Confidential Draft No. 2 as confidentially submitted to the Securities and Exchange Commission on August 12, 2015
This draft registration statement has not been publicly filed with the Securities and Exchange Commission,
and all information herein remains strictly confidential
Registration No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
NUTANIX, INC.
(Exact name of Registrant as specified in its charter)
Delaware | 7372 | 27-0989767 | ||
(State or other jurisdiction of incorporation or organization) |
(Primary Standard Industrial Classification Code Number) |
(I.R.S. Employer Identification Number) |
1740 Technology Drive, Suite 150
San Jose, California 95110
(408) 216-8360
(Address, including zip code, and telephone number, including area code, of Registrants principal executive offices)
Dheeraj Pandey
President, Chief Executive Officer and Chairman
Nutanix, Inc.
1740 Technology Drive, Suite 150
San Jose, California 95110
(408) 216-8360
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
Jeffrey D. Saper, Esq. Mark B. Baudler, Esq. Andrew D. Hoffman, Esq. Wilson Sonsini Goodrich & Rosati, P.C. 650 Page Mill Road Palo Alto, California 94304 (650) 493-9300 |
Eric S. Whitaker, Esq. Olive Huang, Esq. Nutanix, Inc. 1740 Technology Drive, Suite 150 San Jose, California 95110 (408) 216-8360 |
Jeffrey R. Vetter, Esq. James D. Evans, Esq. Fenwick & West LLP 801 California Street Mountain View, California 94041 (650) 988-8500 |
Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. ¨
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨ | Accelerated filer | ¨ | ||||
Non-accelerated filer x | (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
CALCULATION OF REGISTRATION FEE
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Title of Each Class of Securities to be Registered |
Proposed Maximum Aggregate Offering Price(1)(2) |
Amount of Registration Fee | ||
Common Stock, $0.000025 par value per share |
$ | $ | ||
| ||||
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(1) | Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended. |
(2) | Includes the aggregate offering price of additional shares that the underwriters have the option to purchase. |
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
The information in this preliminary prospectus is not complete and may be changed. We and the selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and we and the selling stockholders are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.
Subject to Completion. Dated , 2015.
Shares
Common Stock
This is the initial public offering of shares of common stock of Nutanix, Inc.
Nutanix is offering of the shares to be sold in the offering. The selling stockholders identified in this prospectus are offering an additional shares. Nutanix will not receive any proceeds from the sale of shares by the selling stockholders.
Prior to this offering, there has been no public market for our common stock. It is currently anticipated that the initial public offering price will be between $ and $ per share. We intend to apply to list our common stock on the under the symbol NTNX.
We are an emerging growth company as defined under the federal securities laws and, as such, may elect to comply with certain reduced public company reporting requirements for future filings.
See Risk Factors beginning on page 13 to read about factors you should consider before buying shares of our common stock.
Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.
Per Share | Total | |||||||
Initial public offering price |
$ | $ | ||||||
Underwriting discounts and commissions(1) |
$ | $ | ||||||
Proceeds, before expenses, to Nutanix |
$ | $ | ||||||
Proceeds, before expenses, to the selling stockholders |
$ | $ |
(1) | See the section titled Underwriting for a description of the compensation payable to the underwriters. |
To the extent that the underwriters sell more than shares of our common stock, the underwriters have an option to purchase up to an additional shares from Nutanix and the selling stockholders at the initial public offering price, less the underwriting discounts and commissions.
The underwriters expect to deliver the shares of common stock against payment in New York, New York on , 2015.
Goldman, Sachs & Co. | Morgan Stanley |
J.P. Morgan |
Credit Suisse |
Baird | Needham & Company | Oppenheimer & Co. | Pacific Crest Securities |
Piper Jaffray | Raymond James | Stifel | William Blair |
Prospectus dated , 2015
Customer Delight from IT Infrastructure
Virtualized Hyoerconverged Invisible
NUTANIX tm
Invisible Infrastructure Elevates IT
Consumer-grade Design + Web-scale Engineering = Invisible
Infrastructure
XCP (logo) Xtreme Computing Platform
Consumer-grade Design One-click Operations
Search First Interface Uncompromising Simple
Web-scale Engineering Distributed Systems Self-healing Software intelligence
Agility Scalability Lower TCO Application Mobility Secure Platform
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
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Material U.S. Federal Income and Estate Tax Consequences to Non-U.S. Holders of Our Common Stock |
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F-1 |
Through and including , 2015 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealers obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.
Neither we, the selling stockholders nor the underwriters have authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses prepared by or on behalf of us or to which we have referred you. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date, regardless of the time of delivery of this prospectus or of any sale of the common stock.
For investors outside of the United States: Neither we, the selling stockholders nor the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourself about, and to observe any restrictions relating to, this offering and the distribution of this prospectus outside of the United States.
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This summary highlights information contained elsewhere in this prospectus. You should read the following summary together with the more detailed information appearing in this prospectus, including Risk Factors, Managements Discussion and Analysis of Financial Condition and Results of Operations, Business, and our consolidated financial statements and related notes before deciding whether to purchase shares of our common stock. Our fiscal year end is July 31, and our fiscal quarters end on October 31, January 31, April 30, and July 31. Our fiscal years ended July 31, 2012, 2013 and 2014 and our fiscal year ending July 31, 2015 are referred to herein as fiscal 2012, fiscal 2013, fiscal 2014 and fiscal 2015, respectively.
NUTANIX, INC.
Our Mission
Our mission is to deliver invisible infrastructure and elevate IT to focus on the applications and services that power their business.
Overview
We provide a leading next-generation enterprise computing platform that converges traditional silos of server, virtualization and storage into one integrated solution. Our software-driven platform 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 have recently announced an expansion of our capabilities to provide our customers with the flexibility to selectively utilize the public cloud for suitable workloads and specific use cases by enabling seamless application mobility across private and public clouds. We have combined advanced web-scale technologies with elegant consumer-grade design to deliver a powerful computing platform that elevates IT organizations to focus on the applications and services that power their businesses. We refer to our platform as invisible infrastructure because it provides constant availability and low-touch management, enables application mobility across computing environments and reduces inefficiencies in IT planning.
Leading Internet companies and public cloud providers have embraced convergence and distributed systems and implemented web-scale technologies in their proprietary operating environments. They took these steps because traditional siloed IT infrastructure architectures failed to deliver the levels of scalability and operational efficiency that their dynamic businesses required. Today, organizations across all industries are seeking to leverage IT capabilities as a competitive advantage while also facing the limitations of traditional siloed IT infrastructure. To address these challenges, we have pioneered a converged web-scale architecture that can be easily deployed by organizations of any size to address the limitations of traditional IT infrastructure.
Our solution, the Xtreme Computing Platform, or XCP, is comprised of two comprehensive software product families, Acropolis and Prism, and is delivered on commodity x86 servers. Acropolis delivers high performance distributed storage, application mobility capabilities, which we are continuing to expand, and a built-in hypervisor, software that allows multiple operating systems to share a single hardware host. Prism delivers integrated virtualization and infrastructure management, robust operational analytics and one-click administration capabilities. Our solutions address a broad range of workloads, including enterprise applications, databases, virtual desktop infrastructure, or VDI, unified communications and big data analytics. We have end-customers across a broad range of industries,
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including automotive, consumer goods, education, energy, financial services, healthcare, manufacturing, media, public sector, retail, technology and telecommunications. We also sell to service providers who utilize our platform to provide a variety of cloud-based services to their customers. We had a broad and diverse base of over 1,400 end-customers as of April 30, 2015, including over 140 Global 2000 enterprises. Representative end-customers include Activision Blizzard, Inc., Best Buy Co., Inc., Covance Inc., Jabil Circuit, Inc., Kellogg Co., U.S. Department of Defense Office of the Secretary of Defense, Nintendo Co., Ltd., Nordstrom, Inc. and Total S.A.
We have experienced significant growth in recent periods, with total revenue of $30.5 million and $127.1 million for fiscal 2013 and fiscal 2014, respectively, representing year-over-year growth of 316%. We have continued to make significant investments as we scale our business, including in developing and improving our platform, expanding our sales and marketing capabilities and global coverage, and in expanding our general and administrative resources to support our growth. As a result, we had net losses of $44.7 million and $84.0 million for fiscal 2013 and fiscal 2014, respectively. Net cash used in operating activities was $29.1 million and $45.7 million for fiscal 2013 and fiscal 2014, respectively. For the nine months ended April 30, 2014 and 2015, our total revenue was $88.0 million and $167.3 million, respectively, representing year-over-year growth of 90%. As we continued to make investments, we had net losses of $54.6 million and $88.9 million for the nine months ended April 30, 2014 and 2015, respectively. For the nine months ended April 30, 2014 and 2015, net cash used in operating activities was $28.8 million and $20.3 million, respectively. As of April 30, 2015, we had an accumulated deficit of $236.2 million.
Industry Background
Traditional IT infrastructure presents significant architectural challenges, particularly as it relates to storage and virtualization, including:
| Lack of agility: With traditional enterprise computing infrastructure, different silos of servers, virtualization, storage and networks are typically managed by specialist IT teams as each silo has its own proprietary operating system, hardware platform and management interface. Every time infrastructure is provisioned to support new application requirements, these different teams must coordinate and align their workflows. As a result, traditional infrastructure often requires days or weeks for simple application and infrastructure provisioning or deployment tasks, greatly reducing agility. |
| Diminishing performance as infrastructure scales: Traditional infrastructure places data storage in dedicated, performance-bound appliances that are connected to servers over storage networks. In these environments, scaling capacity by adding more hard drives or flash devices does not improve performance because the storage controllers that read and write data are often fixed at the time of initial deployment. Expanding the storage controllers typically requires an expensive and time-consuming forklift upgrade (i.e., requiring an entire new system purchase and migration of data from the prior system). |
| Costly overprovisioning and manual operations: Due to their lack of scalability and complexity of deployment, servers and storage arrays are typically overprovisioned for longer-term peak capacity and remain underutilized for extensive periods. Furthermore, existing virtualization products are often sold under restrictive enterprise license agreements, which may lead to significant underutilization of software licenses and higher costs. Both of these factors can significantly impact infrastructure IT budgets. These traditional products also require extensive manual administration for routine tasks such as upgrades and maintenance. |
| Closed architectures that prevent mobility of applications and adoption of new technologies: Traditional infrastructure suppliers have created vendor lock-in by providing |
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closed architecture technologies that often do not interoperate well with other enterprise computing environments. For example, virtualization was not designed with the ability to migrate applications across different hypervisors or emerging computing environments such as public clouds and containers, a method of virtualizing the operating system so that multiple applications and their dependent libraries can share the same Linux operating system instance. This is creating cost and complexity challenges as more enterprises seek to operate multi-vendor hypervisor environments. Lack of application mobility across multi-hypervisor, hybrid cloud and container environments has resulted in silos of computing that limit agility, drive up costs and limit the adoption of new technologies. |
While public cloud providers offer an alternative to on-premise infrastructure deployments, wide adoption of the public cloud has been challenging for many organizations due primarily to the lack of control over infrastructure service levels and data. Public cloud providers typically offer homogenous layers of infrastructure and do not provide control or granularity to customize specific services to deliver reliable application performance and availability for traditional enterprise workloads. Customers are largely dependent on public cloud providers to ensure data security and compliance with regulatory requirements. Usage of public clouds can also result in vendor lock-in, as most public cloud providers do not easily allow portability of applications and data to alternative providers or to enterprise private clouds as requirements, costs and services levels change.
Our Solution
XCP is based on powerful distributed systems architecture and converges server, virtualization and storage resources into one integrated platform delivered on commodity x86 servers. Our platform is comprised of two comprehensive software product families, Acropolis and Prism. Acropolis includes our Distributed Storage Fabric that replaces traditional storage arrays and delivers efficient and high performance enterprise-grade data management. Acropolis also includes our innovative Application Mobility Fabric that will enable increasing levels of application placement, conversion and migration across our platform and public clouds. Additionally, the built-in Acropolis Hypervisor can replace expensive third-party hypervisors and eliminate an additional infrastructure silo. Built with consumer-grade design, Prism delivers integrated virtualization and infrastructure management, robust operational analytics and one-click administration capabilities. Prism allows routine IT operations that are typically manual and cumbersome to be completed in one-click, including capacity planning, provisioning of new applications and resources, troubleshooting and software upgrades.
Key benefits of our solution include:
| Agility: Our platform converges several disparate silos of server, virtualization and storage infrastructure into a unified solution that can be deployed and managed as a single system to simplify operations. We have also developed extensive automation capabilities to eliminate time consuming and error-prone tasks, while implementing consumer-grade design into our intuitive user interface for Prism to simplify and streamline common IT administrator workflows. With our solution, infrastructure can be provisioned in minutes with one click by a single IT administrator. |
| Scalability: Our platform is a distributed system and deployments can start with only a few nodes and scale to thousands without degradation in performance per node. Our customers can grow their clusters in flexible increments by adding any number of nodes at a time depending on their capacity and performance requirements. |
| Lower total cost of ownership: We estimate, based on a model validated by IDC, that our solution can reduce cost of ownership by up to 60% compared to traditional infrastructure for a |
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broad set of workloads and up to approximately 30% compared to public cloud offerings for predictable workloads.1 With Acropolis, our end-customers can benefit from application mobility, simplicity of use and up to an 80% reduction in virtualization costs.2 |
| Flexible application mobility: We design our software to provide a high degree of flexibility and choice of where applications run, preventing vendor lock-in. We intend to enable customers to make application placement decisions based entirely on performance, scalability and economic considerations, thereby accelerating speed of implementation and reducing cost. With application mobility, our customers will be able to selectively adopt the public cloud for specific workloads and certain scenarios, while preserving the flexibility to bring those workloads back on-premise or move them to different public cloud providers should requirements or costs change. |
| Secure platform: We embed security features into our hardened software solution and we strengthen our platform by employing two-factor authentication and encryption as configurable system options. We regularly apply threat modeling and analysis to reduce the attack surface, and recently added automated detection and self-healing capability. |
Competitive Strengths
We believe the following strengths will allow us to extend our market leadership and broaden adoption of our solution:
| Purpose built enterprise computing platform based on web-scale engineering: Our platform leverages sophisticated web-scale technologies, enhanced by our proprietary innovations, to build highly reliable distributed systems that are fast, efficient and scalable. |
| Commitment and passion for elegant design: Our passion and appreciation for elegant design inspires us to deliver uncompromisingly simple user experiences. This passion is reflected throughout our platform and customer lifecycle. |
| Breadth of engineering expertise: We have assembled a strong engineering group with experience spanning many technology domains, including distributed systems, virtualization, storage, networking, enterprise applications and security. We believe our engineering expertise should enable us to continue innovating rapidly, developing elegant solutions to difficult technical challenges and addressing emerging market opportunities. |
| Focus on customer delight: Our award-winning support organization focuses on delighting our customers, which has led to high customer loyalty, strong customer references and accelerated repeat purchases. Over the last year, we have maintained an average Net Promoter Score of 90, which we believe is among the industry best for IT infrastructure companies based on comparisons against Net Promoter Scores that have been publicly announced by our competitors |
1 | Percentages are based on an internal model prepared by us using available industry data and our estimates on IT spending, which data and calculations were validated by IDC and reflects a three-to-five year cost of ownership for traditional infrastructure and four year cost of ownership for public cloud offerings. See Risk FactorsOur estimates of end-customer cost savings may not be indicative of the actual benefits that end-customers experience in the future and BusinessOverview for more information. |
2 | Percentages are based on an internal model prepared by us using available industry data and our estimates on virtualization costs. See Risk FactorsOur estimates of end-customer cost savings may not be indicative of the actual benefits that end-customers experience in the future and BusinessOur Solution for more information. |
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and peers.3 Additionally, as of April 30, 2015, 80% of our end-customers who have been with us for 18 months or more have made a repeat purchase, and repurchase orders are often a multiple of the original order value. |
| Diverse and global business: Our platform addresses a common set of critical IT issues which are pervasive across a diverse array of workloads, range of industries and customer segments. Since selling our first product in fiscal 2012, we have taken advantage of this large opportunity, and now have customers spanning more than 70 countries, with international revenue comprising 32% of total revenue for the nine months ended April 30, 2015. |
| Unique culture: Our culture is based on building a deep understanding of our customers, partners and employees that we believe makes us an attractive company to work with and for. We also foster extensive collaboration and open communication, crowdsourcing of ideas and frequent collection of input that we believe leads to rapid and improved decision-making. We embrace constant experimentation and continually challenge ourselves to extend our competitive edge. |
Our Market Opportunity
Our market opportunity is to replace traditional IT products, including x86 servers, storage systems, virtualization software, cloud management software and systems management software. We capture spend from the following markets:
| The x86 server market, which according to Gartner, is expected to be $44.5 billion in 20154 |
| The storage systems markets, which according to IDC, is expected to be $41.5 billion in 2015 |
| The virtualization software market, which according to Gartner, is expected to be $4.1 billion in 20155 |
| The cloud management software market, which according to IDC, is expected to be $3.1 billion in 2015 |
| The systems management software market, which according to IDC, is expected to be $20.3 billion in 2015 |
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 all virtualized workloads and multiple hypervisors. We intend to continue to invest in technologies such as virtualization, containers, cloud management, infrastructure analytics and networking to expand our market opportunity. |
| Invest to acquire new end-customers: We intend to grow our base of over 1,400 end-customers, which we believe represents a small portion of our potential end-customer base, by increasing our investment in sales and marketing, leveraging our network of channel partners |
3 | A Net Promoter Score is a measure of customer loyalty ranging from negative 100 to 100 based on the standard question: On a scale of 0 to 10, with 10 being extremely likely, how likely are you to recommend Nutanix to a friend or colleague? Our Net Promoter Score is based on end-customers who respond to the survey question, which is automatically generated, when we close a product support ticket, and is automatically calculated and tracked by our support analytics system. Our Net Promoter Score is calculated by using the standard methodology of subtracting the percentage of end-customers who respond that they are not likely to recommend Nutanix from the percentage of end-customers that respond that they are extremely likely to recommend Nutanix. |
4 | See Gartner note (3) in the section titled Market and Industry Data. |
5 | See Gartner note (2) in the section titled Market and Industry Data. |
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and furthering our international expansion. One area of specific focus will be on expanding our position within the Global 2000, where we currently have over 140 end-customers. |
| 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, which in the aggregate are often multiples of the initial order. |
| Deepen engagement with current partners and establish additional channel and OEM partners to enhance sales leverage: We have driven strong engagement and initial commercial success with several major resellers and distributors. We have established an original equipment manufacturer, or OEM, partnership with Dell Inc., and believe that OEMs can augment our routes to market to accelerate our growth. We believe there is a significant opportunity to grow our sales with our partners. As a result, we are investing aggressively in sales enablement and co-marketing with our partners, and attracting and engaging new channel and OEM partners around the world. |
Risks Affecting Us
Our business is subject to numerous risks and uncertainties, including those highlighted in the section titled Risk Factors immediately following this prospectus summary. These risks include, but are not limited to, the following:
| we have a history of losses and we may not be able to achieve or maintain profitability in the future; |
| the markets in which we compete are rapidly evolving, which make it difficult to forecast end-user adoption rates and demand for our solutions; |
| if end-customers do not adopt our solution, our ability to grow our business and operating results may be adversely affected; |
| our revenue growth in recent periods may not be indicative of our future performance; |
| we have experienced rapid growth in recent periods and we may not be able to sustain or manage any future growth effectively; |
| we compete with traditional storage vendors, IT systems vendors and infrastructure software providers and expect competition to continue to intensify in the future from both established competitors and new market entrants; |
| our relatively limited operating history makes it difficult to evaluate our current business and prospects, and may increase the risk of your investment; |
| developments or improvements in enterprise IT infrastructure technologies may materially and adversely affect the demand for our solutions; |
| if other 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; |
| if we fail to develop or introduce new or enhanced solutions on a timely basis, our ability to attract and retain end-customers could be impaired and our competitive position could be harmed; and |
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| our directors, executive officers and stockholders holding more than 5% of our capital stock and their affiliates, who will beneficially own, in the aggregate, approximately % of our common stock after the offering collectively, based on the beneficial ownership of our common stock as of June 30, 2015, will continue to have substantial control over us after this offering and will be able to influence corporate matters. |
Corporate Information
We were incorporated in the State of Delaware in September 2009. Our principal executive offices are located at 1740 Technology Drive, Suite 150, San Jose, California, 95110, and our telephone number is (408) 216-8360. Our website address is www.nutanix.com. Information on or that can be accessed through our website is not part of this prospectus and should not be relied upon in determining whether to make an investment decision.
Unless the context otherwise requires, the terms Nutanix, the Company, we, us and our in this prospectus refers to Nutanix, Inc. and its subsidiaries. The Nutanix design logo and the marks Nutanix, Xtreme Computing Platform, Acropolis, Prism and our other registered or common law trade names, trademarks or service marks appearing in this prospectus are our property. This prospectus contains additional trade names, trademarks and service marks of other companies that are the property of their respective owners. We do not intend our use or display of other companies trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies.
Implications of Being an Emerging Growth Company
We are an emerging growth company as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting requirements that are otherwise applicable generally to public companies. These reduced reporting requirements include:
| an exemption from compliance with the auditor attestation requirement on the effectiveness of our internal controls over financial reporting; |
| an exemption from compliance with any requirement that the Public Company Accounting Oversight Board may adopt regarding mandatory audit firm rotation or a supplement to the auditors report providing additional information about the audit and the financial statements; |
| reduced disclosure about our executive compensation arrangements; and |
| an exemption from the requirements to obtain a non-binding advisory vote on executive compensation or stockholder approval of any golden parachute arrangements. |
We will remain an emerging growth company until the earliest to occur of: (i) the first fiscal year following the fifth anniversary of this offering; (ii) the first fiscal year after our annual gross revenue is $1.0 billion or more; (iii) the date on which we have, during the previous three-year period, issued more than $1.0 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 $700.0 million as of the end of the second quarter of that fiscal year.
