Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 31, 2016
OR
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-37883
NUTANIX, INC.
(Exact name of registrant as specified in its charter)
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Delaware | | 20-0989767 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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1740 Technology Drive, Suite 150 San Jose, CA 95110 |
(Address of principal executive offices, including zip code) |
(408) 216-8360 |
(Registrant's telephone number, including area code) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark 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):
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Large accelerated filer | | o | Accelerated filer | | o |
Non-accelerated filer | | x (Do not check if a smaller reporting company) | Smaller reporting company | | o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act). Yes o No x
As of November 30, 2016, the registrant had 17,100,500 shares of Class A common stock, $0.000025 par value per share, and 125,156,937 shares of Class B common stock, $0.000025 par value per share, outstanding.
TABLE OF CONTENTS
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which statements involve substantial risks and uncertainties. All statements contained in this Quarterly Report on Form 10-Q other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “potentially,” “estimate,” “continue,” “anticipate,” “plan,” “intend,” “could,” “would,” “expect” and similar expressions that convey uncertainty of future events or outcomes are intended to identify forward-looking statements. Forward-looking statements included in this Quarterly Report on Form 10-Q include, but are not limited to, statements regarding:
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• | our future cost of revenue and operating expenses, including changes in the cost of product revenue and support and other services revenue, and changes in research and development, sales and marketing and general and administrative expenses; |
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• | anticipated trends, growth rates and challenges in our business and in the markets in which we operate; |
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• | our beliefs and objectives for future operations, including plans to continue to invest in our global engineering, research and development, and sales and marketing teams, and the impact of such investments on our operations; |
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• | our ability to increase sales of our solutions; |
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• | maintaining and expanding our end-customer base and our relationships with our channel and OEM partners; |
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• | our expectations concerning relationships with third parties, including our ability to compress and stabilize sales cycles; |
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• | our expectations concerning future shifts in the mix of whether our solutions are sold as an appliance or as software-only; and |
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• | sufficiency of cash to meet cash needs for at least the next 12 months. |
We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in Part II, Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for us to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and trends discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, performance, or events and circumstances reflected in the forward-looking statements will be achieved or occur. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
NUTANIX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, unaudited)
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| | | | | | | |
| As of |
| July 31, 2016 | | October 31, 2016 |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 99,209 |
| | $ | 225,463 |
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Short-term investments | 85,991 |
| | 121,649 |
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Accounts receivable—net | 110,659 |
| | 147,707 |
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Deferred commissions—current | 17,864 |
| | 19,398 |
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Prepaid expenses and other current assets | 16,138 |
| | 16,304 |
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Total current assets | 329,861 |
| | 530,521 |
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Property and equipment—net | 42,218 |
| | 46,328 |
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Deferred commissions—non-current | 19,029 |
| | 22,125 |
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Intangible assets—net | — |
| | 27,825 |
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Goodwill | — |
| | 16,784 |
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Other assets—non-current | 7,978 |
| | 4,680 |
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Total assets | $ | 399,086 |
| | $ | 648,263 |
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| | | |
Liabilities, Convertible Preferred Stock and Stockholders’ (Deficit) Equity | | | |
Current liabilities: | | | |
Accounts payable | $ | 52,111 |
| | $ | 57,308 |
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Accrued compensation and benefits | 24,547 |
| | 28,352 |
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Accrued expenses and other liabilities | 5,537 |
| | 6,591 |
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Deferred revenue—current | 130,569 |
| | 165,833 |
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Total current liabilities | 212,764 |
| | 258,084 |
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Deferred revenue—non-current | 165,896 |
| | 209,598 |
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Senior notes | 73,260 |
| | — |
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Convertible preferred stock warrant liability | 9,679 |
| | — |
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Early exercised stock options liability | 2,320 |
| | 1,874 |
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Other liabilities—non-current | 1,103 |
| | 7,044 |
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Total liabilities | 465,022 |
| | 476,600 |
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Commitments and contingencies (Note 7) |
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Convertible preferred stock: | | | |
Convertible preferred stock | 310,379 |
| | — |
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Stockholders’ (deficit) equity: | | | |
Common stock | 1 |
| | 4 |
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Additional paid-in capital | 65,629 |
| | 775,667 |
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Accumulated other comprehensive loss | (12 | ) | | (20 | ) |
Accumulated deficit | (441,933 | ) | | (603,988 | ) |
Total stockholders’ (deficit) equity | (376,315 | ) | | 171,663 |
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Total liabilities, convertible preferred stock and stockholders’ (deficit) equity | $ | 399,086 |
| | $ | 648,263 |
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See the accompanying notes to condensed consolidated financial statements.
NUTANIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data, unaudited)
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| | | | | | | |
| Three Months Ended October 31, |
| 2015 | | 2016 |
Revenue: | | | |
Product | $ | 70,396 |
| | $ | 129,657 |
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Support and other services | 17,360 |
| | 37,152 |
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Total revenue | 87,756 |
| | 166,809 |
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Cost of revenue: | | | |
Product | 27,657 |
| | 52,210 |
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Support and other services | 7,422 |
| | 17,552 |
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Total cost of revenue | 35,079 |
| | 69,762 |
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Gross profit | 52,677 |
| | 97,047 |
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Operating expenses: | | | |
Sales and marketing | 58,599 |
| | 128,775 |
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Research and development | 23,857 |
| | 75,281 |
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General and administrative | 7,375 |
| | 29,372 |
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Total operating expenses | 89,831 |
| | 233,428 |
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Loss from operations | (37,154 | ) | | (136,381 | ) |
Other expense—net | (871 | ) | | (25,712 | ) |
Loss before provision for income taxes | (38,025 | ) | | (162,093 | ) |
Provision for income taxes | 520 |
| | 76 |
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Net loss | $ | (38,545 | ) | | $ | (162,169 | ) |
Net loss per share attributable to common stockholders—basic and diluted | $ | (0.90 | ) | | $ | (2.18 | ) |
Weighted-average shares used in computing net loss per share attributable to common stockholders—basic and diluted | 42,838,933 |
| | 74,373,788 |
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See the accompanying notes to condensed consolidated financial statements.
NUTANIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands, unaudited)
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| Three Months Ended October 31, |
| 2015 | | 2016 |
Net loss | $ | (38,545 | ) | | $ | (162,169 | ) |
Other comprehensive gain (loss)—net of tax: | | | |
Change in unrealized gain (loss) on available-for-sale securities, net of tax | 25 |
| | (8 | ) |
Total other comprehensive gain (loss)—net of tax | 25 |
| | (8 | ) |
Comprehensive loss | $ | (38,520 | ) | | $ | (162,177 | ) |
See the accompanying notes to condensed consolidated financial statements.
NUTANIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
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| | | | | | | |
| Three Months Ended October 31, |
| 2015 | | 2016 |
Cash flows from operating activities: | | | |
Net loss | $ | (38,545 | ) | | $ | (162,169 | ) |
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | | | |
Depreciation and amortization | 5,557 |
| | 8,572 |
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Stock-based compensation | 5,386 |
| | 90,728 |
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Loss on debt extinguishment | — |
| | 3,320 |
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Change in fair value of convertible preferred stock warrant liability | 771 |
| | 21,133 |
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Other | (328 | ) | | 369 |
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Changes in operating assets and liabilities: | | | |
Accounts receivable—net | (8,816 | ) | | (36,213 | ) |
Deferred commission | (4,529 | ) | | (4,630 | ) |
Prepaid expenses and other assets | (419 | ) | | 840 |
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Accounts payable | (5,864 | ) | | 5,052 |
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Accrued compensation and benefits | (125 | ) | | 3,518 |
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Accrued expenses and other liabilities | 763 |
| | 682 |
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Deferred revenue | 40,533 |
| | 72,958 |
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Net cash (used in) provided by operating activities | (5,616 | ) | | 4,160 |
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Cash flows from investing activities: | | | |
Purchases of investments | (14,066 | ) | | (87,448 | ) |
Maturities of investments | 15,225 |
| | 19,950 |
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Sales of investments | — |
| | 31,638 |
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Payments for business acquisitions, net of cash acquired | — |
| | (184 | ) |
Purchases of property and equipment | (9,642 | ) | | (11,915 | ) |
Net cash used in investing activities | (8,483 | ) | | (47,959 | ) |
Cash flows from financing activities: | | | |
Proceeds from initial public offering, net of underwriting discounts and commissions | — |
| | 254,455 |
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Payments of offering costs | (803 | ) | | (2,243 | ) |
Proceeds from exercise of stock options, net of repurchases | 1,298 |
| | 1,472 |
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Repayment of senior notes | — |
| | (75,000 | ) |
Debt extinguishment costs | — |
| | (1,580 | ) |
Payment of debt in conjunction with a business acquisition | — |
| | (7,124 | ) |
Other | 586 |
| | 73 |
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Net cash provided by financing activities | 1,081 |
| | 170,053 |
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Net (decrease) increase in cash and cash equivalents | (13,018 | ) | | 126,254 |
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Cash and cash equivalents—beginning of period | 67,879 |
| | 99,209 |
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Cash and cash equivalents—end of period | $ | 54,861 |
| | $ | 225,463 |
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Supplemental disclosures of cash flow information: | | | |
Cash paid for income taxes | $ | 828 |
| | $ | 698 |
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Cash paid for interest | $ | — |
| | $ | 1,271 |
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Supplemental disclosures of non-cash investing and financing information: | | | |
Vesting of early exercised stock options | $ | 1,049 |
| | $ | 499 |
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Purchases of property and equipment included in accounts payable | $ | 5,308 |
| | $ | 5,033 |
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Offering costs included in accounts payable | $ | 1,772 |
| | $ | 367 |
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Conversion of convertible preferred stock to common stock, net of issuance costs | $ | — |
| | $ | 310,379 |
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Reclassification of convertible preferred stock warrant liability to additional paid-in capital | $ | — |
| | $ | 30,812 |
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Issuance of common stock for business acquisitions | $ | — |
| | $ | 27,063 |
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See the accompanying notes to condensed consolidated financial statements.
NUTANIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Organization and Description of Business—Nutanix, Inc. was incorporated in the state of Delaware in September 2009. Nutanix, Inc. is headquartered in San Jose, California, and together with its wholly-owned subsidiaries (collectively, the “Company”) has operations throughout North America, Europe, Asia-Pacific, Middle East, Latin America and Africa.
The Company’s enterprise cloud platform converges traditional silos of server, virtualization and storage into one integrated solution and can also connect to public cloud services. The Company primarily sells its products and services to end-customers through distributors and resellers (collectively “Partners”).
During the three months ended October 31, 2016, the Company completed two acquisitions, Calm.io Pte. Ltd. ("Calm") and PernixData, Inc. ("PernixData") (see Note 3).
Initial Public Offering—In October 2016, the Company completed its initial public offering (“IPO”) of Class A common stock, in which it sold 17,100,500 shares, including 2,230,500 shares pursuant to the underwriters’ over-allotment option. The shares were sold at an IPO price of $16.00 per share for net proceeds of $254.5 million, after deducting underwriting discounts and commissions of $19.2 million. Additionally, offering costs incurred by the Company totaled $5.1 million. Immediately prior to the closing of the Company’s IPO, all outstanding shares of common stock were reclassified as Class B common stock, and all outstanding shares of its convertible preferred stock automatically converted into 76,319,511 shares of common stock on a one-to-one basis and then reclassified as shares of Class B common stock. Following the IPO, the Company has two classes of authorized common stock, Class A common stock, which entitles holders to one vote per share, and Class B common stock which entitles holders to 10 votes per share.
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2. | BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Principles of Consolidation—The condensed consolidated financial statements, which include the accounts of Nutanix, Inc. and its wholly-owned subsidiaries including the acquisitions of Calm and PernixData, have been prepared in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”). All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates—The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Such management estimates include, but are not limited to, the best estimate of selling prices for products and related support; determination of fair value of common stock and convertible preferred stock, fair value of stock options and convertible preferred stock warrant liability; accounting for income taxes, including the valuation reserve on deferred tax assets and uncertain tax positions; warranty liability; commissions expense; fair value of assets and liabilities acquired in business combinations; and contingencies and litigation. Management evaluates these estimates and assumptions on an ongoing basis using historical experience and other factors and makes adjustments when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could materially differ from those estimates and assumptions.
Concentration Risk:
Concentration of Revenue and Accounts Receivable—The Company sells its products primarily through Partners, including distributors and resellers, and occasionally directly to end-customers. For the three months ended October 31, 2015 and 2016, no end-customer accounted for 10% or more of total revenue.
NUTANIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
For each significant Partner, revenue as a percentage of total revenue and accounts receivable as a percentage of total accounts receivable, net are as follows:
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| | | | | | | | | | | |
| Revenue for the Three Months Ended October 31, | | Accounts Receivable as of |
Customers | 2015 | | 2016 | | July 31, 2016 | | October 31, 2016 |
Partner A | 19 | % | | 16 | % | | * |
| | 12 | % |
Partner B | 20 | % | | 22 | % | | 17 | % | | 13 | % |
Partner C | * |
| | 15 | % | | 12 | % | | * |
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Partner D | * |
| | * |
| | 23 | % | | 21 | % |
Partner E | * |
| | * |
| | 11 | % | | 11 | % |
Partner F | 16 | % | | 11 | % | | * |
| | * |
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___________________Business Combinations—The Company accounts for its acquisitions using the acquisition method. Goodwill is measured at the acquisition date as the excess of the purchase price over the fair value of the assets acquired and liabilities assumed. Significant estimates and assumptions are made by management to value such assets and liabilities. Although the Company believes that those estimates and assumptions are reasonable and appropriate, they are inherently uncertain and subject to refinement. Additional information related to the acquisition date fair value of acquired assets and assumed liabilities obtained during the measurement period, not to exceed one year, may result in changes to the recorded values of such assets and liabilities, resulting in an offsetting adjustment to the goodwill associated with the business acquired.
Uncertain tax positions and tax-related valuation allowances are initially established in connection with a business combination as of the acquisition date. The Company continues to collect information and reevaluate these estimates and assumptions quarterly. The Company will record any adjustments to its preliminary estimates to goodwill provided that the Company is within the one year measurement period.
Any contingent consideration payable is recognized at fair value at the acquisition date. Liability-classified contingent consideration is remeasured each reporting period with changes in fair value recognized in earnings until the contingent consideration is settled.
Acquisition related costs incurred in connection with a business combination, other than those associated with the issuance of debt or equity securities, are expensed as incurred.
