What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2020-09-23 compared with 2019-09-24 · 273 added, 169 removed, 408 unchanged (52% of the section changed)

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Nutanix, Inc.

("we," "us," "our" or "Nutanix") provides a leading enterprise cloud platform that consists of software solutions that power many of the world’s business applications by digitizing the traditional silos of enterprise computing.

("we," "us," "our" or "Nutanix") provides a leading enterprise cloud platform, which we call the Nutanix Cloud Platform, that consists of software solutions and cloud services that power our customers’ hybrid cloud and multicloud strategies.

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

Our enterprise cloud platform natively converges compute, virtualization, storage, networking, desktop and security services into one integrated, simple to consume solution, which allows enterprises to simplify the complexities of a multi-cloud environment with automation, cost governance and compliance.

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

Our enterprise cloud platform can be deployed on a variety of qualified hardware platforms or, in the case of our cloud-based software and software as a service ("SaaS") offerings, via hosted service or delivered pre-installed on an appliance that is configured to order.

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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,

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.

NUTANIX, INC.

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Financial Condition and Results of Operations (Continued)

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 heavily in the growth of our business, including the development of our solutions, build-out of our global sales force, projects to increase the demand for our solutions and other sales and marketing initiatives.

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

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

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

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

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

Our total revenue was $845.9 million , $1.2 billion and $1.2 billion for fiscal 2017 , 2018 and 2019 , respectively, representing increases of 36.6% and 7.0% in fiscal 2018 and 2019 , as compared to the respective prior year periods.

Our software and support revenue was $609.6 million , $898.1 million and $1.1 billion for fiscal 2017 , 2018 and 2019 , respectively, representing increases of 47.3% and 25.9% in fiscal 2018 and 2019 , as compared to the respective prior year periods.

Our subscription revenue was $172.5 million , $330.6 million and $648.4 million for fiscal 2017 , 2018 and 2019 , respectively, representing increases of 91.6% and 96.1% in fiscal 2018 and 2019 , as compared to the respective prior year periods.

Our net losses were $379.6 million , $297.2 million and $621.2 million for fiscal 2017 , 2018 and 2019 , respectively.

Net cash provided by operating activities was $14.8 million , $92.5 million and $42.2 million for fiscal 2017 , 2018 and 2019 , respectively.

Free cash flow, which is calculated as net cash provided by operating activities less purchases of property and equipment, was an outflow of $35.4 million for fiscal 2017 , an inflow of $30.2 million for fiscal 2018 and an outflow of $76.3 million for fiscal 2019 .

As of July 31, 2019 , we had an accumulated deficit of $1.6 billion .

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

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

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

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

Impact of the COVID-19 Pandemic

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

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

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

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

requiring our employees to work remotely;

implementing travel restrictions that allow only the most essential business travel;

and postponing, cancelling, withdrawing from, or converting to virtual-only experiences (where possible and appropriate) our in-person customer, industry, analyst, investor, and employee events, including our 2020 .NEXT customer and partner events, our 2020 Investor Day, and our fiscal 2021 sales kick off;

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

As a result of such actions, as well as the general effects of the COVID-19 pandemic, our business and operations have experienced and may continue to experience numerous negative impacts, including:

curtailed demand for certain of our solutions;

reduced IT spending;

delays in or abandonment of planned or future purchases;

lengthened payment terms;

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

supply chain disruptions;

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

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

The travel bans, shutdowns, social distancing restrictions and remote work policies have also made it difficult or impossible to deliver on-site services to our partners and end customers, and to meet with our current and potential end customers in person.

We have also seen positive impacts, including increased demand for our virtual desktop, desktop-as-a-service, and end-user computing solutions as a result of our end customers enabling their employees to work remotely.

NUTANIX, INC.

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Financial Condition and Results of Operations (Continued)

We have also quickly adapted to the new work environment, leveraging digital, video, and other collaborative tools to enable our teams to stay connected with each other, and our sales, marketing and support teams to continue to engage with and remain responsive to our partners and end customers.