We may choose to take advantage of some, but not all, of the available benefits under the JOBS Act. We are choosing to irrevocably opt out of the extended transition periods available under the JOBS Act for complying with new or revised accounting standards, but we intend to take advantage of the other exemptions discussed above. Accordingly, the information contained herein may be different than the information you receive from other public companies in which you hold stock.
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THE OFFERING
Common stock offered by us |
shares | |
Common stock offered by the selling stockholders |
shares | |
Total common stock offered |
shares | |
Underwriters option to purchase additional shares from us |
shares | |
Underwriters option to purchase additional shares from the selling stockholders |
shares | |
Common stock to be outstanding after this offering |
shares ( shares, if the underwriters exercise their option to purchase additional shares in full) | |
Use of proceeds |
We estimate that the net proceeds from the sale of shares of our common stock that we are selling in this offering will be approximately $ million, or approximately $ million if the underwriters exercise their option to purchase additional shares in full, at an assumed initial public offering price of $ per share, the midpoint of the range on the cover of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any of the proceeds from the shares of common stock to be sold by the selling stockholders.
We currently intend to use the net proceeds we receive from this offering primarily for capital expenditures and for general corporate purposes, including working capital, sales and marketing activities, research and development, and general and administrative matters, although we do not currently have any specific or preliminary plans with respect to the use of proceeds for such purposes. See Use of Proceeds. | |
Proposed symbol |
NTNX |
The number of shares of our common stock to be outstanding after this offering is based on 120,655,385 shares of our common stock outstanding as of April 30, 2015 and excludes:
| 28,235,060 shares of common stock issuable upon the exercise of stock options outstanding under our 2010 Stock Plan, or 2010 Plan, and our 2011 Stock Plan, or 2011 Plan, as of April 30, 2015, with a weighted-average exercise price of $3.92 per share; |
| 4,117,218 shares of common stock issuable upon the vesting of restricted stock units, or RSUs, outstanding under our 2010 Plan as of April 30, 2015; |
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| 824,094 shares of common stock issuable upon the exercise of warrants outstanding as of April 30, 2015, with a weighted-average exercise price of $0.70 per share; |
| 652,313 shares of common stock issuable upon the exercise of stock options granted under our 2010 Plan after April 30, 2015, with a weighted-average exercise price of $12.02 per share; |
| 199,750 shares of common stock issuable upon the vesting of RSUs granted under our 2010 Plan after April 30, 2015; and |
| shares of common stock reserved for future issuance under our equity compensation plans as of April 30, 2015, consisting of (i) shares of common stock reserved for future issuance under our 2010 Plan and 2011 Plan but unissued, as of immediately prior to the completion of this offering, which shares will be added to the shares reserved under the 2015 Equity Incentive Plan, or 2015 Plan, which will become effective on the date immediately prior to the date of this prospectus (which reserve does not reflect the options to purchase shares of our common stock and RSUs granted after April 30, 2015), (ii) shares of our common stock initially reserved for future issuance under our 2015 Plan, which will become effective on the date immediately prior to the date of this prospectus, (iii) shares that may be added to the 2015 Plan upon the expiration, termination, forfeiture or other reacquisition of any shares of common stock issuable upon the exercise or settlement of stock awards outstanding under the 2010 Plan and 2011 Plan, and (iv) shares of our common stock initially reserved for issuance under our 2015 Employee Stock Purchase Plan, or ESPP, which will become effective on the date adopted by our board of directors. Our 2015 Plan and ESPP also provide for automatic annual increases in the number of shares reserved under such plans each year, as more fully described in Executive CompensationEmployee Benefit and Stock Plans. |
Except as otherwise indicated, all information in this prospectus assumes:
| the effectiveness of our amended and restated certificate of incorporation and amended and restated bylaws immediately prior to the completion of this offering; |
| the automatic conversion of all outstanding shares of our convertible preferred stock outstanding as of April 30, 2015 into an aggregate of 76,319,511 shares of common stock effective immediately prior to the completion of this offering; |
| the conversion of all outstanding warrants to purchase convertible preferred stock into warrants to purchase shares of common stock; |
| no exercise of outstanding stock options or warrants, or settlement of outstanding RSUs after April 30, 2015; and |
| no exercise of the underwriters option to purchase up to an additional shares. |
9
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
The following table summarizes our consolidated financial data. The summary consolidated statements of operations data presented below for fiscal 2013 and fiscal 2014 are derived from our audited consolidated financial statements that are included elsewhere in this prospectus. The summary consolidated statements of operations data presented below for the nine months ended April 30, 2014 and 2015 and the summary consolidated balance sheet data as of April 30, 2015 are derived from our unaudited interim consolidated financial statements that are included elsewhere in this prospectus. The unaudited consolidated financial statements were prepared on the same basis as the audited consolidated financial statements contained in this prospectus and include, in the opinion of management, all adjustments necessary for a fair presentation of the financial information set forth in those statements. The following summary consolidated financial data should be read together with our audited and unaudited consolidated financial statements and the related notes, as well as the section entitled Managements Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this prospectus. Our historical results are not necessarily indicative of our results in any future period and our interim results are not necessarily indicative of results that should be expected for a full year or any other period.
Fiscal Year Ended July 31 |
Nine Months Ended April 30 |
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2013 | 2014 | 2014 | 2015 | |||||||||||||
(In thousands, except share and per share data) |
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Consolidated Statements of Operations Data: |
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Revenue: |
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Product |
$ | 28,138 | $ | 113,562 | $ | 79,459 | $ | 140,838 | ||||||||
Support and other services |
2,395 | 13,565 | 8,577 | 26,509 | ||||||||||||
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|
|
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Total revenue |
30,533 | 127,127 | 88,036 | 167,347 | ||||||||||||
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|
|
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Cost of revenue: |
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Product(1) |
24,171 | 52,417 | 38,137 | 56,627 | ||||||||||||
Support and other services(1) |
2,433 | 8,495 | 5,432 | 13,998 | ||||||||||||
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|
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Total cost of revenue |
26,604 | 60,912 | 43,569 | 70,625 | ||||||||||||
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|
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Gross profit |
3,929 | 66,215 | 44,467 | 96,722 | ||||||||||||
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Operating expenses: |
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Sales and marketing(1) |
27,200 | 93,001 | 62,084 | 113,067 | ||||||||||||
Research and development(1) |
16,496 | 38,037 | 25,024 | 50,826 | ||||||||||||
General and administrative(1) |
4,833 | 13,496 | 9,116 | 17,072 | ||||||||||||
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|
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Total operating expenses |
48,529 | 144,534 | 96,224 | 180,965 | ||||||||||||
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|
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Loss from operations |
(44,600 | ) | (78,319 | ) | (51,757 | ) | (84,243 | ) | ||||||||
Other expensenet |
(54 | ) | (5,076 | ) | (2,512 | ) | (3,631 | ) | ||||||||
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Loss before provision for income taxes |
(44,654 | ) | (83,395 | ) | (54,269 | ) | (87,874 | ) | ||||||||
Provision for income taxes |
80 | 608 | 304 | 1,068 | ||||||||||||
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Net loss |
$ | (44,734 | ) | $ | (84,003 | ) | $ | (54,573 | ) | $ | (88,942 | ) | ||||
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Net loss per share attributable to common stockholdersbasic and diluted(2) |
$ | (1.36 | ) | $ | (2.30 | ) | $ | (1.52 | ) | $ | (2.22 | ) | ||||
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Weighted-average shares used in computing net loss per share attributable to common stockholdersbasic and diluted(2) |
32,866,059 | 36,520,107 | 35,974,891 | 40,072,814 | ||||||||||||
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Pro forma net loss per share attributable to common stockholdersbasic and diluted(2) |
$ | (0.82 | ) | $ | (0.74 | ) | ||||||||||
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|
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Weighted-average shares used in computing pro forma net loss per share attributable to common stockholdersbasic and diluted(2) |
96,808,971 | 115,340,987 | ||||||||||||||
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|
10
(1) | Includes stock-based compensation expense as follows: |
Fiscal Year Ended July 31 |
Nine Months Ended April 30 |
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2013 | 2014 | 2014 | 2015 | |||||||||||||
(In thousands) | ||||||||||||||||
Cost of revenue: |
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Product |
$ | 61 | $ | 124 | $ | 58 | $ | 254 | ||||||||
Support and other services |
40 | 194 | 116 | 496 | ||||||||||||
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Total cost of revenue |
101 | 318 | 174 | 750 | ||||||||||||
Sales and marketing |
611 | 2,150 | 1,234 | 4,406 | ||||||||||||
Research and development |
3,835 | 2,243 | 1,400 | 3,813 | ||||||||||||
General and administrative |
443 | 1,149 | 581 | 2,914 | ||||||||||||
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Total stock-based compensation expense |
$ | 4,990 | $ | 5,860 | $ | 3,389 | $ | 11,883 | ||||||||
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|
(2) | For an explanation of the calculations of our net loss per share attributable to common stockholdersbasic and diluted, and our pro forma net loss per share attributable to common stockholdersbasic and diluted, see note 11 of the notes to consolidated financial statements included elsewhere in this prospectus. |
As of April 30, 2015 | ||||||||||||
Actual | Pro Forma(1) |
Pro Forma as Adjusted(2)(3) |
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(In thousands) | ||||||||||||
Consolidated Balance Sheet Data: |
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Cash, cash equivalents and short-term investments |
$ | 162,412 | $ | 162,412 | $ | |||||||
Total assets |
240,535 | 240,535 | ||||||||||
Deferred revenue |
83,013 | 83,013 | ||||||||||
Preferred stock warrant liability |
9,550 | | ||||||||||
Convertible preferred stock |
310,379 | | ||||||||||
Total stockholders (deficit) equity |
(204,190 | ) | 115,739 |
(1) | The pro forma column reflects (i) the automatic conversion of all outstanding shares of our convertible preferred stock as of April 30, 2015 into 76,319,511 shares of our common stock, (ii) the related reclassification of the preferred stock warrant liability to additional paid-in capital and (iii) the effectiveness of our amended and restated certificate of incorporation as of immediately prior to the completion of this offering. |
(2) | The pro forma as adjusted column reflects (i) all adjustments included in the pro forma column and (ii) the sale by us of shares of our common stock in this offering at an assumed initial public offering price of $ per share, the midpoint of the range on the cover of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing. |
(3) | Each $1.00 increase (decrease) in the assumed initial public offering price of $ per share, the midpoint of the range on the cover of this prospectus, would increase (decrease) our pro forma as adjusted cash, cash equivalents and short-term investments, total assets and total stockholders (deficit) equity by approximately $ million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions payable by us. |
11
Key Financial and Operational Metrics
We monitor the following key financial and operational metrics:
As of or for the Fiscal Year Ended July 31 |
As of or for the Nine Months Ended April 30 |
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2012 | 2013 | 2014 | 2014 | 2015 | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Total revenue |
$ | 6,586 | $ | 30,533 | $ | 127,127 | $ | 88,036 | $ | 167,347 | ||||||||||
Year-over-year percentage increase |
| 364 | % | 316 | % | | 90 | % | ||||||||||||
Billings(1) |
$ | 7,377 | $ | 42,272 | $ | 151,074 | $ | 103,247 | $ | 213,883 | ||||||||||
Adjusted gross margin percentage(1) |
28 | % | 13 | % | 52 | % | 51 | % | 58 | % | ||||||||||
Total deferred revenue(2) |
$ | 791 | $ | 12,530 | $ | 36,477 | $ | 27,741 | $ | 83,013 | ||||||||||
Net cash used in operating activities |
$ | (15,468 | ) | $ | (29,110 | ) | $ | (45,707 | ) | $ | (28,837 | ) | $ | (20,327 | ) | |||||
Free cash flow(1) |
$ | (16,928 | ) | $ | (38,449 | ) | $ | (64,739 | ) | $ | (41,433 | ) | $ | (36,440 | ) | |||||
Total end-customers |
38 | 211 | 782 | 583 | 1,412 |
(1) | See Non-GAAP Financial Measures below. |
(2) | The majority of our deferred revenue consists of the unrecognized portion of revenue from sales of our support and software maintenance agreements. |
Non-GAAP Financial Measures
Please see the section titled Selected Consolidated Financial and Other Data for more information on the uses and limitations of our non-GAAP financial measures and a reconciliation of our non-GAAP financial measures to the most directly comparable financial measure calculated and presented in accordance with accounting principles generally accepted in the United States, or GAAP.
Billings
We calculate billings by adding the change in deferred revenue between the start and end of the period to total revenue recognized in the same period.
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. Our presentation of adjusted gross margin percentage 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 used in operating activities plus purchases of property and equipment, which measures our ability to generate cash from our business operations after our capital expenditures.
12
Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this prospectus, including our consolidated financial statements and related notes, before investing in our 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 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 $44.7 million and $84.0 million for fiscal 2013 and fiscal 2014, respectively, and $88.9 million for the nine months ended April 30, 2015. As of April 30, 2015, we had an accumulated deficit of $236.2 million. In addition to the investments we expect to continue to make to grow our business, we also expect to incur 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-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. If these markets experience a shift in customer demand, our solutions may not compete as effectively, if at all. It is also difficult to predict end-customer demand or adoption rates for our solutions or the future growth of our market.
If end-customers do not adopt our solutions, our ability to grow our business and operating results may be adversely affected.
We believe that our solutions represent a major shift to web-scale architecture, and traditional IT infrastructure architecture is entrenched in the datacenters of many of our end-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-customers as to the benefits and capabilities of our solutions, particularly as we continue to pursue large organizations as 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.
Our revenue growth in recent periods may not be indicative of our future performance.
We have experienced significant growth in recent periods with total revenue of $30.5 million and $127.1 million for fiscal 2013 and fiscal 2014, respectively. For the nine months ended April 30, 2014 and 2015, our total revenue was $88.0 million and $167.3 million, respectively. You should not consider our revenue growth in recent periods as indicative of our future performance. While we have
13
recently experienced significant revenue growth, we may not achieve similar revenue growth in future periods. Accordingly, you should not rely on our revenue growth for any prior quarterly or annual 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 1,017 as of April 30, 2015, and we expect to 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 grow our business, we must effectively integrate, develop and motivate a large number of new employees while maintaining the effectiveness of our business execution. We must also continue to improve and expand our information technology, or 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 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, IT systems vendors and infrastructure software providers and 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 storage arrays, integrated systems and servers, as well as infrastructure and management software. These markets are characterized by constant change and rapid innovation. Our main competitors fall into the following categories:
| traditional storage array vendors such as EMC Corporation, NetApp, Inc. and Hitachi Data Systems, which typically sell centralized storage products; |
| traditional IT systems vendors such as Hewlett-Packard Company, Cisco Systems, Inc., Lenovo Group Ltd., Dell, Hitachi Data Systems and IBM Corporation 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; and |
| software providers such as VMware, Inc. that offer a broad range of virtualization, infrastructure and management products. |
In addition, we compete against vendors of hyperconverged infrastructure and software-defined storage products such as VMware, Inc. and smaller emerging companies. As our market grows, we expect it will attract new companies as well as existing larger vendors. 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. Furthermore, as we expand our product offerings, we may expand into new markets and we may encounter additional competitors in such markets.
14
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. Some of these competitors have in the past and may in the future take advantage of their existing relationships with end-customers, distributors or resellers to provide incentives to such current or prospective end-customers that make their products more economically attractive or to interfere with our ability to offer our solutions to our 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-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 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. In addition, the rapidly evolving nature of the enterprise IT infrastructure market, as well as other factors beyond our control, reduce 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, may materially and adversely affect our business, operating results and prospects in ways we do not currently anticipate. For example, improvements in existing data storage technologies, such as a significant increase in the speed of traditional interfaces for transferring data between a server and a storage system or the speed of traditional embedded controllers within the storage system, could emerge as a preferred alternative to our solutions, especially if they are sold at lower prices. 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
15
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.
Public cloud infrastructure offers alternatives to the on-premise infrastructure deployments that our platform 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 platform less competitive as compared to the public cloud, and could materially and adversely affect the demand for our solutions.
If other 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 a platform on which software applications and hypervisors from different software providers run. As a result, our solutions must interoperate with our 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 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-customers may be reluctant to buy our solutions, which could decrease demand for our solutions. 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. 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-customers resulting in a decline in sales, and our business, operating results and prospects may be adversely affected.
If we fail to develop or introduce new or enhanced solutions on a timely basis, our ability to attract and retain end-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 and
16
hardware solutions to be integrated with our enterprise computing platform. To compete successfully, we must design, develop, market and sell new or enhanced solutions that provide increasingly higher levels of performance, capacity, scalability, security and reliability and meet the cost expectations of our 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. Any failure to anticipate or develop new or enhanced solutions or technologies in a timely 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. If we fail to introduce new or enhanced solutions that meet the needs of our end-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 organizations and service provider end-customers, our operating results may suffer.
Our growth strategy is dependent in large part upon increasing sales of our solutions to new and existing enterprises, service providers and government entities. Sales to these end-customers involve risks that may not be present (or that are present to a lesser extent) with sales to smaller 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; |
| increased purchasing power and leverage held by large end-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-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-customers as well as our distributors and resellers. We typically provide evaluation products to these end-customers and may spend substantial time, effort and money in our sales efforts to these prospective 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-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.
Our growth depends on our existing end-customers purchasing additional appliances and software upgrades and renewing and upgrading their support and software maintenance agreements, and the failure of our end-customers to do so could harm our business and operating results.
Our future success depends in part on purchases by our existing end-customers of additional appliances and software as well as renewals and upgrades to their support and software maintenance
17
agreements. If our end-customers do not purchase additional appliances, or renew or upgrade their support and software maintenance 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-customers renewing support and software maintenance agreements or purchasing additional appliances. End-customers may choose not to renew their support and software maintenance 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 spending levels or other causes outside of our control. If our existing end-customers do not purchase new solutions, or renew or upgrade their support and software maintenance agreements, our revenue may grow more slowly than expected or may decline, and our business and operating results may be adversely affected.
If we do not effectively expand and train our sales force, we may be unable to add new end-customers or increase sales to our existing end-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. Therefore, we continue to be substantially dependent on our sales force to obtain new end-customers and sell additional solutions to our existing 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. 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 and upfront 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. If we are unable to hire and train sufficient numbers of effective sales personnel, or the sales personnel are not successful in obtaining new end-customers or increasing sales to our existing customer base, our business, operating results and prospects 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, a hardware OEM, value added resellers and system integrators. Our OEM partner in turn distributes our solutions through its 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. Our agreements with our channel partners are non-exclusive, meaning our channel partners may offer end-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, our business, operating results and prospects may be adversely affected. Our channel partners may cease marketing our solutions with
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limited or no notice and with little or no penalty. The loss of a substantial number of our channel partners, 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. 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. 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-customers and channel partners and may cause us to lose prospective end-customers or additional business from existing 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-customers making it more difficult for us to establish brand awareness, ensure proper delivery and installation of our software, support ongoing end-customer requirements, estimate end-customer demand, respond to evolving end-customer needs and obtain subscription renewals from 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. In the event of such termination, 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 administrative processes, and any unfavorable audit could result in the government refusing to continue buying our solutions, 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, we may be required to devote more resources to distribute our solutions directly and support our 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 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; |
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| disruptions in our sales channels or termination of our relationship with important channel partners and OEMs; |
| the timing of revenue recognition for our sales; |
| reductions in end-customers budgets for information technology purchases; |
| delays in end-customers purchasing cycles or deferments of 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 and the mix of revenue between products and support and other services; |
| our ability to develop, introduce and ship in a timely manner new solutions and platform 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; |
| the amount and timing of stock-based compensation expenses; |
| our ability to control the costs of our solutions and their key components; |
| general economic, industry and market conditions; and |
| future accounting pronouncements and changes in accounting policies. |
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 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 and discounts, changes in the cost of components of our hardware appliances, changes in the mix between direct versus indirect sales and the timing and amount of recognized and deferred revenue. 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-customers about the uses and benefits of our solutions, including their technical capabilities and cost saving potential. End-customers often undertake an evaluation and testing process that can result in a lengthy 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-customers have with existing IT vendors sometimes lead
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to unpredictable sales cycles, which make it difficult for us to predict when end-customers may purchase solutions from us. 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 a single third-party 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 on a single third-party hardware product manufacturer, Super Micro Computer, Inc., or Super Micro, to assemble and test our appliances. Our reliance on Super Micro 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. If we fail to manage our relationship with Super Micro effectively, inaccurately forecast our component requirements, or if Super Micro experiences delays, disruptions, capacity constraints or quality control problems in its operations, our ability to ship our appliances could be severely impaired and our competitive position and reputation could be harmed.
Our orders represent a relatively small percentage of the overall orders received by Super Micro from its end-customers. Therefore, fulfilling our orders may not be a priority in guiding Super Micros business decisions and operational commitments. If we are unable to manage our relationship with Super Micro effectively, or if Super Micro suffers delays or disruptions for any reason, experiences increased manufacturing lead-times, capacity constraints or quality control problems in its manufacturing operations, or fails to meet our requirements for timely delivery, our ability to ship high-quality solutions to our end-customers would be impaired, and our business and operating results would be harmed.
Our current agreement with Super Micro expires in May 2017, with the option to terminate upon each annual renewal thereafter, and does not contain any minimum commitment to manufacture our solutions. Further, any orders are fulfilled only after a purchase order has been delivered and accepted. Under certain circumstances, Super Micro may stop taking all or part of our new orders or fulfilling our existing orders. If we are required to change contract manufacturers, we may lose revenue, incur increased costs and damage our channel partner and end-customer relationships. Switching to a new contract manufacturer and commencing production is expensive and time-consuming. Likewise, our agreement with Super Micro does 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 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.
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-customer relationships.
We rely on a limited number of suppliers, and in some cases single-source suppliers, for several key hardware components of our appliances. These components are generally purchased on a purchase order basis through Super Micro 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 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 product qualification process that could take months to complete. Furthermore, we extensively test and qualify the components that
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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 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 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-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 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-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-customers in a timely manner and at competitive prices could be impaired and our competitive position and reputation could be adversely affected. 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-customer relationships which could adversely impact our revenue and operating results.
