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 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") is a global leader in cloud software, offering organizations a single platform for running applications and managing data, anywhere. Our vision is to make hybrid multicloud deployments simple and free customers to focus on achieving their business outcomes. Our mission is to delight customers with an open hybrid multicloud platform with rich data services to run and manage any application, anywhere.
Our Nutanix Cloud Platform is designed to enable organizations to build a hybrid multicloud infrastructure, providing a consistent cloud operating model with a single platform for running applications and managing data in core data centers, at the edge, and in public clouds, all while supporting a variety of hypervisors and container platforms. Nutanix Cloud Platform supports a wide variety of workloads with varied compute, storage, and network requirements, including business-critical applications, data platforms (including SQL and NoSQL databases and business intelligence applications), general-purpose workloads (including system infrastructure, networking, and security), end-user computing and virtual desktop infrastructure services, enterprise artificial intelligence ("AI") workloads (including machine learning and generative AI workloads), and cloud native applications (including modern, containerized applications).
We originally pioneered hyperconverged infrastructure to break down legacy silos by merging compute, storage and networking into a single, easy-to-use, software-defined data center platform. We continued to innovate and developed Nutanix AHV, our native hypervisor that offers enterprise-grade virtualization and built-in Kubernetes support. To provide our customers with more choice, we further engineered our software solutions to run on a variety of server platforms, decoupling our software from Nutanix-branded hardware appliances and powering a variety of on-premises private cloud deployments, as part of our previously-completed transition from a hardware company to a software company. To provide our customers with the flexibility to choose their preferred license levels and durations based on their specific business needs, we reshaped our licensing by completing a transition to a subscription-based business model. In addition to making hybrid multicloud deployments simple, we have a further long-term vision to enable developers to build modern container-based applications once and run them anywhere through Project Beacon, our multi-year effort to provide consistent Kubernetes platform management and data-centric platform services across clouds.
Our business is organized into a single operating and reportable segment. We operate a subscription-based business model, meaning one in which our products, including associated support and entitlement arrangements, are sold with a defined duration.
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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 26,000 end customers as of July 31, 2024, including approximately 1,060 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 our channel partners or original equipment manufacturers ("OEMs") and delivered directly to our end customers. 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 platform to provide a variety of cloud-based services to their customers.
We continue to invest in the profitable 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 creating operational efficiencies throughout our organization, including go-to-market efficiencies, particularly by generating leverage through partnerships. By maintaining this balance, we believe that we can sustain profitable growth.
Key Financial and Performance Metrics
We monitor the following key financial and performance metrics:
As of and for the Fiscal Year Ended July 31,
2022
2023
2024
(in thousands, except percentages and end customer count)
Total revenue
$
1,580,796
$
1,862,895
$
2,148,816
Year-over-year percentage increase
13.4
%
17.8
%
15.3
%
Total billings
$
1,708,641
$
2,005,582
$
2,407,756
Annual contract value ("ACV") billings
$
756,326
$
956,810
$
1,162,428
Annual recurring revenue ("ARR")
$
1,202,438
$
1,561,981
$
1,907,982
Gross profit
$
1,259,640
$
1,530,708
$
1,824,704
Non-GAAP gross profit
$
1,311,662
$
1,575,385
$
1,862,203
Gross margin
79.7
%
82.2
%
84.9
%
Non-GAAP gross margin
83.0
%
84.6
%
86.7
%
Operating expenses
$
1,718,492
$
1,737,858
$
1,817,141
Non-GAAP operating expenses
$
1,398,881
$
1,414,389
$
1,515,096
Operating (loss) income
$
(458,852
)
$
(207,150
)
$
7,563
Non-GAAP operating (loss) income
$
(87,219
)
$
160,996
$
347,107
Operating margin
(29.0
)%
(11.1
)%
0.4
%
Non-GAAP operating margin
(5.5
)%
8.6
%
16.2
%
Net cash provided by operating activities
$
67,543
$
272,403
$
672,931
Free cash flow
$
18,485
$
206,999
$
597,679
Total end customers (1)
22,600
24,550
26,530
(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.
