UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended July 31, 20172018
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| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-37883
NUTANIX, INC.
(Exact name of registrant as specified in its charter)
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| Delaware | | 27-0989767 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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1740 Technology Drive, Suite 150 San Jose, CA 95110 |
| (Address of principal executive offices, including zip code) |
| (408) 216-8360 |
| (Registrant's telephone number, including area code) |
| Securities registered pursuant to Section 12(b) of the Act: |
Title of each class Class A common stock, $0.000025 par value per share | | Name of each exchange on which registered: NASDAQ Global Select Market |
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Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large"large accelerated filer,” “accelerated" "accelerated filer,” “smaller" "smaller reporting company,”" and “emerging"emerging growth company”company" in Rule 12b-2 of the Exchange Act. (Check one):
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| Large accelerated filer | | o
x | Accelerated filer | | o
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| Non-accelerated filer | | o (Do not check if a smaller reporting company) | Smaller reporting company | | o |
| Emerging growth company | | xo | If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | | o
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act). Yes o No x
The aggregate market value of the registrant's common stock held by non-affiliates of the registrant as of January 31, 20172018 (the last business day of the registrant's most recently completed second fiscal quarter) was approximately $2.7$3.6 billion, based upon the closing sale price of such stock on the NASDAQ Global SelectStock Market. The registrant has no non-voting common equity.
As of August 31, 2017,2018, the registrant had 95,793,160135,144,663 shares of Class A common stock, $0.000025 par value per share, and 59,150,48637,744,316 shares of Class B common stock, $0.000025 par value per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
As noted herein, the information called for by Parts II and III is incorporated by reference to specified portions of the registrant’s definitive proxy statement to be filed in conjunction with the registrant’s 20172018 annual meeting of stockholders, which is expected to be filed not later than 120 days after the registrant's fiscal year ended July 31, 2017.
2018.
TABLE OF CONTENTS
SPECIAL NOTE REGARDING FORWARD LOOKINGFORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended or the ("Securities Act,Act"), and Section 21E of the Securities Exchange Act of 1934, as amended or the ("Exchange Act,Act"), which statements involve substantial risks and uncertainties. All statements contained in this Annual Report on Form 10-K other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “potentially,” “estimate,” “continue,” “anticipate,” “plan,” “intend,” “could,” “would,” “expect”"believe," "may," "will," "potentially," "estimate," "continue," "anticipate," "plan," "intend," "could," "would," "expect" and similar expressions that convey uncertainty of future events or outcomes are intended to identify forward-looking statements. Forward-looking statements included in this Annual Report on Form 10-K include, but are not limited to, statements regarding:
our future revenue, cost of revenue, and operating expenses, as well as changes in the cost of product revenue, component costs, product gross margins and support, entitlements and other services revenue, and changes in research and development, sales and marketing and general and administrative expenses;
our business plan, our growth strategy and our ability to effectively manage our growth;
anticipated trends, growth rates and challenges in our business and in the markets in which we operate, including the productivity of our sales team;
our ability to develop new solutions, product features and technology, such as Nutanix CalmXi Cloud Services and Nutanix Xi Cloud Services,Era, and bring them to market in a timely manner;
market acceptance of new technology and recently introduced solutions;
the interoperability and availability of our solutions with and on third-party hardware platforms, such as IBM Power Systems;platforms;
our beliefsplans and objectives for future operations, including plans to continue to invest in our global engineering, research and development, and sales and marketing teams, and the impact of such investments on our operations;
our ability to increase sales of our solutions;
our ability to attract new end-customers,end customers, and retain and grow sales from our existing end-customers;end customers;
our ability to maintain and strengthen our relationships with our channel and OEM partners;
the effects of seasonal trends on our results of operations;
our expectations concerning relationships with third parties, including our ability to compress and stabilize sales cycles;
our ability to maintain, protect and enhance our intellectual property;
our exposure to and ability to guard against cyber attacks;
our ability to continue to expand internationally;
the effects of increased competition in our market and our ability to compete effectively;
anticipated capital expenditures;
future acquisitions or investments in complementary companies, products, services or technologies and the ability to successfully integrate acquisitions such as Calm and PernixData;completed acquisitions;
our ability to stay in compliance with laws and regulations that currently apply or become applicable to our business both in the United States and internationally;internationally, including recent changes in global tax laws;
economic and industry trends, projected growth or trend analysis;
the attractionour ability to attract and retention ofretain qualified employees and key personnel;
our plans for and the impact of changes to our business model, including our expectation to shift to a more subscription-based model;
our expectations concerning future shifts in the mix of whether our solutions are sold as an appliance or as software-only, and in the mix of the types of appliances we sell; and
the sufficiency of cash balances to meet cash needs for at least the next 12 months.
We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in Part I, Item 1A. “Risk Factors”"Risk Factors" in this Annual Report on Form 10-K. Moreover, we operate in a very competitive and rapidly changing environment. Newenvironment and new risks emerge from time to time. It is not possible for us to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and trends discussed in this Annual Report on Form 10-K may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, performance, or events and circumstances reflected in the forward-looking statements will be achieved or occur. The forward-looking statements in this Annual Report on Form 10-K relate only to events as of the date on which the statements are made. We undertake no obligation to update, revise or publicly release the results of any revision to these forward-looking statements to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed on our forward lookingforward-looking statements and you should not place undue reliance on our forward lookingforward-looking statements.
PART I
ITEM 1. Business
Overview
We provideNutanix, Inc. ("we," "us," "our" or "Nutanix") provides a leading next-generation enterprise cloud operating systemplatform that convergespowers many of the world’s business applications and end user services by providing software solutions that digitize traditional silos of server,enterprise computing. With the advent of cloud as a mainstream consumption paradigm, enterprises are increasingly keen to re-platform existing IT environments with a hybrid cloud architecture that allows business to utilize a private cloud, leverage public cloud where applicable, and distribute this hybrid cloud architecture to the edge where their business engages with devices and users. Our solution allows our customers to virtualize various clouds - private, public, edge - into one seamless cloud enabling enterprises to choose the right cloud for the right application. Our enterprise cloud platform converges compute, virtualization, storage, networking, desktop, governance and networking intosecurity services in one integrated, simple to consume solution delivered through software. Further, our software and unifies privatesoftware as a service ("SaaS") solutions allow enterprises to simplify the complexities of a multi-cloud environment with automation, cost governance and compliance. We underpin the platform with unique web-scale engineering and one-click operational simplicity that powers any scale deployment while giving customers the freedom of choice across various hardware platforms, across various virtualization solutions and across major public cloud into a single software fabric. Our software delivers the agility, scalability and pay-as-you-grow economics of the public cloud, while addressing enterprise requirements of application mobility, security, data integrity and control. We provide our customers with the flexibility to selectively utilize the public cloud for suitable workloads and specific use cases by enabling increasing levels of application mobility across private and public clouds. This capability will enable hybrid cloud deployments and addresses a critical requirement for any next-generation enterprise cloud operating system. We have also recently announced additional capabilities that will enable native application orchestration and lifecycle management across multiple private and public cloud environments, as well as a native cloud-based disaster recovery service, which will further extend our hybrid cloud vision across the entire software stack. We have combined advanced web-scale technologies with elegant consumer-grade design to deliver a powerful enterprise cloud operating system that elevates IT organizations to focus on the applications and services that power their businesses. Our operating system is designed to create “invisible infrastructure” that provides constant availability and low-touch management, enables application mobility across computing environments and reduces inefficiencies in IT planning.
Our Enterprise Cloud Operating System
Platform
Our enterprise cloud operating systemplatform is based on powerful distributed systems architecture and converges server,that converge compute, virtualization, storage, networking and networkingsecurity resources into one integrated solution. Our platform, which includes the software features, products and services described below, melds on-premise, public and edge cloud operating system. Generalist IT professionals are ableinfrastructures.
Core Infrastructure Platform. Acropolis is the foundation of our platform. It starts with hyperconvergence, then adds native virtualization, enterprise storage, virtual networking, and platform services, including application mobility and security, in a single turnkey platform. It is an open platform designed to manage one datacenter operating system and management interface, which reduces administrative time and costs. Our solutionaddress all needs for a wide range of workloads that can be run at nearly any scale. Acropolis is currently comprised of twofour foundational components:
Virtualization: Acropolis supports all major virtualization solutions, but also includes our native built-in Acropolis Hypervisor ("AHV"). AHV is based on widely used open source hypervisor technology, known as Linux KVM, and includes enterprise-grade security, self-healing capabilities and robust virtual machine ("VM"), management. AHV is completely managed via Nutanix Prism to streamline the provisioning, placing and managing of VMs.
Enterprise Storage Capabilities: Building on a distributed data fabric, Acropolis enables robust enterprise storage services across multiple storage protocols and hypervisors. Enterprise storage capabilities include performance acceleration capabilities, such as caching, data tiering and data locality, and storage optimization, such as deduplication, compression and erasure coding, along with data protection and disaster recovery features. Acropolis also includes Nutanix Buckets, which provides built-in support for container-based applications controlled via Kubernetes and Docker.
Platform Services: Acropolis delivers a comprehensive software product families,set of platform services that enables IT organizations to consolidate nearly all of their workloads on the Nutanix platform and manage them centrally. These services include Nutanix Volume, a native scale-out block storage solution that enables enterprise applications running on external servers to leverage the Nutanix data fabric, and Acropolis File Services, now named Nutanix Files, a native file storage solution for unstructured data that allows our customers to easily scale their file-based storage for all applications and Prism.users.
Networking Services: Nutanix Flow, which is supported by AHV, provides application-centric network and policy management and allows users to deploy microsegmentation to secure individual applications or groups of applications, without any changes to the existing network.
AcropolisManagement. Acropolis includesPrism is our Distributed Storage Fabric that replaces traditional storage arraysend-to-end consumer-grade management plane providing management and delivers efficientanalytics across our software products and high performance enterprise-grade data management across a range of storage protocols to support a wide variety of enterprise applications, and we have recently introduced the capability to operate both virtualized and non-virtualized applications. Acropolis also includes our innovative Application Mobility Fabric that will enable increasing levels of application placement, conversion and migration across different hypervisors and public clouds. Additionally, the built-in Acropolis Hypervisor can replace expensive third-party hypervisors and eliminate an additional infrastructure silo.
Prism. Built with consumer-grade design, Prismservices. It delivers integrated virtualization and infrastructure management, robust operational analytics, a search-first interface, self-service capabilities and one-click administration. Prism allows routine IT operations that are typically manual and cumbersome to be fully automated or completed with just one click, including capacity planning, provisioning of new applications and resources, troubleshooting and software upgrades. Prism also offers a self-service portal that enables developers and line-of-business owners to provision services as well as a broad set of APIs for integration with third-party cloud management and orchestration software.
Our Technology
Our enterprise cloud operating system converges server, virtualization, storage and networking into one software-driven integrated operating system that unifies private and public cloud into a single software fabric. Our operating system is designed to run on a variety of hardware platforms, including off-the-shelf x86 servers. Our solutions are easy-to-deploy and can be expanded one node at a time, reducing costs associated with overprovisioning. The product is a scalable distributed system and can be formed into very large clusters without any single point of failure or degradation of performance. Our solution is currently comprised of two comprehensive software product families, Acropolis and Prism.
Acropolis. Acropolis provides an open platform designed to address storage, application mobility and virtualization needs for a wide range of workloads that can be run at any scale. This platform offers IT professionals feature-rich turnkey infrastructure with increased flexibility of where to run their applications. Acropolis delivers enterprise-grade data management services, applied to individual virtual machines or applications to provide our customers with the granular infrastructure control they desire. Acropolis also provides scalable, efficient and secure platform services with built-in virtualization. Acropolis is comprised of three foundational components that can replace mid-range to high-end storage arrays and standalone virtualization products:
Acropolis Distributed Storage Fabric: Building on our Nutanix Distributed File System, the Acropolis Distributed Storage Fabric, or DSF, enables robust enterprise storage services across multiple storage protocols and hypervisors. Acropolis DSF provides file-based and block-based storage for both virtualized and non-virtualized environments.
Acropolis Application Mobility Fabric: The Acropolis Application Mobility Fabric, or AMF, provides an open environment capable of delivering intelligent application placement and migration, as well as cross-hypervisor high availability and integrated disaster recovery. Acropolis supports all virtualized applications, and is intended to provide a seamless path to containers and hybrid cloud computing in the future. AMF allows migration from one hypervisor, such as VMware ESXi, to another hypervisor such as AHV. Acropolis DSF abstracts out the storage dependencies and AMF automates the workflows of the discrete steps of file format conversion, driver injection and VM provisioning. AMF also includes Cloud Connect, which offers extended hybrid cloud capabilities such as disaster recovery.
Acropolis Hypervisor: Our built-in Acropolis Hypervisor, or AHV, is based on widely-used open source hypervisor technology known as Linux KVM, and is hardened with enterprise-grade security, self-healing capabilities and robust virtual machine, or VM, management. AHV is also integrated with Prism to deliver streamlined administrator workflows when provisioning, cloning and placing VMs.
Prism. Prism offers a single point of management for server, virtualization, storage and networking resources and provides an end-to-end view of all common administrator workflows, system health, alerts and notifications through a simple, elegant and intuitive interface. Prism features innovative technology that streamlines time-consuming IT tasks, and includes one-click operation of software upgrades, detailed capacity analysis and troubleshooting.
The Prism homepage shows an overview of the cluster, system health and critical alerts:
Prism enables efficient management of enterprise-wide deployments by serving as a central administration point to manage multiple clusters and hypervisors (including VMware ESXi environments) within a datacenter or across multiple sites. Prism is built with HTML5 and can be accessed from any connected device that is HTML5-enabled, including smartphones and tablets. With innovative built-in machine intelligence technology, Prism provides capacity runway projections and capacity optimization recommendations to ensure just the right amount of resources are provisioned to support the applications running on the platform. Users can then precisely track infrastructure utilization across a distributed environment and add or remove nodes to any cluster in minutes. Prism enables efficient management of enterprise-wide deployments by serving as a central administration point to manage multiple clusters and hypervisors within a datacenter or across multiple sites. Prism is also built using a distributed, scale-out NoSQL database, meaning thatarchitecture, and software updates and patches can be executed non-disruptively on a rolling basis and do not requirewithout requiring the cluster to be brought offline. Prism providesalso offers a suiteself-service portal that enables developers and line-of-business owners to provision services, as well as a broad set of APIs for integration with third-party products.
Automation and Orchestration. Nutanix Calm adds native application orchestration, automation, and lifecycle management to our enterprise cloud platform. Nutanix Calm fully automates the provisioning, scaling and deletion of applications using pre-integrated blueprints that simplifies management of applications in both private and public clouds.IT teams can customize and publish blueprints for internal consumption across groups within their company, allowing for streamlining and sharing of operational expertise. The Nutanix Marketplace also allows application developers to publish blueprints for consumption by end users so new applications can quickly be introduced.
Cloud and Platform Services. We are extending our platform to provide new products and services that further extend our hybrid cloud vision across the entire software stack. Beam is our multi-cloud optimization service that gives organizations deep visibility into, and analytics on, their cloud consumption patterns, along with one-click cost optimization across cloud environments. Frame, a new offering we recently acquired, provides our customers with a desktop-as-a-service offering that combines the consumer-grade simplicity and web-scale design of cloud applications with the functionality of traditional virtual desktop applications.
We also continue to develop additional products and services, including Nutanix Xi Cloud Services and Nutanix Era. Nutanix Xi Cloud Services will allow IT leaders to leverage Nutanix software as a native cloud-delivered service, initially for disaster recovery through Nutanix Leap, and is expected to be available in late calendar year 2018. Nutanix Era automates database provisioning and lifecycle management and orchestration systems, and allows developers and business userswill initially provide copy data management services allowing customers to provision, infrastructure services withoutclone, refresh and restore copies of production data. Nutanix Era is also expected to be available in late calendar year 2018.
Delivery of Our Solutions
Customers have the need for intervention by IT. Often viewed as a key capability of any cloud platform, the Nutanix Self Service features built into Prism improve IT agility by radically simplifying application delivery and development while also heightening infrastructure automation.
Our Solutions. Our software is combined with off-the-shelf x86 servers and sold as integrated appliances by us (via our reseller partners) or by one of our OEM partners. Additionally, end-customers canchoice to buy our stand-aloneenterprise cloud software and deploy the software on a variety of qualified hardware platforms or to purchase the software pre-installed onto hardware through one of our original equipment manufacturer ("OEM") partners or other channel partners, including qualified x86 servers.
Theon the Nutanix-branded NX hardware line. Our OEM partners, Dell Technologies ("Dell"), Lenovo Group Ltd. ("Lenovo"), International Business Machines Corporation ("IBM") and Fujitsu Technology Solutions GmbH ("Fujitsu"), license our software and package it with their hardware into the Dell XC Series, Lenovo Converged HX Series, IBM CS Series and Fujitsu XF Series appliances, we sell are designedrespectively. Super Micro Computer, Inc. ("Super Micro") and optimized for various use casesFlextronics Systems Limited ("Flextronics") license our software and workloads, ranging from the NX-1000 series, which is intended for remote branch office environments, topackage it with our NX-8000 series, which is intended for high-end databases and enterprise applications requiring the highest performance. In addition, our Xpress product line leverages the Nutanix enterprise cloud software to address the needs of small and medium-sized businesses.
Across the breadth of models weNutanix-branded NX appliances. Our OEM partners offer ourthese appliances may include one, two or four nodes in a 2U (rack unit) footprint. Our appliances are configured to order, providing our customers with a range of available hardware combinations in termsconfigurations and also sell associated support offerings, which we jointly support.
We also deliver certain of central processing unit, memory, flash devices, hard drivesour cloud and networking interfacesplatform solutions, such as Beam and Frame, and are continuing to meet the specific requirementsdevelop additional cloud services, such as Nutanix Xi Cloud Services and Nutanix Era, all of customers’ workloads. All Nutanix applianceswhich are intended to be delivered as a hosted service which can be configured with all-flash storage to meet higher-end application performance requirements. Our appliances can be mixed and matched with different models inpurchased on a cluster to provide maximum flexibility and address the requirement to scale storage and compute resources independently.
subscription basis.
We also have OEM partnerships with Dell Technologies, or Dell, and Lenovo Group Ltd., or Lenovo, which license our software and package it with their hardware into the Dell XC Series and Lenovo Converged HX Series appliances, respectively. Dell and Lenovo offer the XC Series and HX Series in a range of configurations and also sell associated support offerings, which we jointly support. We also recently announced a partnership with International Business Machines Corporation, or IBM, to deliver our software on IBM Power Systems, as the IBM CS Series.
Acropolis is available in different software editions so that our end-customers can easily select the capabilities to meet their infrastructure needs.
Starter: The Acropolis Starter edition offers the core set of our software functionality. This edition is designed for smaller-scale deployments with a limited set of non-critical workloads. The Starter edition is included in the price of each appliance.
Pro: The Acropolis Pro edition offers enhanced data services, along with higher level resilience and management features. This edition is designed for enterprises running multiple applications on a cluster or for large-scale single workload deployments.
Ultimate: The Acropolis Ultimate edition offers the complete suite of our software capabilities, including application mobility and even more robust data protection, to meet the most demanding infrastructure requirements. This edition is designed for multi-site deployments and for meeting advanced security requirements.
Prism is also available in multiple software editions, helping our end-customers choose the advanced management and automation capabilities that best fit their operational needs.
Starter: The Prism Starter edition is a complete system management platform and includes single and multi-site management of Nutanix clusters. Capabilities include streamlined administration of all compute, virtualization, storage and networking services in the Nutanix operating system.
Pro: The Prism Pro edition includes an advanced machine intelligence platform, delivering robust operations and automation capabilities such as capacity planning, one-click capacity optimization, integrated consumer-grade search and customizable dashboards. This edition adds advanced IT operations management and eliminates the need for expensive third party cloud management and orchestration products.
Recent Developments
Our Support Programs
We recently announced Nutanix Calm and Nutanix Xi Cloud Services, twohave a customer support organization that offers varying levels of our upcoming products and services which, once available, are expected to extend our operating system to customers’ multiple cloud deployments and integrate private cloud and public cloud deployments. Nutanix Calm is a native application orchestration and lifecycle management software solution that abstracts application environments from the underlying infrastructure, and is expected to be available in late 2017. Nutanix Xi Cloud Services will allow IT leaders to leverage Nutanix software infrastructure as a native cloud-delivered service, initially for disaster recovery, and is expected to be available in 2018.
Our Support Program
We offer technical support to our end-customers around the clock to meetcustomers based on their needs and four hour part replacement for end-customers who purchaseneeds. All support customers receive round-the-clock support service from our highest level of support. Ourglobal support centers are located around the world andwhich are staffed by our employees.employees, as well as software entitlements to receive upgrades and enhancements on a when-and-if-available basis. We also offer technical support in multiple different subscription andpremium support programs generally available in one, three or five-year packages includingthrough our technical account managers and designated support engineers.
Professional Services: We provide consulting and implementation services to customers through our professional services team. We typically provide these services at the following:
Xpress Support: Our Xpress Program is designed specificallytime of initial installation to support customers of our Xpress product line.
Production: Our Production Program is designed for mid-size to large enterprises that operate business-critical operations. The Production Program entitles end-customers to 24 hour support, priority callhelp the customer with configuration and case handling and next business day on-site part replacement.implementation.
Mission Critical: Our Mission Critical Program is designed for large enterprises that operate our products in mission-critical environments. The Mission Critical Program entitles end-customers to 24 hour support, priority call and case handling, direct access to senior level engineers and up to four hour on-site part replacement.
Our End-CustomersEnd Customers
Our software is combined with off-the-shelf x86 servers and sold as integrated appliances by us (via our reseller partners) or by one of our OEM partners. Additionally, end-customers can buy our stand-alone software and deploy the software on a variety of hardware platforms, including qualified x86 servers, which we believe expands our addressable market. Our solution addresses a broad range of workloads, including "tier-one" enterprise applications, databases, virtual desktop infrastructure or VDI,("VDI"), unified communications and big data analytics. WeAs a result, we have end-customersend customers across a broad range of industries, including automotive, consumer goods, education, energy, financial services, healthcare, manufacturing, media, public sector, retail, technology and telecommunications. We also sell totelecommunications, some of whom are service providers who utilize our operating systemplatform to provide a variety of cloud-based services to their customers, including infrastructure-as-a-service offerings.customers. We had a broad and diverse base of 7,051 end-customersover 10,600 end customers as of July 31, 2017,2018, including many Global 2000 enterprises. Carahsoft Technology Corp., a distributor to our end-customers, represented 23%, 15% and 11% of our total revenue for fiscal 2015, fiscal 2016 and fiscal 2017, respectively. Promark Technology Inc., another distributor to our end-customers, represented 15%, 20% and 22% of our total revenue for fiscal 2015, fiscal 2016 and fiscal 2017, respectively.
We define the number of end-customersend customers as the number of end-customersend customers for which we have received an order by the last day of the period indicated. Our end customer count of end-customers does not include partners to which we have sold productproducts for their own demonstration purposes. A single organization or customer may represent multiple end-customersend customers for separate divisions, segments or subsidiaries.
Our platform is primarily sold through channel partners, including distributors and resellers, thus the distributor is typically considered the direct purchaser in a transaction. Carahsoft Technology Corp., a distributor to our end customers, represented 14%, 9% and 10% of our total revenue for fiscal 2016, 2017 and 2018, respectively. Promark Technology Inc., another distributor to our end customers, represented 18%, 19% and 20% of our total revenue for fiscal 2016, 2017 and 2018, respectively.
Growth Strategy
Key elements of our growth strategy include:
Continually innovate and maintain technology leadership.Since inception, we have rapidly innovated from supporting limited applications and a single hypervisor to a full platform that is designed to support a wide variety of workloads. We intend to continue to invest heavily in developing our enterprise platform with new features, services and products to expand our market opportunity.
Invest to acquire new end customers. We completed our first end customer sale in October 2011 and have since grown to over 10,600 end customers. We intend to grow our base of end customers by increasing our investment in sales and marketing, leveraging our network of channel partners and OEMs, furthering our international expansion and extending our enterprise cloud platform to address new customer segments. One area of continued focus is expanding our position within the Global 2000.
Continue to drive follow-on sales to existing end customers. Our end customers typically deploy our technology initially for a specific workload. Our sales teams and channel partners then seek to systematically target follow-on sales opportunities to drive purchases of additional appliances and higher tier software editions. This land and expand strategy enables us to quickly expand our footprint within our existing end customer base from follow-on orders that in the aggregate are often multiples of the initial order.
Deepen engagement with current channel and OEM partners and establish additional routes to market to enhance sales leverage. We have established meaningful channel partnerships globally and have driven strong engagement and initial commercial success with several major resellers and distributors. We believe that our OEM relationships can augment our routes to market to accelerate our growth and that there is a significant opportunity to grow our sales with our channel partners and OEMs. We intend to attract and engage new channel and OEM partners around the globe. while also selling our standalone software on qualified servers to maximize the availability of our solution for our customers.
Invest in rapid growth while remaining focused on our overall financial health. We intend to continue investing in our rapid growth, while balancing such growth against our operating cash flow. By maintaining this balance, we believe we can drive toward our high growth potential without sacrificing our overall financial health.
Sales and Marketing
Sales.We primarily engage our end-customersend customers through our global sales force who directly interact with key IT decision makers while also providing sales development, opportunity qualification and support to our channel partners. We have established relationships with our channel partners, who represent many of the key resellers and distributors of datacenter infrastructure software and systems in each of the geographic regions where we operate.
We also engage our end-customersend customers through our OEM partners, Dell and Lenovo, which license our software and package it with their hardware, into the Dell XC Series and Lenovo Converged HX Series appliances, respectively. Dell and Lenovo products incorporating our software are soldsell through their direct sales forces and channel partners.
Technology Alliances. We also recently announcedhave developed relationships with a partnership with IBM, which will licensenumber of leading technology companies that help us deliver world-class solutions to our software and package it with IBM Power Systems servers to create the IBM CS Series, which will be sold through IBM’s direct sales force and channel partners.
Our agreements with Dell, Lenovo and IBM provide that these partners pay us royalties for the distribution ofcustomers. Through our software together with theirElevate Technology Alliance Partner Program, our developer, application, hardware and the sale of support and maintenance contracts for the integrated products. We provide traininginfrastructure partners get access to their support personnel, and we also coordinate withresources that allow them to collectively resolve support issues for end-customers. We have also agreedvalidate and integrate their products with Dell, LenovoNutanix solutions and IBM to investengage in sufficientjoint sales training and marketing resources to support the launch and promotion of the integrated products, which, in the case of Lenovo, includes the commitment of dedicated sales personnel to support the sale of the integrated products. Weenablement. In addition, we work with each of Dell, Lenovo and IBM to ensure interoperability between our software and their hardware and to certify certain hardware configurations for useclosely with our software.technology partners through co-marketing and lead-generation activities in an effort to broaden our marketing reach and help us win new customers and retain existing ones.
Our agreement with Lenovo expires in October 2018, and automatically renews for two successive one-year periods thereafter unless one party gives six months’ prior notice to the other party of its intent not to renew. Our agreement with Dell expires in June 2021, and automatically renews for successive one-year periods thereafter unless one party gives six months’ prior notice to the other party of its intent not to renew. Our agreement with IBM expires in July 2020, and automatically renews for successive one-year periods thereafter unless one party gives 180 days’ prior notice to the other party of its intent not to renew.
Marketing.Our channel partners have joined our integrated partner program, the Nutanix Partner Network, which provides market development funds, preferred pricing through deal registration, sales enablement and product training, innovative marketing campaigns and dedicated account support. We also coordinate with Dell, Lenovo and IBMour OEM partners on joint marketing activities.
We supplement our sales efforts with our marketing program that includes print and online advertising, corporate and third-party events, demand generation activities, social media promotions, media and analyst relations, and communitiescommunity programs. For example, in June 2017May 2018 we hosted our thirdfourth annual .NEXT Conference, where more than 3,500almost 5,000 attendees came to learn about our current and future products and solutions. We also establish deep integration with our ecosystem of third-party technology partners and engage in joint marketing activities with them.
Research and Development
Our research and development efforts are focused primarily on improving current technology, developing new technologies in current and adjacent markets and supporting existing end-customerend customer deployments. Our research and development teams primarily consist of distributed systems software and user interface engineers. Most of our research and development team is based in San Jose, California. We also maintain research and development centers in Bangalore, India, Durham, North Carolina, Seattle, Washington and Seattle, Washington.Belgrade, Serbia. We plan to dedicate significant resources to our continued research and development efforts.
Research and development expense was $73.5 million, $116.4 million, $288.6 million and $288.6$313.8 million for fiscal 2015, fiscal 2016, 2017 and fiscal 2017,2018, respectively.
Manufacturing
We outsource the assembly of our hardware productsbranded NX product line to two contract manufacturers, Super Micro, Computer, Inc., or Super Micro, and Flextronics Systems Limited, or Flextronics. Super Micro and Flextronics assemble and test our NX products and they generally procure the components used in our productsthe NX product line directly from third-party suppliers. Our agreement with Super Micro expires in May 2018,2019, and automatically renews for successive one-year periods thereafter, with the option to terminate upon each annual renewal. In the third quarter of fiscal 2017, we entered into a Memorandum of UnderstandingOur agreement with Flextronics pursuantexpires in November 2020 and automatically renews for successive one-year periods thereafter, with the option to which we have transitioned and will continue to transition portions of our manufacturing operations to Flextronics, and we are currently working with Flextronics to finalize a manufacturing agreement. terminate upon each annual renewal. Distributors handle fulfillment and shipment for certain end-customers,end customers, but do not hold inventory.
Backlog
We typically accept and ship orders within a short time frame. In general, customers may cancel or reschedule orders without penalty, and delivery schedules requested by customers in their purchase orders vary based upon each customer’s particular needs. As a result, we do not believe that our backlog at any particular time is a reliable indicator of future revenue.
Competition
We operate in the intensely competitive enterprise infrastructure market and compete primarily with companies that sell software to build and operate enterprise clouds, integrated systems, and standalone storage and servers, as well as providers of public cloud infrastructure solutions. These markets are characterized by constant change and rapid innovation. Our main competitors fall into the following categories:
software providers, such as VMware, Inc., or VMware, and Red Hat, Inc. and VMware, Inc. ("VMware"), that offer a broad range of virtualization, infrastructure and management products to build and operate enterprise clouds;
traditional IT systems vendors, such as Cisco Systems, Inc. ("Cisco"), Dell, Hewlett Packard Enterprise Company or HPE, Cisco Systems, Inc.("HPE"), or Cisco, Lenovo, Dell, Hitachi Data Systems or Hitachi,("Hitachi"), IBM, and IBM,Lenovo, that offer integrated systems that include bundles of servers, storage and networking solutions, as well as a broad range of standalone server and storage products;
traditional storage array vendors, such as Dell, Hitachi, and NetApp, Inc. and Hitachi,("NetApp"), which typically sell centralized storage products; and
providers of public cloud infrastructure and services, such as Amazon.com, Inc., Google Inc., and Microsoft Corporation.
Corporation.In addition, we compete against vendors of hyperconverged infrastructure and software-defined storage products, such as VMware, Cisco, Dell, HPE, DellVMware and many smaller emerging companies. As our market grows, we expect it will continue to attract new companies as well as existing larger vendors. For example, NetApp has released a solution aimed at the hyperconverged market. Some of our competitors may expand their product offerings, acquire competing businesses, sell at lower prices, bundle with other products, provide closed technology platforms or otherwise attempt to gain a competitive advantage. For example, HPE acquired SimpliVity Corporation and Cisco acquired Springpath, Inc., both of which were emerging hyperconverged vendors, in order to bolster their own hyperconverged product lines. Furthermore, as we expand our product offerings, we may expand into new markets and we may encounter additional competitors in such markets. Additionally, as companies increasingly offer competing solutions, they may be less willing to partner with us as an OEM or otherwise.
We believe the principal competitive factors in the infrastructure software and systemsour market include:
product features and capabilities;
system scalability, performance and resiliency;
management and operations, including provisioning, analytics, automation and upgrades;
total cost of ownership over the lifetime of the technology;
product interoperability with third-party applications, infrastructure software, infrastructure systems and public clouds;
application mobility across disparate silos of enterprise computing, including public and private cloud infrastructure; and
complete customer experience, including usability, support and professional services.
We believe we are positioned favorably against our competitors based on these factors. However, many of our competitors have substantially greater financial, technical and other resources, greater brand recognition, larger sales forces and marketing budgets, broader distribution, and larger and more mature intellectual property portfolios.
Intellectual Property
Our success depends in part upon our ability to protect and use our core technology and intellectual property. We rely on patents, trademarks, copyrights and trade secret laws, confidentiality procedures, and employee nondisclosure and invention assignment agreements to protect our intellectual property rights. As of July 31, 2017,2018, we had 4866 United States patents that have been issued or allowed and 161297 patent applications pending in the United States. Our issued patents expire between 2031 and 2037. We also integrateleverage open source software intoin some of our products.
We control access to and use of our proprietary software and other confidential information through the use of internal and external controls, including contractual protections with employees, contractors, customers and partners, and our software is protected by U.S. and international copyright laws. Despite our efforts to protect our trade secrets and proprietary rights through intellectual property rights, licenses and confidentiality agreements, unauthorized parties may still copy or otherwise obtain and use our software and technology. In addition, we sell extensively internationally, and effective patent, copyright, trademark and trade secret protection may not be available or may be limited in foreign countries.
Our industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding patent and other intellectual property rights. We believe that competitors will try to develop products and services that are similar to ours and that may infringe our intellectual property rights. Our competitors or other third-parties may also claim that our operating system infringes their intellectual property rights. In particular, leading companies in our industry have extensive patent portfolios. From time to time, third-parties, including certain of these leading companies and non-practicing entities, may assert patent, copyright, trademark and other intellectual property rights against us, our channel partners, or our end-customers, which our standard license and other agreements obligate us to indemnify against such claims. Successful claims of infringement by a third-party could prevent us from distributing certain products or performing certain services, require us to expend time and money to develop non-infringing solutions, or force us to pay substantial damages (including damages if we are found to have willfully infringed patents or copyrights), royalties or other fees. In addition, to the extent that we gain greater visibility and market exposure as a public company, we face a higher risk of being the subject of intellectual property infringement claims from third parties. We cannot assure you that we do not currently infringe, or that we will not in the future infringe, upon any third-party patents or other proprietary rights. See “Risk Factors—Third-party claims that we are infringing intellectual property, whether successful or not, could subject us to costly and time-consuming litigation or expensive licenses, and our business could be harmed” for additional information.
See Item 1A, "Risk Factors," for further discussion of risks related to protecting our intellectual property.
Facilities
Our corporate headquarters are located in San Jose, California where, under two lease agreements that expire in March 2021,through April 2024, we currently lease approximately 176,000326,000 square feet of space. We also maintain offices in North America, Europe, Asia-Pacific,Asia Pacific, the Middle East, Latin America and Africa. We lease all of our facilities and do not own any real property. We expect to add facilities as we grow our employee base and expand geographically. We believe that our facilities are adequate to meet our needs for the immediate future, and that, should it be needed, suitable additional space will be available to accommodate the expansion of our operations.
Employees
We had 2,813approximately 4,000 employees worldwide as of July 31, 2017.2018. None of our employees in the United States is represented by a labor organization or is a party to any collective bargaining arrangement. In certain of the European countries in which we operate, we are subject to, and comply with, local labor law requirements in relation to the establishment of works councils. We are often required to consult and seek the consent or advice of these works councils. We have never had a work stoppage and we consider our relationship with our employees to be good.
Information about Segment and Geographic Areas
The segment and geographic information required herein is contained in Note 1412 of our Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.
Corporate Information
We were incorporated in Delaware in September 2009 as Nutanix, Inc. Our principal executive offices are located at 1740 Technology Drive, Suite 150, San Jose, California 95110, and our telephone number is (408) 216-8360. We have operations throughout North America, Europe, Asia-Pacific,Asia Pacific, the Middle East, Latin America and Africa. Our website address is www.nutanix.com. Information contained on or accessible through our website is not a part of this report and the inclusion of our website address in this report is an inactive textual reference only.
Available Information
Our website is located at www.nutanix.com and our investor relations website is located at ir.nutanix.com. This Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, are available free of charge on the investor relations portion of our website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission or SEC.("SEC"). We also provide a link to the section of the SEC’s website at www.sec.gov that has or will have all of our public filings, including this Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, all amendments to those reports, our Proxy Statements, and other ownership relatedownership-related filings. We use our investor relations website as a channel of distribution for important company information. For example, webcasts of our earnings calls and certain events we participate in or host with members of the investment community are on our investor relations website. Additionally, we announce investor information, including news and commentary about our business and financial performance, SEC filings, notices of investor events, and our press and earnings releases, on our investor relations website. Investors and others can receive notifications of new information posted on our investor relations website in real time by signing up for email alerts and RSS feeds. Further corporate governance information, including our corporate governance guidelines, board committee charters and code of conduct, is also available on our investor relations website under the heading “Governance.” The contents of our websites are not incorporated by reference into this Annual Report on Form 10-K or in any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only.
Item 1A. Risk Factors
You should carefully consider the risks and uncertainties described below, together with all of the other information contained in this Annual Report on Form 10-K, including our consolidated financial statements and related notes, before making a decision to invest in our Class A common stock. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that affect our business. If any of the following risks occur, our business, financial condition, operating results and prospects could be materially harmed. In that event, the price of our Class A common stock could decline and you could lose part or all of your investment.
Risks Related to Our Business and Industry
We have a history of losses and we may not be able to achieve or maintain profitability in the future.
We have incurred net losses in all periods since our inception and we expect that we will continue to incur net losses for the foreseeable future. We experienced net losses of $126.1$108.2 million, $168.5$379.6 million and $458.0$297.2 million for fiscal 2015,2016, fiscal 20162017 and fiscal 2017,2018, respectively. As of July 31, 2017,2018, we had an accumulated deficit of $899.8$1,028.1 million. In addition to the investments we expect to continue to make to grow our business, we have also incurredincur and expect to continue incurring significant additional legal, accounting and other expenses as a newly public company that we did not incur as a private company. If we fail to increase our revenue and manage our expenses, we may not achieve or sustain profitability in the future.
The markets in which we compete are rapidly evolving, which make it difficult to forecast end-customerend customer adoption rates and demand for our solutions.
The markets in which we compete are rapidly evolving. Accordingly, our future financial performance will depend in large part on the allocation of spending in traditional IT markets and on our ability to adapt to new market demands. Currently, sales of our solutions are dependent in large part upon replacement of spending in traditional markets, including x86 servers, storage systems and virtualization software. In addition, as we develop new solutions designed to address new market demands, such as the recently announced Nutanix Xi Cloud Services, and Nutanix Calm, sales of our solutions will in part be dependent on capturing new spending in these markets, including hybrid cloud services. If these markets experience a shift in customer demand, or if customers in these markets focus their new spending on, or shift their existing spending to, public cloud solutions more quickly or more extensively than expected, our solutions may not compete as effectively, if at all. It is also difficult to predict end-customerend customer demand or adoption rates for our solutions or the future growth of our market.
If end-customersend customers do not adopt our solutions, our ability to grow our business and operating results may be adversely affected.
Traditional IT infrastructure architecture is entrenched in the datacenters of many of our end-customersend customers because of their historical financial investment in existing IT infrastructure architecture and the existing knowledge base and skillsets of IT administrators. As a result, our sales efforts often involve extensive efforts to educate our end-customersend customers as to the benefits and capabilities of our web-scale architecture solutions, particularly as we continue to pursue large organizations as end-customers.end customers. If we fail to achieve market acceptance of our solutions, our ability to grow our business and our operating results will be adversely affected.
A shift in our relationships with our OEM partners could adversely affect our results of operations.
Our relationships with our OEMoriginal equipment manufacturer ("OEM") partners continue to shift as industry dynamics change, and our OEM partners may be less willing to partner with us as an OEM or otherwise as such shifts occur.occur. For example,
Dell Technologies ("Dell") is not just an OEM partner, but also a competitor of ours, and accounted for over 10%13%, 11% and 8% of our total billings in each of fiscal 2016, fiscal 2017 and fiscal 2017.2018, respectively. In September 2016, EMC Corporation or EMC,("EMC"), was acquired by Dell. As a result of the acquisition, Dell may be more likely to promote and sell its own solutions, including those from EMC’s complementary product portfolio, over our products,, or cease selling or promoting our products entirely. Also, Dell holds a majority of outstanding voting power in VMware Inc. ("VMware") and could combine the Dell, EMC and VMware product portfolios into unified offerings optimized for their platforms. If Dell decides to sell its own solutions over our products, that could adversely impact our OEM sales and harm our business, operating results and prospects, and our stock price could decline.
Further, since we account for OEM sales, including sales made by Dell, as software sales for revenue recognition purposes, and because we have decided to early adopt the new revenue recognition standard (Accounting Standardare generally recognized upon delivery under Accounting Standards Update 2014-09, Revenue from Contracts with Customers or ("ASC 606) effective606"), which we adopted as of August 1, 2017, any reduction in OEM sales by any of our OEM partners will have an increased impact on our reported revenue and gross margins in future periods, potentially making it more difficult for us to forecast revenue and gross margins in future quarters. Under ASC 606, revenue from Dell would have accounted for approximately 12%11%, 10% and 10%9% of our total revenue in fiscal 2016, fiscal 2017 and fiscal 2017,2018, respectively.
Our financial performance, including revenue growth, in recent periods may not be indicative of our future performance.
We have experienced significant revenue growth in recent periods, with total revenue of $241.4$503.4 million, $444.9$845.9 million, and $766.9$1,155.5 million for fiscal 2015,2016, fiscal 20162017 and fiscal 2017,2018, respectively. You should not consider our revenue growth in recent periods as indicative of our future performance. While we have recently experienced significant revenue growth, you should not consider such revenue growth as indicative of our future performance and we may not achieve similar revenue growth in future periods.
In addition, we are in the process of transitioning our business to focus on more software-only transactions and expect to transition toward a subscription-based model in the longer term. Software-only sales typically reflect higher gross margins and lower revenue in a given period, as compared to software sales deployed on off-the-shelf servers, since the sale does not include the revenue or cost of the hardware components in an appliance. As we transition to more software-only transactions, we anticipate that, unless we can replace the hardware revenue with additional software sales, our revenue growth will slow during the transition period, our gross margins may fluctuate and our operating results may be adversely impacted.
Further, as we transition more of our business toward a subscription-based model, our revenue may be impacted in the short term. The revenue associated with certain subscription purchases, such as with Nutanix Xi Cloud Services, will be recognized over the term of the subscription resulting in less upfront revenue as compared to our historical software-only transactions. Also, the revenue we recognize from subscription sales, even if recognized upfront, may in some instances have a lower total dollar value than those associated with licenses for the life of the device because they may be of a shorter term than the life of the device. This may also make it difficult to rapidly increase our revenue in any period through additional sales.
Our success also depends heavily on the ability of our sales team to adjust their strategy to focus on software-only and subscription-based sales. Furthermore, our customers may not understand these changes to our product sales, and investors, industry and financial analysts may have difficulty understanding the changes to our business model, resulting in changes in financial estimates or failure to meet investor expectations. As our business changes, the transition may make it more difficult to accurately project our operating results or plan for future growth. Accordingly, you should not rely on our revenue growth for any prior periods as an indication of our future revenue or revenue growth.
We have experienced rapid growth in recent periods and we may not be able to sustain or manage any future growth effectively.
We have expanded our overall business and operations significantly in recent periods. Our employee headcount increased from 247 as of July 31, 2013 to 2,813 as of July 31, 2017,significantly since our inception, and we may have significant headcount increases in the future. We anticipate that our operating expenses will increase in the foreseeable future as we scale our business, including in developing and improving our solutions, expanding our sales and marketing capabilities and global coverage, and in providing general and administrative resources to support our growth. As we continue to rapidly grow our business, we must effectively integrate, develop and motivate a large number of new employees, as well as existing employees who are promoted or moved into new roles, while maintaining the effectiveness of our business execution. In particular, our success depends heavily on our ability to ramp new sales teams in a fast and effective manner. We must also continue to improve and expand our IT and financial infrastructure, management systems and product management and sales processes. We expect that our future growth will continue to place a significant strain on our management, operational and financial resources. We may incur costs associated with future growth prior to realizing the anticipated benefits, and the return on these investments may be lower, or may develop more slowly than we expect. If we are unable to manage our growth effectively, we may not be able to take advantage of market opportunities. We also may fail to satisfy end-customers’end customers’ requirements, maintain product quality, execute on our business plan or respond to competitive pressures, any of which could adversely affect our business, operating results, financial condition and prospects.
We compete with traditional storage vendors,believe our long-term value as a company will be greater if we focus on growth, which may negatively impact our profitability in the near term.
Part of our business strategy is to primarily focus on our long-term growth. As a result, our profitability may be lower in the near term than it would be if our strategy was to maximize short-term profitability. Expenditures related to expanding our research and development efforts, sales and market efforts, infrastructure and other such investments may not ultimately grow our business or cause long-term profitability. If we are ultimately unable to achieve profitability at the level anticipated by analysts and our stockholders, our stock price may decline.
The enterprise IT systems vendors, including providers of public cloud services,market is rapidly changing and infrastructure software providers,expanding, and we expect competition to continue to intensify in the future from both established competitors and new market entrants.
We operate in the intensely competitive enterprise infrastructure market and compete primarily with companies that sell software to build and operate enterprise clouds, integrated systems, and standalone storage and servers, as well as providers of public cloud infrastructure solutions. These markets are characterized by constant change and rapid innovation. Our main competitors fall into the following categories:
software providers, such as VMware, Inc., or VMware, and Red Hat, Inc., and VMware, that offer a broad range of virtualization, infrastructure and management products to build and operate enterprise clouds;
traditional IT systems vendors, such as Cisco Systems, Inc. ("Cisco"), Dell, Hewlett Packard Enterprise Company or HPE, Cisco Systems, Inc.("HPE"), or Cisco, Lenovo Group Ltd., Dell Technologies Inc., or Dell, Hitachi Data Systems Corporation or Hitachi, and("Hitachi"), International Business Machines Corporation or IBM,("IBM"), and Lenovo Group Ltd., that offer integrated systems that include bundles of servers, storage and networking solutions, as well as a broad range of standalone server and storage products;
traditional storage array vendors, such as Dell, Hitachi and NetApp, Inc. ("NetApp"), or NetApp, and Hitachi, which typically sell centralized storage products; and
providers of public cloud infrastructure, such as Amazon.com, Inc. ("Amazon"), Google Inc., and Microsoft Corporation.
In addition, we compete against vendors of hyperconverged infrastructure and software-defined storage products, such as VMware, Cisco, HPE, Dell, VMware, and many smaller emerging companies. As our market grows, we expect it will continue to attract new companies as well as existing larger vendors. For example, NetApp recently released its first hyperconverged solution. Some of our competitors may expand their product offerings, acquire competing businesses, sell at lower prices, bundle with other products, provide closed technology platforms, partner with other companies to develop joint solutions, or otherwise attempt to gain a competitive advantage. For example, HPE acquired SimpliVity Corporation and Cisco recently announced its intention to acquireacquired Springpath, Inc., both of which arewere emerging hyperconverged vendors, in order to bolster their own hyperconverged product lines. VMWare and Amazon also announced a partnership to offer a joint solution that may directly compete with our products. Furthermore, as we expand our product offerings, we may expand into new markets and we may encounter additional competitors in such markets. Additionally, as companies increasingly offer competing solutions, they may be less willing to partner with us as an OEM or otherwise.
Many of our existing competitors have, and some of our potential competitors may have, competitive advantages over us, such as longer operating histories, significantly greater financial, technical, marketing or other resources, stronger brand awareness and name recognition, larger intellectual property portfolios and broader global presence and distribution networks. Furthermore, some of our competitors supply a wide variety of products to, and have well-established relationships with, our current and prospective end-customers.end customers. Some of these competitors have in the past and may in the future take advantage of their existing relationships with end-customers,end customers, distributors or resellers to provide incentives to such current or prospective end-customersend customers that make their products more economically attractive or to interfere with our ability to offer our solutions to our end-customers.end customers. Our competitors may also be able to offer products or functionality similar to ours at a more attractive price, such as by integrating or bundling their solutions with their other product offerings or those of technology partners or establishing cooperative relationships with other competitors, technology partners or other third parties. Potential end-customersend customers may prefer to purchase from their existing suppliers rather than a new supplier, especially given the significant investments that they have historically made in their legacy infrastructures. Some of our competitors may also have stronger or broader relationships with technology partners than we do, which could make their products more attractive than ours. As a result, we cannot assure you that our solutions will compete favorably, and any failure to do so could adversely affect our business, operating results and prospects.
Our relatively limited operating history makes it difficult to evaluate our current business and prospects, and may increase the risk of your investment.
We began selling our products in October 2011. We have relatively limited historical financial data, and we operate in a rapidly evolving market. Our relatively limited operating history makes it difficult to evaluate our current business and our future prospects, including our ability to plan for and model future growth. For example, recent changesFurthermore, we are in the process of transitioning our sales organization have impacted our sales productivity, makingbusiness to focus on more software-only transactions in the near term, and shift to a software as a service and software as a subscription model in the longer-term, which may make it more difficult to project our business growth.growth and margins. In addition, the rapidly evolving nature of the enterprise IT infrastructure market, as well as other factors beyond our control, reduces our ability to accurately forecast quarterly or annual performance. Our solutions may never reach widespread adoption, and changes or advances in technologies could adversely affect the demand for our solutions. A reduction in demand for web-scale architectures caused by lack of customer acceptance, technological challenges, competing technologies and solutions or otherwise would result in lower revenue growth rates or decreased revenue, either of which could negatively impact our business, operating results and prospects. Any predictions about future revenue and expenses may not be as accurate as they would be if we had a longer operating history. We have encountered and will continue to encounter risks and difficulties associated with rapid growth and expansion and a relatively limited operating history. If we do not address these risks successfully, our business and operating results would be adversely affected, and our stock price could decline.
Developments or improvements in enterprise IT infrastructure technologies may materially and adversely affect the demand for our solutions.
Significant developments in enterprise IT infrastructure technologies, such as advances in storage, virtualization, containers, and management software and public cloud and hybrid cloud infrastructure solutions, may materially and adversely affect our business, operating results and prospects in ways we do not currently anticipate. For example, improvements in existing data storagehybrid cloud technologies, such as a significant increaseimprovements in the speed of traditional interfaces for transferring data between a serverorchestration and a storage system or the speed of traditional embedded controllers within the storage system,automation tools, could emerge as a preferred alternative to our solutions, especially if they are sold at lower prices.introduced to the market before ours are. Any failure by us to develop new or enhanced technologies or processes, to react to changes or advances in existing technologies or to correctly anticipate these changes or advances as we create and invest in our product roadmap could materially delay our development and introduction of new solutions, which could result in the loss of competitiveness of our solutions, decreased revenue and a loss of market share to competitors. In addition, the servers, network, software and other components and systems of a datacenter must comply with established industry standards in order to interoperate and function efficiently together. If larger companies who are more influential in driving industry standards do not support the same standards we use, market acceptance of our solutions could be adversely affected, or we may be required to spend significant time and resources duplicating efforts to adapt to different standards.
Publicpublic cloud infrastructure offers alternatives to the on-premise infrastructure deployments that our operating system primarilyplatform currently supports. Various factors could cause the rate of adoption of public cloud infrastructure to increase, including continued or accelerated decreases in the price of public cloud offerings and improvements in the ability of public cloud providers to deliver reliable performance, enhanced security, better application compatibility and more precise infrastructure control. Any of these factors could make our operating systemplatform less competitive as compared to the public cloud, and could materially and adversely affect the demand for our solutions.
If other IT vendors do not cooperate with us to ensure that our solutions interoperate with their products, including by providing us with early access to their new products or information about their new products, our product development efforts may be delayed or impaired, which could adversely affect our business, operating results and prospects.
Our solutions provide an operating systema platform on which software applications and hypervisors from different software providers run. As a result, our solutions must interoperate with our end-customers’end customers’ existing hardware and software infrastructure, specifically their networks, servers, software and operating systems, as well as the applications that they run on this infrastructure, which may be manufactured and provided by a wide variety of vendors and OEMs. In addition to ensuring that our solutions interoperate with these hardware and software products initially, we must occasionally update our software to ensure that our solutions continue to interoperate with new or updated versions of these hardware and software products. Current or future providers of hardware, software applications, hypervisors or data management tools could make changes that would diminish the ability of our solutions to interoperate with them, and significant additional time and effort may be necessary to ensure the continued compatibility of our solutions, which might not be possible at all. Even if our solutions are compatible with those of other providers, if they do not certify or support our solutions for their systems or cooperate with us to coordinate troubleshooting and hand off of support cases, end-customersend customers may be reluctant to buy our solutions, which could decrease demand for our solutions and harm our ability to achieve a return on the investments and resources that we have dedicated to ensuring compatibility. Developing solutions that interoperate properly requires substantial partnering, capital investment and employee resources, as well as the cooperation of the vendors or developers of the software applications and hypervisors both with respect to product development and product support. Vendors may not provide us with early or any access to their technology and products, assist us in these development efforts, certify our solutions, share with or sell to us any APIs, formats, or protocols we may need, or cooperate with us to support end-customers.end customers. If they do not provide us with the necessary access, assistance or proprietary technology on a timely basis or at all, we may experience product development delays or be unable to ensure the compatibility of our solutions with such new technology or products. To the extent that vendors develop products that compete with ours, they have in the past, and may again in the future, withhold their cooperation, decline to share access, certify our solutions or sell or make available to us their proprietary APIs, protocols or formats or engage in practices to actively limit the functionality, or compatibility, and certification of our products. If any of the foregoing occurs, our product development efforts may be delayed or impaired, our solutions could become less attractive to end-customersend customers resulting in a decline in sales, and our business, operating results and prospects may be adversely affected.
If we fail to successfully execute on our planned transition to selling more cloud services which will be sold on a subscription-basis, our results of operations could be adversely affected.
We are beginning to transition portions of our business from on-premise products generating revenue through software licenses based on the life of the device, to selling our products and services as cloud-based offerings on a subscription business model. This shift requires a considerable investment of technical, financial, legal and sales resources and will continue to divert resources and increase costs, especially in cost of license and other revenues, in any given period. We also intend to make investments in the supporting infrastructure for such cloud-based offerings and may not recoup the costs of such investments. Such investments of resources may also not improve our long-term growth and results of operations. Further, the increase in some costs associated with our cloud services may be difficult to predict over time, especially in light of our lack of historical experience with the costs of delivering cloud-based versions of our applications.
We believe a subscription-based revenue model has certain advantages over our current business model, including better predictability of revenue; however, it also presents a number of risks to us including the following:
arrangements entered into on a subscription basis generally delay when we can recognize revenue and can require up-front costs, which may be significant;
since revenue is recognized over the term of the customer agreement, any decrease in customer purchases of our subscription-based products and services will not be fully reflected in our operating results until future periods. This will also make it difficult for us to rapidly increase our revenue through additional subscription sales in any one period;
subscription-based revenue arrangements are under short-term agreements. Accordingly, our customers generally have no long-term obligation to us and may cancel their subscription at any time, even if our customers are satisfied with our subscription products;
Shiftscustomers in a subscription arrangement may elect not to renew their contract upon expiration, or they may attempt to renegotiate pricing or other contractual terms at the point of, or prior to, renewal on terms that are less favorable to us;
investors, industry and financial analysts may have difficulty understanding the shift in our product mix more toward selling our solutions as software-only as opposedbusiness model, resulting in changes in financial estimates or failure to as an appliance may cause our revenue to decline,meet investor expectations; and our gross margins to fluctuate.
Software-only sales typically reflect higher gross margins and lowerthere is no assurance that the solutions we offer on a subscription basis, including new revenue in a given period, as compared to software sales deployed on off-the-shelf servers, since the sale does not include the revenuemodels or cost of the hardware components in an appliance. If adoption of our solutions continues to increase, therenew products that we may be an increase in the delivery of our solutions as software-only licenses on separately procured hardware, and our overall product mix may shift more towards sales of our solutions as software-only licenses. Unless we can replace the hardware revenue with additional software sales, any increase in software-only sales may cause our revenue to decline, and our gross margins to fluctuate, and may adversely impact our operating results in the short term.introduce, will receive broad marketplace acceptance.
If we fail to develop or introduce new or enhanced solutions on a timely or cost-effective basis, our ability to attract and retain end-customersend customers could be impaired and our competitive position could be harmed.
We operate in a dynamic environment characterized by rapidly changing technologies and industry standards and technological obsolescence. We will need to continue to create valuable software solutions and integrate these solutions across hardware platforms. To compete successfully, we must design, develop, market and sell new or enhanced solutions that provide increasingly higher levels of performance, capacity, scalability, security, application mobility, and reliability and meet the cost expectations of our end-customers.end customers. The introduction of new products by our competitors, the market acceptance of products based on new or alternative technologies, or the emergence of new industry standards could render our existing or future solutions obsolete or less attractive to end-customers.end customers. Any failure to anticipate or develop new or enhanced solutions or technologies in a timely or cost-effective manner in response to technological shifts could result in decreased revenue and harm to our business and prospects. Any new feature or application that we develop or acquire may not be introduced in a timely or cost-effective manner and may not achieve broad market acceptance and investments in research and development or efforts to optimize our engineering cost structure may not be successful. If we fail to introduce new or enhanced solutions that meet the needs of our end-customersend customers or penetrate new markets in a timely fashion, we will lose market share and our business, operating results and prospects will be adversely affected.