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

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

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

pausing all merit salary increases and bonus payments;

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

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

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

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

Our management team is focused on guiding our company through the emerging challenges presented by COVID-19 and remains committed to driving positive business outcomes.

Although we do not currently expect the pandemic to affect our financial reporting systems, internal control over financial reporting or disclosure controls and procedures, the continued impact of the pandemic on our business and financial performance will be highly dependent upon numerous factors, many of which are beyond our control.

See the section titled "Risk Factors" in Part II, Item 1A of this Form 10-Q for further discussion of the possible impact of the COVID-19 pandemic, as well as the actions we have taken in response, on our business and financial performance.

Key Financial and Performance Metrics

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As of and for the Fiscal Year Ended July 31,

2018 2019 2020

(in thousands, except percentages)

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Subscription revenue $ 330,645 $ 648,415 $ 1,030,180

Software and support revenue

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

Total billings $ 1,417,484 $ 1,514,660 $ 1,580,092

Subscription billings $ 581,923 $ 916,000 $ 1,276,413

Software and support billings

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

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

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

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

Adjusted gross profit $ 786,593 $ 965,287 $ 1,063,655

Gross margin 66.6 % 75.4 % 78.1 %

Adjusted gross margin 68.1 % 78.1 % 81.3 %

Total deferred revenue $ 631,207 $ 910,044 $ 1,183,441

Net cash provided by operating activities

Net cash provided by (used in) operating activities $ 92,540 $ 42,168 $ (159,885)

Free cash flow $ 30,168 $ (76,284) $ (249,373)

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Total end customers 10,610 14,180 17,360

NUTANIX, INC.

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

Disaggregation of Revenue and Billings

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Fiscal Year Ended July 31,

(in thousands, except percentages)

2018 2019 2020

(in thousands)

Disaggregation of revenue:

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Total billings $ 1,417,484 $ 1,514,660 $ 1,580,092

NUTANIX, INC.

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

Subscription — 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.

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.

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These subscription software licenses represented approximately $86.7 million, $272.0 million and $521.3 million of our subscription revenue for fiscal 2018, 2019 and 2020, respectively.

For fiscal 2017 , 2018 and 2019 , the weighted average term for these subscription term-based licenses was approximately 2.9 years , 3.7 years and 3.8 years , respectively.

Non-portable software — 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.

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

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

Revenue from our non-portable software products is generally recognized upon transfer of control to the customer.

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

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

We consider the amount allocated to hardware revenue to be equivalent to the cost of the hardware procured.

Hardware revenue is generally recognized upon transfer of control to the customer.

Professional services — We also sell professional services with our products.

Professional services revenue — We also sell professional services with our products.

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

NUTANIX, INC.

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

Non-GAAP Financial Measures and Key Performance Measures

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

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

We evaluate these measures because they:

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• 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, subscription billings, professional services billings and software and support billings are performance measures which management believes provide useful information to investors, as they represent the dollar value under binding purchase orders received and billed during a given period.

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

Adjusted gross profit, adjusted gross margin and non-GAAP operating expenses are performance measures which management believes 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.

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

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

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

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

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.

Adjusted gross profit, adjusted gross margin and non-GAAP operating expenses are performance measures which we believe provide useful information to investors, as they provide meaningful supplemental information regarding our performance and liquidity by excluding certain expenses and expenditures, such as stock-based compensation expense, that may not be indicative of our ongoing core business operating results.

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.

NUTANIX, INC.

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

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

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

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

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

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

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 measures as follows:

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

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

NUTANIX, INC.

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

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

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

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

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

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

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

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

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

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

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

Run-rate ACV — We calculate run-rate ACV as the sum of ACV for all contracts that are in effect as of the end of the period.

For the purposes of this calculation, we assume that the contract term begins on the date a contract is booked, irrespective of the periods in which we would recognize revenue for such contract.