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 locations. As a result of relying on third parties, we have reduced control over shipping and logistics, quality control, security and the supply of replacement parts for support. Consequently, we may be subject to shipping disruptions 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-customers may cancel their contracts with us, we may suffer reputational harm and our business, operating results and prospects may be adversely affected.
We rely on our key technical, sales and management personnel to grow our business, and the loss of one or more 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 key technical, sales and management personnel. In particular, we are highly dependent on the services of Dheeraj Pandey, our President, Chief Executive Officer and Chairman, who is critical to the development of our technology, future vision and strategic direction. We rely on our leadership
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team in the areas of operations, security, marketing, sales, support and general and administrative functions, and on individual contributors on our research and development team. All of our employees work for us on an at-will basis, and we could experience difficulty in retaining members of our senior management team or other key personnel. We do not have key person life insurance policies that cover any of our officers or other key employees. The loss of the services of any of our key employees could disrupt our operations, delay the development and introduction of our solutions, and negatively impact our business, operating results and prospects.
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. Also, many of our employees have become, or will soon become, vested in a substantial amount of equity awards which gives them a substantial amount of personal wealth. This may make it more difficult for us to retain and motive these employees, and this wealth could affect their decision about whether or not they continue to work for us.
Any failure to successfully attract, integrate or retain qualified personnel to fulfill our current or future needs may negatively impact our growth. 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.
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-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-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, 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-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 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 data. Some errors or defects in our solutions may only be discovered after they have been installed and used by end-customers. We previously conducted an in-
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field replacement of equipment manufactured by our previous outsourced manufacturer, and may be required to do so again in the future. 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 end-customers; |
| increased costs, including warranty expense and costs associated with end-customer support as well as development costs to remedy the errors or defects; |
| delays, cancellations, reductions or rescheduling of orders or shipments; |
| platform 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-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 managements attention and adversely affect the markets 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. The budget and approval process for government agencies also experiences a longer sales cycle relative to our other 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 |
| higher expenses associated with diligence and qualifying or maintaining qualification as a government vendor. |
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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. 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, 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 partys intellectual property rights, even if untrue, could harm our relationships with our end-customers, may deter future end-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, 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-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, 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
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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 and we are not currently subject to any claims that they have done so, 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.
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-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, 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
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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 managements attention and resources and an increase in 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, and the General Services Administration, or 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-compliance 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.
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, 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, 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 are in the early stages of implementing our FCPA/anti-corruption compliance program and cannot assure you 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.
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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 managements attention and resources and significant defense costs and other 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 United States 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. 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 to 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 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-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, 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-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.
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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, we derive a significant portion of our revenue from end-customers and channel partners outside the United States. We derived 39% and 17% of our total revenue from our international customers based on bill-to-location in fiscal 2014 and fiscal 2013, respectively. For the nine months ended April 30, 2015, we derived 32% of our total revenue from our international customers based on bill-to-location. 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 April 30, 2015, approximately 31% 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 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 around the world; |
| 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; |
| 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 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; |
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| 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.
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 licenses, 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 increased 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 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 publically 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 |
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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, short-term investments and the amounts available for us to borrow under our credit facility, together with the net proceeds that we receive in this offering, 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 common stock could decline. Furthermore, if we engage in debt financing, the holders of debt would have priority over the holders of 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 datacenter 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-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.
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 will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or Exchange Act, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and the rules and regulations of the . 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 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, 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.
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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 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 .
We are not currently required to comply with the SEC rules that implement Sections 302 and 404 of the Sarbanes-Oxley Act, and are therefore not required to make a formal assessment of the effectiveness of our internal controls over financial reporting for that purpose. Upon becoming a public company, 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 second annual report on Form 10-K. To comply with the requirements of being a public company, we will need to undertake various actions, such as implementing new internal controls and procedures and hiring accounting or internal audit staff.
Our independent registered public accounting firm is not 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 firm 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 disclosure controls and internal control over financial reporting could have a material and adverse effect on our business and operating results and could cause a decline in the price of our common stock.
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-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, 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.
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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-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, 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.
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 sole contact manufacturer 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 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 manmade 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.
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If our networks, computer systems or software solutions are breached or unauthorized access to customer data otherwise occurs, our enterprise and our solutions may be perceived as insecure, we may lose existing end-customers or fail to attract new end-customers, our reputation may be damaged and we may incur significant liabilities.
We store, transmit and process our end-customers data. If any unauthorized access to or security breaches 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-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-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. 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-customers are compromised, even without any actual compromise of our own systems or of our solutions used by such end-customers, we may face negative publicity or reputational harm if our end-customers or anyone else incorrectly attributes the blame for such security breaches to us or our solutions. If end-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 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.
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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 end-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, 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-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 personally identifiable 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 privacy and security policies, permit end-customers 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 personally identifiable 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 may find it necessary or desirable to join industry or other self-regulatory bodies or other information security- or data protection-related organizations that require compliance with their rules pertaining to information security and data protection. We also may be bound by additional, more stringent contractual obligations relating to our collection, use and disclosure of personal, financial and other data.
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. Future laws, regulations, standards and other obligations, and changes in the interpretation of existing laws, regulations, standards and other obligations could impair our or our end-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 end-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 objections 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
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or suspected security incident, whether or not resulting in unauthorized access to, or acquisition, release or transfer of personally identifiable information or other data, may result in governmental enforcement actions and prosecutions, private litigation, fines and penalties or adverse publicity and could cause our end-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.
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.
The forecasts of market growth included in this prospectus may prove to be inaccurate, and even if the markets in which we compete achieve the forecasted growth, we cannot assure you our business will grow at similar rates, if at all.
Growth forecasts are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate. The forecasts in this prospectus relating to the expected growth in the market for virtual computing platform products may prove to be inaccurate. Even if these markets experience the forecasted growth described in this prospectus, we may not grow our business at similar rates, or at all. Our growth is subject to many factors, including our success in implementing our business strategy, which is subject to many risks and uncertainties. Accordingly, the forecasts of market growth included in this prospectus should not be taken as indicative of our future growth.
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 based on our estimates of cost savings. These estimates are based on our internal models, which are based 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.
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We may further expand through acquisitions of, or investments in, other companies, each of which may divert our managements 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. 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 operating difficulties and expenditures. In particular, we may encounter difficulties assimilating or integrating the businesses, technologies, products, personnel or operations of the acquired companies, 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. 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 platforms.
As a public company, we will be subject to the requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, that will require us to diligence, disclose and report whether our solutions contain conflict minerals. The 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. In addition, we will incur additional costs to comply with the disclosure requirements, including costs related to conducting diligence procedures to determine the sources of conflict minerals that may be used in or necessary to the production of our appliances and, if applicable, potential changes to appliances, processes or sources of supply as a consequence of such verification activities. It is also possible that we may face reputational harm if we determine that certain of our appliances contain minerals not determined to be conflict-free or if we are unable to alter our appliances, processes or sources of supply to avoid use of such materials.
Financing agreements to which we are party or may become party may contain operating and financial covenants that restrict our business and financing activities.
Our credit facility with Comerica Bank is collateralized by substantially all of our assets, other than our intellectual property, and contains operating and financial restrictions and covenants, including restrictions on the disposing of assets, undergoing a change in control, merging or consolidating, entering into certain affiliate transactions, making acquisitions, granting liens, incurring debt, paying
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dividends, repurchasing stock and making investments, in each case subject to certain exceptions. The Comerica Bank loan agreement also requires us to maintain a minimum level of liquidity, which is a ratio of our unrestricted cash plus eligible accounts to our outstanding obligations to Comerica Bank. The Comerica Bank credit facility expires in November 2015. The restrictions and covenants in the Comerica Bank credit facility, as well as those contained in any future debt financing agreements that we may enter into, may restrict our ability to finance our operations and engage in, expand or otherwise pursue our business activities and strategies. Our ability to comply with these covenants and restrictions may be affected by events beyond our control, and breaches of these covenants and restrictions could result in a default under the loan agreement and any future financing agreements that we may enter into.
Risks Related to this Offering and Ownership of Our Common Stock
The market price of our common stock may be volatile, and you could lose all or part of your investment.
There has been no public market for our common stock prior to this offering. The initial public offering price for our common stock will be determined through negotiations between us, the selling stockholders and the underwriters. The market price of our common stock following this offering may fluctuate substantially and may be lower than the initial public offering price. The market price of our common stock following this offering will depend on a number of factors, including those described in this 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 common stock, since you might not be able to sell your shares at or above the price you paid in this offering. Factors that could cause fluctuations in the market price of our 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; |
| the expiration of market stand-off or contractual lock-up agreements and sales of shares of our common stock by us or our stockholders; |
| failure of financial analysts to maintain coverage of us, changes in financial estimates by any analysts who follow our company, 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; |
| litigation involving us, our industry or both, or investigations by regulators into our operations or those of our competitors; |
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| developments or disputes concerning our intellectual property or our solutions, or third-party proprietary rights; |
| 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 board of 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 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 companys 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 managements 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 common stock in the public markets, or the perception that they might occur, could reduce the price that our 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 common stock in the public market after this offering, 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 common stock and may make it more difficult for you to sell your common stock at a time and price that you deem appropriate. Based on the total number of outstanding shares of our common stock as of April 30, 2015, upon completion of this offering, we will have shares of common stock outstanding, assuming no exercise of our outstanding stock options or warrants or settlement of RSUs after April 30, 2015.
All of the shares of common stock sold in this offering will be freely tradable without restrictions or further registration under the Securities Act of 1933, as amended, or the Securities Act, except for any shares held by our affiliates as defined in Rule 144 under the Securities Act.
Subject to certain exceptions described in the section titled Underwriting, we, all of our directors and executive officers and holders of substantially all of our common stock, or securities exercisable for or convertible into our common stock outstanding immediately prior to this offering, are subject to market stand-off agreements or have agreed not to offer, sell or agree to sell, directly or indirectly, any shares of common stock without the permission of each of Goldman, Sachs & Co. and Morgan Stanley & Co. LLC on behalf of the underwriters, for a period of 180 days from the date of this prospectus. When the lock-up period expires, we and our securityholders subject to a lock-up agreement or market stand-off agreement will be able to sell our shares in the public market. In addition, the underwriters may, in their sole discretion, release all or some portion of the shares subject to lock-up agreements prior to the expiration of the lock-up period. See Shares Eligible for Future Sale for more information. Sales of a substantial number of such shares upon expiration of the lock-up
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and market stand-off agreements, or the perception that such sales may occur, or early release of these agreements, could cause our market price to fall or make it more difficult for you to sell your common stock at a time and price that you deem appropriate.
In addition, following this offering, holders of up to shares of our common stock, based on shares outstanding as of April 30, 2015, will be entitled to rights with respect to registration of these shares under the Securities Act pursuant to our Amended and Restated Investors Rights Agreement, or the Investors Rights Agreement. If these holders of our common stock, by exercising their registration rights, sell a large number of shares, they could adversely affect the market price for our common stock. We also intend to register the offer and sale of all shares of common stock that we may issue under our equity compensation plans.
We may also issue our shares of common stock or securities convertible into shares of our 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 common stock to decline.
Our directors, executive officers and significant stockholders will continue to have substantial control over us after this offering and will be able to influence corporate matters.
Upon completion of this offering, our directors, executive officers and holders of more than 5% of our capital stock, together with their affiliates, will beneficially own, in the aggregate, approximately % of our outstanding common stock, based on shares outstanding as of June 30, 2015. As a result, these stockholders, if acting together, will be able to exercise significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as a merger or other sale of our company or its assets. They 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. This concentration of ownership could limit your ability to influence corporate matters and may have the effect of delaying or preventing a third party from acquiring control over us, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company and might ultimately affect the market price of our common stock. For information regarding the ownership of our outstanding stock by our directors, executive officers and significant stockholders and their affiliates, see Principal and Selling Stockholders.
An active public trading market may not develop or be sustained following this offering.
Prior to this offering, there has been no public market or active private market for our common stock. We have applied to list our common stock on the , however, an active trading market may not develop following the completion of this offering or, if developed, may not be sustained. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the market price of your shares of common stock. An inactive market may also impair our ability to raise capital by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration. We cannot predict the prices at which our common stock will trade. The initial public offering price of our common stock will be determined by negotiations between us, the selling stockholders and the underwriters and may not bear any relationship to the market price at which our common stock will trade after this offering or to any other established criteria of the value of our business and prospects.
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We have broad discretion to determine how to use the funds raised in this offering, and may use them in ways that may not enhance our operating results or the price of our common stock.
The principal purposes of this offering are to raise additional capital, to create a public market for our common stock and to facilitate our future access to the public equity markets. We currently intend to use a significant portion of the net proceeds from this offering for general corporate purposes, including for any of the purposes described in Use of Proceeds. However, we do not currently have any specific or preliminary plans for the net proceeds from this offering and will have broad discretion in how we use the net proceeds of this offering. We could spend the proceeds from this offering in ways that our stockholders may not agree with or that do not yield a favorable return. You will not have the opportunity as part of your investment decision to assess whether the net proceeds are being used appropriately. Investors in this offering will need to rely upon the judgment of our management with respect to the use of proceeds. If we do not use the net proceeds that we receive in this offering effectively, our business, financial condition, results of operations and prospects could be harmed, and the market price of our common stock could decline.
We are an emerging growth company and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.
For so long as we remain an emerging growth company as defined in the in the 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 initial public offering; (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 common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
The requirements of being a public company may strain our resources, divert managements attention and affect our ability to attract and retain qualified board members.
As a public company, we are subject to the reporting and corporate governance requirements of the Exchange Act, the listing requirements of the 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 after we are no longer an emerging growth company as defined in the JOBS 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, managements attention may be diverted from other business
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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 managements 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 disclosure of information in the filings required of a public company and in this prospectus, our business and financial condition will become 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.
We also expect that being a public company and these new rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified executive officers and members of our board of directors, particularly to serve on our audit committee and compensation committee.
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, or if they issue inaccurate or unfavorable research regarding our common stock, our stock price and trading volume could decline.
The trading market for our 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. As a new public company, we may be slow to attract research coverage and the analysts who publish information about our common stock will have had relatively little experience with our company, which could affect their 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 common stock or publish unfavorable research about us. If one or more of these
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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.
Because the initial public offering price of our common stock will be substantially higher than the pro forma net tangible book value per share of our outstanding common stock following this offering, new investors will experience immediate and substantial dilution.
The initial public offering price of our common stock will be substantially higher than the pro forma net tangible book value per share of our common stock immediately following this offering, based on the total value of our tangible assets less our total liabilities. Therefore, if you purchase shares of our common stock in this offering, you will experience immediate dilution of $ per share, the difference between the price per share you pay for our common stock and its pro forma net tangible book value per share as of April 30, 2015, after giving effect to the issuance of shares of our common stock in this offering and assuming an initial public offering price of $ per share, the midpoint of the range on the cover of this prospectus. Furthermore, if the underwriters exercise their option to purchase additional shares, if outstanding options and warrants are exercised, if we issue awards to our employees under our equity incentive plans, or if we otherwise issue additional shares of our common stock, you could experience further dilution. See Dilution for more information.
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 board of directors or current management and may adversely affect the market price of our common stock.
Our amended and restated certificate of incorporation and amended and restated bylaws that will be in effect upon completion of this offering 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 board of directors or take other corporate actions, including effecting changes in our management. These provisions include:
| a classified board of directors with three-year staggered terms, which could delay the ability of stockholders to change the membership of a majority of our board of directors; |
| the ability of our board of directors 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; |
| the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of our board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors; |
| 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 board of directors, our president, our secretary or a majority vote of our board of 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; |
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| the ability of our board of directors, by majority vote, to amend our amended and restated bylaws, which may allow our board of directors 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 board of directors 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 acquirers 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. See Description of Capital StockAnti-Takeover Effects of Delaware Law and Our Certificate of Incorporation and Bylaws.
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 common stock.
We have never declared or paid any 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 on our common stock in the foreseeable future. Additionally, our ability to pay dividends on our common stock is limited by restrictions on our ability to pay dividends or make distributions under the terms of our loan and security agreement. Any determination to pay dividends in the future will be at the discretion of our board of directors. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus, including the sections entitled Prospectus Summary, Risk Factors, Use of Proceeds, Managements Discussion and Analysis of Financial Condition and Results of Operations, and Business, contains forward-looking statements. The words believe, may, will, potentially, estimate, continue, anticipate, intend, could, would, project, plan, expect and similar expressions that convey uncertainty of future events or outcomes are intended to identify forward-looking statements.
Forward-looking statements contained in this prospectus include, but are not limited to, statements about:
| our future financial performance, including our expectations regarding our total revenue, cost of revenue, gross profit or gross margin, operating expenses including changes in research and development, sales and marketing and general and administrative expenses and our ability to achieve, and maintain, future profitability; |
| our business plan 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; |
| market acceptance of new technology and recently introduced solutions; |
| beliefs and objectives for future operations; |
| our ability to increase sales of our solutions; |
| our ability to attract and retain end-customers; |
| our ability to further penetrate our existing end-customer base; |
| maintaining and expanding our end-customer base and our relationships with our channel partners; |
| our ability to timely and effectively scale and adapt our existing solutions; |
| our ability to develop new solutions and bring them to market in a timely manner and make enhancements to our existing solutions; |
| the effects of seasonal trends on our results of operations; |
| our expectations concerning relationships with third parties; |
| our ability to maintain, protect and enhance our intellectual property; |
| our ability to continue to expand internationally; |
| the effects of increased competition in our markets and our ability to compete effectively; |
| sufficiency of cash to meet cash needs for at least the next 12 months; |
| future acquisitions or investments in complementary companies, products, services or technologies; |
| 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; |
| economic and industry trends, projected growth or trend analysis; |
| the attraction and retention of qualified employees and key personnel; |
| the estimates and estimate methodologies used in preparing our consolidated financial statements and determining option exercise prices; and |
| the future market prices of our common stock. |
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These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in Risk Factors and elsewhere in this prospectus. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for our management 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 circumstances discussed in this prospectus 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, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this prospectus to conform these statements to actual results or to changes in our expectations, except as required by law.
You should read this prospectus and the documents that we reference in this prospectus and have filed with the SEC as exhibits to the registration statement of which this prospectus is a part with the understanding that our actual future results, levels of activity, performance, and events and circumstances may be materially different from what we expect.
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Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate, including our general expectations and market position, market opportunity and market size, is based on information from various sources, including Gartner, Inc., or Gartner, and International Data Corporation, or IDC, on assumptions that we have made that are based on those data and other similar sources and on our knowledge of the markets for our solutions. This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. Estimates of third parties, particularly as they relate to projections, involve numerous assumptions and estimates of our future performance and the future performance of the industry in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the section titled Risk Factors and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.
The Gartner Reports described herein represents data, research opinion or viewpoints published as part of a syndicated subscription service, by Gartner, and are not representations of fact. The Gartner Reports speak as of their original publication dates (and not as of the date of this prospectus) and the opinions expressed in the Gartner Reports are subject to change without notice. In certain instances where the Gartner Reports are identified as the sources of market and industry data contained in this prospectus, the applicable report is identified by superscript notations. The sources of these data are provided below:
(1) | The Long-Term Impact of Web-Scale IT Will be Dramatic, August 20, 2013. |
(2) | Forecast Enterprise Software Markets Worldwide 2012-2019 2Q15 Update, June 11, 2015. |
(3) | Forecast Analysis Servers Worldwide 4Q14 Update, March 25, 2015. |
(4) | Forecast Public Cloud Services Worldwide 2013 2019 1Q15 Update, March 31, 2015. |
The IDC Reports described herein represents data, research opinion or viewpoints published as part of a syndicated subscription service, by IDC, and are not representations of fact. The IDC Reports speak as of their original publication dates (and not as of the date of this prospectus) and the opinions expressed in the IDC Reports are subject to change without notice. The IDC Reports consist of:
| Worldwide Enterprise Storage Systems 2015-2019 Forecast, May 2015, document number 256302. |
| Worldwide Hyperconverged Systems 2015-2019 Forecast, April 2015, document number 255614. |
| Worldwide System Management Software 2015-2019 Forecast, March 2015, document number 254756. |
| Dells Versatile PowerEdge Server Portfolio Accelerates Workloads and Innovates Server Management, September 2014, document number 250370. |
| Worldwide Clouds System Management Software 2014-2018 Forecast Update: Open Source Accelerates Market Growth, September 2014, document number 251442. |
| Storage for Virtual Environments Survey, April 2014, document number 248298. |
| IDC MarketScape Worldwide Hyperconverged Systems 2014 Vendor Assessment, December 2014, document number 253267. |
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We estimate that the net proceeds to us from our sale of shares of common stock in this offering will be approximately $ million, or $ million if the underwriters exercise their option to purchase additional shares in full, based on an assumed initial public offering price of $ per share, the midpoint of the range on the cover of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders.
A $1.00 increase (decrease) in the assumed initial public offering price would increase (decrease) the net proceeds to us from this offering by approximately $ million, assuming the number of shares offered by us, as reflected on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions.
The principal purposes of this offering are to increase our capitalization and financial flexibility, to create a public market for our stock and thereby enable access to the public equity markets for our employees and stockholders, to obtain additional capital and to increase our visibility in the marketplace. We currently intend to use the net proceeds we receive from this offering primarily for capital expenditures, and for general corporate purposes, including working capital, sales and marketing activities, research and development and general and administrative matters, although we do not currently have any specific or preliminary plans with respect to the use of proceeds for such purposes. In addition, we may also use a portion of the net proceeds for the acquisition of, or investment in, technologies, solutions, products or businesses that complement our business, although we have no present commitments or agreements to enter into any material acquisitions or investments. We will have broad discretion over the uses of the net proceeds of this offering. Pending these uses, we intend to invest the net proceeds in short-term, investment-grade interest-bearing securities such as money market accounts, certificates of deposit, commercial paper and guaranteed obligations of the U.S. government.