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Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Disaggregation of Revenue and Billings
The following table depicts the disaggregation of revenue and billings by type, consistent with how we evaluate our financial performance:
Fiscal Year Ended July 31,
2022
2023
2024
(in thousands)
Disaggregation of revenue:
Subscription revenue
$
1,433,773
$
1,730,848
$
2,016,776
Professional services revenue
91,744
91,841
100,852
Other non-subscription product revenue (1)
55,279
40,206
31,188
Total revenue
$
1,580,796
$
1,862,895
$
2,148,816
Disaggregation of billings:
Subscription billings
$
1,563,560
$
1,868,943
$
2,253,633
Professional services billings
89,802
96,433
122,935
Other non-subscription product billings (1)
55,279
40,206
31,188
Total billings
$
1,708,641
$
2,005,582
$
2,407,756
(1) Prior to fiscal 2024, these amounts were presented as separate line items, Non-portable software and Hardware, as described below. Prior period amounts have been updated to conform to the current period presentation.
Subscription revenue — Subscription revenue includes any performance obligation which has a defined term and is generated from the sales of software entitlement and support subscriptions, subscription software licenses and cloud-based software-as-a-service ("SaaS") offerings.
• Ratable — We recognize revenue from software entitlement and support subscriptions and SaaS offerings ratably over the contractual service period, the substantial majority of which relate to software entitlement and support subscriptions. These offerings represented approximately $770.4 million, $905.8 million and $1.0 billion of our subscription revenue for fiscal 2022, 2023 and 2024, 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 $663.4 million, $825.0 million and $987.8 million of our subscription revenue for fiscal 2022, 2023 and 2024, respectively.
Professional services revenue — We also sell professional services with our products. We recognize revenue related to professional services as they are performed.
Other non-subscription product revenue — Other non-subscription product revenue includes approximately $49.7 million, $37.4 million and $27.9 million of non-portable software revenue for fiscal 2022, 2023 and 2024, respectively, and approximately $5.6 million, $2.8 million and $3.3 million of hardware revenue for fiscal 2022, 2023 and 2024, respectively.
• Non-portable software revenue — Non-portable software revenue includes sales of our platform when delivered on a configured-to-order server 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 server on which the software is delivered. Revenue from our non-portable software products is generally recognized upon transfer of control to the customer.
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Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
• Hardware revenue — In the infrequent transactions where the hardware platform 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.
Non-GAAP Financial Measures and Key Performance Measures
We regularly monitor total 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 our 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.
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. ACV billings is a performance measure that we believe has provided useful information to our management and investors during our transition to a subscription-based business model as it has allowed us to better track the top-line growth of business during the transition 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 top-line growth of our subscription business because it 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 generated by the business after 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.
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Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Total 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, 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, gross profit, gross margin, operating expenses, operating income (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 taking the change in deferred revenue less the change in unbilled accounts receivable between the start and end of the period and adding that to total 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 life-of-device contracts that do not have a specified term. We will discontinue reporting ACV billings beginning with our first quarter of fiscal 2025.
ARR — We calculate ARR as the sum of ACV for all subscription contracts 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, 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. ARR excludes all life-of-device contracts.
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 certain 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.