If we are not successful in executing our strategy to increase sales of our solutions to new and existing large organizations, service providers, and government entities, our operating results may suffer.
Our growth strategy is dependent in large part upon increasing sales of our solutions to new and existing large enterprises, service providers and government entities, particularly when such sales result in large orders for our solutions. Sales to these end-customersend customers involve risks that may not be present, (oror that are present to a lesser extent)extent, with sales to smaller end-customers,end customers, which can act as a disincentive to our sales team to pursue these larger end-customers.end customers. These risks include:
competition from companies that traditionally target larger enterprises, service providers and government entities and that may have pre-existing relationships or purchase commitments from such end-customers;end customers;
increased purchasing power and leverage held by large end-customersend customers in negotiating contractual arrangements with us;
more stringent requirements in our support service contracts, including demand for quicker support response times and penalties for any failure to meet support requirements; and
longer sales cycles and the associated risk that substantial time and resources may be spent on a potential end-customerend customer that elects not to purchase our solutions.
Large organizations often undertake a significant evaluation process that results in a lengthy sales cycle. Although we have a channel sales model, our sales representatives typically engage in direct interaction with our prospective end-customersend customers as well as our distributors and resellers. We typically provide evaluation products to these end-customersend customers and may spend substantial time, effort and money in our sales efforts to these prospective end-customers.end customers. In addition, product purchases by large organizations are frequently subject to budget constraints, multiple approvals and unanticipated administrative, processing and other delays. Finally, large organizations typically have longer implementation cycles, require greater product functionality and scalability, require a broader range of services, demand that vendors take on a larger share of risks, require acceptance provisions that can lead to a delay in revenue recognition and expect greater payment flexibility. If we fail to realize an expected sale from a large end-customerend customer in a particular quarter or at all, our business and operating results could be adversely affected. All of these factors can add further risk to business conducted with these end-customers.end customers.
Our growth depends on our existing end-customersend customers making additional purchases of software licenses and software upgrades and renewing and upgrading their support and software maintenanceentitlement agreements, and the failure of our end-customersend customers to do so could harm our business and operating results.
Our future success depends in part on purchases by our existing end-customersend customers of additional appliancessoftware licenses and softwareappliances as well as renewals and upgrades to their support and software maintenanceentitlement agreements. If our end-customersend customers do not purchase additional software licenses or appliances or software upgrades, or renew or upgrade their support and software maintenanceentitlement agreements, our revenue may decline and our operating results may be harmed. In order for us to maintain or improve our operating results, we depend on our existing end-customersend customers renewing support and software maintenanceentitlement agreements or purchasing additional appliances. End-customersEnd customers may choose not to renew their support and software maintenanceentitlement agreements or purchase additional appliances because of several factors, including dissatisfaction with our prices or features relative to competitive offerings, reductions in our end-customers’end customers’ spending levels or other causes outside of our control. If our existing end-customersend customers do not purchase new solutions, or renew or upgrade their support and software maintenanceentitlement agreements, our revenue may grow more slowly than expected or may decline, and our business and operating results may be adversely affected.
We rely on our key personnel, and our Chief Executive Officer in particular, to grow our business, and the loss of one or more such key employees or the inability to attract and retain qualified personnel could harm our business.
Our success and future growth depends to a significant degree on the skills and continued services of our executive officers and key personnel. In particular, we are highly dependent on the services of Dheeraj Pandey, our Chief Executive Officer and Chairman, who is critical to the development of our technology, future vision and strategic direction. We do not have life insurance policies that cover any of our executive officers or other key employees. The loss of the services of Mr. Pandey or any of our key employees or executive officers could disrupt our business and negatively impact our operating results, prospects and future growth. Our future success also depends on our ability to continue to attract, integrate and retain highly skilled personnel, especially skilled sales and engineering employees. Competition for highly skilled personnel is frequently intense, especially in the San Francisco Bay Area, where we are headquartered. Volatility or lack of performance in our stock price may also affect our ability to attract and retain our key employees. We cannot assure you that we will be able to successfully attract or retain qualified personnel. Our inability to attract and retain the necessary personnel could adversely affect our business, operating results and financial condition.
If we do not effectively expand and train our sales force, we may be unable to add new end-customersend customers or increase sales to our existing end-customersend customers and our business will be adversely affected.
Although we have a channel sales model, our sales representatives typically engage in direct interaction with our prospective end-customers.end customers. Therefore, we continue to be substantially dependent on our sales force to obtain new end-customersend customers and sell additional solutions to our existing end-customers.end customers. There is significant competition for sales personnel with the skills and technical knowledge that we require. Our ability to achieve significant revenue growth will depend, in large part, on our success in recruiting, training and retaining sufficient numbers of sales personnel to support our growth. New hires require significant training and may take significant time before they achieve full productivity; we estimate based on past experience that sales team members typically do not fully ramp and are not fully productive until around the time of the start of their fourth quarter of employment with us. Our recent hires and planned hires may not become productive as quickly as we expect, and we may be unable to hire or retain sufficient numbers of qualified individuals in the markets where we do business or plan to do business. Furthermore, hiring sales personnel in new countries requires additional set up, upfront and ongoing costs that we may not recover if the sales personnel fail to achieve full productivity. In addition, as a result of our rapid growth, a large percentage of our sales force is new to our company and our solutions and therefore less effective than our more seasoned employees. In addition, as we transition our business to focus on software-only transactions and more cloud-based services on a subscription basis, we are also re-training our seasoned sales employees, who have historically focused on appliance sales and selling software licenses for the life of the device, in order to maintain or increase their productivity. If theseour new sales employees do not become fully productive on the timelines that we have projected, or if we are not successful in training our more seasoned sales employees as we focus on software-only and subscription-based sales, our revenue will not increase at anticipated levels and our ability to achieve long term projections may be negatively impacted. If we are unable to hire, train and trainmaintain sufficient numbers of effective sales personnel, or theour new or existing sales personnel are not successful in obtaining new end-customersend customers or increasing sales to our existing customer base, our business, operating results and prospects will be adversely affected.
If we do not effectively structure our sales force to focus on the end-customersend customers that will primarily drive our growth strategy, our business will be adversely affected.
As indicated above, our growth is dependent in large part on increasing our sales to large enterprises, particularly when those sales result in large orders for our solutions. Over the past year,In fiscal 2017, we have started to segment our sales force to focus on these major accounts and large deals.deals and continue to further refine this segmentation as our business changes. This process, which we anticipate will continue for the foreseeable future, has involved hiring new, and promoting existing members of our sales team into, global account manager roles that will focus exclusively on large sales to major accounts. As discussed above, weWe anticipate that the sales cycles associated with major accounts will be longer thatthan our traditional sales cycles, which will increase the time it will take our new global account managers to become fully productive. The new sales processes and leadership structures for these global sales teams may also take longer than anticipated to implement, further impacting productivity. In addition, as our organization focuses more heavily on major accounts and large deals, the productivity of our traditional sales teams may be impacted. For example, we experienced what we believe was a short-term decrease in sales productivity of our North American sales teams, as well as a reduction in the number of large deals executed during the quarter ended January 31, 2017, due to the continued segmentation of our sales teams.teams. Additionally, we are in the process of transitioning our business to focus primarily on software-only transactions, and we are adjusting our sales strategy and approach away from appliance sales. These potential fluctuations in sales productivity make it more difficult to accurately project our operating results or plan for future growth.growth. If we are unable to effectively manage these changes or implement our news sales structure in a timely manner, or if our decision to segment our sales force is not successful in obtaining large sales of our solutions, our growth and ability to achieve long termlong-term projections may be negatively impacted, and our business and operating results will be adversely affected.
We rely primarily on indirect sales channels for the distribution of our solutions, and disruption within these channels could adversely affect our business, operating results and cash flows.
We primarily sell our solutions through indirect sales channels, including channel partners, such as distributors, our hardware OEM partners, value added resellers and system integrators. Our OEM partners in turn distribute our solutions through their own networks of channel partners with whom we have no direct relationships.
We rely, to a significant degree, on our channel partners to select, screen and maintain relationships with their distribution networks and to distribute our solutions in a manner that is consistent with applicable law, regulatory requirements and our quality standards. If our channel partners or a partner in their distribution network violates applicable law or regulatory requirements or misrepresents the functionality of our solutions, our reputation could be damaged and we could be subject to potential liability. Additionally, if we are unable to establish relationships with strong channel partners in key growth regions, our ability to sell our solutions in these regions may be adversely affected. Our agreements with our channel partners are non-exclusive, meaning our channel partners may offer end-customersend customers the products of several different companies, including products that compete with ours. If our channel partners do not effectively market and sell our solutions, choose to use greater efforts to market and sell their own products or those of our competitors, or fail to meet the needs of our end-customers,end customers, our business, operating results and prospects may be adversely affected. Our channel partners may cease marketing our solutions with limited or no notice and with little or no penalty. The loss of a substantial number of our channel partners, together with our inability to replace them, or the failure to recruit additional channel partners or establish an alternative distribution network could materially and adversely affect our business and operating results. For example, sales through Carahsoft Technology Corp. and Promark Technology Inc. to our end-customersend customers represented 23%9% and 15%19%, respectively, of our total revenue for the fiscal 2015,year ended July 31, 2017, and represented 15%10% and 20%, respectively, of our total revenue for the fiscal 2016, and represented 11% and 22%, respectively, of our total revenue for fiscal 2017.year ended July 31, 2018. In addition, if a channel partner offers its own products or services that are competitive to our solutions, is acquired by a competitor or reorganizes or divests its reseller business units, our revenue derived from that partner may be adversely impacted or eliminated altogether.
Recruiting and retaining qualified channel partners and training them in the use of our technologies require significant time and resources. If we fail to devote sufficient resources to support and expand our network of channel partners, our business may be adversely affected. Maintaining strong indirect sales channels for our products and effectively leveraging our channel partners and OEMs is important to our growth strategy, and the failure to effectively manage these relationships may lead to higher costs and reduced revenue. Also, in certain international markets, we are in the process of transitioning our distribution model from contracting directly with hundreds of individual resellers to contracting with a smaller number of larger global distributors. Although we believe that this transition will make our sales channels more efficient and broader reaching in the long term in these markets, there is no guarantee that this new distribution model will increase our sales in the short term or allow us to sustain our gross margins. Any potential delays or confusion during the transition process to our new partners may negatively affect our relationship with our existing end-customersend customers and channel partners and may cause us to lose prospective end-customersend customers or additional business from existing end-customers.end customers. Upon completion of the transition to the new sales model, we will be more reliant on fewer channel partners, which may reduce our contact with our end-customersend customers making it more difficult for us to establish brand awareness, ensure proper delivery and installation of our software, support ongoing end-customerend customer requirements, estimate end-customerend customer demand, respond to evolving end-customerend customer needs and obtain subscription renewals from end-customers.end customers.
All of our sales to government entities have been made indirectly through our channel partners. Government entities may have statutory, contractual or other legal rights to terminate contracts with our channel partners for convenience or due to a default, and, in the future, if the portion of government contracts that are subject to renegotiation or termination at the election of the government are material, any such termination or renegotiation may adversely impact our future operating results. Additionally, we sometimes rely on our channel partners to satisfy certain regulatory obligations that we would otherwise have to satisfy if we sold directly to the government entities, and our channel partners may be unable or unwilling to satisfy these obligations in the future. In the event of such termination or change, it may be difficult for us to arrange for another channel partner to sell our solutions to these government entities in a timely manner, and we could lose sales opportunities during the transition. Governments routinely investigate and audit government contractors’ (including subcontractors') administrative processes, and any unfavorable audit could result in the government refusing to continue buying our solutions, our channel partners changing their business models or refusing to continue to sell our solutions under current models, a reduction of revenue or fines, or civil or criminal liability if the audit uncovers improper or illegal activities.
If our indirect distribution channel is disrupted, particularly if we are reliant on a fewer number of channel partners, or if we are required to directly satisfy certain regulatory obligations imposed by government entities as a result of our efforts to expand our sales to government entities, we may be required to devote more time and resources to distribute our solutions directly and support our end-customers,end customers, which may not be as effective and could lead to higher costs, reduced revenue and growth that is slower than expected.
Our operating results may fluctuate significantly, which could make our future results difficult to predict and could cause our operating results to fall below expectations.
Our operating results may fluctuate due to a variety of factors, many of which are outside of our control. As a result, comparing our operating results on a period-to-period basis may not be meaningful. If our revenue or operating results in any particular period fall below investor expectations, the price of our Class A common stock would likely decline. Factors that are difficult to predict and that could cause our operating results to fluctuate include:
the timing and magnitude of orders, shipments and acceptance of our solutions in any quarter;
our ability to attract new and retain existing end-customers;end customers;
disruptions in our sales channels or termination of our relationship with important channel partners and OEMs;
the timing of revenue recognition for our sales, which will materially change for the majority of sales of software-only licenses on or after August 1, 2017 as a result of our adoption of the new ASC 606 revenue recognition standard which requires us to recognize the revenue from sales of software licenses upon transfer of control to our end-customers, instead of deferring the revenue over the post contract support period; this change will heighten the impact of any fluctuations in the timing and magnitude ofwhich is heightened by our shift toward software-only sales on our quarterly operating results;and shift to a subscription-based model;
reductions in end-customers’end customers’ budgets for information technology purchases;
delays in end-customers’end customers’ purchasing cycles or deferments of end-customers’end customers’ purchases in anticipation of new products or updates from us or our competitors;
fluctuations in demand and competitive pricing pressures for our solutions;
the mix of solutions sold, including the mix between appliance and software-only sales and the mix of the types of appliances that we sell, and the mix of revenue between products and support, entitlements and other services;services, which will depend in part on whether we are successful in executing our strategy to transition our business to focus on more software-only transactions;
our ability to develop, introduce and ship in a timely manner new solutions and product enhancements that meet customer requirements;
the timing of product releases or upgrades or announcements by us or our competitors;
any change in the competitive dynamics of our markets, including consolidation among our competitors or resellers, new entrants or discounting of prices;
the amount and timing of expenses to grow our business and the extent to which we are able to take advantage of economies of scale or to leverage our relationships with OEM or channel partners;
the costs associated with acquiring new businesses and technologies and the follow-on costs of integrating and consolidating the results of acquired businesses;
the amount and timing of stock-based compensation expenses;
our ability to control the costs of our solutions and their key components, or to pass along any cost increases to our end-customers;end customers;
general economic, industry and market conditions; and
future accounting pronouncements and changes in accounting policies, including our ability to implement the new procedures and processes necessary to accurately recognize our revenue under the new ASC 606 revenue recognition standard.
The occurrence of any one of these risks could negatively affect our operating results in any particular quarter, which could cause the price of our Class A common stock to decline.
Our gross margins are impacted by a variety of factors and may be subject to variation from period to period.
Our gross margins may be affected by a variety of factors, including shifts in the mix of whether our solutions are sold as an appliance or as software-only, fluctuations in the pricing of our products, including as a result of competitive pricing pressures or increases in component pricing, and the degree to which we are successful in selling the value of incremental feature improvements and upgrades, changes in the cost of components of our hardware appliances, changes in the mix between direct versus indirect sales, changes in the mix of products sold, including whether they are sold as appliances or as software-only, and the timing and amount of recognized and deferred revenue, particularly asgiven that our recognition of revenue from sales of software-only licenses changeshas changed following our adoption of the new ASC 606 revenue recognition standard.606. For example, infor the last three quartersmajority of fiscal 2017 and fiscal 2018, the prices of DRAM and NAND components increased due to supply constraints, causingwhich caused a negative impact on our gross margin. WeWhile the pricing of DRAM and NAND components has begun to decrease and we expect these price increasesthere to continue forbe less impact to our gross margins going forward as our solutions are increasingly being sold on a software-only basis, the immediate future, and topricing of components may continue to impact our gross margin.margins. If we are unable to manage these factors effectively, our gross margins may decline, and fluctuations in gross margin may make it difficult to manage our business and to achieve or maintain profitability, which could adversely affect our business and operating results.
Our sales cycles can be long and unpredictable and our sales efforts require considerable time and expense. As a result, it can be difficult for us to predict when, if ever, a particular customer will choose to purchase our solutions, which may cause our operating results to fluctuate significantly.
Our sales efforts involve educating our end-customersend customers about the uses and benefits of our solutions, including their technical capabilities and cost saving potential. End-customersEnd customers often undertake an evaluation and testing process that can result in a lengthy sales cycle. Increasing competition and the emergence of new hyperconverged infrastructure product offerings often result in customers evaluating multiple vendors at the same time, which can further lengthen the sales cycle. We spend substantial time and resources on our sales efforts without any assurance that our efforts will produce any sales. Platform purchases are frequently subject to budget constraints, multiple approvals and unanticipated administrative, processing and other delays. The broad nature of the technology shift that our solutions represent and the legacy relationships our end-customersend customers have with existing IT vendors sometimes lead to unpredictable sales cycles, which make it difficult for us to predict when end-customersend customers may purchase solutions from us. The unpredictable nature of our sales cycles may be increased in future periods as we focus our sales efforts more heavily on major accounts and large deals. Our business and operating results will be significantly affected by the degree to which and speed with which organizations adopt our solutions.
Because we depend on contract manufacturers to assemble and test our hardware appliances, we are susceptible to delays and pricing fluctuations that could prevent us from shipping orders on time, if at all, or on a cost-effective basis, which would cause our business to be adversely affected.
We rely substantially on Super Micro Computer, Inc., or ("Super Micro,Micro") and Flextronics Systems Limited or Flextronics,("Flextronics") to assemble and test ourthe Nutanix-branded NX series appliances. Our reliance on these contract manufacturers reduces our control over the manufacturing process and exposes us to risks, including reduced control over quality assurance, product costs and product supply and timing. Furthermore, our orders represent a relatively small percentage of the overall orders received by our third-party manufacturers from their customers. Therefore, fulfilling our orders may not be a priority in guiding their business decisions and operational commitments. If we fail to manage our relationships with these contract manufacturers effectively, inaccurately forecast our component requirements, or if either of them experience delays or increased manufacturing lead-times,lead times, component lead-time disruptions, capacity constraints or quality control problems in their operations or are unable to meet our requirements for timely delivery, or we are unable to shift operations from one contract manufacturer to the other, our ability to ship high-quality solutions to our end-customersend customers on time could be severely impaired, we could incur substantial costs, such as costs relating to the expedited procurement of non-standard components andor other associated inventory costs, and our business and operating results, competitive position and reputation could be harmed.
Our agreement with Super Micro automatically renews in May 2019 for successive one-year periods thereafter, with the option to terminate upon each annual renewal, and does not contain any minimum long-term commitment to manufacture our solutions. Our agreement with Flextronics expires in May 2018,November 2020 and automatically renews for successive one-year periods thereafter, with the option to terminate upon each annual renewal , and does not contain any minimum long-term commitment to manufacture our solutions. In addition, in the third quarter of fiscal 2017, we entered into a Memorandum of Understanding with Flextronics pursuant to which we have transitioned and will continue to transition portions of our manufacturing operations to Flextronics, and we are currently working with Flextronics to finalize a manufacturing agreement.renewal. The Flextronics Memorandum of Understandingagreement does not contain any minimum long-term commitment to manufacture our solutions and the terms of the manufacturing agreement have not yet been finalized. Further, any orders are fulfilled only after a purchase order has been delivered and accepted. If we are required to change contract manufacturers, we may lose revenue, incur increased costs and damage our channel partner and end-customerend customer relationships. We may also decide to switch or bring on additional contract manufacturers in order to better meet our needs. Switching to or bringing on a new contract manufacturer and commencing production is expensive and time-consuming and may cause delays in order fulfillment at our existing contract manufacturers or cause other disruptions. For example, while we have already transitioned some of our manufacturing operations to Flextronics, we may encounter unexpected issues as we scale our operations with them. Our agreements with Super Micro and Flextronics do not contain any price assurances, and any increases in component costs, without a corresponding increase in the price of our solutions, could harm our gross margins. Furthermore, we may need to increase our component purchases, manufacturing capacity and internal test and quality functions if we experience increased demand. The inability of Super Micro, Flextronics or other contract manufacturers to provide us with adequate supplies of high-quality products could cause a delay in our order fulfillment, and our business, operating results and prospects would be adversely affected. As of July 31, 2018, we had approximately $23.1 million in the form of guarantees to our contract manufacturers related to certain components.
We rely on a limited number of suppliers, and in some cases single-source suppliers, for several key components of our hardware appliances, and any disruption in the availability or quality of these components could delay shipments of our appliances and damage our channel partner or end-customerend customer relationships.
We rely on a limited number of suppliers, and in some cases single-source suppliers, for several key hardware components of ourthe Nutanix-branded NX series appliances. These components are generally purchased on a purchase order basis through Super Micro or Flextronics and we do not have long-term supply contracts with our suppliers. Our reliance on key suppliers exposes us to risks, including reduced control over product quality, production and component costs, timely delivery and capacity. It also exposes us to the potential inability to obtain an adequate supply of required components because we do not have long-term supply commitments, and replacing some of these components would require a lengthy product qualification process that could take months to complete.process. Furthermore, we extensively test and qualify the components that are used in our appliances to ensure that they meet certain quality and performance specifications. If our supply of certain components is disrupted or delayed, or if we need to replace our existing suppliers, there can be no assurance that additional supplies or components can serve as adequate replacements for the existing components, will be available when required or that supplies will be available on terms that are favorable to us, and we may be required to modify our solutions to interoperate with the replacement components. Any of these developments could extend our lead times, increase the costs of our components or costs of product development, cause us to miss market windows for product launch and adversely affect our business, operating results and financial condition.
We generally maintain minimal inventory for repairs and a limited number of evaluation and demonstration units, and generally acquire components only as needed. We do not enter into long-term supply contracts for these components. As a result, our ability to respond to channel partner or end-customerend customer orders efficiently may be constrained by the then-current availability, terms and pricing of these components. The technology industry has experienced component shortages and delivery delays in the past, and we may experience shortages or delays of critical components in the future as a result of strong demand in the industry, component availability constraints, or other factors. If we or our suppliers inaccurately forecast demand for our solutions or we ineffectively manage our enterprise resource planning processes, our suppliers may have inadequate inventory, which could increase the prices we must pay for substitute components or result in our inability to meet demand for our solutions, as well as damage our channel partner or end-customerend customer relationships.
If the suppliers of the components of our hardware appliances increase prices of components, experience delays, disruptions, capacity constraints, quality control problems in their manufacturing operations or adverse changes to their financial condition, our ability to ship appliances to our channel partners or end-customersend customers in a timely manner and at competitive prices could be impaired and our competitive position, reputation, and operating results could be adversely affected. For example, infor the last three quartersmajority of fiscal 2017 and fiscal 2018, the prices of DRAM and NAND components increased due to supply constraints. Qualifying a new component is expensive and time-consuming. If we are required to change key suppliers or assume internal manufacturing operations, we may lose revenue and damage our channel partner or end-customerend customer relationships which could adversely impact our revenue and operating results.
We enter into arrangements with our suppliers that could require us to purchase certain minimum levels of inventory, which could result in us incurring losses with respect to such inventory, and may negatively impact our business and operating results.
We enter into arrangements with our suppliers whereby the supplier will purchase certain quantities of components and allocate them exclusively for our use in our products. If we are unable to use the inventory within a specified period, we may be required to purchase the inventory, or to pay the supplier the difference between the price at which the supplier purchased the inventory and the price at which the supplier is ultimately able to sell the inventory to a third party. As a result, if we inaccurately or mistakenly forecast our need for any such components, or if the market price of any such components decreases after the components are purchased by a supplier, we may suffer losses with respect to such inventory, and our business and operating results could be adversely affected.
We rely upon third parties for the warehousing and delivery of our appliances and replacement parts for support, and we therefore have less control over these functions than we otherwise would.
We outsource the warehousing and delivery of all of our appliances to a third-party logistics provider for worldwide fulfillment. In addition, some of our support offerings commit us to replace defective parts in our appliances as quickly as four hours after the initial customer support call is received, which we satisfy by storing replacement parts inventory in various third-party supply depots in strategic worldwide locations. As a result of relying on third parties, we have reduced control over shipping and logistics transactions and costs, quality control, security and the supply of replacement parts for support. Consequently, we may be subject to shipping disruptions and unanticipated costs as well as failures to provide adequate support for reasons that are outside of our direct control. If we are unable to have our appliances or replacement products shipped in a timely manner, end-customersend customers may cancel their contracts with us, we may suffer reputational harm and our business, operating results and prospects may be adversely affected.
Our ability to sell our solutions is dependent in part on ease of use and the quality of our technical support, and any failure to offer high-quality technical support would harm our business, operating results and financial condition.
Once our solutions are deployed, our end-customersend customers depend on our support organization to resolve any technical issues relating to our solutions. Furthermore, because of the emerging nature of our solutions, our support organization often provides support for and troubleshoots issues for products of other vendors running on our solutions, even if the issue is unrelated to our solutions. There is no assurance that we can solve issues unrelated to our solutions, or that vendors whose products run on our solutions will not challenge our provision of technical assistance to their products. Our ability to provide effective support is largely dependent on our ability to attract, train and retain personnel who are not only qualified to support our solutions, but also well versed in some of the primary applications and hypervisors that our end-customersend customers run on our solutions. Furthermore, as we expand our operations internationally, our support organization will face additional challenges, including those associated with delivering support, training and documentation in languages other than English. Any failure to maintain high-quality installation and technical support, or a market perception that we do not maintain high-quality support, could harm our reputation, adversely affect our ability to sell our solutions to existing and prospective end-customers,end customers, and could harm our business, operating results and financial condition.
Our solutions are highly technical and may contain undetected defects, which could cause data unavailability, loss or corruption that might, in turn, result in liability to our end-customersend customers and harm to our reputation and business.
Our solutions are highly technical and complex and are often used to store information critical to our end-customers’end customers’ business operations. Our solutions may contain undetected errors, defects or security vulnerabilities that could result in data unavailability, unauthorized access to, loss, corruption or other harm to our end-customers’end customers’ data. Some errors or defects in our solutions may only be discovered after they have been installed and used by end-customers.end customers. We previously conducted an in-field replacement of equipment manufactured by our previous outsourced manufacturer, and may be required to do so again in the future. In addition, we may make certain commitments to our OEM partners regarding the time frames within which we will correct any security vulnerabilities in our software. If any hardware or software errors, defects or security vulnerabilities are discovered in our solutions after commercial release, a number of negative effects in our business could result, including:
lost revenue or lost OEM or other channel partners or end-customers;end customers;
increased costs, including warranty expense and costs associated with end-customerend customer support, as well as development costs to remedy the errors or defects;
delays, cancellations, reductions or rescheduling of orders or shipments;
product returns or discounts; and
damage to our reputation and brand.
In addition, we could face legal claims for breach of contract, product liability, tort or breach of warranty. While many of our contracts with end-customersend customers contain provisions relating to warranty disclaimers and liability limitations, these provisions might not be upheld or might not provide adequate protection if we face such legal claims. Defending a lawsuit, regardless of its merit, could be costly and may divert management’s attention and adversely affect the market’s perception of us and our solutions. In addition, our business liability insurance coverage could prove inadequate with respect to a claim and future coverage may be unavailable on acceptable terms or at all. These product-related issues could result in claims against us and our business could be adversely impacted.
Our business depends, in part, on sales to government organizations, and significant changes in the contracting or fiscal policies of such government organizations could have an adverse effect on our business and operating results.
We derive a portion of our revenue from contracts with federal, state, local and foreign governments, and we believe that the success and growth of our business will continue to depend on our successful procurement of government contracts. However, demand is often unpredictable from government organizations, and there can be no assurance that we will be able to maintain or grow our revenue from the public sector. Government agencies are subject to budgetary processes and expenditure constraints that could lead to delays or decreased capital expenditures in IT spending, particularly in light of continued uncertainties about government spending levels and recent changes to, or failure to appoint new, government leaders. The budget and approval process for government agencies also experiences a longer sales cycle relative to our other end-customers.end customers. If government organizations reduce or shift their capital spending patterns, our business, operating results and prospects may be harmed. Factors that could impede our ability to maintain or increase the amount of revenue derived from government contracts, include:
public sector budgetary cycles and funding authorizations;
changes in fiscal or contracting policies;
decreases in available government funding;
changes in government programs or applicable requirements;
the adoption of new laws or regulations or changes to existing laws or regulations;
potential delays or changes in the government appropriations or other funding authorization processes; and
potential delays or changes in the government appropriations or other funding authorization processes; and
higher expenses associated with, or delays caused by, diligence and qualifying or maintaining qualification as a government vendor.
The occurrence of any of the foregoing could cause governments and governmental agencies to delay or refrain from purchasing our solutions in the future or otherwise have an adverse effect on our business, operating results and prospects.
Third-party claims that we are infringing intellectual property, whether successful or not, could subject us to costly and time-consuming litigation or expensive licenses, and our business could be harmed.
A number of companies, both within and outside of the enterprise computing infrastructure industry, hold a large number of patents covering aspects of storage, servers and virtualization products. In addition to these patents, participants in this industry typically also protect their technology through copyrights and trade secrets. As a result, there is frequent litigation based on allegations of infringement, misappropriation or other violations of intellectual property rights. We have received, and in the future may receive, inquiries from other intellectual property holders and may become subject to claims that we infringe their intellectual property rights, particularly as we expand our presence in the market and face increasing competition. Based upon our review of these claims, we believe we have meritorious defenses to the allegations, although there can be no assurance that we will be successful in defending against these allegations or reaching a business resolution that is satisfactory to us. In addition, parties may claim that the names and branding of our solution infringe their trademark rights in certain countries or territories. If such a claim were to prevail we may have to change the names and branding of our solution in the affected territories and we could incur other costs.
We currently have a number of agreements in effect pursuant to which we have agreed to defend, indemnify and hold harmless our end-customers,end customers, suppliers and channel and other partners from damages and costs which may arise from the infringement by our solutions of third-party patents or other intellectual property rights. The scope of these indemnity obligations varies, but may, in some instances, include indemnification for damages and expenses, including attorneys’ fees. Our insurance may not cover all intellectual property infringement claims. A claim that our solutions infringe a third party’s intellectual property rights, even if untrue, could harm our relationships with our end-customersend customers and/or channel partners, may deter future end-customersend customers from purchasing our solutions and could expose us to costly litigation and settlement expenses. Even if we are not a party to any litigation between a customer and a third party relating to infringement by our solutions, an adverse outcome in any such litigation could make it more difficult for us to defend our solutions against intellectual property infringement claims in any subsequent litigation in which we are a named party. Any of these results could harm our brand and operating results.
Our defense of intellectual property rights claims brought against us or our end-customers,end customers, suppliers and channel partners, with or without merit, could be time-consuming, expensive to litigate or settle, divert management resources and attention and force us to acquire intellectual property rights and licenses, which may involve substantial royalty or other payments. Further, a party making such a claim, if successful, could secure a judgment that requires us to pay substantial damages. An adverse determination also could invalidate our intellectual property rights and prevent us from offering our solutions to our end-customersend customers and may require that we procure or develop substitute solutions that do not infringe, which could require significant effort and expense. We may have to seek a license for the technology, which may not be available on acceptable terms or at all, and as a result may significantly increase our operating expenses or require us to restrict our business activities in one or more respects. Any of these events could adversely affect our business, operating results, financial condition and prospects.
The success of our business depends in part on our ability to protect and enforce our intellectual property rights.
We rely on a combination of patent, copyright, service mark, trademark and trade secret laws, as well as confidentiality procedures and contractual restrictions and covenants, to establish and protect our proprietary rights, all of which provide only limited protection. We cannot assure you that any patents will be issued with respect to our currently pending patent applications in a manner that gives us adequate defensive protection or competitive advantages, if at all, or that any patents issued to us will not be challenged, invalidated or circumvented. We have filed for patents in the United States and in certain international jurisdictions, but such protections may not be available in all countries in which we operate or in which we seek to enforce our intellectual property rights, or may be difficult to enforce in practice. Our currently issued patents and any patents that may be issued in the future with respect to pending or future patent applications may not provide sufficiently broad protection or they may not prove to be enforceable in actions against alleged infringers. We cannot be certain that the steps we have taken will prevent unauthorized use of our technology or the reverse engineering of our technology. Moreover, others may independently develop technologies that are competitive to ours or infringe our intellectual property.
Protecting against the unauthorized use of our intellectual property, solutions and other proprietary rights is expensive and difficult, particularly internationally. Litigation may be necessary in the future to enforce or defend our intellectual property rights or to determine the validity and scope of the proprietary rights of others. Any such litigation could result in substantial costs and diversion of management resources, either of which could harm our business, operating results and financial condition. Further, many of our current and potential competitors have the ability to dedicate substantially greater resources to defending intellectual property infringement claims and to enforcing their intellectual property rights than we have. Attempts to enforce our rights against third parties could also provoke these third parties to assert their own intellectual property or other rights against us, or result in a holding that invalidates or narrows the scope of our rights, in whole or in part. Effective patent, trademark, service mark, copyright and trade secret protection may not be available in every country in which our solutions are available. An inability to adequately protect and enforce our intellectual property and other proprietary rights could seriously harm our business, operating results, financial condition and prospects.
We may become subject to claims that our employees have wrongfully disclosed or we have wrongfully used proprietary information of our employees’ former employers. These claims may be costly to defend and if we do not successfully do so, our business could be harmed.
Many of our employees were previously employed at current or potential competitors. Although we have processes to ensure that our employees do not use the proprietary information or know-how of others in their work for us, we may in the future become subject to claims that these employees have divulged, or we have used, proprietary information of these employees’ former employers. Litigation may be necessary to defend against these claims. If we fail in defending such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. A loss of key research personnel or their work product could hamper our ability to develop new solutions and features for existing solutions, which could severely harm our business. Even if we are successful in defending against these claims, litigation efforts are costly, time-consuming and a significant distraction to management.
If we fail to maintain an effective system of internal controls, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired.
As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended or ("Exchange Act,Act"), the Sarbanes-Oxley Act of 2002 or the ("Sarbanes-Oxley Act,Act"), and the rules and regulations of the NASDAQ Stock Market. We expect that the requirements of these rules and regulations will continue to increase our legal, accounting and financial compliance costs, make some activities more difficult, time-consuming and costly, and place significant strain on our personnel, systems and resources.
The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing to develop and refine our disclosure controls, internal control over financial reporting and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we will file with the Securities and Exchange Commission or SEC,("SEC"), is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that information required to be disclosed in reports under the Exchange Act is accumulated and communicated to our principal executive and financial officers.
Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business. Further, weaknesses in our internal controls may be discovered in the future. Any failure to develop or maintain effective controls, or any difficulties encountered in their implementation or improvement, could harm our operating results or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods. Any failure to implement and maintain effective internal controls also could adversely affect the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting that we are required to include in our periodic reports we will file with the SEC under Section 404 of the Sarbanes-Oxley Act. Ineffective disclosure controls and procedures and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the market price of our Class A common stock.
In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting we have expended and anticipate that we will continue to expend significant resources, including accounting-related costs, and provide significant management oversight. Any failure to maintain the adequacy of our internal controls, or consequent inability to produce accurate financial statements on a timely basis, could increase our operating costs and could materially impair our ability to operate our business. In the event that our internal controls are perceived as inadequate or that we are unable to produce timely or accurate financial statements, investors may lose confidence in our operating results and our stock price could decline. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the NASDAQ Global Select Market.
We are not currently required to comply with the SEC rules that implement Sections 302 and 404 of the Sarbanes-Oxley Act, we have expended and are therefore not required to make a formal assessment of the effectiveness of our internal controls over financial reporting foranticipate that purpose. We will be required to comply with certain of these rules, which will require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of our internal control over financial reporting commencing with our annual report on Form 10-K for the fiscal year ending July 31, 2018. To comply with the requirements of being a public company, we will needcontinue to expend significant resources and undertake various actions, such asincluding incurring accounting-related costs and implementing new internal controls and procedures, and hiring accounting or internal audit staff.
Ourproviding significant management oversight. In addition, our independent registered public accounting firm is notalso required to formally attest to the effectiveness of our internal control over financial reporting until after we are no longer an emerging growth company. At such time, our independent registered public accounting firmand may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating. Any failure to maintain effective disclosurethe adequacy of our internal controls, or consequent inability to produce accurate financial statements on a timely basis, or an adverse report from our independent auditors, could increase our operating costs and internal control over financial reportingcould materially impair our ability to operate our business and could have a material and adverse effect on our business and operating results and could cause a decline in the price of our Class A common stock. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the NASDAQ Stock Market.
Failure to comply with laws and regulations applicable to our business could subject us to fines and penalties and could also cause us to lose end-customersend customers in the public sector or negatively impact our ability to contract with the public sector.
Our business is subject to regulation by various federal, state, local and foreign governmental agencies, including agencies responsible for monitoring and enforcing employment and labor laws, antitrust laws, workplace safety, product safety, environmental laws, consumer protection laws, anti-bribery laws, import/export controls, federal securities laws and tax laws and regulations. In certain jurisdictions, these regulatory requirements may be more stringent than in the United States. Noncompliance with applicable regulations or requirements could subject us to investigations, sanctions, mandatory product recalls, enforcement actions, disgorgement of profits, fines, damages and civil and criminal penalties or injunctions. If any governmental sanctions are imposed, or if we do not prevail in any possible civil or criminal litigation, our business, operating results and financial condition could be adversely affected. In addition, responding to any action will likely result in a significant diversion of management’s attention and resources and an increase in third-party professional fees. Enforcement actions and sanctions could harm our business, operating results and financial condition.
In addition, we must comply with laws and regulations relating to the formation, administration and performance of contracts with the public sector, including U.S. federal, state and local governmental organizations, which affect how we and our channel partners do business with governmental agencies. Selling our solutions to the U.S. government, whether directly or through channel partners, also subjects us to certain regulatory and contractual requirements. Failure to comply with these requirements by either us or our channel partners could subject us to investigations, fines and other penalties, which could have an adverse effect on our business, operating results, financial condition and prospects. As an example, the U.S. Department of Justice or DOJ,("DOJ") and the General Services Administration or GSA,("GSA") have in the past pursued claims against and financial settlements with IT vendors under the False Claims Act and other statutes related to pricing and discount practices and compliance with certain provisions of GSA contracts for sales to the federal government. The DOJ and GSA continue to actively pursue such claims. Violations of certain regulatory and contractual requirements could also result in us being suspended or debarred from future government contracting. Any of these outcomes could have an adverse effect on our revenue, operating results, financial condition and prospects.
These laws and regulations impose added costs on our business, and failure to comply with these or other applicable regulations and requirements, including non-compliancenoncompliance in the past, could lead to claims for damages from our channel partners, penalties, termination of contracts, loss of exclusive rights in our intellectual property, and temporary suspension or permanent debarment from government contracting. Any such damages, penalties, disruptions or limitations in our ability to do business with the public sector could have an adverse effect on our business and operating results.
We are subject to governmental regulation and other legal obligations, particularly related to privacy, data protection and information security, and our actual or perceived failure to comply with such obligations could adversely affect our business and operating results. Compliance with such laws could also impair our efforts to maintain and expand our customer base, and thereby decrease our revenue.
Personal privacy, data protection and information security are significant issues in the United States and the other jurisdictions where we offer our solutions. The regulatory framework for privacy and security issues worldwide is rapidly evolving and is likely to remain uncertain for the foreseeable future. Our handling of data is subject to a variety of laws and regulations, including regulation by various government agencies, including the U.S. Federal Trade Commission or FTC,("FTC") and various state, local and foreign bodies and agencies.
The U.S. federal and various state and foreign governments have adopted or proposed limitations on the collection, distribution, use and storage of personal information of individuals, including end-customersend customers and employees. In the United States, the FTC and many state attorneys general are applying federal and state consumer protection laws to the online collection, use and dissemination of data. Additionally, many foreign countries and governmental bodies, including in Australia, the European Union, India, Japan and numerous other jurisdictions in which we operate or conduct our business, have laws and regulations concerning the collection and use of personal information obtained from their residents or by businesses operating within their jurisdiction. These laws and regulations often are more restrictive than those in the United States. Such laws and regulations may require companies to implement new privacy and security policies, permit individuals to access, correct and delete personal information stored or maintained by such companies, inform individuals of security breaches that affect their personal information, and, in some cases, obtain individuals’ consent to use personal information for certain purposes. In addition, a foreign government could require that any personally identifiable information collected in a country not be disseminated outside of that country, and we are not currently equipped to comply with such a requirement.
We also expect that there will continue to be new proposed laws, regulations and industry standards concerning privacy, data protection and information security in the United States, the European Union and other jurisdictions, and we cannot yet determine the impact such future laws, regulations and standards may have on our business. Additionally, we expect that existing laws, regulations and standards may be interpreted in new manners in the future. There remains significant uncertainty surrounding the regulatory framework for the future of personal data transfers from the European Union to the United States, with regulations such as the recently adopted a General Data Protection Regulation or GDPR,("GDPR"), which became effective in May 2018, that will supersede currentsuperseded prior EU data protection legislation, impose more stringent EU data protection requirements, provideprovides an enforcement authority
which substantially increases compliance costs, and imposeimposes large penalties for noncompliance. Additionally, as a result of current and proposed data protection and privacy laws aimed at using personal data for marketing purposes, including the proposed ePrivacy Regulation to replace the ePrivacy Directive, we face an increased difficulty in marketing to current and potential customers, which impacts our ability to spread awareness of our products and services and, in turn, grow a customer base in particular countries. As we begin to offer more cloud-based services, we will increasingly be positioned as a data processor, which imposes additional obligations, and may increase our liability exposure by operation of law, contract, or penalties for noncompliance. Future laws, regulations, standards and other obligations, including the adoptionenforcement of the GDPR in courts, as well as changes in the interpretation of existing laws, regulations, standards and other obligations could impair our or our customers’ ability to collect, use or disclose information relating to individuals, which could decrease demand for our solutions, require us to restrict our business operations, increase our costs and impair our ability to maintain and grow our customer base and increase our revenue.
Although we are working to comply with those federal, state and foreign laws and regulations, industry standards, contractual obligations and other legal obligations that apply to us, those laws, regulations, standards and obligations are evolving and may be modified, interpreted and applied in an inconsistent manner from one jurisdiction to another, and may conflict with one another, other requirements or legal obligations, our practices or the features of our solutions. As such, we cannot assure ongoing compliance with all such laws or regulations, industry standards, contractual obligations and other legal obligations. Any failure or perceived failure by us to comply with federal, state or foreign laws or regulations, industry standards, contractual obligations or other legal obligations, or any actual or suspected security incident, whether or not resulting in unauthorized access to, or acquisition, release or transfer of personal information or other data, may result in governmental enforcement actions and prosecutions, private litigation, fines and penalties or adverse publicity and could cause our customers to lose trust in us, which could have an adverse effect on our reputation and business. Any inability to adequately address privacy and security concerns, even if unfounded, or comply with applicable laws, regulations, policies, industry standards, contractual obligations or other legal obligations could result in additional cost and liability to us, damage our reputation, inhibit sales, and adversely affect our business and operating results.
Failure to comply with anticorruption and anti-money laundering laws, including the U.S. Foreign Corrupt Practices Act of 1977, as amended or the FCPA,("FCPA"), and similar laws associated with our activities outside of the United States could subject us to penalties and other adverse consequences.
We are subject to the FCPA, the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the U.S. Travel Act, the USA PATRIOT Act, the United Kingdom Bribery Act of 2010 or the ("U.K. Bribery Act,Act"), and possibly other anti-bribery and anti-money laundering laws in countries in which we conduct activities. We face significant risks if we fail to comply with the FCPA and other anticorruption laws that prohibit companies and their employees and third-party intermediaries from authorizing, offering or providing, directly or indirectly, improper payments or benefits to foreign government officials, political parties and private-sector recipients for the purpose of obtaining or retaining business, directing business to any person or securing any advantage. In many foreign countries, particularly in countries with developing economies, it may be a local custom that businesses engage in practices that are prohibited by the FCPA or other applicable laws and regulations. In addition, we use various third parties to sell our solutions and conduct our business abroad. We or our third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities and we can be held liable for the corrupt or other illegal activities of these third-party intermediaries, our employees, representatives, contractors, partners, and agents, even if we do not explicitly authorize such activities. We continue to update and implement our FCPA/anti-corruption compliance program and no assurance can be given that all of our employees and agents, as well as those companies to which we outsource certain of our business operations, will not take actions in violation of our policies and applicable law, for which we may be ultimately held responsible.
Any violation of the FCPA, other applicable anticorruption laws, and anti-money laundering laws could result in whistleblower complaints, adverse media coverage, investigations, loss of export privileges, severe criminal or civil sanctions and, in the case of the FCPA, suspension or debarment from U.S. government contracts, which could have a material and adverse effect on our reputation, business, operating results and prospects. In addition, responding to any enforcement action may result in a materially significant diversion of management’s attention and resources and significant defense costs and other third-party professional fees.
We are subject to governmental export and import controls that could impair our ability to compete in international markets or subject us to liability if we violate the controls.
Our solutions are subject to U.S. export controls, including the Export Administration Regulations and economic sanctions administered by the Office of Foreign Assets Control, and we incorporate encryption technology into certain of our solutions. These encryption products and the underlying technology may be exported outside of the United States only with the required export authorizations, including by license, a license exception or other appropriate government authorizations, including the filing of an encryption registration.
Furthermore, our activities are subject to the U.S. economic sanctions laws and regulations that prohibit the shipment of certain products and services without the required export authorizations, including to countries, governments and persons targeted by U.S. embargoes or sanctions. Additionally, the Trump administrationU.S. government has been critical of existing trade agreements and may impose more stringent export and import controls. Obtaining the necessary export license or other authorization for a particular sale may be time-consuming and may result in the delay or loss of sales opportunities even if the export license ultimately may be granted. While we take precautions to prevent our solutions from being exported in violation of these laws, including obtaining authorizations for our encryption products, implementing IP address blocking and screenings against U.S. government and international lists of restricted and prohibited persons, we cannot guarantee that the precautions we take will prevent violations of export control and sanctions laws. Violations of U.S. sanctions or export control laws can result in significant fines or penalties and possible incarceration for responsible employees and managers could be imposed for criminal violations of these laws.
We also note that if our channel partners fail to obtain appropriate import, export or re-export licenses or permits, we may also be adversely affected, through reputational harm, as well as other negative consequences, including government investigations and penalties. We presently incorporate export control compliance requirements into our channel partner agreements; however, no assurance can be given that our channel partners will be able to comply with such requirements.
Also, various countries, in addition to the United States, regulate the import and export of certain encryption and other technology, including import and export licensing requirements, and have enacted laws that could limit our ability to distribute our solutions or could limit our end-customers’end customers’ ability to implement our solutions in those countries. Changes in our solutions or future changes in export and import regulations may create delays in the introduction of our solutions in international markets, prevent our end-customersend customers with international operations from deploying our solutions globally or, in some cases, prevent the export or import of our solutions to certain countries, governments, or persons altogether. From time to time, various governmental agencies have proposed additional regulation of encryption technology, including the escrow and government recovery of private encryption keys. Any change in export or import regulations, economic sanctions or related legislation, increased export and import controls stemming from Trump administrationU.S. government policies, or change in the countries, governments, persons or technologies targeted by such regulations, could result in decreased use of our solutions by, or in our decreased ability to export or sell our solutions to, existing or potential end-customersend customers with international operations. Any decreased use of our solutions or limitation on our ability to export or sell our solutions would adversely affect our business, operating results and prospects.
Our international operations expose us to additional risks, and failure to manage those risks could adversely affect our business, operating results and cash flows.
Increasingly, weWe derive a significant portion of our revenue from end-customersend customers and channel partners outside the United States. We derived approximately 33%37%, 37%42% and 40%44% of our total revenue from our international customers based on bill-to-location for fiscal 2015, fiscal 2016, 2017 and fiscal 2017,2018, respectively. We are continuing to adapt to and develop strategies to address international markets but there is no guarantee that such efforts will have the desired effect. As of July 31, 2017,2018, approximately 40%44% of our full-time employees were located outside of the United States. We expect that our international activities will continue to grow over the foreseeable future as we continue to pursue opportunities in existing and new international markets, which will require significant management attention and financial resources. We are subject to risks associated with having significant worldwide operations, including:
business practices may differ from those in the United States and may require us in the future to include terms other than our standard terms in customer, channel partner, employee, consultant and other contracts;
political, economic and social instability or uncertainty around the world;
potential changes in trade relations arising from policy initiatives implemented by, or statements made by, the Trump administration,U.S. government, which has been critical of existing and proposed trade agreements;agreements, such as the newly imposed tariffs for Chinese imports to the U.S.;
greater difficulty in enforcing contracts, judgments and arbitration awards in international courts, and in collecting accounts receivable and longer payment and collection periods;
greater risk of unexpected changes in regulatory practices, tariffs, and tax laws and treaties;
risks associated with trade restrictions and foreign legal requirements, including the importation, certification and localization of our solutions required in foreign countries;
greater risk of a failure of foreign employees, partners, distributors and resellers to comply with both U.S. and foreign laws, including antitrust regulations, the FCPA, the U.K. Bribery Act, U.S. or foreign sanctions regimes and export or import control laws, and any trade regulations ensuring fair trade practices;
heightened risk of unfair or corrupt business practices in certain geographies and of improper or fraudulent sales arrangements that may impact financial results and result in restatements of, or irregularities in, financial statements;
requirements to comply with foreign privacy, data protection and information security laws and regulations and the risks and costs of non-compliance;noncompliance;
reduced or uncertain protection for intellectual property rights in some countries;
impediments to the flow of foreign exchange capital payments and receipts due to exchange controls instituted by certain foreign governments;
increased expenses incurred in establishing and maintaining corporate entities, office space, and equipment for our international operations;
difficulties in managing and staffing international offices and increased travel, infrastructure and legal compliance costs associated with multiple international locations;
greater difficulty in identifying, attracting and retaining local experienced personnel, and the costs and expenses associated with such activities;
the challenge of managing a development team in geographically disparate locations;
management communication and integration problems resulting from cultural and geographic dispersion;
differing employment practices and labor relations issues;
fluctuations in exchange rates between the U.S. dollar and foreign currencies in markets where we do business; and
treatment of revenue from international sources for tax purposes and changes in tax laws, regulations or official interpretations, including being subject to foreign tax laws and being liable for paying withholding, income or other taxes in foreign jurisdictions.
As we expand our business globally, our success will depend, in large part, on our ability to anticipate and effectively manage these risks. These factors and other factors could harm our ability to gain future international revenue and, consequently, materially impact our business, operating results and financial condition. The expansion of our existing international operations and entry into additional international markets will require significant management attention and financial resources. Our failure to successfully manage our international operations and the associated risks effectively could limit the future growth of our business. Additionally, failure to effectively manage this growth may result in reduced international revenue relative to U.S. revenue, and as a result, a higher effective tax rate due to the overall percentage of total revenue from U.S. customers relative to international customers.
A number of our solutions incorporate software provided under open source licenses which may restrict or impose certain obligations on how we use or distribute our solutions or subject us to various risks and challenges, which could result in increased development expenses, delays or disruptions to the release or distribution of those solutions, inability to protect our intellectual property rights and increased competition.
Certain significant components of our solutions incorporate or are based upon open source software, and we may incorporate open source software into other solutions in the future. Such open source software is generally licensed under open source licenses, including, for example, the GNU General Public License, the GNU Lesser General Public License, “Apache-style”"Apache-style" licenses, “BSD-style”"BSD-style" licenses and other open source licenses. The use of open source software subjects us to a number of risks and challenges, including:
If open source software programmers, most of whom we do not employ, do not continue to develop and enhance open source technologies, our development expenses could be increasedincrease and our product release and upgrade schedules could be delayed.
Open source software is open to further development or modification by anyone. As a result, others may develop such software to be competitive with our operating system,platform and may make such competitive software available as open source. It is also possible for competitors to develop their own solutions using open source software, potentially reducing the demand for, and putting price pressure on, our solutions.
The licenses under which we license certain types of open source software may require that, if we modify the open source software we receive, we are required to make such modified software and other related proprietary software of ours publicly available without cost and on the same terms. Accordingly, we monitor our use of open source software in an effort to avoid subjecting our proprietary software to such conditions and others we do not intend. Although we believe that we have complied with our obligations under the various applicable licenses for open source software that we use, our processes used to monitor how open source software is used could be subject to error. In addition, there is little or no legal precedent governing the interpretation of terms in most of these licenses. Therefore, any improper usage of open source could result in unanticipated obligations regarding our solutions and technologies, which could have an adverse impact on our intellectual property rights and our ability to derive revenue from solutions incorporating the open source software.
If an author or other third party that distributes such open source software were to allege that we had not complied with the conditions of one or more of these licenses, we could be required to incur legal expenses defending against such allegations, or engineering expenses in developing a substitute solution.
If we are unable to successfully address the challenges of integrating offerings based upon open source technology into our business, our business and operating results may be adversely affected and our development costs may increase.
Our failure to raise additional capital or generate the significant capital necessary to expand our operations and invest in new solutions could reduce our ability to compete and could harm our business.
We expect that our existing cash and cash equivalents, and short-term investments, together with the net proceeds that we received from our initial public offering, or IPO, will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. We may, however, need to raise additional funds in the future, and we may not be able to obtain those funds on favorable terms, or at all. If we raise additional equity financing, our stockholders may experience significant dilution of their ownership interests and the per share value of our Class A common stock could decline. Furthermore, if we engage in debt financing, the holders of debt would have priority over the holders of our common stock, and we may be required to accept terms that restrict our ability to incur additional indebtedness. We may also be required to take other actions, any of which could harm our business and operating results. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly limited, and our business, operating results, financial condition and prospects could be adversely affected.
Adverse economic conditions or reduced datacenterIT spending may adversely impact our revenues and profitability.
Our operations and performance depend in part on worldwide economic conditions and the impact these conditions have on levels of spending on enterprise computing technology. Our business depends on the overall demand for enterprise computing infrastructure and on the economic health and general willingness of our current and prospective end-customersend customers to purchase our solutions. Weak economic conditions, or a reduction in enterprise computing spending, would likely adversely affect our business, operating results and financial condition in a number of ways, including by reducing sales, lengthening sales cycles and lowering prices for our solutions.
We are exposed to fluctuations in currency exchange rates, which could negatively affect our operating results.
Our sales contracts are denominated in U.S. dollars, and therefore, substantially all of our revenue is not subject to foreign currency risk. However, a strengthening of the U.S. dollar could increase the real cost of our solutions to our end-customersend customers outside of the United States, which could adversely affect our financial condition and operating results. In addition, an increasing portion of our operating expenses is incurred outside the United States, is denominated in foreign currencies such as the Euro,euro, the Pound Sterling, the Indian Rupee, the Canadian Dollar and the Australian Dollar, and is subject to fluctuations due to changes in foreign currency exchange rates. If we become more exposed to currency fluctuations and are not able to successfully hedge against the risks associated with currency fluctuations, our operating results could be adversely affected. To date, we have not entered into any hedging arrangements with respect to foreign currency risk or other derivative instruments.
Taxing authorities may successfully assert that we should have collected or in the future should collect sales and use, value added or similar taxes, and we could be subject to liability with respect to past or future sales, which could adversely affect our operating results.
We do not collect sales and use, value added or similar taxes in all jurisdictions in which we have sales, and we have been advised that such taxes are not applicable to our products and services in certain jurisdictions. Sales and use, value added and similar tax laws and rates vary greatly by jurisdiction. Certain jurisdictions in which we do not collect such taxes may assert that such taxes are applicable, which could result in tax assessments, penalties and interest, to us or our end-customersend customers for the past amounts, and we may be required to collect such taxes in the future. If we are unsuccessful in collecting such taxes from our end-customers,end customers, we could be held liable for such costs, which may adversely affect our operating results.
Our international operations may subject us to potential adverse tax consequences.
We are expanding our international operations and staff to better support our growth into the international markets. Our corporate structure and associated transfer pricing policies contemplate the business flows and future growth into the international markets, and consider the functions, risks and assets of the various entities involved in the intercompany transactions. The amount of taxes we pay in different jurisdictions may depend on the application of the tax laws of the various jurisdictions, including the United States, to our international business activities, changes in tax rates, new or revised tax laws or interpretations of existing tax laws and policies and our ability to operate our business in a manner consistent with our corporate structure and intercompany arrangements. The taxing authorities of the jurisdictions in which we operate may challenge our methodologies for pricing intercompany transactions pursuant to the intercompany arrangements or disagree with our determinations as to the income and expenses attributable to specific jurisdictions. If such a challenge or disagreement were to occur, and our position was not sustained, we could be required to pay additional taxes, interest and penalties, which could result in one-time tax charges, higher effective tax rates, reduced cash flows and lower overall profitability of our operations. Our financial statements could fail to reflect adequate reserves to cover such a contingency.
We expect to receive significant tax benefits from salesSales to our non-U.S. customers. These benefitscustomers are taxed at a lower rate, which is contingent upon existing tax laws and regulations in the U.S. and in the countries in which our international operations are located. Future changes in domestic or international tax laws and regulations could adversely affect our ability to continue to realize these lower tax benefits. President Trumprates.
Changes in global tax laws could increase our worldwide tax rate and could have a material adverse effect on our business, cash flow, results of operations or financial conditions.