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 on our common stock in the foreseeable future. Additionally, our ability to pay dividends on our common stock is limited by restrictions on our ability to pay dividends or make distributions under the terms of our loan and security agreement. Any future determination to declare dividends will be made at the discretion of our board of directors and will depend on our financial condition, operating results, capital requirements, general business conditions and other factors that our board of directors may deem relevant.
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The following table sets forth our cash, cash equivalents and short-term investments and capitalization as of April 30, 2015, on:
| an actual basis; |
| a pro forma basis, giving effect to: (i) the automatic conversion of all outstanding shares of our convertible preferred stock as of April 30, 2015 into 76,319,511 shares of our common stock, (ii) the related reclassification of the preferred stock warrant liability to additional paid-in capital and (iii) the effectiveness of our amended and restated certificate of incorporation as of immediately prior to the completion of this offering; and |
| a pro forma as adjusted basis, giving effect to the pro forma adjustments noted above and the sale of shares of our common stock by us in this offering, based on an assumed initial public offering price of $ per share, the midpoint of the range on the cover of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. |
You should read this table together with Selected Consolidated Financial and Other Data, Managements Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and related notes included elsewhere in this prospectus.
As of April 30, 2015 | ||||||||||||
Actual | Pro Forma | Pro Forma as Adjusted(1) |
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(In thousands, except share and per share data) | ||||||||||||
Cash, cash equivalents and short-term investments |
$ | 162,412 | $ | 162,412 | $ | |||||||
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Preferred stock warrant liability |
$ | 9,550 | $ | | $ | |||||||
Convertible preferred stock, $0.000025 par value per share: 78,263,309 shares authorized, 76,319,511 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted |
310,379 | | ||||||||||
Stockholders (deficit) equity: |
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Preferred stock, $0.000025 par value per share: no shares authorized, issued and outstanding, actual; shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted |
| | ||||||||||
Common stock, $0.000025 par value per share: 165,000,000 shares authorized, 44,335,874 shares issued and outstanding, actual; shares authorized, 120,655,385 shares issued and outstanding, pro forma; shares authorized, shares issued and outstanding, pro forma as adjusted |
1 | 3 | ||||||||||
Additional paid-in capital |
32,046 | 351,973 | ||||||||||
Accumulated other comprehensive income |
12 | 12 | ||||||||||
Accumulated deficit |
(236,249 | ) | (236,249 | ) | ||||||||
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Total stockholders (deficit) equity |
(204,190 | ) | 115,739 | |||||||||
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Total capitalization |
$ | 115,739 | $ | 115,739 | $ | |||||||
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(1) | The pro forma as adjusted information is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing. Each $1.00 increase (decrease) in the assumed initial public offering price of $ per share, the midpoint of the range on the cover of this prospectus, would increase (decrease) our pro forma as adjusted cash, cash equivalents and short-term investments, additional paid-in capital, total stockholders (deficit) equity and total capitalization by approximately $ million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions payable by us. |
The number of shares of our common stock to be outstanding after this offering is based on 120,655,385 shares of our common stock outstanding as of April 30, 2015 and excludes:
| 28,235,060 shares of common stock issuable upon the exercise of stock options outstanding under our 2010 Plan and 2011 Plan as of April 30, 2015, with a weighted-average exercise price of $3.92 per share; |
| 4,117,218 shares of common stock issuable upon the vesting of RSUs outstanding under our 2010 Plan as of April 30, 2015; |
| 824,094 shares of common stock issuable upon the exercise of warrants outstanding as of April 30, 2015, with a weighted-average exercise price of $0.70 per share; |
| 652,313 shares of common stock issuable upon the exercise of stock options granted under our 2010 Plan after April 30, 2015, with a weighted-average exercise price of $12.02 per share; |
| 199,750 shares of common stock issuable upon the vesting of RSUs granted under our 2010 Plan after April 30, 2015; and |
| shares of common stock reserved for future issuance under our equity compensation plans as of April 30, 2015, consisting of (i) shares of common stock reserved for future issuance under our 2010 Plan and 2011 Plan but unissued, as of immediately prior to the completion of this offering, which shares will be added to the shares reserved under the 2015 Plan which will become effective on the date immediately prior to the date of this prospectus (which reserve does not reflect the options to purchase shares of our common stock and RSUs granted after April 30, 2015), (ii) shares of our common stock initially reserved for future issuance under our 2015 Plan, which will become effective on the date immediately prior to the date of this prospectus, (iii) shares that may be added to the 2015 Plan upon the expiration, termination, forfeiture or other reacquisition of any shares of common stock issuable upon the exercise or settlement of stock awards outstanding under the 2010 Plan and 2011 Plan, and (iv) shares of our common stock initially reserved for issuance under our ESPP, which will become effective on the date adopted by our board of directors. Our 2015 Plan and ESPP also provide for automatic annual increases in the number of shares reserved under such plans each year, as more fully described in Executive CompensationEmployee Benefit and Stock Plans. |
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If you invest in our common stock, your interest will be diluted to the extent of the difference between the amount per share paid by purchasers of shares of common stock in this initial public offering and the pro forma as adjusted net tangible book value per share of common stock immediately after this offering.
As of April 30, 2015, our pro forma net tangible book value was $115.7 million, or $0.96 per share of common stock. Our pro forma net tangible book value per share represents the amount of our total tangible assets reduced by the amount of our total liabilities and divided by the total number of shares of our common stock outstanding as of April 30, 2015, after giving effect to the automatic conversion of all outstanding shares of our convertible preferred stock into 76,319,511 shares of our common stock and the related reclassification of the preferred stock warrant liability to additional paid-in capital.
After giving effect to our sale in this offering of shares of our common stock, at an assumed initial public offering price of $ per share, the midpoint of the range on the cover of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma net tangible book value as of April 30, 2015, as adjusted to give effect to this offering, would have been approximately $ million, or $ per share of our common stock. This represents an immediate increase in pro forma net tangible book value of $ per share to our existing stockholders and an immediate dilution of $ per share to investors purchasing shares in this offering.
The following table illustrates this dilution:
Assumed initial public offering price per share |
$ | |||||||
Pro forma net tangible book value per share as of April 30, 2015 |
$ | 0.96 | ||||||
Increase in pro forma net tangible book value per share attributable to new investors in this offering |
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Pro forma net tangible book value, as adjusted to give effect to this offering |
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Dilution in pro forma as adjusted net tangible book value per share to new investors in this offering |
$ | |||||||
|
|
The dilution information discussed above is illustrative only and will change based on the actual initial public offering price and other terms of this offering determined at pricing. Each $1.00 increase (decrease) in the assumed initial public offering price of $ per share, the midpoint of the range on the cover of this prospectus, would increase (decrease) our pro forma net tangible book value by $ per share, the increase (decrease) attributable to this offering by $ per share, and the dilution in pro forma as adjusted net tangible book value per share to new investors in this offering by $ per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions payable by us. Each 1.0 million increase (decrease) in the number of shares offered by us as set forth on the cover page of this prospectus, would increase (decrease) our pro forma net tangible book value, as adjusted to give effect to this offering, by $ per share, the increase (decrease) attributable to this offering by $ per share, and the dilution in pro forma as adjusted net tangible book value per share to new investors in this offering by $ per share, assuming that the assumed initial public offering price of $ per share, the midpoint of the range on the cover of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions payable by us.
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If the underwriters exercise their option to purchase additional shares in full, the pro forma net tangible book value per share of our common stock after giving effect to this offering would be $ per share, and the dilution in pro forma net tangible book value per share to new investors in this offering would be $ per share.
The following table summarizes, on a pro forma basis as of April 30, 2015 after giving effect to the sale of shares of common stock by us in this offering, the difference between existing stockholders and new investors with respect to the number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid or to be paid to us at an assumed offering price of $ per share, the midpoint of the range on the cover of this prospectus, before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us:
Shares Purchased | Total Consideration | Average Price Per Share |
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Number | Percent | Amount | Percent | |||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Existing stockholders |
120,655,385 | % | $ | 331,175 | % | $ | 2.74 | |||||||||||||
New public investors |
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Total |
100.0 | % | $ | 100.0 | % | |||||||||||||||
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The information discussed above is illustrative only and will change based on the actual initial public offering price and other terms of this offering determined at pricing. Each $1.00 increase (decrease) in the assumed initial public offering price of $ per share, the midpoint of the range on the cover of this prospectus, would increase (decrease) total consideration paid by new investors and total consideration paid by all stockholders by approximately $ million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
Sales of shares of common stock by the selling stockholders in this offering will reduce the number of shares of common stock held by existing stockholders to , or approximately % of the total shares of common stock outstanding after this offering, and will increase the number of shares held by new investors to , or approximately % of the total shares of common stock outstanding after this offering.
To the extent that any outstanding options or warrants are exercised or RSUs settle, investors will experience further dilution.
Except as otherwise indicated, the above discussion and tables assume no exercise of the underwriters option to purchase additional shares. After giving effect to the sale of shares in the offering by us and the selling stockholders, if the underwriters exercise their option to purchase additional shares in full, our existing stockholders would own % and our new investors would own % of the total number of shares of our common stock outstanding upon the completion of this offering.
The number of shares of our common stock to be outstanding after this offering is based on 120,655,385 shares of our common stock outstanding as of April 30, 2015 and excludes:
| 28,235,060 shares of common stock issuable upon the exercise of stock options outstanding under our 2010 Plan and 2011 Plan as of April 30, 2015, with a weighted-average exercise price of $3.92 per share; |
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| 4,117,218 shares of common stock issuable upon the vesting of RSUs outstanding under our 2010 Plan as of April 30, 2015; |
| 824,094 shares of common stock issuable upon the exercise of warrants outstanding as of April 30, 2015, with a weighted-average exercise price of $0.70 per share; |
| 652,313 shares of common stock issuable upon the exercise of stock options granted under our 2010 Plan after April 30, 2015, with a weighted-average exercise price of $12.02 per share; |
| 199,750 shares of common stock issuable upon the vesting of RSUs granted under our 2010 Plan after April 30, 2015; and |
| shares of common stock reserved for future issuance under our equity compensation plans as of April 30, 2015, consisting of (i) shares of common stock reserved for future issuance under our 2010 Plan and 2011 Plan but unissued, as of immediately prior to the completion of this offering, which shares will be added to the shares reserved under the 2015 Plan which will become effective on the date immediately prior to the date of this prospectus (which reserve does not reflect the options to purchase shares of our common stock and RSUs granted after April 30, 2015), (ii) shares of our common stock initially reserved for future issuance under our 2015 Plan, which will become effective on the date immediately prior to the date of this prospectus, (iii) shares that may be added to the 2015 Plan upon the expiration, termination, forfeiture or other reacquisition of any shares of common stock issuable upon the exercise or settlement of stock awards outstanding under the 2010 Plan and 2011 Plan, and (iv) shares of our common stock initially reserved for issuance under our ESPP, which will become effective on the date adopted by our board of directors. Our 2015 Plan and ESPP also provide for automatic annual increases in the number of shares reserved under such plans each year, as more fully described in Executive CompensationEmployee Benefit and Stock Plans. |
53
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following selected consolidated financial data should be read together with our consolidated financial statements and related notes and Managements Discussion and Analysis of Financial Condition and Results of Operations which are included elsewhere in this prospectus. We derived the selected consolidated statements of operations data for fiscal 2013 and fiscal 2014 and the selected consolidated balance sheet data as of July 31, 2013 and July 31, 2014 from our audited consolidated financial statements included elsewhere in this prospectus. We derived the selected consolidated statements of operations data for fiscal 2012 and the selected consolidated balance sheet data as of July 31, 2012 from our unaudited consolidated financial statements that are not included in this prospectus. We derived the selected consolidated statements of operations data for the nine months ended April 30, 2014 and 2015, and the selected consolidated balance sheet data as of April 30, 2015 from the unaudited interim consolidated financial statements included elsewhere in this prospectus. The unaudited consolidated financial statements were prepared on the same basis as the audited consolidated financial statements contained in this prospectus and include, in the opinion of management, all adjustments necessary for a fair presentation of the financial information set forth in those statements. Our historical results presented below are not necessarily indicative of financial results to be achieved in future periods, and our interim results are not necessarily indicative of results that should be expected for a full year or any other period.
Fiscal Year Ended July 31 | Nine Months Ended April 30 | |||||||||||||||||||
2012 | 2013 | 2014 | 2014 | 2015 | ||||||||||||||||
(In thousands, except share and per share data) | ||||||||||||||||||||
Consolidated Statements of Operations Data: |
||||||||||||||||||||
Revenue: |
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Product |
$ | 6,367 | $ | 28,138 | $ | 113,562 | $ | 79,459 | $ | 140,838 | ||||||||||
Support and other services |
219 | 2,395 | 13,565 | 8,577 | 26,509 | |||||||||||||||
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Total revenue |
6,586 | 30,533 | 127,127 | 88,036 | 167,347 | |||||||||||||||
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Cost of revenue: |
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Product(1) |
4,210 | 24,171 | 52,417 | 38,137 | 56,627 | |||||||||||||||
Support and other services(1) |
577 | 2,433 | 8,495 | 5,432 | 13,998 | |||||||||||||||
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Total cost of revenue |
4,787 | 26,604 | 60,912 | 43,569 | 70,625 | |||||||||||||||
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Gross profit |
1,799 | 3,929 | 66,215 | 44,467 | 96,722 | |||||||||||||||
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Operating expenses: |
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Sales and marketing(1) |
6,349 | 27,200 | 93,001 | 62,084 | 113,067 | |||||||||||||||
Research and development(1) |
6,715 | 16,496 | 38,037 | 25,024 | 50,826 | |||||||||||||||
General and administrative(1) |
2,106 | 4,833 | 13,496 | 9,116 | 17,072 | |||||||||||||||
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Total operating expenses |
15,170 | 48,529 | 144,534 | 96,224 | 180,965 | |||||||||||||||
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Loss from operations |
(13,371 | ) | (44,600 | ) | (78,319 | ) | (51,757 | ) | (84,243 | ) | ||||||||||
Other expensenet |
(586 | ) | (54 | ) | (5,076 | ) | (2,512 | ) | (3,631 | ) | ||||||||||
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Loss before provision for income taxes |
(13,957 | ) | (44,654 | ) | (83,395 | ) | (54,269 | ) | (87,874 | ) | ||||||||||
Provision for income taxes |
5 | 80 | 608 | 304 | 1,068 | |||||||||||||||
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Net loss |
$ | (13,962 | ) | $ | (44,734 | ) | $ | (84,003 | ) | $ | (54,573 | ) | $ | (88,942 | ) | |||||
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Net loss per share attributable to common stockholdersbasic and diluted(2) |
$ | (0.43 | ) | $ | (1.36 | ) | $ | (2.30 | ) | $ | (1.52 | ) | $ | (2.22 | ) | |||||
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Weighted-average shares used in computing net loss per share attributable to common stockholdersbasic and diluted(2) |
32,429,532 | 32,866,059 | 36,520,107 | 35,974,891 | 40,072,814 | |||||||||||||||
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Pro forma net loss per share attributable to common stockholdersbasic and diluted(2) |
$ | (0.82 | ) | $ | (0.74 | ) | ||||||||||||||
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Weighted-average shares used in computing pro forma net loss per share attributable to common stockholdersbasic and diluted(2) |
96,808,971 | 115,340,987 | ||||||||||||||||||
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(1) | Includes stock-based compensation expense as follows: |
Fiscal Year Ended July 31 | Nine Months Ended April 30 | |||||||||||||||||||
2012 | 2013 | 2014 | 2014 | 2015 | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Cost of revenue: |
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Product |
$ | 23 | $ | 61 | $ | 124 | $ | 58 | $ | 254 | ||||||||||
Support and other services |
11 | 40 | 194 | 116 | 496 | |||||||||||||||
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Total cost of revenue |
34 | 101 | 318 | 174 | 750 | |||||||||||||||
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Sales and marketing |
94 | 611 | 2,150 | 1,234 | 4,406 | |||||||||||||||
Research and development |
573 | 3,835 | 2,243 | 1,400 | 3,813 | |||||||||||||||
General and administrative |
141 | 443 | 1,149 | 581 | 2,914 | |||||||||||||||
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Total stock-based compensation expense |
$ | 842 | $ | 4,990 | $ | 5,860 | $ | 3,389 | $ | 11,883 | ||||||||||
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(2) | For an explanation of the calculations of our basic and diluted net loss per share attributable to common stockholders, basic and diluted, and our pro forma net loss per share attributable to common stockholders, basic and diluted, see note 11 of the notes to consolidated financial statements included elsewhere in this prospectus. |
As of July 31 | As of April 30 2015 |
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2012 | 2013 | 2014 | ||||||||||||||
(In thousands) | ||||||||||||||||
Consolidated Balance Sheet Data: |
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Cash, cash equivalents and short-term investments |
$ | 19,428 | $ | 18,047 | $ | 57,485 | $ | 162,412 | ||||||||
Total assets |
26,918 | 44,340 | 118,964 | 240,535 | ||||||||||||
Deferred revenue |
791 | 12,530 | 36,477 | 83,013 | ||||||||||||
Preferred stock warrant liability |
1,025 | 1,110 | 5,507 | 9,550 | ||||||||||||
Convertible preferred stock |
38,472 | 71,368 | 172,075 | 310,379 | ||||||||||||
Total stockholders deficit |
(17,385 | ) | (55,885 | ) | (130,775 | ) | (204,190 | ) |
Key Financial and Operational Metrics
We monitor the following key financial and operational metrics:
As of or for the Fiscal Year Ended July 31 |
As of or for the Nine Months Ended April 30 |
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2012 | 2013 | 2014 | 2014 | 2015 | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Total revenue |
$ | 6,586 | $ | 30,533 | $ | 127,127 | $ | 88,036 | $ | 167,347 | ||||||||||
Year-over-year percentage increase |
| 364 | % | 316 | % | | 90 | % | ||||||||||||
Billings(1) |
$ | 7,377 | $ | 42,272 | $ | 151,074 | $ | 103,247 | $ | 213,883 | ||||||||||
Adjusted gross margin percentage(1) |
28 | % | 13 | % | 52 | % | 51 | % | 58 | % | ||||||||||
Total deferred revenue(2) |
$ | 791 | $ | 12,530 | $ | 36,477 | $ | 27,741 | $ | 83,013 | ||||||||||
Net cash used in operating activities |
$ | (15,468 | ) | $ | (29,110 | ) | $ | (45,707 | ) | $ | (28,837 | ) | $ | (20,327 | ) | |||||
Free cash flow(1) |
$ | (16,928 | ) | $ | (38,449 | ) | $ | (64,739 | ) | $ | (41,433 | ) | $ | (36,440 | ) | |||||
Total end-customers |
38 | 211 | 782 | 583 | 1,412 |
(1) | See Non-GAAP Financial Measures below for more information on the uses and limitations of our non-GAAP financial measures and a reconciliation of billings, adjusted gross margin percentage and free cash flow to the most directly comparable financial measures calculated and presented in accordance with GAAP. |
(2) | The majority of our deferred revenue consists of the unrecognized portion of revenue from sales of our support and software maintenance agreements. |
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Non-GAAP Financial Measures
We regularly monitor billings, adjusted gross margin percentage and free cash flow, which are non-GAAP financial 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 key performance measures because they:
| are used by our management and board of directors to understand and evaluate our performance and trends as well as 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; 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 of goals. |
Billings, adjusted gross margin percentage and free cash flow have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP. Billings, adjusted gross margin percentage and free cash flow are not substitutes for total revenue, gross profit or cash used in operating activities, respectively. In addition, other companies, including companies in our industry, may calculate non-GAAP financial measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures as tools for comparison. We urge you to review the reconciliation of our non-GAAP financial measures to the most directly comparable GAAP financial measures included below, and not to rely on any single financial measure to evaluate our business.
Billings
We calculate billings by adding the change in deferred revenue between the start and end of the period to total revenue recognized in the same period.
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. Our presentation of adjusted gross margin percentage 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 used in operating activities plus purchases of property and equipment, which measures our ability to generate cash from our business operations after our capital expenditures.
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Reconciliation of Non-GAAP Financial Measures
The following table presents a reconciliation of billings, adjusted gross margin percentage and free cash flow to the most directly comparable GAAP financial measures, for each of the periods indicated:
Fiscal Year Ended July 31 |
Nine Months Ended April 30 |
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2012 | 2013 | 2014 | 2014 | 2015 | ||||||||||||||||
(In thousands, except percentages) | ||||||||||||||||||||
Total revenue |
$ | 6,586 | $ | 30,533 | $ | 127,127 | $ | 88,036 | $ | 167,347 | ||||||||||
Change in deferred revenue |
791 | 11,739 | 23,947 | 15,211 | 46,536 | |||||||||||||||
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Billings (non-GAAP) |
$ | 7,377 | $ | 42,272 | $ | 151,074 | $ | 103,247 | $ | 213,883 | ||||||||||
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Gross profit |
$ | 1,799 | $ | 3,929 | $ | 66,215 | $ | 44,467 | $ | 96,722 | ||||||||||
Stock-based compensation |
34 | 101 | 318 | 174 | 750 | |||||||||||||||
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Adjusted gross profit (non-GAAP) |
$ | 1,833 | $ | 4,030 | $ | 66,533 | $ | 44,641 | $ | 97,472 | ||||||||||
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Adjusted gross margin percentage (non-GAAP) |
28 | % | 13 | % | 52 | % | 51 | % | 58 | % | ||||||||||
Net cash used in operating activities |
$ | (15,468 | ) | $ | (29,110 | ) | $ | (45,707 | ) | $ | (28,837 | ) | $ | (20,327 | ) | |||||
Purchases of property and equipment |
(1,460 | ) | (9,339 | ) | (19,032 | ) | (12,596 | ) | (16,113 | ) | ||||||||||
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Free cash flow (non-GAAP) |
$ | (16,928 | ) | $ | (38,449 | ) | $ | (64,739 | ) | $ | (41,433 | ) | $ | (36,440 | ) | |||||
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57
MANAGEMENTS 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 prospectus. The last day of our fiscal year is July 31. Our fiscal quarters end on October 31, January 31, April 30, and July 31. Fiscal 2015, our current fiscal year, will end on July 31, 2015. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under Risk Factors or in other parts of this prospectus.