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

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

We define adjusted gross profit as gross profit adjusted to exclude stock-based compensation expense and the amortization of acquired intangible assets.

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

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

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Fiscal Year Ended July 31,

2018 2019 2020

(in thousands, except percentages)

2 unchanged sentences

Total billings (non-GAAP) $ 1,417,484 $ 1,514,660 $ 1,580,092

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

Stock-based compensation 11,525 18,861 27,348

Amortization of intangible assets 5,641 14,248 14,777

Impairment of lease-related assets — — 537

Other — 163 —

Adjusted gross profit (non-GAAP) $ 786,593 $ 965,287 $ 1,063,655

Gross margin 66.6 % 75.4 % 78.1 %

Stock-based compensation 1.0 % 1.5 % 2.1 %

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Acquisition-related costs (1,757) (721) —

Impairment of lease-related assets — — (2,465)

Other — (204) (1,499)

Operating expenses (non-GAAP) $ 883,244 $ 1,239,567 $ 1,518,697

Net cash provided by operating activities

Net cash provided by (used in) operating activities $ 92,540 $ 42,168 $ (159,885)

Purchases of property and equipment (62,372) (118,452) (89,488)

Free cash flow (non-GAAP) $ 30,168 $ (76,284) $ (249,373)

Excludes deferred revenue assumed in acquisitions of approximately $6.0 million, $0.1 million and $0.3 million for fiscal 2017, 2018 and 2019, respectively.

NUTANIX, INC.

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Financial Condition and Results of Operations (Continued)

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

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

Fiscal Year Ended July 31,

(in thousands, except percentages)

2018 2019 2020

(in thousands)

Subscription revenue $ 330,645 $ 648,415 $ 1,030,180

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

Total software and support revenue (1)

Change in software and support deferred revenue, net of acquisitions (2)

Software and support billings (1)

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

Excludes deferred revenue assumed in acquisitions of approximately $6.0 million, $0.1 million and $0.3 million for fiscal 2017, 2018 and 2019, respectively.

Software and support revenue (TCV revenue) (1)

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

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

Software and support billings (TCV billings) (1)

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

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

Factors Affecting Our Performance

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See the section titled "Risk Factors" for details.

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

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

NUTANIX, INC.

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

Investment in Growth

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

We have significantly increased our sales and marketing personnel, which grew by approximately 36% from July 31, 2018 to July 31, 2019 .

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

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

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

We 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, 2020, we considered approximately 69% of our global sales team members to be fully ramped, while the remaining approximately 31% of our global sales team members are in the process of ramping up.

As we continue to focus some of our new 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

As we continue to focus some of our newer and existing sales team members on major accounts and large deals, and as we continue our transition toward a subscription-based business model, it may take longer, potentially significantly, for these sales team members to become fully productive, and there may also be an impact to the overall productivity of our sales team.

Furthermore, the effects of the COVID-19 pandemic and the measures we have implemented in response, including postponing, cancelling or making virtual-only certain in-person corporate events at which our sales team members have historically received in-person sales enablement and related trainings, may further increase, potentially significantly, the time it takes for our sales team members to become fully productive.

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

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

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

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

NUTANIX, INC.

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Financial Condition and Results of Operations (Continued)

our sales team.

We are focused on actively managing these realignments.

We intend to continue to grow our global sales and marketing team and continue to invest in sales and marketing initiatives to acquire new end customers and to increase sales to existing end customers.

We also intend to continue 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.

Transition to Subscription

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As we continue our transition to a subscription-based business model, we expect a greater portion of our products to be delivered through subscription term-based licenses or cloud-based SaaS subscriptions.

Shifts in the mix of whether our solutions are sold on a subscription basis could result in fluctuations in our billings and revenue.

Shifts in the mix of whether our solutions are sold on a subscription basis have and could continue to result in fluctuations in our billings and revenue.

Subscription sales consist of subscription term-based licenses and offerings with ongoing performance obligations, including software entitlement and support subscriptions and cloud-based SaaS offerings.

