Item 7. Management’s Discussion and Analysis
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 gives effect to the correction disclosed in Note 2 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K, and 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 run and move their workloads, including enterprise applications, high-performance databases, end-user computing and virtual desktop infrastructure 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 and Microsoft Azure 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.
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 toward 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.
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Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
We had a broad and diverse base of over 24,000 end customers as of July 31, 2023, including approximately 1,020 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 sustain profitable growth. As discussed further in the "Factors Affecting Our Performance" section below, 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.
As initially disclosed in our Quarterly Report on Form 10-Q filed with the SEC on May 24, 2023, the Audit Committee of our Board of Directors completed its investigation into our management’s discovery that certain third-party evaluation software was instead used for interoperability testing, validation and customer proofs of concept over a multi-year period. The Audit Committee found no evidence of wrongdoing by current senior management or by any members of the finance, legal, or accounting departments, but found that individual departments within our company procured software licenses without appropriate coordination with other departments and without ensuring that such licenses were sufficient for or consistent with the intended uses of the software, and as a result, evaluation software from two of our third-party providers was used in a non-compliant manner for interoperability testing, validation, customer proofs of concept, training and customer support over a multi-year period. In addition, the Audit Committee concluded that certain employees engaged in intentional misconduct to conceal use of evaluation software with respect to one of our third-party providers in violation of our code of business conduct and ethics and other policies. The Audit Committee proposed certain recommendations that our Board of Directors directed management to implement. Following the completion of the Audit Committee’s investigation, we also terminated certain employees who were found to be primarily responsible for the intentional misconduct, and the Audit Committee identified actions of certain other employees that were inconsistent with our code of business conduct and ethics and other policies and referred these matters to management for appropriate action.
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Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
In connection with the investigation, we had identified control deficiencies that, individually or in the aggregate, constitute a material weakness in our internal control over financial reporting. While our management, with the oversight of the Audit Committee, has made significant progress toward remediating this material weakness, our management determined that this material weakness has not yet been fully remediated. For more information about our remediation efforts, refer to Part II, Item 9A of this Annual Report on Form 10-K. This material weakness resulted in an error in the reporting of expenses for software licenses and support for each prior period beginning in August 2014, resulting in an immaterial understatement of operating expenses and accrued expenses and other current liabilities for these prior periods. We have evaluated the materiality of this error and determined that the impact is not material to our previously issued financial statements. We have determined to prospectively correct our previously issued financial statements to reflect the correction of this error rather than record a cumulative out-of-period adjustment for this error in the current period. As a result, we have prospectively corrected our financial statements for the affected periods to reflect the correction of this error. For more 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.
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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,
2021
2022
2023
(in thousands, except percentages and end customer count)
Total revenue
$
1,394,364
$
1,580,796
$
1,862,895
Year-over-year percentage increase
6.6
%
13.4
%
17.8
%
Subscription revenue
$
1,243,621
$
1,433,773
$
1,730,848
Total billings
$
1,521,096
$
1,708,641
$
2,005,582
Subscription billings
$
1,354,155
$
1,563,560
$
1,868,943
Annual contract value ("ACV") billings
$
594,292
$
756,326
$
956,810
Annual recurring revenue ("ARR")
$
878,733
$
1,202,438
$
1,561,981
Gross profit
$
1,102,458
$
1,259,640
$
1,530,708
Non-GAAP gross profit
$
1,147,730
$
1,311,662
$
1,575,385
Gross margin
79.1
%
79.7
%
82.2
%
Non-GAAP gross margin
82.3
%
83.0
%
84.6
%
Operating expenses
$
1,764,569
$
1,718,492
$
1,737,858
Non-GAAP operating expenses
$
1,430,089
$
1,398,881
$
1,414,389
Operating loss
$
(662,111
)
$
(458,852
)
$
(207,150
)
Non-GAAP operating (loss) income
$
(282,359
)
$
(87,219
)
$
160,996
Operating margin
(47.5
)%
(29.0
)%
(11.1
)%
Non-GAAP operating margin
(20.3
)%
(5.5
)%
8.6
%
Total deferred revenue
$
1,312,923
$
1,445,538
$
1,595,032