Overview
We provide a leading next-generation enterprise computing platform that converges traditional silos of server, virtualization and storage into one integrated solution. Our software-driven platform 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 have recently announced an expansion of our capabilities to provide our customers with the flexibility to selectively utilize the public cloud for suitable workloads and specific use cases by enabling seamless application mobility across private and public clouds. We have combined advanced web-scale technologies with elegant consumer-grade design to deliver a powerful computing platform that elevates IT organizations 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.
We were founded in September 2009 and in October 2011 began selling the initial version of the Nutanix Operating System, which pioneered hyperconverged infrastructure by providing block storage for virtualized environments on VMware. In 2012, we released a new version of our software which included support for file storage, high availability and enhanced security. In 2013, we released several versions of our software, which added our intuitive Prism interface, built-in disaster recovery, deduplication, compression, and additional hypervisor support for Hyper-V and KVM. In 2014, we added enhanced resiliency, One-click Upgrade, Cloud Connect backup to Amazon Web Services, or AWS, and Cluster Health Analytics. In 2015, we rebranded the Nutanix Operating System as Acropolis and introduced the Acropolis Distributed Storage Fabric, Acropolis Mobility Fabric and Acropolis Hypervisor.
Our solution, the Xtreme Computing Platform, or XCP, can be delivered either as an appliance that is configured to order or as software only. When end-customers purchase our platform, they typically also purchase one or more years of support and maintenance in order to receive software upgrades, bug fixes and parts replacement. Product revenue is generated primarily from the sales of XCP, and is generally recognized upon shipment. Support and other services revenue is derived from the related support and maintenance contracts, and is recognized over the term of the support contracts.
We had a broad and diverse base of over 1,400 end-customers as of April 30, 2015, including over 140 Global 2000 enterprises. Since shipping our first product in fiscal 2012, our end-customer base has grown rapidly. The number of end-customers has grown from 211 as of July 31, 2013 to 782 as of July 31, 2014 to 1,412 as of April 30, 2015. Our platform is primarily sold through channel partners, including distributors and resellers, and delivered directly to our end-customers. A major part of our sales and marketing investment is to educate our end-customers about the benefits of XCP, 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, unified communications and big data. We have end-customers across a broad range of industries, such as
58
automotive, consumer goods, education, energy, financial services, healthcare, manufacturing, media, public sector, retail, technology and telecommunications. We also sell to service providers, who utilize our platform to provide a variety of cloud-based services to their customers.
We have invested heavily in the growth of our business, including the development of our solutions and build-out of our global sales force. The number of our full-time employees increased from 247 as of July 31, 2013 to 617 as of July 31, 2014 to 1,017 as of April 30, 2015. 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 and Seattle, Washington. 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 platform, introduce new products and features and build upon our technology leadership. We also intend to continue to expand our global sales and marketing teams. While we believe that these investments will contribute to our long-term growth, they may adversely affect our profitability in the near term. See also the section titled Factors Affecting Our Performance below.
We have experienced significant growth in recent periods, with total revenue of $30.5 million and $127.1 million for fiscal 2013 and fiscal 2014, respectively, representing year-over-year growth of 316%. We have continued to make significant investments as we scale our business, including in developing and improving our platform, expanding our sales and marketing capabilities and global coverage, and in expanding our general and administrative resources to support our growth. As a result, we had net losses of $44.7 million and $84.0 million for fiscal 2013 and fiscal 2014, respectively. Net cash used in operating activities was $29.1 million and $45.7 million for fiscal 2013 and fiscal 2014, respectively. For the nine months ended April 30, 2014 and 2015, our total revenue was $88.0 million and $167.3 million, respectively, representing year-over-year growth of 90%. As we continued to make investments, we had net losses of $54.6 million and $88.9 million for the nine months ended April 30, 2014 and 2015, respectively. For the nine months ended April 30, 2014 and 2015, net cash used in operating activities was $28.8 million and $20.3 million, respectively. As of April 30, 2015, we had an accumulated deficit of $236.2 million.
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. If we are unable to address these challenges, our business and operating results could be adversely affected.
Investment in Growth
We plan to continue to invest in sales and marketing and research and development so that we can capitalize on our market opportunity. We intend to continue to grow our global sales and marketing team to acquire new end-customers and to increase sales to existing end-customers. We intend to continue to grow our global engineering team 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 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
59
benefits of our platform both as compared to traditional datacenter architectures as well as the public cloud, particularly as we continue to pursue large enterprises and mission critical workloads. The broad nature of the technology shift that our platform represents and the relationships our end-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 platform.
Leveraging Channel 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. 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. Our business and results of operations will be significantly affected by our success in leveraging and expanding our network of our channel and OEM partners.
Continued Purchases and Upgrades within Existing Customer Base
Our end-customers typically deploy our technology for a specific workload initially. After the initial order, which includes the product and associated maintenance, support and professional services, by a new end-customer, we focus on expanding our footprint by serving more workloads. We also generate recurring revenue from our support and maintenance renewals. We view continued orders as a critical driver of our success, as the sales cycles are typically shorter compared to new end-customer deployments and selling expenses are typically lower. As of April 30, 2015, 80% of our end-customers who have been with us for 18 months or more have made a repeat purchase, which is defined as any purchase activity, including support and maintenance renewals, subsequent to the initial purchase during the course of their customer lifetime. Additionally, end-customers who have been with us for 18 months or more have total lifetime orders (which includes the initial order) to date in an amount that is more than 3.5x greater, on average, than their initial order. This number increases to approximately 6.0x, on average, for our over 140 Global 2000 end-customers and to more than 9.5x, on average, for our top 25 end-customers. The multiples exclude the effect of one end-customer who had a very large and irregular purchase pattern that we believe is not representative of the purchase patterns of all our other end-customers. Our business and operating results will depend on our ability to sell additional products to our current and future base of existing end-customers.
Changes in Product Mix and Associated Accounting Impact
Shifts in the mix of whether our solutions are sold as an appliance or as software-only could result in fluctuations in our revenue and gross margins. Software-only sales 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. When we sell our solution as an appliance, the revenue for the appliance and the basic version of our software included in the appliance is generally recognized upon delivery, whereas revenue from the incremental software licenses and software is generally 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, which could result in the revenue from these sales being deferred and recognized over the related support period instead of recognized upon delivery. For additional information on our revenue recognition and vendor specific objective evidence of fair value, or VSOE, please see the section titled Critical Accounting EstimatesRevenue Recognition.
60
Components of Our Results of Operations
Revenue
Product revenue. We generate our product revenue from the sales of XCP, both delivered on a hardware appliance as well as software-only. Our revenue from software-only sales, which currently constitute a small portion of our product revenue, is subject to industry-specific software revenue recognition guidance and has typically been deferred and recognized over the contractual support period associated with the delivered software licenses. However, upon the establishment of VSOE for related support and other services, revenue associated with certain software licenses will be recognized upon delivery to our end-customers. For additional information, please see the section titled Critical Accounting EstimatesRevenue Recognition.
Support and other services revenue. We generate our support and other services revenue primarily from support and maintenance contracts, and, to a lesser extent, from professional services. The majority of our product sales are sold in conjunction with support and maintenance contracts with terms ranging from one to five years. We recognize revenue from support and maintenance contracts over the contractual service period. 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, as well as personnel costs associated with our operations function and allocated costs. Personnel costs consist of salaries, benefits, bonuses and stock-based compensation. We expect our cost of product revenue to increase in absolute dollars as our product revenue increases.
Cost of support and other services revenue. Cost of support 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 and other services revenue to increase in absolute dollars as our support and other services revenue increases.
Operating Expenses
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, although our sales and marketing expense may fluctuate as a percentage of total revenue.
Research and development. Research and development expense 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 development costs are expensed as incurred. We expect research and development expense to increase in absolute dollars as we continue to invest in our future products and services, although our research and development expense may fluctuate as a percentage of total revenue.
General and administrative. General and administrative expense consists primarily of personnel costs, which include our executive, finance, human resources and legal organizations. General and administrative expense also includes outside professional services, which consists primarily of legal, accounting and other consulting costs and allocated costs. We expect general and administrative
61
expense to increase in absolute dollars particularly due to additional legal, accounting, insurance and other costs associated with being a public company, although our general and administrative expense may fluctuate as a percentage of total revenue.
Other Expensenet
Other expensenet consists primarily of the change in fair value of our preferred stock warrant liability, and, to a lesser extent, foreign exchange gains or losses and gains or losses on investments. Convertible preferred stock warrants are classified as a liability on our consolidated balance sheet and re-measured to fair value at each balance sheet date with the corresponding changes in fair value recorded as other expense. Upon completion of this offering, the convertible preferred stock warrants will convert into warrants to purchase common stock. As a result, the convertible preferred stock liability will be re-measured to its then fair value, which is based on the offering price per share of our common stock, and reclassified to additional paid-in capital. Based on an assumed offering price of $ per share, the midpoint of the range on the cover of this prospectus, we would record a re-measurement expense of $ million in the quarter in which this offering is completed. Subsequent to the conversion of convertible preferred stock warrants in connection with this offering, we will no longer re-measure them at fair value or incur any charges related to changes in fair value.
Provision for Income Taxes
Provision for income taxes consists primarily of income taxes in certain foreign jurisdictions in which we conduct business. As of July 31, 2014, we had federal and state net operating loss, or NOL, carryforwards of $100.4 million and $91.0 million, respectively, which will begin to expire in 2030. Our NOLs are based on estimates and may change in future periods.
62
Results of Operations
The following tables set forth our consolidated results of operations in dollars and as a percentage of total revenue for the periods presented:
Fiscal Year Ended July 31 |
Nine Months Ended April 30 |
|||||||||||||||
2013 | 2014 | 2014 | 2015 | |||||||||||||
(In thousands) | ||||||||||||||||
Consolidated Statements of Operations Data: |
||||||||||||||||
Revenue: |
||||||||||||||||
Product |
$ | 28,138 | $ | 113,562 | $ | 79,459 | $ | 140,838 | ||||||||
Support and other services |
2,395 | 13,565 | 8,577 | 26,509 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenue |
30,533 | 127,127 | 88,036 | 167,347 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Cost of revenue: |
||||||||||||||||
Product(1) |
24,171 | 52,417 | 38,137 | 56,627 | ||||||||||||
Support and other services(1) |
2,433 | 8,495 | 5,432 | 13,998 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total cost of revenue |
26,604 | 60,912 | 43,569 | 70,625 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Gross profit |
3,929 | 66,215 | 44,467 | 96,722 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating expenses: |
||||||||||||||||
Sales and marketing(1) |
27,200 | 93,001 | 62,084 | 113,067 | ||||||||||||
Research and development(1) |
16,496 | 38,037 | 25,024 | 50,826 | ||||||||||||
General and administrative(1) |
4,833 | 13,496 | 9,116 | 17,072 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total operating expenses |
48,529 | 144,534 | 96,224 | 180,965 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Loss from operations |
(44,600 | ) | (78,319 | ) | (51,757 | ) | (84,243 | ) | ||||||||
Other expensenet |
(54 | ) | (5,076 | ) | (2,512 | ) | (3,631 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Loss before provision for income taxes |
(44,654 | ) | (83,395 | ) | (54,269 | ) | (87,874 | ) | ||||||||
Provision for income taxes |
80 | 608 | 304 | 1,068 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net loss |
$ | (44,734 | ) | $ | (84,003 | ) | $ | (54,573 | ) | $ | (88,942 | ) | ||||
|
|
|
|
|
|
|
|
(1) | Includes stock-based compensation expense as follows: |
Fiscal Year Ended July 31 |
Nine Months Ended April 30 |
|||||||||||||||
2013 | 2014 | 2014 | 2015 | |||||||||||||
(In thousands) | ||||||||||||||||
Cost of revenue: |
||||||||||||||||
Product |
$ | 61 | $ | 124 | $ | 58 | $ | 254 | ||||||||
Support and other services |
40 | 194 | 116 | 496 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total cost of revenue |
101 | 318 | 174 | 750 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Sales and marketing |
611 | 2,150 | 1,234 | 4,406 | ||||||||||||
Research and development |
3,835 | 2,243 | 1,400 | 3,813 | ||||||||||||
General and administrative |
443 | 1,149 | 581 | 2,914 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total stock-based compensation expense |
$ | 4,990 | $ | 5,860 | $ | 3,389 | $ | 11,883 | ||||||||
|
|
|
|
|
|
|
|
63
Fiscal Year Ended July 31 |
Nine Months Ended April 30 |
|||||||||||||||
2013 | 2014 | 2014 | 2015 | |||||||||||||
(As a percentage of total revenue) | ||||||||||||||||
Consolidated Statements of Operations Data: |
||||||||||||||||
Revenue: |
||||||||||||||||
Product |
92 | % | 89 | % | 90 | % | 84 | % | ||||||||
Support and other services |
8 | 11 | 10 | 16 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenue |
100 | 100 | 100 | 100 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Cost of revenue: |
||||||||||||||||
Product |
79 | 41 | 44 | 34 | ||||||||||||
Support and other services |
8 | 7 | 6 | 8 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total cost of revenue |
87 | 48 | 50 | 42 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Gross profit |
13 | 52 | 50 | 58 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating expenses: |
||||||||||||||||
Sales and marketing |
89 | 73 | 71 | 68 | ||||||||||||
Research and development |
54 | 30 | 28 | 30 | ||||||||||||
General and administrative |
16 | 11 | 10 | 10 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total operating expenses |
159 | 114 | 109 | 108 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Loss from operations |
(146 | ) | (62 | ) | (59 | ) | (50 | ) | ||||||||
Other expensenet |
0 | (4 | ) | (3 | ) | (2 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Loss before provision for income taxes |
(146 | ) | (66 | ) | (62 | ) | (52 | ) | ||||||||
Provision for income taxes |
0 | 0 | 0 | (1 | ) | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net loss |
(146 | )% | (66 | )% | (62 | )% | (53 | )% | ||||||||
|
|
|
|
|
|
|
|
Comparison of the Nine Months Ended April 30, 2014 and 2015
Revenue
Nine Months Ended April 30 |
||||||||||||||||
2014 | 2015 | $ Change | % Change | |||||||||||||
(In thousands, except percentages) | ||||||||||||||||
Product |
$ | 79,459 | $ | 140,838 | $ | 61,379 | 77 | % | ||||||||
Support and other services |
8,577 | 26,509 | 17,932 | 209 | % | |||||||||||
|
|
|
|
|
|
|||||||||||
Total revenue |
$ | 88,036 | $ | 167,347 | $ | 79,311 | 90 | % | ||||||||
|
|
|
|
|
|
Total revenue by bill-to-location was as follows:
Nine Months Ended April 30 |
||||||||||||||||
2014 | 2015 | $ Change | % Change | |||||||||||||
(In thousands, except percentages) | ||||||||||||||||
U.S. |
$ | 56,205 | $ | 113,395 | $ | 57,190 | 102 | % | ||||||||
Europe, the Middle East and Africa |
16,217 | 29,228 | 13,011 | 80 | % | |||||||||||
Asia-Pacific |
10,406 | 18,928 | 8,522 | 82 | % | |||||||||||
Other Americas |
5,208 | 5,796 | 588 | 11 | % | |||||||||||
|
|
|
|
|
|
|||||||||||
Total revenue |
$ | 88,036 | $ | 167,347 | $ | 79,311 | 90 | % | ||||||||
|
|
|
|
|
|
64
The increase in product revenue reflects increased domestic and international demand for our solutions as we continue our penetration and expansion in global markets through increased sales and marketing activities. Our total end-customer count increased from 583 as of April 30, 2014 to 1,412 as of April 30, 2015.
Support and other services revenue increased in conjunction with the growth of our end-customer base and the related support and software maintenance contracts.
Cost of Revenue and Gross Margin
Nine Months Ended April 30 |
||||||||||||||||
2014 | 2015 | $ Change | % Change | |||||||||||||
(In thousands, except percentages) | ||||||||||||||||
Cost of product revenue |
$ | 38,137 | $ | 56,627 | $ | 18,490 | 48 | % | ||||||||
Product gross margin |
52 | % | 60 | % | ||||||||||||
Cost of support and other services revenue |
$ | 5,432 | $ | 13,998 | $ | 8,566 | 158 | % | ||||||||
Support and other services gross margin |
37 | % | 47 | % | ||||||||||||
Total gross margin |
50 | % | 58 | % |
Cost of product revenue
The increase in cost of product revenue was primarily due to the corresponding increase in product sales. Product gross margin increased primarily due to cost savings achieved from our procurement process, and changes in product mix, including higher revenue from software-related deliverables.
Cost of support and other services revenue
The increase in cost 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 by 112%, in order to support our growing end-customer base. Support and other services gross margin improved as we continued to gain leverage from our support organization.
Operating Expenses
Sales and marketing
Nine Months Ended April 30 |
||||||||||||||||
2014 | 2015 | $ Change | % Change | |||||||||||||
(In thousands, except percentages) | ||||||||||||||||
Sales and marketing |
$ | 62,084 | $ | 113,067 | $ | 50,983 | 82 | % | ||||||||
Percent of total revenue |
71 | % | 68 | % |
The increase in sales and marketing expense was primarily due to higher personnel costs and sales commissions, as our sales and marketing headcount approximately doubled. As part of our efforts to penetrate and expand in global markets, we increased our marketing activities related to brand awareness, promotions, trade shows and partner programs.
Research and development
Nine Months Ended April 30 |
||||||||||||||||
2014 | 2015 | $ Change | % Change | |||||||||||||
(In thousands, except percentages) | ||||||||||||||||
Research and development |
$ | 25,024 | $ | 50,826 | $ | 25,802 | 103 | % | ||||||||
Percent of total revenue |
28 | % | 30 | % |
65
The increase in research and development expense was primarily due to higher personnel costs, as our research and development headcount approximately doubled as part of the continued expansion of our product development activities primarily related to the addition of features and functionality to our platform.
General and administrative
Nine Months Ended April 30 |
||||||||||||||||
2014 | 2015 | $ Change | % Change | |||||||||||||
(In thousands, except percentages) | ||||||||||||||||
General and administrative |
$ | 9,116 | $ | 17,072 | $ | 7,956 | 87 | % | ||||||||
Percent of total revenue |
10 | % | 10 | % |
The increase in general and administrative expense was primarily due to higher personnel costs, as our general and administrative headcount increased by 79% to support our growing operations and international footprint, and to a lesser extent, costs related to our preparation for becoming a public company.
Other expensenet
Nine Months Ended April 30 |
||||||||||||||||
2014 | 2015 | $ Change | % Change | |||||||||||||
(In thousands, except percentages) | ||||||||||||||||
Other expensenet |
$ | (2,512 | ) | $ | (3,631 | ) | $ | (1,119 | ) | 45 | % |
The increase in other expensenet was primarily due to higher charges resulting from changes in the fair value of our preferred stock warrants.
Provision for income taxes
Nine Months Ended April 30 |
||||||||||||||||
2014 | 2015 | $ Change | % Change | |||||||||||||
(In thousands, except percentages) | ||||||||||||||||
Provision for income taxes |
$ | 304 | $ | 1,068 | $ | 764 | 251 | % |
The increase in the provision for income taxes was primarily due to higher foreign taxes as we continue to expand globally.
Comparison of the Years Ended July 31, 2013 and 2014
Revenue
Fiscal Year Ended July 31 |
||||||||||||||||
2013 | 2014 | $ Change | % Change | |||||||||||||
(In thousands, except percentages) | ||||||||||||||||
Product |
$ | 28,138 | $ | 113,562 | $ | 85,424 | 304 | % | ||||||||
Support and other services |
2,395 | 13,565 | 11,170 | 466 | % | |||||||||||
|
|
|
|
|
|
|||||||||||
Total revenue |
$ | 30,533 | $ | 127,127 | $ | 96,594 | 316 | % | ||||||||
|
|
|
|
|
|
66
Total revenue by bill-to-location was as follows:
Fiscal Year Ended July 31 |
||||||||||||||||
2013 | 2014 | $ Change | % Change | |||||||||||||
(In thousands, except percentages) | ||||||||||||||||
U.S. |
$ | 25,367 | $ | 77,531 | $ | 52,164 | 206 | % | ||||||||
Europe, the Middle East and Africa |
2,109 | 25,789 | 23,680 | 1,123 | % | |||||||||||
Asia-Pacific |
2,042 | 15,949 | 13,907 | 681 | % | |||||||||||
Other Americas |
1,015 | 7,858 | 6,843 | 674 | % | |||||||||||
|
|
|
|
|
|
|||||||||||
Total revenue |
$ | 30,533 | $ | 127,127 | $ | 96,594 | 316 | % | ||||||||
|
|
|
|
|
|
The increase in product revenue was primarily due to increased domestic and international demand for our solutions as we continued our penetration and expansion in global markets through increased sales and marketing activities. Our total end-customer count increased from 211 as of July 31, 2013 to 782 as July 31, 2014. In particular, we saw extensive growth in international markets during fiscal 2014, as we began to invest in our international sales and marketing activities in international markets, where our sales and marketing headcount in non-U.S. locations increased by 228% from July 31, 2013 to July 31, 2014.
Support and other services revenue increased in conjunction with the growth of our end-customer base and the related support and software maintenance contracts.