Goodwill, Intangible Assets and Impairment Assessment—Goodwill represents the excess of the purchase price over the fair value of the assets acquired and liabilities assumed, if any, in a business combination, and is allocated to the Company's single reporting unit. The Company reviews its goodwill for impairment at least annually, or whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The Company may elect to utilize a qualitative assessment to determine whether it is more likely than not that the fair value of its reporting unit is less than its carrying value. If, after assessing the qualitative factors, the Company determines that it is more likely than not that the fair value of its reporting unit is less than its carrying value, the two-step impairment analysis will be performed. In the first step, to identify a potential impairment, the Company compares the fair value of its reporting unit with its carrying amount. If the carrying value of the reporting unit exceeds its fair value, the second step would need to be performed. In the second step, the Company compares the implied fair value of the reporting unit with its carrying amount. Any excess of the reporting unit carrying value over the respective implied fair value is recognized as an impairment loss.
Recently Adopted Accounting Pronouncement— In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, Stock Compensation, which is intended to simplify several aspects of the accounting for share-based payment award transactions. ASU 2016-09 (i) requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled, (ii) requires classification of excess tax benefits as an operating activity in the statement of cash flows rather than a financing activity, (iii) eliminates the requirement to defer recognition of an excess tax benefit until the benefit is realized through a reduction to taxes
NUTANIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
payable, (iv) modifies statutory withholding tax requirements and (v) provides for a policy election to account for forfeitures as they occur. The Company early adopted ASU 2016-09 during the three months ended October 31, 2016. As a result of the adoption of ASU 2016-09, the Company recorded excess tax benefits prospectively in its provision for income taxes. Upon adoption, the Company recognized the previously unrecognized foreign excess tax benefits, which resulted in a cumulative effect adjustment of $0.1 million that reduced its accumulated deficit and increased its foreign deferred tax assets, using a modified retrospective transition method. The previously unrecognized U.S. excess tax benefits were recorded as a deferred tax asset, which was fully offset by a valuation allowance resulting in no impact to the accumulated deficit. Additionally, the Company elected to account for forfeitures as they occur using a modified retrospective transition method, which requires the Company to record cumulative-effect adjustment to accumulated deficit, and determined that the cumulative impact was immaterial. The Company is also required to present its excess tax benefits as a component of operating cash flows rather than financing cash flows on a prospective basis.
Recently Issued and Not Yet Adopted Accounting Pronouncements—In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. ASU 2016-18 will require the Company to present the change in the amounts described as restricted cash or restricted cash equivalents in the statement of cash flows. ASU 2016-18 is effective for the Company beginning August 1, 2018, with early adoption permitted. The Company is currently evaluating the effect the adoption of this guidance will have on its consolidated statement of cash flows.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. ASU 2016-16 will require the Company to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. ASU 2016-16 is effective for the Company beginning August 1, 2018, with early adoption permitted. The Company is currently evaluating the effect the adoption of this guidance will have on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This new standard will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The new standard is effective for the Company beginning August 1, 2018. The new standard will require adoption on a retrospective basis unless it is impracticable to apply, in which case the Company would be required to apply the amendments prospectively as of the earliest date practicable. The Company is currently evaluating the effect the adoption of this guidance will have on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases, which requires recognition of right-to-use lease assets and lease liabilities for all leases (with the exception of short-term leases) on the balance sheet of lessees. ASU 2016-02 is effective for the Company beginning August 1, 2019, including interim periods within those fiscal years, with early adoption permitted. This new standard requires a modified retrospective transition approach and provides certain optional transition relief. The Company is currently evaluating the effect the adoption of this guidance will have on its consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The standard is a comprehensive new revenue recognition model that requires revenue to be recognized in a manner to depict the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers, to defer the effective date of ASU 2014-09 by one year, but permits entities to adopt the original effective date if they choose. In 2016, the FASB issued ASU 2016-08, ASU 2016-10 and ASU 2016-12 that provide interpretive clarifications on the new guidance in Topic 606. These updates in Topic 606 are effective for the Company beginning August 1, 2018. The Company is currently evaluating the impact that the adoption of these updates will have on its consolidated financial statements.
Calm Acquisition
On August 22, 2016, the Company completed the acquisition of all outstanding shares of Calm, a company based in Singapore which specializes in container and DevOps automation, for an aggregate purchase price of $7.7 million, net of cash acquired (the “Calm Acquisition”) . Consideration consisted of 528,517 shares of the Company’s common stock and $1.4 million of cash. The preliminary purchase price allocation includes $4.8 million of goodwill and $4.0 million of identifiable intangible assets, which primarily consist of developed technology, with an expected useful life of
NUTANIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
approximately 4.8 years. Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired, and is not expected to be deductible for income tax purposes. The goodwill in this transaction is primarily attributable to the acquired workforce and expected operating synergies. The Company incurred approximately $0.6 million of acquisition costs related to the Calm Acquisition.
The results of operations of Calm are included in the results of the Company beginning on the date the acquisition was completed. Actual and pro forma results of operations have not been presented as the total amounts of revenue and net income are not material to the Company's consolidated results for the three months ended October 31, 2015 and October 31, 2016, respectively.
PernixData Acquisition
On September 6, 2016, the Company completed the acquisition of PernixData, a company based in the U.S., which specializes in scale-out data acceleration and analytics, for an aggregate purchase price of $23.0 million (the "PernixData Acquisition"). Total consideration consisted of 1,711,019 shares of the Company’s common stock and contingent consideration. Total potential contingent payments amount to $19.0 million, which may be payable over the next three years upon the achievement of certain operating milestones. Up to $7.5 million of the contingent payments are deemed to be part of the purchase price, which may be limited based on certain closing conditions, including PernixData's working capital upon completion of the acquisition. Up to $11.5 million of the payments also require future services to be provided to the Company by the related employees and will be recorded as compensation expense over the service period. The fair value of the contingent consideration considered to be part of the purchase price was $2.4 million as of the acquisition date, and is net of expected limitations of approximately $1.8 million due to closing conditions. The Company incurred approximately $0.7 million of acquisition costs related to the PernixData Acquisition.
As of the date of the acquisition, the preliminary purchase price allocation was as follows (in thousands):
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| | | |
Cash and cash equivalents | $ | 1,051 |
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Accounts receivable | 718 |
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Goodwill | 11,965 |
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Intangible assets | 24,270 |
|
Other assets | 667 |
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Deferred revenue | (6,007 | ) |
Debt | (7,124 | ) |
Other liabilities | (2,533 | ) |
Total | $ | 23,007 |
|
Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired and is not expected to be deductible for income tax purposes. The goodwill in this transaction is primarily attributable to the acquired workforce and expected operating synergies.
The acquired identifiable intangible assets consist of (dollars in thousands):
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| | | | | |
| Amount | | Estimated Life (in years) |
In-process R&D | $ | 16,100 |
| | — |
Developed technology | 3,570 |
| | 5 |
Customer relationships | 4,600 |
| | 6 |
| $ | 24,270 |
| | |
In-process R&D will be tested for impairment at least annually, or whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. Once the in-process R&D is completed, the Company will determine a useful life of the asset resulting from the completed in-process R&D and will begin amortizing
NUTANIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
the asset over its estimated useful life. Once completed, the useful life of the in-process R&D is expected to be approximately 5 to 7 years.
Unaudited Pro Forma Combined Consolidated Financial Information—The following unaudited pro forma combined consolidated financial information summarizes the combined results of operations of the Company and PernixData as though the PernixData Acquisition occurred on August 1, 2015. The unaudited pro forma combined consolidated financial information for all periods presented also included the business combination accounting effects resulting from this acquisition, including amortization charges from acquired intangible assets. The results of operations of PernixData are included in the results of the Company beginning on the date of the acquisition, and are not material.