Net cash (used in) provided by operating activities
$
(99,810
)
$
67,543
$
272,403
Free cash flow
$
(158,457
)
$
18,485
$
206,999
Total end customers (1)
20,130
22,600
24,550
(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,
2021
2022
2023
(in thousands)
Disaggregation of revenue:
Subscription revenue
$
1,243,621
$
1,433,773
$
1,730,848
Non-portable software revenue
71,390
49,694
37,382
Hardware revenue
6,259
5,585
2,824
Professional services revenue
73,094
91,744
91,841
Total revenue
$
1,394,364
$
1,580,796
$
1,862,895
Disaggregation of billings:
Subscription billings
$
1,354,155
$
1,563,560
$
1,868,943
Non-portable software billings
71,390
49,694
37,382
Hardware billings
6,259
5,585
2,824
Professional services billings
89,292
89,802
96,433
Total billings
$
1,521,096
$
1,708,641
$
2,005,582
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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 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. These offerings represented approximately $639.3 million, $770.4 million and $905.8 million of our subscription revenue for fiscal 2021, 2022 and 2023, 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 $604.3 million, $663.4 million and $825.0 million of our subscription revenue for fiscal 2021, 2022 and 2023, 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, non-GAAP gross profit, non-GAAP gross margin, non-GAAP operating expenses, non-GAAP operating income (loss), non-GAAP operating margin, 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 operate 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.
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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 is a performance measure that we believe provides 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. Non-GAAP gross profit, non-GAAP gross margin, non-GAAP operating expenses, non-GAAP operating income (loss), and non-GAAP operating margin 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, non-GAAP gross profit, non-GAAP gross margin, non-GAAP operating expenses, non-GAAP operating income (loss), non-GAAP operating margin, 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 ("GAAP") in the United States. Total billings, subscription billings, non-GAAP gross profit, non-GAAP gross margin, non-GAAP operating expenses, non-GAAP operating income (loss), non-GAAP operating margin, and free cash flow are not substitutes for total revenue, subscription revenue, gross profit, gross margin, operating expenses, operating loss, operating margin, or net cash provided by (used in) operating activities, respectively. There is no GAAP measure that is comparable to ACV billings or ARR, so we have not reconciled either ACV billings or ARR 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 and the change in unbilled accounts receivable between the start and end of the period to total revenue recognized in the same period.
Subscription billings — We calculate subscription billings by adding the change in subscription deferred revenue between the start and end of the period to subscription revenue recognized in the same period.
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Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
ACV billings — We calculate ACV billings as the sum of the ACV for all contracts billed during the period. ACV is defined as the total annualized value of a contract, excluding amounts related to professional services and hardware. We calculate the total annualized value for a contract by dividing the total value of the contract by the number of years in the term of such contract, using, where applicable, an assumed term of five years for contracts that do not have a specified term.
ARR — We calculate ARR as the sum of ACV for all non-life-of-device contracts in effect as of the end of a specific period. For the purposes of this calculation, we assume that the contract term begins on the date a contract is booked, unless the terms of such contract prevent us from fulfilling our obligations until a later period, and irrespective of the periods in which we would recognize revenue for such contract.
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, restructuring charges, impairment of lease-related assets, and costs associated with other non-recurring transactions. Our presentation of non-GAAP gross profit and non-GAAP gross margin 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 these non-GAAP financial measures.
Non-GAAP operating expenses — We define non-GAAP operating expenses as total operating expenses adjusted to exclude stock-based compensation expense, amortization of acquired intangible assets, restructuring charges, impairment of lease-related assets, litigation settlement accruals and legal fees related to certain litigation matters, 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.
Non-GAAP operating income (loss) and Non-GAAP operating margin — We calculate non-GAAP operating margin as non-GAAP operating income (loss) divided by total revenue. We define non-GAAP operating income (loss) as operating loss adjusted to exclude stock-based compensation expense, amortization of acquired intangible assets, restructuring charges, impairment of lease-related assets, litigation settlement accruals and legal fees related to certain litigation matters, and costs associated with other non-recurring transactions. Our presentation of non-GAAP operating income (loss) and non-GAAP operating margin 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 these non-GAAP financial measures.