Cost of Revenue and Gross Margin
Fiscal Year Ended July 31 |
||||||||||||||||
2013 | 2014 | $ Change | % Change | |||||||||||||
(In thousands, except percentages) | ||||||||||||||||
Cost of product revenue |
$ | 24,171 | $ | 52,417 | $ | 28,246 | 117 | % | ||||||||
Product gross margin |
14 | % | 54 | % | ||||||||||||
Cost of support and other revenue |
$ | 2,433 | $ | 8,495 | $ | 6,062 | 249 | % | ||||||||
Support and other services gross margin |
(2 | )% | 37 | % | ||||||||||||
Total gross margin percentage |
13 | % | 52 | % |
Cost of product revenue
The increase in the cost of product revenue was primarily due to the corresponding increase in product sales.
The increase in product gross margin was primarily due to specific factors during fiscal 2013, including a large discount provided on an initial transaction with one large end-customer during our initial product ramp and $3.2 million of warranty charges, which resulted from the in-field replacement of equipment manufactured by our previous outsourced manufacturer.
Cost of support and other services revenue
The increase in cost 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 by 229%, in order to support our growing end-customer base. Support and other services gross margin improved as we continued to gain leverage from our support organization.
67
Operating Expenses
Sales and marketing
Fiscal Year Ended July 31 |
||||||||||||||||
2013 | 2014 | $ Change | % Change | |||||||||||||
(In thousands, except percentages) | ||||||||||||||||
Sales and marketing |
$ | 27,200 | $ | 93,001 | $ | 65,801 | 242 | % | ||||||||
Percent of total revenue |
89 | % | 73 | % |
The increase in sales and marketing expense was primarily due to costs associated with building out our sales and marketing functions, including an increase in our sales and marketing headcount of 145%, and marketing activities related to brand awareness, such as advertising and promotions, trade shows and partner programs, as part of our efforts to penetrate and expand in global markets.
Research and development
Fiscal Year Ended July 31 |
||||||||||||||||
2013 | 2014 | $ Change | % Change | |||||||||||||
(In thousands, except percentages) | ||||||||||||||||
Research and development |
$ | 16,496 | $ | 38,037 | $ | 21,541 | 131 | % | ||||||||
Percent of total revenue |
54 | % | 30 | % |
The increase in research and development expense was primarily due to higher personnel costs, as our research and development headcount increased by 147% as part of our efforts to expand our product development activities.
General and administrative
Fiscal Year Ended July 31 |
||||||||||||||||
2013 | 2014 | $ Change | % Change | |||||||||||||
(In thousands, except percentages) | ||||||||||||||||
General and administrative |
$ | 4,833 | $ | 13,496 | $ | 8,663 | 179 | % | ||||||||
Percent of total revenue |
16 | % | 11 | % |
The increase in general and administrative expense was primarily due to higher personnel costs, as our general and administrative headcount increased by 144%, to support our growing operations and international footprint. As part of this expansion, we began to see increased legal and accounting costs associated with implementing our international corporate structure.
Other expensenet
Fiscal Year Ended July 31 |
||||||||||||||||
2013 | 2014 | $ Change | % Change | |||||||||||||
(In thousands, except percentages) | ||||||||||||||||
Other expensenet |
$ | (54 | ) | $ | (5,076 | ) | $ | (5,022 | ) | 9,300 | % |
The increase in other expensenet was primarily due to higher charges resulting from changes in the fair value of our preferred stock warrants.
68
Provision for income taxes
Fiscal Year Ended July 31 |
||||||||||||||||
2013 | 2014 | $ Change | % Change | |||||||||||||
(In thousands, except percentages) | ||||||||||||||||
Provision for income taxes |
$ | 80 | $ | 608 | $ | 528 | 660 | % |
The increase in the provision for income taxes was primarily due to higher foreign taxes as we accelerated our global expansion during fiscal 2014.
69
Quarterly Results of Operations
The following table sets forth our unaudited consolidated statement of operations data for each of the seven quarters in the period ended April 30, 2015. The unaudited consolidated statement of operations data set forth below have been prepared on the same basis as our audited consolidated financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, that are necessary for the fair presentation of such data. Our historical results are not necessarily indicative of the results that may be expected in the future and the results for any quarter are not necessarily indicative of results to be expected for a full year or any other period. The following quarterly financial data should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this prospectus.
Three Months Ended | ||||||||||||||||||||||||||||
October 31 2013 |
January 31 2014 |
April 30 2014 |
July 31 2014 |
October 31 2014 |
January 31 2015 |
April 30 2015 |
||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||
Consolidated Statement of Operations Data: |
||||||||||||||||||||||||||||
Revenue: |
||||||||||||||||||||||||||||
Product |
$ | 17,818 | $ | 29,443 | $ | 32,198 | $ | 34,103 | $ | 39,125 | $ | 48,090 | $ | 53,623 | ||||||||||||||
Support and other services |
1,998 | 2,780 | 3,799 | 4,988 | 6,928 | 8,708 | 10,873 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total revenue |
19,816 | 32,223 | 35,997 | 39,091 | 46,053 | 56,798 | 64,496 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Cost of revenue: |
||||||||||||||||||||||||||||
Product(1) |
8,784 | 14,331 | 15,022 | 14,280 | 15,768 | 19,143 | 21,716 | |||||||||||||||||||||
Support and other services(1) |
1,175 | 1,874 | 2,383 | 3,063 | 4,052 | 4,668 | 5,278 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total cost of revenue |
9,959 | 16,205 | 17,405 | 17,343 | 19,820 | 23,811 | 26,994 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Gross profit |
9,857 | 16,018 | 18,592 | 21,748 | 26,233 | 32,987 | 37,502 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Operating expenses: |
||||||||||||||||||||||||||||
Sales and marketing(1) |
16,026 | 20,500 | 25,558 | 30,917 | 33,131 | 37,151 | 42,785 | |||||||||||||||||||||
Research and development(1) |
6,397 | 7,749 | 10,878 | 13,013 | 14,305 | 16,717 | 19,804 | |||||||||||||||||||||
General and administrative(1) |
2,406 | 2,582 | 4,128 | 4,380 | 5,385 | 5,307 | 6,380 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total operating expenses |
24,829 | 30,831 | 40,564 | 48,310 | 52,821 | 59,175 | 68,969 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Loss from operations |
(14,972 | ) | (14,813 | ) | (21,972 | ) | (26,562 | ) | (26,588 | ) | (26,188 | ) | (31,467 | ) | ||||||||||||||
Other expensenet |
(248 | ) | (901 | ) | (1,363 | ) | (2,564 | ) | (1,690 | ) | (1,268 | ) | (673 | ) | ||||||||||||||
|
|
|
|
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Loss before provision for income taxes |
(15,220 | ) | (15,714 | ) | (23,335 | ) | (29,126 | ) | (28,278 | ) | (27,456 | ) | (32,140 | ) | ||||||||||||||
Provision for income taxes |
71 | 81 | 152 | 304 | 244 | 350 | 474 | |||||||||||||||||||||
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Net loss |
$ | (15,291 | ) | $ | (15,795 | ) | $ | (23,487 | ) | $ | (29,430 | ) | $ | (28,522 | ) | $ | (27,806 | ) | $ | (32,614 | ) | |||||||
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(1) | Includes stock-based compensation expense as follows: |
Three Months Ended | ||||||||||||||||||||||||||||
October 31 2013 |
January 31 2014 |
April 30 2014 |
July 31 2014 |
October 31 2014 |
January 31 2015 |
April 30 2015 |
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(In thousands) | ||||||||||||||||||||||||||||
Cost of revenue: |
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Product |
$ | 16 | $ | 18 | $ | 24 | $ | 66 | $ | 74 | $ | 89 | $ | 91 | ||||||||||||||
Support and other services |
20 | 23 | 73 | 78 | 87 | 161 | 248 | |||||||||||||||||||||
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Total cost of revenue |
36 | 41 | 97 | 144 | 161 | 250 | 339 | |||||||||||||||||||||
Sales and marketing |
311 | 339 | 584 | 916 | 1,090 | 1,408 | 1,908 | |||||||||||||||||||||
Research and development |
353 | 390 | 657 | 843 | 1,141 | 1,281 | 1,391 | |||||||||||||||||||||
General and administrative |
119 | 167 | 295 | 568 | 859 | 1,038 | 1,017 | |||||||||||||||||||||
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Total stock-based compensation expense |
$ | 819 | $ | 937 | $ | 1,633 | $ | 2,471 | $ | 3,251 | $ | 3,977 | $ | 4,655 | ||||||||||||||
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The following table presents our unaudited quarterly results of operations as a percentage of total revenue for each of the seven quarters in the period ended April 30, 2015:
Three Months Ended | ||||||||||||||||||||||||||||
October 31 2013 |
January 31 2014 |
April 30 2014 |
July 31 2014 |
October 31 2014 |
January 31 2015 |
April 30 2015 |
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(As a percentage of total revenue) | ||||||||||||||||||||||||||||
Consolidated Statement of Operations Data: |
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Revenue: |
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Product |
90 | % | 91 | % | 89 | % | 87 | % | 85 | % | 85 | % | 83 | % | ||||||||||||||
Support and other services |
10 | 9 | 11 | 13 | 15 | 15 | 17 | |||||||||||||||||||||
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Total revenue |
100 | 100 | 100 | 100 | 100 | 100 | 100 | |||||||||||||||||||||
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Cost of revenue: |
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Product |
44 | 44 | 42 | 36 | 34 | 34 | 34 | |||||||||||||||||||||
Support and other services |
6 | 6 | 6 | 8 | 9 | 8 | 8 | |||||||||||||||||||||
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Total cost of revenue |
50 | 50 | 48 | 44 | 43 | 42 | 42 | |||||||||||||||||||||
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Gross profit |
50 | 50 | 52 | 56 | 57 | 58 | 58 | |||||||||||||||||||||
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Operating expenses: |
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Sales and marketing |
81 | 64 | 71 | 79 | 72 | 65 | 66 | |||||||||||||||||||||
Research and development |
32 | 24 | 30 | 34 | 31 | 30 | 31 | |||||||||||||||||||||
General and administrative |
12 | 8 | 12 | 11 | 12 | 9 | 10 | |||||||||||||||||||||
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Total operating expenses |
125 | 96 | 113 | 124 | 115 | 104 | 107 | |||||||||||||||||||||
Loss from operations |
(75 | ) | (46 | ) | (61 | ) | (68 | ) | (58 | ) | (46 | ) | (49 | ) | ||||||||||||||
Other expensenet |
(2 | ) | (3 | ) | (4 | ) | (6 | ) | (3 | ) | (2 | ) | (1 | ) | ||||||||||||||
Loss before provision for income taxes |
(77 | ) | (49 | ) | (65 | ) | (74 | ) | (61 | ) | (48 | ) | (50 | ) | ||||||||||||||
Provision for income taxes |
| | | 1 | 1 | 1 | 1 | |||||||||||||||||||||
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Net loss |
(77 | )% | (49 | )% | (65 | )% | (75 | )% | (62 | )% | (49 | )% | (51 | )% | ||||||||||||||
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Quarterly Revenue Trends
Our quarterly revenue increased for all quarterly periods presented due primarily to increases in the number of new end-customers as well as the related support contracts. Our revenue is subject to seasonal trends depending on spending patterns of our existing and potential end-customers. For instance, we have generally experienced an increase in sales activity as we approach our fiscal year end in July and our second quarter in January, as a portion of our sales professionals compensation is based on results through the end of each of these six-month periods. For instance, we have experienced an increase in sales activity in our second fiscal quarter, which aligns with the tail end of the IT spend budget cycles for many of our end-customers. While we believe that these seasonal trends have affected and will continue to affect our quarterly results, we believe our rapid growth has largely masked seasonal trends to date, and these trends could have more of an impact on our quarterly results in future periods.
Additionally, revenue from support and maintenance contracts has increased as we have generated more product revenue through the sale of our solutions. The revenue from support and maintenance contracts is initially deferred and recognized ratably over the contractual term, which generally ranges from one to five years. As a consequence, support and other services revenue has increased as a greater percentage than product revenue due to the amortization of deferred revenue from sales in prior periods.
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Quarterly Gross Margin Trends
Overall, our total gross margin increased for most quarterly periods presented due to increasing cost savings, including lower procurement costs, as well as changes in product mix, including increased sales of our software-related deliverables. In the future, our gross margin may fluctuate depending on a variety of factors such as mix of our product sales, our discounting practices and procurement costs.
Quarterly Expenses Trends
Sales and marketing, research and development and general and administrative expenses generally grew significantly over the quarterly periods, which have been primarily due to increases in headcount in connection with the expansion of our business. During the three months ended April 30, 2014, general and administrative expenses were primarily impacted by increased external legal costs primarily related to employment- and IP-related matters, as well as legal and accounting costs associated with implementing our international corporate structure.
Liquidity and Capital Resources
To date, we have satisfied our liquidity needs principally through the sale of convertible preferred stock, periodic draws on our credit facilities and proceeds from the exercise of stock options. As of April 30, 2015, we had up to $55.0 million available for us to borrow under our two credit facilities, one of which expired in May 2015. The remaining credit line for up to $15.0 million expires in November 2015. As of April 30, 2015, we did not have any borrowings outstanding under our credit facilities.
As of April 30, 2015, we had cash and cash equivalents of $76.3 million and $86.1 million of short-term investments. In the next 12 months, we anticipate our capital expenditures to be approximately $25.0 million to $35.0 million. We believe that our cash and cash equivalents, short-term investments and the amounts available for us to borrow under our currently available credit facility will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months.
Cash Flows
The following table summarizes our cash flows for the periods presented:
Fiscal Year Ended July 31 | Nine Months Ended April 30 | |||||||||||||||
2013 | 2014 | 2014 | 2015 | |||||||||||||
(In thousands) | ||||||||||||||||
Net cash used in operating activities |
$ | (29,110 | ) | $ | (45,707 | ) | $ | (28,837 | ) | $ | (20,327 | ) | ||||
Net cash used in investing activities |
(9,339 | ) | (19,032 | ) | (12,596 | ) | (102,660 | ) | ||||||||
Net cash provided by financing activities |
37,068 | 104,177 | 103,084 | 141,784 | ||||||||||||
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Net increase (decrease) in cash and cash equivalents |
$ | (1,381 | ) | $ | 39,438 | $ | 61,651 | $ | 18,797 | |||||||
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Cash Flows from Operating Activities
Net cash used in operating activities was $28.8 million and $20.3 million, respectively, for the nine months ended April 30, 2014 and 2015. The decrease was primarily due to higher billings and improved collections, partially offset by higher operating expenses as we continued to invest in the longer term growth of our business.
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Net cash used in operating activities was $29.1 million and $45.7 million, respectively, for fiscal 2013 and fiscal 2014. The increase was primarily due to higher operating expenses as we continued to invest in the longer term growth of our business, partially offset by increased billings and collections and timing of payments on our accounts payable.
Cash Flows from Investing Activities
Net cash used in investing activities of $102.7 million for the nine months ended April 30, 2015 was primarily due to $98.7 million purchases of investments and $16.1 million of purchases of property and equipment as we continued to invest in the longer term growth of our business, partially offset by $12.2 million of maturities of investments.
Net cash used in investing activities of $12.6 million for the nine months ended April 30, 2014 consisted of purchases of property and equipment.
Net cash used in investing activities of $9.3 million and $19.0 million, respectively, for fiscal 2013 and fiscal 2014 consisted of purchases of property and equipment.
Cash Flows from Financing Activities
Net cash provided by financing activities of $141.8 million for the nine months ended April 30, 2015 primarily consisted of $138.3 million of net proceeds from the sale of our Series E convertible preferred stock and $3.6 million of proceeds from exercises of stock options.
Net cash provided by financing activities of $103.1 million for the nine months ended April 30, 2014 primarily consisted of $101.0 million of net proceeds from the sale of Series D convertible preferred stock.
Net cash provided by financing activities of $104.2 million for fiscal 2014 primarily consisted of $101.0 million of net proceeds from the sale of Series D convertible preferred stock and $3.7 million of proceeds from exercises of stock options.
Net cash provided by financing activities of $37.1 million for fiscal 2013 primarily consisted of $32.9 million of net proceeds from the sale of Series C convertible preferred stock and $4.4 million of proceeds from exercises of stock options.
Debt Obligations
We have a revolving credit line with Comerica Bank which provides a total of $15.0 million available to borrow. This credit facility is secured by substantially all of our assets other than our intellectual property and contains certain financial and non-financial restrictive covenants, including a minimum liquidity ratio of 1.25 to 1.00, which we must comply with monthly. This credit facility expires in November 2015. As of April 30, 2015, we did not have any borrowings outstanding under this facility. For further information on our debt obligations, see note 5 of the notes to consolidated financial statements included elsewhere in this prospectus.
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Contractual Obligations
The following table summarizes our contractual obligations as of July 31, 2014:
Payments Due by Period | ||||||||||||||||||||
Total | Less than 1 year |
1 year to 3 Years |
3 to 5 Years | More than 5 Years |
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(In thousands) | ||||||||||||||||||||
Contractual Obligations: |
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Operating lease obligations |
$ | 6,873 | $ | 2,653 | $ | 2,403 | $ | 1,783 | $ | 34 | ||||||||||
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Total |
$ | 6,873 | $ | 2,653 | $ | 2,403 | $ | 1,783 | $ | 34 | ||||||||||
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In addition to the operating lease obligations as presented in the above table, we entered into various non-cancellable lease agreements globally during the nine months ended April 30, 2015 as we continue to expand our business. As of April 30, 2015, our outstanding non-cancellable lease obligations totaled $19.7 million and the associated payments are made through fiscal 2019.
From time to time, we make commitments with our contract manufacturer, which consist of obligations for on-hand inventories 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 manufacturer for non-standard components when and if quantities exceed our future demand forecasts Our historical charges have not been material. As of April 30, 2015, we had $1.0 million of purchase commitments with our third-party hardware appliance manufacturer. As of July 31, 2014, we did not have any material purchase commitments with our third-party hardware appliance manufacturer.
As of July 31, 2014 and April 30, 2015, 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 since it is unclear when these liabilities will be paid.
Off-Balance Sheet Arrangements
As of July 31, 2014 and April 30, 2015, 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.
Segment Information
We have one primary business activity and operate in one reportable segment.
Quantitative and Qualitative Disclosures About Market Risk
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.
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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 greatly 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 exchanges rates applicable to our business would not have had a material impact on our historical consolidated financial statements.
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, certificates of deposit and corporate bonds. Such fixed and floating interest-earning instruments carry a degree of interest rate risk. Fixed income securities may have their fair market value adversely impacted due to 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.
We have a revolving credit line, which provides up to $15.0 million available for us to borrow. Borrowings under the revolving credit line bear floating interest rates equal to Comericas prime referenced rate plus 1% per annum, but not below 3.5% per annum. As of April 30, 2015, we did not have any borrowings outstanding under our revolving credit line. The effect of a hypothetical 100 basis point change in interest rates applicable to our borrowings would not have had a material impact on our operating results and cash flows. This credit line expires in November 2015.
We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure.
Critical Accounting 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 consists of hardware combined with software and software-only revenue, and (ii) support and service revenue which includes post-contract customer support, or PCS, and professional services. Revenue is recognized when all of the following criteria are met:
Persuasive evidence of an arrangement exists. We rely on sales agreements and purchase orders to determine the existence of an arrangement.
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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 determinable based on the payment terms associated with the transaction. Payment from partners is not contingent upon 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, if 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. Since we have not established VSOE for any of our deliverables and TPE typically cannot be obtained, we typically allocate consideration to all deliverables based on BESP. 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 factors such as customer demographics, costs to manufacture products or provide services, pricing practices and market conditions.
Commissions
Commissions consist of direct and incremental costs paid to our sales force related to customer orders. Commissions are expensed over the same period that revenue is recognized from the related customer order. Deferred commissions are recoverable through the revenue streams that will be recognized under the related orders. Amortization of deferred commissions is included in sales and marketing expense in the consolidated statements of operations.
Convertible Preferred Stock Warrant Liability
We account for freestanding warrants to purchase shares of our convertible preferred stock as liabilities in the consolidated balance sheets at their estimated fair value. The fair value of the warrants is estimated using the Black-Scholes-Merton, or Black-Scholes, option-pricing model and is subject to re-measurement at fair value at each reporting date. Changes in the estimated fair value of the warrants are recorded in the consolidated statements of operations within other expensenet. We will continue to adjust the preferred stock warrant liability for changes in fair value until the earlier of conversions, exercise or expiration of the warrants. Upon the conversion of the underlying preferred stock to common stock in connection with an initial public offering, or IPO, the preferred stock warrants will become warrants to purchase common stock, the related preferred stock warrant liability will be re-measured to its then fair value and will be re-classified to additional paid-in capital, and subsequently we will cease to record any related fair value adjustments.
Income Taxes
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
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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 to amounts that are more likely than not to be realized.
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.
Stock-Based Compensation
Stock-based compensation expense is measured and recognized in the financial statements based on the fair value of the awards granted. The fair value of a stock option is estimated on the grant date using the Black-Scholes option-pricing model. The fair value of an RSU is measured using the fair value of our common stock on the date of the grant. Stock-based compensation expense is recognized, net of forfeitures, over the requisite service periods of the awards, which is generally four years.
Our use of the Black-Scholes option-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-pricing model represent managements best estimates. These estimates involve inherent uncertainties and the application of managements 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. As our stock is not publicly traded, we estimate the fair value of common stock as discussed in Common Stock Valuations below.
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 a 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.
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We must also estimate a forfeiture rate to calculate the stock-based compensation expense for our awards. Our forfeiture rate is based on an analysis of our actual forfeitures. We will continue to evaluate the appropriateness of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover and other factors. Quarterly changes in the estimated forfeiture rate can have a significant impact on our stock-based compensation expense as the cumulative effect of adjusting the rate is recognized in the period the forfeiture estimate is changed. Higher revised forfeiture rate than previously estimated will result in an adjustment that will decrease the stock-based compensation expense recognized in the consolidated statement of operations. Lower revised forfeiture rate than previously estimated will result in an adjustment that will increase the stock-based compensation expense recognized in the consolidated statement of operations.
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.