Since revenue is recognized as performance obligations are delivered, sales with ongoing performance obligations may reflect lower revenue in a given period.

In addition, other factors relating to our shift to selling more subscription term-based licenses may impact our billings and revenue.

In addition, other factors relating to our shift to selling more subscription term-based licenses may impact our billings, revenue and cash flow.

For example, our term-based licenses generally have an average term of less than four years and thus result in lower billings and revenue in a given period when compared to our historical life of device license sales, which have a duration equal to the life of the associated appliance, which we estimate to be approximately five years.

Revenue for our solutions, whether or not sold a subscription term-based license, is generally recognized upon transfer of control to the customer.

In addition, starting in fiscal 2021, we are beginning to compensate our sales force based on ACV instead of total contract value, and while we expect that the shift to an ACV-based sales compensation plan will incentivize sales representatives to maximize ACV and minimize discounts, it could also further compress the average term of our subscription term-based licenses.

Furthermore, our customers may, including in response to the uncertainty caused by the COVID-19 pandemic, decide to purchase our software solutions on shorter subscription terms than they have historically, and/or request to only pay for the initial year of a multi-year subscription term upfront, which could negatively impact our billings, revenue and cash flow in a given period when compared to historical life-of-device or multiple-year term-based license sales.

Revenue for our solutions, whether or not sold as a subscription term-based license, is generally recognized upon transfer of control to the customer.

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

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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, both as compared to traditional datacenter architectures as well as the public cloud, particularly as we continue to pursue large enterprises and mission critical workloads and transition toward a subscription-based business model.

The broad nature of the technology shift that our enterprise cloud platform represents, the relationships our end customers have with existing IT vendors and our transition toward a subscription-based consumption model sometimes lead to unpredictable sales cycles, which we hope to compress and stabilize 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 expand.

A key focus of our sales and marketing efforts is creating market awareness about the benefits of our enterprise cloud platform.

This includes our newer products outside of our core hyperconverged infrastructure ("HCI") offering, both as compared to traditional datacenter architectures as well as the public cloud, particularly as we continue to pursue large enterprises and mission critical workloads and transition toward a subscription-based business model.

The broad nature of the technology shift that our enterprise cloud platform represents, the relationships our end customers have with existing IT vendors, and our transition toward a subscription-based business model sometimes lead to unpredictable sales cycles.

We hope to compress and stabilize these sales cycles as market adoption increases, as we gain leverage with our channel partners, as we continue to educate the market about our subscription-based business model, and as our sales and marketing efforts evolve.

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

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We plan to continue to strengthen and expand our network of channel partners and OEMs to increase sales to both new and existing end customers.

We believe that increasing channel leverage, particularly as we expand our focus on opportunities in commercial accounts, by investing aggressively in sales enablement and co-marketing with our partners and OEMs will extend and improve our engagement with a broad set of end customers.

We believe that increasing channel leverage, particularly as we expand our focus on opportunities in commercial accounts, by investing in sales enablement and co-marketing with our partners and OEMs in the long term will extend and improve our engagement with a broad set of end customers.

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

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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.

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.

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Our business and operating results will depend on our ability to retain and sell additional products to our existing and future base of end customers.

Our ability to retain existing customers and expand our customer base will in turn depend in part on 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.

Our ability to obtain new and retain existing customers will in turn depend in part on a number of factors.

These factors include our ability to effectively maintain existing and future customer relationships, continue to innovate by adding new functionality and improving usability of our solutions in a manner that addresses our end customers’ needs and requirements, and optimally price our solutions in light of marketplace conditions, competition, our costs and customer demand.

Furthermore, our ongoing transition to a subscription-based business model 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.

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

NUTANIX, INC.

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

Product revenue — Product revenue consists of software and hardware revenue.

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Hardware revenue is generally recognized upon transfer of control to the customer.

NUTANIX, INC.

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

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.