In December 2017, the U.S. Congress have called for comprehensivepassed and the President signed legislation commonly referred to as the Tax Cuts and Jobs Act ("TCJA"), which includes a broad range of tax reform which, among other things, might changeproposals affecting businesses, including a federal corporate rate reduction from 35% to 21%; limitations on the deductibility of interest expense and executive compensation; creation of new minimum taxes such as the base erosion anti-abuse tax, Global Intangible Low Taxed Income; and a new minimum tax on certain foreign earnings. We are analyzing the TCJA to determine the full impact of the new tax law. In addition, international organizations such as the Organization for Economic Cooperation and Development, have published Base Erosion and Profit Shifting, action plans that, if adopted by countries where we do business, could increase our tax obligations in these countries. Due to the large scale of our U.S. tax rules impactingand international business activities, many of these enacted and proposed changes to the way U.S. based multinationals are taxed on foreign income. Thistaxation of our activities could adversely affectincrease our worldwide effective tax rate and have an adverse effect on our operating results, cash flow or result in higher tax liabilities.financial condition.
Our business is subject to the risks of earthquakes, fire, floods and other natural catastrophic events, and interruptions by man-made problems, such as network security breaches, computer viruses or terrorism.
A significant natural disaster, such as an earthquake, fire, flood or significant power outage could have an adverse impact on our business and operating results. Despite the implementation of network security measures, our networks also may be vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering with our solutions. Both our corporate headquarters and our main contract manufacturers are located in the San Francisco Bay Area, a region known for seismic activity. In addition, natural disasters, acts of terrorism or war could cause disruptions in our or our end-customers’end customers’ or channel partners’ businesses, our suppliers’ and manufacturers’ operations or the economy as a whole. We also rely on IT systems to communicate among our workforce and with third parties. Any disruption to our communications, whether caused by a natural disaster or by manmademan-made problems, such as power disruptions, could adversely affect our business. We do not have a formal disaster recovery plan or policy in place and do not currently require that our manufacturing partners have such plans or policies in place. To the extent that any such disruptions result in delays or cancellations of orders or impede our suppliers’ or our manufacturers’ ability to timely deliver our solutions and product components, or the deployment of our solutions, our business, operating results and financial condition would be adversely affected. We do maintain what we believe are commercially reasonable levels of business interruption insurance. However, such insurance may not adequately cover our losses in the event of a significant disruption in our business.
Ifa cyber attack and our networks, computer systems or software solutions are breached or unauthorized access to customer data otherwise occurs, our enterprise and our solutionsbusiness operations may be perceived as insecure, we may lose existing end-customers or fail to attract new end-customers,interrupted, our reputation may be damaged and we may incur significant liabilities.
Cyber attacks designed to gain access to sensitive information by breaching mission critical systems of large organizations are constantly evolving, and high-profile electronic security breaches leading to the unauthorized release of sensitive customer information have occurred at a number of large companies in recent years. As we transition to offering more cloud-based solutions, such as Xi Cloud Services, we may increasingly be the target of cyber threats. Because the techniques used and vulnerabilities exploited to obtain unauthorized access or to sabotage systems change frequently, and generally are not identified until they are launched against a target, we may be unable to anticipate these techniques or vulnerabilities or implement adequate preventative measures. We store, transmit and process our end-customers’ data.may also experience security breaches that may remain undetected for an extended period. If any unauthorized access to or security breach of our solutions occurs, or is believed to have occurred, such an event or perceived event could result in the loss of data, loss of intellectual property or trade secrets, loss of business, severe reputational or brand damage adversely affecting end-customerend customer or investor confidence, regulatory investigations and orders, litigation, indemnity obligations, damages for contract breach, and penalties for violation of privacy, data protection and other applicable laws, regulations or contractual obligations. We may also be subject to significant costs for remediation that may include liability for stolen assets or information and repair of system damage that may have been caused or incentives offered to end-customersend customers or other business partners in an effort to maintain business relationships after a breach and other liabilities. Additionally, any such event or perceived event could impact our reputation, harm customer confidence, hurt our sales and expansion into new markets or cause us to lose existing end-customers.end customers. We could be required to expend significant capital and other resources to alleviate problems caused by such actual or perceived breaches and to remediate our systems, we could be exposed to a risk of loss, litigation or regulatory action and possible liability, and our ability to operate our business may be impaired. Additionally, actual, potential or anticipated attacks may cause us to incur increasing costs, including costs to deploy additional personnel and protection technologies, train employees and engage third-party experts and consultants.
Additionally, we depend upon our employees to appropriately handle confidential data and deploy our IT resources in a safe and secure fashion that does not expose our network systems, or those of our end-customers, to security breaches and the loss of data. Accordingly, if our cybersecurity systems and measures or those of our contractors, partners and vendors fail to protect against unauthorized access, sophisticated cyberattacks and the mishandling of data by our employees, contractors, partners or vendors, our business and prospects could be adversely affected. We could lose or suffer the exposure of sensitive data regarding our business, including intellectual property or other proprietary data, or personally identifiable information of our end-customers, employees and business partners; encounter disruptions in our communications systems that impair our ability to conduct our business operations; and experience degradation in our ability to process customer orders or deliver solutions, affecting our distribution channels and delaying our revenue recognition. Likewise, security vulnerabilities could be exploited or introduced into our solutions, thereby damaging the reputation and perceived reliability and security of our products and services and potentially making the data systems of our end-customers vulnerable to further data loss and cyber incidents.
In addition, if the security measures of our end-customersend customers are compromised, even without any actual compromise of our own systems or of our solutions used by such end-customers,end customers, we may face negative publicity or reputational harm if our end-customersend customers or anyone else incorrectly attributes the blame for such security breaches to us or our solutions. If end-customersend customers believe that our solutions do not provide adequate security for the storage of personal or other sensitive or proprietary information or the transmission of such information over the internet, our business will be harmed. End-customers’End customers’ concerns about security or privacy may deter them from using our solutions for activities that involve personal or other sensitive information, which may significantly affect our business and operating results.
Because the techniques used and vulnerabilities exploited to obtain unauthorized access or to sabotage systems change frequently and generally are not identified until they are launched against a target, we may be unable to anticipate these techniques or vulnerabilities or implement adequate preventative measures. We may also experience security breaches that may remain undetected for an extended period.
We are dependent on the continued availability of the Internet and third-party computer and communications systems.
Our ability to provide services and solutions to our end-customers depends on our ability to communicate with our end-customers through the public Internet and electronic networks that are owned and operated by third parties. In addition, in order to provide customer service and sales on-demand and promptly, our computer equipment and network servers must be functional 24 hours per day, which requires access to telecommunications facilities managed by third parties and the availability of electricity, which we do not control. A severe disruption of one or more of these networks, including as a result of utility or third-party system interruptions, could impair our ability to process information, which could impede our ability to provide services to our end-customers, harm our reputation, result in a loss of end-customers and adversely affect our business and operating results.
Our estimates of end-customer cost savings may not be indicative of the actual benefits that end-customers experience in the future.
We have based our estimates of the cost savings that end-customers may experience on our internal models, which depend on a variety of assumptions, including publicly-available industry data, our estimates of spending on IT and our industry experience. These assumptions may turn out to be incorrect, may not reflect the specific circumstances faced by an end-customer or could change over time due to a variety of factors, including our assumptions regarding the costs of third-party equipment, software licenses, services, support offerings and IT administration may change over time, may not accurately reflect current market trends or may not accurately reflect the actual costs faced by our end-customers; the prices of our solutions may change; technological changes could render the need for some equipment obsolete; and competitors may offer more favorable pricing or bundle some components together with other products, reducing the cost of the infrastructures or solutions against which we have made our comparisons. As a result, end-customers may not experience these estimated cost savings, and the failure of many of them to do so could harm our brand or our future sales, which could harm our business.
We have expanded and may further expand through acquisitions of, or investments in, other companies, each of which may divert our management’s attention, resulting in additional dilution to our stockholders and consumption of resources that are necessary to sustain and grow our business.
Our business strategy may, from time to time, include acquiring other complementary products, technologies or businesses. For example, in August 2018 we acquired Mainframe2, Inc. ("Frame"), in March 2018 we acquired Minjar, Inc. and Netsil Inc., in August 2016, we acquired Calm.io Pte. Ltd., or Calm, and in September 2016, we acquired PernixData, Inc., or PernixData. We also may enter into relationships with other businesses in order to expand our solutions, which could involve preferred or exclusive licenses, additional channels of distribution or discount pricing or investments in other companies. Negotiating these transactions can be time-consuming, difficult and expensive, and our ability to close these transactions may be subject to third-party approvals, such as government regulatory approvals, which are beyond our control. Consequently, we can make no assurance that these transactions once undertaken and announced, will close.
These kinds of acquisitions or investments may result in unforeseen expenditures and operating and integration difficulties, especially if the acquisitions or investments are more complex in structure and expenditures.scope, including due to the geographic location of the acquired company. In particular, we may encounter difficulties assimilating or integrating the businesses, technologies, products, personnel or operations of companies that we may acquire, particularly if the key personnel of the acquired business choose not to work for us. We may have difficulty retaining the customers of any acquired business or the acquired technologies or research and development expectations may prove unsuccessful. Acquisitions may also disrupt our ongoing business, divert our resources and require significant management attention that would otherwise be available for development of our business. We may not successfully evaluate or utilize the acquired technology or personnel, or accurately forecast the financial impact of an acquisition transaction, including accounting charges. Any acquisition or investment could expose us to unknown liabilities. Moreover, we cannot assure you that the anticipated benefits of any acquisition or investment would be realized or that we would not be exposed to unknown liabilities. In connection with these types of transactions, we may issue additional equity securities that would dilute our stockholders, use cash that we may need in the future to operate our business, incur debt on terms unfavorable to us or that we are unable to repay, incur large charges or substantial liabilities, encounter difficulties integrating diverse business cultures, and become subject to adverse tax consequences, substantial depreciation or deferred compensation charges. These challenges related to acquisitions or investments could adversely affect our business, operating results, financial condition and prospects.
Regulations related to conflict minerals may cause us to incur additional expenses and could limit the supply and increase the costs of certain metals used in the manufacturing of our solutions.
We are subject to the requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 or the Dodd-Frank Act,(the "Dodd-Frank Act") that will require us to perform due diligence and disclose and report whether our solutions contain conflict minerals. The Trump administration has indicated that the Dodd-Frank Act will be under further scrutiny and some of the provisions of the Dodd-Frank Act may be revised, repealed or amended, and, in April 2017,Although the SEC announced that it was suspending enforcement of portionshas recently provided guidance with respect to a portion of the conflict minerals regulations enacted under the Dodd-Frank Act following a ruling by the U.S. Court of Appeals for the District of Columbia Circuit. The implementation ofmineral filing requirements that may somewhat reduce our reporting practices, we have incurred and expect to incur additional costs to comply with these disclosure requirements, and any changes effected by the Trump administration's implementation of these requirements could adversely affect the sourcing, availability and pricing of the materials used in the manufacture of components used in our appliances.products.
Risks Related to the Notes
We may not have the ability to raise the funds necessary to settle conversions of the Notes in cash or to repurchase the Notes upon a fundamental change, and our future debt may contain limitations on our ability to pay cash upon conversion or repurchase of the Notes.
Holders of the Notes will have the right to require us to repurchase all or a portion of their Notes upon the occurrence of a fundamental change before the maturity date at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid special interest, if any. In addition, upon conversion of the Notes, unless we elect to deliver solely shares of our Class A common stock to settle such conversion (other than paying cash in lieu of delivering any fractional share), we will incur additional costsbe required to complymake cash payments in respect of the Notes being converted. Moreover, we will be required to repay the Notes in cash at their maturity unless earlier converted or repurchased. However, we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of Notes surrendered therefor or pay cash with respect to Notes being converted or at their maturity.
In addition, our ability to repurchase Notes or to pay cash upon conversions of Notes or at their maturity may be limited by law, regulatory authority or agreements governing our future indebtedness. Our failure to repurchase Notes at a time when the disclosure requirements, including costsrepurchase is required by the indenture or to pay cash upon conversions of Notes or at their maturity as required by the indenture would constitute a default under the indenture. A default under the indenture or the fundamental change itself could also lead to a default under agreements governing our future indebtedness. Moreover, the occurrence of a fundamental change under the indenture could constitute an event of default under any such agreement. If the payment of the related indebtedness were to conducting diligence proceduresbe accelerated after any applicable notice or grace periods, we may not have sufficient funds to determinerepay the sourcesindebtedness or to pay cash amounts due upon conversion, upon required repurchase or at maturity of conflict mineralsthe Notes.
The conditional conversion feature of the Notes, if triggered, may adversely affect our financial condition and operating results.
In the event the conditional conversion feature of the Notes is triggered, holders of the Notes will be entitled to convert their Notes at any time during specified periods at their option. If one or more holders elect to convert their Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our Class A common stock (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation in cash, which could adversely affect our liquidity. In addition, even if holders of Notes do not elect to convert their Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.
The accounting method for convertible debt securities that may be usedsettled in cash, such as the Notes, could have a material effect on our reported financial results.
Under Accounting Standards Codification 470-20, Debt with Conversion and Other Options ("ASC 470-20"), an entity must separately account for the liability and equity components of the convertible debt instruments (such as the Notes) that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost. The effect of ASC 470-20 on the accounting for the Notes is that the equity component is required to be included in the additional paid-in capital section of stockholders’ equity on our consolidated balance sheet at the issuance date and the value of the equity component would be treated as debt discount for the purpose of accounting for the debt component of the Notes. As a result, we are required to record non-cash interest expense as a result of the amortization of the discounted carrying value of the Notes to their face amount over the term of the Notes. We will report larger net losses (or lower net income) in our financial results because ASC 470-20 will require interest to include the amortization of the debt discount, which could adversely affect our reported or future financial results or the trading price of our Class A common stock.
In addition, under certain circumstances, convertible debt instruments (such as the Notes) that may be settled entirely or partly in cash may be accounted for utilizing the treasury stock method, the effect of which is that the shares issuable upon conversion of such Notes are not included in the calculation of diluted earnings per share, except to the extent that the conversion value of such Notes exceeds their principal amount. Under the treasury stock method, for diluted earnings per share purposes, the transaction is accounted for as if the number of shares of Class A common stock that would be necessary to the production of our appliances and, if applicable, potential changes to appliances, processes or sources of supply as a consequence ofsettle such verification activities. It is also possible that we may face reputational harmexcess, if we determineelected to settle such excess in shares, are issued. We cannot be sure that certainthe accounting standards in the future will continue to permit the use of our appliances contain minerals not determined to be conflict-free or ifthe treasury stock method. If we are unable or otherwise elect not to alteruse the treasury stock method in accounting for the shares issuable upon conversion of the Notes, then our appliances, processesdiluted earnings per share could be adversely affected.
The convertible note hedge and warrant transactions may affect the value of the Notes and our Class A common stock.
In connection with the pricing of the Notes, we entered into convertible note hedge transactions with one or sourcesmore of supplythe initial purchasers of the Notes and/or their respective affiliates or other financial institutions, or the option counterparties. We also entered into warrant transactions with the option counterparties pursuant to which we will sell warrants for the purchase of our Class A common stock. The convertible note hedge transactions are expected generally to reduce the potential dilution upon any conversion of Notes and/or offset any cash payments we are required to make in excess of the principal amount upon conversion of any Notes. The warrant transactions could separately have a dilutive effect to the extent that the market price per share of our Class A common stock exceeds the strike price of the warrants.
The option counterparties and/or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our Class A common stock and/or purchasing or selling our Class A common stock in secondary market transactions prior to the maturity of the Notes (and are likely to do so during any observation period related to a conversion of Notes or following any repurchase of Notes by us on any fundamental change repurchase date or otherwise). This activity could also cause or avoid usean increase or a decrease in the market price of our Class A common stock. In addition, if any such convertible note hedge and warrant transactions fail to become effective, the option counterparties may unwind their hedge positions with respect to our Class A common stock, which could adversely affect the value of our Class A common stock.
The potential effect, if any, of these transactions and activities on the market price of our Class A common stock will depend in part on market conditions and cannot be ascertained at this time. Any of these activities could adversely affect the value of our Class A common stock.
We are subject to counterparty risk with respect to the convertible note hedge transactions.
The option counterparties will be financial institutions or affiliates of financial institutions, and we will be subject to the risk that one or more of such materials.option counterparties may default under the convertible note hedge transactions. Our exposure to the credit risk of the option counterparties will not be secured by any collateral. If any option counterparty becomes subject to bankruptcy or other insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim equal to our exposure at that time under our transactions with that option counterparty. Our exposure will depend on many factors but, generally, an increase in our exposure will be correlated to an increase in our Class A common stock market price and in the volatility of the market price of our Class A common stock. In addition, upon a default by an option counterparty, we may suffer adverse tax consequences and dilution with respect to our Class A common stock. We can provide no assurance as to the financial stability or viability of any option counterparty.
Risks Related to Ownership of Our Class A Common Stock
The market price of our Class A common stock may be volatile and may decline.
The market price of our Class A common stock has fluctuated and may continue to fluctuate substantially. The market price of our Class A common stock depends on a number of factors, including those described in this “Risk Factors”"Risk Factors" section, many of which are beyond our control and may not be related to our operating performance. These fluctuations could cause you to lose all or part of your investment in our Class A common stock. Factors that could cause fluctuations in the market price of our Class A common stock include the following:
price and volume fluctuations in the overall stock market from time to time;
volatility in the market prices and trading volumes of high technology stocks;
changes in operating performance and stock market valuations of other technology companies generally, or those in our industry in particular;
failure of financial analysts to maintain coverage of us, changes in financial estimates by any analysts who follow our company, including as a result of our plan to transition our business to focus on more software-only transactions and our announced plan to transition toward a subscription-based model, or our failure to meet these estimates or the expectations of investors;
the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;
announcements by us or our competitors of new products or new or terminated significant contracts, commercial relationships or capital commitments;
public analyst or investor reaction to our press releases, other public announcements and filings with the SEC;
rumors and market speculation involving us or other companies in our industry;
actual or anticipated changes or fluctuations in our operating results;
actual or anticipated developments in our business or our competitors’ businesses or the competitive landscape generally;
actual or threatened litigation involving us, our industry or both, or investigations by regulators into our operations or those of our competitors;
developments or disputes concerning our intellectual property or our solutions, or third-party proprietary rights;
rumored, announced or completed acquisitions of businesses or technologies by us or our competitors;
new laws or regulations or new interpretations of existing laws or regulations applicable to our business;
changes in accounting standards, policies, guidelines, interpretations or principles;
any major changes in our management or our boardBoard of directors;Directors;
general economic conditions and slow or negative growth of our markets; and
other events or factors, including those resulting from war, incidents of terrorism or responses to these events.
In addition, the stock market in general, and the market for technology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may seriously affect the market price of our Class A common stock, regardless of our actual operating performance. In addition, in the past, following periods of volatility in the overall market and the market prices of a particular company’s securities, securities class action litigation has often been instituted against that company. Securities litigation, if instituted against us, could result in substantial costs and divert our management’s attention and resources from our business. This could have an adverse effect on our business, operating results and financial condition.
Sales of substantial amounts of our Class A common stock in the public markets, or the perception that they might occur, could reduce the price that our Class A common stock might otherwise attain and may dilute your voting power and your ownership interest in us.
Sales of a substantial number of shares of our Class A common stock in the public markets, particularly sales by our directors, executive officers and significant stockholders, or the perception that these sales could occur, could adversely affect the market price of our Class A common stock.
We have reserved a substantial number of shares of our Class A common stock for issuance upon vesting or exercise of our equity compensation plans, upon conversion of the Notes and in relation to warrant transactions we entered into in connection with the pricing of the Notes.
In addition, certain holders of our Class B common stock are entitled to rights with respect to registration of these shares under the Securities Act of 1933, as amended, pursuant to our Amended and Restated Investors’ Rights Agreement. If such holders exercise their registration rights and sell a large number of shares, they could adversely affect the market price for our Class A common stock. We have also registered the offer and sale of all shares of Class A and Class B common stock that we may issue under our equity compensation plans.
We may also issue our shares of Class A common stock or additional securities convertible into shares of our Class A common stock from time to time in connection with a financing, acquisition, investments or otherwise. Any such issuance could result in substantial dilution to our existing stockholders and cause the market price of our Class A common stock to decline.
The dual class structure of our common stock as contained in our charter documents has the effect of concentrating voting control with a limited number of stockholders that held our stock prior to our IPO, including our directors, executive officers, and employees and their affiliates, and significant stockholders, which will limit your ability to influence corporate matters.
Our Class B common stock has 10 votes per share, and our Class A common stock has one vote per share. As of July 31, 2017,2018, stockholders who hold shares of Class B common stock, including our investors and our directors, executive officers, and employees, and their affiliates, together hold a significant majority of the voting power of our outstanding capital stock. As a result, for the foreseeable future, such stockholders will have significant influence over the management and affairs of our company and over the outcome of all matters submitted to our stockholders for approval, including the election of directors and significant corporate transactions, such as a merger, consolidation or sale of substantially all of our assets.
In addition, the holders of Class B common stock collectively will continue to control all matters submitted to our stockholders for approval even if their stock holdings represent less than 50% of the outstanding shares of our common stock. Because of the ten-to-one voting ratio between our Class B and Class A common stock, the holders of our Class B common stock collectively will continue to control a majority of the combined voting power of our common stock so long as the shares of Class B common stock represent at least 9.1% of all outstanding shares of our Class A and Class B common stock. This concentrated control will limit your ability to influence corporate matters for the foreseeable future, and, as a result, the market price of our Class A common stock could be adversely affected. These holders of our Class B common stock may also have interests that differ from yours and may vote in a way with which you disagree and which may be adverse to your interests, and, unless earlier converted at the election of the holders of 67% of our outstanding Class B common stock, our amended and restated certificate of incorporation provides for a dual class stock structure for 17 years following the completion of our IPO.
Future transfers, whether or not for value, by holders of Class B common stock will generally result in those shares converting to Class A common stock, subject to limited exceptions, such as certain transfers affected for estate planning purposes. The conversion of shares of our Class B common stock into shares of our Class A common stock will have the effect, over time, of increasing the relative voting power of those holders of Class B common stock who retain their shares in the long term. If one or more significant holders of our Class B common stock decides to convert or sell their shares, it could result in a different group of Class B common stock holders having the power to exert significant influence over our company, which may or may not align with the strategy and direction set by our management. Any such changes could adversely affect the market price of our Class A common stock.
We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our Class A common stock less attractive to investors.
For so long as we remain an “emerging growth company” as defined in the in the Jumpstart Our Business Startups Act, or JOBS Act, we may take advantage of certain exemptions from various requirements that are applicable to public companies that are not “emerging growth companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We may take advantage of these exemptions until we are no longer an emerging growth company. We would cease to be an emerging growth company upon the earliest to occur of: (i) the first fiscal year following the fifth anniversary of our IPO; (ii) the first fiscal year after our annual gross revenue is $1 billion or more; (iii) the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt securities; or (iv) as of the end of any fiscal year in which the market value of our common stock held by non-affiliates exceeded $700 million as of the end of the second quarter of that fiscal year. We cannot predict if investors will find our Class A common stock less attractive because we may rely on these exemptions. If some investors find our Class A common stock less attractive as a result, there may be a less active trading market for our Class A common stock and our stock price may be more volatile.
The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified boardBoard members.
We are subject to the reporting and corporate governance requirements of the Exchange Act, the listing requirements of the NASDAQ Global SelectStock Market and other applicable securities rules and regulations, including the Sarbanes-Oxley Act and the Dodd-Frank Act. Compliance with these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources, particularly afternow that we are no longer an “emerging"emerging growth company”company," as defined in the JOBSJumpstart Our Business Startups Act. Among other things, the Exchange Act requires that we file annual, quarterly and current reports with respect to our business and results of operations and maintain effective disclosure controls and procedures and internal control over financial reporting. In order to improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. As a result, management’s attention may be diverted from other business concerns, which could harm our business, financial condition, results of operations and prospects. Although we have already hired additional employees to help comply with these requirements, we may need to further expand our legal and finance departments in the future, which will increase our costs and expenses.
In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time-consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expense and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies, regulatory authorities may initiate legal proceedings against us and our business and prospects may be harmed. As a result of disclosureour required public disclosures of information, in the filings required of a public company, our business and financial condition will becomeare more visible, which may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business, financial condition, results of operations and prospects could be harmed, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and harm our business, financial condition, results of operations and prospects.
In addition, as a result of our disclosure obligations as a public company, we will have reduced strategic flexibility and will be under pressure to focus on short-term results, which may adversely affect our ability to achieve long-term profitability.
If financial or industry analysts do not publish research or reports about our business, if they have a difficulty understanding the changes to our business model, or if they issue inaccurate or unfavorable research regarding our Class A common stock, our stock price and trading volume could decline.
The trading market for our Class A common stock will be influenced by the research and reports that industry or financial analysts publish about us or our business. We do not control these analysts or the content and opinions included in their reports. AsIn addition, we are in a new public company, weperiod of transition to focus our business on more software-only transactions in the short term and a subscription-based business model in the long term, which analysts may be slow to attract research coverage andnot have historically reflected, or may not accurately in the analysts who publish information about our Class A common stock will have had relatively little experience with our company, whichfuture reflect, in their research. The foregoing factors could affect theiranalysts' ability to accurately forecast our results and make it more likely that we fail to meet their estimates. In the event we obtain industry or financial analyst coverage, if any of the analysts who cover us issue an inaccurate or unfavorable opinion regarding our stock price, our stock price would likely decline. In addition, the stock prices of many companies in the high technology industry have declined significantly after those companies have failed to meet, or often times significantly exceeded, the financial guidance publicly announced by the companies or the expectations of analysts. If our financial results fail to meet (or significantly exceed) our announced guidance or the expectations of analysts or public investors, analysts could downgrade our Class A common stock or publish unfavorable research about us. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.
Certain provisions in our charter documents and under Delaware law could make an acquisition of our company more difficult, limit attempts by our stockholders to replace or remove members of our boardBoard of directorsDirectors or current management and may adversely affect the market price of our Class A common stock.
Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that could delay or prevent a change in control of our company. These provisions could also make it difficult for stockholders to elect directors that are not nominated by the current members of our boardBoard of directorsDirectors or take other corporate actions, including effecting changes in our management. These provisions include:
our amended and restated certificate of incorporation provides for a dual class common stock structure for 17 years following the completion of our IPO;
a classified boardBoard of directorsDirectors with three-year staggered terms, which could delay the ability of stockholders to change the membership of a majority of our boardBoard of directors;Directors;
the ability of our boardBoard of directorsDirectors to issue shares of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer;
upon the conversion of our Class A common stock and Class B common stock into a single class of common stock, the exclusive right of our boardBoard of directorsDirectors to elect a director to fill a vacancy created by the expansion of our boardBoard of directorsDirectors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our boardBoard of directors;Directors;
upon the conversion of our Class A common stock and Class B common stock into a single class of common stock, a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders;
the requirement that a special meeting of stockholders may be called only by the chairman of our boardBoard of directors,Directors, our lead independent director, our president, our secretary or a majority vote of our boardBoard of directors,Directors, which could delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors;
the requirement for the affirmative vote of holders of at least 66 2⁄3% of the voting power of all of the then outstanding shares of the voting stock, voting together as a single class, to amend the provisions of our amended and restated certificate of incorporation relating to the issuance of preferred stock and management of our business or our amended and restated bylaws, which may inhibit the ability of an acquirer to effect such amendments to facilitate an unsolicited takeover attempt;
the ability of our boardBoard of directors,Directors, by majority vote, to amend our amended and restated bylaws, which may allow our boardBoard of directorsDirectors to take additional actions to prevent an unsolicited takeover and inhibit the ability of an acquirer to amend our amended and restated bylaws to facilitate an unsolicited takeover attempt; and
advance notice procedures with which stockholders must comply to nominate candidates to our boardBoard of directorsDirectors or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of us.
In addition, as a Delaware corporation, we are subject to Section 203 of the Delaware General Corporation Law. These provisions may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us for a certain period of time.
We believe our long-term value as a company will be greater if we focus on growth, which may negatively impact our profitability in the near term.
Part of our business strategy is to primarily focus on our long-term growth. As a result, our profitability may be lower in the near term than it would be if our strategy was to maximize short-term profitability. Expenditures on expanding our research and development efforts, sales and market efforts, infrastructure and other such investments may not ultimately grow our business or cause long-term profitability. If we are ultimately unable to achieve profitability at the level anticipated by analysts and our stockholders, our stock price may decline.
We do not intend to pay dividends in the foreseeable future. As a result, your ability to achieve a return on your investment will depend on appreciation in the price of our Class A common stock.
We have never declared or paid any cash dividends on our Class A common stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any dividends on our Class A common stock in the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our boardBoard of directors.Directors. Accordingly, investors must rely on sales of their Class A common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments.
Item 1B. Unresolved Staff Comments
Not Applicable
Applicable.
Item 2. Properties
Our corporate headquarters are located in San Jose, California where, under two lease agreements that expire in March 2021,through April 2024, we currently lease approximately 176,000326,000 square feet of space. We also maintain offices in North America, Europe, Asia-Pacific,Asia Pacific, the Middle East, Latin America and Africa. We lease all of our facilities and do not own any real property. We expect to add facilities as we grow our employee base and expand geographically. We believe that our facilities are adequate to meet our needs for the immediate future and that, should it be needed, suitable additional space will be available to accommodate the expansion of our operations.
Item 3. Legal Proceedings
We are not currently a party to any material legal proceedings that we believe to be material to our business or financial condition. From time to time we may become party to various litigation matters and subject to claims that arise in the ordinary course of business.
Item 4. Mine Safety Disclosures
Not ApplicableApplicable.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information for Common Stock
Our Class A common stock began trading publicly on the NASDAQ Global SelectStock Market under the ticker symbol “NTNX”"NTNX" on September 30, 2016. Prior to that time, there was no public market for our Class A common stock. The following table sets forth, for the periods indicated, the high and low sale prices of our Class A common stock as reported on the NASDAQ Global Select Market since our initial public offering, or IPO.Market.
|
| | | | | | | |
| Fiscal Year 2017 Quarter Ended: | High | | Low |
| October 31, 2016 (from September 30, 2016) | $ | 44.46 |
| | $ | 24.50 |
|
| January 31, 2017 | $ | 34.69 |
| | $ | 23.37 |
|
| April 30, 2017 | $ | 33.10 |
| | $ | 15.19 |
|
| July 31, 2017 | $ | 24.41 |
| | $ | 14.46 |
|
|
| | | | | | | | | | | | | | | |
| | Fiscal 2017 | | Fiscal 2018 |
| Fiscal Quarter: | High | | Low | | High | | Low |
| First quarter | $ | 44.46 |
| | $ | 24.50 |
| | $ | 28.50 |
| | $ | 20.70 |
|
| Second quarter | $ | 34.69 |
| | $ | 23.37 |
| | $ | 38.41 |
| | $ | 27.33 |
|
| Third quarter | $ | 33.10 |
| | $ | 15.19 |
| | $ | 55.51 |
| | $ | 30.34 |
|
| Fourth quarter | $ | 24.41 |
| | $ | 14.46 |
| | $ | 63.71 |
| | $ | 48.88 |
|
Our Class B common stock is not listed nor traded on any stock exchange.
Holders of Record
As of July 31, 2017,2018, there were 175137 holders of record of our Class A common stock. This figure does not include a substantially greater number of “street name”"street name" holders or beneficial holders of our common stock whose shares are held of record by banks, brokers and other financial institutions. As of July 31, 2017,2018, there were approximately 12066 stockholders of record of our Class B common stock.
Dividend Policy
We have never declared or paid cash dividends on our common stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any dividends in the foreseeable future. Any future determination to declare dividends will be made at the discretion of our boardBoard of directors,Directors, subject to applicable laws, and will depend on our financial condition, operating results, capital requirements, general business conditions, and other factors that our boardBoard of directorsDirectors may deem relevant.
Sale of Unregistered Securities and Use of Proceeds
(a) Unregistered Sales of Equity Securities
None
None.
(b) Use of Proceeds
Our IPO of Class A common stock was effected through Registration Statements on Form S-1 (File Nos. 333-208711 and 333-213876), which were declared or became effective on September 29, 2016. There has been no material change in the use of proceeds from our IPO as described in our final prospectus filed with the Securities and Exchange Commission or SEC,("SEC"), pursuant to Rule 424(b) of the Securities Act of 1933, as amended or the ("Securities Act,Act"), and other periodic reports previously filed with the SEC.
Issuer Purchases of Equity Securities
We issued shares of common stock related to exercises of unvested stock options, or the early exercised stock options. The shares of common stock issued in connection with the early exercised stock options are subject to our repurchase right at the original purchase price. The proceeds are initially recorded as a liability and reclassified to common stock and additional paid in capital as our repurchase right lapses. During fiscal 2017, we repurchased the following shares related to unvested early exercised stock options due to termination: |
| | | | | | | |
| Period | | Total Number of Shares (or Units) Purchased | | Average Price Paid per Share (or Unit) |
| August 1, 2016 to October 31, 2016 | | — |
| | $ | — |
|
| November 1, 2016 to January 31, 2017 | | 9,480 |
| | $ | 1.89 |
|
| February 1, 2017 to April 30, 2017 | | 1,250 |
| | $ | 1.22 |
|
| May 1, 2017 to July 31, 2017 | | 10,938 |
| | $ | 2.34 |
|
| Total | | 21,668 |
| | $ | 2.08 |
|
Purchases of Equity Securities by the Issuer
None.
Stock Performance Graph
The following graph shows a comparison from September 30, 2016 (the date our Class A common stock commenced trading on the NASDAQ Global SelectStock Market) through July 31, 20172018 of the cumulative total return for our Class A common stock.stock based on the closing price on the last day of each respective period. The graph assumes thatan initial investment of $100 was invested on September 30, 2016 in the common stock of Nutanix, Inc., the NASDAQ Composite Index and NASDAQ Computer Index, and assumes reinvestment of any dividends. The stock price performance on the following graph is not necessarily indicative of future stock price performance.
| | | | Quarter Ended | Quarter Ended |
| | September 30,
2016 | | October 31,
2016 | | January 31,
2017 | | April 30,
2017 | | July 31,
2017 | September 30,
2016 | | October 31,
2016 | | January 31,
2017 | | April 30,
2017 | | July 31,
2017 | | October 31,
2017 | | January 31,
2018 | | April 30,
2018 | | July 31,
2018 |
| Nutanix, Inc. | $ | 100 |
| | $ | 66.22 |
| | $ | 81.81 |
| | $ | 41.05 |
| | $ | 57.42 |
| $ | 100 |
| | $ | 66.22 |
| | $ | 81.81 |
| | $ | 41.05 |
| | $ | 57.42 |
| | $ | 77.03 |
| | $ | 86.76 |
| | $ | 136.73 |
| | $ | 132.14 |
|
| NASDAQ Composite Index | $ | 100 |
| | $ | 97.55 |
| | $ | 105.66 |
| | $ | 114.16 |
| | $ | 120.32 |
| $ | 100 |
| | $ | 97.62 |
| | $ | 105.47 |
| | $ | 114.05 |
| | $ | 120.18 |
| | $ | 127.29 |
| | $ | 140.48 |
| | $ | 134.22 |
| | $ | 145.70 |
|
| NASDAQ Computer Index | $ | 100 |
| | $ | 100.13 |
| | $ | 106.54 |
| | $ | 118.27 |
| | $ | 126.04 |
| $ | 100 |
| | $ | 100.13 |
| | $ | 106.47 |
| | $ | 118.27 |
| | $ | 126.08 |
| | $ | 141.97 |
| | $ | 152.77 |
| | $ | 146.25 |
| | $ | 161.12 |
|
The information on the above graph shall not be deemed to be “filed”"filed" for purposes of Section 18 of the the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section or Sections 11 and 12(a)(2) of the Securities Act, and shall not be incorporated by reference into any registration statement or other document filed by us with the SEC, whether made before or after the date of this Annual Report on Form 10-K, regardless of any general incorporation language in such filing, except as shall be expressly set forth by specific reference in such filing.
Securities Authorized for Issuance Under Equity Compensation Plans
The information required by this item is incorporated herein by reference to our definitive proxy statement for our 20172018 annual meeting of stockholders, which will be filed notno later than 120 days after the end of our fiscal year ended July 31, 2017.
2018.
Item 6. Selected Consolidated Financial and Other Data
The selected consolidated statement of operations data for fiscal 2015, fiscal 2016, 2017, and fiscal 20172018 and the consolidated balance sheet data as of July 31, 20162017 and 20172018 are derived from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The selected consolidated statement of operations data for fiscal 20142015 and fiscal 20132014 and the consolidated balance sheet data as of July 31, 2013, 2014, 2015, and 2015 are2016 were derived from audited financial statements not included in this Annual Report on Form 10-K. Our historical results are not necessarily indicative of the results that may be expected in the future. The selected consolidated financial data below should be read in conjunction with the section entitled “Management’s"Management’s Discussion and Analysis of Financial Condition and Results of Operations”Operations" included in Part II, Item 7 of this Annual Report on Form 10-K and our consolidated financial statements and related notes included in Part II, Item 8 of this Annual Report on Form 10-K.
For the fiscal years ended July 31, 2016 and 2017, we have recast certain of the following financial data as a result of our adoption of Accounting Standard Update 2014-09, Revenue from Contracts with Customers ("ASC 606") in the first quarter of fiscal 2018, as indicated by the "as adjusted" note. Financial data for the fiscal years ended July 31, 2014 and 2015 has not been adjusted to reflect the adoption of ASC 606. See Note 3 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for further information regarding our adoption of ASC 606.
| | | | Fiscal Year Ended July 31, | Fiscal Year Ended July 31, |
| | 2013 | | 2014 | | 2015 | | 2016 | | 2017 | 2014 | | 2015 | | 2016 *As Adjusted | | 2017 *As Adjusted | | 2018 |
| | | | | | | | | | | (in thousands, except share and per share data) |
| | (In thousands, except share and per share data) | |
| Consolidated Statements of Operations Data: | | | | | | | | | | |
| Consolidated Statement of Operations Data: | | Consolidated Statement of Operations Data: | | | | | | | | |
| Revenue: | | | | | | | | | | | | | | | | | | |
| Product | $ | 28,138 |
| | $ | 113,562 |
| | $ | 200,833 |
| | $ | 350,798 |
| | $ | 583,011 |
| $ | 113,562 |
| | $ | 200,833 |
| | $ | 413,910 |
| | $ | 673,297 |
| | $ | 887,989 |
|
| Support and other services | 2,395 |
| | 13,565 |
| | 40,599 |
| | 94,130 |
| | 183,858 |
| |
| Support, entitlements and other services | | 13,565 |
| | 40,599 |
| | 89,500 |
| | 172,606 |
| | 267,468 |
|
| Total revenue | 30,533 |
|
| 127,127 |
|
| 241,432 |
|
| 444,928 |
|
| 766,869 |
| 127,127 |
|
| 241,432 |
|
| 503,410 |
|
| 845,903 |
|
| 1,155,457 |
|
| Cost of revenue: | | | | | | | | | | | | | | | | | | |
| Product(1) (2) | 24,171 |
| | 52,417 |
| | 80,900 |
| | 133,541 |
| | 249,393 |
| |
| Support and other services(1) | 2,433 |
| | 8,495 |
| | 20,059 |
| | 37,246 |
| | 77,938 |
| |
Product (1)(2) | | 52,417 |
| | 80,900 |
| | 133,541 |
| | 249,393 |
| | 276,127 |
|
Support, entitlements and other services (1) | | 8,495 |
| | 20,059 |
| | 37,246 |
| | 77,938 |
| | 109,903 |
|
| Total cost of revenue | 26,604 |
|
| 60,912 |
|
| 100,959 |
|
| 170,787 |
|
| 327,331 |
| 60,912 |
|
| 100,959 |
|
| 170,787 |
|
| 327,331 |
|
| 386,030 |
|
| Gross profit | 3,929 |
|
| 66,215 |
|
| 140,473 |
| | 274,141 |
|
| 439,538 |
| 66,215 |
|
| 140,473 |
|
| 332,623 |
| | 518,572 |
|
| 769,427 |
|
| Operating expenses: | | | | | | | | | | | | | | | | | | |
| Sales and marketing(1) (2) | 27,200 |
| | 93,001 |
| | 161,829 |
| | 288,493 |
| | 500,529 |
| |
| Research and development(1) | 16,496 |
| | 38,037 |
| | 73,510 |
| | 116,400 |
| | 288,619 |
| |
| General and administrative(1) | 4,833 |
| | 13,496 |
| | 23,899 |
| | 34,265 |
| | 77,341 |
| |
Sales and marketing (1)(2) | | 93,001 |
| | 161,829 |
| | 286,584 |
| | 501,021 |
| | 649,657 |
|
Research and development (1) | | 38,037 |
| | 73,510 |
| | 116,400 |
| | 288,619 |
| | 313,777 |
|
General and administrative (1) | | 13,496 |
| | 23,899 |
| | 34,265 |
| | 77,341 |
| | 86,401 |
|
| Total operating expenses | 48,529 |
| | 144,534 |
|
| 259,238 |
|
| 439,158 |
|
| 866,489 |
| 144,534 |
| | 259,238 |
|
| 437,249 |
|
| 866,981 |
|
| 1,049,835 |
|
| Loss from operations | (44,600 | ) |
| (78,319 | ) |
| (118,765 | ) |
| (165,017 | ) |
| (426,951 | ) | (78,319 | ) |
| (118,765 | ) |
| (104,626 | ) |
| (348,409 | ) |
| (280,408 | ) |
| Other expense—net | (54 | ) | | (5,076 | ) | | (5,818 | ) | | (1,290 | ) | | (26,377 | ) | |
| Other expense, net | | (5,076 | ) | | (5,818 | ) | | (1,290 | ) | | (26,377 | ) | | (9,306 | ) |
| Loss before provision for income taxes | (44,654 | ) |
| (83,395 | ) |
| (124,583 | ) |
| (166,307 | ) |
| (453,328 | ) | (83,395 | ) |
| (124,583 | ) |
| (105,916 | ) |
| (374,786 | ) |
| (289,714 | ) |
| Provision for income taxes | 80 |
| | 608 |
| | 1,544 |
| | 2,192 |
| | 4,683 |
| 608 |
| | 1,544 |
| | 2,317 |
| | 4,852 |
| | 7,447 |
|
| Net loss | $ | (44,734 | ) |
| $ | (84,003 | ) |
| $ | (126,127 | ) |
| $ | (168,499 | ) |
| $ | (458,011 | ) | $ | (84,003 | ) |
| $ | (126,127 | ) |
| $ | (108,233 | ) |
| $ | (379,638 | ) |
| $ | (297,161 | ) |
| Net loss per share attributable to Class A and Class B common stockholders—basic and diluted | $ | (1.36 | ) |
| $ | (2.30 | ) |
| $ | (3.11 | ) |
| $ | (3.83 | ) | | $ | (3.57 | ) | $ | (2.30 | ) |
| $ | (3.11 | ) |
| $ | (2.46 | ) |
| $ | (2.96 | ) | | $ | (1.81 | ) |
| Weighted-average shares used in computing net loss per share attributable to Class A and Class B common stockholders—basic and diluted | 32,866,059 |
| | 36,520,107 |
| | 40,509,481 |
| | 43,970,381 |
| | 128,295,563 |
| |
| Weighted average shares used in computing net loss per share attributable to Class A and Class B common stockholders—basic and diluted | | 36,520,107 |
| | 40,509,481 |
| | 43,970,381 |
| | 128,295,563 |
| | 164,091,302 |
|
| |
| (1) | Includes stock-based compensation expense as follows: |
| | | | Fiscal Year Ended July 31, | Fiscal Year Ended July 31, |
| | 2013 | | 2014 | | 2015 | | 2016 | | 2017 | 2014 | | 2015 | | 2016 | | 2017 | | 2018 |
| | (In thousands) | (in thousands) |
| Cost of revenue: | | | | | | | | | | | | | | | | | | |
| Product | $ | 61 |
| | $ | 124 |
| | $ | 363 |
| | $ | 391 |
| | $ | 3,066 |
| $ | 124 |
| | $ | 363 |
| | $ | 391 |
| | $ | 3,066 |
| | $ | 2,580 |
|
| Support and other services | 40 |
| | 194 |
| | 718 |
| | 968 |
| | 10,411 |
| |
| Support, entitlements and other services | | 194 |
| | 718 |
| | 968 |
| | 10,411 |
| | 8,945 |
|
| Total cost of revenue | 101 |
|
| 318 |
|
| 1,081 |
|
| 1,359 |
|
| 13,477 |
| 318 |
|
| 1,081 |
|
| 1,359 |
|
| 13,477 |
|
| 11,525 |
|
| Sales and marketing | 611 |
| | 2,150 |
| | 6,474 |
| | 8,006 |
| | 78,117 |
| 2,150 |
| | 6,474 |
| | 8,006 |
| | 78,117 |
| | 65,060 |
|
| Research and development | 3,835 |
| | 2,243 |
| | 5,411 |
| | 6,259 |
| | 109,044 |
| 2,243 |
| | 5,411 |
| | 6,259 |
| | 109,044 |
| | 74,389 |
|
| General and administrative | 443 |
| | 1,149 |
| | 4,174 |
| | 4,432 |
| | 30,853 |
| 1,149 |
| | 4,174 |
| | 4,432 |
| | 30,853 |
| | 26,894 |
|
| Total stock-based compensation expense | $ | 4,990 |
|
| $ | 5,860 |
|
| $ | 17,140 |
|
| $ | 20,056 |
|
| $ | 231,491 |
| $ | 5,860 |
|
| $ | 17,140 |
|
| $ | 20,056 |
|
| $ | 231,491 |
|
| $ | 177,868 |
|
During the three months ended October 31, 2016, we recorded approximately $83.0 million of stock-based compensation expense related to the performance stock awards, as we determined that the performance conditions (certain liquidity events, including our IPO, and the achievement of specified performance targets) were probable of achievement.
| |
| (2) | Includes amortization of intangible assets as follows: |
(2)Includes amortization of intangible assets as follows: | | | | Fiscal Year Ended July 31, | Fiscal Year Ended July 31, |
| | 2013 | | 2014 | | 2015 | | 2016 | | 2017 | 2014 | | 2015 | | 2016 | | 2017 | | 2018 |
| | (In thousands) | (in thousands) |
| Product cost of revenue | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,314 |
| $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,314 |
| | $ | 5,641 |
|
| Sales and marketing | — |
| | — |
| | — |
| | — |
| | 915 |
| — |
| | — |
| | — |
| | 915 |
| | 914 |
|
| Total amortization of intangible assets | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 2,229 |
| $ | — |
| | $ | — |
| | $ | — |
| | $ | 2,229 |
| | $ | 6,555 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | As of July 31, |
| | 2014 | | 2015 | | 2016 *As Adjusted | | 2017 *As Adjusted | | 2018 |
| | (in thousands) |
| Consolidated Balance Sheet Data: | | | | | | | | | |
| Cash, cash equivalents and short-term investments | $ | 57,485 |
| | $ | 150,539 |
| | $ | 185,200 |
| | $ | 349,053 |
| | $ | 934,303 |
|
| Total assets | $ | 118,964 |
| | $ | 249,831 |
| | $ | 411,715 |
| | $ | 738,212 |
| | $ | 1,599,880 |
|
| Deferred revenue (current and non-current portion) | $ | 36,477 |
| | $ | 103,598 |
| | $ | 218,481 |
| | $ | 369,056 |
| | $ | 631,207 |
|
| Long-term debt | $ | — |
| | $ | — |
| | $ | 73,260 |
| | $ | — |
| | $ | 429,598 |
|
| Preferred stock warrant liability | $ | 5,507 |
| | $ | 11,683 |
| | $ | 9,679 |
| | $ | — |
| | $ | — |
|
| Convertible preferred stock | $ | 172,075 |
| | $ | 310,379 |
| | $ | 310,379 |
| | $ | — |
| | $ | — |
|
| Total stockholders’ (deficit) equity | $ | (130,775 | ) | | $ | (234,734 | ) | | $ | (285,827 | ) | | $ | 217,063 |
| | $ | 326,779 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | As of July 31, |
| | 2013 | | 2014 | | 2015 | | 2016 | | 2017 |
| | (In thousands) |
| Consolidated Balance Sheet Data: | | | | | | | | | |
| Cash, cash equivalents and short-term investments | $ | 18,047 |
| | $ | 57,485 |
| | $ | 150,539 |
| | $ | 185,200 |
| | $ | 349,053 |
|
| Total assets | $ | 44,340 |
| | $ | 118,964 |
| | $ | 249,831 |
| | $ | 399,086 |
| | $ | 726,073 |
|
| Deferred revenue (current and non-current portion) | $ | 12,530 |
| | $ | 36,477 |
| | $ | 103,598 |
| | $ | 296,465 |
| | $ | 526,071 |
|
| Senior notes | $ | — |
| | $ | — |
| | $ | — |
| | $ | 73,260 |
| | $ | — |
|
| Preferred stock warrant liability | $ | 1,110 |
| | $ | 5,507 |
| | $ | 11,683 |
| | $ | 9,679 |
| | $ | — |
|
| Convertible preferred stock | $ | 71,368 |
| | $ | 172,075 |
| | $ | 310,379 |
| | $ | 310,379 |
| | $ | — |
|
| Total stockholders’ (deficit) equity | $ | (55,885 | ) | | $ | (130,775 | ) | | $ | (234,734 | ) | | $ | (376,315 | ) | | $ | 48,202 |
|
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with the consolidated financial statements and related notes that are 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”"Risk Factors" or in other parts of this Annual Report on Form 10-K.
Overview
We provide
Nutanix, Inc. ("we," "us," "our" or "Nutanix") provides a leading next-generation enterprise cloud operating systemplatform that convergespowers many of the world’s business applications and end user services by providing software solutions that digitize traditional silos of server,enterprise computing. Our solution allows our customers to virtualize various clouds - private, public, edge - into one seamless cloud enabling enterprises to choose the right cloud for the right application. Our enterprise cloud platform converges compute, virtualization, storage, networking, desktop, governance and networking intosecurity services in one integrated, simple to consume solution delivered through software. Further, our software and unifies privatesoftware as a service ("SaaS") solutions allow enterprises to simplify the complexities of a multi-cloud environment with automation, cost governance and compliance. We underpin the platform with unique web-scale engineering and one-click operational simplicity that powers any scale deployment while giving customers the freedom of choice across various hardware platforms, across various virtualization solutions and across major public cloud into a single software fabric. providers.
Our software delivers the agility, scalability and pay-as-you-grow economics of the public cloud, while addressing enterprise requirements of application mobility, security, data integrity and control. We provide our customers with the flexibility to selectively utilize the public cloud for suitable workloads and specific use cases by enabling increasing levels of application mobility across private and public clouds. We have combined advanced web-scale technologies with elegant consumer-grade design to deliver a powerful enterprise cloud operating system that elevates IT organizations by enabling them to focus on the applications and services that power their businesses. Our invisible infrastructure provides constant availability and low-touch management, enables application mobility across computing environments and reduces inefficiencies in IT planning.
Our solutionplatform can be delivered either aspre-installed on an appliance that is configured to order or asdelivered separately to be utilized on a variety of certified hardware platforms. Software delivered on configured to order appliances is not portable to other appliances and has a term equal to the life of the associated appliance, while separately purchased software only. When end-customers purchasetypically has a term of one to five years. For the fiscal year ended July 31, 2018, the weighted average term for such software licenses was approximately 3.5 years. Configured to order appliances, including our operating system, theyNutanix-branded NX hardware line, can be purchased from one of our original equipment manufacturer ("OEM") partners or directly from Nutanix. Our platform is typically also purchasepurchased with one or more years of support and maintenance in orderentitlements, which includes the right to receive software upgrades bug fixes and parts replacement. enhancements as well as technical support.
Product revenue is generated primarily from the sales of our solution and is generally recognized upon shipment.transfer of control to the customer. Support, entitlements and other services revenue is primarily derived from the related support and maintenance contracts and is recognized ratably over the term of thethose support contracts. Sales of our solution on appliances purchased from Nutanix have comprised the bulk of our historical product revenue; however, starting in the first quarter of fiscal 2018, more of our customers began buying appliances directly from our OEMs, or in some cases, purchasing separately sold term license subscriptions. We expect both of these trends to continue.
NUTANIX, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
We had a broad and diverse base of 7,051 end-customersover 10,600 end customers as of July 31, 2017,2018, including approximately 559over 700 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. Since shipping our first product in fiscal 2012, our end-customerend customer base has grown rapidly. The number of end-customersend customers grew from 3,768over 7,000 as of July 31, 20162017 to 7,051over 10,600 as of July 31, 2017.2018. Our operating systemplatform is primarily sold through channel partners, including distributors, resellers and resellers,OEMs, and delivered directly to our end-customers. A major partend customers. The majority of our sales and marketing investment is used to educate our end-customersend customers about the benefits of our solution, particularly as we continue to pursue large enterprises and mission critical workloads. Our solutions serve a broad range of workloads, including enterprise applications, databases, virtual desktop infrastructure or VDI,("VDI"), unified communications, and big data analytics and we have recently announced the capability to support both virtualized and non-virtualized applications. We have end-customersend 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 operating systemplatform to provide a variety of cloud-based services to their customers.
We have investedcontinue to invest heavily in the growth of our business, including the development of our solutions and build-out of our global sales force and the acquisitions of Calm.io Pte. Ltd., or Calm, and PernixData, Inc., or PernixData, during the first quarter of fiscal 2017.force. The number of our full-time employees increased from 1,980approximately 2,800 as of July 31, 20162017 to 2,813approximately 4,000 as of July 31, 2017.2018. We have recruited 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 Bangalore, India, Durham, North Carolina, Seattle, Washington and Seattle, Washington.Belgrade, Serbia. We have also expanded our international sales and marketing presence by continuing to build out our global teams. We intend to continue to invest in our global engineering team to enhance the functionality of our operating system,platform, 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 $444.9$503.4 million, $845.9 million and $766.9$1,155.5 million for fiscal 2016, 2017 and 2018, respectively, representing increases of 68.0% and 36.6% in fiscal 2017 and fiscal 2017, respectively, representing year-over-year growth of 72.4%.2018, as compared to the prior year periods. Our net losses were $168.5$108.2 million, $379.6 million and $458.0$297.2 million for fiscal 2016, 2017 and fiscal 2017,2018, respectively. Net cash generated from operationsprovided by operating activities was $3.6 million, $13.8 million and $13.8$92.6 million for fiscal 2016, 2017 and fiscal 2017,2018, respectively. Free cash flow, which is calculated as net cash provided by (used in) operating activities less purchases of property and equipment, was an outflow of $38.7 million and $36.4 million for fiscal 2016 and fiscal 2017, respectively.respectively, and an inflow of $30.2 million for fiscal 2018. As of July 31, 2017,2018, we had an accumulated deficit of $899.8$1,028.1 million.
Initial Public Offering
In October 2016,January 2018, we completed our initial public offering, or IPO,issued Convertible Senior Notes with a 0% interest rate for an aggregate principal amount of Class A common stock,$575.0 million, due in which we sold 17,100,500 shares, including 2,230,500 shares pursuant to the underwriters’ over-allotment option.2023 (the "Notes"). The shares were sold at an IPO price of $16.00 per share fortotal net proceeds of $254.5 million,from this offering, after deducting underwriting discounts and commissionsthe initial purchasers' discount of $19.2approximately $10.8 million, were approximately $564.2 million. Approximately $55.2 million of the proceeds were used to purchase a convertible note hedge, partially offset by the proceeds from the sale of warrants to purchase additional stock at a higher price. We incurred offering costsapproximately $0.7 million of $5.3 million.other issuance costs. The remaining proceeds from the Notes will be used for general corporate purposes, including working capital requirements, capital expenditures and potential acquisitions. 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.
New Accounting Standards
We adopted Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASC 606"), the new accounting standard related to revenue recognition, effective August 1, 2017. Prior period information presented has been adjusted to reflect the adoption of this new standard. See Note 3 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for a summary of adjustments.
NUTANIX, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Key Financial and Performance Metrics
We monitor the following key financial and performance metrics:
| | | | As of and for the | | | | | | | |
| | Year Ended July 31, | As of and for the Fiscal Year Ended July 31, |
| | 2015 | | 2016 | | 2017 | 2016 | | 2017 | | 2018 |
| | (Dollars in thousands) | (in thousands, except percentages) |
| Total revenue | $ | 241,432 |
| | $ | 444,928 |
| | $ | 766,869 |
| $ | 503,410 |
| | $ | 845,903 |
| | $ | 1,155,457 |
|
| Year-over-year percentage increase | 90 | % | | 84 | % | | 72 | % | (1) |
| | 68.0 | % | | 36.6 | % |
| Billings | $ | 308,553 |
| | $ | 637,795 |
| | $ | 990,467 |
| $ | 637,795 |
| | $ | 990,467 |
| | $ | 1,417,484 |
|
| Gross margin percentage | 58 | % | | 62 | % | | 57 | % | |
| Adjusted gross margin percentage | 59 | % | | 62 | % | | 59 | % | |
| Gross profit | | $ | 332,623 |
| | $ | 518,572 |
| | $ | 769,427 |
|
| Gross margin | | 66.1 | % | | 61.3 | % | | 66.6 | % |
| Adjusted gross profit | | $ | 333,982 |
| | $ | 533,363 |
| | $ | 786,593 |
|
| Adjusted gross margin | | 66.3 | % | | 63.1 | % | | 68.1 | % |
| Total deferred revenue | $ | 103,598 |
| | $ | 296,465 |
| | $ | 526,071 |
| $ | 218,481 |
| | $ | 369,056 |
| | $ | 631,207 |
|
| Net cash provided by (used in) operating activities | $ | (25,694 | ) | | $ | 3,636 |
| | $ | 13,822 |
| |
| Net cash provided by operating activities | | $ | 3,636 |
| | $ | 13,822 |
| | $ | 92,555 |
|
| Free cash flow | $ | (49,002 | ) | | $ | (38,658 | ) | | $ | (36,359 | ) | $ | (38,658 | ) | | $ | (36,359 | ) | | $ | 30,183 |
|
| Non-GAAP operating expenses | $ | 243,179 |
| | $ | 420,461 |
| | 644,964 |
| $ | 418,552 |
| | $ | 645,456 |
| | $ | 883,244 |
|
| Total end-customers | 1,799 |
| | 3,768 |
| | 7,051 |
| |
| Total end customers | | 3,770 |
| | 7,050 |
| | 10,610 |
|
| |
| (1) | Fiscal 2016 growth rate is not shown, as only fiscal 2016 and fiscal 2017 financial data was recast under ASC 606. |
Non-GAAP Financial Measures and Key Performance Measures
We regularly monitor billings, adjusted gross profit, adjusted gross margin, percentage, 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, and identify trends in our sales activity, and establish our budgets. We evaluate these measures because they:
are used by our management and boardthe Board of directorsDirectors to understand and evaluate our performance and trends, as well as to provide a useful measure for period-to-period comparisons of our core business;
are widely used by investors and other parties in understanding and evaluating companies in our industry as a measure of financial performance;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 the extent of achievement ofour actual performance against our goals.