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Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
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 non-ordinary course litigation matters, and costs associated with certain 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 income (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 non-ordinary course litigation matters, and costs associated with certain 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,
2022
2023
2024
(in thousands, except percentages)
Total revenue
$
1,580,796
$
1,862,895
$
2,148,816
Change in deferred revenue
127,845
142,687
258,940
Total billings (non-GAAP)
$
1,708,641
$
2,005,582
$
2,407,756
Gross profit
$
1,259,640
$
1,530,708
$
1,824,704
Stock-based compensation
38,225
34,577
34,107
Amortization of intangible assets
13,579
9,870
3,392
Restructuring charges
218
230
—
Non-GAAP gross profit
$
1,311,662
$
1,575,385
$
1,862,203
Gross margin
79.7
%
82.2
%
84.9
%
Stock-based compensation
2.4
%
1.9
%
1.6
%
Amortization of intangible assets
0.9
%
0.5
%
0.2
%
Restructuring charges
—
—
—
Non-GAAP gross margin
83.0
%
84.6
%
86.7
%
Operating expenses
$
1,718,492
$
1,737,858
$
1,817,141
Stock-based compensation
(305,021
)
(277,168
)
(299,726
)
Amortization of intangible assets
(2,604
)
(827
)
(317
)
Restructuring (charges) reversals
(10,957
)
(5,073
)
194
Early exit of lease-related assets
(597
)
(1,726
)
—
Litigation settlement accrual and legal fees
(432
)
(38,675
)
(1,971
)
Other
—
—
(225
)
Non-GAAP operating expenses
$
1,398,881
$
1,414,389
$
1,515,096
(Loss) income from operations
$
(458,852
)
$
(207,150
)
$
7,563
Stock-based compensation
343,246
311,745
333,833
Amortization of intangible assets
16,183
10,697
3,709
Restructuring charges (reversals)
11,175
5,303
(194
)
Early exit of lease-related assets
597
1,726
—
Litigation settlement accrual and legal fees
432
38,675
1,971
Other
—
—
225
Non-GAAP (loss) income from operations
$
(87,219
)
$
160,996
$
347,107
Operating margin
(29.0
)%
(11.1
)%
0.4
%
Stock-based compensation
21.8
%
16.6
%
15.5
%
Amortization of intangible assets
1.0
%
0.6
%
0.2
%
Restructuring charges (reversals)
0.7
%
0.3
%
—
Early exit of lease-related assets
—
0.1
%
—
Litigation settlement accrual and legal fees
—
2.1
%
0.1
%
Other
—
—
—
Non-GAAP operating margin
(5.5
)%
8.6
%
16.2
%
Net cash provided by operating activities
$
67,543
$
272,403
$
672,931
Purchases of property and equipment
(49,058
)
(65,404
)
(75,252
)
Free cash flow (non-GAAP)
$
18,485
$
206,999
$
597,679
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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. Refer to Part I, Item 1A. "Risk Factors" in this Annual Report on Form 10-K 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 creating operational efficiencies throughout our organization, including go-to-market efficiencies, particularly by generating leverage through partnerships. By maintaining this balance, we believe we can sustain profitable growth.
Investment in Sales and Marketing – Our ability to drive top-line 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. As we continue to recruit additional sales representatives, it will take time to train and ramp them to full productivity. As a result, our overall sales and marketing expense may fluctuate 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, 2024, we considered approximately 79% of our global sales team members to be fully ramped, while the remaining approximately 21% 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 operate our 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 OEMs, including supporting new OEMs, and optimizing headcount in geographies based on market opportunities.
Investment in Research and Development and Engineering – We also intend, in the long term, to grow our global research and development and engineering teams to enhance our solutions, including our newer subscription-based products, improve integration with new and existing ecosystem partners and broaden the range of technologies and features available through our platform. We continue to invest in our growth by strengthening our core offerings, investing in our solution ecosystem, and taking advantage of emerging opportunities around generative AI and modern applications across hybrid and mutlicloud environments.
We believe that these investments will contribute to our long-term growth, although they may adversely affect our profitability in the near term.
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Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Our Subscription-Based Business Model
We operate a subscription-based business model to provide our customers with the flexibility to choose their preferred license levels and durations based on their specific business needs. A subscription-based business model means one in which our products, including associated support and entitlement arrangements, are sold with a defined duration. Subscription-based sales consist of subscription term-based licenses and offerings with ongoing performance obligations, including software entitlement and support subscriptions and cloud-based SaaS offerings. Revenue from subscription term-based licenses is generally recognized upfront upon transfer of control to the customer, which happens when we make the software available to the customer. Accordingly, any decline in average contract durations associated with our subscription term-based licenses would negatively impact our top-line results. Revenue from software entitlement and support subscription and cloud-based SaaS offerings is recognized ratably over the contractual service period. Accordingly, any decline in new or renewed subscriptions in any one fiscal quarter may not be fully or immediately reflected in our revenue for that fiscal quarter. For additional information on revenue recognition, see Note 2 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K and "Critical Accounting Estimates" later in this "Management’s Discussion and Analysis of Financial Condition and Results of Operations" section.