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Cost of Revenue

Cost of product revenue — Cost of product revenue consists of costs paid to third-party contract manufacturers, 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 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.

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

We expect sales and marketing expense to continue to increase in absolute dollars as we increase the size of our global sales and marketing organizations.

Sales and marketing expense may fluctuate as a percentage of total revenue.

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

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

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

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

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

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

NUTANIX, INC.

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

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

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R&D costs are expensed as incurred.

We expect R&D expense to increase in absolute dollars as we continue 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.

We expect R&D expense, in the long term, to increase in absolute dollars as part of our long-term plans to invest in our future products and services, including our newer subscription-based products, although R&D expense may fluctuate as a percentage of total revenue and, on an absolute basis, from quarter to quarter.

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

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

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 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.

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

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

Other Income (Expense), Net

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

NUTANIX, INC.

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

Provision for Income Taxes

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

NUTANIX, INC.

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

Fiscal Year Ended July 31,

2018 2019 2020

(in thousands)

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

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

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Product (1)(2)

276,127 143,078 71,312

Support, entitlements and other services (1)

109,903 161,050 215,377

Total cost of revenue 386,030 304,128 286,689

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

Operating expenses:

Sales and marketing (1)(2)

649,657 909,750 1,160,389

Research and development (1)

313,777 500,719 553,978

General and administrative (1)

86,401 119,587 135,547

Total operating expenses 1,049,835 1,530,056 1,849,914

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Loss before provision for income taxes

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

Provision for income taxes 7,447 8,119 17,662

NUTANIX, INC.

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

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

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

Fiscal Year Ended July 31,

2018 2019 2020

(in thousands)

Cost of revenue:

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

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

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Total stock-based compensation expense

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

(2) Includes amortization of intangible assets as follows:

Fiscal Year Ended July 31,

2018 2019 2020

(in thousands)

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Total amortization of intangible assets

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

NUTANIX, INC.

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

Fiscal Year Ended July 31,

2018 2019 2020

(as a percentage of total revenue)

Product 76.9 % 67.3 % 58.6 %

Support, entitlements and other services 23.1 % 32.7 % 41.4 %

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Cost of revenue:

Product 23.9 % 11.6 % 5.4 %

Support, entitlements and other services 9.5 % 13.0 % 16.5 %

Total cost of revenue 33.4 % 24.6 % 21.9 %

Gross profit 66.6 % 75.4 % 78.1 %

Operating expenses:

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Loss before provision for income taxes

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

Provision for income taxes 0.6 % 0.7 % 1.4 %

NUTANIX, INC.

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

Fiscal Year Ended July 31,

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

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

2018 2019 $ % 2019 2020 $ %

(in thousands, except percentages)

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

Support, entitlements and other services

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

Total revenue $ 1,155,457 $ 1,236,143 $ 80,686 7 % $ 1,236,143 $ 1,307,682 $ 71,539 6 %

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

Fiscal Year Ended July 31,

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

2018 2019 $ % 2019 2020 $ %

(in thousands, except percentages)

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

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

Europe, the Middle East and Africa

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

Other Americas 42,013 43,735 1,722 4 % 43,735 58,991 15,256 35 %

Total revenue $ 1,155,457 $ 1,236,143 $ 80,686 7 % $ 1,236,143 $ 1,307,682 $ 71,539 6 %

Product revenue increased year-over-year for fiscal 2018 due primarily to increased domestic and international demand for our solutions through penetration and expansion in global markets through increased sales and marketing activities.

Our product revenue during fiscal 2018 was also impacted by the reduction of hardware revenue from transactions where the hardware was not sold by us.

Product revenue decreased year-over-year for fiscal 2019 due primarily to the reduction of hardware revenue from transactions where the hardware was not sold by us.

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

We continue to focus on more software-only transactions and therefore anticipate selling less hardware in future periods.

Support, entitlements and other services revenue increased year-over-year for both fiscal 2018 and fiscal 2019 in conjunction with the growth of our end customer base and the related software entitlement and support subscriptions.