Billings is a performance measure which our management believes provides useful information to investors, becauseas it represents the amountsdollar value under binding purchase orders received by usand billed during a given period that have been billed.period. Free cash flow is a performance measure that our management believes provides useful information to management and investors about the amount of cash (used in)used in or generated by the business after necessary capital expenditures. We use theseAdjusted gross profit, adjusted gross margin and non-GAAP financial and keyoperating expenses are performance measures for financial and operational decision-making and as a means to evaluate period-to-period comparisons. Ourwhich management believes that these non-GAAP financial and key performance measuresprovides 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)
Billings, adjusted gross profit, adjusted gross margin, percentage, free cash flow, and non-GAAP operating expenses have limitations as analytical tools, and youthey should not consider thembe considered in isolation or as substitutes for analysis of our results as reported under GAAP.generally accepted accounting principles ("GAAP") in the United States. Billings, adjusted gross profit, adjusted gross margin, percentage, free cash flow, and non-GAAP operating expenses are not substitutes for total revenue, gross profit, gross margin, percentage, cash provided by (used in) provided by operating activities, or GAAP operating expenses, respectively. 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:
Billings—We calculate billings by adding the change in deferred revenue, (netnet of acquisitions)acquisitions, between the start and end of the period to total revenue recognized in the same period.
Adjusted gross profit and adjusted gross margin percentage—We calculate adjusted gross margin percentage as adjusted gross profit divided by total revenue. We define adjusted gross profit as our gross profit adjusted to exclude stock-based compensation expense and the amortization of acquired intangible assets. Our presentation of adjusted gross margin percentageprofit should not be construed as implying that our future results will not be affected by any recurring expenses or any unusual or non-recurring items that we exclude from our calculation of this non-GAAP financial measure.
Free cash flow—We calculate free cash flow as net cash provided by (used in) provided by operating activities adjusted withless purchases of property and equipment, which measures our ability to generate cash from our business operations after our capital expenditures.
Non-GAAP operating expenses—We define non-GAAP operating expenses as total operating expenses adjusted to exclude stock-based compensation and the related income tax impactexpense and costs associated with business acquisitions (suchcombinations, such as amortization of acquired intangible assets, revaluation of contingent consideration income tax related impact, and other acquisition-related costs).costs. 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.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
The following table presents a reconciliation of billings, adjusted gross profit, adjusted gross margin, percentage, free cash flow, and non-GAAP operating expenses to the most directly comparable GAAP financial measures, for each of the periods indicated:
| | | | Year Ended July 31, | Fiscal Year Ended July 31, |
| | 2015 | | 2016 | | 2017 | 2016 | | 2017 | | 2018 |
| | (Dollars in thousands) | (in thousands, except percentages) |
| Total revenue | $ | 241,432 |
| | $ | 444,928 |
| | $ | 766,869 |
| $ | 503,410 |
| | $ | 845,903 |
| | $ | 1,155,457 |
|
| Change in deferred revenue (net of acquisitions) | 67,121 |
| | 192,867 |
| | 223,598 |
| |
| Change in deferred revenue, net of acquisitions | | 134,385 |
| | 144,564 |
| | 262,027 |
|
| Billings (non-GAAP) | $ | 308,553 |
| | $ | 637,795 |
| | $ | 990,467 |
| $ | 637,795 |
| | $ | 990,467 |
| | $ | 1,417,484 |
|
| | | | | | | | | | | |
| Gross profit | $ | 140,473 |
| | $ | 274,141 |
| | $ | 439,538 |
| $ | 332,623 |
| | $ | 518,572 |
| | $ | 769,427 |
|
| Stock-based compensation | 1,081 |
| | 1,359 |
| | 13,477 |
| 1,359 |
| | 13,477 |
| | 11,525 |
|
| Amortization of intangible assets | — |
| | — |
| | 1,314 |
| — |
| | 1,314 |
| | 5,641 |
|
| Adjusted gross profit (non-GAAP) | $ | 141,554 |
| | $ | 275,500 |
| | $ | 454,329 |
| $ | 333,982 |
| | $ | 533,363 |
| | $ | 786,593 |
|
| | | | | | | | | | | |
| Gross margin percentage | 58 | % | | 62 | % | | 57 | % | |
| Gross margin | | 66.1 | % | | 61.3 | % | | 66.6 | % |
| Stock-based compensation | 1 | % | | — | % | | 2 | % | 0.2 | % | | 1.6 | % | | 1.0 | % |
| Amortization of intangibles | — | % | | — | % | | — | % | — | % | | 0.2 | % | | 0.5 | % |
| Adjusted gross margin percentage (non-GAAP) | 59 | % | | 62 | % | | 59 | % | |
| Adjusted gross margin (non-GAAP) | | 66.3 | % | | 63.1 | % | | 68.1 | % |
| | | | | | | | | | | |
| Net cash provided by (used in) operating activities | $ | (25,694 | ) | | $ | 3,636 |
| | $ | 13,822 |
| |
| Net cash provided by operating activities | | $ | 3,636 |
| | $ | 13,822 |
| | $ | 92,555 |
|
| Purchases of property and equipment | (23,308 | ) | | (42,294 | ) | | (50,181 | ) | (42,294 | ) | | (50,181 | ) | | (62,372 | ) |
| Free cash flow (non-GAAP) | $ | (49,002 | ) | | $ | (38,658 | ) | | $ | (36,359 | ) | $ | (38,658 | ) | | $ | (36,359 | ) | | $ | 30,183 |
|
| | | | | | | | | | | |
| Operating expenses | $ | 259,238 |
| | $ | 439,158 |
| | $ | 866,489 |
| $ | 437,249 |
| | $ | 866,981 |
| | $ | 1,049,835 |
|
| Stock-based compensation | (16,059 | ) | | (18,697 | ) | | (218,014 | ) | (18,697 | ) | | (218,014 | ) | | (166,343 | ) |
| Change in fair value of contingent consideration | — |
| | — |
| | (1,924 | ) | — |
| | (1,924 | ) | | 2,423 |
|
| Amortization of intangible assets | — |
| | — |
| | (915 | ) | — |
| | (915 | ) | | (914 | ) |
| Business acquisition-related costs | — |
| | — |
| | (672 | ) | |
| non-GAAP operating expenses | $ | 243,179 |
| | $ | 420,461 |
| | $ | 644,964 |
| |
| Acquisition-related costs | | — |
| | (672 | ) | | (1,757 | ) |
| Operating expenses (non-GAAP) | | $ | 418,552 |
| | $ | 645,456 |
| | $ | 883,244 |
|
Factors Affecting Our Performance
We believe that our future success will depend on many factors, including those described below. While these areas present significant opportunity, they also present risks that we must manage to achieve successful results. See the section titled “Risk Factors”."Risk Factors" for details. If we are unable to address these challenges, our business and operating results could be adversely affected.
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 and as part of this, we intend to specifically expand our focus on opportunities with major accounts and large deals, which we define as transactions over $500,000 in committed value.$500,000. We have significantly increased our sales and marketing personnel, which grew by approximately 42% from July 31, 20162017 to July 31, 2017.2018. We estimate, based on past experience, that sales team members typically become fully ramped up around the time of 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, 2017,2018, we considered approximately 59% of our global sales team members to be fully productive,ramped, while the remaining approximately 41% of our global sales team members are in the process of ramping up. As we shift the focus of some of our new and existing sales team members to major accounts and large deals, it may take longer for these sales team members to become fully productive, and there may also be an impact to the overall productivity of our sales team. We are focused on actively managing this realignment and expect continuing improvement over the coming quarters. We intend to continue to grow our global sales and marketing team to acquire new end-customersend customers and to increase sales to existing end-customers.end customers.
We also intend to continue to grow our global research and development and global engineering teamteams to enhance our solutions, improve integration with new and existing ecosystem partners and broaden the range of IT infrastructure technologies that we converge into our operating system.platform. We believe that these investments will contribute to our long-term growth, although they may adversely affect our profitability in the near term.
Market Adoption of Our Products
The public cloud has changed IT buyer expectations about the simplicity, agility, scalability, 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 operating system,platform, both as compared to traditional data centerdatacenter architectures as well as the public cloud, particularly as we continue to pursue large enterprises and mission critical workloads. The broad nature of the technology shift that our operating systemplatform represents and the relationships our end-customersend customers have with existing IT vendors 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 and as our sales and marketing efforts expand. Our business and operating results will be significantly affected by the degree to and speed with which organizations adopt our operating system.platform.
Leveraging Channel and OEM Partners
We plan to continue to strengthen and expand our network of channel and OEM partners to increase sales to both new and existing end-customers.end customers. We believe that increasing channel leverage by investing aggressively in sales enablement and co-marketing with our partners will extend and improve our engagement with a broad set of end-customers.end customers. Our business and results of operations will be significantly affected by our success in leveraging and expanding our network of channel and OEM partners.
Continued Purchases and Upgrades within Existing Customer Base
Our end-customersend customers typically deploy our technology for a specific workload initially. After a new end-customer'send customer's initial order, which includes the product and associated maintenance, support and services, we focus on expanding our footprint by serving more workloads. We also generate recurring revenue from our support and maintenance renewals. We view continued purchases and upgrades as critical drivers of our success, as the sales cycles are typically shorter as compared to new end-customerend customer deployments and selling efforts are typically less. As of July 31, 2017,2018, approximately 74%67% of our end-customersend customers who have been with us for 18 months or morelonger have made a repeat purchase, which is defined as any purchase activity, including support and maintenance renewals, subsequent toafter the initial purchase. Additionally, end-customersend customers who have been with us for 18 months or morelonger have total lifetime orders, (which includesincluding the initial order)order, to date in an amount that is more than 4.8x4.1x greater, on average, than their initial order. This number increases to approximately 8.1x,10.1x, on average, for our 559 Global 2000 end-customersend customers who have been with us for 18 months or longer, and to more than 18.8x,18.3x, on average, for our top 25 end-customersend customers as of July 31, 2017. The2018. These multiples exclude the effect of one end-customerend 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.end customers. Our business and operating results will depend on our ability to sell additional products to our current existing and future base of end-customers.end customers.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Changes in Product Mix and Associated Accounting Impact
Shifts in the mix of whether our solutions are sold aswith or without an appliance, or as software-onlysales of our solution on a subscription basis, could result in fluctuations in our revenue and gross margins. Software-only salesmargin. Sales where customers separately procure an appliance typically reflect higher gross margins and lower revenue in a given period, since the sale does not include the revenue or cost of the hardware components in an appliance. WhenSales of subscription software include fixed-term licenses and other offerings with ongoing performance obligations, such as SaaS. Since our revenue is recognized as our performance obligations are delivered, sales in this manner may reflect lower revenue in a given period.
Historically, we sellhave delivered most of our solution assolutions on an appliance, thus our revenue included the revenue forassociated with the appliance and the basic versionincluded non-portable software which lasts for the life of the appliance. However, starting in the first quarter of fiscal 2018, more of our software includedcustomers began buying appliances directly from our OEMs, or in some cases, purchasing separately sold subscription software. We expect to continue see increases in the sales of our solutions without hardware appliances and sales of subscription software, which will be reflected in further corresponding changes to our revenue and gross margin.
Revenue for our solutions, whether or not sold on an appliance by us or as a software subscription, is generally recognized upon delivery, whereas revenue from software-only transactions is only recognized upon deliverytransfer of control to the extent we have established vendor specific objective evidence, or VSOE, of the fair value of the related maintenance and support contracts, otherwise revenue for the entire arrangement is deferred and recognized over the term of our maintenance and support contracts. Historically, most of our solutions have been delivered on an appliance, and, as a result, most of our historical product revenue has been recognized upon delivery. However, we anticipate that to the extent that broad market adoption of our solutions continues to increase, there may be an increase in the delivery of our software licenses on separately procured hardware. customer. For additional information on our revenue recognition, see Note 3 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-Kand VSOE, please see the section titled “Critical"Critical Accounting Estimates”Estimates" later in this “Management’s"Management’s Discussion and Analysis of Financial Condition and Results of Operations”Operations" section.
Revenue from Contracts with Customers
In May 2014, the Financial Accounting Standards Board or FASB,("FASB"), issued ASU 2014-09, Revenue from Contracts with Customers (ASC(Topic 606). The standard is a comprehensive new revenue recognition model that willrequires revenue to be effectiverecognized in a manner which depicts the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for us beginning August 1, 2018,those goods or services. The FASB issued several amendments to the standard, including clarifications on the disclosure of prior period performance obligations and permits us the ability to early adopt on August 1, 2017. remaining performance obligations.
The standardguidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method).
The new standard would have been effective for us beginning in August 1, 2018, however, we but early adoption as of the original effective date of August 1, 2017 was also permitted. We elected to early adopt the standard effective August 1, 2017 using the full retrospective method, which requiresrequired us to restaterecast our historical financial information for fiscal 2016 and 2017 to be consistentconform with the new standard. The most significant impact of the standard relatesrelated to the timing of revenue recognition for certain software licenses sold with post contractpost-contract support, or PCS, for which we dodid not have VSOEvendor specific objective evidence ("VSOE") under currentthe previous revenue recognition guidance. Under the new standard, the requirement to have VSOE for undelivered elements iswas eliminated and we willnow recognize revenue for such software licenses upon transfer of control to our customers.the customer. In addition, the adoption of ASC 606 will also resultresulted in differences in the timing of recognition of contract costs, such as sales commissions, as well as the corresponding impactsimpact to our provision for income taxes.
The adoption of the standard will result in the recognition of additional revenue of $58.5 million and $79.0 million for fiscal 2016 and fiscal 2017, respectively, an increase in gross profit of $58.5 million and $79.0 million in fiscal 2016 and fiscal 2017, respectively, a decrease in sales and marketing expense of $1.9 million in fiscal 2016 and an increase in sales and marketing expense of $0.5 million in fiscal 2017, and a decrease in loss from operations of $60.4 million in fiscal 2016 and $78.5 million in fiscal 2017. In addition, the adoption of the standard will result in a decrease in total net deferred revenue of $78.0 million and $157.0 million as of July 31, 2016 and 2017, respectively, driven by the upfront recognition of software licenses sold with PCS for which we do not have VSOE, and an increase in total deferred commissions of $12.6 million and $12.1 million as of July 31, 2016 and 2017, respectively, which will be recognized in sales and marketing expense in future periods. The adoption of the standard will have no significant impact to the provision for income taxes and will have no impact to cash from or used in operating, investing, or financing on our consolidated statements of cash flows. For additional information on the expected impactsimpact to previously reported results, see Note 23 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Components of Our Results of Operations
Our results of operations for fiscal 2017 include (i)included significant cumulative stock-based compensation expense related to stock awards with performance conditions, referred to as the performance stock awards, due to our IPO and (ii) the impact of the Calm and PernixData acquisitions, which closed during the first quarter of fiscal 2017. No expense associated with the performance stock awards was recorded prior to our IPO, as the qualifying event (IPO) had not been deemed probable (see Note 11 of Part II, Item 8 of this Annual Report on Form 10-K)initial public offering ("IPO"). Beginning in fiscal 2014, we began granting performance stock awards with vesting subject to (i) continuous service with us and (ii) the satisfaction of one or more performance conditions (a liquidity event or both a liquidity event and certain performance targets). As a result of our IPO, we began to recognize stock-based compensation expense related to thethese performance stock awards during the three months ended October 31, 2016, as the performance condition, a liquidity event or IPO, was deemed probable of achievement. The cumulative stock-based compensation expense recognized in the first quarter of fiscal 2017 was approximately $83.0 million and represented the portion of the awards for which the relevant service condition had been satisfied. We continue to amortize the expense over the remaining service period. Amortization during the fiscal years ended July 31, 2017 and 2018 related to these performance stock awards was approximately $120.9 million and $18.7 million, respectively. We expect the expense related to these awards to continue to decrease.
Revenue
Product revenue. We generate our product revenue primarily from the salessale of our solutions,enterprise cloud platform, which can be delivered bothpre-installed on an appliance that is configured to order or delivered separately to be utilized on a variety of certified hardware platforms. Software delivered on configured to order appliances is not portable to other appliances and has a term equal to the life of the associated appliance, while separately purchased software typically has a term of one to five years. For the fiscal year ended July 31, 2018, the weighted average term for such software licenses was approximately 3.5 years. Configured to order appliances, including our Nutanix-branded NX hardware line, can be purchased from one of our OEM partners or directly from Nutanix. Our operating system is typically purchased with one or more years of support and entitlements, which includes the right to software upgrades and enhancements as well as software-only. Ourtechnical support. A substantial portion of sales are made through channel partners and OEM relationships.
Software revenue from software-only sales, which currently constitute a small portion — A majority of our product revenue is subject to industry-specific software revenue recognition guidance and has typically been deferred and recognized overgenerated from the contractual support period associated with the deliveredsale of our enterprise cloud operating system. We also sell renewals of previously purchased software licenses. However, revenue associated with certainRevenue from our software licenses can beproducts is generally recognized upon deliverytransfer of control to the customer, which is typically upon shipment for sales including a hardware appliance, or upon making the software available to our end-customerscustomers when not sold with an appliance.
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 extent we have established VSOE for related support and other services.cost of the hardware procured. Hardware revenue is generally recognized upon transfer of control to the customer.
Support, entitlements and other services revenue. — We generate our support, entitlements and other services revenue primarily from software entitlement and support subscriptions, which include the right to software upgrades and maintenance contracts, and, to a lesser extent, from professional services.enhancements as well as technical support. The majority of our product sales are sold in conjunction with software entitlement and support and maintenance contractssubscriptions, 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 and maintenance contracts ratably over the contractual service period. The service period typically commences upon transfer of control of the corresponding products to the customer. We recognize revenue related to professional services as they are performed.
Cost of Revenue
Cost of product revenue. — Cost of product revenue consists of costs paid to third-party contract manufacturers, which includes hardware costs, personnel costs associated with our operations function (consisting of salaries, benefits, bonuses and stock-based compensation) associated with our operations function, and allocated costs (which consist(consisting of certain facilities, depreciation and amortization, recruiting, and information technology costs allocated based on headcount). We expect our cost of product revenue to increase in absolute dollarsdecrease as a percentage of revenue, as we expect an increasing percentage of our product revenue increases.sales to move to a software-only model.
NUTANIX, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
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,expense, sales commissions. Personnel costs also include stock-based compensation expense.
Sales and marketing.— Sales and marketing expense consists primarily of personnel costs. Sales and marketing expense also includes sales commissions, costs for promotional activities and other marketing costs, travel costs, and costs associated with demonstration units, including depreciation and allocated costs. Commissions are deferred and recognized as we recognize the associated revenue. We expect sales and marketing expense to continue to increase in absolute dollars as we increase the size of our global sales and marketing organizations. Our salesSales and marketing expense may fluctuate as a percentage of total revenue.
Research and development. — Research and development ("R&D") expense consists primarily consists 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. Research and developmentR&D costs are expensed as incurred. We expect research and developmentR&D expense to increase in absolute dollars as we continue to invest in our future products and services, although our research and developmentR&D expense may fluctuate as a percentage of total revenue.
General and administrative. — General and administrative ("G&A") expense consists primarily of personnel costs, which include our executive, finance, human resources, and legal organizations. General and administrativeG&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 general and administrativeG&A expense to increase in absolute dollars, particularly due to additional legal, accounting, insurance, and other costs associated with both our growth, and operating as a public company, although our general and administrativeG&A expense may fluctuate as a percentage of total revenue.
Other Income (Expense)—net, Net
Other income (expense)—, net consists primarily of interest income and expense, which includes the amortization of the debt discount and issuance costs associated with the Notes, foreign currency exchange gains or losses and gains or losses on investments. Upon the completion of our IPO during the three months ended October 31, 2016, we reclassified the convertible preferred stock warrants, which, prior to our IPO, were classified as a liability on our consolidated balance sheet and re-measuredremeasured to fair value at each balance sheet date, with the corresponding changes in fair value recorded as other expense, into warrants to purchase Class B common stock. As a result, the convertible preferred stock liability was re-measuredremeasured to its then fair value, which was based on the closing per share price of our Class A common stock on October 4, 2016, and reclassified to additional paid-in capital. Subsequent to the conversion of our convertible preferred stock warrants in connection with our IPO, we no longer remeasureremeasured them at fair value or incurincurred any charges related to changes in fair value. In addition, during the three months ended October 31, 2016, we fully repaid our outstanding $75.0 million of senior notes due April 15, 2019 or the senior notes,("2019 Notes") and incurred a loss on debt extinguishment. During the fiscal year ended July 31, 2018, we recognized $14.7 million of interest expense related to the amortization of the debt discount and issuance costs associated with the Notes.
Provision for Income Taxes
Provision for income taxes consists primarily of income taxes infor certain foreign jurisdictions in which we conduct business and federal alternative minimum tax and state income taxes in the United States. We have recorded a full valuation allowance related to our federal and state net operating losses and other net deferred tax assets and a partial valuation allowance related to our foreign net deferred tax assets due to the uncertainty of the ultimate realization of the future benefits of those assets.
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:presented. The period-to-period comparison of results is not necessarily indicative of results for future periods. We adopted ASC 606, the new revenue recognition accounting standard, effective August 1, 2017. Prior period information presented has been adjusted to reflect the adoption of this new standard. See Note 3 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for a summary of adjustments.
| | | | Fiscal Year Ended July 31, | Fiscal Year Ended July 31, |
| | 2015 | | 2016 | | 2017 | 2016 | | 2017 | | 2018 |
| | (In thousands) | (in thousands) |
| Consolidated Statements of Operations Data: | | | | | | |
| Revenue: | | | | | | | | | | |
| Product | $ | 200,833 |
| | $ | 350,798 |
| | $ | 583,011 |
| $ | 413,910 |
| | $ | 673,297 |
| | $ | 887,989 |
|
| Support and other services | 40,599 |
| | 94,130 |
| | 183,858 |
| |
| Support, entitlements and other services | | 89,500 |
| | 172,606 |
| | 267,468 |
|
| Total revenue | 241,432 |
|
| 444,928 |
|
| 766,869 |
| 503,410 |
|
| 845,903 |
|
| 1,155,457 |
|
| Cost of revenue: | | | | | | | | | | |
| Product(1) (2) | 80,900 |
| | 133,541 |
| | 249,393 |
| |
| Support and other services(1) | 20,059 |
| | 37,246 |
| | 77,938 |
| |
Product (1)(2) | | 133,541 |
| | 249,393 |
| | 276,127 |
|
Support, entitlements and other services (1) | | 37,246 |
| | 77,938 |
| | 109,903 |
|
| Total cost of revenue | 100,959 |
|
| 170,787 |
|
| 327,331 |
| 170,787 |
|
| 327,331 |
|
| 386,030 |
|
| Gross profit | 140,473 |
| | 274,141 |
| | 439,538 |
| 332,623 |
| | 518,572 |
| | 769,427 |
|
| Operating expenses: | | | | | | | | | | |
| Sales and marketing(1) (2) | 161,829 |
| | 288,493 |
| | 500,529 |
| |
| Research and development(1) | 73,510 |
| | 116,400 |
| | 288,619 |
| |
| General and administrative(1) | 23,899 |
| | 34,265 |
| | 77,341 |
| |
Sales and marketing (1)(2) | | 286,584 |
| | 501,021 |
| | 649,657 |
|
Research and development (1) | | 116,400 |
| | 288,619 |
| | 313,777 |
|
General and administrative (1) | | 34,265 |
| | 77,341 |
| | 86,401 |
|
| Total operating expenses | 259,238 |
|
| 439,158 |
|
| 866,489 |
| 437,249 |
|
| 866,981 |
|
| 1,049,835 |
|
| Loss from operations | (118,765 | ) |
| (165,017 | ) |
| (426,951 | ) | (104,626 | ) |
| (348,409 | ) |
| (280,408 | ) |
| Other expense—net | (5,818 | ) | | (1,290 | ) | | (26,377 | ) | |
| Other expense, net | | (1,290 | ) | | (26,377 | ) | | (9,306 | ) |
| Loss before provision for income taxes | (124,583 | ) |
| (166,307 | ) |
| (453,328 | ) | (105,916 | ) |
| (374,786 | ) |
| (289,714 | ) |
| Provision for income taxes | 1,544 |
| | 2,192 |
| | 4,683 |
| 2,317 |
| | 4,852 |
| | 7,447 |
|
| Net loss | $ | (126,127 | ) | | $ | (168,499 | ) | | $ | (458,011 | ) | $ | (108,233 | ) | | $ | (379,638 | ) | | $ | (297,161 | ) |
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
| |
| (1) | Includes stock-based compensation expense as follows: |
| | | | Fiscal Year Ended July 31, | Fiscal Year Ended July 31, |
| | 2015 | | 2016 | | 2017 | 2016 | | 2017 | | 2018 |
| | (In thousands) | (in thousands) |
| Cost of revenue: | | | | | | | | | | |
| Product | $ | 363 |
| | $ | 391 |
| | $ | 3,066 |
| $ | 391 |
| | $ | 3,066 |
| | $ | 2,580 |
|
| Support and other services | 718 |
| | 968 |
| | 10,411 |
| |
| Support, entitlements and other services | | 968 |
| | 10,411 |
| | 8,945 |
|
| Total cost of revenue | 1,081 |
| | 1,359 |
| | 13,477 |
| 1,359 |
| | 13,477 |
| | 11,525 |
|
| Sales and marketing | 6,474 |
| | 8,006 |
| | 78,117 |
| 8,006 |
| | 78,117 |
| | 65,060 |
|
| Research and development | 5,411 |
| | 6,259 |
| | 109,044 |
| 6,259 |
| | 109,044 |
| | 74,389 |
|
| General and administrative | 4,174 |
| | 4,432 |
| | 30,853 |
| 4,432 |
| | 30,853 |
| | 26,894 |
|
| Total stock-based compensation expense | $ | 17,140 |
| | $ | 20,056 |
| | $ | 231,491 |
| $ | 20,056 |
| | $ | 231,491 |
| | $ | 177,868 |
|
(2) | |
| (2) | Includes amortization of intangible assets as follows: |
|
| | | | | | | | | | | |
| | Fiscal Year Ended July 31, |
| | 2016 |
| 2017 |
| 2018 |
| | (in thousands) |
| Product cost of revenue | $ | — |
| | $ | 1,314 |
| | $ | 5,641 |
|
| Sales and marketing | — |
| | 915 |
| | 914 |
|
| Total amortization of intangible assets | $ | — |
|
| $ | 2,229 |
|
| $ | 6,555 |
|
|
| | | | | | | | | | | |
| | Fiscal Year Ended July 31, |
| | 2015 |
| 2016 |
| 2017 |
| | (In thousands) |
| Product cost of revenue | $ | — |
|
| $ | — |
|
| $ | 1,314 |
|
| Sales and marketing | — |
|
| — |
|
| 915 |
|
| Total amortization of intangible assets | $ | — |
|
| $ | — |
|
| $ | 2,229 |
|
|
| | | | | | | | |
| | Fiscal Year Ended July 31, |
| | 2016 | | 2017 | | 2018 |
| | (as a percentage of total revenue) |
| Revenue: | | | | | |
| Product | 82.2 | % | | 79.6 | % | | 76.9 | % |
| Support, entitlements and other services | 17.8 | % | | 20.4 | % | | 23.1 | % |
| Total revenue | 100.0 | % | | 100.0 | % |
| 100.0 | % |
| Cost of revenue: | | | | | |
| Product | 26.5 | % | | 29.5 | % | | 23.9 | % |
| Support, entitlements and other services | 7.4 | % | | 9.2 | % | | 9.5 | % |
| Total cost of revenue | 33.9 | % |
| 38.7 | % |
| 33.4 | % |
| Gross profit | 66.1 | % | | 61.3 | % | | 66.6 | % |
| Operating expenses: | | | | | |
| Sales and marketing | 56.9 | % | | 59.2 | % | | 56.2 | % |
| Research and development | 23.1 | % | | 34.1 | % | | 27.2 | % |
| General and administrative | 6.8 | % | | 9.2 | % | | 7.5 | % |
| Total operating expenses | 86.8 | % |
| 102.5 | % |
| 90.9 | % |
| Loss from operations | (20.7 | )% | | (41.2 | )% | | (24.3 | )% |
| Other expense, net | (0.3 | )% | | (3.1 | )% | | (0.8 | )% |
| Loss before provision for income taxes | (21.0 | )% |
| (44.3 | )% |
| (25.1 | )% |
| Provision for income taxes | 0.5 | % | | 0.6 | % | | 0.6 | % |
| Net loss | (21.5 | )% | | (44.9 | )% | | (25.7 | )% |
|
| | | | | | | | |
| | Fiscal Year Ended July 31, |
| | 2015 | | 2016 | | 2017 |
| | | | | | |
| | (As a percentage of total revenue) |
| Consolidated Statements of Operations Data: | | | | | |
| Revenue: | | | | | |
| Product | 83 | % | | 79 | % | | 76 | % |
| Support and other services | 17 |
| | 21 |
| | 24 |
|
| Total revenue | 100 |
| | 100 |
|
| 100 |
|
| Cost of revenue: | | | | | |
| Product | 34 |
| | 30 |
| | 33 |
|
| Support and other services | 8 |
| | 8 |
| | 10 |
|
| Total cost of revenue | 42 |
|
| 38 |
|
| 43 |
|
| Gross profit | 58 |
| | 62 |
| | 57 |
|
| Operating expenses: | | | | | |
| Sales and marketing | 67 |
| | 65 |
| | 65 |
|
| Research and development | 30 |
| | 26 |
| | 38 |
|
| General and administrative | 10 |
| | 8 |
| | 10 |
|
| Total operating expenses | 107 |
|
| 99 |
|
| 113 |
|
| Loss from operations | (49 | ) | | (37 | ) | | (56 | ) |
| Other expense—net | (2 | ) | | — |
| | (3 | ) |
| Loss before provision for income taxes | (51 | ) |
| (37 | ) |
| (59 | ) |
| Provision for income taxes | 1 |
| | 1 |
| | 1 |
|
| Net loss | (52 | )% | | (38 | )% | | (60 | )% |
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Revenue
| | | | Fiscal Year Ended July 31, | Fiscal Year Ended July 31, | | Change | | Fiscal Year Ended July 31, | | Change |
| | 2015 | | 2016 | | $ Change | | % Change | | 2016 | | 2017 | | $ Change | | % Change | 2016 | | 2017 | | $ | | % | | 2017 | | 2018 | | $ | | % |
| | (In thousands, except percentages) | (in thousands, except percentages) |
| Product | $ | 200,833 |
| | $ | 350,798 |
| | $ | 149,965 |
| | 75 | % | | $ | 350,798 |
| | $ | 583,011 |
| | $ | 232,213 |
| | 66 | % | $ | 413,910 |
| | $ | 673,297 |
| | $ | 259,387 |
| | 62.7 | % | | $ | 673,297 |
| | $ | 887,989 |
| | $ | 214,692 |
| | 31.9 | % |
| Support and other services | 40,599 |
| | 94,130 |
| | 53,531 |
| | 132 | % | | 94,130 |
| | 183,858 |
| | 89,728 |
| | 95 | % | |
| Support, entitlements and other services | | 89,500 |
| | 172,606 |
| | 83,106 |
| | 92.9 | % | | 172,606 |
| | 267,468 |
| | 94,862 |
| | 55.0 | % |
| Total revenue | $ | 241,432 |
|
| $ | 444,928 |
|
| $ | 203,496 |
| | 84 | % | | $ | 444,928 |
|
| $ | 766,869 |
|
| $ | 321,941 |
| | 72 | % | $ | 503,410 |
|
| $ | 845,903 |
|
| $ | 342,493 |
| | 68.0 | % | | $ | 845,903 |
|
| $ | 1,155,457 |
|
| $ | 309,554 |
| | 36.6 | % |
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 |
| | 2015 | | 2016 | | $ Change | | % Change | | 2016 | | 2017 | | $ Change | | % Change | 2016 | | 2017 | | $ | | % | | 2017 | | 2018 | | $ | | % |
| | (In thousands, except percentages) | (in thousands, except percentages) |
| U.S. | $ | 161,439 |
| | $ | 280,800 |
| | $ | 119,361 |
| | 74 | % | | $ | 280,800 |
| | $ | 462,770 |
| | $ | 181,970 |
| | 65 | % | $ | 319,296 |
| | $ | 488,079 |
| | $ | 168,783 |
| | 52.9 | % | | $ | 488,079 |
| | $ | 648,805 |
| | $ | 160,726 |
| | 32.9 | % |
| Europe, the Middle East and Africa | 43,526 |
| | 81,320 |
| | 37,794 |
| | 87 | % | | 81,320 |
| | 139,170 |
| | 57,850 |
| | 71 | % | 65,599 |
| | 138,815 |
| | 73,216 |
| | 111.6 | % | | 138,815 |
| | 224,392 |
| | 85,577 |
| | 61.6 | % |
| Asia-Pacific | 28,386 |
| | 63,610 |
| | 35,224 |
| | 124 | % | | 63,610 |
| | 131,921 |
| | 68,311 |
| | 107 | % | |
| Asia Pacific | | 96,723 |
| | 186,864 |
| | 90,141 |
| | 93.2 | % | | 186,864 |
| | 240,247 |
| | 53,383 |
| | 28.6 | % |
| Other Americas | 8,081 |
| | 19,198 |
| | 11,117 |
| | 138 | % | | 19,198 |
| | 33,008 |
| | 13,810 |
| | 72 | % | 21,792 |
| | 32,145 |
| | 10,353 |
| | 47.5 | % | | 32,145 |
| | 42,013 |
| | 9,868 |
| | 30.7 | % |
| Total revenue | $ | 241,432 |
| | $ | 444,928 |
| | $ | 203,496 |
| | 84 | % | | $ | 444,928 |
| | $ | 766,869 |
| | $ | 321,941 |
| | 72 | % | $ | 503,410 |
| | $ | 845,903 |
| | $ | 342,493 |
| | 68.0 | % | | $ | 845,903 |
| | $ | 1,155,457 |
| | $ | 309,554 |
| | 36.6 | % |
Product revenue increased year-over-year for both fiscal 20162017 and fiscal 2017.2018. The increase in product revenue reflects increased domestic and international demand for our solutionsolutions as we continue our penetrationto penetrate and expansionexpand in global markets through increased sales and marketing activities. Our total end-customerend customer count increased from 1,799 as of July 31, 2015 to 3,768over 3,700 as of July 31, 2016 and to 7,051over 7,000 as of July 31, 2017.2017 and to over 10,600 as of July 31, 2018. 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. We estimate that if we had sold the hardware in these transactions, our product revenue for the fiscal year ended July 31, 2018 would have been approximately $168.9 million higher. 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 20162017 and fiscal 20172018 in conjunction with the growth of our establishedend customer base of end-customers withand the related support and software maintenance contracts.
Cost of Revenue and Gross Margin
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended July 31, |
| | 2015 | | 2016 | | $ Change | | % Change | | 2016 | | 2017 | | $ Change | | % Change |
| | (In thousands, except percentages) |
| Cost of product revenue | $ | 80,900 |
| | $ | 133,541 |
| | $ | 52,641 |
| | 65 | % | | $ | 133,541 |
| | $ | 249,393 |
| | $ | 115,852 |
| | 87 | % |
| Product gross margin | 60 | % | | 62 | % | | | |
|
| | 62 | % | | 57 | % | | | | |
| Cost of support and other revenue | $ | 20,059 |
| | $ | 37,246 |
| | $ | 17,187 |
| | 86 | % | | $ | 37,246 |
| | $ | 77,938 |
| | $ | 40,692 |
| | 109 | % |
| Support and other services gross margin | 51 | % | | 60 | % | | | | | | 60 | % | | 58 | % | | | | |
| Total gross margin percentage | 58 | % | | 62 | % | | | | | | 62 | % | | 57 | % | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended July 31, | | Change | | Fiscal Year Ended July 31, | | Change |
| | 2016 | | 2017 | | $ | | % | | 2017 | | 2018 | | $ | | % |
| | (in thousands, except percentages) |
| Cost of product revenue | $ | 133,541 |
| | $ | 249,393 |
| | $ | 115,852 |
| | 86.8 | % | | $ | 249,393 |
| | $ | 276,127 |
| | $ | 26,734 |
| | 10.7 | % |
| Product gross margin | 67.7 | % | | 63.0 | % | | | | (4.7 | )% | | 63.0 | % | | 68.9 | % | | | | 5.9 | % |
| Cost of support, entitlements and other revenue | $ | 37,246 |
| | $ | 77,938 |
| | $ | 40,692 |
| | 109.3 | % | | $ | 77,938 |
| | $ | 109,903 |
| | $ | 31,965 |
| | 41.0 | % |
| Support, entitlements and other services gross margin | 58.4 | % | | 54.8 | % | | | | (3.6 | )% | | 54.8 | % | | 58.9 | % | | | | 4.1 | % |
| Total gross margin | 66.1 | % | | 61.3 | % | | | | (4.8 | )% | | 61.3 | % | | 66.6 | % | | | | 5.3 | % |
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Cost of product revenue
The increase in costCost of product revenue inincreased year-over-year for both fiscal 2016 compared to2017 and fiscal 2015 was2018 due primarily due to the corresponding year-over-year increaseincreases in product sales. The increase in cost of product revenue inrevenue. In addition, for both fiscal 2017 and fiscal 2018, as compared to fiscal 2016 was mainly due to the corresponding year-over-year increase in product sales, an increase in stock-based compensation expense of $2.7 million as a result of our IPO, and the $1.3 million amortization of intangible assets related to our business acquisitions in fiscal 2017. Additionally, starting in the second quarter of fiscal 2017,respective prior year periods, the cost of certain of our hardware components, specifically DRAM and NAND, increased due to supply constraints. The total cost of our DRAM and NAND components represented approximately 20%, 22% and 30% of cost of product revenue for the fiscal years ended July 31, 2016, 2017 and 2018, respectively. DRAM and NAND component prices increased by approximately 102% and 51% for fiscal 2017 and fiscal 2018, respectively, as compared to the prior year periods.
Product gross margin increased from 60% in fiscal 2015 to 62% in fiscal 2016 primarily due to cost savings achieved from our procurement process, and changes in product mix. Product gross margin decreased by 4.7 percentage points, from 62%67.7% in fiscal 2016 to 57%63.0% in fiscal 2017, due primarilydue to an increase in stock-based compensation expense and an increase in amortization of intangible assets. This was partially offset by cost savings achieved in our procurement process and changes in product mix. We expectProduct gross margin increased by 5.9 percentage points, from 63.0% in fiscal 2017 to see continued pressure on the costs of DRAM and NAND as a result of continued supply constraints68.9% in fiscal 2018, anddue primarily to a higher mix of software revenue, as we expect these costs to continue to increase so long as the DRAM and NAND markets remain supply constrained.focus on more software-only transactions.
Cost of support, entitlements and other services revenue
The increase in costCost of support, and other services revenue was primarily due to higher personnel costs of our global customer support organization, as our customer support and services headcount increased in order to support our growing end-customer base.
Cost of supportentitlements and other services revenue increased year-over-year for both fiscal 20162017 and 2017fiscal 2018 due primarily due to higher personnelpersonnel-related costs fromrelating to our global customer support organization, resulting fromorganization. The increases in personnel-related costs were due primarily to increases in our customer support, entitlements and other services headcount of 113% from July 31, 2015 to July 31, 2016 and 62% from July 31, 2016 to July 31, 2017. The increase in cost2017 and 56% from July 31, 2017 to July 31, 2018. Cost of support, entitlements and other services revenue in fiscal 2017 was also driven up by a $9.4 million year-over-year increase inincreased stock-based compensation expense as a resultrelated to pre-IPO grants that we started expensing in the first quarter of our IPO.fiscal 2017.
Support, entitlements and other services gross margin decreased by 3.6 percentage points, from 58.4% in fiscal 2016 improved compared to 54.8% in fiscal 20152017, due primarily to higher stock-based compensation expense, as we continued to gain leverage from our support organization. discussed above. Support, entitlements and other services gross margin increased by 4.1 percentage points, from 54.8% in fiscal 2017 decreased compared to 58.9% in fiscal 20162018, due primarily due to higher stock-based compensation expense mentioned above.efficiencies gained in our support organization and personnel-related costs growing at a slower rate than support, entitlements and other services revenue.
Operating Expenses
Sales and marketing
| | | | Fiscal Year Ended July 31, | Fiscal Year Ended July 31, | | Change | | Fiscal Year Ended July 31, | | Change |
| | 2015 | | 2016 | | $ Change | | % Change | | 2016 | | 2017 | | $ Change | | % Change | 2016 | | 2017 | | $ | | % | | 2017 | | 2018 | | $ | | % |
| | (In thousands, except percentages) | (in thousands, except percentages) |
| Sales and marketing | $ | 161,829 |
| | $ | 288,493 |
| | $ | 126,664 |
| | 78 | % | | $ | 288,493 |
| | $ | 500,529 |
| | $ | 212,036 |
| | 73 | % | $ | 286,584 |
| | $ | 501,021 |
| | $ | 214,437 |
| | 74.8 | % | | $ | 501,021 |
| | $ | 649,657 |
| | $ | 148,636 |
| | 29.7 | % |
| Percent of total revenue | 67 | % | | 65 | % | | | | | | 65 | % | | 65 | % | | | | | 56.9 | % | | 59.2 | % | | | | | | 59.2 | % | | 56.2 | % | | | | |
Sales and marketing expense increased year-over-year both for fiscal 20162017 and 2017fiscal 2018 due primarily due to higher personnelpersonnel-related costs and sales commissions, as our sales and marketing headcount increased by 42% year-over-year by 70% in fiscal 2016 and 42% in fiscal 2017. The year-over-year increase inboth fiscal 2017 in salesand 2018. Sales and marketing personnelpersonnel-related costs includes a $70.1 million increase infor fiscal 2017 were also driven up by increased stock-based compensation expense as a resultrelated to pre-IPO grants that we started expensing in the first quarter of our IPO. fiscal 2017. Additionally, as part of our efforts to penetrate and expand in global markets, we have continually increasedcontinue to increase our marketing activities related to brand awareness, promotions, trade shows, and partner programs.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Research and development
| | | | Fiscal Year Ended July 31, | Fiscal Year Ended July 31, | | Change | | Fiscal Year Ended July 31, | | Change |
| | 2015 | | 2016 | | $ Change | | % Change | | 2016 | | 2017 | | $ Change | | % Change | 2016 | | 2017 | | $ | | % | | 2017 | | 2018 | | $ | | % |
| | (In thousands, except percentages) | (in thousands, except percentages) |
| Research and development | $ | 73,510 |
| | $ | 116,400 |
| | $ | 42,890 |
| | 58 | % | | $ | 116,400 |
| | $ | 288,619 |
| | $ | 172,219 |
| | 148 | % | $ | 116,400 |
| | $ | 288,619 |
| | $ | 172,219 |
| | 148.0 | % | | $ | 288,619 |
| | $ | 313,777 |
| | $ | 25,158 |
| | 8.7 | % |
| Percent of total revenue | 30 | % | | 26 | % | | | | | | 26 | % | | 38 | % | | | | | 23.1 | % | | 34.1 | % | | | | | | 34.1 | % | | 27.2 | % | | | | |
Research and development expense increased year-over-year both for fiscal 20162017 and 2017fiscal 2018 due primarily due to higher personnelpersonnel-related costs, as our research and developmentR&D headcount increased year-over-year by 59%40% in fiscal 20162017 and 40% (inclusive of the42% in fiscal 2018, including additional headcount from the PernixData and Calm acquisitions)acquisitions, in fiscal 2017, as we have continuedan effort to continue the expansion of our product development activities. The year-over-year increase inR&D personnel-related costs for fiscal 2017 in research and development personnel costs includes a $102.8 million increase inwere also driven up by increased stock-based compensation expense as a resultrelated to pre-IPO grants that we started expensing in the first quarter of our IPO.fiscal 2017.
General and administrative
| | | | Fiscal Year Ended July 31, | Fiscal Year Ended July 31, | | Change | | Fiscal Year Ended July 31, | | Change |
| | 2015 | | 2016 | | $ Change | | % Change | | 2016 | | 2017 | | $ Change | | % Change | 2016 | | 2017 | | $ | | % | | 2017 | | 2018 | | $ | | % |
| | (In thousands, except percentages) | (in thousands, except percentages) |
| General and administrative | $ | 23,899 |
| | $ | 34,265 |
| | $ | 10,366 |
| | 43 | % | | $ | 34,265 |
| | $ | 77,341 |
| | $ | 43,076 |
| | 126 | % | $ | 34,265 |
| | $ | 77,341 |
| | $ | 43,076 |
| | 125.7 | % | | $ | 77,341 |
| | $ | 86,401 |
| | $ | 9,060 |
| | 11.7 | % |
| Percent of total revenue | 10 | % | | 8 | % | | | | | | 8 | % | | 10 | % | | | | | 6.8 | % | | 9.2 | % | | | | | | 9.2 | % | | 7.5 | % | | | | |
General and administrative expense increased year-over-year both for fiscal 20162017 and 2017fiscal 2018 due primarily due to higher personnelpersonnel-related costs, as our general and administrativeG&A headcount increased year-over-year by 51% in fiscal 2016 and 24% in fiscal 2017 and 29% in fiscal 2018 in order to support our growing operations and international footprint, as well asfootprint. G&A personnel-related costs associated with being a public company. The year-over-year increase infor fiscal 2017 in general and administrative personnel costs includes a $26.4 million increase inwere also driven up by increased stock-based compensation expense as a resultrelated to pre-IPO grants that we started expensing in the first quarter of our IPO.fiscal 2017.
Other expense—expense, net
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended July 31 |
| | 2015 | | 2016 | | $ Change | | % Change | | 2016 | | 2017 | | $ Change | | % Change |
| | (In thousands, except percentages) |
| Other expense-net | $ | (5,818 | ) | | $ | (1,290 | ) | | $ | 4,528 |
| | (78 | )% | | $ | (1,290 | ) | | $ | (26,377 | ) | | $ | (25,087 | ) | | 1,945 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended July 31, | | Change | | Fiscal Year Ended July 31, | | Change |
| | 2016 | | 2017 | | $ | | % | | 2017 | | 2018 | | $ | | % |
| | (in thousands, except percentages) |
| Other expense, net | $ | (1,290 | ) | | $ | (26,377 | ) | | $ | 25,087 |
| | 1,944.7 | % | | $ | (26,377 | ) | | $ | (9,306 | ) | | $ | (17,071 | ) | | (64.7 | )% |
The year-over-year decrease in other expense—net in fiscal 2016 was primarily due to $8.2 million of higher charges related to the change in fair value of our convertible preferred stock warrant liability in fiscal 2015 compared to fiscal 2016, partially offset by a $2.3 million increase in interestOther expense, from the issuance of the senior notes in fiscal 2016 and a $1.5 million increase in net foreign currency losses in fiscal 2016 compared to fiscal 2015.
The year-over-year increase in other expense-net in fiscal 2017 was primarily duerelated to a $23.1 million of higher charges resulting from changeschange in the fair value of our convertible preferred stock warrant liability and a $3.3 million loss on debt extinguishment resulting from the early extinguishment of our senior notes.the 2019 Notes.
Other expense, net in fiscal 2018 was primarily related to $14.7 million of interest expense associated with the amortization of the debt discount and issuance costs for the Notes and $3.6 million of foreign currency losses, partially offset by $9.1 million of interest income from short-term investments.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Provision for income taxes
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended July 31, |
| | 2015 | | 2016 | | $ Change | | % Change | | 2016 | | 2017 | | $ Change | | % Change |
| | (In thousands, except percentages) |
| Provision for income taxes | $ | 1,544 |
| | $ | 2,192 |
| | $ | 648 |
| | 42 | % | | $ | 2,192 |
| | $ | 4,683 |
| | $ | 2,491 |
| | 114 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended July 31, | | Change | | Fiscal Year Ended July 31, | | Change |
| | 2016 | | 2017 | | $ | | % | | 2017 | | 2018 | | $ | | % |
| | (in thousands, except percentages) |
| Provision for income taxes | $ | 2,317 |
| | $ | 4,852 |
| | $ | 2,535 |
| | 109.4 | % | | $ | 4,852 |
| | $ | 7,447 |
| | $ | 2,595 |
| | 53.5 | % |
The year-over-year increase in the provision for income taxes in fiscal 2017 was due primarily due to increases in foreign taxes as a result of higher taxable earnings in foreign jurisdictions, as we continued our global expansion, partially offset by a $1.5 million partial release of the U.S. valuation allowance from the PernixData acquisition. The net deferred tax liability from the PernixData acquisition provided an additional source of taxable income to support the realizability of the pre-existing deferred tax assets and, as a result, we released a portion of the U.S. deferred tax asset valuation allowance. We continue to maintain full valuation allowance on our U.S. federal and state deferred tax assets.
The year-over-year increase in the provision for income taxes in fiscal 20162018 was due primarily due to higherthe 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 expand globally.acquisitions completed during fiscal 2018. We continue to maintain a full valuation allowance on our U.S. federal and state deferred tax assets, as revalued using the reduced federal tax rate.
Impact of U.S. Federal Income Tax Reform
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, including a federal corporate rate reduction from 35% to 21%, limitations on the deductibility of interest expense and executive compensation, the creation of new minimum taxes, such as the base erosion anti-abuse tax ("BEAT") and Global Intangible Low Taxed Income ("GILTI") tax, and a new minimum tax on certain foreign earnings.
Our initial analysis of the impact of the TCJA resulted in a significant reduction to our net U.S. deferred tax assets and valuation allowance and an immaterial impact to income tax expense due to the valuation allowance on our net U.S. deferred tax assets. Certain provisions of the TCJA are not effective for us until fiscal 2019. We continue to assess the impact of these provisions, but we do not currently anticipate that the net impact will be material to our fiscal 2019 effective income tax rate.
The income tax provisions for the fiscal years ended July 31, 2016, 2017 and 2018 are based on the assumption that foreign undistributed earnings are indefinitely reinvested. We will continue to evaluate whether or not to continue to assert indefinite reinvestment on part or all of our foreign undistributed earnings. In the event we determine not to continue to assert the permanent reinvestment of part or all of our foreign undistributed earnings, such a determination could result in the accrual and payment of additional foreign, state and local taxes.
NUTANIX, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Liquidity and Capital Resources
As of July 31, 2017,2018, we had $138.4$306.0 million of cash and cash equivalents and $210.7$628.3 million of short-term investments.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. We do not anticipate that we will need funds generated from foreign operations to fund our domestic operations.
Prior to our IPO,In January 2018, we satisfied our liquidity needs primarily through the saleissued Convertible Senior notes with a 0% interest rate for an aggregate principal amount of convertible preferred stock, senior notes, borrowings from our credit facilities and proceeds from the exercise of stock options. In October 2016, we completed our IPO of Class A common stock and received net proceeds of $254.5 million after deducting underwriting discounts and commissions of $19.2 million, but before deducting offering costs of $5.3$575.0 million. Additionally, in September 2016, we fully repaid the outstanding balance of our senior notes. As of July 31, 2017, we did not have any outstanding borrowings.
As discussed above, we have previously granted performance stock awards with vesting subject to satisfaction of one or more performance conditions, including a liquidity event condition tied to our IPO. Certain of those performance stock awards began to vest during the three months ending April 30, 2017, and, subjectThere are no required principal payments prior to the termsmaturity of the underlying awards, will continueNotes. For additional information, see Note 6 of Notes to vest periodically thereafter. In February 2017, we changed the method by which withholding taxes resulting from the vestingConsolidated Financial Statements included in Part II, Item 8 of such performance stock awards held by our executive officers would be covered to be consistent with that of the rest of our employee population. As a result, in addition to our general employee population being required to sell a portion of the shares that they receive upon vesting of their performance stock awards in order to cover any required withholding taxes, or sell-to-cover, our executive officers will now also be required to fund any withholding taxes resulting from the vesting of their performance stock awards through a sell-to-cover, as opposed to our previous approach of retaining a number of shares with a value equal to the amount of the tax and remitting cash to the appropriate taxing authorities, or net share settlement. The sell-to-cover approach allows us to avoid the large cash outflows that would have otherwise been required to satisfy withholding tax obligations resulting from the vesting of performance stock awards, including those held by our executive officers, under the net share settlement approach. In addition, as compared to the net share settlement approach, sell-to-cover will result in more shares being issued into the market as employees’ performance stock awards vest, thereby increasing the dilutive impact of our share-based compensation programsthis Annual Report on shareholders.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. 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, and the continuing market acceptance of our products. 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.
Cash Flows
The following table summarizes our cash flows for the periods presented:
| | | | Fiscal Year Ended July 31, | Fiscal Year Ended July 31, |
| | 2015 | | 2016 | | 2017 | 2016 | | 2017 | | 2018 |
| | (In thousands) | (in thousands) |
| Net cash (used in) provided by operating activities | $ | (25,694 | ) | | $ | 3,636 |
| | $ | 13,822 |
| |
| Net cash provided by operating activities | | $ | 3,636 |
| | $ | 13,822 |
| | $ | 92,555 |
|
| Net cash used in investing activities | (106,667 | ) | | (46,504 | ) | | (176,094 | ) | (46,504 | ) | | (176,094 | ) | | (503,555 | ) |
| Net cash provided by financing activities | 142,755 |
| | 74,198 |
| | 201,422 |
| 74,198 |
| | 201,422 |
| | 578,616 |
|
| Net increase in cash and cash equivalents | $ | 10,394 |
|
| $ | 31,330 |
|
| $ | 39,150 |
| $ | 31,330 |
|
| $ | 39,150 |
|
| $ | 167,616 |
|
Cash Flows from Operating Activities
Net cash generated from operating activities was $3.6 million, $13.8 million and $13.8$92.6 million for fiscal 2016, 2017 and fiscal 2017, respectively.2018, representing increases of $29.3 million, $10.2 million and $78.7 million, respectively, as compared to the prior year periods. The generation of cash for bothduring each fiscal yearsyear was due primarily due to higher billings and collections, partially offset by higher operating expenses as we continuedcontinue to invest in the longer term growth of our business. The cash flow generated from fiscal 2017 included $14.4 million of withholdings related to our employee stock purchase plan.
Net cash used in operating activities for fiscal 2015 was $25.7 million compared to $3.6 million of net cash provided by operating activities for fiscal 2016. The generation in cash was primarily due to higher billings and collections, partially offset by higher operating expenses as we continued to invest in the longer termlong-term growth of our business.
Cash Flows from Investing Activities
Net cash used in investing activities of $46.5 million for fiscal 2016 primarily consisted of $106.3 million of short-term investment purchases and $42.3 million of purchases of property and equipment, as we continue to invest in the long-term growth of our business, partially offset by $102.1 million of maturities of short-term investments.
Net cash used in investing activities of $176.1 million for fiscal 2017 was due toprimarily consisted of $242.5 million of short-term investment purchases, of investments using a significant portion of the proceeds from our IPO, and $50.2 million of purchases of property and equipment, as we continue to invest in the longer term growth of our business, 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 $46.5$503.6 million for fiscal 2016 was due to $106.32018 primarily consisted of $716.4 million of short-term investment purchases, using a significant portion of investments and $42.3the proceeds from the Notes, $62.4 million of purchases of property and equipment as we continue to invest in the longer term growthand $22.2 million of ourpayments for business combinations, net of cash acquired, partially offset by $102.1$297.5 million of maturities of short-term investments.
Net cash used in investing activities
NUTANIX, INC.
Management's Discussion and Analysis of $106.7 million for fiscal 2015 was due to $116.1 million
Financial Condition and Results of purchases of investments and $23.3 million of purchases of property and equipment, partially offset by $32.8 million of maturities of investments.Operations (Continued)
Cash Flows from Financing Activities
Net cash provided by financing activities of $201.4 million for the year ended July 31, 2017 was primarily due to net proceeds of $254.5 million, after deducting underwriting discounts and commission from our IPO and $32.3 million net proceeds from sales of shares through employee equity incentive plans, partially offset by $76.6 million of repayment of our senior notes including debt extinguishment costs, $7.1 million payment of debt in conjunction with the PernixData acquisition and $1.7 million of payments of IPO costs.