Market Adoption of Our Products
Hybrid and multicloud paradigms, as well as trends in generative AI and modern applications, have affected IT buyer expectations about the simplicity, agility, scalability, portability, and pay-as-you-grow economics of IT resources. A key focus of our sales and marketing efforts is creating market awareness about the benefits of our platform. This includes our newer products outside of our core hyperconverged infrastructure offering, both as compared to traditional data center architectures, as well as the public cloud, particularly as we continue to pursue large enterprises and mission critical workloads. Our business and operating results will be significantly affected by the degree to and speed with which organizations adopt our 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 platforms that our customers often choose to purchase 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 platforms on which our software runs exposes us to supply chain delays, which could impair our ability to provide services to end customers in a timely manner. Our business and results of operations will be significantly affected by our success in leveraging our relationships with our channel and OEM partners and expanding our network of cloud and ecosystem partners.
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Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Customer Acquisition, Retention and Expansion
Our business and operating results will depend on our ability to obtain new end customers and retain and sell additional solutions to our existing base of end customers. Our ability to obtain new end customers and retain and sell additional solutions to existing customers will in turn depend in part on a number of factors. These factors include our ability to: execute on our business plans, vision, and objectives (including our growth and go-to-market strategies), respond to competitive pressures, 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, our ability to respond to competitive pressures, manage our costs, and anticipate and manage customer demand. Furthermore, our 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.
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 subscription-focused business model, software and support renewals are having 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 of July 31, 2024, approximately 76% 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 8.7x greater, on average, than their initial order. This number increases to approximately 30.8x, on average, for Global 2000 end customers who have been with us for 18 months or longer as of July 31, 2024. 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.
More recently, our sales pipeline has evolved to include a higher mix of larger deal opportunities, which often take longer to close and require more levels of review from the customer's executive team, involve greater competition, and have greater variability in timing, outcome and deal structure. We have also seen a modest elongation of average sales cycles compared to historical levels. These trends are expected to drive greater variability in our ability to land new customers and expand sales to existing customers, and our top-line results may be adversely affected.
Components of Our Results of Operations
Revenue
We generate revenue primarily from the sale of our Nutanix Cloud Platform, sold primarily as subscription term-based licenses, and 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 a server that is configured to order. Non-portable software licenses are delivered or sold alongside configured-to-order servers and can be used over the life of the associated server.
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Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Our subscription term-based licenses are sold separately, or can be sold alongside configured-to-order servers. 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.
Our customers generally purchase their qualified hardware platforms for deployment of our software from one of our channel partners or OEMs. Our 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 primarily consists of software revenue. A majority of our product revenue is generated from the sale of our Nutanix Cloud Platform. 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 server from a partner, upon making the software available to the customer when not sold with a server, or as services are performed with SaaS offerings. In the infrequent transactions where the hardware 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.
Support, entitlements and other services revenue — We generate our support, entitlements and other services revenue primarily from software entitlement and support subscriptions, which include the right to software upgrades and enhancements as well as technical support. The majority of our product sales are sold in conjunction with software entitlement and support subscriptions, with terms ranging from one to five years. Occasionally, we also sell professional services with our products. We recognize revenue from software entitlement and support contracts ratably over the contractual service period, which typically commences upon transfer of control of the corresponding products to the customer. We recognize revenue related to professional services as they are performed.
Cost of Revenue
Cost of product revenue — Cost of product revenue consists of costs paid to 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.
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Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Sales and marketing — Sales and marketing expense consists primarily of personnel costs, including sales commissions. Sales and marketing expense also includes costs for promotional activities and other marketing costs, travel expenses, 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. As we continue to recruit additional sales representatives, it will take time to train and ramp them to full productivity. As a result, our sales and marketing expense may fluctuate.
Research and development — Research and development ("R&D") expense consists primarily of personnel costs, as well as other direct and allocated costs. We have devoted our product development efforts primarily to enhancing the functionality and expanding the capabilities of our solutions. R&D costs are expensed as incurred, unless they meet the criteria for capitalization. We expect R&D expense, in the long term, to increase in absolute dollars as part of our long-term plans to invest in our future products and services, including our newer subscription-based products, although R&D expense may fluctuate as a percentage of total revenue and on an absolute basis from quarter to quarter.
