recognize revenue for such contract. Non-GAAP gross profit and non-GAAP gross margin — We calculate non-GAAP gross margin as non-GAAP gross profit divided by total revenue. We define non-GAAP gross profit as gross profit adjusted to exclude stock-based compensation expense, amortization of acquired intangible assets, impairment of lease-related assets, and costs associated with other non-recurring transactions. Our presentation of non-GAAP gross profit should not be construed as implying that our future results will not be affected by any recurring expenses or any unusual or non-recurring items that we exclude from our calculation of this non-GAAP financial measure. Non-GAAP operating expenses — We define non-GAAP operating expenses as total operating expenses adjusted to exclude stock-based compensation expense, impairment of lease-related assets, costs associated with business combinations, such as amortization of acquired intangible assets, revaluation of contingent consideration and other acquisition-related costs and costs associated with other non-recurring transactions. Our presentation of non-GAAP operating expenses should not be construed as implying that our future results will not be affected by any recurring expenses or any unusual or non-recurring items that we exclude from our calculation of this non-GAAP financial measure. Free cash flow — We calculate free cash flow as net cash provided by (used in) operating activities less purchases of property and equipment, which measures our ability to generate cash from our business operations after our capital expenditures. Total end customers — We define the number of end customers as the number of end customers for which we have received an order by the last day of the period, excluding partners to which we have sold products for their own demonstration purposes. A single organization or customer may represent multiple end customers for separate divisions, segments, or subsidiaries, and the total number of end customers may contract due to mergers, acquisitions, or other consolidation among existing end customers. 70 Table of Contents NUTANIX, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) The following table presents a reconciliation of total billings, non-GAAP gross profit, non-GAAP gross margin, non-GAAP operating expenses and free cash flow to the most directly comparable GAAP financial measures, for each of the periods indicated: Fiscal Year Ended July 31, 2020 2021 2022 (in thousands, except percentages) Total revenue $ 1,307,682 $ 1,394,364 $ 1,580,796 Change in deferred revenue 272,410 126,732 127,845 Total billings (non-GAAP) $ 1,580,092 $ 1,521,096 $ 1,708,641 Gross profit $ 1,020,993 $ 1,102,458 $ 1,259,640 Stock-based compensation 27,348 30,483 38,225 Amortization of intangible assets 14,777 14,776 13,579 Restructuring charges — — 218 Impairment of lease-related assets 537 13 — Non-GAAP gross profit $ 1,063,655 $ 1,147,730 $ 1,311,662 Gross margin 78.1 % 79.1 % 79.7 % Stock-based compensation 2.1 % 2.2 % 2.4 % Amortization of intangible assets 1.1 % 1.0 % 0.9 % Non-GAAP gross margin 81.3 % 82.3 % 83.0 % Operating expenses $ 1,849,914 $ 1,763,240 $ 1,717,084 Stock-based compensation (324,650 ) (328,062 ) (305,021 ) Amortization of intangible assets (2,603 ) (2,604 ) (2,604 ) Restructuring charges — — (10,957 ) Impairment and early exit of lease-related assets (2,465 ) (1,407 ) (597 ) Other (1,499 ) (2,407 ) (432 ) Non-GAAP operating expenses $ 1,518,697 $ 1,428,760 $ 1,397,473 Net cash (used in) provided by operating activities $ (159,885 ) $ (99,810 ) $ 67,543 Purchases of property and equipment (89,488 ) (58,647 ) (49,058 ) Free cash flow (non-GAAP) $ (249,373 ) $ (158,457 ) $ 18,485 The following table 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, 2020 2021 2022 (in thousands) Subscription revenue $ 1,030,180 $ 1,243,621 $ 1,433,773 Change in subscription deferred revenue 246,233 110,534 129,787 Subscription billings $ 1,276,413 $ 1,354,155 $ 1,563,560 Professional services revenue $ 45,889 $ 73,094 $ 91,744 Change in professional services deferred revenue 26,177 16,198 (1,942 ) Professional services billings $ 72,066 $ 89,292 $ 89,802 71 Table of Contents NUTANIX, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Factors Affecting Our Performance We believe that our future success will depend on many factors, including those described below. While these areas present significant opportunity, they also present risks that we must manage to achieve successful results. See the section titled "Risk Factors" for details. If we are unable to address these challenges, our business and operating results could be materially and adversely affected. Investment in Profitable Growth We continue to invest in our growth over the long-run, while improving our operating cash flow performance by focusing on go-to-market efficiencies. By maintaining this balance, we believe we can drive toward profitable growth. Investment in Sales and Marketing – Our ability to achieve billings and revenue growth depends, in large part, on our ability to capitalize on our market opportunity, including our ability to recruit, train and retain sufficient numbers of ramped sales personnel to support our growth. As part of our investment in our growth over the long-run, we plan to invest in sales and marketing, including investing in our sales and marketing teams and continuing our focus on opportunities with major accounts, large deals, and commercial accounts, as well as other sales and marketing initiatives to increase our pipeline growth. However, we have recently seen higher-than-normal attrition among our sales representatives and our overall sales headcount being below our targets, which may negatively impact our billings and revenue growth. While we are actively recruiting additional sales representatives, it will take time to replace, train, and ramp them to full productivity. As a result, our overall sales and marketing expense may fluctuate, and may decline, in the near term. We estimate, based on past experience, that our average sales team members typically become fully ramped up around the start of their fourth quarter of employment with us, and as our newer employees ramp up, we expect their increased productivity to contribute to our revenue growth. As of July 31, 2022, we considered approximately 73% of our global sales team members to be fully ramped, while the remaining approximately 27% of our global sales team members are in the process of ramping up. As we continue to focus some of our newer and existing sales team members on major accounts and large deals, and as we continue our transition toward a subscription-based business model, it may take longer, potentially significantly, for these sales team members to become fully productive, and there may also be an impact to the overall productivity of our sales team. Furthermore, the effects of the COVID-19 pandemic and the measures we have implemented in response, including postponing, cancelling or making virtual-only certain in-person corporate events , as well as some of the measures implemented as part of our overall efforts to improve our operating cash flow performance and the continued higher-than-normal attrition rates of sales representatives, may impact the productivity of our sales teams in the near term. We are focused on actively managing these realignments and potential effects. As part of our overall efforts to improve our free cash flow performance, we have also proactively taken steps to increase our go-to-market productivity and over time, we intend to reduce our overall sales and marketing spend as a percentage of revenue. These measures include improving the efficiency of our demand generation spend, focusing on lower cost renewals, increasing leverage of our channel partners, and optimizing headcount in geographies based on market opportunities. 