Net cash provided by financing activities of $74.2 million for fiscal 2016 primarily consisted of $73.3 million of net proceeds from the senior notes2019 Notes and $3.1 million of net proceeds from sales of shares through employee equity incentive plans,, partially offset by $3.2 million in payments offor IPO costs.
Net cash provided by financing activities of $142.8$201.4 million for fiscal 20152017 primarily consisted of $138.3net IPO proceeds of $254.5 million, after deducting underwriting discounts and commissions, and $32.3 million of net proceeds from the sale of our Series E convertible preferred stock and $4.8 million of net proceeds from sales of shares through employee equity incentive plans,.
Debt Obligations
In April 2016, we issued an aggregate principal amount of $75.0 partially offset by the $76.6 million of senior notes due on April 15, 2019 to Goldman Sachs Specialty Lending Group, L.P. In September 2016, we repaid the entire outstanding principal amountrepayment of the senior notes2019 Notes, including debt extinguishment costs, a $7.1 million debt payment in conjunction with the PernixData acquisition and incurred $3.3$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 loss onnet proceeds from the Notes, after deducting the initial purchasers' discount and debt extinguishment.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 the Minjar acquisition.
Contractual Obligations
The following table summarizes our contractual obligations as of July 31, 2017:2018:
| | | | Payments Due by Period | Payments Due by Period |
| | Total | | Less than 1 Year | | 1 Year to 3 Years | | 3 to 5 Years | | More than 5 Years | Total | | Less than 1 Year | | 1 Year to 3 Years | | 3 to 5 Years | | More than 5 Years |
| | (In thousands) | | | (in thousands) |
| Contractual Obligations: | | | | | | | | | | |
Principal amount payable on convertible senior notes (1) | | $ | 575,000 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 575,000 |
|
| Operating lease obligations | $ | 58,377 |
| | $ | 16,304 |
| | $ | 27,649 |
| | $ | 12,732 |
| | $ | 1,692 |
| 122,328 |
| | 26,158 |
| | 45,598 |
| | 37,854 |
| | 12,718 |
|
Other purchase commitments(1)(2) | 26,580 |
| | 26,580 |
| | | | | | — |
| 36,716 |
| | 36,716 |
| | — |
| | — |
| | — |
|
Purchase commitments with contract manufacturers(2)(3) | 72,622 |
| | 72,622 |
| | — |
| | — |
| | — |
| 23,059 |
| | 23,059 |
| | — |
| | — |
| | — |
|
| Contingent consideration(3) | 5,690 |
| | — |
| | 5,690 |
| | — |
| | — |
| |
| Total | $ | 163,269 |
|
| $ | 115,506 |
|
| $ | 33,339 |
|
| $ | 12,732 |
| | $ | 1,692 |
| $ | 757,103 |
|
| $ | 85,933 |
|
| $ | 45,598 |
|
| $ | 37,854 |
| | $ | 587,718 |
|
| |
| (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. |
| |
| (2) | Purchase obligations pertaining to our normal operations. |
| |
(2)(3) | Commitments within the form of guarantees to our contract manufacturers which consist of obligations for on-hand inventories and non-cancelable purchase orders forrelated to certain components. |
| |
(3) | Represents $7.5 million contingent payments, net of $1.8 million working capital adjustment, assumed in the PernixData acquisition. The amount is remeasured at fair value every reporting period with the change in fair value recorded in general and administrative expenses (see Note 3 and Note 4, of Part II, Item 8 of this Annual Report on Form 10-K). The actual amount ultimately paid out may be different depending on the level of achievement of certain operating milestones. |
As of July 31, 2017,2018, payments related to our above outstanding non-cancellablenon-cancelable lease obligations will be made through fiscal 2024.
From time to time, we make commitments with our contract manufacturer,manufacturers, which consist of obligations for on-hand inventoriesinventory and non-cancelable purchase orders for non-standard components. We record a charge to cost of product sales for firm, non-cancelable and unconditional purchase commitments with the contract manufacturers for non-standard components when and if quantities exceed our future demand forecasts. Our historical charges have not been material.
As of July 31, 2017,2018, 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 table above, sinceas it is unclear when these liabilities will be paid.
Off-Balance Sheet Arrangements
As of July 31, 2017,2018, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with GAAP. The preparation of these consolidated financial statements requires our 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 base our estimates, assumptions and judgments on historical experience and on 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. We evaluate our estimates, assumptions and judgments on an ongoing basis.
The critical accounting estimates, assumptions and judgments that we believe have the most significant impact on our consolidated financial statements are described below.
Revenue Recognition
We derive revenue from two sources: (i) product revenue, which consistsSome of hardware combinedour contracts with softwarecustomers contain multiple performance obligations. Determining whether products and software-only revenue, and (ii)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 support and service revenue which includes PCSmaintenance 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 professional services. Revenueobjectives, 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 recognized when allallocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the following criteria are met:
Persuasive evidence of an arrangement exists.transaction price to each performance obligation based on a relative SSP. We rely on sales agreements and purchase orders to determine the existence of an arrangement.
Delivery has occurred. We typically recognize product revenue upon shipment, when title and risk of loss are transferred to our partners at that time. Service revenue is recognized as services are performed.
The fee is fixed or determinable. We assess whether the fee is fixed or determinableSSP based on the payment terms associated withprice at which the transaction. Payment from partnersperformance obligation is sold separately. If the SSP is not contingent uponobservable through past transactions, we estimate the partners receiving payments from end-customers.
Collectability is reasonably assured. We assess collectability based on a credit analysis and payment history.
Most of our arrangements are multiple-element arrangements with a combination of hardware, software, support and maintenance and other professional services. Products and services generally qualify as separate units of accounting. Hardware deliverables include proprietary software, which together deliver the essential functionality of the products. For multiple-element arrangements, we allocate revenue to each unit of accounting based on an estimated selling price at the arrangement inception. The estimated selling price for each element is based upon the following hierarchy: VSOE of selling price, ifSSP, taking into account available third-party evidence, or TPE, of selling price, if VSOE of selling price is not available, or best estimate of selling price, or BESP, if neither VSOE of selling price nor TPE of selling price are available. Other than certain PCS related deliverables, we have not established VSOE of fair value and TPE typically cannot be obtained, therefore we typically allocate consideration to deliverables based on BESP. Our process to determine VSOE is based upon the evaluation of normal pricing and discount practices on deliverables when they are sold separately. Our process to determine BESP for our products and services is based on qualitative and quantitative considerations of multiple factors, which primarily include historical sales, margin objectives and discount behavior. Additional considerations are given to other factorsinformation such as customer demographics, costs to manufacture products or provide services,market conditions and internally approved pricing practices and market conditions.
Commissions
Commissions consist of direct incremental costs paid to our sales forceguidelines related to customer orders. Commissions are expensed over the same period thatperformance obligations.
The new standard related to revenue is recognized from the related customer order. Deferred commissions are recoverable through the revenue streams that will be recognized under the related orders. Amortizationrecognition, ASC 606, had a material impact on our consolidated financial statements. Refer to Note 3 of deferred commissions isNotes to Consolidated Financial Statements included in sales and marketing expense in the consolidated statementsPart II, Item 8 of operations.
this Annual Report on Form 10-K for further discussion.
Income Taxes
We accountThe objectives of accounting for income taxes usingare to recognize the assetamount of taxes payable or refundable for the current year, and liability method. Deferred income taxes are recognized by applying enacted statutorydeferred tax rates applicable to future years to differences between the financial statement carrying amounts of existing assets and liabilities and their respectiveassets for the future tax bases and operating loss and tax credit carryforwards. The effect on deferred tax assets and liabilitiesconsequences of a change in tax rates isevents that have been recognized in income inan entity’s financial statements or tax returns. We recognize the period that includes the enactment date. The measurement of deferred tax assetsbenefit from an uncertain tax position only if it is reduced, if necessary, by a valuation allowance to amounts that are more likely than not tothat the tax position will be realized.
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.
The TCJA significantly changes existing U.S. tax law and includes 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.
NUTANIX, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
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 employee stock purchase plan, or ESPP,2016 Employee Stock Purchase Plan ("2016 ESPP"), based on the estimated fair value of the awards on the grant date. We use Black-Scholesthe Black-Scholes-Merton ("Black-Scholes") option pricing model to estimate the fair value of a stock optionoptions and 2016 ESPP purchase rights. The fair value of a restricted stock unit, or RSU,units ("RSUs"), is measured using the fair value of our common stock on the date of the grant. The fair value of stock options and RSUs is recognized as an expense on a straight-line basis over the requisite service periods,period, which is generally four years. For stock-based awards granted to employees with a performance condition, we recognize stock-based compensation expense for these awards underusing the accelerated attribution method over the requisite service period when management determines it is probable that the performance condition will be satisfied. The fair value of the 2016 ESPP purchase rights is recognized as an 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-pricingoption pricing model requires the input of highly subjective assumptions, including the fair value of the underlying common stock, expected term of the option, expected volatility of the price of our common stock, risk-free interest rates, and the expected dividend yield of our common stock. The assumptions used in our option-pricingoption 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.
These assumptions and estimates are as follows:
Fair Value of Common Stock. Prior to our IPO, the fair value of the common stock underlying our stock options was determined by our board of directors. The valuations of our common stock were determined in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. Our board of directors, with input from management, exercised significant judgment and considered numerous objective and subjective factors to determine the fair value of our common stock at each grant date, including but not limited to, (i) contemporaneous valuations of common stock performed by unrelated third-party specialists; (ii) recent private stock sales transactions; (iii) the prices, rights, preferences and privileges of our convertible preferred stock relative to those of our common stock; (iv) the lack of marketability of our common stock; (v) developments in the business; (vi) the likelihood of achieving a liquidity event, such as an IPO or a merger or acquisition of our business, given prevailing market conditions; (vii) the market performance of comparable publicly traded companies; (viii) our actual operating and financial performance; (ix) U.S. and global capital market conditions; (x) the illiquidity of stock-based awards involving securities in a private company; (xi) our stage of development; and (xii) our history and the timing of the introduction of new products and services.
Subsequent to our IPO, we use the market closing price for our Class A common stock as reported on the NASDAQ Global Select Market on the date of grant.
Expected Term. The expected term of employee stock options represents the weighted-average period that the stock options are expected to remain outstanding. To determine the expected term, we generally apply the simplified approach in which the expected term of an award is presumed to be the mid-point between the vesting date and the expiration date of the award as we do not have sufficient historical exercise data to provide a reasonable basis for an estimate of expected term.
Risk-Free Interest Rate. We base the risk-free interest rate on the yields of U.S. Treasury securities with maturities approximately equal to the term of employee stock option awards.
Expected Volatility. As we do not have sufficient trading history for our common stock, the expected volatility for our common stock was estimated by taking the average historic price volatility for industry peers based on daily price observations over a period equivalent to the expected term of the stock option awards. Industry peers consist of several public companies in our industry which are either similar in size, stage of life cycle or financial leverage and were the same as the comparable companies used in the common stock valuation analyses.
Dividend Rate. We have never declared or paid any cash dividends and do not presently plan to pay cash dividends in the foreseeable future. Consequently, we use a dividend rate of zero.
We will continue to use judgment in evaluating the assumptions related to our stock-based compensation on a prospective basis. As we continue to accumulate additional data related to our common stock, we may have refinements to our estimates, which could materially impact our future stock-based compensation expense.
Business Combinations
We account for our acquisitions using the acquisition method. Goodwill is measured at the acquisition date as the excess of the purchase price over the fair value of the assets acquired and liabilities assumed. Significant estimates and assumptions are made by management to value such assets and liabilities. Although we believe that those estimates and assumptions are reasonable and appropriate, they are inherently uncertain and subject to refinement. Additional information related to the acquisition date fair value of acquired assets and assumed liabilities obtained during the measurement period, not to exceed one year, may result in changes to the recorded values of such assets and liabilities, resulting in an offsetting adjustment to the goodwill associated with the business acquired.
Uncertain tax positions and tax-related valuation allowances are initially established in connection with a business combination as of the acquisition date. We continue to collect information and reevaluate these estimates and assumptions quarterly. We will record any adjustments to our preliminary estimates to goodwill, provided that we are within the one-year measurement period.
Any contingent consideration payable is recognized at fair value at the acquisition date. Liability-classified contingent consideration is remeasured each reporting period, with changes in fair value recognized in earnings until the contingent consideration is settled.
Goodwill, Intangible Assets and Impairment Assessment
Goodwill represents the excess of the purchase price over the fair value of the assets acquired and liabilities assumed, if any, in a business combination, and is allocated to our single reporting unit. We review our goodwill and other intangible assets determined to have an indefinite useful life, such as in-process research and development or ("IPR&D,&D"), for impairment at least annually, or whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Goodwill is tested for impairment by comparing the reporting unit's carrying value, including goodwill, to the fair value of the reporting unit. We operate under one reporting unit and for our annual goodwill impairment test, we determine the fair value of our reporting unit based on our enterprise value. We may elect to utilize a qualitative assessment to determine whether it is more likely than not that the fair value of our reporting unit is less than its carrying value. If, after assessing the qualitative factors, we determine that it is more likely than not that the fair value of our reporting unit is less than its carrying value, an impairment analysis will be performed. The Company comparesWe will compare the fair value of itsour reporting unit with its carrying amount and if the carrying value of the reporting unit exceeds its fair value, an impairment loss iswill be recognized.
IPR&D is tested for impairment by comparing the carrying amount of the related technology to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset.
To date, we have not recorded any impairment charges related to our goodwill and intangible assets. However, deteriorating market conditions or any future events that negatively impact our business may result in an impairment charge.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
We will start amortizingLegal 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 in-process R&D duringamount of the first quarterloss can be reasonably estimated. In determining whether a loss should be accrued, we evaluate, among other factors, the degree of fiscal 2018 overprobability of an unfavorable outcome and the ability to make a useful lifereasonable estimate of between 5 to 7 years as the related technology was completed and releasedamount of loss. Changes in the first quarter of fiscal 2018.these factors could materially impact our consolidated financial statements.
Recent Accounting Pronouncements
Refer to “Recent"Recent Accounting Pronouncements”Pronouncements" in Note 2. Basis of Presentation and Summary of Significant Accounting Policies1 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We have operations both within the United States and internationally, and we are exposed to market risk in the ordinary course of our business. We are exposed to market risk in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in foreign currency exchange rates and interest rates.
Foreign Currency Risk
Our consolidated results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates. Historically, our revenue contracts have been denominated in U.S. dollars. Our expenses are generally denominated in the currencies in which our operations are located. To date, we have not entered into any hedging arrangements with respect to foreign currency risk or other derivative instruments. In the event our foreign sales and expenses increase, our operating results may be more greatlysignificantly affected by foreign currency exchange rate fluctuations, which can affect our operating income or loss. The effect of a hypothetical 10% change in foreign currency exchangesexchange rates on our non-U.S. dollar monetary assets and liabilities would not have had a material impact on our historical consolidated financial statements. Foreign currency transaction gains and losses and exchange rate fluctuations have not been material to our consolidated financial statements.
A hypothetical 10% decrease in the U.S. dollar against other currencies would result in an increase in our operating loss of approximately $11.8 million, $19.3 million and $23.2$31.2 million for fiscal 2016, 2017 and fiscal 2017,2018, respectively. The change in hypothetical increase in operating loss for fiscal 2017 compared to prior year was primarilythis hypothetical change is due to our global expansion which resulted to an increase in our expenses denominated in foreign currency denominated expenses.currencies due to of our continued global expansion. This analysis disregards the possibilities that rates can move in opposite directions and that losses from one geographic area may be offset by gains from another geographic area.
Interest Rate Risk
Our investment objective is to conserve capital and maintain liquidity to support our operations; therefore, we generally invest in highly liquid securities, consisting primarily of bank deposits, money market funds, commercial paper, U.S. government securities, and corporate bonds. Such fixed and floating interest-earning instruments carry a degree of interest rate risk. FixedThe fair market value of fixed income securities may have their fair market valuebe adversely impacted due toby a rise in interest rates, while floating rate securities may produce less income than predicted if interest rates fall. Due to the short-term nature of our investment portfolio, we do not believe an immediate 10% increase or decrease in interest rates would have a material effect on the fair market value of our portfolio. Therefore, we do not expect our operating results or cash flows to be materially affected by a sudden change in interest rates.
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and the Stockholders of
Nutanix, Inc.
San Jose, California
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Nutanix, Inc. and subsidiaries (the “Company”"Company") as of July 31, 20172018 and 2016, and2017, the related consolidated statements of operations, comprehensive loss, convertible preferred stock and stockholders’ (deficit) equity, and cash flows, for each of the three years in the period ended July 31, 2017. 2018, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of July 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended July 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of July 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated September 21, 2018, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits.
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not requiredmisstatement, whether due to have, nor were we engaged to perform, an audit of its internal control over financial reporting.error or fraud. Our audits included considerationperforming procedures to assess the risks of internal control overmaterial misstatement of the financial reporting as a basis for designing auditstatements, whether due to error or fraud, and performing procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includesrespond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated |
| |
/s/ DELOITTE & TOUCHE LLP | |
| San Jose, California | |
| September 21, 2018 | |
| |
We have served as the Company's auditor since 2012.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Nutanix, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial statements present fairly, in all material respects, the financial positionreporting of Nutanix, Inc. and subsidiaries (the “Company”) as of July 31, 2017 and 2016, and2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the resultsCommittee of their operations and their cash flows for eachSponsoring Organizations of the three yearsTreadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of July 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the periodstandards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended July 31, 2017,2018, of the Company and our report dated September 21, 2018, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in conformitythe accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, generally acceptedand that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the United Statescompany; and (3) provide reasonable assurance regarding prevention or timely detection of America.unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
|
| |
/s/ DELOITTE & TOUCHE LLP | |
| San Jose, California | |
September 18, 2017 | |
| 21, 2018 | |
NUTANIX, INC.
CONSOLIDATED BALANCE SHEETS
|
| | | | | | | |
| | As of July 31, |
| | 2017 *As Adjusted | | 2018 |
| | (in thousands, except share data) |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 138,359 |
| | $ | 305,975 |
|
| Short-term investments | 210,694 |
| | 628,328 |
|
| Accounts receivable, net of allowance of $132 and $815 as of July 31, 2017 and 2018 | 178,876 |
| | 258,289 |
|
| Deferred commissions—current | 23,843 |
| | 33,691 |
|
| Prepaid expenses and other current assets | 28,362 |
| | 36,818 |
|
| Total current assets | 580,134 |
| | 1,263,101 |
|
| Property and equipment, net | 58,072 |
| | 85,111 |
|
| Deferred commissions—non-current | 49,684 |
| | 80,688 |
|
| Intangible assets, net | 26,001 |
| | 45,366 |
|
| Goodwill | 16,672 |
| | 87,759 |
|
| Other assets—non-current | 7,649 |
| | 37,855 |
|
| Total assets | $ | 738,212 |
| | $ | 1,599,880 |
|
| Liabilities and Stockholders’ Equity | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 73,725 |
| | $ | 65,503 |
|
| Accrued compensation and benefits | 57,521 |
| | 85,398 |
|
| Accrued expenses and other current liabilities | 9,707 |
| | 31,682 |
|
| Deferred revenue—current | 170,123 |
| | 275,648 |
|
| Total current liabilities | 311,076 |
| | 458,231 |
|
| Deferred revenue—non-current | 198,933 |
| | 355,559 |
|
| Convertible senior notes, net | — |
| | 429,598 |
|
| Other liabilities—non-current | 11,140 |
| | 29,713 |
|
| Total liabilities | 521,149 |
| | 1,273,101 |
|
| Commitments and contingencies (Note 7) |
| |
|
| Stockholders’ equity: | | | |
| Preferred stock, par value of $0.000025 per share— 200,000,000 shares authorized as of July 31, 2017 and 2018; no shares issued and outstanding as of July 31, 2017 and 2018 | — |
| | — |
|
| Common stock, par value of $0.000025 per share— 1,200,000,000 (1,000,000,000 Class A, 200,000,000 Class B) shares authorized as of July 31, 2017 and 2018; 154,636,520 (93,570,171 Class A, 61,066,349 Class B) and 172,858,082 (135,109,672 Class A, 37,748,410 Class B) shares issued and outstanding as of July 31, 2017 and 2018 | 4 |
| | 4 |
|
| Additional paid-in capital | 948,134 |
| | 1,355,907 |
|
| Accumulated other comprehensive loss | (106 | ) | | (1,002 | ) |
| Accumulated deficit | (730,969 | ) | | (1,028,130 | ) |
| Total stockholders’ equity | 217,063 |
| | 326,779 |
|
| Total liabilities and stockholders’ equity | $ | 738,212 |
| | $ | 1,599,880 |
|
* See Note 3 for a summary of adjustments related to the adoption of the new revenue recognition standard.
See the accompanying notes to the consolidated financial statements.
NUTANIX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
| | | | | | | | | | | |
| | Fiscal Year Ended July 31, |
| | 2016 *As Adjusted | | 2017 *As Adjusted | | 2018 |
| | (in thousands, except share and per share data) |
| Revenue: | | | | | |
| Product | $ | 413,910 |
| | $ | 673,297 |
| | $ | 887,989 |
|
| Support, entitlements and other services | 89,500 |
| | 172,606 |
| | 267,468 |
|
| Total revenue | 503,410 |
| | 845,903 |
| | 1,155,457 |
|
| Cost of revenue: | | | | | |
| Product | 133,541 |
| | 249,393 |
| | 276,127 |
|
| Support, entitlements and other services | 37,246 |
| | 77,938 |
| | 109,903 |
|
| Total cost of revenue | 170,787 |
| | 327,331 |
| | 386,030 |
|
| Gross profit | 332,623 |
| | 518,572 |
| | 769,427 |
|
| Operating expenses: | | | | | |
| Sales and marketing | 286,584 |
| | 501,021 |
| | 649,657 |
|
| Research and development | 116,400 |
| | 288,619 |
| | 313,777 |
|
| General and administrative | 34,265 |
| | 77,341 |
| | 86,401 |
|
| Total operating expenses | 437,249 |
| | 866,981 |
| | 1,049,835 |
|
| Loss from operations | (104,626 | ) | | (348,409 | ) | | (280,408 | ) |
| Other expense, net | (1,290 | ) | | (26,377 | ) | | (9,306 | ) |
| Loss before provision for income taxes | (105,916 | ) | | (374,786 | ) | | (289,714 | ) |
| Provision for income taxes | 2,317 |
| | 4,852 |
| | 7,447 |
|
| Net loss | $ | (108,233 | ) | | $ | (379,638 | ) | | $ | (297,161 | ) |
| Net loss per share attributable to Class A and Class B common stockholders—basic and diluted | $ | (2.46 | ) | | $ | (2.96 | ) | | $ | (1.81 | ) |
| Weighted average shares used in computing net loss per share attributable to Class A and Class B common stockholders—basic and diluted | 43,970,381 |
| | 128,295,563 |
| | 164,091,302 |
|
* See Note 3 for a summary of adjustments related to the adoption of the new revenue recognition standard.
See the accompanying notes to the consolidated financial statements.
NUTANIX, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
|
| | | | | | | | | | | |
| | Fiscal Year Ended July 31, |
| | 2016 *As Adjusted | | 2017 *As Adjusted | | 2018 |
| | (in thousands) |
| Net loss | $ | (108,233 | ) | | $ | (379,638 | ) | | $ | (297,161 | ) |
| Other comprehensive income (loss), net of tax: | | | | | |
| Change in unrealized gain (loss) on available-for-sale securities, net of tax | 2 |
| | (94 | ) | | (896 | ) |
| Comprehensive loss | $ | (108,231 | ) | | $ | (379,732 | ) | | $ | (298,057 | ) |
* See Note 3 for a summary of adjustments related to the adoption of the new revenue recognition standard.
See the accompanying notes to the consolidated financial statements.
NUTANIX, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ (DEFICIT) EQUITY
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Convertible Preferred Stock | | | Common Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Loss | | Accumulated Deficit *As Adjusted | | Total Stockholders’ (Deficit) Equity *As Adjusted |
| | Shares | | Amount | | | Shares | | Amount | |
| | (in thousands, except share data) |
| Balance - July 31, 2015 | 76,319,511 |
| | $ | 310,379 |
| | | 44,797,201 |
| | $ | 1 |
| | $ | 38,713 |
| | $ | (14 | ) | | $ | (273,434 | ) | | $ | (234,734 | ) |
| Cumulative effect of adjustment from adoption of ASC 606 | — |
| | — |
| | | — |
| | — |
| | — |
| | — |
| | 30,222 |
| | 30,222 |
|
| Stock-based compensation | — |
| | — |
| | | — |
| | — |
| | 20,056 |
| | — |
| | — |
| | 20,056 |
|
| Issuance of common stock upon exercise of stock options | — |
| | — |
| | | 1,573,577 |
| | — |
| | 2,675 |
| | — |
| | — |
| | 2,675 |
|
| Vesting of early exercised stock options | — |
| | — |
| | | — |
| | — |
| | 3,205 |
| | — |
| | — |
| | 3,205 |
|
| Repurchase of common stock from early exercised stock options | — |
| | — |
| | | (287,127 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
| Excess tax benefit from stock-based compensation | — |
| | — |
| | | — |
| | — |
| | 980 |
| | — |
| | — |
| | 980 |
|
| Other comprehensive loss | — |
| | — |
| | | — |
| | — |
| | — |
| | 2 |
| | — |
| | 2 |
|
| Net loss | — |
| | — |
| | | — |
| | — |
| | — |
| | — |
| | (108,233 | ) | | (108,233 | ) |
| Balance - July 31, 2016 | 76,319,511 |
| | 310,379 |
| | | 46,083,651 |
| | 1 |
| | 65,629 |
| | (12 | ) | | (351,445 | ) | | (285,827 | ) |
| Conversion of convertible preferred stock to common stock upon IPO | (76,319,511 | ) | | (310,379 | ) | | | 76,319,511 |
| | 2 |
| | 310,377 |
| | — |
| | — |
| | 310,379 |
|
| Issuance of class A common stock upon IPO, net of issuance costs | — |
| | — |
| | | 17,100,500 |
| | 1 |
| | 249,169 |
| | — |
| | — |
| | 249,170 |
|
| Reclassification of convertible preferred stock warrant liability to APIC upon IPO | — |
| | — |
| | | — |
| | — |
| | 30,812 |
| | — |
| | — |
| | 30,812 |
|
| Issuance of common stock upon exercise of common stock warrants | — |
| | — |
| | | 775,554 |
| | — |
| | 77 |
| | — |
| | — |
| | 77 |
|
| Stock-based compensation | — |
| | — |
| | | — |
| | — |
| | 231,491 |
| | — |
| | — |
| | 231,491 |
|
| Issuance of common stock through employee equity incentive plans, net of repurchases | — |
| | — |
| | | 10,871,714 |
| | — |
| | 14,956 |
| | — |
| | — |
| | 14,956 |
|
| Issuance of common stock from ESPP purchase | — |
| | — |
| | | 1,246,054 |
| | — |
| | 16,946 |
| | — |
| | — |
| | 16,946 |
|
| Issuance of common stock for acquisitions | — |
| | — |
| | | 2,239,536 |
| | — |
| | 27,063 |
| | — |
| | | | 27,063 |
|
| Vesting of early exercised stock options | — |
| | — |
| | | — |
| | — |
| | 1,614 |
| | — |
| | — |
| | 1,614 |
|
| Cumulative effect adjustment from adoption of ASU 2016-09 | — |
| | — |
| | | — |
| | — |
| | — |
| | — |
| | 114 |
| | 114 |
|
| Other comprehensive income | — |
| | — |
| | | — |
| | — |
| | — |
| | (94 | ) | |
|
| | (94 | ) |
| Net loss | — |
| | — |
| | | — |
| | — |
| | — |
| | — |
| | (379,638 | ) | | (379,638 | ) |
| Balance - July 31, 2017 | — |
| | — |
| | | 154,636,520 |
| | 4 |
| | 948,134 |
| | (106 | ) | | (730,969 | ) | | 217,063 |
|
| Issuance of common stock through employee equity incentive plans, net of repurchases | — |
| | — |
| | | 14,492,922 |
| | — |
| | 33,037 |
| | — |
| | — |
| | 33,037 |
|
| Issuance of common stock from ESPP purchase | — |
| | — |
| | | 2,417,850 |
| | — |
| | 39,009 |
| | — |
| | — |
| | 39,009 |
|
| Issuance of common stock for acquisitions | — |
| | — |
| | | 1,310,790 |
| | — |
| | 63,780 |
| | — |
| | | | 63,780 |
|
| Vesting of early exercised stock options | — |
| | — |
| | | — |
| | — |
| | 681 |
| | — |
| | — |
| | 681 |
|
| Stock-based compensation | — |
| | — |
| | | — |
| | — |
| | 177,868 |
| | — |
| | — |
| | 177,868 |
|
| Equity component of convertible senior notes, net | — |
| | — |
| | | — |
| | — |
| | 148,598 |
| | — |
| | — |
| | 148,598 |
|
| Purchase of bond hedges related to the convertible senior notes | — |
| | — |
| | | — |
| | — |
| | (143,175 | ) | | | | | | (143,175 | ) |
| Sale of warrants related to the convertible senior notes | | | | | | | | | | 87,975 |
| | | | | | 87,975 |
|
| Other comprehensive loss | — |
| | — |
| | | — |
| | — |
| | — |
| | (896 | ) | | — |
| | (896 | ) |
| Net loss | — |
| | — |
| | | — |
| | — |
| | — |
| | — |
| | (297,161 | ) | | (297,161 | ) |
| Balance - July 31, 2018 | — |
| | $ | — |
| | | 172,858,082 |
| | $ | 4 |
| | $ | 1,355,907 |
| | $ | (1,002 | ) | | $ | (1,028,130 | ) | | $ | 326,779 |
|
* See Note 3 for a summary of adjustments related to the adoption of the new revenue recognition standard.
See the accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| | | | | | | | | | | |
| | Fiscal Year Ended July 31, |
| | 2016
*As Adjusted | | 2017
*As Adjusted | | 2018 |
| | (in thousands) |
| Cash flows from operating activities: | | | | | |
| Net loss | $ | (108,233 | ) | | $ | (379,638 | ) | | $ | (297,161 | ) |
| Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | |
| Depreciation and amortization | 26,408 |
| | 38,399 |
| | 50,302 |
|
| Stock-based compensation | 20,056 |
| | 231,491 |
| | 177,868 |
|
| Amortization of debt discount and issuance cost | — |
| | — |
| | 14,685 |
|
| Change in fair value of contingent consideration | — |
| | 1,924 |
| | (2,423 | ) |
| Change in fair value of convertible preferred stock warrant liability | (2,004 | ) | | 21,133 |
| | — |
|
| Loss on debt extinguishment | — |
| | 3,320 |
| | — |
|
| Other | 129 |
| | 764 |
| | (962 | ) |
| Changes in operating assets and liabilities: | | | | | |
| Accounts receivable, net | (71,406 | ) | | (67,382 | ) | | (79,273 | ) |
| Deferred commissions | (21,724 | ) | | (24,006 | ) | | (40,852 | ) |
| Prepaid expenses and other assets | (3,460 | ) | | (15,830 | ) | | (37,359 | ) |
| Accounts payable | 19,985 |
| | 21,280 |
| | (16,469 | ) |
| Accrued compensation and benefits | 10,709 |
| | 32,687 |
| | 27,877 |
|
| Accrued expenses and other liabilities | (1,209 | ) | | 5,116 |
| | 34,295 |
|
| Deferred revenue | 134,385 |
| | 144,564 |
| | 262,027 |
|
| Net cash provided by operating activities | 3,636 |
|
| 13,822 |
|
| 92,555 |
|
| Cash flows from investing activities: | | | | | |
| Purchases of investments | (106,345 | ) | | (242,525 | ) | | (716,417 | ) |
| Maturities of investments | 102,135 |
| | 84,156 |
| | 297,461 |
|
| Sales of investments | — |
| | 32,640 |
| | — |
|
| Purchases of property and equipment | (42,294 | ) | | (50,181 | ) | | (62,372 | ) |
| Payments for business combinations, net of cash acquired | — |
| | (184 | ) | | (22,227 | ) |
| Net cash used in investing activities | (46,504 | ) |
| (176,094 | ) |
| (503,555 | ) |
| Cash flows from financing activities: | | | | | |
| Proceeds from issuance of convertible senior notes, net | — |
| | — |
| | 563,587 |
|
| Payments for convertible note hedges | — |
| | — |
| | (143,175 | ) |
| Proceeds from sales of shares through employee equity incentive plans, net of repurchases | 3,149 |
| | 32,254 |
| | 72,010 |
|
| Proceeds from issuance of warrants | — |
| | — |
| | 87,975 |
|
| Payment of debt in conjunction with business combinations | — |
| | (7,124 | ) | | (1,696 | ) |
| Payments of offering costs | (3,186 | ) | | (1,717 | ) | | (85 | ) |
| Proceeds from initial public offering, net of underwriting discounts and commissions | — |
| | 254,455 |
| | — |
|
| Repayment of senior notes | — |
| | (75,000 | ) | | — |
|
| Debt extinguishment costs | — |
| | (1,580 | ) | | — |
|
| Proceeds from issuance of senior notes, net | 73,255 |
| | — |
| | — |
|
| Other | 980 |
| | 134 |
| | — |
|
| Net cash provided by financing activities | 74,198 |
|
| 201,422 |
|
| 578,616 |
|
| Net increase in cash and cash equivalents | 31,330 |
|
| 39,150 |
|
| 167,616 |
|
| Cash and cash equivalents—beginning of period | 67,879 |
| | 99,209 |
| | 138,359 |
|
| Cash and cash equivalents—end of period | $ | 99,209 |
|
| $ | 138,359 |
|
| $ | 305,975 |
|
| | | | | | |
NUTANIX, INC.
CONSOLIDATED BALANCE SHEETSSTATEMENTS OF CASH FLOWS
(In thousands, except share and per share data)
|
| | | | | | | |
| | As of July 31, |
| | 2016 | | 2017 |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 99,209 |
| | $ | 138,359 |
|
| Short-term investments | 85,991 |
| | 210,694 |
|
| Accounts receivable—net of allowance of $132 and $132 as of July 31, 2016 and 2017 | 110,659 |
| | 178,876 |
|
| Deferred commissions—current | 17,864 |
| | 27,679 |
|
| Prepaid expenses and other current assets | 16,138 |
| | 28,362 |
|
| Total current assets | 329,861 |
| | 583,970 |
|
| Property and equipment—net | 42,218 |
| | 58,072 |
|
| Deferred commissions—non-current | 19,029 |
| | 33,709 |
|
| Intangible assets-net | — |
| | 26,001 |
|
| Goodwill | — |
| | 16,672 |
|
| Other assets—non-current | 7,978 |
| | 7,649 |
|
| Total assets | $ | 399,086 |
| | $ | 726,073 |
|
| Liabilities, Convertible Preferred Stock and Stockholders’ (Deficit) Equity | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 52,111 |
| | $ | 73,725 |
|
| Accrued compensation and benefits | 24,547 |
| | 57,521 |
|
| Accrued expenses and other current liabilities | 5,537 |
| | 9,414 |
|
| Deferred revenue—current | 130,569 |
| | 233,498 |
|
| Total current liabilities | 212,764 |
| | 374,158 |
|
| Deferred revenue—non-current | 165,896 |
| | 292,573 |
|
| Senior notes | 73,260 |
| | — |
|
| Convertible preferred stock warrant liability | 9,679 |
| | — |
|
| Early exercised stock options liability | 2,320 |
| | 851 |
|
| Other liabilities—non-current | 1,103 |
| | 10,289 |
|
| Total liabilities | 465,022 |
| | 677,871 |
|
| Commitments and contingencies (Note 7) |
| |
|
| Convertible preferred stock, par value of $0.000025 per share— 78,263,309 and no shares authorized as of July 31, 2016 and 2017; 76,319,511 and no shares issued and outstanding as of July 31, 2016 and 2017; aggregate liquidation preference of $370,244 as of July 31, 2016 | 310,379 |
| | — |
|
| Stockholders’ (deficit) equity: | | | |
Preferred stock, par value of $0.000025 per share— no and 200,000,000 shares authorized as of July 31, 2016 and 2017; no shares issued and outstanding as of July 31, 2016 and 2017
| — |
| | — |
|
| Common stock, par value of $0.000025 per share—165,000,000 and 1,200,000,000 (1,000,000,000 Class A, 200,000,000 Class B) shares authorized as of July 31, 2016 and 2017; 46,083,651 and 154,636,520 (93,570,171 Class A, 61,066,349 Class B) shares issued and outstanding as of July 31, 2016 and 2017 | 1 |
| | 4 |
|
| Additional paid-in capital | 65,629 |
| | 948,134 |
|
| Accumulated other comprehensive loss | (12 | ) | | (106 | ) |
| Accumulated deficit | (441,933 | ) | | (899,830 | ) |
| Total stockholders’ (deficit) equity | (376,315 | ) | | 48,202 |
|
| Total liabilities, convertible preferred stock and stockholders’ (deficit) equity | $ | 399,086 |
| | $ | 726,073 |
|
|
| | | | | | | | | | | |
| | Fiscal Year Ended July 31, |
| | 2016
*As Adjusted | | 2017
*As Adjusted | | 2018 |
| | (in thousands) |
| Supplemental disclosures of cash flow information: | | | | | |
| Cash paid for income taxes | $ | 2,455 |
| | $ | 5,213 |
| | $ | 10,116 |
|
| Cash paid for interest | $ | 2,188 |
| | $ | 1,271 |
| | $ | — |
|
| Supplemental disclosures of non-cash investing and financing information: | | | | | |
| Issuance of common stock for business combinations | $ | — |
| | $ | 27,063 |
| | $ | 63,780 |
|
| Purchases of property and equipment included in accounts payable and accrued liabilities | $ | 5,007 |
| | $ | 5,591 |
| | $ | 13,444 |
|
| Vesting of early exercised stock options | $ | 3,205 |
| | $ | 1,614 |
| | $ | 681 |
|
| Offering costs included in accounts payable | $ | 902 |
| | $ | 85 |
| | $ | — |
|
| Conversion of convertible preferred stock to common stock, net of issuance costs | $ | — |
| | $ | 310,379 |
| | $ | — |
|
| Reclassification of convertible preferred stock warrant liability to additional paid-in capital | $ | — |
| | $ | 30,812 |
| | $ | — |
|
* See Note 3 for a summary of adjustments related to the adoption of the new revenue recognition standard.
See the accompanying notes to the consolidated financial statements.
NUTANIX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
|
| | | | | | | | | | | |
| | Year Ended July 31, |
| | 2015 | | 2016 | | 2017 |
| Revenue: | | | | | |
| Product | $ | 200,833 |
| | $ | 350,798 |
| | $ | 583,011 |
|
| Support and other services | 40,599 |
| | 94,130 |
| | 183,858 |
|
| Total revenue | 241,432 |
| | 444,928 |
| | 766,869 |
|
| Cost of revenue: | | | | | |
| Product | 80,900 |
| | 133,541 |
| | 249,393 |
|
| Support and other services | 20,059 |
| | 37,246 |
| | 77,938 |
|
| Total cost of revenue | 100,959 |
| | 170,787 |
| | 327,331 |
|
| Gross profit | 140,473 |
| | 274,141 |
| | 439,538 |
|
| Operating expenses: | | | | | |
| Sales and marketing | 161,829 |
| | 288,493 |
| | 500,529 |
|
| Research and development | 73,510 |
| | 116,400 |
| | 288,619 |
|
| General and administrative | 23,899 |
| | 34,265 |
| | 77,341 |
|
| Total operating expenses | 259,238 |
| | 439,158 |
| | 866,489 |
|
| Loss from operations | (118,765 | ) | | (165,017 | ) | | (426,951 | ) |
| Other expense—net | (5,818 | ) | | (1,290 | ) | | (26,377 | ) |
| Loss before provision for income taxes | (124,583 | ) | | (166,307 | ) | | (453,328 | ) |
| Provision for income taxes | 1,544 |
| | 2,192 |
| | 4,683 |
|
| Net loss | $ | (126,127 | ) | | $ | (168,499 | ) | | $ | (458,011 | ) |
| Net loss per share attributable to Class A and Class B common stockholders—basic and diluted | $ | (3.11 | ) | | $ | (3.83 | ) | | $ | (3.57 | ) |
| Weighted-average shares used in computing net loss per share attributable to Class A and Class B common stockholders—basic and diluted | 40,509,481 |
| | 43,970,381 |
| | 128,295,563 |
|
See the accompanying notes to the consolidated financial statements.
NUTANIX, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
|
| | | | | | | | | | | |
| | Year Ended July 31, |
| | 2015 | | 2016 | | 2017 |
| Net loss | $ | (126,127 | ) | | $ | (168,499 | ) | | $ | (458,011 | ) |
| Other comprehensive income (loss)—net of tax: | | | | | |
| Unrealized gain (loss) on available-for-sale securities | (14 | ) | | 2 |
| | (94 | ) |
| Total other comprehensive income (loss)—net of tax | (14 | ) | | 2 |
| | (94 | ) |
| Comprehensive loss | $ | (126,141 | ) | | $ | (168,497 | ) | | $ | (458,105 | ) |
See the accompanying notes to the consolidated financial statements.
NUTANIX, INC.
CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ (DEFICIT) EQUITY
(In thousands, except share and per share data)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Convertible Preferred Stock | | Common Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Loss | | Accumulated Deficit | | Total Stockholders’ (Deficit) Equity |
| | Shares | | Amount | | Shares | | Amount | |
| Balance - August 1, 2014 | 65,495,787 |
| | $ | 172,075 |
| | 42,937,818 |
| | $ | 1 |
| | $ | 16,531 |
| | $ | — |
| | $ | (147,307 | ) | | $ | (130,775 | ) |
| Stock-based compensation | — |
| | — |
| | — |
| | — |
| | 17,140 |
| | — |
| | — |
| | 17,140 |
|
Issuance of Series E Convertible Preferred Stock at $13.3965 per share—net of issuance costs
| 10,823,724 |
| | 138,304 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Issuance of common stock upon exercise of stock options | — |
| | — |
| | 1,996,194 |
| | — |
| | 1,584 |
| | — |
| | — |
| | 1,584 |
|
| Vesting of early exercised stock options | — |
| | — |
| | — |
| | — |
| | 3,458 |
| | — |
| | — |
| | 3,458 |
|
| Repurchase of common stock from early exercised stock options | — |
| | — |
| | (136,811 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
| Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | — |
| | (14 | ) | | — |
| | (14 | ) |
| Net loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (126,127 | ) | | (126,127 | ) |
| Balance - July 31, 2015 | 76,319,511 |
| | 310,379 |
| | 44,797,201 |
| | 1 |
| | 38,713 |
| | (14 | ) | | (273,434 | ) | | (234,734 | ) |
| Stock-based compensation | — |
| | — |
| | — |
| | — |
| | 20,056 |
| | — |
| | — |
| | 20,056 |
|
| Issuance of common stock upon exercise of stock options | — |
| | — |
| | 1,573,577 |
| | — |
| | 2,675 |
| | — |
| | — |
| | 2,675 |
|
| Vesting of early exercised stock options | — |
| | — |
| | — |
| | — |
| | 3,205 |
| | — |
| | — |
| | 3,205 |
|
| Repurchase of common stock from early exercised stock options | — |
| | — |
| | (287,127 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
| Excess tax benefit from stock-based compensation | — |
| | — |
| | — |
| | — |
| | 980 |
| | — |
| | — |
| | 980 |
|
| Other comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | 2 |
| | — |
| | 2 |
|
| Net loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (168,499 | ) | | (168,499 | ) |
| Balance - July 31, 2016 | 76,319,511 |
| | 310,379 |
| | 46,083,651 |
| | 1 |
| | 65,629 |
| | (12 | ) | | (441,933 | ) | | (376,315 | ) |
| Conversion of convertible preferred stock to common stock upon IPO | (76,319,511 | ) | | (310,379 | ) | | 76,319,511 |
| | 2 |
| | 310,377 |
| | — |
| | — |
| | 310,379 |
|
| Issuance of class A common stock upon IPO, net of issuance costs | — |
| | — |
| | 17,100,500 |
| | 1 |
| | 249,169 |
| | — |
| | — |
| | 249,170 |
|
| Reclassification of convertible preferred stock warrant liability to APIC upon IPO | — |
| | — |
| | — |
| | — |
| | 30,812 |
| | — |
| | — |
| | 30,812 |
|
| Issuance of common stock upon exercise of common stock warrants | — |
| | — |
| | 775,554 |
| | — |
| | 77 |
| | — |
| | — |
| | 77 |
|
| Issuance of common stock through employee equity incentive plans, net of repurchases | — |
| | — |
| | 10,871,714 |
| | — |
| | 14,956 |
| | — |
| | — |
| | 14,956 |
|
| Issuance of common stock from ESPP purchase | — |
| | — |
| | 1,246,054 |
| | — |
| | 16,946 |
| | — |
| | — |
| | 16,946 |
|
| Issuance of common stock for acquisitions | — |
| | — |
| | 2,239,536 |
| | — |
| | 27,063 |
| | — |
| | | | 27,063 |
|
| Vesting of early exercised stock options | — |
| | — |
| | — |
| | — |
| | 1,614 |
| | — |
| | — |
| | 1,614 |
|
| Stock-based compensation | — |
| | — |
| | — |
| | — |
| | 231,491 |
| | — |
| | — |
| | 231,491 |
|
| Cumulative-effect adjustment from adoption of ASU 2016-09 | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 114 |
| | 114 |
|
| Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | — |
| | (94 | ) | | — |
| | (94 | ) |
| Net loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (458,011 | ) | | (458,011 | ) |
| Balance - July 31, 2017 | — |
| | $ | — |
| | 154,636,520 |
| | $ | 4 |
| | $ | 948,134 |
| | $ | (106 | ) | | $ | (899,830 | ) | | $ | 48,202 |
|
See the accompanying notes to the consolidated financial statements.
NUTANIX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
| | | | | | | | | | | |
| | Year Ended July 31, |
| | 2015 | | 2016 | | 2017 |
| Cash flows from operating activities: | | | | | |
| Net loss | $ | (126,127 | ) | | $ | (168,499 | ) | | $ | (458,011 | ) |
| Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | | | | | |
| Depreciation and amortization | 16,567 |
| | 26,408 |
| | 38,399 |
|
| Stock-based compensation | 17,140 |
| | 20,056 |
| | 231,491 |
|
| Change in fair value of convertible preferred stock warrant liability | 6,176 |
| | (2,004 | ) | | 21,133 |
|
| Loss on debt extinguishment | — |
| | — |
| | 3,320 |
|
| Change in fair value of contingent consideration | — |
| | — |
| | 1,924 |
|
| Other | 483 |
| | 129 |
| | 764 |
|
| Changes in operating assets and liabilities: | | | | | |
| Accounts receivable—net | (9,018 | ) | | (71,406 | ) | | (67,382 | ) |
| Deferred commission | (8,978 | ) | | (19,813 | ) | | (24,495 | ) |
| Prepaid expenses and other assets | (7,003 | ) | | (3,460 | ) | | (15,830 | ) |
| Accounts payable | 11,318 |
| | 19,985 |
| | 21,280 |
|
| Accrued compensation and benefits | 4,903 |
| | 10,709 |
| | 32,687 |
|
| Accrued expenses and other liabilities | 1,724 |
| | (1,336 | ) | | 4,944 |
|
| Deferred revenue | 67,121 |
| | 192,867 |
| | 223,598 |
|
| Net cash (used in) provided by operating activities | (25,694 | ) |
| 3,636 |
|
| 13,822 |
|
| Cash flows from investing activities: | | | | | |
| Purchases of investments | (116,116 | ) | | (106,345 | ) | | (242,525 | ) |
| Maturities of investments | 32,757 |
| | 102,135 |
| | 84,156 |
|
| Sales of investments | — |
| | — |
| | 32,640 |
|
| Payments for business acquisitions, net of cash acquired | — |
| | — |
| | (184 | ) |
| Purchases of property and equipment | (23,308 | ) | | (42,294 | ) | | (50,181 | ) |
| Net cash used in investing activities | (106,667 | ) |
| (46,504 | ) |
| (176,094 | ) |
| Cash flows from financing activities: | | | | | |
Proceeds from initial public offering, net of underwriting discounts and commissions
| — |
| | — |
| | 254,455 |
|
| Proceeds from senior notes—net of issuance costs | — |
| | 73,255 |
| | — |
|
| Payments of offering costs, net | (299 | ) | | (3,186 | ) | | (1,717 | ) |
Proceeds from sales of shares through employee equity incentive plans, net of repurchases
| 4,750 |
| | 3,149 |
| | 32,254 |
|
| Repayment of senior notes | — |
| | — |
| | (75,000 | ) |
| Debt extinguishment costs | — |
| | — |
| | (1,580 | ) |
| Payment of debt in conjunction with a business acquisition | — |
| | — |
| | (7,124 | ) |
| Proceeds from issuance of convertible preferred stock—net of issuance costs | 138,304 |
| | — |
| | — |
|
| Other | — |
| | 980 |
| | 134 |
|
| Net cash provided by financing activities | 142,755 |
|
| 74,198 |
|
| 201,422 |
|
| Net increase in cash and cash equivalents | 10,394 |
|
| 31,330 |
|
| 39,150 |
|
| Cash and cash equivalents—beginning of period | 57,485 |
| | 67,879 |
| | 99,209 |
|
| Cash and cash equivalents—end of period | $ | 67,879 |
|
| $ | 99,209 |
|
| $ | 138,359 |
|
| Supplemental disclosures of cash flow information: | | | | | |
| Cash paid for income taxes | $ | 1,169 |
| | $ | 2,455 |
| | $ | 5,213 |
|
| Cash paid for interest | $ | — |
| | $ | 2,188 |
| | $ | 1,271 |
|
| Supplemental disclosures of non-cash investing and financing information: | | | | | |
| Vesting of early exercised stock options | $ | 3,458 |
| | $ | 3,205 |
| | $ | 1,614 |
|
| Purchases of property and equipment included in accounts payable | $ | 5,104 |
| | $ | 5,007 |
| | $ | 5,591 |
|
| Offering costs included in accounts payable | $ | 1,796 |
| | $ | 902 |
| | $ | 85 |
|
| Conversion of convertible preferred stock to common stock, net of issuance costs | $ | — |
| | $ | — |
| | $ | 310,379 |
|
Reclassification of convertible preferred stock warrant liability to additional paid-in capital
| $ | — |
| | $ | — |
| | $ | 30,812 |
|
| Issuance of common stock for business acquisitions | $ | — |
| | $ | — |
| | $ | 27,063 |
|
See the accompanying notes to the consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Description of Business—
Nutanix, Inc. was incorporated in the state of Delaware in September 2009. Nutanix, Inc. is headquartered in San Jose, California, and together with its wholly-owned subsidiaries (collectively, the “Company”"we," "us," "our" or "Nutanix") has operations throughout North America, Europe, Asia-Pacific,Asia Pacific, the Middle East, Latin America and Africa.
The Company’sWe provide a leading enterprise cloud operating system convergesplatform that digitizes traditional silos of server,enterprise computing, converging compute, virtualization, storage, networking, desktop, governance and networking intosecurity services in one integrated solution and unifies private and public cloud into a single software fabric. The Companysolution. We primarily sells itssell our products and services to end-customersend customers through distributors, resellers and original equipment manufacturers ("OEMs") (collectively, “Partners”"Partners").
During the first quarter of fiscal 2017, the Company completed two acquisitions, Calm.io Pte. Ltd. (“Calm”) and PernixData, Inc. (“PernixData”) (see Note 3).
Initial Public Offering—
In October 2016, the Companywe completed itsour initial public offering (“IPO”("IPO") of Class A common stock, in which itwe sold 17,100,500 shares, including 2,230,500 shares pursuant to the underwriters’ over-allotment option. The shares were sold at an IPO price of $16.00 per share for net proceeds of $254.5 million, after deducting underwriting discounts and commissions of $19.2 million. Additionally, we incurred approximately $5.3 million offering costs incurred by the Company totaled $5.3 million.costs. Immediately prior to the closing of the Company’sour IPO, all outstanding shares of common stock were reclassified as Class B common stock, and all outstanding shares of itsour convertible preferred stock automatically converted into 76,319,511 shares of common stock on a one-to-one basis and then reclassified as shares of Class B common stock. Following the IPO, the Company haswe have two classes of authorized common stock, Class A common stock, which entitles holders to one vote per share, and Class B common stock which entitles holders to 10 votes per share. Immediately prior to the closing of our IPO, 824,024 outstanding convertible preferred stock warrants automatically converted to common stock warrants, and then were reclassified as Class B common stock warrants. As a result of the automatic conversion of the convertible preferred stock warrants to Class B common stock warrants, we revalued the convertible preferred stock warrants as of the completion of the IPO and reclassified the outstanding preferred stock warrant liability balance to additional paid-in capital with no further remeasurements, as the common stock warrants are now deemed permanent equity. As of July 31, 2018, there were 34,180 Class B common stock warrants outstanding.
| |
NOTE 2. | BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Principles of Consolidation—
The accompanying consolidated financial statements, which include the accounts of Nutanix, Inc. and its wholly-owned subsidiaries, have been prepared in conformity with accounting principles generally accepted in the United States (“("U.S. GAAP”GAAP"). All intercompany accounts and transactions have been eliminated in consolidation. Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation. These reclassifications had no impact on the previously reported net loss or accumulated deficit.
Effective August 1, 2017, we adopted Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers ("ASC 606"), as discussed in detail in Note 3. All amounts and disclosures set forth in this Annual Report on Form 10-K have been updated to comply with ASC 606, as indicated by the "as adjusted" note. Certain prior period amounts have been adjusted as a result of our adoption of ASC 606. Refer to "Recently Adopted Accounting Pronouncements" below for more information.
Use of Estimates—
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Such management estimates include, but are not limited to, the best estimate of selling prices for products and related support; useful lives of intangible assets and property and equipment; allowance for doubtful accounts; determination of fair value of common stock and convertible preferred stock, fair value of stock-based awards and convertible preferred stock warrant liability; accounting for income taxes, including the valuation reserveallowance on deferred tax assets and uncertain tax positions; warranty liability; fair value of contingent consideration in a business combination; sales commissions expense; and contingencies and litigation. Management evaluates these estimates and assumptions on an ongoing basis using historical experience and other factors and makes adjustments when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could materially differ from those estimates and assumptions.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Concentration Risk:Risk
Credit Risk—Financial instruments that potentially subject the Companyus to concentrations of credit risk consist of cash and cash equivalents and accounts receivable. The Company places itsWe invest only in high-quality credit instruments and maintain our cash and cash equivalents primarily with domesticand available-for-sale investments in fixed income securities. Management believes that the financial institutions that hold our investments are federally insured within statutory limits. The Company places itsfinancially sound and, accordingly, are subject to minimal credit risk. Our deposits are with multiple institutions, however such deposits may exceed federally insured limits. The Company providesWe provide credit, in the normal course of business, to a number of companies and performsperform credit evaluations of itsour customers.
Concentration of Revenue and Accounts Receivable—The Company sells its We sell our products primarily through Partners and occasionally directly to end-customers.end customers. For the fiscal years ended July 31, 2015, 2016, 2017 and 2017,2018, no end-customerend customer accounted for more than 10% of total revenue.
For each significant Partner, revenue as a percentage of total revenue and accounts receivable as a percentage of total accounts receivable, net are as follows:
| | | | Revenue | | Accounts Receivable | | Revenue | | Accounts Receivable as of July 31, |
| | Fiscal Year Ended July 31, | | As of July 31 | | Fiscal Year Ended July 31, | |
| Customers | 2015 | | 2016 | | 2017 | | 2016 | | 2017 | |
| Partners | | | 2016 As Adjusted (2) | | 2017 As Adjusted (2) | | 2018 | | 2017 | | 2018 |
| Partner A | 23 | % | | 15 | % | | 11 | % | | * |
| | * |
| | 14 | % | | (1) |
| | 10 | % | | (1) |
| | 16 | % |
| Partner B | 15 | % | | 20 | % | | 22 | % | | 17 | % | | 12 | % | | 18 | % | | 19 | % | | 20 | % | | 12 | % | | 13 | % |
| Partner C | * |
| | 14 | % | | 18 | % | | 12 | % | | 14 | % | | 13 | % | | 16 | % | | 18 | % | | 14 | % | | 15 | % |
| Partner D | * |
| | * |
| | * |
| | 23 | % | | 20 | % | | 11 | % | | 10 | % | | (1) |
| | 20 | % | | (1) |
|
| Partner E | * |
| | 11 | % | | * |
| | 11 | % | | * |
| | 10 | % | | (1) |
| | (1) |
| | (1) |
| | (1) |
|
| Partner F | * |
| | 15 | % | | 13 | % | | * |
| | 18 | % | | 15 | % | | 14 | % | | 13 | % | | 18 | % | | 12 | % |
| |
| (2) | Adjusted to include the impact of ASC 606. Refer to Note 3 for more details on the impact of the adoption of this standard. |
Vendor Risk—The Company relies We rely on a limited number of suppliers for itsour contract manufacturing and certain raw material components. In instances where suppliers fail to perform their obligations, the Companywe may be unable to find alternative suppliers or satisfactorily deliver itsour products to itsour customers on time.
Summary of Significant Accounting Policies
Cash, Cash Equivalents and Short-Term Investments—The Company classifies
We classify all highly liquid investments with original maturities of three months or less from the date of purchase as cash equivalents and all highly liquid investments with stated maturities of greater than three months as marketable securities.