The unaudited pro forma combined consolidated financial information is as follows (in thousands, except per share data):
|
| | | | | | | |
| Three Months Ended October 31, |
| 2015 | | 2016 |
Revenue | $ | 88,718 |
| | $ | 167,709 |
|
Net loss | (48,847 | ) | | (163,081 | ) |
Basic and diluted net loss per share | (1.10 | ) | | (2.17 | ) |
| |
4. | FAIR VALUE MEASUREMENTS |
The fair value of the Company’s financial assets and liabilities measured on a recurring basis is as follows:
|
| | | | | | | | | | | | | | | |
| As of July 31, 2016 |
| Level I | | Level II | | Level III | | Total |
| (In thousands) |
Financial Assets: | | | | | | | |
Cash equivalents: | | | | | | | |
Money market funds | $ | 47,305 |
| | $ | — |
| | $ | — |
| | $ | 47,305 |
|
Commercial paper | — |
| | 4,999 |
| | — |
| | 4,999 |
|
Short-term investments: | | | | | | |
|
|
Corporate bonds | — |
| | 64,360 |
| | — |
| | 64,360 |
|
Commercial paper | — |
| | 21,631 |
| | — |
| | 21,631 |
|
Total measured at fair value | 47,305 |
|
| 90,990 |
|
| — |
|
| 138,295 |
|
Cash | | | | | | | 46,905 |
|
Total cash, cash equivalents and short-term investments | | | | | | | $ | 185,200 |
|
Financial Liabilities: | | | | | | | |
Convertible preferred stock warrant liability | $ | — |
| | $ | — |
| | $ | 9,679 |
| | $ | 9,679 |
|
NUTANIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
|
| | | | | | | | | | | | | | | |
| As of October 31, 2016 |
| Level I | | Level II | | Level III | | Total |
| (In thousands) |
Financial Assets: | | | | | | | |
Cash equivalents: | | | | | | | |
Money market funds | $ | 144,890 |
| | $ | — |
| | $ | — |
| | $ | 144,890 |
|
Commercial paper | — |
| | 22,582 |
| | — |
| | 22,582 |
|
Short-term investments: | | | | | | |
|
|
Corporate bonds | — |
| | 80,225 |
| | — |
| | 80,225 |
|
Commercial paper | — |
| | 31,381 |
| | — |
| | 31,381 |
|
U.S. government securities | — |
| | 10,043 |
| | — |
| | 10,043 |
|
Total measured at fair value | $ | 144,890 |
| | $ | 144,231 |
| | $ | — |
| | 289,121 |
|
Cash | | | | | | | 57,991 |
|
Total cash, cash equivalents and short-term investments | | | | | | | $ | 347,112 |
|
Financial Liabilities: | | | | | | | |
Contingent consideration | $ | — |
| | $ | — |
| | $ | 2,557 |
| | $ | 2,557 |
|
A summary of the changes in the fair value of the Company’s convertible preferred stock warrant liability is as follows:
|
| | | | | | | |
| Three Months Ended October 31, |
| 2015 | | 2016 |
| (In thousands) |
Convertible preferred stock warrant liability—beginning balance | $ | 11,683 |
| | $ | 9,679 |
|
Change in fair value* | 771 |
| | 21,133 |
|
Reclassification of unexercised warrants to additional paid-in capital upon the IPO | — |
| | (30,812 | ) |
Convertible preferred stock warrant liability—ending balance | $ | 12,454 |
| | $ | — |
|
______________
| |
* | Recorded in the consolidated statements of operations within other expense—net. |
A summary of the changes in the fair value of the Company’s contingent consideration is as follows:
|
| | | |
| Three Months Ended October 31, 2016 |
| (In thousands) |
Contingent consideration—beginning balance | $ | — |
|
Assumed in the PernixData Acquisition | 2,371 |
|
Change in fair value* | 186 |
|
Contingent consideration—ending balance | $ | 2,557 |
|
______________
| |
* | Recorded in the consolidated statements of operations within general and administrative expenses |
The Company measures the fair value of its Level 3 contingent consideration liability using the Monte Carlo simulation on projected future payments.
NUTANIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
| |
5. | BALANCE SHEET COMPONENTS |
Short-Term Investments—The amortized cost of the Company’s short-term investments approximate their fair value. As of July 31, 2016 and October 31, 2016, unrealized gains or losses from the Company’s short-term investments were immaterial and there were no securities that were in an unrealized loss position for more than 12 months.
The following table summarizes the estimated fair value of the Company’s investments in marketable debt securities, by the contractual maturity date (in thousands):
|
| | | |
| As of October 31, 2016 |
Due within 1 year | $ | 69,700 |
|
Due after 1 year through 3 years | 51,949 |
|
Total | $ | 121,649 |
|
Property and Equipment—Net—Property and equipment, net consists of the following:
|
| | | | | | | | | |
| Estimated Useful Life (In months) | | As of |
| | July 31, 2016 | | October 31, 2016 |
| | | (In thousands) |
Computer, production, engineering and other equipment | 36 | | $ | 54,161 |
| | $ | 60,436 |
|
Demonstration units | 12 | | 33,184 |
| | 37,149 |
|
Leasehold improvements | * | | 6,619 |
| | 7,831 |
|
Furniture and fixtures | 60 | | 3,641 |
| | 4,097 |
|
Total property and equipment—gross | | | 97,605 |
|
| 109,513 |
|
Less accumulated depreciation and amortization | | | (55,387 | ) | | (63,185 | ) |
Total property and equipment—net | | | $ | 42,218 |
|
| $ | 46,328 |
|
______________
| |
* | Leasehold improvements are amortized over the shorter of the estimated useful lives of the improvements or the remaining lease term. |
Depreciation and amortization expense related to the Company's property and equipment was $5.6 million and $8.2 million, respectively, for the three months ended October 31, 2015 and 2016.