NUTANIX, INC.

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

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

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

The total average contract term was approximately 4.3 years, 4.1 years and 3.8 years for fiscal 2018, 2019 and 2020, 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 2019 and fiscal 2020 in conjunction with the growth of our end customer base and the related software entitlement and support subscription contracts.

Our total end customer count increased from approximately 10,610 as of July 31, 2018 to approximately 14,180 as of July 31, 2019 and to approximately 17,360 as of July 31, 2020.

Cost of Revenue and Gross Margin

Fiscal Year Ended July 31,

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

2018 2019 $ % 2019 2020 $ %

(in thousands, except percentages)

Cost of product revenue

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

Product gross margin 68.9 % 82.8 % 82.8 % 90.7 %

Cost of support, entitlements and other services revenue

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

Support, entitlements and other services gross margin

58.9 % 60.1 % 60.1 % 60.3 %

Total gross margin

NUTANIX, INC.

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

66.6 % 75.4 % 75.4 % 78.1 %

Cost of product revenue

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

For fiscal 2018 , as compared to the respective prior year period, cost of product revenue was impacted by increases in the cost of certain of our hardware components, specifically DRAM and NAND, due to supply constraints.

The total cost of our DRAM and NAND components represented approximately 22% and 30% of cost of product revenue for the fiscal years ended July 31, 2017 and 2018 , respectively.

DRAM and NAND component prices increased by approximately 51% for fiscal 2018 , as compared to the prior year period.

For fiscal 2019 , as compared to the respective prior year period, the decrease in cost of product revenue was due primarily to our continued focus on software-only transactions, which have a higher margin as compared to hardware sales.

Product gross margin increased by 5.9 percentage points, from 63.0% in fiscal 2017 to 68.9% in fiscal 2018 , and by 13.9 percentage points, to 82.8% in fiscal 2019 , due primarily to the higher mix of software revenue, as we continue to focus on more software-only transactions.

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

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

Cost of support, entitlements and other services revenue

Cost of support, entitlements and other services revenue increased year-over-year for both fiscal 2018 and fiscal 2019 due primarily to higher personnel-related costs relating to the expansion of our global customer support organization.

The increases in personnel-related costs were due primarily to increases in our customer support, entitlements and other services headcount of 56% from July 31, 2017 to July 31, 2018 and 40% from July 31, 2018 to July 31, 2019 .

Support, entitlements and other services gross margin increased by 4.1 percentage points, from 54.8% in fiscal 2017 to 58.9% in fiscal 2018 , and by 1.2 percentage points to 60.1% in fiscal 2019 , due primarily to efficiencies gained in our support organization and personnel-related costs growing at a slower rate than support, entitlements and other services revenue, as well as the ramp up for new products, specifically cloud services.

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

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

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

NUTANIX, INC.

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

Operating Expenses

Sales and marketing

Fiscal Year Ended July 31,

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

2018 2019 $ % 2019 2020 $ %

(in thousands, except percentages)

Sales and marketing

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

Percent of total revenue

Sales and marketing expense increased year-over-year both for fiscal 2018 and fiscal 2019 due primarily to higher personnel-related costs and sales commissions, as our sales and marketing headcount increased year-over-year by 42% in fiscal 2018 and 36% in fiscal 2019 .

Additionally, as part of our continued efforts to penetrate and expand in global markets and increase our pipeline growth through additional demand generation, we continue to increase our sales and marketing activities related to brand awareness, promotions, trade shows and partner programs.

We expect sales and marketing expense to increase as we continue to grow.

NUTANIX, INC.

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

56.2 % 73.6 % 73.6 % 88.7 %

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

Research and development

Fiscal Year Ended July 31,

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

2018 2019 $ % 2019 2020 $ %

(in thousands, except percentages)

Research and development

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

Percent of total revenue

Research and development expense increased year-over-year both for fiscal 2018 and fiscal 2019 due primarily to higher personnel-related costs, as our R&D headcount increased year-over-year by 42% in fiscal 2018 and 27% in fiscal 2019 in an effort to continue the expansion of our product development activities, including new products.