The Company determinesWe determine the appropriate classificationsclassification of itsour marketable securities at the time of purchase and reevaluatesreevaluate such designation as of each balance sheet date. The Company classifiesWe classify and accountsaccount for itsour marketable securities as available-for-sale securities. The Company classifies itsWe classify our marketable securities with stated maturities greater than twelve months as short-term investments due to its intentionour intent and ability to use these securities to support itsour current operations.
The Company’sOur marketable securities are recorded at their estimated fair value. Unrealized gains or losses on available-for-sale securities are reported in other comprehensive income (loss). The CompanyWe periodically reviewsreview whether itsour securities may be other-than-temporarily impaired, including whether or not (i) the Company haswe have the intent to sell the security or (ii) it is more likely than not that the Companywe will be required to sell the security before its anticipated recovery. If one of these factors is met, the Companywe will record an impairment loss associated with itsour impaired investment. The impairment loss will be recorded as a write-down of investments in the consolidated balance sheets and a realized loss within other expense in the consolidated statements of operations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fair Value Measurement—The Company defines
We define fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, which are required to be recorded at fair value, the Company considerswe consider the principal or most advantageous market in which to transact and the market-based risk. The Company appliesWe apply fair value accounting for all assets and liabilities that are recognized or disclosed at fair value in the consolidated financial statements on a recurring basis. The carrying amounts reported in the consolidated financial statements for cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair values due to their short-term nature. The fair value of the Company’s Senior Notes (see Note 6) approximates their face value as the effective interest ratesis determined based on the Seniorclosing trading price per $100 of the Notes approximate market interest ratesas of the last day of trading for similar instruments.the period.
Accounts Receivable and Allowance for Doubtful Accounts—
Accounts receivable are recorded at the invoiced amount, net of an allowance for doubtful accounts. Credit is extended to customers based on an evaluation of their financial condition and other factors. The CompanyWe generally doesdo not require collateral or other security to support accounts receivable. The Company performsWe perform ongoing credit evaluations of itsour customers and maintainsmaintain an allowance for doubtful accounts.
The allowance for doubtful accounts is based on the best estimate of the amount of probable credit losses in existing accounts receivable. The Company evaluatesWe evaluate the collectability of itsour accounts receivable based on known collection risks and historical experience. In circumstances where the Company iswe are aware of a specific customer’s inability to meet its financial obligations (e.g., bankruptcy filings or substantial downgrading of credit ratings), the Company recordswe record an allowance for doubtful accounts in order to reduce the net recognized receivable to the amount the Companywe reasonably believesbelieve will be collected. For all other customers, the Company recordswe record an allowance for doubtful accounts based on the length of time the accounts receivable areis past due and the Company’sour historical experience of collections and write-offs.
The changes in the allowance for doubtful accounts are as follows (in thousands):follows:
| | | | | | | | | Fiscal Year Ended July 31, |
| | Fiscal Year Ended July 31, | 2016 | | 2017 | | 2018 |
| | 2015 | | 2016 | | 2017 | (in thousands) |
| Allowance for doubtful accounts—beginning balance | $ | 400 |
| | $ | 410 |
| | $ | 132 |
| $ | 410 |
| | $ | 132 |
| | $ | 132 |
|
| Charged to provision for doubtful accounts (credit) | 119 |
| | (85 | ) | | — |
| (85 | ) | | — |
| | 815 |
|
| Write-offs | (109 | ) | | (193 | ) | | — |
| (193 | ) | | — |
| | (132 | ) |
| Allowance for doubtful accounts—ending balance | $ | 410 |
|
| $ | 132 |
|
| $ | 132 |
| $ | 132 |
|
| $ | 132 |
|
| $ | 815 |
|
Property and Equipment—
Property and equipment, including leasehold improvements, are stated at cost, less accumulated depreciation and amortization. The Company includesWe include the cost to acquire demonstration units and the related accumulated depreciation in property and equipment as such units are generally not available for sale. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the related assets.
Business Combinations—The Company accounts
We account for itsour acquisitions using the acquisition method. Goodwill is measured at the acquisition date as the excess of the purchase price over the fair value of the assets acquired and liabilities assumed. Significant estimates and assumptions are made by management to value such assets and liabilities. Although the Company believeswe believe that those estimates and assumptions are reasonable and appropriate, they are inherently uncertain and subject to refinement. Additional information related to the acquisition date fair value of acquired assets and assumed liabilities obtained during the measurement period, not to exceed one year, may result in changes to the recorded values of such assets and liabilities, resulting in an offsetting adjustment to the goodwill associated with the business acquired.
NUTANIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Uncertain tax positions and tax-related valuation allowances are initially established in connection with a business combination as of the acquisition date. The Company continuesWe continue to collect information and reevaluate these estimates and assumptions quarterly. The CompanyWe will record any adjustments to itsour preliminary estimates to goodwill, provided that the Companyit is within the one yearone-year measurement period.Anyperiod. Any contingent consideration payable is recognized at fair value at the acquisition date. Liability-classified contingent consideration is remeasured each reporting period, with changes in fair value recognized in earnings until the contingent consideration is settled.
Acquisition related costs incurred in connection with a business combination, other than those associated with the issuance of debt or equity securities, are expensed as incurred.
Goodwill, Intangible Assets and Other Long-Lived Assets—Assets
Goodwill represents the future economic benefits arising from other assets acquired in a business combination or an acquisition that are not individually identified and separately recorded. The excess of the purchase price over the estimated fair value of net assets of businesses acquired in a business combination is recognized as goodwill.
Intangible assets consist of identifiable intangible assets, including developed technology, customer relationships and in-process research and development (“("IPR&D”&D"), resulting from business acquisitions.combinations. Finite-lived intangible assets are recorded at fair value, net of accumulated amortization. Finite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives. Amortization expense is included as a component of cost of product revenue and sales and marketing expense in the accompanying consolidated statements of operations. Amounts included in sales and marketing expense relate to amortization of intangible asset attributed to customer relationships.
Goodwill and other intangible assets acquired in a business combination and determined to have an indefinite useful life, such as IPR&D, are not amortized, but instead tested for impairment at least annually, as of May 1st.1 of each year. Such goodwill and other intangible assets may also be tested for impairment between annual tests in the presence of impairment indicators such as, but not limited to: (a)(i) a significant adverse change in legal factors or in the business climate; (b)(ii) a substantial decline in the Company'sour market capitalization, (c)capitalization; (iii) an adverse action or assessment by a regulator; (d)(iv) unanticipated competition; (e)(v) loss of key personnel; (f)(vi) a more likely-than-not expectation of the sale or disposal of a reporting unit or a significant portion thereof; (g)(vii) a realignment of the Company'sour resources or restructuring of itsour existing businesses in response to changes to industry and market conditions; (h)(viii) testing for recoverability of a significant asset group within a reporting unit; or (i)(ix) a higher discount rate used in the impairment analysis as impacted by an increase in interest rates.
Goodwill is tested for impairment by comparing the reporting unit's carrying value, including goodwill, to the fair value of the reporting unit. The Company operatesWe operate under one reporting unit and for itsour annual goodwill impairment test, the Company determineswe determine the fair value of itsour reporting unit based on the Company'sour enterprise value. The CompanyWe may elect to utilize a qualitative assessment to determine whether it is more likely than not that the fair value of itsour reporting unit is less than its carrying value. If, after assessing the qualitative factors, the Company determineswe determine that it is more likely than not that the fair value of itsour reporting unit is less than its carrying value, an impairment analysis will be performed. The Company comparesWe compare the fair value of itsour reporting unit with its carrying amount and if the carrying value of the reporting unit exceeds its fair value, an impairment loss iswill be recognized.
Long-lived assets, such as property and equipment and finite-lived intangible assets subject to depreciation and amortization, are evaluated for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Among the factors and circumstances we consideredconsider in determining recoverability are: (i) a significant decrease in the market price of a long-lived asset; (ii) a significant adverse change in the extent or manner in which a long-lived asset is being used or in its physical condition; (iii) a significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset, including an adverse action or assessment by a regulator; (iv) an accumulation of costs significantly in excess of the amount originally expected for the acquisitionacquisition; and (v) current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset.
There have been no indicators of impairment of goodwill, intangible assets andor other long-lived assets, and we did not record any impairment losses during fiscal 2015, 2016, and 2017.2017 or 2018.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Revenue Recognition—The Company derives
Effective August 1, 2017, we adopted ASC 606 using the full retrospective method. Refer to Note 3 for a detailed discussion of accounting policies related to revenue from two sources (1) product revenue, which consists of hardware combined with software and software-onlyrecognition, including deferred revenue and (2) support and service revenue which includes post-contract customer support (“PCS”) and professional services.commissions.
The Company recognizes revenue when:
Persuasive evidence of an arrangement exists—The Company relies on sales agreements and purchase orders to determine the existence of an arrangement.
Delivery has occurred—The Company typically recognizes product revenue upon shipment, when title and risk of loss are transferred to its Partners at that time. Service revenue is recognized as services are performed.
The fee is fixed or determinable—The Company assesses whether the fee is fixed or determinable based on the payment terms associated with the transaction. Payment from Partners is not contingent upon the Partners receiving payments from end-customers.
Collection is reasonably assured—The Company assesses collectability based on a credit analysis and payment history.
The Company reports revenue net of sales taxes. The Company includes shipping charges billed to customers in revenue and the related shipping costs are included in cost of revenue.
A substantial majority of the Company’s product revenue is generated from the sale of the Company’s software operating system, which is typically delivered on a hardware appliance that is configured to order. The software is deemed essential to the functionality of the hardware. Although historically it has represented a small portion of the Company’s product revenue, the Company’s proprietary software can also be delivered on a software-only basis. The Company also sells non-essential software, which can be purchased by customers to enhance the functionality of the Company’s offerings. The hardware appliance and the software essential to the functionality of the hardware appliance are considered non-software deliverables and, therefore, are not subject to industry-specific software revenue recognition guidance. Software-only and non-essential software sales are subject to the industry-specific software revenue recognition guidance. The Company established Vendor Specific Objective Evidence (“VSOE”) of fair value for certain of its PCS offerings during the fourth quarter of the year ended July 31, 2015. The establishment of VSOE for these PCS offerings did not have a material impact on the Company’s results. When VSOE of fair value for PCS does not exist, revenues subject to industry-specific software revenue recognition guidance are deferred and generally recognized ratably over the PCS period (see VSOE related discussion below).
Support and other services revenue includes the sale of PCS contracts and professional services such as installation, training and onsite engineering support. The Company’s PCS contracts include the right to receive unspecified software upgrades and enhancements on a when-and-if-available basis, bug fixes, as well as parts replacement services related to the Company’s hardware appliances. The Company’s PCS contracts support both non-software deliverables and non-essential software. The Company allocates fees associated with PCS to the software deliverables and non-software deliverables in a contract based on the relative selling prices of such deliverables, which is based on VSOE when available. When VSOE is not available, relative selling prices are determined based upon the Company’s best estimate of selling price, as third-party evidence is also not available. Revenue related to PCS contracts are recognized ratably over the contractual term, which generally range from one to five years. Revenue related to installation, training and onsite engineering support services are recognized as the services are provided to the customer.
Most of the Company’s arrangements, other than stand-alone renewals of PCS contracts, are multiple-element arrangements with a combination of product and support and service related deliverables (as defined above). In multiple-element revenue arrangements, the Company allocates consideration at the inception of an arrangement to all deliverables based on the relative selling price method in accordance with the selling price hierarchy, which includes (i) VSOE of selling price, if available; (ii) third-party evidence (“TPE”) of selling price, if VSOE is not available; and (iii) best estimate of selling price (“BESP”), if neither VSOE nor TPE is available. For deliverables where the Company has not established VSOE, the Company typically allocates consideration to all deliverables based on BESP as TPE typically cannot be obtained.
VSOE—In the Company’s multiple-element arrangements, the Company determines VSOE based on its historical pricing and discounting practices for the specific products and services when sold separately. In determining VSOE, the Company requires that a substantial majority of the stand-alone selling prices fall within a reasonably narrow pricing range. The Company has established VSOE for certain PCS related deliverables based upon the pricing and discounting of a substantial majority of stand-alone sales of the deliverables falling within a reasonably narrow range. The Company has not established VSOE for any of its other deliverables given that its pricing is not sufficiently concentrated (based on an analysis of separate sales of the deliverables) to conclude that it can demonstrate VSOE of selling prices.
TPE—When VSOE cannot be established for deliverables in multiple-element arrangements, the Company applies judgment with respect to whether it can establish a selling price based on TPE. TPE is determined based on competitor prices for interchangeable products or services when sold separately to similarly situated customers. However, because the Company’s products contain a significant element of proprietary technology and the Company’s solutions offer substantially different features and functionality, the comparable pricing of products with similar functionality cannot be obtained.
BESP—When neither VSOE nor TPE can be established, the Company utilizes BESP to allocate consideration to deliverables in a multiple-element arrangement. The Company’s process to determine its BESP for products and services is based on qualitative and quantitative considerations of multiple factors, which primarily include historical sales, margin objectives and discount behavior. Additional considerations are given to other factors such as customer demographics, pricing practices and market conditions.
Deferred Revenue—The Company recognizes certain revenue ratably over the contractual support period. Amounts prepaid by customers in excess of revenue recognized are deferred. The current portion of deferred revenue represents the amounts that are expected to be recognized as revenue within one year of the consolidated balance sheet date.
Deferred Commissions—Deferred commissions consist of direct and incremental costs paid to the Company’s sales force related to customer contracts. The deferred commission amounts are recoverable through the revenue streams that will be recognized under the related customer contracts. Direct sales commissions are deferred when earned and amortized over the same period that revenue is recognized from the related customer contract. Amortization of deferred commissions is included in sales and marketing expense in the consolidated statements of operations.
Cost of Revenue—
Cost of revenue consists of cost of product revenue and cost of support, entitlements and other services revenue. Personnel costs associated with the Company’sour operations and global customer support organizations consist of salaries, benefits and stock-based compensation. Allocated costs consist of certain facilities, depreciation and amortization, recruiting, and information technology costs allocated based on headcount.
Warranties—The Company
We generally providesprovide a one-year warranty on hardware and a 90-day warranty on software licenses. The hardware warranty provides for parts replacement for defective components and the software warranty provides for bug fixes. With respect to the hardware warranty obligation, the Company haswe have a warranty agreement with itsour contract manufacturers under which the contract manufacturers are generally required to replace defective hardware within three years of shipment. Furthermore, the Company’s PCSour post-contract customer support ("PCS") agreements provide for the same parts replacement that customers are entitled to under the warranty program, except that replacement parts are delivered according to targeted response times to minimize disruption to the customers’ critical business applications. Substantially all customers purchase PCS agreements.
Given the warranty agreement with the Company’sour contract manufacturers and considering that substantially all products are sold together with PCS agreements, the Companywe generally hashave very limited exposure related to warranty costs and therefore no warranty reserve has been recognized.
Research and Development—The Company’s
Our research and development expense consists primarily of product development personnel costs, including salaries and benefits, stock-based compensation and allocated facilities costs. Research and development costs are expensed as incurred.
Convertible Preferred Stock Warrant Liability—The Company accounted for freestanding warrants to purchase shares of its Convertible Preferred Stock (the “Convertible Preferred Stock Warrants”), as liabilities in the consolidated balance sheets at their estimated fair value. The fair value of the warrants was estimated using the Black-Scholes-Merton (“Black-Scholes”) option-pricing model and was remeasured at fair value at each reporting date until the warrants were converted to common stock upon the completion of the Company’s IPO. Changes in the estimated fair value of the Convertible Preferred Stock Warrants were recorded in the consolidated statements of operations within other expense, net. Upon the conversion of the underlying Convertible Preferred Stock to common stock upon the completion of the Company's IPO, the related convertible preferred stock warrant liability was re-measured to its then fair value and was reclassified to additional paid-in capital.
Stock-Based Compensation—
Stock-based compensation expense is measured based on the grant-dategrant date fair value of the share-based awards. The fair value of the stock options and purchase rights issued to employees under our ESPP2016 Employee Stock Purchase Plan ("2016 ESPP") is estimated using Black-Scholes,the Black-Scholes-Merton ("Black-Scholes") option pricing model, which is impacted by the fair value of our common stock, as well as changes in assumptions regarding a number of subjective variables. These variables include the expected common stock price volatility over the term of the awards, the expected term of the awards, risk-free interest rates and expected dividend yield. The Company grants bothWe grant stock awards with service conditionconditions only and with both service and performance conditions. The Company recognizesWe recognize stock-based compensation expense for employee stock awards with a service condition only using the straight-line method over the requisite service period of the awards, which is generally the vesting period. The Company usesWe use the accelerated attribution method of recognizingto recognize stock-based compensation expense related to its employee stock awards that contain both service and performance conditions. The fair value of the 2016 ESPP purchase rights is recognized as an expense on a straight-line basis over the offering period. We account for forfeitures of all share-based awards when they occur.
The Company determinesWe determine the fair value of the stock awards issued to non-employeesnonemployees on the date of grant, utilizing Black-Scholes.the Black-Scholes option pricing model. Stock-based compensation expense for stock awards issued to non-employeesnonemployees is recognized over the requisite service period or when it is probable that the performance condition will be satisfied. AwardsNonemployee awards subject to vesting are periodically remeasured to current fair value over the vesting period.
NUTANIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Foreign Currency—
The functional currency of the Company’sour foreign subsidiaries is the U.S. dollar. Transactions denominated in currencies other than the functional currency are re-measuredremeasured at the average exchange rate in effect during the reporting period. At the end of each reporting period all monetary assets and liabilities of the Company’sour subsidiaries are re-measuredremeasured at the current U.S. dollar exchange rate at the end of the reporting period. Remeasurement gains and losses are included within other expense, net in the accompanying consolidated statements of operations. ForDuring the year ended July 31, 2015, the Company’s net foreign currency gains were immaterial. During thefiscal years ended July 31, 2016, 2017 and 2017, the Company2018, we recognized foreign currency losses of $1.5 million, $2.6 million and $2.6$3.6 million, respectively. To date, the Company haswe have not undertaken any hedging transactions related to foreign currency exposure.
Segments
Our chief operating decision maker is a group which is comprised of our Chief Executive Officer and Chief Financial Officer. This group allocates resources and assesses financial performance based upon discrete financial information at the consolidated level. Accordingly, we have determined that we operate as a single operating and reportable segment.
Income Taxes—The Company accounts
We account for income taxes using the asset and liability method. Deferred income taxes are recognized by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance toon amounts that are more likely than not to be realized.
The Company recordsWe record a liability for uncertain tax positions if it is not more likely than not to be sustained based solely on its technical merits as of the reporting date. The Company considersWe consider many factors when evaluating and estimating itsour tax positions and tax benefits, which may require periodic adjustments and may not accurately anticipate actual outcomes.
Advertising Costs—
Advertising costs are charged to sales and marketing expenses as incurred in the consolidated statements of operations. During the fiscal years ended July 31, 2015, 2016, 2017 and 2017,2018, advertising expense was $3.5 million, $6.5 million, and $13.0 million and $14.6 million, respectively.
Recently Adopted Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued ASC 606. The standard is a comprehensive new revenue recognition model that requires revenue to be recognized in a manner which depicts the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. The FASB has issued several amendments to the standard, including clarifications on the disclosure of prior period performance obligations and remaining performance obligations.
The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). The new standard would have been effective for us beginning August 1, 2018, but early adoption as of the original effective date of August 1, 2017 was also permitted. We elected to early adopt the standard effective August 1, 2017 using the full retrospective method, which required a recast historical financial information to conform with the new standard. Refer to Note 3 for details of the impact to previously reported results.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Deferred Offering Costs—Deferred offering costs consistedIn January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of feesFinancial Assets and expenses incurred in connectionFinancial Liabilities, which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments, with further clarifications made recently with the saleissuance of the Company’s common stockASU 2018-03 and 2018-04. These new standards require equity securities to be measured at fair value, with changes in its IPO, including the legal, accounting, printing and other IPO-related costs. Upon completion of the Company’s IPO, these deferred offering costs were reclassified to stockholders’ (deficit) equity and offset against the proceeds of the offering. As of July 31, 2016, deferred offering costs of $4.5 million were included within other assets—non-current. Total deferred offering costsfair value recognized through net income, which results in greater variability in our net income. We adopted the completionstandard on January 1, 2018 and it did not have any impact on the consolidated financial statements, since other than our investments in money market funds, which are reported as part of cash and cash equivalents, we do not have any other investments that are classified as equity securities. There are no unrealized gains or losses related to our investments in money market funds, as the IPO and reclassifiedfair value is equal to stockholders' deficit and offset against the IPO proceeds were $5.3 million.face value.
Recently Adopted Accounting Pronouncement—In MarchAugust 2016, the Financial Accounting Standards Board (“FASB”)FASB issued Accounting Standards Update (“ASU”) 2016-09, Stock Compensation, which is intendedASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This new standard will make eight targeted changes to simplify several aspects of the accounting for share-based payment award transactions. ASU 2016-09 (i) requires all income tax effects of awards to be recognized in the income statement when the awards vest orhow cash receipts and cash payments are settled, (ii) requires classification of excess tax benefits as an operating activitypresented and classified in the statement of cash flows rather than a financing activity, (iii) eliminatesflows. The new standard was effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. We adopted this ASU effective November 1, 2017 and our adoption did not have any impact on the requirement to defer recognition of an excess tax benefit until the benefit is realized through a reduction to taxes payable, (iv) modifies statutory withholding tax requirements and (v) provides for a policy election to account for forfeitures as they occur. The Company early adopted ASU 2016-09 during the three months ended October 31, 2016. As a result of the adoption of ASU 2016-09, the Company recorded excess tax benefits prospectively in its provision for income taxes. Upon adoption, the Company recognized the previously unrecognized foreign excess tax benefits, which resulted in a cumulative effect adjustment of $0.1 million that reduced its accumulated deficit and increased its foreign deferred tax assets, using a modified retrospective transition method. The previously unrecognized U.S. excess tax benefits were recorded as a deferred tax asset, which was fully offset by a valuation allowance resulting in no impact to the accumulated deficit. Additionally, the Company elected to account for forfeitures as they occur using a modified retrospective transition method, which requires the Company to record cumulative-effect adjustment to accumulated deficit, and determined that the cumulative impact was immaterial. The Company presents its excess tax benefits as a component of operating cash flows rather than financing cash flows on a prospective basis.consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and OtherNo. 2017-01, Business Combinations (Topic 350): Simplifying805), to clarify the Testdefinition of a business to assist entities with evaluating whether transactions should be accounted for Goodwill Impairment. ASU 2017-04 removes Step 2as acquisitions (or disposals) of the goodwill impairment test, which requires a hypothetical purchase price allocation. An impairment charge will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 isassets or businesses. The guidance was effective for the Companyfiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We adopted this ASU effective August 1, 2020, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. As the Company evaluates goodwill for impairment on an annual basis as of May 1st, the Company early adopted ASU 2017-04 in fiscal 2017 and itsour adoption did not have anya material impact on itsthe consolidated financial statements.
Recently Issued and Not Yet Adopted Accounting Pronouncements— In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting, which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The guidance is effective for annual periods beginning after December 15, 2017, with early adoption permitted, including adoption in any interim period for which financial statements have not yet been issued. The Company is currently evaluatingWe adopted this ASU effective August 1, 2017 and our adoption did not have a material impact on the effect the adoption of this guidance will have on its consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805) to clarify the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance is effective for fiscal years beginning after December 15, 2017 including interim periods within those fiscal years. Early adoption is permitted under certain circumstances. The Company is currently evaluating the effect the adoption of this guidance will have on its consolidated financial statements.
Recently Issued and Not Yet Adopted Accounting Pronouncements
In NovemberFebruary 2016, the FASB issued ASU 2016-18, Statement2016-02, Leases, which requires recognition of Cash Flows (Topic 230): Restricted Cash.right-to-use lease assets and lease liabilities for all leases, except for short-term leases, on the balance sheet of lessees. ASU 2016-18 will require the Company to present the change in the amounts described as restricted cash or restricted cash equivalents in the statement of cash flows. ASU 2016-182016-02 is effective for the Companyus beginning August 1, 2018,2019, with early adoption permitted. The Company does not believeThis new standard requires a modified retrospective transition approach and provides certain optional transition relief. We currently anticipate that the adoption of this ASUstandard will have a material impact on itsour consolidated financial statements.
$100 million as of July 31, 2018. We expect that most of our operating lease commitments will be subject to the new standard and recognized as lease liabilities and right-of-use assets upon adoption, which will increase the total assets and total liabilities reported. However, we do not anticipate that the adoption of this standard will have a material impact on our consolidated statements of operations, as the expense recognition under this new standard will be similar to current practice.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. ASU 2016-16This new standard will require the Companyus to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. ASU 2016-16 is effective for the Companyus beginning August 1, 2018, with early adoption permitted. The Company is currently evaluatingWe will adopt this standard in the effect the adoptionfirst quarter of this guidancefiscal 2019 and anticipate an increase in deferred tax assets, which will have on itsbe offset by a valuation allowance, thus resulting in an immaterial net impact to our consolidated financial statements.
In AugustNovember 2016, the FASB issued ASU 2016-15,2016-18, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.Restricted Cash. This new standard will make eight targeted changes to howrequires that a statement of cash receiptsflows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash or restricted cash equivalents should be included with cash and cash payments are presentedequivalents when reconciling beginning-of-period and classified inend-of-period amounts shown on the statement of cash flows. The new standardASU 2016-18 is effective for the Companyus beginning August 1, 2018. The new standard will require2018, with early adoption on a retrospective basis unless it is impracticable to apply, in which case the Company would be required to apply the amendments prospectively as of the earliest date practicable. The Company is currently evaluating the effectpermitted. We do not believe that the adoption of this guidanceASU will have a material impact on itsour consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases, which requires recognition of right-to-use lease assets and lease liabilities for all leases (with the exception of short-term leases) on the balance sheet of lessees. ASU 2016-02 is effective for the Company beginning August 1, 2019, including interim periods within those fiscal years, with early adoption permitted. This new standard requires a modified retrospective transition approach and provides certain optional transition relief. The Company is currently evaluating the effect the adoption of this guidance will have on its consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (ASC 606). The standard is a comprehensive new revenue recognition model that requires revenue to be recognized in a manner to depict the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. The FASB has issued several amendments to the standard, including clarifications on disclosure of prior-period performance obligations and remaining performance obligations.
The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). The new standard will be effective for the Company beginning August 1, 2018, and adoption as of the original effective date of August 1, 2017 is permitted. The Company elected to early adopt the standard effective August 1, 2017 using the full retrospective method, which requires the Company to restate our historical financial information for fiscal years 2016 and 2017 to be consistent with the standard. The most significant impact of the standard relates to the timing of revenue recognition for certain software licenses sold with PCS for which it does not have VSOE under current guidance. Under the new standard the requirement to have VSOE for undelivered elements is eliminated and the Company will recognize revenue for such software licenses upon transfer of control to its customers. In addition, the adoption of ASC 606 will also result in differences in the timing of recognition of contract costs, such as sales commissions, as well as the corresponding impacts to provision for income taxes.
The adoption of the standard will result in the recognition of additional revenue of $58.5 million and $79.0 million for fiscal 2016 and fiscal 2017, respectively, an increase in gross profit of $58.5 million and $79.0 million in fiscal 2016 and fiscal 2017, respectively, a decrease in sales and marketing expense of $1.9 million in fiscal 2016 and an increase in sales and marketing of $0.5 million in fiscal 2017, and a decrease in loss from operations of $60.4 million in fiscal 2016 and $78.5 million in fiscal 2017. In addition, the adoption of the standard will result in a decrease in total net deferred revenue of $78.0 million and $157.0 million as of July 31, 2016 and 2017, respectively, driven by the upfront recognition of software licenses sold with PCS for which the Company does not have VSOE, and an increase in total deferred commissions of $12.6 million and $12.1 million as of July 31, 2016 and 2017, respectively, which will be recognized in sales and marketing expense in future periods. The adoption of the standard will have no significant impact to the provision for income taxes and will have no impact to the net cash from or used in operating, investing, or financing on the Company's consolidated statements of cash flows. See Expected Impacts to Reported Results below for the impact of adoption of the standard on the Company's consolidated balance sheets and consolidated statements of operations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Expected ImpactsIn June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Reported Results
TheNonemployee Share-Based Payment Accounting, which aligns the accounting for share-based payment awards issued to nonemployees with the guidance applicable to grants to employees. Under the new standard, equity-classified share-based payment awards issued to nonemployees will be measured on the grant date, instead of the current requirement to remeasure the awards through the performance completion date. ASU 2018-07 is effective for us beginning August 1, 2019, with early adoption permitted. We do not believe that the adoption of the standard related to the new revenue recognition is expected tothis ASU will have a material impact on our reported results as follows:consolidated financial statements.
Fiscal Year 2016:
|
| | | | | | | | | | | |
| Income Statement: | Year Ended July 31, 2016 |
| | As Reported | | Impact of Adoption | | As Adjusted |
| | (in thousands, except per share data) |
| Product revenue | $ | 350,798 |
| | $ | 63,112 |
| | $ | 413,910 |
|
| Support and other services | 94,130 |
| | (4,630 | ) | | 89,500 |
|
| Total revenue | $ | 444,928 |
| | $ | 58,482 |
| | $ | 503,410 |
|
| Gross profit | $ | 274,141 |
| | $ | 58,482 |
| | $ | 332,623 |
|
| Operating expenses | $ | 439,158 |
| | $ | (1,909 | ) | | $ | 437,249 |
|
| Loss from operations | $ | (165,017 | ) | | $ | 60,391 |
| | $ | (104,626 | ) |
| Net Loss | $ | (168,499 | ) | | $ | 60,266 |
| | $ | (108,233 | ) |
| Basic and diluted net loss per share | $ | (3.83 | ) | | $ | 1.37 |
| | $ | (2.46 | ) |
Fiscal Year 2017:
|
| | | | | | | | | | | |
| Income Statement: | Year Ended July 31, 2017 |
| | As Reported | | Impact of Adoption | | As Adjusted |
| | (in thousands, except per share data) |
| Product revenue | $ | 583,011 |
| | $ | 90,286 |
| | $ | 673,297 |
|
| Support and other services | 183,858 |
| | (11,252 | ) | | 172,606 |
|
| Total revenue | $ | 766,869 |
| | $ | 79,034 |
| | $ | 845,903 |
|
| Gross profit | $ | 439,538 |
| | $ | 79,034 |
| | $ | 518,572 |
|
| Operating expenses | $ | 866,489 |
| | $ | 492 |
| | $ | 866,981 |
|
| Loss from operations | $ | (426,951 | ) | | $ | 78,542 |
| | $ | (348,409 | ) |
| Net Loss | $ | (458,011 | ) | | $ | 78,373 |
| | $ | (379,638 | ) |
| Basic and diluted net loss per share | $ | (3.57 | ) | | $ | 0.61 |
| | $ | (2.96 | ) |
Fiscal Year 2016:
|
| | | | | | | | | | | |
| Balance Sheet: | As of July 31, 2016 |
| | As Reported | | Impact of Adoption | | As Adjusted |
| | (in thousands, except per share data) |
| Deferred commissions - current | $ | 17,864 |
| | $ | (3,648 | ) | (1) | $ | 14,216 |
|
| Deferred commissions - non-current | 19,029 |
| | 16,277 |
| (1) | 35,306 |
|
| Total deferred commissions | $ | 36,893 |
| | $ | 12,629 |
| | $ | 49,522 |
|
| | | | | | |
| Deferred revenue - current | $ | 130,569 |
| | $ | (28,962 | ) | (2) | $ | 101,607 |
|
| Deferred revenue - non-current | 165,896 |
| | (49,022 | ) | (2) | 116,874 |
|
| Total deferred revenue | $ | 296,465 |
| | $ | (77,984 | ) | | $ | 218,481 |
|
| | | | | | |
| Accrued expenses and other current liabilities | $ | 5,537 |
| | $ | 125 |
| (3) | $ | 5,662 |
|
| Stockholders' deficit | $ | (376,315 | ) | | $ | 90,488 |
| | $ | (285,827 | ) |
Fiscal Year 2017:
|
| | | | | | | | | | | |
| Balance Sheet: | As of July 31, 2017 |
| | As Reported | | Impact of Adoption | | As Adjusted |
| | (in thousands, except per share data) |
| Deferred commissions - current | $ | 27,679 |
| | $ | (3,836 | ) | (1) | $ | 23,843 |
|
| Deferred commissions - non-current | 33,709 |
| | 15,975 |
| (1) | 49,684 |
|
| Total deferred commissions | $ | 61,388 |
| | $ | 12,139 |
| | $ | 73,527 |
|
| | | | | | |
| Deferred revenue - current | $ | 233,498 |
| | $ | (63,375 | ) | (2) | $ | 170,123 |
|
| Deferred revenue - non-current | 292,573 |
| | (93,640 | ) | (2) | 198,933 |
|
| Total deferred revenue | $ | 526,071 |
| | $ | (157,015 | ) | | $ | 369,056 |
|
| | | | | | |
| Accrued expenses and other current liabilities | $ | 9,414 |
| | $ | 293 |
| (3) | $ | 9,707 |
|
| Stockholders' equity | $ | 48,202 |
| | $ | 168,861 |
| | $ | 217,063 |
|
_______________________
(1) Impact of cumulative change in commissions expense
(2) Impact of cumulative change in revenue
(3) Impact of cumulative change in provision for income taxes
| |
NOTE 3. | NOTE 2. BUSINESS COMBINATIONS |
Calm Acquisition
On August 22, 2016, the CompanyWe completed the acquisitiontwo acquisitions in each of all outstanding shares of Calm, a company based in Singapore which specializes in containerfiscal 2017 and DevOps automation, for an aggregate purchase price of $7.7 million, net of cash acquired (the “Calm Acquisition”). Consideration consisted of 528,517 shares of the Company’s common stock and $1.4 million of cash.fiscal 2018. The preliminary purchase price allocation includes $4.8 millionfor these acquisitions, discussed in detail below, reflects various preliminary fair value estimates and analyses, including certain tangible assets acquired and liabilities assumed, the valuation of goodwill and $4.0 million of identifiable intangible assets acquired, income taxes, and goodwill, which primarily consistare subject to change within the measurement period as preliminary valuations are finalized. Measurement period adjustments are recorded in the reporting period in which the estimates are finalized and adjustment amounts are determined. We determined the fair values of developed technology,the intangible assets with an expected useful lifethe assistance of approximately 4.8 years.a valuation firm. The estimation of the fair value of the intangible assets required the use of valuation techniques and entailed consideration of all the relevant factors that might affect the fair value, such as present value factors and estimates of future revenues and costs.
Our consolidated financial statements for the fiscal years ended July 31, 2017 and 2018 include the operations of the acquired companies from the dates the deals closed. Pro forma results of operations have not been presented because they are not material to our consolidated financial statements, either individually or in the aggregate. Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. The goodwill recognized in these acquisitions is primarily attributable to the synergies expected from the expanded market opportunities with our offerings and the knowledgeable and experienced workforce that joined us as part of the acquisitions. Goodwill will not be amortized, but will instead be tested for impairment annually, or more frequently if certain indicators of impairment are present.
Fiscal 2017 Acquisitions
Calm Acquisition
On August 22, 2016, we completed the acquisition of all outstanding shares of Calm.io Pte. Ltd. ("Calm"), a company based in Singapore, which specialized in container and DevOps automation, for an aggregate purchase price of approximately $7.7 million, net of cash acquired ("Calm Acquisition"). Total consideration consisted of 528,517 shares of our common stock and approximately $1.4 million of cash. The purchase price allocation primarily included approximately $4.8 million of goodwill and approximately $4.0 million of intangible assets, which primarily consisted of developed technology, to be amortized over an estimated economic life of approximately 4.8 years. Goodwill is not expected to be deductible for income tax purposes. The goodwill in this transaction is primarily attributable to the acquired workforce and expected operating synergies. The CompanyWe incurred approximately $0.6 million of acquisition costs related to the Calm Acquisition.
The results of operations of Calm are included in the results of the Company beginning on the date the acquisition was completed. Actual and pro forma results of operations have not been presented as the total amounts of revenue and net income are not material to the Company’s consolidated results for the year ended July 31, 2017.acquisition-related costs.
PernixData Acquisition
On September 6, 2016, the Companywe completed the acquisition of PernixData, Inc. ("PernixData"), a company based in the U.S., which specializesspecialized in scale-out data acceleration and analytics, for an aggregate purchase price of $23.0 million, (the “PernixData Acquisition”net of cash acquired ("PernixData Acquisition"). Total consideration consisted of 1,711,019 shares of the Company’sour common stock and contingent consideration. Total potential contingent payments amountamounted to $19.0 million whichand may be payable over the next three years upon the achievement of certain operating milestones. Up to $7.5 million of the contingent payments arewere deemed to be part of the purchase price, which may bewere limited based on certain closing conditions, including PernixData’s working capital upon completion of the acquisition. Up to $11.5 million of the contingent payments also requirerequired future services to be provided to the Companyus by the related employees and will beare being recorded as compensation expense over the service period. The fair value of the contingent consideration considered to be part of the purchase price was $2.4 million as of the acquisition date and iswas net of expected limitations of approximately $1.8 million due to closing conditions. The CompanyWe incurred approximately $0.7 million of acquisition costsacquisition-related costs.
NUTANIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The purchase price allocation primarily included $11.9 million of goodwill, which is expected to be deductible for income tax purposes, and intangible assets, consisting of $16.1 million related to IPR&D, $3.6 million related to developed technology, which will be amortized over an estimated economic life of five years, and $4.6 million related to customer relationships, which will be amortized over an estimated economic life of six years. During the first quarter of fiscal 2018, the technology related to the PernixData Acquisition.IPR&D was completed and made generally available. As such, we started amortizing the IPR&D during the first quarter of fiscal 2018. We are amortizing developed technology using the straight-line method over a useful life of five years.
AsFiscal 2018 Acquisitions
Minjar Acquisition
On March 16, 2018, we completed the acquisition of Minjar, Inc. ("Minjar"), a privately held Delaware corporation with its offices in Bangalore, India ("Minjar Acquisition"). Minjar was a cloud technology solutions company, and the acquisition will complement and enhance our products, allowing us to offer customers new capabilities to better manage their multi-cloud deployments. At the close of the acquisition, all outstanding shares of Minjar capital stock and all in-the-money options and warrants to purchase Minjar capital stock were purchased or canceled in exchange for an aggregate purchase price of approximately $19.3 million, consisting of $18.8 million in cash and approximately $0.5 million of holdback liability. The holdback liability represents deferred payments to Minjar's former key employees to be released in installments during the two years following the date of acquisition. As the PernixData Acquisition,release of these deferred payments is not contingent upon the future and continued service, the $0.5 million holdback liability, which approximated fair value, was considered as part of the purchase price.
Certain portions of the consideration for the acquisition had been placed in escrow to secure the indemnification obligations of certain Minjar security holders. In addition to the $19.3 million purchase price, we also entered into employee holdback or deferred payment arrangements with former employees of Minjar who joined us after the acquisition, totaling approximately $4.4 million. As payment of these deferred payments is contingent upon the continuous service of the employees, they are being accounted for as compensation over the required service period of two years.
The preliminary purchase price allocation
was as follows (in thousands): |
| | | |
| Cash and cash equivalents | $ | 1,051 |
|
| Accounts receivable | 718 |
|
| Goodwill | 11,853 |
|
| Intangible assets | 24,270 |
|
| Other assets | 761 |
|
| Deferred revenue | (6,007 | ) |
| Debt | (7,124 | ) |
| Other liabilities | (2,515 | ) |
| Total | $ | 23,007 |
|
Goodwill represents the excessprimarily includes approximately $18.0 million of the purchase price over the fair valuegoodwill, $7.0 million of the net tangible and intangible assets, acquiredwhich primarily consists of approximately $5.6 million related to developed technology and $1.4 million related to customer relationships, both of which will be amortized over an estimated economic life of five years, and $5.7 million of deferred income tax and other tax liabilities. Goodwill is not expected to be deductible for income tax purposes.
We recognized approximately $0.6 million of acquisition-related costs, which were expensed as incurred, as general and administrative expenses in the consolidated statement of operations during the fiscal year ended July 31, 2018.
Netsil Acquisition
On March 22, 2018, we completed the acquisition of Netsil Inc. ("Netsil"), a privately held Delaware corporation headquartered in San Francisco, California ("Netsil Acquisition"). This acquisition represents an opportunity for us to accelerate our ability to deliver native multi-cloud operations with the addition of application discovery and operations management. The goodwillaggregate purchase price of approximately $67.5 million consisted of approximately $3.7 million in this transaction is primarily attributablecash and 1,206,364 unregistered shares of our Class A common stock with an aggregate fair value of approximately $63.8 million. The fair value of the shares of common stock issued was determined to be $52.87 per share, the closing price of our stock on March 22, 2018. Certain portions of the consideration for the acquisition, both cash and shares of our Class A common stock, have been placed in escrow to secure the indemnification obligations of certain Netsil security holders.
We also entered into employee holdback or deferred payment arrangements with the founders of Netsil who joined us after the acquisition, whereby we issued 104,426 unregistered shares of our Class A common stock to the acquired workforcefounders subject to their continuous employment with us for two years. The fair value of the Class A common stock issued pursuant to the holdback arrangements was approximately $5.5 million, or $52.87 per share, the closing price of our Class A common stock on March 22, 2018. This holdback is being accounted for as stock-based compensation over the required two-year service period.
NUTANIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The preliminary purchase price allocation primarily includes approximately $53.1 million of goodwill, $19.0 million of intangible assets, primarily related to developed technology, which will be amortized over an estimated economic life of seven years, $2.6 million of deferred income tax liabilities, and $1.4 million of assumed debt. Goodwill is not expected to be deductible for income tax purposes.
We recognized approximately $0.4 million of acquisition-related costs, which were expensed as incurred, as general and administrative expenses in the consolidated statement of operations during the fiscal year ended July 31, 2018.
The following table presents the preliminary aggregate purchase price allocation related to the acquisitions completed during fiscal 2017 and fiscal 2018:
|
| | | | | | | |
| | As of July 31, |
| | 2017 | | 2018 |
| | (in thousands) |
| Goodwill | $ | 16,672 |
| | $ | 71,087 |
|
| Amortizable intangible assets | 28,230 |
| | 25,920 |
|
| Tangible assets acquired | 2,884 |
| | 842 |
|
| Liabilities assumed | (16,988 | ) | | (11,041 | ) |
| Total consideration | $ | 30,798 |
| | $ | 86,808 |
|
NUTANIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 3. REVENUE, DEFERRED REVENUE AND DEFERRED COMMISSIONS
Revenue Recognition
Effective August 1, 2017, we adopted ASC 606 using the full retrospective method, which required a recast of historical financial information to conform with the standard. The most significant impact of ASC 606 on our historical financial information relates to the timing of revenue recognition for certain software licenses sold with PCS, for which we did not have vendor specific objective evidence ("VSOE") of fair value under the previous revenue recognition guidance. Under ASC 606, the requirement to have VSOE for undelivered elements was eliminated and we now recognize revenue for such software licenses upon transfer of control to the customer. In addition, the adoption of ASC 606 also resulted in differences in the timing of recognition of contract costs, such as sales commissions, as well as the corresponding impact to the provision for income taxes. The adoption of the standard had no significant impact on the provision for income taxes and had no impact on the net cash from or used in operating, synergies.investing or financing activities on the consolidated statements of cash flows. See "ASC 606 Adoption Impact to Previously Reported Results" below for the impact of the adoption of the standard on the consolidated financial statements.
ASC 606 Adoption Impact to Previously Reported Results
We adjusted our consolidated financial statements from amounts previously reported due to the adoption of ASC 606. Selected consolidated balance sheet line items, adjusted for the adoption of ASC 606, are as follows:
|
| | | | | | | | | | | |
| | As of July 31, 2017 |
| | As Previously Reported | | Impact of Adoption | | As Adjusted |
| | (in thousands) |
| Assets | | | | | |
Deferred commissions—current | $ | 27,679 |
| | $ | (3,836 | ) | (1) | $ | 23,843 |
|
Deferred commissions—non-current | 33,709 |
| | 15,975 |
| (1) | 49,684 |
|
| Total deferred commissions | $ | 61,388 |
| | $ | 12,139 |
| | $ | 73,527 |
|
| Liabilities | | | | | |
Deferred revenue—current | $ | 233,498 |
| | $ | (63,375 | ) | (2) | $ | 170,123 |
|
Deferred revenue—non-current | 292,573 |
| | (93,640 | ) | (2) | 198,933 |
|
| Total deferred revenue | $ | 526,071 |
| | $ | (157,015 | ) | | $ | 369,056 |
|
| Accrued expenses and other current liabilities | $ | 9,414 |
| | $ | 293 |
| (3) | $ | 9,707 |
|
| Stockholders' Equity | $ | 48,202 |
| | $ | 168,861 |
| | $ | 217,063 |
|
| |
| (1) | Impact of cumulative change in commissions expense |
| |
| (2) | Impact of cumulative change in revenue |
| |
| (3) | Impact of cumulative change in provision for income taxes |
NUTANIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Selected consolidated statement of operations line items, adjusted for the adoption of ASC 606, are as follows:
|
| | | | | | | | | | | |
| | Fiscal Year Ended July 31, 2016 |
| | As Previously Reported | | Impact of Adoption | | As Adjusted |
| | (in thousands, except per share data) |
| Revenue | | | | | |
| Product | $ | 350,798 |
| | $ | 63,112 |
| | $ | 413,910 |
|
| Support, entitlements and other services | 94,130 |
| | (4,630 | ) | | 89,500 |
|
| Total revenue | $ | 444,928 |
| | $ | 58,482 |
| | $ | 503,410 |
|
| Gross profit | $ | 274,141 |
| | $ | 58,482 |
| | $ | 332,623 |
|
| Operating expenses | | | | | |
| Sales and marketing expenses | $ | 288,493 |
| | $ | (1,909 | ) | | $ | 286,584 |
|
| Loss from operations | $ | (165,017 | ) | | $ | 60,391 |
| | $ | (104,626 | ) |
| Net loss | $ | (168,499 | ) | | $ | 60,266 |
| | $ | (108,233 | ) |
| Basic and diluted net loss per share | $ | (3.83 | ) | | $ | 1.37 |
| | $ | (2.46 | ) |
|
| | | | | | | | | | | |
| | Fiscal Year Ended July 31, 2017 |
| | As Previously Reported | | Impact of Adoption | | As Adjusted |
| | (in thousands, except per share data) |
| Revenue | | | | | |
| Product | $ | 583,011 |
| | $ | 90,286 |
| | $ | 673,297 |
|
| Support, entitlements and other services | 183,858 |
| | (11,252 | ) | | 172,606 |
|
| Total revenue | $ | 766,869 |
| | $ | 79,034 |
| | $ | 845,903 |
|
| Gross profit | $ | 439,538 |
| | $ | 79,034 |
| | $ | 518,572 |
|
| Operating expenses | | | | | |
| Sales and marketing expenses | $ | 500,529 |
| | $ | 492 |
| | $ | 501,021 |
|
| Loss from operations | $ | (426,951 | ) | | $ | 78,542 |
| | $ | (348,409 | ) |
| Net loss | $ | (458,011 | ) | | $ | 78,373 |
| | $ | (379,638 | ) |
| Basic and diluted net loss per share | $ | (3.57 | ) | | $ | 0.61 |
| | $ | (2.96 | ) |
Revenue by geographic location, based on bill-to location, adjusted for the adoption of ASC 606, is as follows:
|
| | | | | | | | | | | |
| | Fiscal Year Ended July 31, 2016 |
| | As Previously Reported | | Impact of Adoption | | As Adjusted |
| | (in thousands) |
| U.S. | $ | 280,800 |
| | $ | 38,496 |
| | $ | 319,296 |
|
| Europe, the Middle East and Africa | 81,320 |
| | (15,721 | ) | | 65,599 |
|
| Asia Pacific | 63,610 |
| | 33,113 |
| | 96,723 |
|
| Other Americas | 19,198 |
| | 2,594 |
| | 21,792 |
|
| Total revenue | $ | 444,928 |
| | $ | 58,482 |
| | $ | 503,410 |
|
NUTANIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
| | | | | | | | | | | |
| | Fiscal Year Ended July 31, 2017 |
| | As Previously Reported | | Impact of Adoption | | As Adjusted |
| | (in thousands) |
| U.S. | $ | 462,770 |
| | $ | 25,309 |
| | $ | 488,079 |
|
| Europe, the Middle East and Africa | 139,170 |
| | (355 | ) | | 138,815 |
|
| Asia Pacific | 131,921 |
| | 54,943 |
| | 186,864 |
|
| Other Americas | 33,008 |
| | (863 | ) | | 32,145 |
|
| Total revenue | $ | 766,869 |
| | $ | 79,034 |
| | $ | 845,903 |
|
Selected consolidated statement of cash flows line items, adjusted for the adoption of ASC 606, are as follows:
|
| | | | | | | | | | | |
| | Fiscal Year Ended July 31, 2016 |
| | As Previously Reported | | Impact of Adoption | | As Adjusted |
| | (in thousands) |
| Cash flows from operating activities: | | | | | |
| Net loss | $ | (168,499 | ) | | $ | 60,266 |
| | $ | (108,233 | ) |
| Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | |
| Deferred commissions | $ | (19,813 | ) | | $ | (1,911 | ) | | $ | (21,724 | ) |
| Accrued expenses and other liabilities | $ | (1,336 | ) | | $ | 127 |
| | $ | (1,209 | ) |
| Deferred revenue | $ | 192,867 |
| | $ | (58,482 | ) | | $ | 134,385 |
|
|
| | | | | | | | | | | |
| | Fiscal Year Ended July 31, 2017 |
| | As Previously Reported | | Impact of Adoption | | As Adjusted |
| | (in thousands) |
| Cash flows from operating activities: | | | | | |
| Net loss | $ | (458,011 | ) | | $ | 78,373 |
| | $ | (379,638 | ) |
| Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | |
| Deferred commissions | $ | (24,495 | ) | | $ | 489 |
| | $ | (24,006 | ) |
| Accrued expenses and other liabilities | $ | 4,944 |
| | $ | 172 |
| | $ | 5,116 |
|
| Deferred revenue | $ | 223,598 |
| | $ | (79,034 | ) | | $ | 144,564 |
|
The core principle of ASC 606 is to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. This principle is achieved by applying the following five-step approach:
Identification of the contract, or contracts, with a customer — A contract with a customer exists when (i) we enter into an enforceable contract with a customer that defines each party’s rights regarding the goods or services to be transferred and identifies the payment terms related to these goods or services, (ii) the contract has commercial substance and (iii) we determine that collection of substantially all consideration for goods or services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. We apply judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors, including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer.
NUTANIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Identification of the performance obligations in the contract — Performance obligations promised in a contract are identified based on the goods or services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the goods or services either on their own or together with other resources that are readily available from third parties or from us, and are distinct in the context of the contract, whereby the transfer of the goods or services is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised goods or services, we apply judgment to determine whether promised goods or services are capable of being distinct and distinct in the context of the contract. If these criteria are not met, the promised goods or services are accounted for as a combined performance obligation.
Determination of the transaction price — The transaction price is determined based on the consideration to which we will be entitled in exchange for transferring goods or services to the customer.
Allocation of the transaction price to the performance obligations in the contract — 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 standalone selling price ("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.
Recognition of revenue when, or as, performance obligations are satisfied — We satisfy performance obligations either over time or at a point in time, as discussed in further detail below. Revenue is recognized at the time the related performance obligation is satisfied with the transfer of a promised good or service to a customer.
Disaggregation of Revenue
We generate revenue primarily from the sale of our enterprise cloud platform, which can be delivered pre-installed on an appliance that is configured to order or delivered separately to be utilized on a variety of certified hardware platforms. Software delivered on configured to order appliances is not portable to other appliances and has a term equal to the life of the associated appliance, while separately purchased software typically has a term of one to five years. For the fiscal year ended July 31, 2018, the weighted average term for such software licenses was approximately 3.5 years. Configured to order appliances, including our Nutanix-branded NX hardware line, can be purchased from one of our OEM partners or directly from Nutanix. Our platform is typically purchased with one or more years of support and entitlements, which includes the right to software upgrades and enhancements as well as technical support. A substantial portion of sales are made through channel partners and OEM relationships. The following table depicts the disaggregation of revenue by revenue type, consistent with how we evaluate our financial performance:
|
| | | | | | | | | | | |
| | Fiscal Year Ended July 31, |
| | 2016 | | 2017 | | 2018 |
| | (in thousands) |
| Software revenue | $ | 287,603 |
| | $ | 436,981 |
| | $ | 630,675 |
|
| Hardware revenue | 126,307 |
| | 236,316 |
| | 257,314 |
|
| Support, entitlements and other services revenue | 89,500 |
| | 172,606 |
| | 267,468 |
|
| Total revenue | $ | 503,410 |
| | $ | 845,903 |
| | $ | 1,155,457 |
|
Software revenue — A majority of our product revenue is generated from the sale of our enterprise cloud platform. We also sell renewals of previously purchased software licenses. Revenue from our software products is generally recognized upon transfer of control to the customer, which is typically upon shipment for sales including a hardware appliance, or upon making the software available to our customers when not sold with an appliance.
NUTANIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
Support, entitlements and other services revenue — We generate our support, entitlements and other services revenue primarily from software entitlement and support subscriptions, which include the right to software upgrades and enhancements as well as technical support. The majority of our product sales are sold in conjunction with software entitlement and support subscriptions, with terms ranging from one to five years. Occasionally, we also sell professional services with our products. We recognize revenue from software entitlement and support contracts ratably over the contractual service period. The service period typically commences upon transfer of control of the corresponding products to the customer. We recognize revenue related to professional services as they are performed.
Contracts with multiple performance obligations — Some of our contracts with customers contain multiple performance obligations. 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 SSP basis. For deliverables that are routinely sold separately, such as support and maintenance on our core offerings, SSP is determined by evaluating the standalone sales over the trailing 12 months. For those that are not sold routinely, SSP is determined based on 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.
Contract balances — The timing of revenue recognition may differ from the timing of invoicing to customers. Accounts receivable are recorded at the invoiced amount, net of an allowance for doubtful accounts. A receivable is recognized in the period goods are delivered or services are provided, or when the right to consideration is unconditional.
Payment terms on invoiced amounts are typically 30 days. The balance of accounts receivable, net of allowance for doubtful accounts, as of July 31, 2017 and 2018 is presented in the accompanying consolidated balance sheets.
Costs to obtain and fulfill a contract — We capitalize commissions paid to sales personnel and the related payroll taxes when customer contracts are signed. These costs are recorded as deferred commission expense in the consolidated balance sheets, current and non-current. We determine whether costs should be deferred based on our sales compensation plans, if the commissions are incremental and would not have been incurred absent the execution of the customer contract. Sales commissions for renewals of customer contracts are not commensurate with the commissions paid for the acquisition of the initial contract given the substantive difference in commission rates in proportion to their respective contract values. Commissions paid upon the initial acquisition of a contract are amortized over the estimated period of benefit, which may exceed the term of the initial contract. Accordingly, the amortization of deferred costs is recognized on a systematic basis that is consistent with the pattern of revenue recognition allocated to each performance obligation and included in sales and marketing expense in the consolidated statements of operations. We determine the estimated period of benefit by evaluating the expected renewals of customer contracts, the duration of relationships with our customers, customer retention data, our technology development lifecycle, and other factors. Deferred costs are periodically reviewed for impairment.
Deferred revenue — We record deferred revenue when cash payments are received in advance of performance. The current portion of deferred revenue represents the amounts that are expected to be recognized as revenue within one year of the consolidated balance sheet date.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Significant changes in the balance of deferred revenue (contract liability) and total deferred commissions (contract asset) for the periods presented are as follows:
The acquired identifiable intangible assets consist of (in thousands, except estimated useful life): |
| | | | | |
| | Amount | | Estimated Useful Life (in years) |
| In-process R&D | $ | 16,100 |
| | — |
| Developed technology | 3,570 |
| | 5 |
| Customer relationships | 4,600 |
| | 6 |
| | $ | 24,270 |
| | |
|
| | | | | | | |
| | Deferred Revenue | | Deferred Commissions |
| | (in thousands) |
| Balance as of July 31, 2016 | $ | 218,481 |
| | $ | 49,522 |
|
| Additions | 317,170 |
| | 101,152 |
|
| Revenue/commissions recognized | (172,606 | ) | | (77,147 | ) |
| Assumed in a business combination | 6,011 |
| | — |
|
Balance as of July 31, 2017 (1) | 369,056 |
| | 73,527 |
|
| Additions | 529,495 |
| | 150,122 |
|
| Revenue/commissions recognized | (267,468 | ) | | (109,270 | ) |
| Assumed in a business combination | 124 |
| | — |
|
| Balance as of July 31, 2018 | $ | 631,207 |
| | $ | 114,379 |
|
In-process R&D is tested for impairment at least annually, or whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. The Company will start amortizing the in-process R&D during the first quarter of fiscal 2018 over a useful life of between 5 to 7 years as the related technology was completed and released in the first quarter of fiscal 2018.
Unaudited Pro Forma Combined Consolidated Financial Information—The following unaudited pro forma combined consolidated financial information summarizes the combined results of operations of the Company and PernixData as though the PernixData Acquisition occurred on August 1, 2015. The unaudited pro forma combined consolidated financial information for all periods presented also included the business combination accounting effects resulting from this acquisition, including amortization charges from acquired intangible assets. The results of operations of PernixData are included in the results of the Company beginning on the date of the acquisition, and are not material.