Intangible Assets—Net—Intangible assets, net consists of the following:
NUTANIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
|
| | | |
| As of October 31, 2016 |
| (In thousands) |
Indefinite-lived intangible asset: | |
In-process R&D | $ | 16,100 |
|
Finite-lived intangible assets: | |
Developed technology | 7,300 |
|
Customer relationships | 4,830 |
|
Total finite-lived intangible assets, gross | 12,130 |
|
Total intangible assets, gross | 28,230 |
|
Less: | |
Accumulated amortization of developed technology | (239 | ) |
Accumulated amortization of customer relationships | (166 | ) |
Total accumulated amortization | (405 | ) |
Intangible assets, net | $ | 27,825 |
|
Changes in the net book value of intangible assets are as follows:
|
| | | |
| Three Months Ended October 31, 2016 |
| (In thousands) |
Intangible assets, net—beginning balance | $ | — |
|
Acquired in the Calm Acquisition | 3,960 |
|
Acquired in the PernixData Acquisition | 24,270 |
|
Amortization of intangible assets * | (405 | ) |
Intangible assets, net—ending balance | $ | 27,825 |
|
______________
| |
* | Represents amortization expense of finite-lived intangible assets recorded in the condensed consolidated statement of operations during the period within product cost of revenue and sales and marketing expenses. |
Estimated future amortization expense of finite-lived intangible assets is as follows:
|
| | | |
Year Ending July 31: | (In thousands) |
2017 (remaining nine months) | $ | 1,823 |
|
2018 | 2,220 |
|
2019 | 2,201 |
|
2020 | 2,201 |
|
2021 | 2,201 |
|
Thereafter | 1,079 |
|
Total | $ | 11,725 |
|
Accrued Compensation and Benefits—Accrued compensation and benefits consists of the following:
NUTANIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
|
| | | | | | | |
| As of |
| July 31, 2016 | | October 31, 2016 |
| (In thousands) |
Accrued commissions | $ | 14,203 |
| | $ | 14,599 |
|
Accrued vacation | 3,490 |
| | 4,203 |
|
Contributions to ESPP withheld | — |
| | 3,340 |
|
Accrued bonus | 3,592 |
| | 2,498 |
|
Other | 3,262 |
| | 3,712 |
|
Total accrued compensation and benefits | $ | 24,547 |
|
| $ | 28,352 |
|
Accrued Expenses and Other Liabilities—Accrued expenses and other liabilities consists of the following:
|
| | | | | | | |
| As of |
| July 31, 2016 | | October 31, 2016 |
| (In thousands) |
Accrued professional services | $ | 3,585 |
| | $ | 3,090 |
|
Income taxes payable | 1,417 |
| | 2,463 |
|
Other | 535 |
| | 1,038 |
|
Total accrued expenses and other liabilities | $ | 5,537 |
|
| $ | 6,591 |
|
Senior Notes—In April 2016, the Company issued an aggregate principal amount of $75.0 million of senior notes due on April 15, 2019 (the “Senior Notes”) to a lender. The Senior Notes contained a guaranteed minimum return to the holder of the Senior Notes (the “Guaranteed Minimum Return”). In September 2016, the Company fully repaid all outstanding principal balance of the Senior Notes and incurred approximately $3.3 million of loss on debt extinguishment, which consisted of $1.7 million of unamortized debt issuance costs and $1.6 million of debt extinguishment costs primarily related to the Guaranteed Minimum Return.
7. COMMITMENTS AND CONTINGENCIES
Operating Leases—The Company has commitments for future payments related to its office facility leases and other contractual obligations. The Company leases its office facilities under non-cancelable operating lease agreements expiring through the year ending 2021. Certain of these lease agreements have free or escalating rent payments. The Company recognizes rent expense under such agreements on a straight-line basis over the lease term, with any free or escalating rent payments amortized as a reduction or addition of rent expense over the lease term.
Future minimum payments due under operating leases as of October 31, 2016 are as follows:
|
| | | |
Year Ending July 31: | (In thousands) |
2017 (remaining nine months) | $ | 7,398 |
|
2018 | 9,762 |
|
2019 | 10,524 |
|
2020 | 10,078 |
|
2021 | 7,212 |
|
Thereafter | 2,840 |
|
Total | $ | 47,814 |
|
NUTANIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Rent expense incurred under operating leases was $1.4 million and $2.9 million for the three months ended October 31, 2015 and 2016, respectively.
Purchase Commitments—In the normal course of business, the Company makes commitments with its third-party hardware contract manufacturers to manufacture its inventories and non-standard components based on its forecasts. These commitments consist of obligations for on-hand inventories and non-cancellable purchase orders for non-standard components. The Company records a charge for firm, non-cancellable and unconditional purchase commitments with its third-party hardware contract manufacturers for non-standard components when and if quantities exceed its future demand forecasts through a charge to cost of product sales. As of October 31, 2016, the Company had approximately $19.5 million of non-cancellable purchase commitments pertaining to its normal operations, and approximately $19.8 million of other purchase obligations with its contract manufacturers.
Guarantees— The Company has entered into agreements with some of its Partners and customers that contain indemnification provisions in the event of claims alleging that the Company’s products infringe the intellectual property rights of a third party. The scope of such indemnification varies, and may include, in certain cases, the ability to cure the indemnification by modifying or replacing the product at the Company’s own expense, requiring the return and refund of the infringing product, procuring the right for the partner and/or customer to continue to use or distribute the product, as applicable, and/or defending the partner or customer against and paying any damages from third party actions based upon claims of infringement. Other guarantees or indemnification arrangements include guarantees of product and service performance. The fair value of liabilities related to indemnifications and guarantee provisions are not material and have not had any material impact on the consolidated financial statements to date.
Litigation — From time to time, the Company may become involved in various litigation and administrative proceedings relating to claims arising from its operations in the normal course of business. Management is not currently aware of any matters that may have a material adverse impact on the Company’s business, financial position, results of operations or cash flows.
| |
8. | CONVERTIBLE PREFERRED STOCK WARRANTS |
The Convertible Preferred Stock Warrants outstanding were as follows (in thousands, except for share and per share amounts):
|
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | Fair Value as of |
Class of Shares | Issuance Date | | Contractual Term | | Number of Shares | | Exercise Price per Share | | July 31, 2016 | | IPO Date(1) |
Series A warrants | December 21, 2009 | | 10 years | | 683,644 |
| | $ | 0.234 |
| | $ | 8,259 |
| | $ | 25,883 |
|
Series A warrants | May 10, 2010 | | 10 years | | 85,450 |
| | 0.234 |
| | 1,032 |
| | 3,235 |
|
Series D warrants | November 26, 2013 | | 10 years | | 10,000 |
| | 7.289 |
| | 77 |
| | 308 |
|
Series D warrants | December 12, 2013 | | 7 years | | 45,000 |
| | 7.289 |
| | 311 |
| | 1,386 |
|
| | | | | 824,094 |
| | | | $ | 9,679 |
| (2) | $ | 30,812 |
|
______________
| |
(1) | Immediately prior to the closing of the Company’s IPO. |
(2) Reflected in the consolidated balance sheets as convertible preferred stock warrant liability.
Immediately prior to the closing of the Company’s IPO, all outstanding convertible preferred stock warrants automatically converted to common stock warrants, and then were reclassified as Class B common stock warrants. As a result of the automatic conversion of the convertible preferred stock warrants to Class B common stock warrants, the Company revalued the convertible preferred stock warrants as of the completion of the IPO and reclassified the outstanding preferred stock warrant liability balance to additional paid-in capital with no further remeasurements as the common stock warrants are now deemed permanent equity. During the three months ended October 31, 2016, 55,000 Class B common stock warrants were exercised. As a result, the Company issued 46,529 shares of Class B common stock as the contracts allow a net share settlement for Class B common stock. As of October 31, 2016, there were 769,094 Class B common stock warrants outstanding.
NUTANIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
| |
9. | CONVERTIBLE PREFERRED STOCK |
Series A Convertible Preferred Stock, Series B Convertible Preferred Stock, Series C Convertible Preferred Stock, Series D Convertible Preferred Stock and Series E Convertible Preferred Stock (collectively the “Convertible Preferred Stock”) outstanding consisted of the following as of July 31, 2016 and as of immediately prior to the automatic conversion of the Convertible Preferred Stock into Class B common stock:
|
| | | | | | | | | |
| Shares Authorized | | Shares Issued and Outstanding | | Aggregate Liquidation Preference |
| | | | | (In thousands) |
Series A | 28,165,300 |
| | 27,396,198 |
| | $ | 15,494 |
|
Series B | 16,558,441 |
| | 16,558,441 |
| | 25,250 |
|
Series C | 7,683,710 |
| | 7,683,710 |
| | 33,000 |
|
Series D | 13,912,438 |
| | 13,857,438 |
| | 151,500 |
|
Series E | 11,943,420 |
| | 10,823,724 |
| | 145,000 |
|
| 78,263,309 |
|
| 76,319,511 |
|
| $ | 370,244 |
|
Immediately prior to the closing of the Company’s IPO, all shares of the Company’s then-outstanding Convertible Preferred Stock, as shown in the table above, automatically converted on a one-for-one basis into an aggregate of 76,319,511 shares of common stock, which were then reclassified into Class B common stock.