General and administrative — General and administrative ("G&A") expense consists primarily of personnel costs, which include our executive, finance, human resources, and legal organizations. G&A expense also includes outside professional services, which consists primarily of legal, accounting and other consulting costs, as well as insurance and other costs associated with being a public company and allocated costs. We expect G&A expense, in the long term, to increase in absolute dollars, particularly due to additional legal, accounting, insurance, and other costs associated with our growth, although G&A expense may fluctuate as a percentage of total revenue and on an absolute basis from quarter to quarter.
Other Income (Expense), Net
Other income (expense), net consists primarily of interest income and expense, which includes the amortization of the debt discount and debt issuance costs associated with our previously outstanding 0% convertible senior notes due 2023 (the "2023 Notes"), our previously outstanding 2.50% convertible senior notes due 2026 (the "2026 Notes") and our outstanding 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 related to the conversion of the 2026 Notes in full, 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. Beginning in fiscal 2023, provisions in the U.S. Tax Cuts and Jobs Act of 2017 required us to capitalize and amortize R&D expenditures rather than deducting the costs as incurred. The capitalization of R&D resulted in U.S. taxable income for the fiscal 2024, which was offset by net operating loss carryforwards.
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NUTANIX, INC.
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Results of Operations
The following tables set forth our 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,
2022
2023
2024
(in thousands)
Revenue:
Product
$
757,623
$
912,114
$
1,067,948
Support, entitlements and other services
823,173
950,781
1,080,868
Total revenue
1,580,796
1,862,895
2,148,816
Cost of revenue:
Product (1)(2)
55,602
51,107
36,441
Support, entitlements and other services (1)
265,554
281,080
287,671
Total cost of revenue
321,156
332,187
324,112
Gross profit
1,259,640
1,530,708
1,824,704
Operating expenses:
Sales and marketing (1)(2)
979,075
924,696
977,286
Research and development (1)
572,999
580,961
638,992
General and administrative (1)
166,418
232,201
200,863
Total operating expenses
1,718,492
1,737,858
1,817,141
(Loss) income from operations
(458,852
)
(207,150
)
7,563
Other expense, net
(320,830
)
(26,435
)
(108,881
)
Loss before provision for income taxes
(779,682
)
(233,585
)
(101,318
)
Provision for income taxes
19,264
20,975
23,457
Net loss
$
(798,946
)
$
(254,560
)
$
(124,775
)
(1) Includes stock-based compensation expense as
follows:
Product cost of revenue
$
7,379
$
7,966
$
6,822
Support, entitlements and other services cost of revenue
30,846
26,611
27,285
Sales and marketing
104,592
82,758
80,190
Research and development
143,759
139,073
156,784
General and administrative
56,670
55,337
62,752
Total stock-based compensation expense
$
343,246
$
311,745
$
333,833
(2) Includes amortization of intangible assets as follows:
Product cost of revenue
$
13,579
$
9,870
$
3,392
Sales and marketing
2,604
827
317
Total amortization of intangible assets
$
16,183
$
10,697
$
3,709
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NUTANIX, INC.
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Fiscal Year Ended July 31,
2022
2023
2024
(as a percentage of total revenue)
Revenue:
Product
47.9
%
49.0
%
49.7
%
Support, entitlements and other services
52.1
%
51.0
%
50.3
%
Total revenue
100.0
%
100.0
%
100.0
%
Cost of revenue:
Product
3.5
%
2.7
%
1.7
%
Support, entitlements and other services
16.8
%
15.1
%
13.4
%
Total cost of revenue
20.3
%
17.8
%
15.1
%
Gross profit
79.7
%
82.2
%
84.9
%
Operating expenses:
Sales and marketing
61.9
%
49.6
%
45.5
%
Research and development
36.2
%
31.2
%
29.7
%
General and administrative
10.5
%
12.5
%
9.3
%
Total operating expenses
108.6
%
93.3
%
84.5
%
(Loss) income from operations
(28.9
)%
(11.1
)%
0.4
%
Other expense, net
(20.3
)%
(1.4
)%
(5.1
)%
Loss before provision for income taxes
(49.2
)%
(12.5
)%
(4.7
)%
Provision for income taxes
1.2
%
1.1
%
1.1
%
Net loss
(50.4
)%
(13.6
)%
(5.8
)%
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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, 2022, 2023 and 2024
Revenue
Fiscal Year Ended
July 31,
Change
Fiscal Year Ended
July 31,
Change
2022
2023
$
%
2023
2024
$
%
(in thousands, except percentages)
Product
$
757,623
$
912,114
$
154,491
20
%
$
912,114
$
1,067,948
$
155,834
17
%
Support, entitlements
and other services
823,173
950,781
127,608
16
%
950,781
1,080,868
130,087
14
%
Total revenue
$
1,580,796
$
1,862,895
$
282,099
18
%
$
1,862,895
$
2,148,816
$
285,921
15
%
Fiscal Year Ended
July 31,
Change
Fiscal Year Ended
July 31,
Change
2022
2023
$
%
2023
2024
$
%
(in thousands, except percentages)
U.S.