The unaudited pro forma combined consolidated financial information is as follows (in thousands, except per share data): |
| | | | | | | |
| | Fiscal Year Ended
July 31, |
| | 2016 | | 2017 |
| Revenue | $ | 454,665 |
| | $ | 767,681 |
|
| Net loss | $ | (199,351 | ) | | $ | (459,454 | ) |
| Basic and diluted net loss per share | $ | (4.36 | ) | | $ | (3.53 | ) |
| |
| (1) | See details above for a summary of adjustments to deferred commissions and deferred revenue as a result of the adoption of ASC 606. |
Of the $114.4 million deferred commissions balance as of July 31, 2018, we expect to recognize approximately 29% as commission expense over the next 12 months, and the remainder thereafter.
During the fiscal year ended July 31, 2017, we recognized revenue of approximately $101.6 million pertaining to amounts deferred as of July 31, 2016. During the fiscal year ended July 31, 2018, we recognized revenue of approximately $170.1 million pertaining to amounts deferred as of July 31, 2017.
The majority of our contracted but not invoiced performance obligations are subject to cancellation terms. Revenue allocated to remaining performance obligations represents contracted revenue that has not yet been recognized ("contracted not recognized"), which includes deferred revenue and non-cancelable amounts that will be invoiced and recognized as revenue in future periods and excludes performance obligations that are subject to cancellation terms. Contracted not recognized revenue was approximately $657.1 million as of July 31, 2018, of which we expect to recognize approximately 45% over the next 12 months, and the remainder thereafter.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| |
NOTE 4. | FAIR VALUE MEASUREMENTS |
NOTE 4. FAIR VALUE MEASUREMENTS
The authoritative guidance on fair value measurements establishes a three-tier fair value hierarchy based on the observability of the inputs available in the market used to measure fair value as follows:
Level I—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;
Level II—Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and
Level III—Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Cash equivalents and short-term investments. The Company’sinvestments
Our money market funds are classified within Level I due to the highly liquid nature of these assets and have unadjusted inputs, quoted prices in active markets for these assets at the measurement date from the financial institution that carries these investment securities. The Company’sOur investments in available-for-sale debt securities such as commercial paper, and corporate bonds and U.S. government securities are classified within Level II. The fair value of these securities is priced by using inputs based on non-binding market consensus prices that are corroborated by observable market data, quoted market prices for similar instruments, or pricing models such as discounted cash flow techniques.
Convertible Preferred Stock warrant liability. The Company’s convertible preferred stock warrant liability is classified within Level III. The convertible preferred stock warrant liability is measured at fair value on a recurring basis using Black-Scholes. The valuation takes into account multiple inputs, such as the estimated fair value of the underlying stock at the valuation measurement date, the remaining contractual term of the warrants, risk-free interest rates, expected dividends and the expected volatility of the underlying stock. Generally, changes in the fair value of the underlying stock would result in a directionally similar impact to the fair value measurement. The valuation methodology and underlying assumptions are discussed further in Note 8.
The fair value of the Company’sour financial assets and liabilities measured on a recurring basis is as follows:
|
| | | | | | | | | | | | | | | |
| | As of July 31, 2017 |
| | Level I | | Level II | | Level III | | Total |
| | (in thousands) |
| Financial Assets: | | | | | | | |
| Cash equivalents: | | | | | | | |
| Money market funds | $ | 34,784 |
| | $ | — |
| | $ | — |
| | $ | 34,784 |
|
| Commercial paper | — |
| | 23,041 |
| | — |
| | 23,041 |
|
| Short-term investments: | | | | | | |
|
|
| Corporate bonds | — |
| | 160,634 |
| | — |
| | 160,634 |
|
| Commercial paper | — |
| | 36,084 |
| | — |
| | 36,084 |
|
| U.S. government securities | — |
| | 13,976 |
| | — |
| | 13,976 |
|
| Total measured at fair value | $ | 34,784 |
|
| $ | 233,735 |
|
| $ | — |
|
| $ | 268,519 |
|
| Cash |
| |
| |
| | 80,534 |
|
| Total cash, cash equivalents and short-term investments | | | | | | | $ | 349,053 |
|
| Financial Liabilities: | | | | | | |
|
| Contingent consideration | $ | — |
| | $ | — |
| | $ | 4,295 |
| | $ | 4,295 |
|
|
| | | | | | | | | | | | | | | |
| | As of July 31, 2016 |
| | Level I | | Level II | | Level III | | Total |
| | (In thousands) |
| Financial Assets: | | | | | | | |
| Cash equivalents: | | | | | | | |
| Money market funds | $ | 47,305 |
| | $ | — |
| | $ | — |
| | $ | 47,305 |
|
| Commercial paper | — |
| | 4,999 |
| | — |
| | 4,999 |
|
| Short-term investments: | | | | | | |
|
|
| Corporate bonds | — |
| | 64,360 |
| | — |
| | 64,360 |
|
| Commercial paper | — |
| | 21,631 |
| | — |
| | 21,631 |
|
| Total measured at fair value | 47,305 |
|
| 90,990 |
|
| — |
|
| 138,295 |
|
| Cash | | | | | | | 46,905 |
|
| Total cash, cash equivalents and short-term investments | | | | | | | $ | 185,200 |
|
| Financial Liabilities: | | | | | | | |
| Convertible preferred stock warrant liability | $ | — |
| | $ | — |
| | $ | 9,679 |
| | $ | 9,679 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | | As of July 31, 2017 | As of July 31, 2018 |
| | Level I | | Level II | | Level III | | Total | Level I | | Level II | | Level III | | Total |
| | (In thousands) | (in thousands) |
| Financial Assets: | | | | | | | | | | | | | | |
| Cash equivalents: | | | | | | | | | | | | | | |
| Money market funds | $ | 34,784 |
| | $ | — |
| | $ | — |
| | $ | 34,784 |
| $ | 41,763 |
| | $ | — |
| | $ | — |
| | $ | 41,763 |
|
| Commercial paper | — |
| | 23,041 |
| | — |
| | 23,041 |
| — |
| | 77,818 |
| | — |
| | 77,818 |
|
| U.S. government securities | | — |
| | 4,985 |
| | — |
| | 4,985 |
|
| Short-term investments: | | | | | | |
|
| | | | | | |
|
|
| Corporate bonds | — |
| | 160,634 |
| | — |
| | 160,634 |
| — |
| | 448,458 |
| | — |
| | 448,458 |
|
| Commercial paper | — |
| | 36,084 |
| | — |
| | 36,084 |
| — |
| | 120,772 |
| | — |
| | 120,772 |
|
| U.S. government securities | — |
| | 13,976 |
| | — |
| | 13,976 |
| — |
| | 59,098 |
| | — |
| | 59,098 |
|
| Total measured at fair value | 34,784 |
|
| 233,735 |
|
| — |
|
| 268,519 |
| 41,763 |
|
| 711,131 |
|
| — |
|
| 752,894 |
|
| Cash | | | | | | | 80,534 |
| | | | | | | 181,409 |
|
| Total cash, cash equivalents and short-term investments | | | | | | | $ | 349,053 |
| | | | | | | $ | 934,303 |
|
| Financial Liabilities: | | | | | | | | | | | | | | |
| Contingent consideration | $ | — |
| | $ | — |
| | $ | 4,295 |
| | $ | 4,295 |
| $ | — |
| | $ | — |
| | $ | 1,872 |
| | $ | 1,872 |
|
Financial Instruments Not Recorded at Fair Value on a Recurring Basis
We report our financial instruments at fair value, with the exception of the 0% Convertible Senior Notes, due in 2023 (the "Notes"). Financial instruments that are not recorded at fair value are measured at fair value on a quarterly basis for disclosure purposes. The carrying values and estimated fair values of financial instruments not recorded at fair value are as follows:
|
| | | | | | | | | | | | | | | |
| | As of July 31, 2017 | | As of July 31, 2018 |
| | Carrying Value | | Estimated Fair Value | | Carrying Value | | Estimated Fair Value |
| | (in thousands) |
| Convertible senior notes, net | $ | — |
| | $ | — |
| | $ | 429,598 |
| | $ | 685,527 |
|
The carrying value of the Notes as of July 31, 2018 was net of the unamortized debt discount of $137.7 million and unamortized debt issuance costs of $7.7 million.
The total estimated fair value of the Notes was determined based on the closing trading price per $100 of the Notes as of the last day of trading for the period. We consider the fair value of the Notes to be a Level 2 measurement due to the limited trading activity.
A summary of the changes in the fair value of our contingent consideration, characterized as Level 3 in the Company’s convertible preferred stock warrant liabilityfair value hierarchy, is as follows (in thousands):follows:
|
| | | | | | | | | | | |
| | Fiscal Year Ended July 31, |
| | 2015 | | 2016 | | 2017 |
| Convertible preferred stock warrant liability—beginning balance | $ | 5,507 |
| | $ | 11,683 |
| | $ | 9,679 |
|
| Change in fair value* | 6,176 |
| | (2,004 | ) | | 21,133 |
|
| Reclassification of unexercised warrants to APIC upon the IPO | — |
| | — |
| | (30,812 | ) |
| Convertible preferred stock warrant liability—ending balance | $ | 11,683 |
|
| $ | 9,679 |
|
| $ | — |
|
______________ |
| | | | | | | |
| | Fiscal Year Ended July 31, |
| | 2017 | | 2018 |
| | (in thousands) |
| Contingent consideration—beginning balance | $ | — |
| | $ | 4,295 |
|
| Assumed in a business combination | 2,371 |
| | — |
|
Change in fair value (1) | 1,924 |
| | (2,423 | ) |
| Contingent consideration—ending balance | $ | 4,295 |
| | $ | 1,872 |
|
| |
* | Recognized in the consolidated statements of operations within other expense—net. |
A summary of the changes in the fair value of the Company’s contingent consideration is as follows (in thousands):
|
| | | |
| | Fiscal Year Ended July 31, 2017 |
| Contingent consideration—beginning balance | $ | — |
|
| Assumed in the PernixData acquisition | 2,371 |
|
| Change in fair value* | 1,924 |
|
| Contingent consideration—ending balance | $ | 4,295 |
|
______________
| |
*(1) | Recognized in the consolidated statements of operations within general and administrative expenses. |
The Company remeasures
NUTANIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We remeasure the fair value of itsour Level 3 contingent consideration liability using thea Monte Carlo simulation on projected future payments. The fair value is determined by calculating the net present value of the expected payments using significant inputs that are not observable in the market, including the probability of achieving the milestone, estimated bookings and discount rates. The fair value of the contingent consideration will increase or decrease according to the movement of the inputs.
| |
NOTE 5. | BALANCE SHEET COMPONENTS |
NOTE 5. BALANCE SHEET COMPONENTS
Short-Term Investments—
The amortized cost of the Company’sour short-term investments approximateapproximates their fair value. As of July 31, 20162017 and 2017,2018, unrealized gains orand losses from the Company’sour short-term investments were immaterialnot material. As of July 31, 2017 and there were no2018, securities that were in an unrealized loss position for more than 12 months.months were not material. Unrealized losses related to short-term investments are due to interest rate fluctuations, as opposed to credit quality. In addition, unless we need cash to support our current operations, we do not intend to sell and it is not likely that we would be required to sell these investments before recovery of their amortized cost basis, which may be at maturity. As a result, at July 31, 2017 and 2018, there were no other-than-temporary impairments for these investments.
The following table summarizes the estimated fair value of the Company’sour investments in marketable debt securities by thetheir contractual maturity date (in thousands):dates:
|
| | | |
| | As of July 31 |
| | 2017 |
| Due within 1 year | $ | 151,014 |
|
| Due after 1 year through 3 years | 59,680 |
|
| Total | $ | 210,694 |
|
|
| | | |
| | As of July 31, 2018 |
| | (in thousands) |
| Due within one year | $ | 463,940 |
|
| Due in one year through three years | 164,388 |
|
| Total | $ | 628,328 |
|
Property and Equipment—Equipment, Net—
Property and equipment, net consists of the following (in thousands):following:
|
| | | | | | | | | |
| | Estimated Useful Life | | As of July 31 |
| | 2016 | | 2017 |
| | (In months) | | | | |
| Computer, production, engineering and other equipment | 36 | | $ | 54,161 |
| | $ | 85,280 |
|
| Demonstration units | 12 | | 33,184 |
| | 46,387 |
|
| Leasehold improvements | ** | | 6,619 |
| | 10,562 |
|
| Furniture and fixtures | 60 | | 3,641 |
| | 4,744 |
|
| Total property and equipment—gross | | | 97,605 |
|
| 146,973 |
|
| Less accumulated depreciation and amortization | | | (55,387 | ) | | (88,901 | ) |
| Total property and equipment—net | | | $ | 42,218 |
|
| $ | 58,072 |
|
|
| | | | | | | | | |
| | Estimated Useful Life | | As of July 31, |
| | 2017 | | 2018 |
| | (in months) | | (in thousands) |
| Computer, production, engineering, and other equipment | 36 | | $ | 85,280 |
| | $ | 131,805 |
|
| Demonstration units | 12 | | 46,387 |
| | 53,547 |
|
| Leasehold improvements | (1) | | 10,562 |
| | 19,916 |
|
| Furniture and fixtures | 60 | | 4,744 |
| | 7,636 |
|
| Total property and equipment, gross | | | 146,973 |
|
| 212,904 |
|
| Less: Accumulated depreciation and amortization | | | (88,901 | ) | | (127,793 | ) |
| Total property and equipment, net | | | $ | 58,072 |
|
| $ | 85,111 |
|
** Leasehold improvements are amortized over the shorter of the estimated useful lives of the improvements or the remaining lease term. | |
| (1) | Leasehold improvements are amortized over the shorter of the estimated useful lives of the improvements or the remaining lease term. |
Depreciation expense related to our property and amortization expenseequipment was $26.4 million, $36.2 million and $43.7 million for the fiscal years ended July 31, 2015, 2016, 2017 and 2017 was $16.6 million, $26.4 million and $38.4 million,2018, respectively.
Intangible Assets—Net—Intangible assets, net consists of the following (in thousands):
|
| | | |
| | As of July 31, 2017 |
| Indefinite-lived intangible asset: | |
| In-process R&D | $ | 16,100 |
|
| Finite-lived intangible assets: | |
| Developed technology | 7,300 |
|
| Customer relationships | 4,830 |
|
| Total finite-lived intangible assets, gross | 12,130 |
|
| Total intangible assets, gross | 28,230 |
|
| Less: | |
| Accumulated amortization of developed technology | (1,314 | ) |
| Accumulated amortization of customer relationships | (915 | ) |
| Total accumulated amortization | (2,229 | ) |
| Intangible assets, net | $ | 26,001 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
ChangesIntangible Assets, Net
Intangible assets, net consists of the following:
|
| | | | | | | |
| | As of July 31, |
| | 2017 | | 2018 |
| | (in thousands) |
| Indefinite-lived intangible asset: | | | |
In-process R&D (1) | $ | 16,100 |
| | $ | — |
|
| Finite-lived intangible assets: | | | |
Developed technology (1) | 7,300 |
| | 47,500 |
|
| Customer relationships | 4,830 |
| | 6,650 |
|
| Total finite-lived intangible assets, gross | 12,130 |
| | 54,150 |
|
| Total intangible assets, gross | 28,230 |
| | 54,150 |
|
| Less: | | | |
| Accumulated amortization of developed technology | (1,314 | ) | | (6,956 | ) |
| Accumulated amortization of customer relationships | (915 | ) | | (1,828 | ) |
| Total accumulated amortization | (2,229 | ) | | (8,784 | ) |
| Intangible assets, net | $ | 26,001 |
| | $ | 45,366 |
|
| |
| (1) | We started amortizing in-process R&D during the first quarter of fiscal 2018, as the related technology was completed and made generally available in the first quarter of fiscal 2018. We are amortizing developed technology using the straight-line method over a useful life of five years. Based on the foregoing, the balance of in-process R&D is now presented as part of developed technology as of July 31, 2018. |
The amortization expense related to our finite-lived intangible assets is being recognized in the consolidated statements of operations within product cost of revenue for developed technology and sales and marketing expense for customer relationships.
The changes in the net book value of intangible assets, net are as follows (in thousands):follows:
|
| | | |
| | Fiscal Year Ended
July 31, 2017 |
| Intangible assets, net—beginning balance | $ | — |
|
| Acquired in the Calm Acquisition | 3,960 |
|
| Acquired in the PernixData Acquisition | 24,270 |
|
| Amortization of intangible assets * | (2,229 | ) |
| Intangible assets, net—ending balance | $ | 26,001 |
|
|
| | | | | | | |
| | As of July 31, |
| | 2017 | | 2018 |
| | (in thousands) |
| Intangible assets, net—beginning balance | $ | — |
| | $ | 26,001 |
|
| Acquired intangible assets | 28,230 |
| | 25,920 |
|
Amortization of intangible assets (1) | (2,229 | ) | | (6,555 | ) |
| Intangible assets, net—ending balance | $ | 26,001 |
| | $ | 45,366 |
|
| |
*(1) | Represents amortization expense ofrelated to finite-lived intangible assets recognized during the year in the consolidated statementstatements of operations, during the year within product cost of revenue and sales and marketing expenses. |
Estimated
NUTANIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The estimated future amortization expense of our finite-lived intangible assets is as follows:
| | | Fiscal Year Ending July 31: | (In thousands) | Amount |
| 2018 | $ | 2,220 |
| |
| | | (in thousands) |
| 2019 | 2,201 |
| $ | 9,551 |
|
| 2020 | 2,201 |
| 9,511 |
|
| 2021 | 2,201 |
| 9,511 |
|
| 2022 | | 8,314 |
|
| 2023 | | 3,971 |
|
| Thereafter | 1,078 |
| 4,508 |
|
| Total | $ | 9,901 |
| $ | 45,366 |
|
Goodwill -Changes
The changes in the carrying amount of goodwill for fiscal 2017 are as follows (in thousands):follows:
|
| | | |
| | Fiscal Year Ended
July 31, 2017 |
| Goodwill—beginning balance | $ | — |
|
| Acquired in the Calm Acquisition | 4,819 |
|
| Acquired in the PernixData Acquisition | 11,853 |
|
| Goodwill—ending balance | $ | 16,672 |
|
|
| | | |
| | Carrying Amount |
| | (in thousands) |
| Balance at July 31, 2016 | $ | — |
|
| Acquired in Calm Acquisition | 4,819 |
|
| Acquired in PernixData Acquisition | 11,853 |
|
| Balance at July 31, 2017 | 16,672 |
|
| Acquired in Netsil Acquisition | 53,085 |
|
| Acquired in Minjar Acquisition | 18,002 |
|
| Balance at July 31, 2018 | $ | 87,759 |
|
Other Assets—Non-Current
Other assets—non-current consists of the following:
|
| | | | | | | |
| | As of July 31, |
| | 2017 | | 2018 |
| | (in thousands) |
| Other tax assets—non-current | $ | — |
| | $ | 30,927 |
|
| Deferred tax assets—non-current | 3,420 |
| | 2,860 |
|
| Other | 4,229 |
| | 4,068 |
|
| Total other assets—non-current | $ | 7,649 |
| | $ | 37,855 |
|
Other tax assets—non-current as of July 31, 2018 represents a receivable associated with alternative minimum tax credit carryforwards which will be refundable as a result of the Tax Cuts and Jobs Act. For additional details, refer to Note 11.
NUTANIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Accrued Compensation and Benefits—
Accrued compensation and benefits consists of the following (in thousands):following:
| | | | As of July 31 | As of July 31, |
| | 2016 | | 2017 | 2017 | | 2018 |
| | | (in thousands) |
| Contributions to ESPP withheld | | $ | 14,371 |
| | $ | 21,931 |
|
| Accrued commissions | $ | 14,203 |
| | $ | 20,388 |
| 20,388 |
| | 21,660 |
|
| Contributions to ESPP withheld | — |
| | 14,371 |
| |
| Accrued bonus | 3,592 |
| | 7,342 |
| 7,342 |
| | 12,129 |
|
| Accrued vacation | 3,490 |
| | 6,286 |
| 6,286 |
| | 10,548 |
|
| Payroll taxes payable | 1,234 |
| | 3,434 |
| 3,434 |
| | 9,563 |
|
| Other | 2,028 |
| | 5,700 |
| 5,700 |
| | 9,567 |
|
| Total accrued compensation and benefits | $ | 24,547 |
|
| $ | 57,521 |
| $ | 57,521 |
|
| $ | 85,398 |
|
Accrued Expenses and Other Current Liabilities—
Accrued expenses and other current liabilities consists of the following (in thousands):following:
| | | | As of July 31 | As of July 31, |
| | 2016 | | 2017 | 2017 | | 2018 |
| | | (in thousands) |
Income taxes payable | | $ | 3,873 |
| | $ | 20,863 |
|
| Accrued professional services | $ | 3,585 |
| | $ | 4,167 |
| 4,167 |
| | 5,838 |
|
Income taxes payable | 1,417 |
| | 3,580 |
| |
| Other | 535 |
| | 1,667 |
| 1,667 |
| | 4,981 |
|
| Total accrued expenses and other current liabilities | $ | 5,537 |
|
| $ | 9,414 |
| $ | 9,707 |
|
| $ | 31,682 |
|
| |
NOTE 6.(1) | DEBTBalance as of July 31, 2017 was adjusted to reflect the impact of the adoption of ASC 606 on income taxes. See Note 3 for a summary of adjustments. |
| |
| (2) | The increase in income taxes payable during the fiscal year ended July 31, 2018 was due primarily to a payable related to the alternative minimum tax associated with the migration of certain intangible assets. For additional details, refer to Note 11. |
NUTANIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 6. DEBT
Senior Notes—
In April 2016, the Companywe issued an aggregate principal amount of $75.0 million of senior notes due on April 15, 2019 (the “Senior Notes”"2019 Notes") to a lender. The Senior2019 Notes contained a guaranteed minimum return to the holder of the Senior2019 Notes (the “Guaranteed"Guaranteed Minimum Return”Return"). In September 2016, the Companywe fully repaid all outstanding principal balance of the Senior2019 Notes and incurred approximately $3.3 million of loss on debt extinguishment, which consisted of $1.7 million of unamortized debt issuance costs and $1.6 million of debt extinguishment costs primarily related to the Guaranteed Minimum Return.
Convertible Senior Notes
In January 2018, we issued Convertible Senior Notes with a 0% interest rate for an aggregate principal amount of $575.0 million, due in 2023 (the "Notes"), in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. This included $75.0 million in aggregate principal amount of the Notes that we issued resulting from initial purchasers fully exercising their option to purchase additional notes. There are no required principal payments prior to the maturity of the Notes. The total net proceeds from the Notes are as follows:
|
| | | |
| | Amount |
| | (in thousands) |
| Principal amount | $ | 575,000 |
|
| Less: initial purchasers' discount | (10,781 | ) |
| Less: cost of the bond hedges | (143,175 | ) |
| Add: proceeds from the sale of warrants | 87,975 |
|
| Less: other issuance costs | (707 | ) |
| Net proceeds | $ | 508,312 |
|
The Notes do not bear any interest and will mature on January 15, 2023, unless earlier converted or repurchased in accordance with their terms. The Notes are unsecured and do not contain any financial covenants or any restrictions on the payment of dividends, or the issuance or repurchase of securities by us.
Each $1,000 of principal of the Notes will initially be convertible into 20.4705 shares of our Class A common stock, which is equivalent to an initial conversion price of approximately $48.85 per share, subject to adjustment upon the occurrence of specified events. Holders of these Notes may convert their Notes at their option at any time prior to the close of the business day immediately preceding October 15, 2022, only under the following circumstances:
| |
| 1) | during any fiscal quarter commencing after the fiscal quarter ending on April 30, 2018 (and only during such fiscal quarter), if the last reported sale price of our Class A common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter, is greater than or equal to 130% of the conversion price on each applicable trading day; |
| |
| 2) | during the five business day period after any five consecutive trading day period (the "measurement period") in which the trading price per $1,000 principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our Class A common stock and the conversion rate for the Notes on each such trading day; or |
| |
| 3) | upon the occurrence of certain specified corporate events. |
Based on the closing price of our Class A common stock of $48.89 on July 31, 2018, the if-converted value of the Notes was greater than the principal amount. However, since the price of our Class A common stock was not greater than or equal to 130% of the conversion price for 20 or more trading days during the 30 consecutive trading days ending on the last trading day of the quarter ended July 31, 2018, the Notes were not convertible during the fiscal quarter ending on July 31, 2018.
NUTANIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On or after October 15, 2022, holders may convert all or any portion of their Notes at any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date, regardless of the foregoing conditions.
Upon conversion of the Notes, we will pay or deliver, as the case may be, cash, shares of our Class A common stock or a combination of cash and shares of Class A common stock, at our election. We intend to settle the principal of the Notes in cash.
The conversion rate will be subject to adjustment in some events, but will not be adjusted for any accrued or unpaid interest. A holder who converts their Notes in connection with certain corporate events that constitute a "make-whole fundamental change" per the indenture governing the Notes are, under certain circumstances, entitled to an increase in the conversion rate. In addition, if we undergo a fundamental change prior to the maturity date, holders may require us to repurchase for cash all or a portion of their Notes at a repurchase price equal to 100% of the principal amount of the repurchased Notes, plus accrued and unpaid interest.
We may not redeem the Notes prior to the maturity date, and no sinking fund is provided for the Notes.
In accounting for the issuance of the Notes, we separated the Notes into liability and equity components. The carrying amount of the liability component of approximately $423.4 million was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component of approximately $151.6 million, representing the conversion option, was determined by deducting the fair value of the liability component from the par value of the Notes. The difference between the principal amount of the Notes and the liability component (the "debt discount") is amortized to interest expense using the effective interest method over the term of the Notes. The equity component of the Notes is included in additional paid-in capital in the consolidated balance sheets and is not remeasured as long as it continues to meet the conditions for equity classification.
We incurred transaction costs related to the issuance of the Notes of approximately $11.5 million, consisting of an initial purchasers' discount of $10.8 million and other issuance costs of approximately $0.7 million. In accounting for the transaction costs, we allocated the total amount incurred to the liability and equity components using the same proportions as the proceeds from the Notes. Transaction costs attributable to the liability component were approximately $8.5 million, recorded as debt issuance costs (presented as contra debt in the consolidated balance sheets), and are being amortized to interest expense over the term of the Notes. The transaction costs attributable to the equity component were approximately $3.0 million and were net with the equity component within stockholders’ equity.
The Notes consisted of the following:
|
| | | |
| | As of July 31, 2018 |
| | (in thousands) |
| Principal amounts: | |
| Principal | $ | 575,000 |
|
Unamortized debt discount (1) | (137,719 | ) |
Unamortized debt issuance costs (1) | (7,683 | ) |
| Net carrying amount | $ | 429,598 |
|
Carrying amount of equity component (2) | $ | 148,598 |
|
| |
| (1) | Included in the consolidated balance sheets within "Convertible senior notes, net" and amortized over the remaining life of the Notes using the effective interest rate method. The effective interest rate is 6.62%. |
| |
| (2) | Included in the consolidated balance sheets within additional paid-in capital, net of $3.0 million in equity issuance costs. |
As of July 31, 2018, the remaining life of the Notes was approximately 53 months.
NUTANIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table sets forth the total interest expense recognized related to the Notes:
|
| | | |
| | Fiscal Year Ended July 31, 2018 |
| | (in thousands) |
| Interest expense related to amortization of debt discount | $ | 13,909 |
|
| Interest expense related to amortization of debt issuance costs | 776 |
|
| Total interest expense | $ | 14,685 |
|
Note Hedges and Warrants
Concurrently with the offering of the Notes in January 2018, we entered into convertible note hedge transactions with certain bank counterparties, whereby we have the initial option to purchase a total of approximately 11.8 million shares of our Class A common stock at a conversion price of approximately $48.85 per share, subject to adjustment for certain specified events. The total cost of the convertible note hedge transactions was approximately $143.2 million. In addition, we sold warrants to certain bank counterparties, whereby the holders of the warrants have the initial option to purchase a total of approximately 11.8 million shares of our Class A common stock at a price of $73.46 per share, subject to adjustment for certain specified events. We received approximately $88.0 million in cash proceeds from the sale of these warrants.
Taken together, the purchase of the convertible note hedges and the sale of warrants are intended to offset any actual dilution from the conversion of the Notes and to effectively increase the overall conversion price from $48.85 to $73.46 per share. As these transactions meet certain accounting criteria, the convertible note hedges and warrants are recorded within stockholders’ equity and are not accounted for as derivatives. The net cost incurred in connection with the convertible note hedge and warrant transactions of approximately $55.2 million was recorded as a reduction to additional paid-in capital in the consolidated balance sheet as of July 31, 2018. The fair value of the note hedges and warrants are not remeasured each reporting period. The amounts paid for the note hedges are tax deductible expenses, while the proceeds received from the warrants are not taxable.
Impact to Earnings per Share
The Notes will have no impact to diluted earnings per share ("EPS") until they meet the criteria for conversion, as discussed above, as we intend to settle the principal amount of the Notes in cash upon conversion. Under the treasury stock method, in periods when we report net income, we are required to include the effect of additional shares that may be issued under the Notes when the price of our Class A common stock exceeds the conversion price. Under this method, the cumulative dilutive effect of the Notes would be approximately 3.9 million shares if the average price of our Class A common stock was $73.46. However, upon conversion, there will be no economic dilution from the Notes, as exercise of the note hedges eliminate any dilution that would have otherwise occurred. The note hedges are required to be excluded from the calculation of diluted earnings per share, as they would be antidilutive under the treasury stock method.
The warrants will have a dilutive effect when the average share price exceeds the warrant strike price of $73.46 per share. As the price of our Class A common stock continues to increase above the warrant strike price, additional dilution would occur at a declining rate so that a $10 increase from the warrant strike price would yield a cumulative dilution of approximately 4.9 million diluted shares for EPS purposes. However, upon conversion, the note hedges would neutralize the dilution from the Notes so that there would only be dilution from the warrants, which would result in an actual dilution of approximately 1.4 million shares at a common stock price of $83.46.
NUTANIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| |
NOTE 7. | COMMITMENTS AND CONTINGENCIES |
NOTE 7. COMMITMENTS AND CONTINGENCIES
Operating Leases—The Company has
We have commitments for future payments related to itsour office facility leases and other contractual obligations. The Company leases itsWe lease our office facilities under non-cancelable operating lease agreements expiring through the year ending 2024. Certain of these lease agreements have free or escalating rent payments. The Company recognizesWe recognize rent expense under such agreements on a straight-line basis over the lease term, with any free or escalating rent payments amortized as a reduction or addition of rent expense over the lease term.
Future minimum payments due under operating leases as of July 31, 20172018 are as follows (in thousands):follows:
| | | Fiscal Year Ending July 31: | | Amount |
| 2018 | $ | 16,304 |
| |
| | | (in thousands) |
| 2019 | 14,891 |
| $ | 26,158 |
|
| 2020 | 12,758 |
| 23,849 |
|
| 2021 | 9,197 |
| 21,749 |
|
| 2022 | 3,535 |
| 20,739 |
|
| 2023 | | 17,115 |
|
| Thereafter | 1,692 |
| 12,718 |
|
| Total | $ | 58,377 |
| $ | 122,328 |
|
Rent expense incurred under operating leases was $4.0 million, $7.6 million, $12.7 million and $12.7$19.0 million for the fiscal years ended July 31, 2015, 2016, 2017 and 2017,2018, respectively.
Purchase Commitments—
In the normal course of business, the Company makeswe make commitments with itsour third-party hardware product manufacturers to manufacture its inventoriesour inventory and non-standard components based on itsour forecasts. These commitments consist of obligations for on-hand inventoriesinventory and non-cancelable purchase orders for non-standard components. The Company recordsWe record a charge for firm, non-cancelable and unconditional purchase commitments with itsour third-party hardware product manufacturers for non-standard components when and if quantities exceed itsour future demand forecasts through a charge to cost of product sales. As of July 31, 2017, the Company2018, we had approximately $72.6$23.1 million in the form of guarantees to our contract manufacturers related to certain components and approximately $36.7 million of non-cancellableother non-cancelable purchase commitments with its contract manufacturers. As of July 31, 2017, the Company had approximately $26.6 million in other purchase obligations pertaining to itsour normal operations.
Guarantees and Indemnifications
Guarantees—The Company hasWe have entered into agreements with some of itsour Partners and customers that contain indemnification provisions in the event of claims alleging that the Company’sour products infringe the intellectual property rights of a third party. The scope of such indemnification varies, and may include, in certain cases, the ability to cure the indemnification by modifying or replacing the product at the Company’sour own expense, requiring the return and refund of the infringing product, procuring the right for the partner and/or customer to continue to use or distribute the product, as applicable, and/or defending the partner or customer against and paying any damages from third-party actions based upon claims of infringement. Other guarantees or indemnification arrangements include guarantees of product and service performance.
We have also agreed to indemnify our directors, executive officers and certain other officers for costs associated with any fees, expenses, judgments, fines and settlement amounts incurred by any of these persons in any action or proceeding to which any of those persons is, or is threatened to be, made a party by reason of the person’s service as a director or officer, including any action by us, arising out of that person’s services as a director or officer of our company or that person’s services provided to any other company or enterprise at our request. We maintain director and officer insurance coverage that may enable us to recover a portion of any future amounts paid.
The fair value of liabilities related to indemnifications and guarantee provisions are not material and have not had any material impact on the consolidated financial statements to date.
NUTANIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Litigation —From
From time to time, the Companywe may become involved in various litigation and administrative proceedings relating to claims arising from itsour operations in the normal course of business. Management is not currently aware of any matters that may have a material adverse impact on the Company’sour business, financial position, results of operations or cash flows.
| |
NOTE 8. | CONVERTIBLE PREFERRED STOCK WARRANTS |
The Convertible Preferred Stock Warrants outstanding prior to the IPO were as follows (in thousands, except for share and per share amounts):
|
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Fair Value as of |
| Class of Shares | Issuance Date | | Contractual Term | | Number of
Shares | | Exercise
Price per
Share | | July 31, 2016 | | IPO Date(1) |
| Series A warrants | December 21, 2009 | | 10 years | | 683,644 |
| | $ | 0.234 |
| | $ | 8,259 |
| | $ | 25,883 |
|
| Series A warrants | May 10, 2010 | | 10 years | | 85,450 |
| | $ | 0.234 |
| | 1,032 |
| | 3,235 |
|
| Series D warrants | November 26, 2013 | | 10 years | | 10,000 |
| | $ | 7.289 |
| | 77 |
| | 308 |
|
| Series D warrants | December 12, 2013 | | 7 years | | 45,000 |
| | $ | 7.289 |
| | 311 |
| | 1,386 |
|
| | | | | | 824,094 |
| | | | $ | 9,679 |
| (2) | $ | 30,812 |
|
______________
| |
(1) | Immediately prior to the closing of the Company’s IPO. |
(2) Reflected in the consolidated balance sheets as convertible preferred stock warrant liability.
Immediately prior to the closing of the Company’s IPO, all outstanding convertible preferred stock warrants automatically converted to common stock warrants, and then were reclassified as Class B common stock warrants. As a result of the automatic conversion of the convertible preferred stock warrants to Class B common stock warrants, the Company revalued the convertible preferred stock warrants as of the completion of the IPO and reclassified the outstanding preferred stock warrant liability balance to additional paid-in capital with no further remeasurements as the common stock warrants are now deemed permanent equity. During the year ended July 31, 2017, a total of 789,914 Class B common stock warrants were exercised. As a result, during the year ended July 31, 2017, the Company issued a total of 775,554 shares of Class B common stock as the contracts allow a net share settlement for Class B common stock. As of July 31, 2017, there were 34,180 Class B common stock warrants outstanding.
Prior to the Company's IPO, it estimated the fair value of each Convertible Preferred Stock Warrants using Black-Scholes with the following assumptions:
Fair Value of Convertible Preferred Stock—The fair value of Convertible Preferred Stock represented the fair value of the underlying Convertible Preferred Stock that the warrants were convertible into.
Remaining Contractual Term—The remaining contractual term represented the time from the date of the valuation to the expiration of the warrant.
Risk-Free Interest Rate—The risk-free interest rate was based on U.S. Treasury yield in effect as of the measurement dates, and for zero coupon U.S. Treasury notes with maturities approximately equal to the term of the warrant.
Volatility—The volatility was derived from historical volatilities of several unrelated publicly-listed peer companies over a period approximately equal to the term of the warrant because the Company had limited information on the volatility of the Convertible Preferred Stock since there was currently no trading history. When making the selections of industry peer companies to be used in the volatility calculation, the Company considered the size, operational and economic similarities to the Company’s principle business operations.
Dividend Yield—The expected dividend assumption was based on the Company’s current expectations about the Company’s anticipated dividend policy.
The assumptions used to determine the fair value of the Company’s Series A convertible preferred stock warrants prior to the Company's IPO are as follows:
|
| | | | |
| | | As of July 31, 2016 |
| Fair value of convertible preferred stock | | $ | 12.31 |
|
| Risk-free interest rate | | 0.9 | % |
| Contractual term (in years) | | 3.4 |
|
| Volatility | | 54 | % |
| Dividend yield | | — |
|
The assumptions used to determine the fair value of the Company’s Series D convertible preferred stock warrants prior to the Company's IPO are as follows:
|
| | | | |
| | | As of July 31, 2016 |
| Fair value of convertible preferred stock | | $ | 13.16 |
|
| Risk-free interest rate | | 1.0 | % |
| Contractual term (in years) | | 4.9 |
|
| Volatility | | 35 | % |
| Dividend yield | | — |
|
NOTE 9. CONVERTIBLE PREFERRED STOCK8. STOCKHOLDERS’ EQUITY
Series A Convertible Preferred Stock, Series B Convertible Preferred Stock, Series C Convertible Preferred Stock, Series D Convertible Preferred Stock and Series E Convertible Preferred Stock (collectively the “Convertible Preferred Stock”) outstanding consisted of the following as of July 31, 2016 and as of immediately prior to the automatic conversion of the Convertible Preferred Stock into Class B common stock:
|
| | | | | | | | | |
| | Shares Authorized | | Shares Issued and Outstanding | | Aggregate Liquidation Preference |
| | | | | | (In thousands) |
| Series A | 28,165,300 |
| | 27,396,198 |
| | $ | 15,494 |
|
| Series B | 16,558,441 |
| | 16,558,441 |
| | 25,250 |
|
| Series C | 7,683,710 |
| | 7,683,710 |
| | 33,000 |
|
| Series D | 13,912,438 |
| | 13,857,438 |
| | 151,500 |
|
| Series E | 11,943,420 |
| | 10,823,724 |
| | 145,000 |
|
| | 78,263,309 |
|
| 76,319,511 |
|
| $ | 370,244 |
|
Immediately prior to the closing of the Company’s IPO, all shares of the Company’s then-outstanding Convertible Preferred Stock, as shown in the table above, automatically converted on a one-for-one basis into an aggregate of 76,319,511 shares of common stock, which were then reclassified into Class B common stock.
| |
NOTE 10. | STOCKHOLDERS’ EQUITY |
Preferred Stock
Immediately prior to the closing of the Company’sour IPO, the Companywe filed an Amended and Restated Certificate of Incorporation, which authorized the issuance of undesignated preferred stock with rights and preferences, including voting rights, designated from time to time by the Company’sour Board of Directors (the “Board”"Board"). As of July 31, 2017,2018, there were 200,000,000 shares of preferred stock authorized with a par value of $0.000025 and no shares of preferred stock issued and outstanding.
Common Stock
In connection with theour IPO, the Companywe established two classes of authorized common stock, Class A common stock and Class B common stock. All shares of common stock outstanding immediately prior to the IPO, including shares of common stock issued upon the conversion of the Convertible Preferred Stock, were converted into an equivalent number of shares of Class B common stock. As of July 31, 2017, the Company2018, we had 1,000,000,000 shares of Class A common stock authorized with a par value of $0.000025 per share and 200,000,000 shares of Class B common stock authorized with a par value of $0.000025 per share. As of July 31, 2017, 93,570,1712018, we had 135,109,672 shares of Class A common stock were issued and outstanding and 61,066,34937,748,410 shares of Class B common stock were issued and outstanding.
Holders of Class A common stock are entitled to one vote for each share of Class A common stock held on all matters submitted to a vote of stockholders and holdersstockholders. Holders of Class B common stock are entitled to ten votes for each share of Class B common stock held on all matters submitted to a vote of stockholders. Except with respect to voting, the rights of the holders of Class A and Class B common stock are identical. Shares of Class B common stock are voluntarily convertible into shares of Class A common stock at the option of the holder and are generally automatically converted into shares of the Company'sour Class A common stock upon sale or transfer. Shares issued in connection with exercises of stock options, vesting of restricted stock units, or shares purchased under the employee stock purchase plan are generally automatically converted into shares of the Company’sour Class A common stock. Shares issued in connection with an exercise of the common stock warrants are converted into shares of the Company’sour Class B common stock.
Common Stock Reserved Forfor Issuance
As of July 31, 2017,2018, we had reserved shares of common stock for future issuance as follows:
|
| | |
| | As of July 31, 20172018 |
| Shares reserved for future equity grants | 15,149,58911,169,061 |
|
| Shares underlying outstanding stock options | 20,334,53111,332,554 |
|
| Shares underlying outstanding restricted stock units | 17,376,09023,597,499 |
|
| Shares reserved for future employee stock purchase plan awards | 2,553,9461,682,461 |
|
| Shares underlying outstanding common stock warrants | 34,180 |
|
| Total | 55,448,33647,815,755 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| |
NOTE 11. | EQUITY AWARD PLANS |
NOTE 9. EQUITY AWARD PLANS
Stock Plans—
In June 2010, the Companywe adopted the 2010 Stock Plan (“("2010 Plan”Plan"), and in December 2011, the Companywe adopted the 2011 Stock Plan (“("2011 Plan”Plan"). In, and in December 2015, the Board adopted the 2016 Equity Incentive Plan (“("2016 Plan” and together with the 2010 Plan and 2011 Plan, the “Stock Plans”Plan"), which was amended in September 2016. The Company’s2016 (collectively, the "Stock Plans"). Our stockholders approved the 2016 Plan in March 2016 and it became effective in connection with the Company’sour IPO. As a result, uponat the time of the IPO, the Companywe ceased granting additional stock awards under the 2010 Plan and 2011 Plan and the 2010 Plan and 2011 Planboth plans were terminated. Any outstanding stock awards under the 2010 Plan and 2011 Plan will remain outstanding, subject to the terms of the applicable plan and award agreements, until such shares are issued under those stock awards, by exercise of stock options or settlement of RSUs,restricted stock units ("RSUs"), or until those stock awards become vested or expired by their terms.
Under the 2016 Plan, the Companywe may grant incentive stock options (“ISO”("ISOs"), non-statutory stock options (“NSO”("NSOs"), restricted stock, (“RS”), restricted stock units (“RSU”)RSUs and stock appreciation rights (“SAR”) to employees, directors and consultants. The Company hasWe initially reserved 22,400,000 shares of the Company’sour Class A common stock for issuance under the 2016 Plan. The number of shares of Class A common stock available for issuance under the 2016 Plan will also include an annual increase on the first day of each fiscal year, beginning in fiscal year 2018, equal to the lesser of: 18,000,000 shares, 5% of the outstanding shares of all classes of common stock as of the last day of the Company’sour immediately preceding fiscal year, or such other amount as may be determined by the Board. In addition, up to a maximumAccordingly, on August 1, 2017, the number of 38,667,284 shares of Class BA common stock returned to the 2010 Plan and 2011 Plan as the result of expiration or termination of awards after the IPO will also become available for issuance under the 2016 Plan.Plan increased by 7,731,826 shares pursuant to these provisions. As of July 31, 2017, the Company2018, we had reserved a total of 52,860,21046,133,294 shares for the issuance of equity awards under the Stock Plans, of which 15,149,58911,169,061 shares were still available for grant. On August 1, 2018, the number of shares of Class A common stock available for issuance under the 2016 Plan increased by 8,642,904 shares pursuant to the automatic increase provisions.
Restricted Stock Units
Below is a summary of RSU activity under the Stock Plans:
|
| | | | | | | | | | | | | |
| | Fiscal Year Ended July 31, |
| | 2017 | | 2018 |
| | Number of
Shares | | Grant Date Fair Value per Share | | Number of
Shares | | Grant Date Fair Value per Share |
| Outstanding at beginning of period | 12,265,369 |
| | $ | 13.23 |
| | 17,376,090 |
| | $ | 18.85 |
|
| Granted | 12,986,597 |
| | $ | 21.84 |
| | 14,947,403 |
| | $ | 39.44 |
|
| Released | (6,146,169 | ) | | $ | 15.63 |
| | (5,823,800 | ) | | $ | 19.96 |
|
| Canceled/forfeited | (1,729,707 | ) | | $ | 13.57 |
| | (2,902,194 | ) | | $ | 22.34 |
|
| Outstanding at end of period | 17,376,090 |
| | $ | 18.85 |
| | 23,597,499 |
| | $ | 31.20 |
|
Performance RSUs. The Company grants— We grant RSUs that contain both service and performance conditions to itsour executives and employees.employees ("Performance RSUs"). Vesting of the Performance RSUs is subject to continuous service withand the Company and satisfaction of certain liquidity events, of the Company, including the expiration of a lock-up period established in connection with the IPO and/or both certain liquidity events and specified performance targets (collectively, the “Performance RSUs”).targets. While the Company recognizeswe recognize cumulative stock-based compensation expense for the portion of the awards for which both the service condition has been satisfied whenand it is probable that the performance conditions will be met, the actual vesting and settlement of the Performance RSUs are subject to the performance conditions actually being met. During the first quarter of fiscal 2017, the Companywe began to recognize stock-based compensation expense related to certain Performance RSUs with liquidity event performance conditions, as the satisfaction of the performance conditions for vesting became probable.
The Company’s summary of RSU activity under the Stock Plans is as follows:
|
| | | | | | |
| | Number of
Shares | | Grant Date Fair Value per Share |
| Outstanding—July 31, 2016 | 12,265,369 |
| | $ | 13.23 |
|
| Granted | 12,986,597 |
| | $ | 21.84 |
|
| Released | (6,146,169 | ) | | $ | 15.63 |
|
| Canceled/forfeited | (1,729,707 | ) | | $ | 13.57 |
|
| Outstanding—July 31, 2017 | 17,376,090 |
| | $ | 18.85 |
|
Offer to Exchange Stock Options for RSUs (the “Tender Offer”).In July 2016, the Company approved a tender offer stock option exchange program under which outstanding employee stock options with exercise prices of $8.41 or greater per share could be exchanged for a specified number of Performance RSUs based on a predetermined exchange ratio granted with a new vesting period. As a result of the Tender Offer, on August 16, 2016, stock options to purchase 1,361,317 common shares were cancelled and, in exchange, the Company granted 911,489 Performance RSUs to eligible employees. The Tender Offer resulted in a total incremental stock-based compensation expense of approximately $3.4 million.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Employee Stock Purchase Plan—In December 2015, the Board adopted the 2016 Employee Stock Purchase Plan, which was subsequently amended in January 2016 and September 2016 and approved by the Company’s stockholders in March 2016 (the “2016 ESPP”). The 2016 ESPP became effective in connection with the Company’s IPO. A total of 3,800,000 shares of Class A common stock were initially reserved for issuance under the 2016 ESPP. The number of shares of Class A common stock available for sale under the 2016 ESPP will also include an annual increase on the first day of each fiscal year beginning in fiscal 2018, equal to the lesser of: 3,800,000 shares, 1% of the outstanding shares of all classes of common stock as of the last day of the Company’s immediately preceding fiscal year, or such other amount as may be determined by the Board.
The 2016 ESPP allows eligible employees to purchase shares of the Company’s Class A common stock at a discount through payroll deductions of up to 15% of eligible compensation, subject to caps of $25,000 in any calendar year and 1,000 shares on any purchase date. The 2016 ESPP provides for 12-month offering periods generally beginning March and September of each year, and each offering period consists of two six-month purchase periods. The initial offering period began in September 2016 and will end in September 2017.
On each purchase date, participating employees will purchase Class A common stock at a price per share equal to 85% of the lesser of the fair market value of the Company’s Class A common stock on (i) the first trading day of the applicable offering period and (2) the last trading day of each purchase period in the applicable offering period. If the stock price of the Company's Class A common stock on any purchase date in an offering period is lower than the stock price on the enrollment date of that offering period, the offering period will immediately reset after the purchase of shares on such purchase date and automatically roll into a new offering period.
For the first offering period, which began on September 30, 2016, the fair market value of the common stock used for the first offering period was $16, the IPO price of the Company’s Class A common stock, and on April 5, 2017, 1,246,054 shares of common stock were purchased for an aggregate amount of $16.9 million. As of July 31, 2016, 2,553,946 shares were available for future issuance under the 2016 ESPP.
The Company uses the Black-Scholes option-pricing model to determine the fair value of shares purchased under the 2016 ESPP with the following weighted-average assumptions on the date of grant (on October 11, 2016 and April 5, 2017): |
| | |
| Fiscal Year Ended
July 31, 2017 |
Expected term (in years) | 0.75 |
|
Risk-free interest rate | 0.6 | % |
Volatility | 51.0 | % |
Dividend yield | — | % |
Stock Options
The Board determines the period over which stock options become exercisable and stock options generally vest over a four-year period. Stock options generally expire 10 years from the date of grant. The term of an ISO grant to a 10% stockholder will not exceed five years from the date of the grant. The exercise price of an ISO will not be less than 100% of the estimated fair value of the shares of common stock underlying the stock option (or 110% of the estimated fair value in the case of an ISO granted to a 10% stockholder) on the date of grant. The exercise price of aan NSO is determined by the Board at the time of grant and is generally not less than 100% of the estimated fair value of the shares of common stock underlying the stock option on the date of grant.
The Company’s stock option activity under the Stock PlanPlans is as follows:
|
| | | | | | | | | | | | | |
| | Options Outstanding |
| | Number of Shares | | | Weighted- Average Exercise Price | | Weighted- Average Remaining Contractual Life | | Aggregate Intrinsic Value |
| | | | | | | (In years) | | (In thousands) |
| Outstanding—August 1, 2016 | 26,166,968 |
| (1) | | $ | 4.39 |
| | 7.5 | | $ | 208,101 |
|
| Options granted | 1,047,950 |
| | | 12.14 |
| | | | |
| Options exercised | (4,786,381 | ) | | | 3.27 |
| | | | |
| Options canceled/forfeited | (2,094,006 | ) | | | 8.89 |
| | | | |
| Outstanding—July 31, 2017 | 20,334,531 |
| | | 4.59 |
| | 6.4 | | 338,787 |
|
| Exercisable—July 31, 2017 | 19,645,676 |
| | | 4.43 |
| | 6.3 | | 330,486 |
|
| Vested and expected to vest—July 31, 2017 | 20,334,531 |
| | | 4.59 |
| | 6.4 | | 338,787 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended July 31, |
| | 2017 | | 2018 |
| | Number of Shares | | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life | | Aggregate Intrinsic Value | | Number of Shares | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life | | Aggregate Intrinsic Value |
| | | | | | | (in years) | | (in thousands) | | | | | | (in years) | | (in thousands) |
| Outstanding at beginning of period | 26,166,968 |
| (1) | | $ | 4.39 |
| | 7.5 | | $ | 208,101 |
| | 20,334,531 |
| | $ | 4.59 |
| | 6.4 | | $ | 338,787 |
|
| Options granted | 1,047,950 |
| | | $ | 12.14 |
| | | | | | — |
| | $ | — |
| | | | |
| Options exercised | (4,786,381 | ) | | | $ | 3.27 |
| | | | | | (8,672,623 | ) | | $ | 3.81 |
| | | | |
| Options canceled/forfeited | (2,094,006 | ) | | | $ | 8.89 |
| | | | | | (329,354 | ) | | $ | 6.63 |
| | | | |
| Outstanding at end of period | 20,334,531 |
| | | $ | 4.59 |
| | 6.4 | | $ | 338,787 |
| | 11,332,554 |
| | $ | 5.12 |
| | 5.6 | | $ | 496,022 |
|
| Exercisable at end of period | 19,645,676 |
| | | $ | 4.43 |
| | 6.3 | | $ | 330,486 |
| | 11,159,045 |
| | $ | 5.01 |
| | 5.5 | | $ | 489,682 |
|
| Vested and expected to vest at end of period | 20,334,531 |
| | | $ | 4.59 |
| | 6.4 | | $ | 338,787 |
| | 11,332,554 |
| | $ | 5.12 |
| | 5.6 | | $ | 496,022 |
|
| |
| (1) | Includes 455,000 stock options with both service and performance conditions with a weighted-averageweighted average fair value per share of $3.78 (the “Performance"Performance Stock Options”Options"). Vesting of the Performance Stock Options was subject to continuous service with the Companyus (the “service condition”"service condition") and satisfaction of certain liquidity events of the Company (the “performance condition”"performance condition"). The CompanyWe recognized cumulative stock-based compensation expense related to the Performance Stock Options in the first quarter of fiscal year 2017, as the performance condition was met upon the Company's successful completion of our IPO. The cumulative stock-based compensation expense recorded in the first quarter of fiscal 2017 was for the portion of the awards for which the relevant service condition had been satisfied and the remaining expense is being recognized over the remaining service period. |
The stockStock options exercisable as of July 31, 2017 includeincludes 15,241,715 of stock options are related to vested options and 4,403,961 unvested options with an early exercise provision. Stock options exercisable as of stockJuly 31, 2018 includes 9,660,757 vested options that areand 1,498,288 unvested options with an early exercise provision. The weighted-average grant-dateweighted average grant date fair value per share of stock options granted was $4.86, $6.36 and $6.41 for the fiscal years ended July 31, 2015, 2016 and 2017, respectively. There were no options granted during fiscal 2018.
The aggregate intrinsic value of stock options exercised was $16.2 million, $18.3 million and $73.9 million forduring the fiscal years ended July 31, 2015, 2016, 2017 and 2017,2018 was $18.3 million, $73.9 million and $289.4 million, respectively. Aggregate intrinsic value represents the difference between the exercise price of the options and the estimated fair value of the Company’sour common stock. Cash received from option exercises was $3.5 million, $15.6 million and $33.1 million for the fiscal years ended July 31, 2016, 2017 and 2018, respectively.
The total grant date fair value of stock options vested was $10.8 million, $23.9 million, $16.1 million and $16.1$11.5 million for the fiscal years ended July 31, 2015, 2016, 2017 and 2017,2018, respectively. The vested and expected to vest amounts included in the table above exclude 243,148 and 47,691 shares of early exercised stock options of 243,148 as of July 31, 2017.
Early Exercise of Stock Options. The Company issued 1,019,223, 269,7372017 and 67,360 shares of common stock for total proceeds of $3.3 million, $0.8 million and $0.2 million, respectively, related to exercises of unvested stock options (the “early exercised stock options”) during the years ended July 31, 2015, 2016 and 2017. The shares of common stock issued in connection with the early exercised stock options are subject to the Company’s repurchase right at the original purchase price. The proceeds initially are recorded as a liability and reclassified to common stock and additional paid in capital as the Company’s repurchase right lapses. As of July 31, 2016 and 2017, 954,215 and 243,148 respectively, shares of common stock related to the early exercised stock options held by employees at an aggregate price of $2.3 million and $0.9 million, respectively, were subject to the Company’s repurchase right.
2018, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Employee Stock Purchase Plan
In December 2015, the Board adopted the 2016 ESPP, which was subsequently amended in January 2016 and September 2016 and approved by our stockholders in March 2016. The 2016 ESPP became effective in connection with our IPO. A total of Contents3,800,000 shares of Class A common stock were initially reserved for issuance under the 2016 ESPP. The number of shares of Class A common stock available for sale under the 2016 ESPP also includes an annual increase on the first day of each fiscal year, beginning in fiscal 2018, equal to the lesser of: 3,800,000 shares, 1% of the outstanding shares of all classes of common stock as of the last day of our immediately preceding fiscal year, or such other amount as may be determined by the Board. Accordingly, on August 1, 2017, the number of shares of Class A common stock available for issuance under 2016 ESPP increased by 1,546,365 shares pursuant to these provisions.
The 2016 ESPP allows eligible employees to purchase shares of our Class A common stock at a discount through payroll deductions of up to 15% of eligible compensation, subject to caps of $25,000 in any calendar year and 1,000 shares on any purchase date. The 2016 ESPP provides for 12-month offering periods generally beginning in March and September of each year, and each offering period consists of two six-month purchase periods. The first offering period began in September 2016.
On each purchase date, participating employees will purchase Class A common stock at a price per share equal to 85% of the lesser of the fair market value of our Class A common stock on (i) the first trading day of the applicable offering period or (ii) the last trading day of each purchase period in the applicable offering period. If the stock price of our Class A common stock on any purchase date in an offering period is lower than the stock price on the enrollment date of that offering period, the offering period will immediately reset after the purchase of shares on such purchase date and automatically roll into a new offering period.
During the fiscal year ended July 31, 2018, 2,417,850 shares of common stock were purchased under the 2016 ESPP for an aggregate amount of $39.0 million. As of July 31, 2018, 1,682,461 shares were available for future issuance under the 2016 ESPP. On August 1, 2018, the number of shares of Class A common stock available for issuance under the 2016 ESPP increased by 1,728,580 shares pursuant to the automatic increase provisions noted above.