72 Table of Contents NUTANIX, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Investment in Research and Development and Engineering – We also intend, in the long term, to grow our global research and development and engineering teams to enhance our solutions, including our newer subscription-based products, improve integration with new and existing ecosystem partners and broaden the range of technologies and features available through our platform. However, as discussed above in the section titled "Impact of the COVID-19 Pandemic," in response to the COVID-19 pandemic we had previously effected a global hiring pause outside of a small number of critical roles and, while the hiring pause is no longer in effect, the overall growth in our global research and development and engineering teams may fluctuate from quarter to quarter in the near term. We believe that these investments will contribute to our long-term growth, although they may adversely affect our profitability in the near term. Transition to Subscription Starting in fiscal 2019, as a result of our transition towards a subscription-based business model, more of our customers began purchasing separately sold subscription term-based licenses that could be deployed on a variety of hardware platforms. As we continue our transition to a subscription-based business model, we expect a greater portion of our products to be delivered through subscription term-based licenses or cloud-based SaaS subscriptions. Shifts in the mix of whether our solutions are sold on a subscription basis have and could continue to result in fluctuations in our billings and revenue. Subscription sales consist of subscription term-based licenses and offerings with ongoing performance obligations, including software entitlement and support subscriptions and cloud-based SaaS offerings. Since revenue is recognized as performance obligations are delivered, sales with ongoing performance obligations may reflect lower revenue in a given period. In addition, other factors relating to our shift to selling more subscription term-based licenses may impact our billings, revenue and cash flow. For example, our term-based licenses generally have an average term of less than four years and thus result in lower billings and revenue in a given period when compared to our historical life of device license sales, which have a duration equal to the life of the associated appliance, which we estimate to be approximately five years. In addition, starting in fiscal 2021, we began compensating our sales force based on ACV instead of total contract value, and while we expect that the shift to an ACV-based sales compensation plan will incentivize sales representatives to maximize ACV and minimize discounts, it could also further compress the average term of our subscription term-based licenses. Furthermore, our customers may, including in response to the uncertainty caused by the COVID-19 pandemic, decide to purchase our software solutions on shorter subscription terms than they have historically, and/or request to only pay for the initial year of a multi-year subscription term upfront, which could negatively impact our billings, revenue and cash flow in a given period when compared to historical life-of-device or multiple-year term-based license sales. Revenue for our solutions, whether or not sold as a subscription term-based license, is generally recognized upon transfer of control to the customer. For additional information on revenue recognition, see Note 2 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K and "Critical Accounting Estimates" later in this "Management’s Discussion and Analysis of Financial Condition and Results of Operations" section. 73 Table of Contents NUTANIX, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Market Adoption of Our Products The public cloud and, more recently, hybrid cloud paradigms, have changed IT buyer expectations about the simplicity, agility, scalability, portability and pay-as-you-grow economics of IT resources, which represent a major architectural shift and business model evolution. A key focus of our sales and marketing efforts is creating market awareness about the benefits of our enterprise cloud platform. This includes our newer products outside of our core hyperconverged infrastructure offering, both as compared to traditional datacenter architectures as well as the public cloud, particularly as we continue to pursue large enterprises and mission critical workloads and transition toward a subscription-based business model. The broad nature of the technology shift that our enterprise cloud platform represents, the relationships our end customers have with existing IT vendors, and our transition toward a subscription-based business model sometimes lead to unpredictable sales cycles. We hope to compress and stabilize these sales cycles as market adoption increases, as we gain leverage with our channel partners, as we continue to educate the market about our subscription-based business model and as our sales and marketing efforts evolve. Our business and operating results will be significantly affected by the degree to and speed with which organizations adopt our enterprise cloud platform. Leveraging Partners We plan to continue to leverage our relationships with our channel and OEM partners and expand our network of cloud and ecosystem partners, all of which help to drive the adoption and sale of our solutions with our end customers. We sell our solutions primarily through our partners, and our solutions primarily run on hardware appliances which are purchased from our channel or OEM partners. We believe that increasing channel leverage, particularly as we expand our focus on opportunities in commercial accounts, by investing in sales enablement and co-marketing with our channel and OEM partners in the long term will extend and improve our engagement with a broad set of end customers. Our reliance on manufacturers, including