$
887,141
$
1,039,294
$
152,153
17
%
$
1,039,294
$
1,189,213
$
149,919
14
%
Europe, the Middle
East and Africa
374,186
471,367
97,181
26
%
471,367
563,281
91,914
19
%
Asia Pacific
274,373
309,138
34,765
13
%
309,138
348,952
39,814
13
%
Other Americas
45,096
43,096
(2,000
)
(4
)%
43,096
47,370
4,274
10
%
Total revenue
$
1,580,796
$
1,862,895
$
282,099
18
%
$
1,862,895
$
2,148,816
$
285,921
15
%
Product revenue increased year-over-year for both fiscal 2023 and fiscal 2024 due primarily to increases in software revenue resulting from an increased adoption of our products as well as growth in software renewals. Specifically, we saw growth in term-based license revenue, which increased by approximately 24% and 20% year-over-year for fiscal 2023 and fiscal 2024, respectively. The total average contract duration was approximately 3.2 years, 3.0 years and 3.0 years for fiscal 2022, 2023 and 2024, respectively. Total average contract duration represents the dollar-weighted term across all subscription contracts, as well as our limited number of 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 2023 and fiscal 2024 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
2022
2023
$
%
2023
2024
$
%
(in thousands, except percentages)
Cost of product revenue
$
55,602
$
51,107
$
(4,495
)
(8
)%
$
51,107
$
36,441
$
(14,666
)
(29
)%
Product gross margin
92.7
%
94.4
%
94.4
%
96.6
%
Cost of support,
entitlements and
other services revenue
$
265,554
$
281,080
$
15,526
6
%
$
281,080
$
287,671
$
6,591
2
%
Support, entitlements
and other services
gross margin
67.7
%
70.4
%
70.4
%
73.4
%
Total gross margin
79.7
%
82.2
%
82.2
%
84.9
%
Cost of product revenue
Cost of product revenue decreased year-over-year for both fiscal 2023 and fiscal 2024 due primarily to decreases of $3.7 million and $6.5 million, respectively, in amortization expense resulting from acquired intangible assets starting to reach the end of their useful lives. 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 1.7 percentage points and 2.2 percentage points in fiscal 2023 and fiscal 2024, respectively, due primarily to product revenue increasing while cost of product revenue decreases .
Cost of support, entitlements and other services revenue
Cost of support, entitlements and other services revenue increased year-over-year for both fiscal 2023 and fiscal 2024 due primarily to higher personnel-related costs, resulting from growth in our global customer support organization. Higher outside services costs also contributed to the increase for fiscal 2024.
Support, entitlements and other services gross margin increased by 2.7 percentage points and 3.0 percentage points fiscal 2023 and in fiscal 2024, respectively, 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
2022
2023
$
%
2023
2024
$
%
(in thousands, except percentages)
Sales and marketing
$
979,075
$
924,696
$
(54,379
)
(6
)%
$
924,696
$
977,286
$
52,590
6
%
Percent of total revenue
61.9
%
49.6
%
49.6
%
45.5
%
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 transitioned from virtual to in-person.