This increase includes additional headcount and stock-based compensation expense related to employees who joined the Company through acquisitions.

27.2 % 40.5 % 40.5 % 42.4 %

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

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

General and administrative

Fiscal Year Ended July 31,

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

2018 2019 $ % 2019 2020 $ %

(in thousands, except percentages)

General and administrative

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

Percent of total revenue

General and administrative expense increased year-over-year both for fiscal 2018 and fiscal 2019 due primarily to higher personnel-related costs, as our G&A headcount increased year-over-year by 29% in fiscal 2018 and 30% in fiscal 2019 in order to support our growing business.

7.5 % 9.7 % 9.7 % 10.4 %

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

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

Other Expense, Net

Fiscal Year Ended July 31,

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

2018 2019 $ % 2019 2020 $ %

(in thousands, except percentages)

Other expense, net $ (9,306) $ (15,019) $ 5,713 61 % $ (15,019) $ (26,300) $ 11,281 75 %

The fluctuations in other expense, net for fiscal 2018 and fiscal 2019 were primarily related to the amortization of the debt discount and issuance costs for the Notes, as the Notes were issued during the second quarter of fiscal 2018, as well as interest earned on short-term investments.

The decrease in other expense, net for fiscal 2018 was also due to $23.1 million of expense in fiscal 2017 related to changes in the fair value of our convertible preferred stock warrant liability.

Provision for Income Taxes

Fiscal Year Ended July 31,

(in thousands, except percentages)

Provision for income taxes

The year-over-year increase in the provision for income taxes in fiscal 2018 was due primarily to the alternative minimum tax related to the migration of certain intangible assets and foreign taxes as a result of higher taxable earnings in foreign jurisdictions, as we continued our global expansion.

The increase was partially offset by a $3.9 million partial release of the U.S.

valuation allowance related to acquisitions completed during fiscal 2018.

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

NUTANIX, INC.

1 unchanged sentence

Financial Condition and Results of Operations (Continued)

The year-over-year increase in the provision for income taxes in fiscal 2019 was due primarily to higher foreign taxes as a result of higher taxable earnings in foreign jurisdictions, as we continued our global expansion, partially offset by a $5.8 million partial release of the U.S.

valuation allowance related to an acquisition completed during fiscal 2019 and a tax benefit related to the change in tax law.

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

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

Provision for Income Taxes

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

2018 2019 $ % 2019 2020 $ %

(in thousands, except percentages)

Provision for income taxes

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

The year-over-year increase in the provision for income taxes in fiscal 2019 and fiscal 2020 was due primarily to higher foreign taxes as a result of higher taxable earnings in foreign jurisdictions, as we continued our global expansion.

The provision for income taxes in fiscal 2019 was partially offset by a one-time U.S.

valuation allowance release related to a business combination and a one-time tax benefit related to the change in tax law.

We continue to maintain a full valuation allowance on our U.S.

federal and state deferred tax assets and a partial valuation allowance related to our foreign net deferred tax assets.

In December 2017, the U.S.

Congress passed and the President signed the Tax Cuts and Jobs Act ("TCJA"), which includes a broad range of tax reform proposals affecting businesses.

For additional details, refer to Note 11 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

Liquidity and Capital Resources

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government and its agencies and debt instruments of highly rated corporations.

We do not anticipate that we will need funds generated from foreign operations to fund our domestic operations.

In January 2018, we issued Convertible Senior Notes with a 0% interest rate for an aggregate principal amount of $575.0 million.

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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.

We believe that our cash and cash equivalents and short-term investments will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months.

In the event that additional financing is required from outside sources, we may not be able to raise such financing on terms acceptable to us or at all.

If we are unable to raise additional capital when desired, our business, operating results and financial condition would be adversely affected.