We use the Black-Scholes option pricing model to determine the fair value of shares purchased under the 2016 ESPP with the following weighted average assumptions on the date of grant:
|
| | | | | |
| | Fiscal Year Ended July 31, |
| | 2017 | | 2018 |
| Expected term (in years) | 0.75 |
| | 0.75 |
|
| Risk-free interest rate | 0.6 | % | | 1.4 | % |
| Volatility | 51.0 | % | | 49.8 | % |
| Dividend yield | — | % | | — | % |
NUTANIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Stock-Based Compensation—
Total stock-based compensation expense recognized for stock awards granted under the equity award plans in the consolidated statements of operations is as follows (in thousands):follows:
| | | | | | | | | Fiscal Year Ended July 31, |
| | Fiscal Year Ended July 31, | 2016 | | 2017 | | 2018 |
| | 2015 | | 2016 | | 2017 | (in thousands) |
| Cost of revenue: | | | | | | | | | | |
| Product | $ | 363 |
| | $ | 391 |
| | $ | 3,066 |
| $ | 391 |
| | $ | 3,066 |
| | $ | 2,580 |
|
| Support and other services | 718 |
| | 968 |
| | 10,411 |
| |
| Support, entitlements and other services | | 968 |
| | 10,411 |
| | 8,945 |
|
| Sales and marketing | 6,474 |
| | 8,006 |
| | 78,117 |
| 8,006 |
| | 78,117 |
| | 65,060 |
|
| Research and development | 5,411 |
| | 6,259 |
| | 109,044 |
| 6,259 |
| | 109,044 |
| | 74,389 |
|
| General and administrative | 4,174 |
| | 4,432 |
| | 30,853 |
| 4,432 |
| | 30,853 |
| | 26,894 |
|
| Total stock-based compensation expense | $ | 17,140 |
|
| $ | 20,056 |
|
| $ | 231,491 |
| $ | 20,056 |
|
| $ | 231,491 |
|
| $ | 177,868 |
|
FiscalStock-based compensation expense for the fiscal year ended July 31, 2017 included cumulative stock-compensation expense related to stock awards with performance conditions, for which vesting was deemed probable in the first quarter of fiscal 2017 upon the Company’s successful completion of our IPO. Prior to fiscal 2017, no expense was recognized related to these stock awards, with performance conditions as vesting was not deemed probable. The cumulative stock-based compensation expense recorded in the first quarter of fiscal 2017 was forrelated to the portion of the awards for which the relevant service condition had been satisfied and the Company haswe have continued to recognize the remaining expense over the remaining service period. Stock-based compensation expense related to stock awards without performance conditions is recognized on a straight-line basis over the requisite service period.
As of July 31, 2017,2018, unrecognized stock-based compensation expense related to the outstanding stock awards was approximately $273.6$647.9 million and is expected to be recognized over a weighted-averageweighted average period of approximately 2.22.7 years.
Determination of Fair Value—
The fair value of options granted to employees is estimated on the grant date using Black-Scholes.the Black-Scholes option pricing model. Compensation expense related to options granted to non-employeesnonemployees is recognized as the equity instruments vest, and such options are revalued at each reporting date. As a result, compensation expense related to unvested options granted to non-employeesnonemployees fluctuates as the fair value of the Company’sour common stock fluctuates.
The valuation model for stock-based compensation expense requires the Companyus to make assumptions and judgments about the variables used in the calculation, including the expected term, (weighted-average period of time that the options granted are expected to be outstanding), the expected volatility of the Company’sour common stock, a risk-free interest rate and expected dividend yield.
The fair value of the Company’sour stock options was estimated using the following weighted-averageweighted average assumptions:
| | | | Fiscal Year Ended July 31, | Fiscal Year Ended July 31, |
| | 2015 | | 2016 | | 2017 | 2016 | | 2017 |
| Fair value of common stock | $ | 10.29 |
| | $ | 14.81 |
| | $ | 12.14 |
| $ | 14.81 |
| | $ | 12.14 |
|
| Expected term (in years) | 6.1 |
| | 6.1 |
| | 6.1 |
| 6.1 |
| | 6.1 |
|
| Risk-free interest rate | 1.7 | % | | 1.6 | % | | 1.3 | % | 1.6 | % | | 1.3 | % |
| Volatility | 46 | % | | 42 | % | | 52 | % | 42 | % | | 52 | % |
| Dividend yield | — |
| | — |
| | — |
| — | % | | — | % |
We did not grant any stock options during fiscal 2018. The fair value of each grant of stock options was determined using the Black-Scholes option pricing model and the assumptions discussed below. Each of these inputs is subjective and generally requires significant judgment to determine.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fair Value of Common Stock—Prior to the Company’sour IPO, the fair value of the common stock underlying itsour stock options was determined by its board of directors.our Board. The valuations of itsour common stock were determined in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. The Board, with input from management, exercised significant judgment and considered numerous objective and subjective factors to determine the fair value of the Company’sour common stock at each grant date, including but not limited to, (i) contemporaneous valuations of common stock performed by unrelated third-party specialists; (ii) recent private stock sales transactions; (iii) the prices, rights, preferences and privileges of the Company’sour convertible preferred stock relative to those of our common stock; (iv) the lack of marketability of the Company’sour common stock; (v) developments in the business; (vi) the likelihood of achieving a liquidity event, such as an IPO or a merger or acquisition of the Company’sour business, given prevailing market conditions; (vii) the market performance of comparable publicly traded companies; (viii) the Company’sour actual operating and financial performance; (ix) U.S. and global capital market conditions; (x) the illiquidity of stock-based awards involving securities in a private company; (xi) the Company’sour stage of development; and (xii) the Company’sour history and the timing of the introduction of new products and services.
Subsequent to itsour IPO, the Company useswe use the market closing price for our Class A common stock as reported on the NASDAQ Global SelectStock Market on the date of grant.
Expected Term—The expected term represents the period that the stock-based awards are expected to be outstanding. For option grants that are considered to be “plain"plain vanilla,” the Company determines" we determine the expected term using the simplified method as provided by the Securities and Exchange Commission. The simplified method deems the term to be the average of the time-to-vesting and the contractual life of the options.
Risk-Free Interest Rate—The risk-free interest rate is based on U.S. Treasury yield curve in effect at the time of grant for zero-coupon U.S. Treasury notes with maturities approximately equal to the option’s expected term.
Expected Volatility—Since the Company doeswe do not have a long trading history of itsour common stock, the expected volatility was derived from the average historical stock volatilities of several unrelated public companies within the Company’s industry that its considerswe consider to be comparable to itsour business over a period equivalent to the expected term of the stock option grants.
Dividend Rate—The expected dividend was assumed to be zero, as the Company haswe have never paid dividends and have no current plans to do so.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| |
NOTE 12. | NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS |
NOTE 10. NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS
Basic and diluted net loss per share attributable to common stockholders is presented in conformity with the two-class method required for participating securities. The Company’sOur Convertible Preferred Stock is considered a participating security. Participating securities do not have a contractual obligation to share in the Company’sour losses. As such, for the periods the Company incurswe incur net losses, there is no impact on the calculated net loss per share attributable to common stockholders in applying the two-class method.
Basic net lossincome (loss) per share attributable to common stockholders is computed by dividing the net lossincome (loss) by the weighted-averageweighted average number of shares of common stockshares outstanding during the period. The dilutedDiluted net lossincome (loss) per share attributable to common stockholders is computed by giving effect to all potentialpotentially dilutive common stock equivalents outstanding for the period. For purposes of this calculation,period, as their effect would be antidilutive. Potentially dilutive common shares include participating securities and shares issuable upon the exercise of stock options, to purchasethe exercise of common stock warrants, the exercise of convertible preferred stock warrants, the vesting of RSUs, and warrants toeach purchase Convertible Preferred Stock are considered to be commonunder the 2016 ESPP, under the treasury stock equivalentsmethod. In loss periods, basic net loss per share and have been excluded from the calculation of diluted net loss per share attributable toare the same, as the effect of potential common stockholders, as their effectshares is antidilutive.antidilutive and therefore excluded.
The rights, including the liquidation and dividend rights, of the holders of our Class A and Class B common stock are identical, except with respect to voting. As the liquidation and dividend rights are identical, the Company’sour undistributed earnings or losses are allocated on a proportionate basis among the holders of both Class A and Class B common stock. As a result, the net lossincome (loss) per share attributed to common stockholders will, therefore, be the same for both Class A and Class B common stock on an individual or combined basis.
Net Loss Per Share Attributable to Class A and Class B Common Stockholders—
The computation of basic and diluted net loss per share is as follows (in thousands, except share and per share data):follows:
| | | | | | | | | Fiscal Year Ended July 31, |
| | Fiscal Year Ended July 31 | 2016 As Adjusted (1) | | 2017 As Adjusted (1) | | 2018 |
| | 2015 | | 2016 | | 2017 | (in thousands, except share and per share data) |
| Numerator: | | | | | | | | | | |
| Net loss | $ | (126,127 | ) | | $ | (168,499 | ) | | $ | (458,011 | ) | $ | (108,233 | ) | | $ | (379,638 | ) | | $ | (297,161 | ) |
| Denominator: | | | | | | | | | | |
| Weighted-average shares—basic and diluted | 40,509,481 |
| | 43,970,381 |
| | 128,295,563 |
| |
| Net loss per share —basic and diluted | $ | (3.11 | ) | | $ | (3.83 | ) | | $ | (3.57 | ) | |
| Weighted average shares—basic and diluted | | 43,970,381 |
| | 128,295,563 |
| | 164,091,302 |
|
| Net loss per share—basic and diluted | | $ | (2.46 | ) | | $ | (2.96 | ) | | $ | (1.81 | ) |
| |
| (1) | Adjusted to include the impact of ASC 606. Refer to Note 3 for more details on the impact of the adoption of this standard. |
The potential shares of common stock that werewould have been excluded from the computation of diluted net loss per share attributable to common stockholders for the fiscal years presented because including them would have been antidilutive are as follows:
| | | | As of July 31 | As of July 31, |
| | 2015 | | 2016 | | 2017 | 2016 | | 2017 | | 2018 |
| Convertible preferred stock | 76,319,511 |
| | 76,319,511 |
| | — |
| 76,319,511 |
| | — |
| | — |
|
| Stock awards | 33,039,810 |
| | 38,432,337 |
| | 37,710,621 |
| |
| Outstanding stock options and RSUs | | 38,432,337 |
| | 37,710,621 |
| | 34,930,053 |
|
| Employee stock purchase plan | — |
| | — |
| | 1,447,385 |
| — |
| | 1,447,385 |
| | 1,310,653 |
|
| Common stock subject to repurchase | 2,549,102 |
| | 954,215 |
| | 243,148 |
| 954,215 |
| | 243,148 |
| | 47,691 |
|
| Convertible preferred stock warrants | 824,094 |
| | 824,094 |
| | 34,180 |
| |
| Contingently issuable shares pursuant to a business combination | | — |
| | — |
| | 276,625 |
|
| Common stock warrants | | 824,094 |
| | 34,180 |
| | 34,180 |
|
| Total | 112,732,517 |
|
| 116,530,157 |
|
| 39,435,334 |
| 116,530,157 |
|
| 39,435,334 |
|
| 36,599,202 |
|
NUTANIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Shares that will be issued in connection with the Company’sour stock awards and shares that will be purchased under the employee stock purchase plan are generally automatically converted into shares of the Company’sour Class A common stock. Shares issued in connection with an exercise of the common stock warrants are converted into shares of the Company’sour Class B common stock and are voluntarily convertible into shares of Class A common stock at the option of the holder.
NOTE 13.11. INCOME TAXES
Income Taxes—
Loss before provision for income taxes by fiscal year consisted of the following (in thousands):following:
| | | | | | | | | Fiscal Year Ended July 31, |
| | Fiscal Year Ended July 31, | 2016
As Adjusted (1) | | 2017
As Adjusted (1) | | 2018 |
| | 2015 | | 2016 | | 2017 | (in thousands) |
| Domestic | $ | (84,327 | ) | | $ | (104,339 | ) | | $ | (350,759 | ) | $ | (67,776 | ) | | $ | (304,363 | ) | | $ | (201,666 | ) |
| Foreign | (40,256 | ) | | (61,968 | ) | | (102,569 | ) | (38,140 | ) | | (70,423 | ) | | (88,048 | ) |
| Loss before provision for income taxes | $ | (124,583 | ) | | $ | (166,307 | ) | | $ | (453,328 | ) | $ | (105,916 | ) | | $ | (374,786 | ) | | $ | (289,714 | ) |
| |
| (1) | Adjusted to include the impact of ASC 606. Refer to Note 3 for more details on the impact of the adoption of this standard. |
Provision for income taxes by fiscal year consisted of the following (in thousands):following:
| | | | | | | | | Fiscal Year Ended July 31, |
| | Fiscal Year Ended July 31, | 2016
As Adjusted (1) | | 2017
As Adjusted (1) | | 2018 |
| | 2015 | | 2016 | | 2017 | (in thousands) |
| Current: | | | | | | | | | | |
| U.S. federal | | $ | — |
| | $ | — |
| | $ | 2,059 |
|
| State and local | $ | 56 |
| | $ | 140 |
| | $ | 193 |
| 140 |
| | 193 |
| | 429 |
|
| Foreign | 1,655 |
| | 3,047 |
| | 8,027 |
| 3,172 |
| | 8,196 |
| | 8,541 |
|
| Total current taxes | 1,711 |
| | 3,187 |
| | 8,220 |
| 3,312 |
| | 8,389 |
| | 11,029 |
|
| Deferred: | | | | | | | | | | |
| U.S. federal | — |
| | — |
| | (1,342 | ) | — |
| | (1,342 | ) | | (3,387 | ) |
| State and local | — |
| | — |
| | 13 |
| — |
| | 13 |
| | (718 | ) |
| Foreign | (167 | ) | | (995 | ) | | (2,208 | ) | (995 | ) | | (2,208 | ) | | 523 |
|
| Total deferred taxes | (167 | ) | | (995 | ) | | (3,537 | ) | (995 | ) | | (3,537 | ) | | (3,582 | ) |
| Provision for income taxes | $ | 1,544 |
| | $ | 2,192 |
| | $ | 4,683 |
| $ | 2,317 |
| | $ | 4,852 |
| | $ | 7,447 |
|
| |
| (1) | Adjusted to include the impact of ASC 606. Refer to Note 3 for more details on the impact of the adoption of this standard. |
NUTANIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The income tax provision differs from the amount of income tax determined by applying the applicable U.S. federal statutory income tax rate of 34%26.1% to pretaxpre-tax loss. The reconciliation of the statutory federal income tax and the Company’sour effective income tax is as follows (in thousands):follows:
| | | | Fiscal Year Ended July 31, | Fiscal Year Ended July 31, |
| | 2015 | | 2016 | | 2017 | 2016
As Adjusted (1) | | 2017
As Adjusted (1) | | 2018 |
| | | (in thousands) |
| U.S. tax reform impact | | $ | — |
| | $ | — |
| | $ | 93,352 |
|
| U.S. federal income tax at statutory rate | $ | (42,351 | ) | | $ | (56,545 | ) | | $ | (153,965 | ) | (36,011 | ) | | (127,427 | ) | | (75,779 | ) |
| Stock-based compensation | | 3,655 |
| | 6,701 |
| | (73,631 | ) |
| Effect of foreign operations | | 15,144 |
| | 16,891 |
| | 26,117 |
|
| Change in valuation allowance | 24,030 |
| | 31,700 |
| | 102,549 |
| 19,268 |
| | 86,941 |
| | 25,274 |
|
| Effect of foreign operations | 15,168 |
| | 23,121 |
| | 27,652 |
| |
| Stock-based compensation | 2,152 |
| | 3,655 |
| | 6,701 |
| |
| Warrant revaluation | 2,100 |
| | (681 | ) | | 7,185 |
| |
| Transfer pricing adjustments | | — |
| | 11,822 |
| | 4,584 |
|
| Intangible asset migration | | — |
| | — |
| | 4,461 |
|
| Non-deductible expenses | 389 |
| | 802 |
| | 1,693 |
| 802 |
| | 1,693 |
| | 2,115 |
|
| State income taxes | 56 |
| | 140 |
| | 206 |
| 140 |
| | 206 |
| | (290 | ) |
| Transfer pricing adjustments | — |
| | — |
| | 11,822 |
| |
| Warrant revaluation | | (681 | ) | | 7,185 |
| | — |
|
| Other | — |
| | — |
| | 840 |
| — |
| | 840 |
| | 1,244 |
|
| Total | $ | 1,544 |
| | $ | 2,192 |
| | $ | 4,683 |
| $ | 2,317 |
| | $ | 4,852 |
| | $ | 7,447 |
|
| |
| (1) | Adjusted to include the impact of ASC 606. Refer to Note 3 for more details on the impact of the adoption of this standard. |
During the year ended July 31, 2017, the Company’s provision for income taxes was primarily attributable to foreign tax provision in certain foreign jurisdictions in which it conducts business.
During thefiscal year ended July 31, 2016, the Companywe early adopted ASU 2015-17 on a prospective basis. As a result, of this adoption, the Company decreasedwe released $3.3 million of itsour non-current deferred tax assets, which are includedreported within other assets—non-current on the consolidated balance sheets, and $3.3 million of itsour current deferred tax liabilities, which are includedreported within accrued expenses and other liabilities on itsthe consolidated balance sheet upon adoption. The Companysheets. We did not retrospectively adjust prior periods.
During the fiscal year ended July 31, 2017, our provision for income taxes was primarily attributable to foreign tax provisions in certain foreign jurisdictions in which we conduct business.
During the fiscal year ended July 31, 2018, our provision for income taxes was primarily attributable to the alternative minimum tax in the U.S. related to the migration of certain intangible assets and foreign tax provisions in certain foreign jurisdictions in which we conduct business, partially offset by a partial valuation allowance release in the U.S. due to acquisitions completed during fiscal 2018.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The temporary differences that give rise to significant portions of deferred tax assets and liabilities are as follows (in thousands):follows:
|
| | | | | | | |
| | As of July 31, |
| | 2016 | | 2017 |
| Deferred tax assets: | | | |
| Net operating loss carryforward | $ | 81,546 |
| | $ | 135,929 |
|
| Deferred revenue | 9,935 |
| | 37,274 |
|
| Tax credit carryforward | 7,304 |
| | 13,100 |
|
| Property and equipment | — |
| | 1,118 |
|
| Accruals and reserves | 1,938 |
| | 7,427 |
|
| Stock compensation expense | 5,780 |
| | 27,512 |
|
| Total deferred tax assets | 106,503 |
| | 222,360 |
|
| Deferred tax liabilities: | | | |
| Deferred commission expense | (13,483 | ) | | (22,535 | ) |
| Other | (424 | ) | | (558 | ) |
| Total deferred tax liabilities | (13,907 | ) | | (23,093 | ) |
| Valuation allowance | (91,346 | ) | | (196,091 | ) |
| Net deferred tax assets | $ | 1,250 |
| | $ | 3,176 |
|
Total net deferred tax assets and liabilities included in the Company’s consolidated balance sheets are as follows (in thousands): |
| | | | | | | |
| | As of July 31, |
| | 2017
As Adjusted (1) | | 2018 |
| | (in thousands) |
| Deferred tax assets: | | | |
| Net operating loss carryforward | $ | 135,929 |
| | $ | 162,914 |
|
| Tax credit carryforward | 13,100 |
| | 47,839 |
|
| Deferred revenue | 2,378 |
| | 27,577 |
|
| Stock-based compensation expense | 27,512 |
| | 21,252 |
|
| Accruals and reserves | 7,427 |
| | 8,370 |
|
| Property and equipment | 1,118 |
| | — |
|
| Total deferred tax assets | 187,464 |
| | 267,952 |
|
| Deferred tax liabilities: | | | |
| Deferred commission expense | (22,535 | ) | | (27,829 | ) |
| Goodwill and intangible assets | (483 | ) | | (5,909 | ) |
| Property and equipment | — |
| | (3,870 | ) |
| Other | (75 | ) | | (497 | ) |
| Total deferred tax liabilities | (23,093 | ) | | (38,105 | ) |
| Valuation allowance | (161,195 | ) | | (226,987 | ) |
| Net deferred tax assets | $ | 3,176 |
| | $ | 2,860 |
|
|
| | | | | | | |
| | As of July 31, |
| | 2016 | | 2017 |
| Non-current deferred tax assets | $ | 1,250 |
| | $ | 3,176 |
|
| Current deferred tax liabilities | — |
| | — |
|
| Net deferred tax assets | $ | 1,250 |
| | $ | 3,176 |
|
| |
| (1) | Adjusted to include the impact of ASC 606. Refer to Note 3 for more details on the impact of the adoption of this standard. |
Management believes that based on available evidence, both positive and negative, it is more likely than not that the U.S. deferred tax assets will not be utilized and as such, that a full valuation allowance has been recorded.
The valuation allowance for deferred tax assets was $196.1$227.0 million as of July 31, 2017.2018. The net changeincrease in the total valuation allowance for the fiscal years ended July 31, 20162017 and 20172018 was an increase of $36.7$69.8 million and $104.7$65.8 million, respectively.
As of July 31, 2017, the Company2018, we had approximately $453.5$853.2 million of federal net operating loss carryforwards and $282.4$562.1 million of state net operating loss carryforwards available to reduce future taxable income, which will begin to expire in 2030.
In addition, the Companywe had approximately $11.6$43.3 million of federal research credit carryforwards and $11.6$30.7 million of state research credit carryforwards. The federal credits will begin to expire in 2030 and the state credits can be carried forward indefinitely.
Utilization of the net operating loss and tax creditscredit carryforwards may be subject to an annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. Any annual limitation may result in the expiration of net operating losses and credits before utilization. If an ownership change occurred, utilization of the net operating loss and tax credit carryforwards could be significantly reduced.
As of July 31, 2017, the Company2018, we held an aggregate of $58.9$146.5 million in cash and cash equivalents in the Company’sour foreign subsidiaries, of which $49.5$122.6 million was denominated in U.S. dollars. None of the Company’sour short-term investments waswere held in its foreign subsidiaries as of July 31, 2017. The Company attributes2018. We attribute net revenue, costs and expenses to domestic and foreign components based on the terms of itsour agreements with itsour subsidiaries. The Company doesWe do not provide for federal income taxes on the undistributed earnings of itsour foreign subsidiaries, as such earnings are to be reinvested offshore indefinitely. The income tax liability would be insignificant if these earnings were to be repatriated.
The Company recognizes
NUTANIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During the fiscal year ended July 31, 2018, we undertook an internal restructuring to align certain intangible assets with our U.S. business. These intangible assets will be subject to U.S. tax amortization.
We recognize uncertain tax positions in theour financial statements if that position iswill more likely than not of beingbe sustained on audit, based on the technical merits of the position. A reconciliation of the Company’sour unrecognized tax benefits, excluding accrued interest and penalties, is as follows (in thousands):follows:
| | | | | | | Fiscal Year Ended July 31, |
| | Fiscal Year Ended July 31, | 2017 | | 2018 |
| | 2016 | | 2017 | (in thousands) |
| Balance at the beginning of the year | $ | 28,311 |
| | $ | 19,711 |
| $ | 19,711 |
| | $ | 42,655 |
|
| Increases related to current year tax positions | 1,654 |
| | 22,571 |
| 22,571 |
| | 58,727 |
|
| Increases related to prior year tax positions | 972 |
| | 373 |
| 373 |
| | 4,893 |
|
| Decreases related to prior year tax positions | (3,942 | ) | | — |
| — |
| | (14,559 | ) |
| Settlements with tax authorities | (7,284 | ) | | — |
| |
| Balance at the end of the year | $ | 19,711 |
| | $ | 42,655 |
| $ | 42,655 |
| | $ | 91,716 |
|
During the fiscal year ended July 31, 2017,2018, the increase in unrecognized tax positions was primarily attributable to federal and state research and development credits, intercompany charges and business acquisitionscombinations in fiscal year 2017.
During the fiscal year ended July 31, 2016, the $3.9 million decrease in unrecognized tax benefits was due to the issuance of a California Supreme Court opinion on December 31, 2015 disallowing taxpayers to use the three-factor apportionment formula pursuant to the Multistate Tax Compact, which the Company previously elected. The California Supreme Court decision resulted in an adjustment to the Company’s deferred tax assets and a corresponding adjustment to the valuation allowance but did not impact provision for income taxes in the Company’s statement of operations. In addition, the $7.3 million decrease in unrecognized tax benefits during the year ended July 31, 2016 was due to the resolution of an uncertain tax position with a foreign tax authority, of which $0.4 million impacted the Company’s effective tax rate and the remaining amount resulted in an adjustment to the Company’s deferred tax assets and a corresponding adjustment to the valuation allowance.2018.
As of July 31, 2017,2018, if uncertain tax positions are fully recognized in the future, $1.6it would result in a $7.4 million would impact theto our effective tax rate, and the remaining amount would result in adjustments to deferred tax assets and corresponding adjustments to the valuation allowance.
The Company recognizesWe recognize interest and/or penalties related to income tax matters as a component of income tax expense. As of July 31, 2017, the Company2018, we had recognized immaterial accrued interest and penalties related to uncertain tax positions.
The Company filesWe file income tax returns in the U.S. federal jurisdiction as well as various U.S. states and foreign jurisdictions. The tax years 2009 and forward remain open to examination by the major jurisdictions in which the Company iswe are subject to tax. These fiscal years outside the normal statute of limitation remain open to audit by tax authorities due to tax attributes generated in those early years, which have been carried forward and may be audited in subsequent years when utilized. The Company isWe are subject to the continuous examination of income tax returns by various tax authorities. The CompanyWe regularly assessesassess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of the provision for income taxes. The Company believesWe believe that adequate amounts have been reserved for any adjustments that may ultimately result from these examinations and doesdo not anticipate a significant impact to the gross unrecognized tax benefits within the next 12 months related to these years.
Impact of U.S. Federal Income Tax Reform
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, including a federal corporate rate reduction from 35% to 21%, effective January 1, 2018, limitations on the deductibility of interest expense and executive compensation, the creation of new minimum taxes, such as the base erosion anti-abuse tax ("BEAT") and Global Intangible Low Taxed Income ("GILTI") tax and a new minimum tax on certain foreign earnings.
As a result, we are required to remeasure our U.S. deferred tax assets and liabilities at the new tax rate. Our U.S. operation is in a net deferred tax asset position, offset by a full valuation allowance. We reduced our net deferred tax assets and the corresponding valuation allowance by $93.8 million.
The TCJA includes a one-time mandatory repatriation transition tax on the net accumulated earnings and profits of a U.S. taxpayer’s foreign subsidiaries. We have performed an earnings and profits analysis, and as a result of our overall deficit in net accumulated earnings and profits, there will be no transition tax income tax effect in the current period.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The income tax benefit and provision for the fiscal year ended July 31, 2018 are based on the assumption that foreign undistributed earnings are indefinitely reinvested. We will continue to evaluate whether or not to continue to assert indefinite reinvestment on part or all of our foreign undistributed earnings. In the event we determine not to continue to assert the permanent reinvestment of part or all of our foreign undistributed earnings, such a determination could result in the accrual and payment of additional foreign, state and local taxes.
We have not yet made a policy election with respect to our treatment of any potential GILTI tax. Companies can either account for taxes on GILTI as incurred or recognize deferred taxes when basis differences exist that are expected to affect the amount of the GILTI inclusion upon reversal. We are still in the process of analyzing the provisions of the TCJA associated with GILTI and the expected impact GILTI will have on us in the future.
Pursuant to SEC Staff Accounting Bulletin 118, which provides guidance on accounting for the tax effects of the TJCA, we will continue to evaluate the impact of various domestic and international provisions of the TCJA, as well as the impact of additional guidance that may be issued, to assess the full effects on our financial results.
| |
NOTE 14. | SEGMENT INFORMATION |
The Company’sNOTE 12. SEGMENT INFORMATION
Our chief operating decision maker is a group which is comprised of itsour Chief Executive Officer and Chief Financial Officer and President.Officer. This group reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. Accordingly, the Company haswe have a single reportable segment.
The following table sets forth revenue by geographic area by bill-to location (in thousands):location:
| | | | | | | | | Fiscal Year Ended July 31, |
| | Fiscal Year Ended July 31, | 2016 As Adjusted (1) | | 2017 As Adjusted (1) | | 2018 |
| | 2015 | | 2016 | | 2017 | (in thousands) |
| U.S. | $ | 161,439 |
| | $ | 280,800 |
| | $ | 462,770 |
| $ | 319,296 |
| | $ | 488,079 |
| | $ | 648,805 |
|
| Europe, the Middle East and Africa | 43,526 |
| | 81,320 |
| | 139,170 |
| 65,599 |
| | 138,815 |
| | 224,392 |
|
| Asia-Pacific | 28,386 |
| | 63,610 |
| | 131,921 |
| |
| Asia Pacific | | 96,723 |
| | 186,864 |
| | 240,247 |
|
| Other Americas | 8,081 |
| | 19,198 |
| | 33,008 |
| 21,792 |
| | 32,145 |
| | 42,013 |
|
| Total revenue | $ | 241,432 |
|
| $ | 444,928 |
|
| $ | 766,869 |
| $ | 503,410 |
|
| $ | 845,903 |
|
| $ | 1,155,457 |
|
| |
| (1) | Adjusted to include the impact of ASC 606. Refer to Note 3 for more details on the impact of the adoption of this standard. |
Pursuant to our arrangement with one of our OEMs, prior to the fourth quarter of fiscal 2017, billings to this OEM were entirely attributed to Asia Pacific. Beginning in the fourth quarter of fiscal 2017, billings to this OEM were allocated to various geographic locations.
As of July 31, 20162017 and 2017, $30.02018, $63.3 million and $63.3$130.0 million, respectively, of the Company’sour long-lived assets, net were located in the United States.
The Company has a 401(k) Savings Plan (“401(k) Plan”) that qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Under the 401(k) Plan, participating full-time employees over the age of 21 may voluntarily elect to contribute up to 75% of their eligible compensation, subject to maximum allowed by law. The 401(k) Plan provides for a discretionary employer-matching contribution. The Company has not made any matching contributions to the 401(k) Plan to date.
| |
NOTE 16. | RELATED-PARTY TRANSACTIONS |
The Company entersNOTE 13. RELATED-PARTY TRANSACTIONS
We enter into various transactions with its related parties in the normal course of business. During the fiscal years ended July 31, 2015, 2016, 2017 and 2017, the Company’s purchases of goods or services from related parties totaled $0.2 million, $0.8 million and $0.9 million, respectively. The Company2018, we did not have any payables outstanding tomaterial related parties as of July 31, 2016 and 2017. Revenue from related parties for the years ended July 31, 2015, 2016 and 2017 were $0.1 million, $0.6 million and $0.4 million, respectively. The Company did not have any receivables outstanding from related parties as of July 31, 2016 and 2017, respectively.party transactions.
In connection with the PernixData Acquisition, (see Note 3), entities affiliated with Lightspeed Venture Partners, which owned approximately 36.7% of the Company’sour outstanding Convertible Preferred Stock as of July 31, 2016, owned approximately 26.4% of the outstanding capital stock of PernixData immediately prior to the completion of the PernixData Acquisition. These entities received 625,478 sharesOne member of the Company’s common stock in the PernixData Acquisition, as well as the right to receive up to approximately $2.7 million in cash in the event the contingent consideration becomes payable. Two members of theour Board areis affiliated with Lightspeed Venture Partners. As of July 31, 2017,2018, entities affiliated with Lightspeed Venture partnersPartners owned approximately 7.5%6.7% of the Company'sour total outstanding Class A and Class B common stock.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| |
NOTE 17. | SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) |
NOTE 14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following sets forth selected unaudited quarterly consolidated statements of operations data for each of the eight quarters in the period ended July 31, 2017 (in thousands, except per share amounts).2018. The information for each of these quarters has been prepared on a basis consistent with our audited annual consolidated financial statements included elsewhere in this report and, in the opinion of management, includes all adjustments of a normal, recurring nature that are necessary for the fair presentation of the results of operations for these periods in accordance with generally accepted accounting principles in the United States.U.S. GAAP. This data should be read in conjunction with our audited consolidated financial statements and related notes included elsewhere in this report. These historical quarterly operating results are not necessarily indicative of the results that may be expected for a full fiscal year or any future period.
| | | | Three Months Ended | Three Months Ended |
| | October 31,
2015 | | January 31,
2016 | | April 30,
2016 | | July 31,
2016 | | October 31,
2016 | | January 31,
2017 | | April 30,
2017 | | July 31,
2017 | October 31, 2016 (1) | | January 31, 2017 (1) | | April 30, 2017 (1) | | July 31, 2017 (1) | | October 31, 2017 | | January 31, 2018 | | April 30, 2018 | | July 31, 2018 |
| | (unaudited, in thousands, except per share amounts) | (unaudited, in thousands, except per share amounts) |
| Revenue: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Product | $ | 70,396 |
| | $ | 81,229 |
| | $ | 89,957 |
| | $ | 109,216 |
| | $ | 129,657 |
| | $ | 138,508 |
| | $ | 143,142 |
| | $ | 171,704 |
| $ | 153,536 |
| | $ | 158,213 |
| | $ | 160,076 |
| | $ | 201,472 |
| | $ | 219,052 |
| | $ | 223,170 |
| | $ | 221,117 |
| | $ | 224,650 |
|
| Support and other services | 17,360 |
| | 21,468 |
| | 24,733 |
| | 30,569 |
| | 37,152 |
| | 43,687 |
| | 48,621 |
| | 54,398 |
| |
| Support, entitlements and other services | | 35,025 |
| | 41,001 |
| | 45,594 |
| | 50,986 |
| | 56,500 |
| | 63,574 |
| | 68,296 |
| | 79,098 |
|
| Total revenue | 87,756 |
|
| 102,697 |
|
| 114,690 |
|
| 139,785 |
|
| 166,809 |
|
| 182,195 |
|
| 191,763 |
|
| 226,102 |
| 188,561 |
| | 199,214 |
| | 205,670 |
| | 252,458 |
|
| 275,552 |
|
| 286,744 |
|
| 289,413 |
|
| 303,748 |
|
| Cost of revenue: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Product (1) (2) | 27,657 |
| | 29,977 |
| | 33,427 |
| | 42,480 |
| | 52,210 |
| | 58,403 |
| | 62,593 |
| | 76,187 |
| |
| Support and other services (1) | 7,422 |
| | 7,959 |
| | 9,966 |
| | 11,899 |
| | 17,552 |
| | 18,443 |
| | 20,613 |
| | 21,330 |
| |
Product (3)(4) | | 52,210 |
| | 58,403 |
| | 62,593 |
| | 76,187 |
| | 85,162 |
| | 83,217 |
| | 66,680 |
| | 41,068 |
|
Support, entitlements and other services (3) | | 17,552 |
| | 18,443 |
| | 20,613 |
| | 21,330 |
| | 23,460 |
| | 25,311 |
| | 28,935 |
| | 32,197 |
|
| Total cost of revenue | 35,079 |
|
| 37,936 |
|
| 43,393 |
|
| 54,379 |
|
| 69,762 |
|
| 76,846 |
|
| 83,206 |
|
| 97,517 |
| 69,762 |
| | 76,846 |
| | 83,206 |
| | 97,517 |
|
| 108,622 |
|
| 108,528 |
|
| 95,615 |
|
| 73,265 |
|
| Gross profit | 52,677 |
|
| 64,761 |
|
| 71,297 |
|
| 85,406 |
|
| 97,047 |
|
| 105,349 |
|
| 108,557 |
|
| 128,585 |
| 118,799 |
| | 122,368 |
| | 122,464 |
| | 154,941 |
|
| 166,930 |
|
| 178,216 |
|
| 193,798 |
|
| 230,483 |
|
| Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Sales and marketing (1) (2) | 58,599 |
| | 66,128 |
| | 75,849 |
| | 87,917 |
| | 128,775 |
| | 111,244 |
| | 128,007 |
| | 132,503 |
| |
Sales and marketing (3)(4) | | 128,625 |
| | 111,374 |
| | 126,746 |
| | 134,276 |
| | 145,405 |
| | 151,201 |
| | 169,860 |
| | 183,191 |
|
Research and development (1)(3) | 23,857 |
| | 26,024 |
| | 31,390 |
| | 35,129 |
| | 75,281 |
| | 70,914 |
| | 74,607 |
| | 67,817 |
| 75,281 |
| | 70,914 |
| | 74,607 |
| | 67,817 |
| | 64,512 |
| | 70,924 |
| | 81,291 |
| | 97,050 |
|
General and administrative (1)(3) | 7,375 |
| | 7,840 |
| | 8,761 |
| | 10,289 |
| | 29,372 |
| | 15,481 |
| | 15,610 |
| | 16,878 |
| 29,372 |
| | 15,481 |
| | 15,610 |
| | 16,878 |
| | 16,052 |
| | 15,948 |
| | 24,929 |
| | 29,472 |
|
| Total operating expenses | 89,831 |
| | 99,992 |
| | 116,000 |
| | 133,335 |
|
| 233,428 |
|
| 197,639 |
|
| 218,224 |
|
| 217,198 |
| 233,278 |
| | 197,769 |
| | 216,963 |
| | 218,971 |
|
| 225,969 |
|
| 238,073 |
|
| 276,080 |
|
| 309,713 |
|
| Loss from operations | (37,154 | ) |
| (35,231 | ) |
| (44,703 | ) |
| (47,929 | ) |
| (136,381 | ) |
| (92,290 | ) |
| (109,667 | ) |
| (88,613 | ) | (114,479 | ) | | (75,401 | ) | | (94,499 | ) | | (64,030 | ) |
| (59,039 | ) |
| (59,857 | ) |
| (82,282 | ) |
| (79,230 | ) |
| Other income (expense)—net | (871 | ) | | 2,646 |
| | (2,106 | ) | | (959 | ) | | (25,712 | ) | | (421 | ) | | 303 |
| | (547 | ) | |
| Other income (expense), net | | (25,712 | ) | | (421 | ) | | 303 |
| | (547 | ) | | (189 | ) | | (861 | ) | | (4,235 | ) | | (4,021 | ) |
| Loss before provision for income taxes | (38,025 | ) |
| (32,585 | ) |
| (46,809 | ) |
| (48,888 | ) |
| (162,093 | ) |
| (92,711 | ) |
| (109,364 | ) |
| (89,160 | ) | (140,191 | ) | | (75,822 | ) | | (94,196 | ) | | (64,577 | ) |
| (59,228 | ) |
| (60,718 | ) |
| (86,517 | ) |
| (83,251 | ) |
| Provision for income taxes | 520 |
| | 620 |
| | 11 |
| | 1,041 |
| | 76 |
| | 501 |
| | 2,613 |
| | 1,493 |
| 111 |
| | 547 |
| | 2,639 |
| | 1,555 |
| | 2,259 |
| | 1,913 |
| | (843 | ) | | 4,118 |
|
| Net loss | $ | (38,545 | ) |
| $ | (33,205 | ) |
| $ | (46,820 | ) |
| $ | (49,929 | ) |
| $ | (162,169 | ) |
| $ | (93,212 | ) |
| $ | (111,977 | ) |
| $ | (90,653 | ) | $ | (140,302 | ) | | $ | (76,369 | ) | | $ | (96,835 | ) | | $ | (66,132 | ) |
| $ | (61,487 | ) |
| $ | (62,631 | ) |
| $ | (85,674 | ) |
| $ | (87,369 | ) |
Net loss per share attributable to Class A and Class B common stockholders—basic and diluted | $ | (0.90 | ) | | $ | (0.76 | ) | | $ | (1.05 | ) | | $ | (1.11 | ) | | $ | (2.18 | ) | | $ | (0.66 | ) | | $ | (0.78 | ) | | $ | (0.59 | ) | $ | (1.89 | ) | | $ | (0.54 | ) | | $ | (0.67 | ) | | $ | (0.43 | ) | | $ | (0.39 | ) | | $ | (0.39 | ) | | $ | (0.51 | ) | | $ | (0.51 | ) |
Basic and diluted earnings per share are computed independently for each of the quarters presented. Therefore, the sum of quarterly basic and diluted per share amounts may not equal annual basic and diluted per share amounts. | |
| (1) | Adjusted to include the impact of ASC 606. Refer to Note 3 for more details on the impact of the adoption of this standard. |
| |
| (2) | Basic and diluted earnings per share are computed independently for each of the quarters presented. Therefore, the sum of quarterly basic and diluted per share amounts may not equal annual basic and diluted per share amounts. |
NUTANIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| |
| (3) | Includes stock-based compensation as follows: |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | October 31, 2016 | | January 31, 2017 | | April 30, 2017 | | July 31, 2017 | | October 31, 2017 | | January 31, 2018 | | April 30, 2018 | | July 31, 2018 |
| | (unaudited, in thousands) |
| Product cost of sales | $ | 966 |
| | $ | 848 |
| | $ | 610 |
| | $ | 642 |
| | $ | 570 |
| | $ | 684 |
| | $ | 634 |
| | $ | 692 |
|
| Support, entitlements and other services cost of sales | 3,350 |
| | 2,389 |
| | 2,471 |
| | 2,201 |
| | 2,072 |
| | 2,133 |
| | 1,951 |
| | 2,789 |
|
| Sales and marketing | 33,891 |
| | 15,528 |
| | 15,726 |
| | 12,972 |
| | 13,766 |
| | 15,942 |
| | 18,051 |
| | 17,301 |
|
| Research and development | 34,026 |
| | 28,759 |
| | 27,041 |
| | 19,218 |
| | 15,542 |
| | 17,023 |
| | 16,474 |
| | 25,350 |
|
| General and administrative | 18,495 |
| | 5,083 |
| | 4,503 |
| | 2,772 |
| | 3,565 |
| | 6,229 |
| | 7,836 |
| | 9,264 |
|
| Total | $ | 90,728 |
| | $ | 52,607 |
| | $ | 50,351 |
| | $ | 37,805 |
| | $ | 35,515 |
| | $ | 42,011 |
| | $ | 44,946 |
| | $ | 55,396 |
|
| |
| (4) | Includes amortization of intangible assets as follows: |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | October 31, 2016 | | January 31, 2017 | | April 30, 2017 | | July 31, 2017 | | October 31, 2017 | | January 31, 2018 | | April 30, 2018 | | July 31, 2018 |
| | (unaudited, in thousands) |
| Product cost of sales | $ | 238 |
| | $ | 360 |
| | $ | 358 |
| | $ | 358 |
| | $ | 895 |
| | $ | 1,164 |
| | $ | 1,447 |
| | $ | 2,135 |
|
| Sales and marketing | 167 |
| | 248 |
| | 250 |
| | 250 |
| | 211 |
| | 192 |
| | 222 |
| | 289 |
|
| Total | $ | 405 |
| | $ | 608 |
| | $ | 608 |
| | $ | 608 |
| | $ | 1,106 |
| | $ | 1,356 |
| | $ | 1,669 |
| | $ | 2,424 |
|
NUTANIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 15. SUBSEQUENT EVENT
Frame Acquisition
On August 24, 2018, we completed the acquisition of Mainframe2, Inc., ("Frame"), a privately held Delaware corporation with its principal offices in San Mateo, California. Frame provides a cloud-based Windows desktop and application delivery service. The aggregate preliminary purchase price of approximately $129.7 million consisted of approximately $26.7 million in cash and 1,807,576 unregistered shares of our Class A common stock with an aggregate fair value of approximately $103.0 million. The fair value of the shares of common stock issued was determined to be $56.97 per share, the closing price of our stock on August 24, 2018. Certain portions of the consideration for the acquisition, both cash and shares of our Class A common stock, have been placed in escrow to secure the indemnification obligations of certain Frame security holders.
We also entered into employee holdback or deferred payment arrangements with certain employees of Frame who joined Nutanix after the acquisition, totaling approximately $6.6 million. As payment of these deferred payments is contingent upon the continuous service of the employees, they are being accounted for as compensation over the required service period of three years. In addition, we also issued 643,746 unregistered shares of our Class A common stock to these Frame employees subject to their continuous employment with us. The fair value of the Class A common stock issued pursuant to the holdback arrangements was approximately $36.7 million, or $56.97 per share, the closing price of our Class A common stock on August 24, 2018. This holdback will be accounted for as stock-based compensation over the required three-year service period.
We are currently in the process of finalizing the accounting for this transaction and expect to complete our preliminary allocation of the purchase consideration to the assets acquired and liabilities assumed by the end of the first quarter of fiscal 2019.
(1) Includes stock-based compensation as follows: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | October 31,
2015 | | January 31,
2016 | | April 30,
2016 | | July 31,
2016 | | October 31,
2016 | | January 31,
2017 | | April 30,
2017 | | July 31,
2017 |
| | (unaudited, in thousands) |
| Product cost of sales | $ | 109 |
| | $ | 104 |
| | $ | 98 |
| | $ | 80 |
| | $ | 966 |
| | $ | 848 |
| | $ | 610 |
| | $ | 642 |
|
| Support cost of sales | 293 |
| | 241 |
| | 230 |
| | 204 |
| | 3,350 |
| | 2,389 |
| | 2,471 |
| | 2,201 |
|
| Sales and marketing | 2,118 |
| | 1,964 |
| | 2,029 |
| | 1,895 |
| | 33,891 |
| | 15,528 |
| | 15,726 |
| | 12,972 |
|
| Research and development | 1,629 |
| | 1,612 |
| | 1,519 |
| | 1,499 |
| | 34,026 |
| | 28,759 |
| | 27,041 |
| | 19,218 |
|
| General and administrative | 1,237 |
| | 1,029 |
| | 1,168 |
| | 998 |
| | 18,495 |
| | 5,083 |
| | 4,503 |
| | 2,772 |
|
| Total | $ | 5,386 |
|
| $ | 4,950 |
|
| $ | 5,044 |
|
| $ | 4,676 |
|
| $ | 90,728 |
|
| $ | 52,607 |
|
| $ | 50,351 |
|
| $ | 37,805 |
|
(2) Includes amortization of intangible assets as follows: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | October 31,
2015 | | January 31,
2016 | | April 30,
2016 | | July 31,
2016 | | October 31,
2016 | | January 31,
2017 | | April 30,
2017 | | July 31,
2017 |
| | (unaudited, in thousands) |
| Product cost of sales | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 238 |
| | $ | 360 |
| | $ | 358 |
| | $ | 358 |
|
| Sales and marketing | | | — |
| | — |
| | — |
| | 167 |
| | 248 |
| | 250 |
| | 250 |
|
| Total | $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 405 |
|
| $ | 608 |
|
| $ | 608 |
|
| $ | 608 |
|
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the the Securities and Exchange Act of 1934, as amended or the ("Exchange Act)Act")) prior to the filing of this Annual Report on Form 10-K. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this Annual Report on Form 10-K, our disclosure controls and procedures were, in design and operation, effective at the reasonable assurance level.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) and Rule 15d-15(f) of the Exchange Act. Internal control over financial reporting consists of policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) are designed and operated to provide reasonable assurance regarding the reliability of our financial reporting and our process for the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. Our management evaluated the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework (2013). Based on the results of our evaluation, our management has concluded that our internal control over financial reporting was effective as of July 31, 2018.
The effectiveness of our internal control over financial reporting as of July 31, 2018 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report, which appears in Part II, Item 8 of this Annual Report on Form 10-K.
Limitations on the Effectiveness of Controls
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements and projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the most recently completed fiscal quarter ended July 31, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
This Annual Report on Form 10-K does not include a report of management’s assessment regarding internal control over financial reporting or an attestation report of our independent registered public accounting firm due to a transition period established by the rules of the Securities Exchange Commission for newly public companies.
Attestation Report of the Registered Public Accounting Firm
This Annual Report on Form 10-K does not include an attestation report of our registered public accounting firm due to an exemption established by the Jumpstart Our Business Startups Act, or JOBS Act, for “emerging growth companies.”
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers, and Corporate Governance
The information required by this item is incorporated herein by reference to our definitive proxy statement for our 20172018 annual meeting of stockholders (“2017("2018 Proxy Statement”Statement"), which will be filed not later than 120 days after the end of our fiscal year ended July 31, 2017.2018.
Item 11. Executive Compensation
The information required by this item is incorporated herein by reference to our 20172018 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated herein by reference to our 20172018 Proxy Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated herein by reference to our 20172018 Proxy Statement.
Item 14. Principal Accountant Fees and Services
The information required by this item is incorporated herein by reference to our 20172018 Proxy Statement.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)(1) Consolidated Financial Statements
We have filed the consolidated financial statements listed in the Index to Consolidated Financial Statements Schedules, and Exhibits included in Part II, Item 8, “Financial"Financial Statements and Supplementary Data”Data" of this Annual Report on Form 10-K.
(a)(2) Financial Statement Schedules
All financial statement schedules have been omitted because they are not applicable, not material, or the required information is shown in the consolidated financial statements or the notes thereto.
(a)(3) Exhibits
See the Exhibit Index below in this Annual Report on Form 10-K.
Item 16. Form 10-K Summary
None.
EXHIBIT INDEX
| | | | | Incorporated by Reference | | | Incorporated by Reference | |
| Number | Exhibit Title | Form | File No. | Exhibit | Filing Date | Filed Herewith | Exhibit Title | Form | File No. | Exhibit | Filing Date | Filed Herewith |
| | 10-Q | 001-37883 | 3.1 | 12/8/2016 | | | 10-Q | 001-37883 | 3.1 | 12/8/2016 | |
| | S-1/A | 333-208711 | 3.4 | 5/27/2016 | | | S-1/A | 333-208711 | 3.4 | 5/27/2016 | |
| | S-1 | 333-208711 | 4.1 | 12/22/2015 | | | S-1 | 333-208711 | 4.1 | 12/22/2015 | |
| | S-1/A | 333-208711 | 4.2 | 4/4/2016 | | | S-1/A | 333-208711 | 4.2 | 4/4/2016 | |
| | S-1 | 333-208711 | 4.3 | 12/22/2015 | | | S-1 | 333-208711 | 4.3 | 12/22/2015 | |
| | 10-Q/A | 001-37883 | 10.1 | 7/5/2017 | | |
| 4.4 | | | 8-K | 001-37883 | 4.1 | 1/23/2018 | |
| 10.1† | | | 10-Q/A | 001-37883 | 10.1 | 7/5/2017 | |
| | S-1 | 333-208711 | 10.1 | 12/22/2015 | | | S-1 | 333-208711 | 10.1 | 12/22/2015 | |
| | S-1/A | 333-208711 | 10.2 | 8/16/2016 | | |
| | S-1 | 333-208711 | 10.3 | 12/22/2015 | | |
| | S-1/A | 333-208711 | 10.4 | 9/19/2016 | | |
| | S-1/A | 333-208711 | 10.5 | 9/19/2016 | | |
| | S-1 | 333-208711 | 10.6 | 12/22/2015 | | |
| | S-1 | 333-208711 | 10.7 | 12/22/2015 | | |
| | S-1 | 333-208711 | 10.8 | 12/22/2015 | | |
| | S-1 | 333-208711 | 10.9 | 12/22/2015 | | |
| | S-1 | 333-208711 | 10.11 | 12/22/2015 | | |
| | S-1 | 333-208711 | 10.12 | 12/22/2015 | | |
| | S-1 | 333-208711 | 10.13 | 12/22/2015 | | |
| | S-1 | 333-208711 | 10.14 | 12/22/2015 | | |
| 10.3+ | | | S-1/A | 333-208711 | 10.2 | 8/16/2016 | |
| 10.4+ | | | S-1 | 333-208711 | 10.3 | 12/22/2015 | |
| 10.5+ | | | S-1/A | 333-208711 | 10.4 | 9/19/2016 | |
| 10.6+ | | | S-1/A | 333-208711 | 10.5 | 9/19/2016 | |
| 10.7+ | | | S-1 | 333-208711 | 10.6 | 12/22/2015 | |
| 10.8+ | | | S-1 | 333-208711 | 10.7 | 12/22/2015 | |
| 10.9+ | | | 10-Q | 001-37883 | 10.1 | 12/13/2017 | |
| 10.10+ | | | S-1 | 333-208711 | 10.9 | 12/22/2015 | |
| 10.11+ | | | S-1 | 333-208711 | 10.11 | 12/22/2015 | |
| 10.12+ | | | S-1 | 333-208711 | 10.12 | 12/22/2015 | |
| 10.13+ | | | S-1 | 333-208711 | 10.13 | 12/22/2015 | |
| 10.14+ | | | S-1 | 333-208711 | 10.14 | 12/22/2015 | |
| | S-1/A | 333-208711 | 10.15 | 8/16/2016 | | | S-1/A | 333-208711 | 10.15 | 8/16/2016 | |
| | S-1/A | 333-208711 | 10.16 | 8/16/2016 | | | S-1/A | 333-208711 | 10.16 | 8/16/2016 | |
| | S-1 | 333-208711 | 10.17 | 12/22/2015 | | |
| | S-1/A | 333-208711 | 10.19 | 9/12/2016 | | |
| | S-1/A | 333-208711 | 10.21 | 9/12/2016 | | |
| | S-1/A | 333-208711 | 10.18 | 5/27/2016 | | |
| | 10-Q | 001-37883 | 10.1 | 3/10/2017 | | |
| 10.17† | | | 10-Q | 001-37883 | 10.03 | 3/15/2018 | |
| 10.18+ | | | S-1/A | 333-208711 | 10.19 | 9/12/2016 | |
| 10.19+ | | | S-1/A | 333-208711 | 10.21 | 9/12/2016 | |
| 10.20† | | | S-1/A | 333-208711 | 10.18 | 5/27/2016 | |
| 10.21+ | | | 10-Q | 001-37883 | 10.1 | 3/10/2017 | |
| 10.22+ | | | 10-Q | 001-37883 | 10.1 | 3/15/2018 | |
| 10.23† | | | 10-Q | 001-37883 | 10.2 | 3/15/2018 | |
| 10.24 | | | 10-Q | 001-37883 | 10.1 | 6/12/2018 | |
| 10.25 | | | 10-Q | 001-37883 | 10.2 | 6/12/2018 | |
| 10.26 | | | 10-Q | 001-37883 | 10.3 | 6/12/2018 | |
| 10.27 | | | 10-Q | 001-37883 | 10.4 | 6/12/2018 | |
| 10.28 | | | 8-K | 001-37883 | 10.1 | 1/23/2018 | |
| 10.29 | | | | X |
| | | X | | | X |
| | | X | | | X |
| | | X | | | X |
| | | X | | | X |
| | | X | | | X |
| | | X | | | X |
| | | X | | | X |
| 101.INS | XBRL Instance Document. | | X | XBRL Instance Document. | | X |
| 101.SCH | XBRL Taxonomy Extension Schema Document. | | X | XBRL Taxonomy Extension Schema Document. | | X |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. | | X | XBRL Taxonomy Extension Calculation Linkbase Document. | | X |
| 101. | XBRL Taxonomy Extension Definition. | | X | XBRL Taxonomy Extension Definition. | | X |
| 101. | XBRL Taxonomy Extension Label Linkbase | | X | XBRL Taxonomy Extension Label Linkbase | | X |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. | | X | XBRL Taxonomy Extension Presentation Linkbase Document. | | X |
† Confidential treatment has been requested for portions of this exhibit. These portions have been omitted and have been filed separately with the Securities and Exchange Commission.
* These exhibits are furnished with this Annual Report on Form 10-K and are not deemed filed with the Securities and Exchange Commission and are not incorporated by reference in any filing of Nutanix, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date hereof and irrespective of any general incorporation language contained in such filings.
+Indicates a management contract or compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized.
|
| | |
| | NUTANIX, INC. |
| | | |
Date: September 18, 201721, 2018 | By: | /s/ DHEERAJ PANDEY s/ Dheeraj Pandey |
| | | Dheeraj Pandey
Chief Executive Officer and Chairman |
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Dheeraj Pandey and Duston M. Williams, jointly and severally, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this report, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
| | | | |
| Signature | | Title | | Date |
/s/ S/ DHEERAJ PANDEYDheeraj Pandey | | Chief Executive Officer and Chairman (Principal Executive Officer) | | September 18, 201721, 2018 |
| Dheeraj Pandey | | |
| | | | | |
/s/ S/ DUSTONDuston M. WILLIAMSWilliams | | Chief Financial Officer (Principal Financial Officer) | | September 18, 201721, 2018 |
| Duston M. Williams | | |
| | | | | |
/s/S/ KENNETHKenneth W. LONGLong III | | Vice President, Corporate Controller and Chief Accounting Officer (Principal Accounting Officer) | | September 18, 201721, 2018 |
| Kenneth W. Long III | | |
| | | | | |
/s/ Steven J. GomoSusan L. Bostrom | | Director | | September 18, 201721, 2018 |
| Susan L. Bostrom | | |
| | | | |
/s/ Craig Conway | | Director | | September 21, 2018 |
| Craig Conway | | |
| | | | |
/s/ Steven J. Gomo | | Director | | September 21, 2018 |
| Steven J. Gomo | | |
| | | | | |
/s/ John McAdam | | Director | | September 18, 201721, 2018 |
| John McAdam | | |
| | | | | |
/s/ Ravi Mhatre | | Director | | September 18, 201721, 2018 |
| Ravi Mhatre | | |
| | | | | |
/s/ Jeffrey T. Parks | | Director | | September 18, 201721, 2018 |
| Jeffrey T. Parks | | |
| | | | | |
/s/ Michael P. Scarpelli | | Director | | September 18, 201721, 2018 |
| Michael P. Scarpelli | | |
| | | | |
/s/ Bipul Sinha | | Director | | September 18, 2017 |
Bipul Sinha | | |