Sales and marketing expense increased year-over-year for fiscal 2024 due primarily to higher personnel-related costs, including commissions expense, resulting from the 6% growth in our sales and marketing headcount from July 31, 2023 to July 31, 2024, partially offset by decreases in outside services costs.
Research and development
Fiscal Year Ended
July 31,
Change
Fiscal Year Ended
July 31,
Change
2022
2023
$
%
2023
2024
$
%
(in thousands, except percentages)
Research and development
$
572,999
$
580,961
$
7,962
1
%
$
580,961
$
638,992
$
58,031
10
%
Percent of total revenue
36.2
%
31.2
%
31.2
%
29.7
%
Research and development expense increased year-over-year for fiscal 2023 due primarily to higher personnel-related costs resulting from the 6% growth in our R&D headcount 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 related to certain partner programs.
Research and development expense increased year-over-year for fiscal 2024 due primarily to higher personnel-related costs, including stock-based compensation expense, resulting from the 19% growth in our R&D headcount from July 31, 2023 to July 31, 2024, partially offset by decreases in technical costs related to certain partner programs.
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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
2022
2023
$
%
2023
2024
$
%
(in thousands, except percentages)
General and administrative
$
166,418
$
232,201
$
65,783
40
%
$
232,201
$
200,863
$
(31,338
)
(13
)%
Percent of total revenue
10.5
%
12.5
%
12.5
%
9.3
%
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 completed Audit Committee investigation. The increase in G&A expense was also due to an increase in personnel-related costs resulting from the 13% growth in our G&A headcount from July 31, 2022 to July 31, 2023. For additional information regarding the securities class actions, refer to Note 7 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.
General and administrative expense decreased year-over-year for fiscal 2024 due primarily to a decrease in legal costs, in particular, related to the litigation settlement accrual and legal fees as a result of the February 2023 settlement of the two securities class actions. The decreases were partially offset by higher personnel-related costs, including stock-based compensation expense, resulting from the 11% growth in our G&A headcount from July 31, 2023 to July 31, 2024, as well as an increase in technical costs related to software licenses and computers and supplies.
Other Expense, Net
Fiscal Year Ended
July 31,
Change
Fiscal Year Ended
July 31,
Change
2022
2023
$
%
2023
2024
$
%
(in thousands, except percentages)
Interest income, net
$
4,765
$
38,427
$
(33,662
)
(706
)%
$
38,427
$
68,486
$
(30,059
)
(78
)%
Change in fair value of
derivative liability
(198,038
)
—
(198,038
)
(100
)%
—
—
—
0
%
Amortization of debt
discount and issuance
costs and interest
expense
(60,734
)
(64,113
)
3,379
6
%
(64,113
)
(61,503
)
(2,610
)
(4
)%
Interest expense related to
conversion of 2026
Notes attributable to
debt discount and
issuance costs
—
—
—
0
%
—
(107,877
)
107,877
100
%
Debt extinguishment costs
(64,911
)
—
(64,911
)
(100
)%
—
—
—
0
%
Other
(1,912
)
(749
)
(1,163
)
(61
)%
(749
)
(7,987
)
7,238
966
%
Other (expense) income, net
$
(320,830
)
$
(26,435
)
$
(294,395
)
(92
)%
$
(26,435
)
$
(108,881
)
$
82,446
312
%
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, 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)
The increase in other expense, net for fiscal 2024 was due primarily to $107.9 million of interest expense recognized resulting from the conversion of the 2026 Notes in full, as well as increases in foreign exchange gains, partially offset by increases in interest income on our investments.
Provision for Income Taxes
Fiscal Year Ended
July 31,
Change
Fiscal Year Ended
July 31,
Change
2022
2023
$
%
2023
2024
$
%
(in thousands, except percentages)
Provision for income taxes
$
19,264
$
20,975
$
1,711
9
%
$
20,975
$
23,457
$
2,482
12
%
The year-over-year increases in the provision for income taxes in fiscal 2023 and fiscal 2024 were due primarily to higher U.S. state income taxes due to taxable income in various states, as well as higher foreign taxes as a result of higher taxable earnings in foreign jurisdictions, as we continued to grow our business internationally, partially offset by foreign excess tax benefits on stock options and restricted stock units exercised during the periods. 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, 2024, we had $655.3 million of cash and cash equivalents, $0.4 million of restricted cash and $339.1 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, 2024, we had accounts receivable of $229.8 million, net of allowances of $0.8 million.