Free cash flow — We calculate free cash flow as net cash provided by (used in) operating activities less purchases of property and equipment, which measures our ability to generate cash from our business operations after our capital expenditures.
Total end customers — We define the number of end customers as the number of end customers for which we have received an order by the last day of the period, excluding partners to which we have sold products for their own demonstration purposes. A single organization or customer may represent multiple end customers for separate divisions, segments, or subsidiaries, and the total number of end customers may contract due to mergers, acquisitions, or other consolidation among existing end customers.
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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, non-GAAP operating income (loss), non-GAAP operating margin, and free cash flow to the most directly comparable GAAP financial measures, for each of the periods indicated:
Fiscal Year Ended July 31,
2021
2022
2023
(in thousands, except percentages)
Total revenue
$
1,394,364
$
1,580,796
$
1,862,895
Change in deferred revenue
126,732
127,845
142,687
Total billings (non-GAAP)
$
1,521,096
$
1,708,641
$
2,005,582
Gross profit
$
1,102,458
$
1,259,640
$
1,530,708
Stock-based compensation
30,483
38,225
34,577
Amortization of intangible assets
14,776
13,579
9,870
Restructuring charges
—
218
230
Impairment of lease-related assets
13
—
—
Non-GAAP gross profit
$
1,147,730
$
1,311,662
$
1,575,385
Gross margin
79.1
%
79.7
%
82.2
%
Stock-based compensation
2.2
%
2.4
%
1.9
%
Amortization of intangible assets
1.0
%
0.9
%
0.5
%
Restructuring charges
—
—
—
Impairment of lease-related assets
—
—
—
Non-GAAP gross margin
82.3
%
83.0
%
84.6
%
Operating expenses
$
1,764,569
$
1,718,492
$
1,737,858
Stock-based compensation
(328,062
)
(305,021
)
(277,168
)
Amortization of intangible assets
(2,604
)
(2,604
)
(827
)
Restructuring charges
—
(10,957
)
(5,073
)
Impairment / early exit of lease-related assets
(1,407
)
(597
)
(1,726
)
Litigation settlement accrual and legal fees
(2,407
)
(432
)
(38,675
)
Non-GAAP operating expenses
$
1,430,089
$
1,398,881
$
1,414,389
Loss from operations
$
(662,111
)
$
(458,852
)
$
(207,150
)
Stock-based compensation
358,545
343,246
311,745
Amortization of intangible assets
17,380
16,183
10,697
Restructuring charges
—
11,175
5,303
Impairment / early exit of lease-related assets
1,420
597
1,726
Litigation settlement accrual and legal fees
2,407
432
38,675
Non-GAAP (loss) income from operations
$
(282,359
)
$
(87,219
)
$
160,996
Operating margin
(47.5
)%
(29.0
)%
(11.1
)%
Stock-based compensation
25.7
%
21.8
%
16.6
%
Amortization of intangible assets
1.2
%
1.0
%
0.6
%
Restructuring charges
—
0.7
%
0.3
%
Impairment / early exit of lease-related assets
0.1
%
—
0.1
%
Litigation settlement accrual and legal fees
0.2
%
—
2.1
%
Non-GAAP operating margin
(20.3
)%
(5.5
)%
8.6
%
Net cash (used in) provided by operating activities
$
(99,810
)
$
67,543
$
272,403
Purchases of property and equipment
(58,647
)
(49,058
)
(65,404
)
Free cash flow (non-GAAP)
$
(158,457
)
$
18,485
$
206,999
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Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
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,
2021
2022
2023
(in thousands)
Subscription revenue
$
1,243,621
$
1,433,773
$
1,730,848
Change in subscription deferred revenue
110,534
129,787
138,095
Subscription billings
$
1,354,155
$
1,563,560
$
1,868,943
Professional services revenue
$
73,094
$
91,744
$
91,841
Change in professional services deferred revenue
16,198
(1,942
)
4,592
Professional services billings
$
89,292
$
89,802
$
96,433
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 sustain 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. In recent years, we have also 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 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, 2023, we considered approximately 80% of our global sales team members to be fully ramped, while the remaining approximately 20% 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. 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.