our channel and OEM partners, to produce the hardware appliances on which our software runs exposes us to supply chain delays, which impair our ability to provide services to end customers in a timely manner. Our business and results of operations will be significantly affected by our success in leveraging our relationships with our channel and OEM partners and expanding our network of cloud and ecosystem partners. Customer Retention and Expansion Our end customers typically deploy our technology for a specific workload initially. After a new end customer's initial order, which includes the product and associated software entitlement and support subscription and services, we focus on expanding our footprint by serving more workloads. We also generate recurring revenue from our software entitlement and support subscription renewals, and given our transition to a subscription-focused business model, software and support renewals will have an increasing significance for our future revenue streams as existing subscriptions come up for renewal. We view continued purchases and upgrades as critical drivers of our success, as the sales cycles are typically shorter as compared to new end customer deployments, and selling efforts are typically less. As of July 31, 2022, approximately 73% of our end customers who have been with us for 18 months or longer have made a repeat purchase, which is defined as any purchase activity, including renewals of term-based licenses or software entitlement and support subscription renewals, after the initial purchase. Additionally, end customers who have been with us for 18 months or longer have total lifetime orders, including the initial order, in an amount that is more than 6.9x greater, on average, than their initial order. This number increases to approximately 20.9x, on average, for Global 2000 end customers who have been with us for 18 months or longer as of July 31, 2022. These multiples exclude the effect of one end customer who had a very large and irregular purchase pattern that we believe is not representative of the purchase patterns of all of our other end customers. 74 Table of Contents NUTANIX, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Our business and operating results will depend on our ability to retain and sell additional solutions to our existing and future base of end customers. Our ability to obtain new and retain existing customers will in turn depend in part on a number of factors. These factors include our ability to effectively maintain existing and future customer relationships, continue to innovate by adding new functionality and improving usability of our solutions in a manner that addresses our end customers’ needs and requirements, and optimally price our solutions in light of marketplace conditions, competition, our costs and customer demand. Furthermore, our ongoing transition to a subscription-based business model and ongoing product transitions, such as our updated pricing and packaging to simplify our product portfolio, may cause concerns among our customer base, including concerns regarding changes to pricing over time, and may also result in confusion among new and existing end customers, for example, regarding our pricing models. Such concerns and/or confusion can slow adoption and renewal rates among our current and future customer base. Components of Our Results of Operations Revenue We generate revenue primarily from the sale of our enterprise cloud platform, which can be deployed on a variety of qualified hardware platforms or, in the case of our cloud-based SaaS offerings, via hosted service or delivered pre-installed on an appliance that is configured to order. Non-portable software licenses are delivered or sold alongside configured-to-order appliances and can be used over the life of the associated appliance. Our subscription term-based licenses are sold separately, or can be sold alongside configured-to-order appliances. Our subscription term-based licenses typically have a term of one to five years. Our cloud-based SaaS subscriptions have terms extending up to five years. Configured-to-order appliances, including our Nutanix-branded NX hardware line, can be purchased from one of our channel partners, OEMs or, in limited cases, directly from Nutanix. Our enterprise cloud platform typically includes one or more years of support and entitlements, which provides customers with the right to software upgrades and enhancements as well as technical support. Our platform is primarily sold through channel partners and OEMs. Revenue is recognized net of sales tax and withholding tax. Product revenue — Product revenue consists of software and hardware revenue. A majority of our product revenue is generated from the sale of our enterprise cloud operating system. We also sell renewals of previously purchased software licenses and SaaS offerings. Revenue from our software products is generally recognized upon transfer of control to the customer, which is typically upon shipment for sales including a hardware appliance, upon making the software available to the customer when not sold with an appliance or as services are performed with SaaS offerings. In transactions where the hardware appliance is purchased directly from Nutanix, we consider ourselves to be the principal in the transaction and we record revenue and costs of goods sold on a gross basis. We consider the amount allocated to hardware revenue to be equivalent to the cost of the hardware procured. Hardware revenue is generally recognized upon transfer of control to the customer. Support, entitlements and other services revenue — We generate our support, entitlements and other services revenue primarily from software entitlement and support subscriptions, which include the right to software upgrades and enhancements as well as technical support. The majority of our product sales are sold in conjunction with software entitlement and support subscriptions, with terms ranging from one to five years. Occasionally, we also sell professional services with our products. We recognize revenue from software entitlement and support contracts ratably over the contractual service period, which typically commences upon transfer of control of the corresponding products to the customer. We recognize revenue related to professional services as they are performed. 