Preferred Stock
Immediately prior to the closing of the Company's IPO, the Company filed an Amended and Restated Certificate of Incorporation, which authorized the issuance of undesignated preferred stock with rights and preferences, including voting rights, designated from time to time by the Company's Board of Directors (the "Board"). As of October 31, 2016, there were 200,000,000 shares of preferred stock authorized with a par value of $0.000025 and no shares of preferred stock issued and outstanding.
Common Stock
In connection with the IPO, the Company established two classes of authorized common stock, Class A common stock and Class B common stock. All shares of common stock outstanding immediately prior to the IPO, including shares of common stock issued upon the conversion of the Convertible Preferred Stock, were converted into an equivalent number of shares of Class B common stock. As of October 31, 2016, the Company had 1,000,000,000 shares of Class A common stock authorized with a par value of $0.000025 per share and 200,000,000 shares of Class B common stock authorized with a par value of $0.000025 per share. As of October 31, 2016, 17,100,500 shares of Class A common stock were issued and outstanding and 125,145,728 shares of Class B common stock were issued and outstanding.
Holders of Class A common stock are entitled to one vote for each share of Class A common stock held on all matters submitted to a vote of stockholders and holders of Class B common stock are entitled to ten votes for each share of Class B common stock held on all matters submitted to a vote of stockholders. Except with respect to voting, the rights of the holders of Class A and Class B common stock are identical. Shares of Class B common stock are voluntarily convertible into shares of Class A common stock at the option of the holder and generally automatically convert into shares of our Class A common stock upon a transfer.
Stock Plans—In June 2010, the Company adopted the 2010 Stock Plan (“2010 Plan”), and in December 2011, the Company adopted the 2011 Stock Plan (“2011 Plan”). In December 2015, the Board adopted the 2016 Equity Incentive Plan (“2016 Plan” and together with the 2010 Plan and 2011 Plan, the “Stock Plans”), which was amended in September 2016. The Company’s stockholders approved the 2016 Plan in March 2016 and it became effective in connection with the
NUTANIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Company’s IPO. As a result, upon the IPO, the Company ceased granting additional stock awards under the 2010 Plan and 2011 Plan and the 2010 Plan and 2011 Plan terminated. Any outstanding stock awards under the 2010 Plan and 2011 Plan will remain outstanding, subject to the terms of the applicable plan and award agreements, until such shares are issued under those stock awards, by exercise of stock options or settlement of RSUs, or until those stock awards become vested or expired by their terms. Under the 2016 Plan, the Company may grant incentive stock options (“ISO”), non-statutory stock options (“NSO”), restricted stock (“RS”), restricted stock units (“RSU”) and stock appreciation rights (“SAR”) to employees, directors and consultants. The Company has initially reserved 22,400,000 shares of the Company’s Class A common stock for issuance under the 2016 Plan. The number of shares of Class A common stock available for issuance under the 2016 Plan will also include an annual increase on the first day of each fiscal year beginning in fiscal year 2018, equal to the least of: 18,000,000 shares, 5% of the outstanding shares of classes of common stock as of the last day of the Company’s immediately preceding fiscal year, or such other amount as may be determined by the Company’s board of directors. In addition, up to a maximum of 38,667,284 shares of Class B common stock returned to the 2010 Plan and 2011 Plan as the result of expiration or termination of awards after the IPO will also become available for issuance under the 2016 Plan. As of October 31, 2016, the Company had reserved a total of 81,873,371 shares for the issuance of equity awards under the Stock Plans, of which 22,661,656 shares were still available for grant.
Restricted Stock Units
Performance RSUs. The Company grants RSUs that contain both service and performance conditions to its executives and employees. Vesting of the Performance RSUs is subject to continuous service with the Company and satisfaction of certain liquidity events of the Company, including the expiration of a lock-up period established in connection with the IPO, or both certain liquidity events and specified performance targets (collectively, the “Performance RSUs”). While the Company recognizes cumulative stock-based compensation expense for the portion of the awards for which the service condition has been satisfied when it is probable that the performance conditions will be met, vesting and settlement of the Performance RSUs are subject to the performance conditions actually being met. During the three months ended October 31, 2016, the Company began to recognize the Performance RSUs as the satisfaction of the performance conditions for vesting became probable.
The Company’s summary of Performance RSUs activity under the Stock Plan is as follows:
|
| | | | | | |
| Number of Shares | | Grant Date Fair Value per Share |
Outstanding—July 31, 2016 | 12,265,369 |
| | $ | 13.23 |
|
Granted | 3,340,762 |
| | 10.18 |
|
Canceled/forfeited | (127,569 | ) | | 12.75 |
|
Outstanding—October 31, 2016 | 15,478,562 |
| | 12.58 |
|
Offer to Exchange Stock Options for RSUs (the “Tender Offer”). In July 2016, the Company approved a tender offer stock option exchange program under which outstanding employee stock options with exercise prices of $8.41 or greater per share could be exchanged for a specified number of Performance RSUs based on a predetermined exchange ratio granted with a new vesting period. As a result of the Tender Offer, on August 16, 2016, stock options to purchase 1,361,317 common shares were cancelled and, in exchange, the Company granted 911,489 Performance RSUs to eligible employees. The Tender Offer resulted in a total incremental stock-based compensation expense of approximately $3.4 million.
Employee Stock Purchase Plan—In December 2015, the Board adopted the 2016 Employee Stock Purchase Plan, which was subsequently amended in January 2016 and September 2016 and approved by the Company’s stockholders in March 2016 (the “2016 ESPP”). The ESPP became effective in connection with the Company’s IPO. A total of 3,800,000 shares of Class A common stock were initially reserved for issuance under the 2016 ESPP. The number of shares of Class A common stock available for sale under the 2016 ESPP will also include an annual increase on the first day of each fiscal year beginning in fiscal 2018, equal to the least of: 3,800,000 shares, 1% of the outstanding shares of classes of common stock as of the last day of the Company’s immediately preceding fiscal year, or such other amount as may be determined by the Company’s board of directors.
NUTANIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
The 2016 ESPP allows eligible employees to purchase shares of the Company’s Class A common stock at a discount through payroll deductions of up to 15% of eligible compensation, subject to caps of $25,000 in any calendar year and 1,000 shares on any purchase date. The 2016 ESPP provides for 12-month offering periods generally beginning March and September of each year, and each offering period consists of two six-month purchase periods. The initial offering period began in September 2016 and will end in September 2017.
On each purchase date, participating employees will purchase Class A common stock at a price per share equal to 85% of the lesser of the fair market value of the Company’s common stock on (i) the first trading day of the applicable offering period and (2) the last trading day of each purchase period in the applicable offering period. If the stock price of the Company's Class A common stock on any purchase date in an offering period is lower than the stock price on the enrollment date of that offering period, the offering period will immediately reset after the purchase of shares on such purchase date and automatically roll into a new offering period.
For the first offering period, which began on September 30, 2016, the fair market value of the common stock used for the first offering period was $16, the IPO price of the Company’s Class A common stock.