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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.
We believe that these investments will contribute to our long-term growth, although they may adversely affect our profitability in the near term.
Subscription-Based Business Model
Starting in fiscal 2019, as a result of our transition toward 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. 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 have impacted our billings, revenue and cash flow. For example, our term-based licenses generally have an average term of approximately three 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 based on an estimate of approximately five years. In addition, starting in fiscal 2021, we began compensating our sales force based on ACV instead of total contract value, and the shift to an ACV-based sales compensation plan incentivizes sales representatives to maximize ACV and minimize discounts, which may further compress the average term of our subscription term-based licenses. Furthermore, our customers may 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.
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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. The broad nature of the technology shift that our enterprise cloud platform represents and the relationships our end customers have with existing IT vendors 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, 2023, approximately 74% 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 7.8x greater, on average, than their initial order. This number increases to approximately 25.8x, on average, for Global 2000 end customers who have been with us for 18 months or longer as of July 31, 2023. 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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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 transition to a subscription-based business model and product transitions may cause concerns among our customer base, including concerns regarding changes to pricing over time, and may also result in confusion among new and existing end customers, for example, regarding our pricing models. Such concerns and/or confusion can slow adoption and renewal rates among our current and future customer base.
Components of Our Results of Operations
Revenue
We generate revenue primarily from the sale of our enterprise cloud platform, which can be deployed on a variety of qualified hardware platforms or, in the case of our cloud-based SaaS offerings, via hosted service or delivered pre-installed on an appliance that is configured to order. Non-portable software licenses are delivered or sold alongside configured-to-order appliances and can be used over the life of the associated appliance.
Our subscription term-based licenses are sold separately, or can be sold alongside configured-to-order appliances. Our subscription term-based licenses typically have a term of one to five years. Our cloud-based SaaS subscriptions have terms extending up to five years.
Configured-to-order appliances, including our Nutanix-branded NX hardware line, can be purchased from one of our channel partners, OEMs or, in limited cases, directly from Nutanix. Our enterprise cloud platform typically includes one or more years of support and entitlements, which provides customers with the right to software upgrades and enhancements as well as technical support. Our platform is primarily sold through channel partners 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.
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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 a plan to reduce our global headcount by approximately 4%, primarily in sales and marketing, as part of our efforts to drive toward profitable growth. In recent years, we have also 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.
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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 discount and debt issuance costs associated with our previously outstanding 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 certain foreign net operating losses due to the uncertainty of the ultimate realization of the future benefits of those assets.
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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,
2021
2022
2023
(in thousands)
Revenue:
Product
$
705,804
$
757,623
$
912,114
Support, entitlements and other services
688,560
823,173
950,781
Total revenue
1,394,364
1,580,796
1,862,895
Cost of revenue:
Product (1)(2)
55,287
55,602
51,107
Support, entitlements and other services (1)
236,619
265,554
281,080
Total cost of revenue
291,906
321,156
332,187
Gross profit
1,102,458
1,259,640
1,530,708
Operating expenses:
Sales and marketing (1)(2)
1,052,779
979,075
924,696
Research and development (1)
558,008
572,999
580,961
General and administrative (1)
153,782
166,418
232,201
Total operating expenses
1,764,569
1,718,492
1,737,858
Loss from operations
(662,111
)
(458,852
)
(207,150
)
Other expense, net
(354,991
)
(320,830
)
(26,435
)
Loss before provision for income taxes
(1,017,102
)
(779,682
)
(233,585
)
Provision for income taxes
18,487
19,264
20,975
Net loss
$
(1,035,589
)
$
(798,946
)
$
(254,560
)
(1) Includes stock-based compensation expense as
follows:
Product cost of revenue
$
6,023
$
7,379
$
7,966
Support, entitlements and other services cost of revenue
24,460
30,846
26,611
Sales and marketing
122,815
104,592
82,758
Research and development
150,856
143,759
139,073
General and administrative
54,391
56,670
55,337
Total stock-based compensation expense
$
358,545
$
343,246
$
311,745
(2) Includes amortization of intangible assets as follows:
Product cost of revenue
$
14,776
$
13,579
$
9,870
Sales and marketing
2,604
2,604
827
Total amortization of intangible assets
$
17,380
$
16,183
$
10,697
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Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Fiscal Year Ended July 31,
2021
2022
2023
(as a percentage of total revenue)
Revenue:
Product
50.6
%
47.9
%
49.0
%
Support, entitlements and other services
49.4
%
52.1
%
51.0
%
Total revenue
100.0
%
100.0
%
100.0
%
Cost of revenue:
Product
3.9
%
3.5
%
2.7
%
Support, entitlements and other services
17.0
%
16.8
%
15.1
%
Total cost of revenue
20.9
%
20.3
%
17.8
%
Gross profit
79.1
%
79.7
%
82.2
%
Operating expenses:
Sales and marketing
75.5
%
61.9
%
49.6
%
Research and development
40.0
%
36.2
%
31.2
%
General and administrative
11.0
%
10.5
%
12.5
%
Total operating expenses
126.5
%
108.6
%
93.3
%
Loss from operations
(47.4
)%
(28.9
)%
(11.1
)%
Other expense, net
(25.5
)%
(20.3
)%
(1.4
)%
Loss before provision for income taxes
(72.9
)%
(49.2
)%
(12.5
)%
Provision for income taxes
1.3
%
1.2
%
1.1
%
Net loss
(74.2
)%
(50.4
)%
(13.6
)%
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Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Comparison of the Fiscal Years Ended July 31, 2021, 2022 and 2023
Revenue
Fiscal Year Ended
July 31,
Change
Fiscal Year Ended
July 31,
Change
2021
2022
$
%
2022
2023
$
%
(in thousands, except percentages)
Product
$
705,804
$
757,623
$
51,819
7
%
$
757,623
$
912,114
$
154,491
20
%
Support, entitlements
and other services
688,560
823,173
134,613
20
%
823,173
950,781
127,608
16
%
Total revenue
$
1,394,364
$
1,580,796
$
186,432
13
%
$
1,580,796
$
1,862,895
$
282,099
18
%
Fiscal Year Ended
July 31,
Change
Fiscal Year Ended
July 31,
Change
2021
2022
$
%
2022
2023
$
%
(in thousands, except percentages)
U.S.
$
758,128
$
887,141
$
129,013
17
%
$
887,141
$
1,039,294
$
152,153
17
%
Europe, the Middle
East and Africa
320,837
374,186
53,349
17
%
374,186
471,367
97,181
26
%
Asia Pacific
260,637
274,373
13,736
5
%
274,373
309,138
34,765
13
%
Other Americas
54,762
45,096
(9,666
)
(18
)%
45,096
43,096
(2,000
)
(4
)%
Total revenue
$
1,394,364
$
1,580,796
$
186,432
13
%
$
1,580,796
$
1,862,895
$
282,099
18
%
Product revenue increased year-over-year for both fiscal 2022 and fiscal 2023 due primarily to increases in software revenue resulting from growth in software renewals due to our transition to selling subscription term-based licenses and an increased adoption of our products, partially offset by the impact of the shorter average contract terms resulting from this transition. The total average contract term was approximately 3.4 years, 3.2 years and 3.0 years for fiscal 2021, 2022 and 2023, 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 2022 and fiscal 2023 in conjunction with the growth of our end customer base and the related software entitlement and support subscription contracts and renewals.
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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
2021
2022
$
%
2022
2023
$
%
(in thousands, except percentages)
Cost of product revenue
$
55,287
$
55,602
$
315
1
%
$
55,602
$
51,107
$
(4,495
)
(8
)%
Product gross margin
92.2
%
92.7
%
92.7
%
94.4
%
Cost of support,
entitlements and
other services revenue
$
236,619
$
265,554
$
28,935
12
%
$
265,554
$
281,080
$
15,526
6
%
Support, entitlements
and other services
gross margin
65.6
%
67.7
%
67.7
%
70.4
%
Total gross margin
79.1
%
79.7
%
79.7
%
82.2
%
Cost of product revenue
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. Cost of product revenue decreased year-over-year for fiscal 2023 due primarily to corresponding decreases in hardware revenue. Slight fluctuations in hardware revenue and cost of product revenue are anticipated, as we expect to continue selling small amounts of hardware for the foreseeable future.