75 Table of Contents NUTANIX, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Cost of Revenue Cost of product revenue — Cost of product revenue consists of costs paid to third-party OEM partners, hardware costs, personnel costs associated with our operations function, consisting of salaries, benefits, bonuses and stock-based compensation, cloud-based costs associated with our SaaS offerings, and allocated costs, consisting of certain facilities, depreciation and amortization, recruiting and information technology costs allocated based on headcount. Cost of support, entitlements and other services revenue — Cost of support, entitlements and other services revenue includes personnel and operating costs associated with our global customer support organization, as well as allocated costs. We expect our cost of support, entitlements and other services revenue to increase in absolute dollars as our support, entitlements and other services revenue increases. Operating Expenses Our operating expenses consist of sales and marketing, research and development and general and administrative expenses. The largest component of our operating expenses is personnel costs. Personnel costs consist of wages, benefits, bonuses and, with respect to sales and marketing expenses, sales commissions. Sales and marketing — Sales and marketing expense consists primarily of personnel costs. Sales and marketing expense also includes sales commissions, costs for promotional activities and other marketing costs, travel costs and costs associated with demonstration units, including depreciation and allocated costs. Commissions are deferred and recognized as we recognize the associated revenue. We expect sales and marketing expense to continue, in the long term, to increase in absolute dollars as part of our long-term plans to invest in our growth. However, as part of our overall efforts to improve our operating cash flow performance, we have also proactively taken steps to increase our go-to-market productivity and over time, we intend to reduce our overall sales and marketing spend as a percentage of revenue. For example, in August 2022, we announced that we will be decreasing our global headcount by approximately 4%, primarily in sales and marketing, as part of our continued effort to drive toward sustainable profitable growth. We have also recently seen higher than normal attrition among our sales representatives, and while we are actively recruiting additional sales representatives, it will take time to replace, train, and ramp them to full productivity. As a result, our sales and marketing expense will fluctuate, and may decline, in the near term. Research and development — Research and development ("R&D") expense consists primarily of personnel costs, as well as other direct and allocated costs. We have devoted our product development efforts primarily to enhancing the functionality and expanding the capabilities of our solutions. R&D costs are expensed as incurred, unless they meet the criteria for capitalization. We expect R&D expense, in the long term, to increase in absolute dollars as part of our long-term plans to invest in our future products and services, including our newer subscription-based products, although R&D expense may fluctuate as a percentage of total revenue and, on an absolute basis, from quarter to quarter. 76 Table of Contents NUTANIX, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General and administrative — General and administrative ("G&A") expense consists primarily of personnel costs, which include our executive, finance, human resources and legal organizations. G&A expense also includes outside professional services, which consists primarily of legal, accounting and other consulting costs, as well as insurance and other costs associated with being a public company and allocated costs. We expect G&A expense, in the long term, to increase in absolute dollars, particularly due to additional legal, accounting, insurance and other costs associated with our growth, although G&A expense may fluctuate as a percentage of total revenue and, on an absolute basis, from quarter to quarter. Other Income (Expense), Net Other income (expense), net consists primarily of interest income and expense, which includes the amortization of the debt issuance costs associated with our 0% convertible senior notes due 2023 (the "2023 Notes"), our 2.50% convertible senior notes due 2026 (the "2026 Notes") and our 0.25% convertible senior notes due 2027 (the "2027 Notes"), changes in the fair value of the derivative liability associated with the 2026 Notes, non-cash interest expense on the 2026 Notes, the amortization of the debt discount on the 2026 Notes, interest expense on the 2027 Notes, debt extinguishment costs, interest income related to our short-term investments, and foreign currency exchange gains or losses. Provision for Income Taxes Provision for income taxes consists primarily of income taxes for certain foreign jurisdictions in which we conduct business and state income taxes in the United States. We have recorded a full valuation allowance related to our federal and state net operating losses and other net deferred tax assets and a partial valuation allowance related to our foreign net deferred tax assets due to the uncertainty of the ultimate realization of the future benefits of those assets. 77 Table of Contents NUTANIX, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Results of Operations The following tables set forth our consolidated results of operations in dollars and as a percentage of total revenue for the fiscal years presented. The period-to-period comparison of results is not necessarily indicative of results for future periods. Fiscal Year Ended July 31, 2020 2021 2022 (in thousands) Revenue: Product $ 765,822 $ 705,804 $ 757,623 Support, entitlements and other services 541,860 688,560 823,173 Total revenue 1,307,682 1,394,364 1,580,796 Cost of revenue: Product (1)(2) 71,312 55,287 55,602 Support, entitlements and other services (1) 215,377 236,619 265,554 Total cost of revenue 286,689 291,906 321,156 Gross profit 1,020,993 1,102,458 1,259,640 Operating expenses: Sales and marketing (1)(2) 1,160,389 1,052,508 978,704 Research and development (1) 553,978 556,950 571,962 General and administrative (1) 135,547 153,782 166,418 Total operating expenses 1,849,914 1,763,240 1,717,084 Loss from operations (828,921 ) (660,782 ) (457,444 ) Other expense, net (26,300 ) (354,991 ) (320,830 ) Loss before provision for income taxes (855,221 ) (1,015,773 ) (778,274 ) Provision for income taxes 17,662 18,487 19,264 Net loss $ (872,883 ) $ (1,034,260 ) $ (797,538 ) (1) Includes stock-based compensation expense as follows: Product cost of revenue $ 5,334 $ 6,023 $ 7,379 Support, entitlements and other services cost of revenue 22,014 24,460 30,846 Sales and marketing 126,015 122,815 104,592 Research and development 153,252 150,856 143,759 General and administrative 45,383 54,391 56,670 Total stock-based compensation expense $ 351,998 $ 358,545 $ 343,246 (2) Includes amortization of intangible assets as follows: Product cost of revenue $ 14,777 $ 14,776 $ 13,579 Sales and marketing 2,603 2,604 2,604 Total amortization of intangible assets $ 17,380 $ 17,380 $ 16,183 78 Table of Contents NUTANIX, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Fiscal Year Ended July 31, 2020 2021 2022 (as a percentage of total revenue) Revenue: Product 58.6 % 50.6 % 47.9 % Support, entitlements and other services 