The Company uses the Black-Scholes option-pricing model to determine the fair value of shares purchased under the 2016 ESPP with the following weighted average assumptions on the date of the grant (on October 11, 2016):
|
| | |
| Three Months Ended October 31, 2016 |
Expected term (in years) | 0.75 |
|
Risk-free interest rate | 0.6 | % |
Volatility | 50.6 | % |
Dividend yield | — | % |
Stock-Based Compensation —Total stock-based compensation expense recognized for stock awards in the consolidated statements of operations is as follows:
|
| | | | | | | |
| Three Months Ended October 31, |
| 2015 | | 2016 |
| (In thousands) |
Cost of revenue: | | | |
Product | $ | 109 |
|
| $ | 966 |
|
Support and other services | 293 |
|
| 3,350 |
|
Sales and marketing | 2,118 |
|
| 33,891 |
|
Research and development | 1,629 |
|
| 34,026 |
|
General and administrative | 1,237 |
|
| 18,495 |
|
Total stock-based compensation expense | $ | 5,386 |
|
| $ | 90,728 |
|
NUTANIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Total stock-based compensation expense recognized for stock awards in the consolidated statements of operations by type of awards is as follows:
|
| | | | | | | |
| Three Months Ended October 31, |
| 2015 | | 2016 |
| (In thousands) |
RSUs * | $ | — |
| | $ | 82,331 |
|
Stock options * | 5,386 |
| | 5,892 |
|
ESPP | — |
| | 2,505 |
|
Total stock-based compensation expense | $ | 5,386 |
|
| $ | 90,728 |
|
_____________ | |
* | Includes stock-compensation expense related to stock awards with performance conditions, which vesting was deemed probable as of October 31, 2016. |
As of October 31, 2016, unrecognized stock-based compensation expense related to the outstanding stock awards was approximately $193.9 million and is expected to be recognized over a weighted-average period of approximately 1.7 years.
During the three months ended October 31, 2016, the income tax provision of $0.1 million primarily consisted of foreign taxes on the Company's international operations and U.S. state income taxes, offset by the partial release of $1.5 million of the U.S. valuation allowance in connection with the PernixData Acquisition and tax benefit related to the early adoption of ASU 2016-09. The net deferred tax liability recorded in connection with the PernixData Acquisition provided an additional source of taxable income to support the realizability of the pre-existing deferred tax assets and as a result, the Company released a portion of the U.S. valuation allowance. During the three months ended October 31, 2015, the income tax provision of $0.5 million primarily consisted of foreign taxes on our international operations and state income taxes in the U.S.
The computation of basic and diluted net loss per share is as follows (in thousands, except share and per share data):
|
| | | | | | | |
| Three Months Ended October 31, |
| 2015 | | 2016 |
Numerator: | | | |
Net loss | $ | (38,545 | ) | | $ | (162,169 | ) |
Denominator: | | | |
Weighted-average shares—basic and diluted | 42,838,933 |
| | 74,373,788 |
|
Net loss per share attributable to common stockholders—basic and diluted | $ | (0.90 | ) | | $ | (2.18 | ) |
The weighted-average potential shares of common stock that were excluded from the computation of diluted net loss per share attributable to common stockholders for the periods presented because including them would have been anti-dilutive are as follows:
NUTANIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
|
| | | | | |
| Three Months Ended October 31, |
| 2015 | | 2016 |
Stock awards | 34,003,653 |
| | 40,764,842 |
|
Common stock subject to repurchase | 2,192,005 |
| | 727,254 |
|
Common stock warrants | — |
| | 769,094 |
|
Convertible preferred stock | 76,319,511 |
| | — |
|
Convertible preferred stock warrants | 824,094 |
| | — |
|
Total | 113,339,263 |
|
| 42,261,190 |
|
The following table sets forth revenue by geographic area based on bill-to location:
|
| | | | | | | |
| Three Months Ended October, 31 |
| 2015 | | 2016 |
| (In thousands) |
U.S. | $ | 56,728 |
| | $ | 102,871 |
|
Europe, the Middle East and Africa | 16,361 |
| | 24,248 |
|
Asia-Pacific | 11,154 |
| | 28,908 |
|
Other Americas | 3,513 |
| | 10,782 |
|
Total revenue | $ | 87,756 |
|
| $ | 166,809 |
|
As of July 31, 2016 and October 31, 2016, $30.0 million and $54.7 million, respectively, of the Company’s long-lived assets, net were located in the U.S.
| |
15. | RELATED PARTY TRANSACTIONS |
The Company enters into various transactions with its related parties in the normal course of business. During the three months ended October 31, 2015 and 2016, the Company’s purchases of goods or services from related parties totaled $0.4 million and $0.2 million, respectively. Amounts payable to related parties as of October 31, 2016 were $0.2 million. Revenue from related parties for the three months ended October 31, 2015 and 2016 were $0.2 million and $0.1 million, respectively. The Company did not have any receivables outstanding from related parties as of July 31, 2016 and October 31, 2016, respectively.
In connection with the PernixData Acquisition (see Note 3), entities affiliated with Lightspeed Venture Partners, which owned approximately 36.7% of the Company’s outstanding Convertible Preferred Stock as of July 31, 2016, owned approximately 26.4% of the outstanding capital stock of PernixData immediately prior to the completion of the PernixData Acquisition. These entities received 625,478 shares of the Company’s common stock in the PernixData Acquisition, as well as the right to receive up to approximately $2.7 million in cash in the event the contingent consideration becomes payable. Two members of the Company’s board of directors are affiliated with Lightspeed Venture Partners.
In November 2016, the Company granted 4,035,428 RSUs to its employees with a weighted-average fair value of $30.45 per share.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition, results of operations and cash flows should be read in conjunction with the (1) unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q, and (2) the audited consolidated financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations for the fiscal year ended July 31, 2016 included in our prospectus filed pursuant to Rule 424(b)(4) on September 30, 2016, or the 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. 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”, set forth in Part II, Item 1A of this Form 10-Q. See “Special Note Regarding Forward-Looking Statements” above.
Overview
We provide a leading next-generation enterprise cloud platform that converges traditional silos of server, virtualization and storage into one integrated solution that can also connect to public cloud services. Our software delivers the agility, scalability and pay-as-you-grow economics of the public cloud, while addressing enterprise requirements of application mobility, security, data integrity and control. We provide our customers with the flexibility to selectively utilize the public cloud for suitable workloads and specific use cases by enabling increasing levels of application mobility across private and public clouds. We have combined advanced web-scale technologies with elegant consumer-grade design to deliver a powerful enterprise cloud platform that elevates IT organizations by enabling them to focus on the applications and services that power their businesses. Our invisible infrastructure provides constant availability and low-touch management, enables application mobility across computing environments and reduces inefficiencies in IT planning.
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 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 our solution, and is generally recognized upon shipment. Support and other services revenue is derived from the related support and maintenance contracts, and is recognized ratably over the term of the support contracts.
We have a broad and diverse base of 4,473 end-customers as of October 31, 2016, including 376 Global 2000 enterprises. Since shipping our first product in fiscal 2012, our end-customer base has grown rapidly. The number of end-customers grew from 2,144 as of October 31, 2015 to 4,473 as of October 31, 2016. 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 our solution, particularly as we continue to pursue large enterprises and mission critical workloads. Our solutions serve a broad range of workloads, including enterprise applications, databases, virtual desktop infrastructure, or VDI, unified communications and big data analytics and we have recently announced the capability to support both virtualized and non-virtualized applications. We have end-customers across a broad range of industries, such as automotive, consumer goods, education, energy, financial services, healthcare, manufacturing, media, public sector, retail, technology and telecommunications. We also sell to service providers, who utilize our 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 and the acquisitions of Calm.io Pte. Ltd., or Calm, and PernixData, Inc., or PernixData, during the three months ended October 31, 2016. The number of our full-time employees increased from 1,368 as of October 31, 2015 to 2,354 as of October 31, 2016. 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.