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

Notwithstanding that fact, we believe that our cash and cash equivalents and short-term investments will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months.

Our future capital requirements will depend on many factors, including our growth rate, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced product and service offerings, the continuing market acceptance of our products, the impact of COVID-19 pandemic on our business, our end customers and partners, and the economy, and the timing of and extent to which our customers transition to shorter-term contracts or request to only pay for the initial term of multi-year contracts as a result of our transition to a subscription-based business model.

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

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

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

NUTANIX, INC.

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

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

Fiscal Year Ended July 31,

2018 2019 2020

(in thousands)

Net cash provided by operating activities

Net cash used in investing activities

Net cash provided by (used in) operating activities

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

Net cash (used in) provided by investing activities (503,555) (16,850) 24,559

Net cash provided by financing activities

Net increase in cash, cash equivalents and restricted cash

578,616 67,104 57,797

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

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

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

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

See Note 1 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional information on this new standard.

NUTANIX, INC.

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

Cash Flows from Operating Activities

Net cash generated from operating activities was $14.8 million , $92.5 million and $42.2 million for fiscal 2017 , 2018 and 2019 , respectively, representing increases of $11.0 million and $77.8 million and a decrease of $50.4 million , respectively, as compared to the prior year periods.

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

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

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

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

Cash Flows from Investing Activities

Net cash used in investing activities of $176.1 million for fiscal 2017 primarily consisted of $242.5 million of short-term investment purchases, using a significant portion of the proceeds from our initial public offering ("IPO"), and $50.2 million of purchases of property and equipment, partially offset by $84.2 million of maturities of short-term investments and $32.6 million of sales of short-term investments.

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

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

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

Cash Flows from Financing Activities

Net cash provided by financing activities of $201.4 million for fiscal 2017 primarily consisted of net IPO proceeds of $254.5 million , after deducting underwriting discounts and commissions, and $32.3 million of net proceeds from sales of shares through employee equity incentive plans, partially offset by the $76.6 million of repayment of senior notes in September 2016, including debt extinguishment costs, a $7.1 million debt payment in conjunction with a business combination and $1.7 million in payments for IPO costs.

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

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

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

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

NUTANIX, INC.

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Financial Condition and Results of Operations (Continued)

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

Contractual Obligations

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Payments Due by Period

More than 5 Years

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)

Operating lease obligations

$ 575,000 $ — $ 575,000 $ — $ —

Operating leases (undiscounted basis) (2)

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

Other commitments (3)

Guarantees with contract manufacturers and OEMs

62,453 59,722 2,131 600 —

Guarantees with OEMs

81,215 51,215 30,000 — —

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

(1) For additional information regarding our convertible senior notes, refer to Note 6 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

Purchase obligations and other commitments pertaining to our normal operations.

As of July 31, 2019 , payments related to our above outstanding non-cancelable lease obligations will be made through fiscal 2026.

From time to time in the normal course of business, we make commitments with our contract manufacturers and OEMs to ensure them a minimum level of financial consideration for their investment in our joint solutions.

(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 OEMs to ensure them a minimum level of financial consideration for their investment in our joint solutions.

These commitments are based on revenue targets or on-hand inventory and non-cancelable purchase orders for non-standard components.

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Our historical charges have not been material.

As of July 31, 2019 , we had $15.8 million of accrued liabilities related to uncertain tax positions, which are reflected on our consolidated balance sheet.

As of July 31, 2020, 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.

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Variations in the actual outcome of these future tax consequences could materially impact our consolidated financial statements.

The TCJA significantly changed existing U.S.

tax law and included and continues to include numerous provisions that affect our business.

Refer to Note 11 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.

Stock-Based Compensation

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

These estimates involve inherent

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.

NUTANIX, INC.

1 unchanged sentence

Financial Condition and Results of Operations (Continued)

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.

Business Combinations

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

What changed 10-K

Item 7. Management’s Discussion and Analysis