41.4 % 49.4 % 52.1 % Total revenue 100.0 % 100.0 % 100.0 % Cost of revenue: Product 5.4 % 3.9 % 3.5 % Support, entitlements and other services 16.5 % 17.0 % 16.8 % Total cost of revenue 21.9 % 20.9 % 20.3 % Gross profit 78.1 % 79.1 % 79.7 % Operating expenses: Sales and marketing 88.7 % 75.5 % 61.9 % Research and development 42.4 % 39.9 % 36.2 % General and administrative 10.4 % 11.0 % 10.5 % Total operating expenses 141.5 % 126.4 % 108.6 % Loss from operations (63.4 )% (47.3 )% (28.9 )% Other expense, net (2.0 )% (25.5 )% (20.3 )% Loss before provision for income taxes (65.4 )% (72.8 )% (49.2 )% Provision for income taxes 1.4 % 1.3 % 1.2 % Net loss (66.8 )% (74.1 )% (50.4 )% 79 Table of Contents NUTANIX, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Comparison of the Fiscal Years Ended July 31, 2020, 2021 and 2022 Revenue Fiscal Year Ended July 31, Change Fiscal Year Ended July 31, Change 2020 2021 $ % 2021 2022 $ % (in thousands, except percentages) Product $ 765,822 $ 705,804 $ (60,018 ) (8 )% $ 705,804 $ 757,623 $ 51,819 7 % Support, entitlements and other services 541,860 688,560 146,700 27 % 688,560 823,173 134,613 20 % Total revenue $ 1,307,682 $ 1,394,364 $ 86,682 7 % $ 1,394,364 $ 1,580,796 $ 186,432 13 % Fiscal Year Ended July 31, Change Fiscal Year Ended July 31, Change 2020 2021 $ % 2021 2022 $ % (in thousands, except percentages) U.S. $ 706,110 $ 758,128 $ 52,018 7 % $ 758,128 $ 887,141 $ 129,013 17 % Europe, the Middle East and Africa 277,489 320,837 43,348 16 % 320,837 374,186 53,349 17 % Asia Pacific 265,092 260,637 (4,455 ) (2 )% 260,637 274,373 13,736 5 % Other Americas 58,991 54,762 (4,229 ) (7 )% 54,762 45,096 (9,666 ) (18 )% Total revenue $ 1,307,682 $ 1,394,364 $ 86,682 7 % $ 1,394,364 $ 1,580,796 $ 186,432 13 % Product revenue decreased year-over-year for fiscal 2021 due primarily to our continued transition to selling subscription term-based licenses, as these licenses generally have a shorter average term than those that can be used over the life of the associated appliance. The decrease in product revenue was also impacted by a decrease in hardware revenue, as more customers are purchasing hardware directly from our OEMs. Product revenue increased year-over-year for fiscal 2022 due primarily to increases in software revenue resulting from an increased adoption of our products, as well as growth in software renewals due to our transition to selling subscription term-based licenses, partially offset by the impact of the shorter average contract terms resulting from this transition. The total average contract term was approximately 3.8 years, 3.4 years and 3.2 years for fiscal 2020, 2021 and 2022, respectively. Total average contract term represents the dollar-weighted term across all subscription and life-of-device contracts billed during the period, using an assumed term of five years for licenses without a specified term, such as life-of-device licenses. Support, entitlements and other services revenue increased year-over-year for both fiscal 2021 and fiscal 2022 in conjunction with the growth of our end customer base and the related software entitlement and support subscription contracts. Our total end customer count increased from approximately 17,360 as of July 31, 2020 to approximately 20,130 as of July 31, 2021 and to approximately 22,600 as of July 31, 2022. 80 Table of Contents NUTANIX, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Cost of Revenue and Gross Margin Fiscal Year Ended July 31, Change Fiscal Year Ended July 31, Change 2020 2021 $ % 2021 2022 $ % (in thousands, except percentages) Cost of product revenue $ 71,312 $ 55,287 $ (16,025 ) (22 )% $ 55,287 $ 55,602 $ 315 1 % Product gross margin 90.7 % 92.2 % 92.2 % 92.7 % Cost of support, entitlements and other services revenue $ 215,377 $ 236,619 $ 21,242 10 % $ 236,619 $ 265,554 $ 28,935 12 % Support, entitlements and other services gross margin 60.3 % 65.6 % 65.6 % 67.7 % Total gross margin 78.1 % 79.1 % 79.1 % 79.7 % Cost of product revenue Cost of product revenue decreased year-over-year for fiscal 2021 due primarily to the decreases in hardware revenue resulting from our continued focus on more software-only transactions. Cost of product revenue remained relatively flat year-over-year for fiscal 2022 due primarily to the fact that hardware revenue was also relatively flat. Slight fluctuations in hardware revenue and cost of product revenue are anticipated, as we expect to continue selling small amounts of hardware for the foreseeable future. Product gross margin increased by 1.5 percentage points, from 90.7% in fiscal 2020 to 92.2% in fiscal 2021, and by 0.5 percentage points, to 92.7% in fiscal 2022, due primarily to the higher mix of software revenue, as we continued to focus on more software-only transactions, which have a higher margin as compared to hardware sales. Cost of support, entitlements and other services revenue Cost of support, entitlements and other services revenue increased year-over-year for both fiscal 2021 and fiscal 2022 due primarily to higher personnel-related costs, resulting from growth in our global customer support organization. Support, entitlements and other services gross margin increased by 5.3 percentage points, from 60.3% in fiscal 2020 to 65.6% in fiscal 2021, and by 2.1 percentage points to 67.7% in fiscal 2022, due primarily to support, entitlements and other services revenue growing at a higher rate than personnel-related costs. 81 Table of Contents NUTANIX, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Operating Expenses Sales and marketing Fiscal Year Ended July 31, Change Fiscal Year Ended July 31, Change 2020 2021 $ % 2021 2022 $ % (in thousands, except percentages) Sales and marketing $ 1,160,389 $ 1,052,508 $ (107,881 ) (9 )% $ 1,052,508 $ 978,704 $ (73,804 ) (7 )% Percent of total revenue 88.7 % 75.5 % 75.5 % 61.9 % Sales and marketing expense decreased year-over-year for fiscal 2021 due primarily to lower marketing costs, travel and entertainment expenses and personnel-related costs as a result of the COVID-19 pandemic, as discussed in the "Impact of the COVID-19 Pandemic" section above. In addition, the decrease in sales and marketing expense was aided by the changes to our sales compensation plans beginning in fiscal 2021, resulting from our transition to a subscription-based business model, including our continued emphasis on ACV, which resulted in more expense being deferred to later periods. Sales and marketing expense decreased year-over-year for fiscal 2022 due primarily to lower marketing costs resulting from decreased spending and increased efficiencies, as well as lower headcount-related costs, driven by the 2% decrease in sales and marketing headcount from July 31, 2021 to July 31, 2022. The overall decrease in sales and marketing expense was partially offset by severance and other termination benefit costs accrued in August 2022 related to the reduction in force announced in the first quarter of fiscal 2023, savings in the prior year period due to the company-wide furlough week during the first quarter of fiscal 2021, and an increase in commissions expense as a result of the increase in revenue. Research and development Fiscal Year Ended July 31, Change Fiscal Year Ended July 31, Change 2020 2021 $ % 2021 2022 $ % (in thousands, except percentages) Research and development $ 553,978 $ 556,950 $ 2,972 1 % $ 556,950 $ 571,962 $ 15,012 3 % Percent of total revenue 42.4 % 39.9 % 39.9 % 36.2 % Research and development 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. Research and development expense increased year-over-year for fiscal 2022 due primarily to higher personnel-related costs resulting from growth in our R&D headcount, which grew 13% from July 31, 2021 to July 31, 2022, partially offset by lower stock-based compensation expense resulting from terminations during the period and lower technical costs. 