Product gross margin increased by 0.5 percentage points, from 92.2% in fiscal 2021 to 92.7% in fiscal 2022, and by 1.7 percentage points, to 94.4% in fiscal 2023, 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 2022 and fiscal 2023 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 2.1 percentage points, from 65.6% in fiscal 2021 to 67.7% in fiscal 2022, and by 2.7 percentage points to 70.4% in fiscal 2023, due primarily to support, entitlements and other services revenue growing at a higher rate than personnel-related costs.
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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
2021
2022
$
%
2022
2023
$
%
(in thousands, except percentages)
Sales and marketing
$
1,052,779
$
979,075
$
(73,704
)
(7
)%
$
979,075
$
924,696
$
(54,379
)
(6
)%
Percent of total revenue
75.5
%
61.9
%
61.9
%
49.6
%
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 personnel-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.
Sales and marketing expense decreased year-over-year for fiscal 2023 due primarily to lower personnel-related costs, driven by the 8% decrease in sales and marketing headcount from July 31, 2022 to July 31, 2023, as well as lower marketing costs. The overall decrease in sales and marketing expense was partially offset by higher travel and event-related costs, as meetings and events continue to transition from virtual to in-person.
Research and development
Fiscal Year Ended
July 31,
Change
Fiscal Year Ended
July 31,
Change
2021
2022
$
%
2022
2023
$
%
(in thousands, except percentages)
Research and development
$
558,008
$
572,999
$
14,991
3
%
$
572,999
$
580,961
$
7,962
1
%
Percent of total revenue
40.0
%
36.2
%
36.2
%
31.2
%
Research and development expense increased year-over-year for both fiscal 2022 and fiscal 2023 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 and 6% from July 31, 2022 to July 31, 2023, partially offset by lower stock-based compensation expense resulting from terminations during the period and lower technical costs.
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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
2021
2022
$
%
2022
2023
$
%
(in thousands, except percentages)
General and administrative
$
153,782
$
166,418
$
12,636
8
%
$
166,418
$
232,201
$
65,783
40
%
Percent of total revenue
11.0
%
10.5
%
10.5
%
12.5
%
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.
General and administrative expense increased year-over-year for fiscal 2023 due primarily to charges of $71.0 million for the proposed settlement of the securities class actions, partially offset by $39.9 million for amounts recoverable under our applicable insurance policies, as well as costs incurred related to the recently completed Audit Committee investigation. The increase in G&A expense was also due to an increase in personnel-related costs resulting from growth in our G&A headcount, which grew 13% from July 31, 2022 to July 31, 2023. For additional information regarding the securities class actions, refer to Note 8 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.
Other Expense, Net
Fiscal Year Ended
July 31,
Change
Fiscal Year Ended
July 31,
Change
2021
2022
$
%
2022
2023
$
%
(in thousands, except percentages)
Interest income, net
$
4,067
$
4,765
$
(698
)
(17
)%
$
4,765
$
38,427
$
(33,662
)
(706
)%
Change in fair value of
derivative liability
(269,265
)
(198,038
)
(71,227
)
(26
)%
(198,038
)
—
(198,038
)
(100
)%
Amortization of debt
discount and issuance
costs and interest
expense
(79,932
)
(60,734
)
(19,198
)
(24
)%
(60,734
)
(64,113
)
3,379
6
%
Debt extinguishment costs
—
(64,911
)
64,911
100
%
(64,911
)
—
(64,911
)
(100
)%
Other
(9,861
)
(1,912
)
(7,949
)
(81
)%
(1,912
)
(749
)
(1,163
)
(61
)%
Other expense, net
$
(354,991
)
$
(320,830
)
$
(34,161
)
(10
)%
$
(320,830
)
$
(26,435
)
$
(294,395
)
(92
)%
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.