We have granted stock options and RSUs that will vest upon satisfaction of both service and performance conditions, together referred to as the performance stock awards. The service condition of the performance stock awards is satisfied over the vesting term but the performance condition will be satisfied upon a liquidity event, IPO or a change of control. As of April 30, 2015, we had a total of approximately $42.8 million of unrecognized stock-based compensation expense, net of estimated forfeitures, related to the performance stock awards, of which none had been recognized as satisfaction of the performance condition is not deemed probable. In the quarter in which this offering occurs we expect to recognize $ million of stock-based compensation expense related to the performance stock awards as the satisfaction of the performance condition will be deemed probable. Additionally, we will begin to record stock-based compensation expense related to the performance stock awards for the portion of the awards for which the service condition has not been satisfied over the remaining vesting term of the awards. In addition to the performance stock awards, we had a total of approximately $50.0 million of unrecognized stock-based compensation expense, net of estimated forfeitures, as of April 30, 2015, which is expected to be recognized over a weighted-average period of 3.3 years.
Upon the settlement of RSUs with both service and performance conditions, or the performance RSUs, granted to our executive officers, we plan to undertake a net settlement of the performance RSUs and remit income taxes on behalf of the holders of the performance RSUs at the applicable minimum statutory rates. Based on the performance RSUs outstanding as of April 30, 2015 for which the service condition had been satisfied, assuming that the performance condition had been satisfied on the date of the settlement and the price of our common stock at the time of settlement was equal to $ , which is the midpoint of the range on the cover of this prospectus, we estimate that our tax obligation on the initial settlement date would be approximately $ million in the aggregate. However, depending on our closing stock price on the vesting date, which is also the settlement date, the amounts of actual tax obligation on the settlement date could materially differ from the tax obligation as previously estimated. Following the initial settlement date, the performance RSUs will begin to vest in accordance with the service condition, and the tax obligations due on each such settlement date will depend on the price of our common stock on each such settlement date.
Common Stock Valuations
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. In the absence of a public trading market,
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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 as of the date of each option grant, including the following factors:
| contemporaneous valuations performed by independent third-party valuation firms; |
| the prices, rights, preferences and privileges of our convertible preferred stock relative to those of our common stock; |
| the lack of marketability of our common stock; |
| our actual operating and financial performance; |
| current business conditions and projections; |
| our history and the timing of the introduction of new products and services; |
| our stage of development; |
| the likelihood of achieving a liquidity event, such as an initial public offering or a merger or acquisition of our business given prevailing market conditions; |
| the illiquidity of stock-based awards involving securities in a private company; |
| the market performance of comparable publicly-traded companies; |
| recent private stock sales transactions; and |
| U.S. and global capital market conditions. |
In valuing our common stock, the fair value of our business, or Enterprise Value, was determined using an income approach and a market approach, which are both considered highly complex and subjective valuation methodologies. The income approach estimates the fair value of a company based on the present value of the companys future estimated cash flows and the residual value of the company beyond the forecast period. These future cash flows, including the cash flows beyond the forecast period for the residual value, are discounted to their present values using an appropriate discount rate, to reflect the risks inherent in the company achieving these estimated cash flows. We used the guideline public company method in applying the market approach. The guideline public company method is based upon the premise that indications of value for a given entity can be estimated based upon the observed valuation multiples of comparable public companies, the equity of which is freely-traded by investors in the public securities markets. The Enterprise Value determined was then adjusted to: (1) add back cash on hand and tax benefits from NOLs and (2) remove certain long-term liabilities in order to determine an equity value, or Equity Value.
The resulting Equity Value was then allocated to the common stock using combination of the option pricing method, or OPM, and a Probability Weighted Expected Return Method, or PWERM. The PWERM approach involves the estimation of multiple future potential outcomes for us, and estimates of the probability of each respective potential outcome. The common stock per share value determined using this approach is ultimately based upon probability-weighted per share values resulting from the various future scenarios, which include an initial public offering, merger or sale, or continued operation as a private company. Additionally, the OPM uses the preferred stockholders liquidation preferences, participation rights, dividend rights, and conversion rights to determine the value of each share class in specific potential future outcomes considered in the PWERM approach.
After the Equity Value is determined and allocated to the various classes of shares, a discount for lack of marketability, or DLOM is applied to arrive at the fair value of the common stock. A DLOM is applied based on the theory that as a private company an owner of the stock has limited opportunities to sell this stock and any such sale would involve significant transaction costs, thereby reducing overall
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fair market value. Our assessments of the fair value of the common stock for grant dates between the dates of the valuations were based in part on the current available financial and operational information and the common stock value provided in the most recent valuation as compared to the timing of each grant. For financial reporting purposes, we considered the amount of time between the valuation date and the grant date to determine whether to use the latest common stock valuation or a straight-line calculation between the two valuation dates. This determination included an evaluation of whether the subsequent valuation indicated that any significant change in valuation had occurred between the previous valuation and the grant date.
Once we are operating as a public company, we will rely on the closing price of our common stock as reported on the date of grant to determine the fair value of our common stock.
Based on the assumed initial public offering price per share of $ , which is the midpoint of the range set forth on the cover of this prospectus, the aggregate intrinsic value of our outstanding stock awards as of April 30, 2015 was $ million, of which $ million related to vested awards and $ million related to unvested awards.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2014-09, Revenue from Contracts with Customers. 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. We expect to adopt ASU 2014-09, as currently issued, which is effective for us beginning August 1, 2017, with early adoption prohibited. On April 1, 2015, the FASB voted to propose a one-year deferral to the effective date to August 1, 2018, but permits entities to adopt the original effective date if they choose. We are currently evaluating the impact that the adoption of this standard will have on our consolidated financial statements, if any.
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Our Mission
Our mission is to deliver invisible infrastructure and elevate IT to focus on the applications and services that power their business.
Overview
We provide a leading next-generation enterprise computing platform that converges traditional silos of server, virtualization and storage into one integrated solution. Our software-driven platform 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 have recently announced an expansion of our capabilities to provide our customers with the flexibility to selectively utilize the public cloud for suitable workloads and specific use cases by enabling seamless application mobility across private and public clouds. We have combined advanced web-scale technologies with elegant consumer-grade design to deliver a powerful computing platform that elevates IT organizations to focus on the applications and services that power their businesses. We refer to our platform as invisible infrastructure because it provides constant availability and low-touch management, enables application mobility across computing environments and reduces inefficiencies in IT planning.
Leading Internet companies and public cloud providers such as Google Inc., Facebook, Inc. and Amazon.com, Inc. have embraced convergence and distributed systems and implemented web-scale technologies in their proprietary operating environments. They took these steps because traditional siloed IT infrastructure architectures failed to deliver the levels of scalability and operational efficiency that their dynamic businesses required. To address these challenges, we have pioneered a converged web-scale architecture that can be easily deployed by organizations of any size to address the limitations of traditional IT infrastructure. Our enterprise computing platform also addresses the limitations of existing virtualization products, which often require days or weeks for simple provisioning or deployment tasks and limit the ability to migrate applications across computing environments such as different hypervisors, or software that allows multiple operating systems to share a single hardware host, containers, which are a method of virtualizing the operating system so that multiple applications and their dependent libraries can share the same Linux operating system instance, and public clouds.
Our solution, the Xtreme Computing Platform, or XCP, is comprised of two comprehensive software product families, Acropolis and Prism. XCP is delivered on commodity x86 servers, also referred to as nodes. These nodes can be joined to form clusters, permitting the pooling of resources across servers to increase overall system performance, capacity and resiliency. Acropolis includes our Distributed Storage Fabric that delivers efficient and high performance enterprise-grade data management features. Acropolis also includes our innovative Application Mobility Fabric that will enable application placement, conversion and migration across hypervisors, and between public and private clouds. Prism delivers integrated virtualization and infrastructure management, robust operational analytics and a suite of one-click administration capabilities.
XCP is simple, scalable and cost-effective, and also facilitates application mobility across computing environments. Our platforms extensive automation and convergence of disparate silos into a single system significantly enhances IT agility and scalability, enabling organizations to scale infrastructure incrementally from a few to thousands of nodes. We estimate, based on a model validated by IDC, that our solution can reduce cost of ownership by up to 60% compared to traditional infrastructure for a broad set of workloads and up to approximately 30% compared to public cloud
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offerings for predictable workloads.1 Our software also provides customers with flexibility and choice of where applications run, reducing their dependence on a specific vendor, which is commonly known as vendor lock-in.
Our solutions address a broad range of workloads, including enterprise applications, databases, virtual desktop infrastructure, or VDI, unified communications and big data analytics. We have end-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 to service providers who utilize our platform to provide a variety of cloud-based services to their customers. We had a broad and diverse base of over 1,400 end-customers as of April 30, 2015, including over 140 Global 2000 enterprises. Representative end-customers include Activision Blizzard, Inc., Best Buy Co., Inc., Covance Inc., Jabil Circuit, Inc., Kellogg Co., U.S. Department of Defense Office of the Secretary of Defense, Nintendo Co., Ltd., Nordstrom, Inc. and Total S.A.
We have experienced significant growth in recent periods, with total revenue of $30.5 million and $127.1 million for fiscal 2013 and fiscal 2014, respectively, representing year-over-year growth of 316%. We have continued to make significant investments as we scale our business, including in developing and improving our platform, expanding our sales and marketing capabilities and global coverage, and in expanding our general and administrative resources to support our growth. As a result, we had net losses of $44.7 million and $84.0 million for fiscal 2013 and fiscal 2014, respectively. Net cash used in operating activities was $29.1 million and $45.7 million for fiscal 2013 and fiscal 2014, respectively. For the nine months ended April 30, 2014 and 2015, our total revenue was $88.0 million and $167.3 million, respectively, representing year-over-year growth of 90%. As we continued to make investments, we had net losses of $54.6 million and $88.9 million for the nine months ended April 30, 2014 and 2015, respectively. For the nine months ended April 30, 2014 and 2015, net cash used in operating activities was $28.8 million and $20.3 million, respectively. As of April 30, 2015, we had an accumulated deficit of $236.2 million.
Industry Background
Emergence and adoption of web-scale IT
The resiliency, agility, flexibility and scalability of IT capabilities have become significant competitive differentiators and play an important role in driving business success. Internet companies in particular faced extreme dependency on IT as they aggressively competed for first-mover advantage in markets that often presented minimal barriers to entry for new competitors. These companies required IT infrastructure that would enable rapid development and deployment of new applications and services, effectively handle unpredictable and large-scale usage demands and minimize capital
1 | Percentages are based on an internal model prepared by us using available industry data and our estimates on IT spending, which data and calculations were validated by IDC, and reflect a three-to-five year cost of ownership for traditional infrastructure and four year cost of ownership for public cloud offerings. The cost of ownership model for traditional infrastructure estimates typical capital expenditures (storage, compute, networking and software costs) and operating expenses (support, facilities and management costs) for a mid-size server virtual machine required for mid-to-large sized enterprises using these solutions and compares them to the same costs for a comparable Nutanix solution. The cost of ownership model for the public cloud estimates assumes a predictable server workload over four years, typical compute, storage, cloud monitoring charges and basic level support costs, and compares those costs to the capital expenditures and operating expenses for a comparable Nutanix solution. Calculations for both models are based on U.S.-based list pricing with assumptions related to typical discount rates in the industry, derived from either published price lists or vendor quotes. IDCs validation of the cost of ownership models, which was commissioned by us, included a review and validation of the cost of ownership calculation methodology as well as validating the cost assumptions underlying the calculations. See Risk FactorsOur estimates of end-customer cost savings may not be indicative of the actual benefits that end-customers experience in the future. |
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and operating expenditures. Traditional IT infrastructure solutions failed to meet these requirements, and as a result, these companies developed their own infrastructure stacks built with web-scale architectures, which are based on advanced distributed systems technology. These infrastructure stacks, driven by powerful proprietary software, provided greater agility, highly automated operations, predictable and linear scalability and lower total cost of ownership.
Today, organizations of all sizes across all industries are seeking to leverage IT capabilities as a competitive advantage and are also experiencing the challenges associated with traditional IT solutions. As a result, the benefits of web-scale architectures introduced by leading Internet companies and public cloud providers are now desired by many IT organizations. According to Gartner, by 2017, web-scale IT will be an architectural approach found operating in 50% of Global 2000 enterprises.2
Limitations of existing enterprise IT infrastructure
Traditional IT infrastructure presents significant architectural challenges related to existing storage and virtualization technologies, limiting the IT organizations ability to deliver applications and services fast and efficiently.
Limitations of storage
Traditional centralized storage requires complex and expensive storage networks that connect storage to servers where applications run. This separation of data storage from the applications has slowed performance, increased costs, added administrative overhead and limited scalability. The adoption of flash has magnified the architectural limitations of centralized storage because placing flash devices outside the server diminishes the expected performance gains. Early efforts to alleviate the challenges of centralized storage involved placing hard drives or flash devices in servers, but these offerings failed to gain widespread adoption due to the lack of a scale-out data fabric that can (i) pool resources across many servers in a cluster, (ii) deliver high levels of resiliency and (iii) address critical data management requirements.
Also, managing storage policies, such as compression, deduplication and replication, has been complicated due to the wide adoption of virtualization. Virtualization enables deployment of multiple applications on a single server, but paradoxically depends on centralized storage arrays that are designed to operate with a single application on each server. This incongruity results in storage policies that are not mapped directly to virtualized applications, causing inefficient storage management and wasteful overprovisioning.
Limitations of virtualization
Todays virtualization products, comprised primarily of hypervisors and associated management, were generally designed to operate with disparate silos of infrastructure. As a result, these products often require days or weeks for simple application and infrastructure provisioning or deployment tasks. Additionally, virtualization was not designed with the ability to migrate applications across different hypervisors or emerging computing environments such as containers and public clouds. This is creating cost and complexity challenges as more enterprises seek to operate multi-vendor hypervisor environments and adopt containers and hybrid cloud computing. Lack of application mobility across these environments has resulted in silos of computing that limit agility, drive up costs and result in vendor lock-in.
2 | See Gartner note (1) in the section titled Market and Industry Data. |
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Challenges resulting from limitations of existing enterprise infrastructure options
Limitations of traditional storage and virtualization products are creating a number of challenges for IT organizations, including:
| Lack of agility: With traditional enterprise computing infrastructure, different silos of servers, virtualization, storage and networks are typically managed by specialist IT teams as each silo has its own proprietary operating system, hardware platform and management interface. These products require extensive training, experience and certifications to effectively operate them, restricting IT professionals from working across silos. Every time infrastructure is provisioned to support new application requirements, these different teams must coordinate and align their workflows, significantly reducing the agility of the IT function. |
| Diminishing performance as infrastructure scales: Traditional infrastructure places data storage in dedicated, performance-bound appliances that are connected to servers over storage networks. In these environments, scaling capacity by adding more hard drives or flash devices does not improve performance because the storage controllers that read and write data are often fixed at the time of initial deployment. Managing an ever-growing volume of data with the same capacity storage controllers reduces response times and negatively impacts application performance. Expanding the storage controllers typically requires an expensive and time-consuming forklift upgrade (i.e., requiring an entire new system purchase and migration of data from the prior system). |
| Costly overprovisioning and manual operations: Due to their lack of scalability and complexity of deployment, servers and storage arrays are typically overprovisioned for longer-term peak capacity and remain underutilized for extensive periods. Furthermore, existing virtualization products are often sold under restrictive enterprise license agreements, which may lead to significant underutilization of software licenses and higher costs. Both of these factors can significantly impact infrastructure IT budgets. These traditional products also require extensive manual administration for routine tasks such as upgrades and maintenance, driving up recurring operating expenses. According to IDC, IT administrators spend approximately 80% of their time just on maintaining the existing infrastructure. This keeps IT organizations from focusing on the applications and services that drive their business. |
| Closed architectures that prevent mobility of applications and adoption of new technologies: Traditional infrastructure suppliers have created vendor lock-in by providing closed architecture technologies that often do not interoperate well with other enterprise computing environments. This makes application portability difficult while also limiting adoption of new technologies. With the pace of innovation in datacenter technologies, these closed architectures can significantly harm customers and reduce their competitiveness. |
Limitations of full public cloud adoption
While the public cloud offers significant agility, scalability and economic benefits over traditional infrastructure, wide adoption has been challenging for many organizations due primarily to the lack of control over infrastructure service levels, data integrity and compliance. Public cloud providers typically offer homogenous layers of infrastructure and do not provide control or granularity to customize specific services to deliver reliable application performance and availability for traditional enterprise workloads. Also, customers are largely dependent on public cloud providers to ensure data security and compliance with regulatory requirements, which are further complicated by providers operating across many jurisdictions and being subjected to local laws, increasing the potential for compliance risk.
Usage of public clouds can also result in vendor lock-in, as most public cloud providers do not easily allow portability of applications and data to alternative providers or to enterprise private clouds
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as requirements, costs and services levels change. Further, removing an application from the public cloud is expensive, time consuming and creates a high risk of downtime. These limitations create disparate computing environments that reduce flexibility for customers and require additional layers of management to operate.
Our Solution
Our Xtreme Computing Platform, or XCP, is based on powerful distributed systems architecture and converges server, virtualization and storage resources into one integrated platform delivered on commodity x86 servers. Our integrated solution enables generalist IT professionals to manage one operating system and management platform, which reduces administrative time and costs. XCP combines the benefits of the public cloud such as agility, scalability and pay-as-you-grow economics with the enterprise requirements of application mobility, security, data integrity and control. XCP is comprised of two comprehensive software product families, Acropolis and Prism, which provide web-scale resiliency, agility, scalability and flexibility. The diagram below represents XCPs capabilities and the different computing environments it is intended to support.
* | Under development. |
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Acropolis includes our Distributed Storage Fabric that replaces traditional storage arrays and delivers efficient and high performance enterprise-grade data management. Acropolis also includes our innovative Application Mobility Fabric that will enable increasing levels of application placement, conversion and migration across our platform and public clouds. Additionally, the built-in Acropolis Hypervisor can replace expensive third-party hypervisors and eliminate an additional infrastructure silo. With Acropolis, our end-customers can benefit from application mobility, simplicity of use and up to an 80% reduction in virtualization costs.3
Built with consumer-grade design, Prism delivers integrated virtualization and infrastructure management, robust operational analytics and one-click administration capabilities. Prism allows routine IT operations that are typically manual and cumbersome to be completed in one-click, including capacity planning, provisioning of new applications and resources, troubleshooting and software upgrades. Prism also offers a broad set of APIs for integration with third-party cloud management and orchestration software.
Key benefits of our solution include:
| Agility: Our platform converges several disparate silos of server, virtualization and storage infrastructure into a unified solution that can be deployed and managed as a single system to simplify operations. We have also developed extensive automation capabilities to eliminate time consuming and error-prone tasks, while implementing consumer-grade design into our intuitive user interface for Prism to simplify and streamline common IT administrator workflows. With our solution, infrastructure can be provisioned in minutes with one click by a single IT administrator, compared to traditional infrastructure that can take several days and dozens of discrete tasks executed by separate IT administrators. |
| Scalability: Our platform is a distributed system and deployments can start with only a few nodes and scale to thousands of nodes without degradation in performance per node. Our Acropolis Distributed Storage Fabric places software-based storage controllers in every node within a cluster to deliver predictable and linear scalability. Our customers can grow their clusters in flexible increments by adding any number of nodes at a time depending on their capacity and performance requirements. |
3 | Percentages are based on an internal model prepared by us using available industry data and our estimates on virtualization costs. Our internal model compares the software license and support costs of a virtualization solution offered by VMware vSphere with the built-in virtualization solution in the Acropolis Hypervisor for two typical customer scenarios: mid-size enterprise customers requiring core virtualization functionality to implement server consolidation and large enterprise customers that need a virtualization solution to run enterprise applications in production environments. Calculations are based on U.S.-based list pricing, with no assumptions made on discounting in order to make an equivalent price comparison. See Risk FactorsOur estimates of end-customer cost savings may not be indicative of the actual benefits that end-customers experience in the future. |
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| Lower total cost of ownership: We estimate, based on a model validated by IDC, that our solution can reduce cost of ownership by up to 60% compared to traditional infrastructure for a broad set of workloads and up to approximately 30% compared to public cloud offerings for predictable workloads.4 We can deliver a significant reduction in operating expenses resulting from personnel, power and rack space savings. Our solutions also reduce capital expenditure as a result of more precise infrastructure provisioning, reduction in excessive spend on virtualization software and elimination of the storage area network. |
| Flexible application mobility: We design our software to provide a high degree of flexibility and choice of where applications run, preventing vendor lock-in to any specific compute, storage or network hardware, hypervisor or public cloud. We intend to enable customers to make application placement decisions based entirely on performance, scalability and economic considerations, thereby accelerating speed of implementation and reducing cost. With application mobility, our customers will be able to selectively adopt the public cloud for specific workloads and certain scenarios, while preserving the flexibility to bring those workloads back on-premise or move them to different public cloud providers should requirements or costs change. |
| Secure platform: We embed security features into our hardened software solution and we strengthen our platform by employing two-factor authentication and encryption as customer configurable system options. We continually enhance the security of our platform with fully-automated testing and threat modeling that regularly assesses our systems for attack vectors to significantly decrease the threat posture. Additionally, our platforms self-healing capabilities isolate security baseline misconfigurations and allow for automated remediation of the system. |
As a result of these benefits, our customers are able to elevate their IT innovation by freeing up valuable resources and budgets that may otherwise be spent on maintaining IT infrastructure and reallocating those resources toward developing new applications and services that power their businesses.