82 Table of Contents NUTANIX, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General and administrative Fiscal Year Ended July 31, Change Fiscal Year Ended July 31, Change 2020 2021 $ % 2021 2022 $ % (in thousands, except percentages) General and administrative $ 135,547 $ 153,782 $ 18,235 13 % $ 153,782 $ 166,418 $ 12,636 8 % Percent of total revenue 10.4 % 11.0 % 11.0 % 10.5 % General and administrative expense increased year-over-year for fiscal 2021 due primarily to increases in stock-based compensation expense and other personnel-related costs, partially offset by the impact of our response to the COVID-19 pandemic, as discussed in the "Impact of the COVID-19 Pandemic" section above, as well as lower outside services costs. General and administrative expense increased year-over-year for fiscal 2022 due primarily to an increase in personnel-related costs resulting from growth in our G&A headcount, which grew 17% from July 31, 2021 to July 31, 2022. Other Expense, Net Fiscal Year Ended July 31, Change Fiscal Year Ended July 31, Change 2020 2021 $ % 2021 2022 $ % (in thousands, except percentages) Interest income, net $ 13,453 $ 4,067 $ 9,386 70 % $ 4,067 $ 4,765 $ (698 ) (17 )% Change in fair value of derivative liability — (269,265 ) 269,265 100 % (269,265 ) (198,038 ) (71,227 ) (26 )% Amortization of debt discount and issuance costs and interest expense (31,312 ) (79,932 ) 48,620 155 % (79,932 ) (60,734 ) (19,198 ) (24 )% Debt extinguishment costs — — — 0 % — (64,911 ) 64,911 100 % Other (8,441 ) (9,861 ) 1,420 17 % (9,861 ) (1,912 ) (7,949 ) (81 )% Other expense, net $ (26,300 ) $ (354,991 ) $ 328,691 1,250 % $ (354,991 ) $ (320,830 ) $ (34,161 ) (10 )% The increase in other expense, net for fiscal 2021 was due primarily to additional expense resulting from the new 2026 Notes, including the change in the fair value of the derivative liability and interest expense associated with the amortization of the debt discount and issuance costs for the 2026 Notes. The decrease in other expense, net for fiscal 2022 was due primarily to the change in the fair value of the derivative liability related to the 2026 Notes, which was reclassified to equity during the first quarter of fiscal 2022, partially offset by the debt extinguishment costs resulting from the exchange of $416.5 million in aggregate principal amount of the 2023 Notes for $477.3 million in aggregate principal amount of the 2027 Notes. 83 Table of Contents NUTANIX, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Provision for Income Taxes Fiscal Year Ended July 31, Change Fiscal Year Ended July 31, Change 2020 2021 $ % 2021 2022 $ % (in thousands, except percentages) Provision for income taxes $ 17,662 $ 18,487 $ 825 5 % $ 18,487 $ 19,264 $ 777 4 % The year-over-year increase in the provision for income taxes in fiscal 2021 and fiscal 2022 was due primarily to higher foreign taxes as a result of higher taxable earnings in foreign jurisdictions, as we continued to grow our business internationally. We continue to maintain a full valuation allowance on our U.S. federal and state deferred tax assets and a partial valuation allowance related to our foreign net deferred tax assets. Liquidity and Capital Resources As of July 31, 2022, we had $402.9 million of cash and cash equivalents, $3.0 million of restricted cash and $921.4 million of short-term investments, which were held for general corporate purposes. Our cash, cash equivalents and short-term investments primarily consist of bank deposits, money market accounts and highly rated debt instruments of the U.S. government and its agencies and debt instruments of highly rated corporations. In January 2018, we issued convertible senior notes with a 0% interest rate for an aggregate principal amount of $575.0 million. In September 2021, we entered into privately negotiated exchange and note repurchase transactions, after which $145.7 million in aggregate principal amount of 2023 Notes remains outstanding. There are no required principal payments on the 2023 Notes prior to their maturity. We intend to settle the principal amount of the 2023 Notes in cash upon maturity in January 2023. For additional information, see Note 5 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K. In September 2020, we issued $750.0 million in aggregate principal amount of 2.50% convertible senior notes due 2026 to BCPE Nucleon (DE) SVP, LP, an entity affiliated with Bain Capital, LP. For additional information, see Note 5 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K. In September 2021, we issued convertible senior notes with a 0.25% interest rate for an aggregate principal amount of $575.0 million due 2027, of which $477.3 million in principal amount was issued in exchange for approximately $416.5 million principal amount of the 2023 Notes and the remaining $97.7 million in principal amount was issued for cash. There are no required principal payments on the 2027 Notes prior to their maturity. For additional information, see Note 5 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K. Due to investments in our business as well as the potential cash flow impacts resulting from our continued transition to a subscription-based business model, we expect our operating and free cash flow to continue to fluctuate during the next 12 months. Notwithstanding that fact, we believe that our cash and cash equivalents and short-term investments will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. Our future capital requirements will depend on many factors, including our growth rate, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced product and service offerings, the continuing market acceptance of our products, the impact of COVID-19 pandemic on our business, our end customers and partners, and the economy, and the timing of and extent to which our customers transition to shorter-term contracts or request to only pay for the initial term of multi-year contracts as a result of our transition to a subscription-based business model. 