The decrease in other expense, net for fiscal 2023 was due primarily to the fair value of the derivative liability related to the 2026 Notes, which was reclassified to equity during the first quarter of fiscal 2022, 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, the $11.0 million gain on our divestiture of Frame Desktop-as-a-Service ("Frame"), and an increase in interest income on our investments.
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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
2021
2022
$
%
2022
2023
$
%
(in thousands, except percentages)
Provision for income taxes
$
18,487
$
19,264
$
777
4
%
$
19,264
$
20,975
$
1,711
9
%
The year-over-year increase in the provision for income taxes in fiscal 2022 and fiscal 2023 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 certain foreign net operating losses.
Liquidity and Capital Resources
Our principal sources of liquidity were cash, cash equivalents, and marketable securities and net accounts receivable. As of July 31, 2023, we had $512.9 million of cash and cash equivalents, $2.8 million of restricted cash and $924.5 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. As of July 31, 2023, we had accounts receivable of $157.3 million, net of allowances of $0.7 million.
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 remained outstanding. In January 2023, we settled the 2023 Notes in full at maturity with a cash payment of $145.7 million. For additional information, see Note 6 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) SPV, LP, an entity affiliated with Bain Capital, LP. For additional information, see Note 6 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 6 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.
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Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Due to investments in our business as well as the potential cash flow impacts resulting from our transition to a subscription-based business model, our operating and free cash flow may 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, including share repurchases, 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, 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.
Capital Return
In August 2023, our Board of Directors authorized the repurchase of up to $350.0 million of our Class A common stock. Repurchases will be funded from available working capital and may be made at management’s discretion from time to time. The authorization has no fixed expiration date and does not obligate us to repurchase any specified number or dollar value of shares. The program may be modified, suspended or discontinued at any time. For more information on the share repurchase program, refer to Note 15 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.
Cash Flows
The following table summarizes our cash flows for the periods presented:
Fiscal Year Ended July 31,
2021
2022
2023
(in thousands)
Net cash (used in) provided by operating activities
$
(99,810
)
$
67,543
$
272,403
Net cash used in investing activities
(597,153
)
(54,189
)
(49,785
)
Net cash provided by (used in) financing activities
663,845
103,635
(112,709
)
Net (decrease) increase in cash, cash equivalents and restricted cash
$
(33,118
)
$
116,989
$
109,909
Cash Flows from Operating Activities
Net cash used in operating activities was $99.8 million for fiscal 2021 and net cash provided by operating activities was $67.5 million and $272.4 million for fiscal 2022 and fiscal 2023, respectively, representing improvements of $167.4 million and $204.9 million, respectively, as compared to the respective prior year periods. The increases in cash generated from operating activities for fiscal 2022 and fiscal 2023 were due primarily to decreases in our net loss from operations.
Cash Flows from Investing Activities
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.
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Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Net cash used in investing activities of $49.8 million for fiscal 2023 consisted of $955.3 million of short-term investment purchases and $65.4 million of purchases of property and equipment, partially offset by $965.0 million of maturities of short-term investments and $5.9 million in proceeds from the Frame divestiture.
Cash Flows from Financing Activities
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.
Net cash used in financing activities of $112.7 million for fiscal 2023 consisted of $145.7 million used to repay the 2023 Notes at maturity, $10.2 million of taxes paid related to the net share settlement of equity awards, and $3.3 million of payments for finance lease obligations, partially offset by $46.5 million of proceeds from the sale of shares through employee equity incentive plans.
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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, 2023:
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)
$
1,372,569
$
—
$
—
$
1,372,569
$
—
Interest on convertible senior notes (1)
8,292
759
—
7,533
—
Operating leases (undiscounted basis) (2)
119,900
33,830
32,601
28,420
25,049
Other commitments (3)
99,992
88,178
8,995
2,819
—
Guarantees with contract manufacturers
45,288
45,288
—
—
—
Total
$
1,646,041
$
168,055
$
41,596
$
1,411,341
$
25,049
(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 6 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 7 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, 2023, 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 13 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.
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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 3 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.
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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.
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.
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