Competitive Strengths
We believe the following strengths will allow us to extend our market leadership and broaden adoption of our solutions:
| Purpose built enterprise computing platform based on web-scale engineering: Our platform leverages sophisticated web-scale technologies, enhanced by our proprietary innovations, to build highly reliable distributed systems that are fast, efficient and scalable. Our extensible platform can be used to converge additional infrastructure services, thereby delivering the benefits of highly efficient and reliable distributed systems to these services. |
4 | Percentages are based on an internal model prepared by us using available industry data and our estimates on IT spending, which data and calculations were validated by IDC, and reflect a three-to-five year cost of ownership for traditional infrastructure and four year cost of ownership for public cloud offerings. The cost of ownership model for traditional infrastructure estimates typical capital expenditures (storage, compute, networking and software costs) and operating expenses (support, facilities and management costs) for a mid-size server virtual machine required for mid-to-large sized enterprises using these solutions and compares them to the same costs for a comparable Nutanix solution. The cost of ownership model for the public cloud estimates assumes a predictable server workload over four years, typical compute, storage, cloud monitoring charges and basic level support costs, and compares those costs to the capital expenditures and operating expenses for a comparable Nutanix solution. Calculations for both models are based on U.S.-based list pricing with assumptions related to typical discount rates in the industry, derived from either published price lists or vendor quotes. IDCs validation of the cost of ownership models, which was commissioned by us, included a review and validation of the cost of ownership calculation methodology as well as validating the cost assumptions underlying the calculations. See Risk FactorsOur estimates of end-customer cost savings may not be indicative of the actual benefits that end-customers experience in the future. |
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| Commitment and passion for elegant design: Our passion and appreciation for elegant design inspires us to deliver uncompromisingly simple user experiences. This passion is reflected throughout our platform and customer lifecycle, from planning and sizing, to procurement and deployment, and through scaling and maintenance. |
| Breadth of engineering expertise: We have assembled a strong engineering group with experience spanning many technology domains, including distributed systems, virtualization, storage, networking, enterprise applications and security. Some of our employees are widely recognized in the industry for their expertise and contributions to advancing research and development in their fields. We believe our engineering prowess will enable us to continue innovating rapidly, developing elegant solutions to difficult technical challenges and addressing emerging market opportunities. |
| Focus on customer delight: Our objective is to exceed our customers expectations throughout the procurement and support lifecycle. Our award-winning support organization is comprised of highly trained and certified engineers who are able to quickly diagnose and resolve customer support issues, including those caused by independent third-party software or hardware that is deployed in conjunction with our platform. This focus on delighting our customers has led to high customer loyalty, strong customer references and accelerated repeat purchases. Over the last year, we have achieved an average Net Promoter Score of 90, which we believe is among the industry best for IT infrastructure companies based on comparisons against Net Promoter Scores that have been publicly announced by our competitors and peers.5 Additionally, as of April 30, 2015, 80% of our end-customers who have been with us for 18 months or more have made a repeat purchase, and repurchase orders are often a multiple of the original order value. |
| Diverse and global business: Our platform addresses a common set of critical IT issues which are pervasive across a broad set of workloads. Additionally, our solution can be deployed in both core enterprise datacenters and in sprawling remote and branch office environments. This allows us to sell across a broad range of industries, customer segments and geographies. We have taken advantage of this large opportunity by rapidly expanding our footprint, and we have acquired a diverse customer base across more than 70 countries, with international revenue comprising 32% of total revenue for the nine months ended April 30, 2015. |
| Unique culture: Our culture is based on building a deep understanding of our customers, partners and employees that we believe makes us an attractive company to work with and for. We also foster extensive collaboration and open communication, crowdsourcing of ideas and frequent collection of input that we believe leads to rapid and improved decision-making. We embrace constant experimentation and continually challenge ourselves to extend our competitive edge. The combination of our culture and talented employees has enabled us to solve very difficult technical and business challenges. |
5 | A Net Promoter Score is a measure of customer loyalty ranging from negative 100 to 100 based on the standard question: On a scale of 0 to 10, with 10 being extremely likely, how likely are you to recommend Nutanix to a friend or colleague? Our Net Promoter Score is based on end-customers who respond to the survey question, which is automatically generated, when we close a product support ticket, and is automatically calculated and tracked by our support analytics system. Our Net Promoter Score is calculated by using the standard methodology of subtracting the percentage of end-customers who respond that they are not likely to recommend Nutanix from the percentage of end-customers that respond that they are extremely likely to recommend Nutanix. |
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Our Market Opportunity
Our market opportunity is to replace traditional IT products, including x86 servers, storage systems, virtualization software, cloud management software and systems management software. We believe these categories of traditional IT spending are undergoing significant disruption and budgets are being reallocated to address new technical and business requirements. We capture spend from the following markets:
| The x86 server market, which according to Gartner, is expected to be $44.5 billion in 20156 |
| The storage systems markets, which according to IDC, is expected to be $41.5 billion in 2015 |
| The virtualization software market, which according to Gartner, is expected to be $4.1 billion in 20157 |
| The cloud management software market, which according to IDC, is expected to be $3.1 billion in 2015 |
| The systems management software market, which according to IDC, is expected to be $20.3 billion in 2015 |
Beyond these five markets, IT budgets are also being directed to public cloud services. Compute and storage, along with associated virtualization and management services, delivered through the public cloud is often described as Infrastructure as a Service, or IaaS. Gartner estimates this market to be $16.5 billion in 2015.8 We believe our XCP provides a compelling alternative to IaaS, while also
6 | See Gartner note (3) in the section titled Market and Industry Data. |
7 | See Gartner note (2) in the section titled Market and Industry Data. |
8 | See Gartner note (4) in the section titled Market and Industry Data. |
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providing in the future a seamless path to adopt IaaS for specific workloads, which could influence public cloud adoption patterns and enable us to participate in this growing opportunity.
Some industry research firms have characterized our initial products as hyperconverged infrastructure, which is the first step in our journey to deliver invisible infrastructure in that we make storage invisible. This is a market in which we are the leader and remain at the forefront of innovation. According to IDC, during the first half of 2014 we held 52% of the hyperconverged market share. Our technology leadership is a key driver of our rapid revenue growth as we continue to replace traditional infrastructure and participate in the re-allocation of IT budgets towards our technology. According to IDC, hyperconverged systems are expected to grow from $807 million in 2015 to $3.9 billion in 2019, representing a 48% CAGR. Because of the numerous benefits of our solutions, we believe hyperconverged infrastructure could replace traditional infrastructure offerings at a faster rate than IDC predicts and result in evolving market definitions.
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 all virtualized workloads and multiple hypervisors. In June 2015, we announced Acropolis, which extended our storage fabric, and added new capabilities, including built-in virtualization and application mobility. We also announced the latest version of Prism, which delivers advanced infrastructure analytics and management. We intend to continue to invest in technologies such as virtualization, containers, cloud management, infrastructure analytics and networking 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 1,400 end-customers. We believe this represents a small portion of our potential end-customer base given the breadth of our solutions. We intend to grow our base of end-customers by increasing our investment in sales and marketing, leveraging our network of channel partners and furthering our international expansion. One area of specific focus will be on expanding our position within the Global 2000, where we currently have over 140 end-customers. |
| 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 allows 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. We intend to continue to pursue follow-on opportunities within our large and growing end-customer base. |
| Deepen engagement with current partners and establish additional channel and OEM partners 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 have established an OEM partnership with Dell and believe that OEMs can augment our routes to market to accelerate our growth. We believe there is a significant opportunity to grow our sales with our partners. We are investing aggressively in sales enablement and co-marketing with our partners, which we believe will provide meaningful leverage to our sales organization. We also intend to attract and engage new channel and OEM partners around the globe. |
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Our Technology
XCP converges server, virtualization and storage into one software-driven integrated platform. XCP is designed to run on commodity x86 servers with off-the-shelf central processing units, or CPUs, memory and storage media. 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. XCP is 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 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 common enterprise storage services across multiple storage protocols and hypervisors. |
| 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. |
| Acropolis Hypervisor: Our built-in Acropolis Hypervisor is based on widely-used open source hypervisor technology known as Linux KVM, and is enhanced with security, self-healing capabilities and robust virtual machine, or VM, management. |
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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. The rich set of capabilities delivered by Acropolis include:
| Data protection: Acropolis DSF creates application-centric clones (full copies of the data within a VM) and snapshots (capturing subsequent changes from an initial clone copy) for fine-grained data protection without sacrificing performance or space efficiency. Our innovative Shadow Clones feature provides data consistency across multiple virtual machines without sacrificing performance in multi-reader scenarios due to an innovative distributed caching mechanism. Our disaster recovery, backup and Metro Availability (also known as stretch clustering) features are simple to configure and implement with only a few clicks in our Prism management interface. These features utilize compression techniques and only send fine-grained changes in order to minimize data transfer over low bandwidth wide area links. |
| Intelligent data tiering: Flash devices are used both as a cache and as a persistent data tier in our system. Utilizing our MapReduce massively parallel framework, data is intelligently placed in the optimal storage tier (memory, flash devices and hard drives) to yield maximum performance. This enables us to abstract the underlying storage media and apply different storage technologies in the system without complex administration. |
| Inline and post-process deduplication: Acropolis DSF enables deduplication across the entire system to reduce the storage footprint required and improve performance. Inline deduplication in the content cache, performed before any data is written to disk, can yield significant capacity savings while accelerating performance for configured storage. Post-process deduplication, done after data is written to a disk, is performed and distributed across all nodes in the cluster using MapReduce to minimize system overhead on any individual node. |
| Inline and post-process compression: Acropolis DSF uses an optimized algorithm to increase the effective storage capacity of the system by performing fine-grained compression for increased efficiency and greater capacity savings. |
| Erasure coding: Our proprietary EC-X technology is one of the industrys first commercial implementations of erasure coding in a hyperconverged infrastructure platform. This technology can increase effective storage capacity by up to 70%, from the prior release of our software. |
| Thin provisioning: Acropolis DSF only allocates physical storage when required by a workload instead of allocating large blocks of physical storage to each workload before storage is actually needed. |
| Encryption: We leverage our distributed systems architecture to provide the most scalable encryption performance in our platform by invoking key management across all available nodes in the system. We utilize commodity hardware such as self-encrypting hard drives to implement transparent encryption of all data-at-rest within our system. Management of encryption keys is performed by third-party software and our technology invokes in a highly scalable parallel manner from the available nodes in the system to provide the highest possible performance. |
| Multi-protocol support: We implement standard storage protocols such as NFS, iSCSI and SMB to deliver broad coverage of enterprise applications and enable our customers to utilize one infrastructure platform for all of their workloads. |
| Scalable NoSQL metadata: We leverage a distributed database system called Cassandra, which we have extensively customized to deliver strict consistency of updates, higher reliability over noisy networks and dramatically improved CPU consumption in low-compute cluster environments such as branch office closets and factory floors. We use lockless techniques to update multiple copies of |
metadata to dramatically improve scalability of our clusters. This approach also helps us grow and |
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shrink clusters without causing global redistribution of keys metadata perturbations that can become one of the biggest challenges in large cluster environments. |
| Rolling upgrades: Our data, metadata, and inter-service communication use a web-scale self-describing format called protobufs to support backward compatibility and inherent versioning of on-disk data and over-the-network protocols. Acropolis software upgrades can, therefore, be done in a piecemeal rolling fashion without requiring the cluster to be taken offline. Similarly, petabytes of data and terabytes of metadata can be upgraded incrementally over time without disruption to operations. |
| Auto-pathing: Because the Acropolis DSF and AMF run outside of the hypervisor kernel, local applications can survive planned or unplanned downtime of the software-based storage controller. We use ZooKeeper, a web-scale cluster manager service, to detect downtimes, and in the event of storage controller unavailability, we re-route storage traffic to other controllers in the cluster using a software-based patent-pending technique named auto-pathing. This capability also enables rolling (non-disruptive) upgrades in the system. |
| Data locality and intelligent application placement: Because applications and our storage controller run on the same instance of the hypervisor, we deliberately decouple virtualization tasks from the storage fabric so that there is no change to the existing compute-side workflows. With Acropolis DSF and AMF, the onus of detecting application migration and high availability is left to unique auto-detection and leadership-election algorithms that we implement using ZooKeeper. This technique also helps us in moving hot data closer to the application or vice-versa. Data locality is at the heart of our platform, and helps us scale without generating noisy neighbors that often overwhelm the network. |
| Multi-hypervisor operations and application mobility: Because our software runs outside the hypervisor kernel, we are able to support multiple hypervisors in both private cloud and public cloud environments. We provide support for heterogeneous computing environments within the same Acropolis DSF instance. Our software controllers can run on top of multiple hypervisors while being part of the same cluster, enabling us to develop a highly innovative and differentiated application mobility feature with Acropolis AMF. This feature will support high availability, disaster recovery, placement and intelligent resource scheduling across multiple hypervisors, including VMware ESXi and Microsoft Hyper-V, as well as our own Acropolis Hypervisor. Acropolis AMF will also allow migration from one hypervisor such as VMware ESXi to another hypervisor such as Acropolis Hypervisor. The underlying Acropolis DSF will be used to abstract out the storage dependencies and Acropolis AMF will automate the workflows of the discrete steps of file format conversion, driver injection and VM provisioning. |
| Hybrid cloud: We currently offer a feature named Cloud Connect that allows customers to back up application data to AWS. Cloud Connect is now part of Acropolis AMF, which will offer extended hybrid cloud capabilities such as disaster recovery and full application bursting to AWS, Microsoft Azure and other cloud providers. This will also support bi-directional application migration across customer datacenters and public clouds including the ability to move workloads back on-premise. |
| Built-in hypervisor with integrated management: Acropolis Hypervisor is based on open-source KVM technology, has been enhanced to support native support for iSCSI and is hardened with enterprise-grade security and self-healing mechanisms. It 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 and storage 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
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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 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. Users can precisely track infrastructure utilization across a distributed environment and add or remove nodes to any cluster in minutes. Software updates and patches can be executed non-disruptively on a rolling basis and do not require the cluster to be brought offline. Prism provides a suite of APIs for integration with third-party cloud management and orchestration systems.
The innovative and powerful capabilities delivered by Prism include:
| High performance management plane without a single point of failure: Prism is built using a scale-out NoSQL database that provides multiple resiliency and scalability benefits. For example, during rolling upgrades, Prism continues to be available as it leverages the underlying distributed NoSQL framework and is not dependent on any particular node. Also, Prism becomes more powerful as clusters grow because the statistics and configuration data are stored and queried in a distributed fashion. |
| Real-time search and analytics: Prism implements a scale-out analytics database that provides real-time monitoring and troubleshooting capabilities for the applications and hardware resources within XCP. It also provides advanced search capability by leveraging our proprietary machine learning technology with built-in heuristics and business intelligence to quickly analyze large volumes of historical and current system data to generate actionable insights for improving infrastructure performance. |
| Single pane of glass to manage heterogeneous computing environments: Prism unifies management of diverse appliance models, multiple hypervisors and specific elements of public cloud infrastructure, while maintaining the same elegant administrator experience. |
| Secure platform: Prism combines two-factor authentication, cluster lockdown and password policy compliance, with a security development lifecycle that is applied throughout product |
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development to help customers meet their security requirements. XCP is certified across a broad set of evaluation programs to ensure compliance with the strictest standards including FIPS 140-2 and Common Criteria. |
| Proactive infrastructure operations: Prism includes a feature named Pulse that proactively monitors the system health of XCP appliances and will identify hot spots in CPU or storage capacity usage, latency anomalies and likely-to-fail hardware components. This capability enables our support organization to anticipate potential technical issues, thereby providing higher levels of service and faster troubleshooting, while delivering more accurate capacity forecasting. |
The Prism planning tool shows how many days or weeks of capacity remain in the cluster given historical usage patterns:
Prism can be configured with personalized dashboards to provide summary views of cluster details appropriate for different administrators:
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Our Solutions: Each year since 2012 we have introduced several new appliance models designed and optimized for various use cases and workloads, ranging from the NX-1000 series, which is intended for remote branch office environments, to the all-flash NX-9000 series, which is intended for high-end databases and enterprise applications requiring the highest performance. Our software-driven solution is deployed on commodity x86 servers. Additionally, customers can buy our solutions as stand-alone software offerings and deploy the software on qualified commodity x86 servers. We offer our appliances in a variety of models, including entry level, mid-range, or high-end hardware configurations. Across the breadth of models we offer, our 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 terms of CPU, memory, flash devices, hard drives and networking interfaces to meet the specific requirements of customers workloads. Our appliances can be mixed and matched with different models in a cluster to provide maximum flexibility and address the requirement to scale storage and compute resources independently.
We also have an OEM partnership with Dell, which purchases our software and packages it with its hardware into the Dell XC Series. Dell provides the XC Series in a range of configurations and also sells associated support offerings, which we and Dell jointly support.
Acropolis is available in different software editions so that our end-customers can easily select the capabilities to meet their infrastructure needs.
| Starter: The 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 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. |
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| Ultimate: The Ultimate edition offers the complete suite of our software capabilities, including application mobility and 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. |
The complete suite of Prism capabilities is currently included with each Acropolis edition but we expect to license separate editions of Prism in the future.
Our Support Program
We offer technical support to our end-customers around the clock to meet their needs and four hour part replacement for end-customers who purchase our highest level of support. Our support centers are located around the world and are staffed by our employees. We offer technical support in the form of three different subscription and support programs, available in one, three or five-year packages:
| Basic (Gold): Our Gold Program is an economical choice for single-site or test and development environments that require support during business hours. End-customers receive telephone and web support, and next business day on-site part replacement. |
| Production (Platinum): Our Platinum Program is designed for mid-size to large enterprises that operate business-critical operations. The Platinum Program entitles end-customers to 24 hour support, priority call and case handling and next business day on-site part replacement. |
| Mission Critical (Platinum Plus): Our Platinum Plus Program is designed for large enterprises that operate our products in mission-critical environments. The Platinum Plus 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-Customers
Our solutions address a broad range of workloads, including enterprise applications, databases, VDI, unified communications and big data analytics. We have end-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 to service providers who utilize our platform to provide a variety of cloud-based services to their customers. We had a broad and diverse base of over 1,400 end-customers as of April 30, 2015, including many Global 2000 enterprises. Representative end-customers include Activision Blizzard, Inc., Best Buy Co., Inc., Covance Inc., Jabil Circuit, Inc., Kellogg Co., U.S. Department of Defense Office of the Secretary of Defense, Nintendo Co., Ltd., Nordstrom, Inc. and Total S.A. Carahsoft Technology Corp., a distributor to our end-customers, represented 38%, 23%, 26% and 24% of our total revenue for fiscal 2013, fiscal 2014 and for the nine months ended April 30, 2014 and 2015, respectively. For the nine months ended April 30, 2015, Promark Technology Inc., another distributor to our end-customers, also represented 15% of our total revenue.
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 indicated. Our count of end-customers does not include partners to which we have sold product for their own demonstration purposes. A single organization or customer may represent multiple end-customers for separate divisions, segments or subsidiaries.
Sales and Marketing
We primarily engage our end-customers through our global sales force who directly interact with key IT decision makers while also providing sales development, opportunity qualification and support to
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our channel partners. We have established relationships with 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-customers through our OEM partner Dell, which purchases our software and packages it with its hardware into the Dell XC Series. Dell products incorporating our software are sold through Dells direct sales force and channel partners. We work with Dell to ensure interoperability between our software and Dells hardware. We also provide training to Dells support personnel, and we coordinate with Dell to collectively resolve support issues for end-customers.
Our channel partners, including Dell, 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 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 communities programs. For example, in June 2015 we hosted our first .NEXT Conference, where approximately 1,000 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-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 and Seattle, Washington. We plan to dedicate significant resources to our continued research and development efforts.
Research and development expense was $16.5 million and $38.0 million for fiscal 2013 and fiscal 2014, respectively.
Manufacturing
We outsource the assembly of our hardware products to Super Micro Computer, Inc., which assembles and tests our products. It generally procures the components used in our products directly from third-party suppliers. The initial term of our agreement expires in May 2017, with the option to terminate upon each annual renewal thereafter. Our third-party logistics partners handle shipment of our products. Distributors handle fulfillment and shipment for certain end-customers, but do not hold inventory.
Backlog
Products are shipped and billed shortly after receipt of an order, with the majority of our product revenue coming from orders that are received and shipped in the same quarter. Accordingly, we do not believe that our product backlog at any particular time is meaningful because it is not necessarily indicative of future revenue in any given period.
Competition
We operate in the intensely competitive enterprise infrastructure market and compete primarily with companies that sell storage arrays, integrated systems and servers, as well as infrastructure and
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management software. These markets are characterized by constant change and rapid innovation. Our main competitors fall into the following categories:
| traditional storage array vendors such as EMC Corporation, NetApp, Inc. and Hitachi Data Systems, which typically sell centralized storage products; |
| traditional IT systems vendors such as Hewlett-Packard Company, Cisco Systems, Inc., Lenovo Group Ltd., Dell, Hitachi Data Systems and IBM Corporation 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; and |
| software providers such as VMware, Inc. that offer a broad range of virtualization, infrastructure and management products. |
In addition, we compete against vendors of hyperconverged infrastructure and software-defined storage products such as VMware, Inc. and smaller emerging companies. As our market grows, we expect it will attract new companies as well as existing larger vendors. 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.
We believe the principal competitive factors in the infrastructure software and systems 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; and |
| complete customer experience, including 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 disclosure and invention assignment agreements to protect our intellectual property rights. As of April 30, 2015, we had nine United States patents that have been issued or allowed and 49 patent applications pending in the United States. Our issued patents expire between 2031 and 2033. We also integrate open source software into 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
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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 platform 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 FactorsThird-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.
Facilities
Our corporate headquarters are located in San Jose, California where, under two lease agreements that expire in March 2018, we currently lease approximately 100,000 square feet of space and we expect to expand into another approximately 65,000 square feet by February 2016. We also maintain offices in Durham, North Carolina and Seattle, Washington as well as multiple locations internationally, including in Australia, Belgium, China, Germany, India, Japan, South Korea, Malaysia, the Netherlands, Singapore, Thailand, Turkey, United Arab Emirates, and the United Kingdom. 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 expansion of our operations.
Employees
We had approximately 1,000 employees worldwide as of April 30, 2015. None of our employees in the United States are 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.
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.
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Executive Officers and Directors
The following table provides information regarding our executive officers and directors as of July 31, 2015:
Name |
Age | Position(s) | ||||