84 Table of Contents NUTANIX, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Cash Flows The following table summarizes our cash flows for the periods presented: Fiscal Year Ended July 31, 2020 2021 2022 (in thousands) Net cash (used in) provided by operating activities $ (159,885 ) $ (99,810 ) $ 67,543 Net cash provided by (used in) investing activities 24,559 (597,153 ) (54,189 ) Net cash provided by financing activities 57,797 663,845 103,635 Net (decrease) increase in cash, cash equivalents and restricted cash $ (77,529 ) $ (33,118 ) $ 116,989 Cash Flows from Operating Activities Net cash used in operating activities was $159.9 million and $99.8 million for fiscal 2020 and fiscal 2021, respectively, and net cash provided by operating activities was $67.5 million for fiscal 2022, representing improvements of $60.1 million and $167.4 million, respectively, as compared to the respective prior year periods. The increases in cash generated from operating activities for fiscal 2021 and fiscal 2022 were due primarily to decreases in our net loss from operations. Cash Flows from Investing Activities Net cash provided by investing activities of $24.6 million for fiscal 2020 consisted of $645.8 million of maturities of short-term investments and $75.4 million of sales of short-term investments, partially offset by $607.2 million of short-term investment purchases and $89.5 million of purchases of property and equipment. Net cash used in investing activities of $597.2 million for fiscal 2021 consisted of $1.4 billion of short-term investment purchases and $58.6 million of purchases of property and equipment, partially offset by $784.2 million of maturities of short-term investments and $70.1 million of sales of short-term investments. Net cash used in investing activities of $54.2 million for fiscal 2022 consisted of $1.1 billion of short-term investment purchases and $49.1 million of purchases of property and equipment, partially offset by $1.1 billion of maturities of short-term investments and $18.0 million of sales of short-term investments. Cash Flows from Financing Activities Net 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 is issuance of the 2026 Notes, net of issuance costs, and $65.8 million of proceeds from the sale of shares through employee equity incentive plans, partially offset by $125.1 million of repurchases of our Class A common stock and $0.5 million of payments for finance leases. Net cash provided by financing activities of $103.6 million for fiscal 2022 consisted of $88.7 million of proceeds from the issuance of the 2027 Notes in the subscription transactions that closed in September 2021, net of issuance costs, $67.8 million of proceeds from the sale of shares through employee equity incentive plans, and $39.9 million of proceeds from the termination of portions of the convertible note hedge transactions previously entered into in connection with the 2023 Notes, partially offset by $58.6 million of repurchases of our Class A common stock, $18.4 million of payments for the termination of portions of the warrant transactions previously entered into in connection with the 2023 Notes, and $14.7 million of debt extinguishment costs. 85 Table of Contents NUTANIX, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) M aterial Cash Requirements and Other Obligations The following table summarizes our material cash requirements and other obligations as of July 31, 2022: Payments Due by Period Total Less than 1 Year 1 Year to 3 Years 3 to 5 Years More than 5 Years (in thousands) Principal amount payable on convertible senior notes (1) $ 1,498,701 $ 145,704 $ — $ 777,997 $ 575,000 Interest on convertible senior notes (1) 7,823 475 — 7,348 — Operating leases (undiscounted basis) (2) 160,847 44,089 49,802 28,202 38,754 Other commitments (3) 88,679 80,242 6,050 2,387 — Guarantees with contract manufacturers 82,275 82,275 — — — Total $ 1,838,325 $ 352,785 $ 55,852 $ 815,934 $ 613,754 (1) Includes accrued paid-in-kind interest on the 2026 Notes and accrued interest on the 2027 Notes. For additional information regarding our convertible senior notes, refer to Note 5 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K. (2) For additional information regarding our operating leases, refer to Note 6 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K. (3) Purchase obligations and other commitments pertaining to our daily business operations. From time to time, in the normal course of business, we make commitments with our contract manufacturers to ensure them a minimum level of financial consideration for their investment in our joint solutions. These commitments are based on revenue targets or on-hand inventory and non-cancelable purchase orders for non-standard components. We record a charge related to these items when we determine that it is probable a loss will be incurred and we are able to estimate the amount of the loss. Our historical charges have not been material. As of July 31, 2022, we had accrued liabilities related to uncertain tax positions, which are reflected on our consolidated balance sheet. These accrued liabilities are not reflected in the contractual obligations disclosed in the table above, as it is uncertain if or when such amounts will ultimately be settled. Uncertain tax positions are further discussed in Note 12 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K. Critical Accounting Policies and Estimates Our consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the applicable periods. We evaluate our estimates, assumptions and judgments on an ongoing basis. Our estimates, assumptions and judgments are based on historical experience and various other factors that we believe to be reasonable under the circumstances. Different assumptions and judgments would change the estimates used in the preparation of our consolidated financial statements, which, in turn, could change the results from those reported. The critical accounting estimates, assumptions and judgments that we believe have the most significant impact on our consolidated financial statements are described below. 86 Table of Contents NUTANIX, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Revenue Recognition Some of our contracts with customers contain multiple performance obligations. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. For these contracts, we account for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price ("SSP") basis. For deliverables that we routinely sell separately, such as software entitlement and support subscriptions on our core offerings, we determine SSP by evaluating the standalone sales over the trailing 12 months. For those that are not sold routinely, we determine SSP based on our overall pricing trends and objectives, taking into consideration market conditions and other factors, including the value of our contracts, the products sold and geographic locations. If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative SSP. We determine SSP based on the price at which the performance obligation is sold separately. If the SSP is not observable through past transactions, we estimate the SSP, taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations. Refer to Note 1 and Note 2 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional information on revenue recognition. Income Taxes The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. We recognize uncertain tax positions only if it is more likely than not to be sustained based solely on its technical merits as of the reporting date. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes. Judgment is required in assessing the future tax consequences of events that have been recognized in our consolidated financial statements or tax returns. Variations in the actual outcome of these future tax consequences could materially impact our consolidated financial statements. Stock-Based Compensation We measure and recognize compensation expense for all stock-based awards, including stock options and purchase rights issued to employees under our 2016 Employee Stock Purchase Plan ("2016 ESPP"), based on the estimated fair value of the awards on the grant date. We use the Black-Scholes-Merton ("Black-Scholes") option pricing model to estimate the fair value of stock options and 2016 ESPP purchase rights. The fair value of restricted stock units ("RSUs") is measured using the fair value of our common stock on the date of the grant. The fair value of stock options and RSUs is recognized as expense on a straight-line basis over the requisite service period, which is generally four years. For stock-based awards granted to employees with a performance condition, we recognize stock-based compensation expense using the graded vesting attribution method over the requisite service period when management determines it is probable that the performance condition will be satisfied. The fair value of the 2016 ESPP purchase rights is recognized as expense on a straight-line basis over the offering period. We account for forfeitures of all share-based awards when they occur. 87 Table of Contents NUTANIX, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Our use of the Black-Scholes option pricing model requires the input of subjective assumptions, including the fair value of the underlying common stock, expected term of the option, expected volatility of the price of our common stock, risk-free interest rates and the expected dividend yield of our common stock. The assumptions used in our option pricing model represent management’s best estimates. These estimates involve inherent uncertainties and the application of management’s judgment. If factors change and different assumptions are used, our stock-based compensation expense could be materially different in the future. Derivative Liability We evaluate convertible notes or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under the relevant sections of Accounting Standards Codification ("ASC") 815-40, Derivatives and Hedging: Contracts in Entity’s Own Equity. The result of this accounting guidance could result in the fair value of a financial instrument being classified as a derivative instrument and recorded at fair market value at each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded on our consolidated statements of operations as other income or other expense. Once the criteria for conversion is fixed, the derivative instrument is marked to fair value and reclassified to equity. We use the binomial model to estimate the fair value of the embedded derivative at each period-end. Our use of the binomial model requires the input of highly subjective assumptions, including expected volatility of our common stock, risk-free interest rates, and estimated conversion price ratios based on forecasted financial metrics. The assumptions used in the binomial model represent management's best estimates. These estimates involve inherent uncertainties and the application of management’s judgment. If factors change and different assumptions are used, the fair value of the embedded derivative liability could be materially different in the future. Goodwill, Intangible Assets and Impairment Assessment Goodwill represents the excess of the purchase price over the fair value of the assets acquired and liabilities assumed, if any, in a business combination, and is allocated to our single reporting unit. We review our goodwill and other intangible assets determined to have an indefinite useful life for impairment at least annually, during the fourth quarter, or more frequently whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Goodwill is tested for impairment by comparing the reporting unit's carrying value, including goodwill, to the fair value of the reporting unit. We operate under one reporting unit and for our annual goodwill impairment test, we determine the fair value of our reporting unit based on our enterprise value. We may elect to utilize a qualitative assessment to determine whether it is more likely than not that the fair value of our reporting unit is less than its carrying value. If, after assessing the qualitative factors, we determine that it is more likely than not that the fair value of our reporting unit is less than its carrying value, an impairment analysis will be performed. We will compare the fair value of our reporting unit with its carrying amount and if the carrying value of the reporting unit exceeds its fair value, an impairment loss will be recognized. Assessing whether impairment indicators exist or if events or changes in circumstances have occurred, including market conditions, operating fundamentals, competition and general economic conditions, requires significant judgment. Additionally, changes in the technology industry occur frequently and quickly. Therefore, there can be no assurance that a charge to operating expenses will not occur as a result of future goodwill, intangible assets and other long-lived assets impairment tests. To date, we have not recorded any impairment charges related to our goodwill and intangible assets. 88 Table of Contents NUTANIX, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Legal and Other Contingencies The outcomes of legal proceedings and claims brought against us are subject to significant uncertainty. An estimated loss from a loss contingency such as a legal proceeding or claim is accrued by a charge to income if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. In determining whether a loss should be accrued, we evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Changes in these factors could materially impact our consolidated financial statements. Recent Accounting Pronouncements Refer to "Recent Accounting Pronouncements" in Note 1 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K. 89 Table of Contents