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 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) SPV, LP, an entity affiliated with Bain Capital, LP. On June 6, 2024, BCPE Nucleon (DE) SPV, LP delivered a notice of conversion to convert $817.6 million aggregate principal amount of the 2026 Notes, representing all of the outstanding principal amount of the 2026 Notes. During the fiscal quarter ended July 31, 2024, we settled the conversion by paying $817.6 million in cash and delivering approximately 16.9 million shares of Class A common stock. 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.
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Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
We believe that our cash, cash equivalents and short-term investments and our expected net cash provided by operating activities will be sufficient to meet our anticipated cash needs for working capital, capital expenditures, and share repurchases (if any) for at least the next 12 months. We may, from time to time, evaluate market conditions, our liquidity profile, and various financing alternatives (including debt or equity financing) for opportunities to enhance our capital structure. Our future cash needs will depend on many factors, including our growth strategy and plans, 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 market, economic and financial conditions (including inflation and interest rates). In addition, if the conditional conversion feature of the 2027 Notes is triggered prior to their October 1, 2027 maturity date, holders of the 2027 Notes will be entitled to convert the 2027 Notes at their option. If one or more holders elect to convert their 2027 Notes, we may elect to satisfy our conversion obligation by delivering shares of our Class A common stock or a combination of cash and shares of Class A common stock, rather than exclusively in cash.
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 8 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,
2022
2023
2024
(in thousands)
Net cash provided by operating activities
$
67,543
$
272,403
$
672,931
Net cash (used in) provided by investing activities
(54,189
)
(49,785
)
529,589
Net cash provided by (used in) financing activities
103,635
(112,709
)
(1,062,629
)
Net increase in cash, cash equivalents and restricted cash
$
116,989
$
109,909
$
139,891
Cash Flows from Operating Activities
Net cash provided by operating activities was $67.5 million, $272.4 million and $672.9 million for fiscal 2022, 2023 and 2024, respectively, representing improvements of $204.9 million and $400.5 million, respectively, as compared to the respective prior year periods. The increases in cash generated from operating activities for fiscal 2023 and fiscal 2024 were due primarily to decreases in our net loss from operations.
Cash Flows from Investing Activities
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.
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.
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NUTANIX, INC.
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Net cash provided by investing activities of $529.6 million for fiscal 2024 consisted of $774.2 million of maturities of short-term investments and $706.4 million of sales of short-term investments, partially offset by $871.3 million of short-term investment purchases, $75.3 million of purchases of property and equipment, and $4.5 million of cash paid for acquisitions.
Cash Flows from Financing Activities
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.
Net cash used in financing activities of $1.1 billion for fiscal 2024 consisted of $817.6 million used to pay the cash portion of the obligation due upon conversion of the 2026 Notes, $161.6 million of taxes paid related to the net share settlement of equity awards, $131.1 million of repurchases of our Class A common stock, and $3.9 million of payments for finance lease obligations, partially offset by $51.6 million of proceeds from the sale of shares through employee equity incentive plans.
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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, 2024:
Payments Due by Period
Total
Less than
1 Year
1 Year to
3 Years
3 to
5 Years
More than
5 Years
(in thousands)
Principal amount payable on convertible senior notes (1)
$
575,475
$
475
$
—
$
575,000
$
—
Operating leases (undiscounted basis) (2)
136,474
31,947
50,322
40,219
13,986
Other commitments (3)
110,621
102,392
7,035
1,194
—
Guarantees with contract manufacturers
85,177
85,177
—
—
—
Total
$
907,747
$
219,991
$
57,357
$
616,413
$
13,986
(1) Includes 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, 2024, 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.
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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 awards with a market-based condition is measured using a Monte Carlo simulation.
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NUTANIX, INC.
Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
The fair value of stock options and RSUs with a service condition 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. For stock-based awards with a market-based condition, we recognize stock-based compensation expense using the graded vesting attribution method over the requisite service period, regardless of achievement, provided the requisite service condition is met. 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.
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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