In October 2016, we completed our initial public offering, or IPO, of Class A common stock, in which we sold 17,100,500 shares, including 2,230,500 shares pursuant to the underwriters’ over-allotment option. The shares were sold at an IPO price of $16.00 per share for net proceeds of $254.5 million, after deducting underwriting discounts and commissions of $19.2 million. Offering costs incurred by the Company were $5.1 million.
Our total revenue was $87.8 million and $166.8 million for the three months ended October 31, 2015 and 2016, respectively, representing year-over-year growth of 90.1%. Our net losses were $38.5 million and $162.2 million for the three months ended October 31, 2015 and 2016, respectively. Net cash used in operating activities was $5.6 million for the three months ended October 31, 2015 and net cash generated from operations was $4.2 million for the three months ended October 31, 2016. As of October 31, 2016, we had an accumulated deficit of $604.0 million.
Key Financial and Performance Metrics
We monitor the following key financial and performance metrics:
|
| | | | | | | |
| As of and for the Three months ended October 31 |
| 2015 | | 2016 |
| (Dollars in thousands) |
Total revenue | $ | 87,756 |
| | $ | 166,809 |
|
Billings | $ | 128,289 |
| | $ | 239,767 |
|
Gross margin percentage | 60 | % | | 58 | % |
Adjusted gross margin percentage | 60 | % | | 61 | % |
Total deferred revenue | $ | 144,131 |
| | $ | 375,431 |
|
Net cash (used in) provided by operating activities | $ | (5,616 | ) | | $ | 4,160 |
|
Free cash flow | $ | (15,258 | ) | | $ | (7,755 | ) |
Total end-customers | 2,144 |
| | 4,473 |
|
Non-GAAP Financial Measures and Key Performance Measures
We regularly monitor billings, adjusted gross margin percentage and free cash flow, which are non-GAAP financial measures and key performance measures, to help us evaluate our growth and operational efficiencies, measure our performance and identify trends in our sales activity, and establish our budgets. We evaluate these measures because they:
| |
• | are used by our management and 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 margin percentage or cash used in operating activities, respectively. In addition, other companies, including companies in our industry, may calculate non-GAAP financial measures and key performance measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures and key performance measures as tools for comparison. We urge you to review the reconciliation of our non-GAAP financial measures and key performance measures to the most directly comparable GAAP financial measures included below, and not to rely on any single financial measure to evaluate our business.
We calculate our non-GAAP measures as follows:
Billings—We calculate billings by adding the change in deferred revenue (net of acquisitions) 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 and amortization of acquired intangible assets. 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) provided by operating activities adjusted with purchases of property and equipment, which measures our ability to generate cash from our business operations after our capital expenditures
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:
|
| | | | | | | |
| Three months ended October 31 |
| 2015 | | 2016 |
| (Dollars in thousands) |
Total revenue | $ | 87,756 |
| | $ | 166,809 |
|
Change in deferred revenue (net of acquisitions) | 40,533 |
| | 72,958 |
|
Billings | $ | 128,289 |
| | $ | 239,767 |
|
| | | |
Gross profit | $ | 52,677 |
| | $ | 97,047 |
|
Stock-based compensation | 402 |
| | 4,316 |
|
Amortization of intangible assets | — |
| | 242 |
|
Adjusted gross profit (non-GAAP) | $ | 53,079 |
| | $ | 101,605 |
|
Adjusted gross margin percentage (non-GAAP) | 60 | % | | 61 | % |
|
| |
|
Net cash (used in) provided by operating activities | $ | (5,616 | ) | | $ | 4,160 |
|
Purchases of property and equipment | (9,642 | ) | | (11,915 | ) |
Free cash flow (non-GAAP) | $ | (15,258 | ) | | $ | (7,755 | ) |
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 so that we can capitalize on our market opportunity. We have significantly increased our sales and marketing personnel, which grew by 64% from October 31, 2015 to October 31, 2016. We estimate, based on past experience, that sales team members typically become fully productive around the time of the start of their fourth quarter of employment with us, and as our newer employees ramp up, we expect their increased productivity to contribute to our revenue growth. As of October 31, 2016, we considered 56% of our global sales team members to be fully productive, while the remaining 44% of our global sales team members are in the process of ramping up. 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 also intend to continue to grow our research and development and 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 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 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 purchases and upgrades as critical drivers of our success, as the sales cycles are typically shorter compared to new end-customer deployments and selling efforts are typically less. As of October 31, 2016, approximately 76% 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 3.9x greater, on average, than their initial order. This number increases to approximately 7.3x, on average, for our 376 Global 2000 end-customers and to more than 15.5x, 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 existing and future base of 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 software-only transactions is only recognized upon delivery to the extent we have established vendor specific objective evidence, or VSOE, of the fair value of the related maintenance and support contracts, otherwise revenue for the entire arrangement is deferred and recognized over the term of our maintenance and support contracts. Historically, most of our solutions have been delivered on an appliance, and, as a result, most of our historical product revenue has been recognized upon delivery. However, we anticipate that to the extent that broad market adoption of our solutions continues to increase, there may be an increase in the delivery of our software licenses on separately procured hardware. For additional information on our revenue recognition and VSOE, please see the section titled “Critical Accounting Estimates” in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Prospectus.
Components of Our Results of Operations
Our result of operations for the three months ended October 31, 2016 include (i) a cumulative catch-up of $83.0 million of stock-based compensation related to stock awards with performance conditions, referred to as the performance stock awards, which vesting is subject to continuous service with us and satisfaction of performance conditions (certain liquidity events, including IPO, and achievement of specified performance targets), and (ii) the impact of the Calm and PernixData acquisitions, which closed during the three months ended October 31, 2016. No prior expense had been recorded for the performance stock awards, as the performance conditions had not been deemed probable (see Note 11 of Part I, Item 1 of this Quarterly Report on Form 10-Q).
Revenue
Product revenue. We generate our product revenue from the sales of our solution, 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, revenue associated with certain software licenses can be recognized upon delivery to our end-customers to the extent we have established VSOE for related support and other services.
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, personnel costs (consisting of salaries, benefits, bonuses and stock-based compensation) associated with our operations function and allocated costs. 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. 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 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 Income (Expense)—net
Other income (expense)—net consists primarily of interest expense, foreign exchange gains or losses and gains or losses on investments. Upon the completion of our initial public offering, or IPO, we reclassified convertible preferred stock warrants, which were 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, into warrants to purchase Class B common stock. As a result, the convertible preferred stock liability was re-measured to its then fair value, which was based on the closing per share price of our Class A common stock on October 4, 2016, and reclassified to additional paid-in capital. Subsequent to the conversion of our convertible preferred stock warrants in connection with our IPO, we no longer remeasure them at fair value or incur any charges related to changes in fair value. In addition, during the three months ended October 31, 2016, we fully repaid our outstanding $75.0 million of senior notes due April 15, 2019, or the senior notes, and incurred a loss on debt extinguishment.
Provision for Income Taxes
Provision for income taxes consists primarily of income taxes in certain foreign jurisdictions in which we conduct business and state income taxes in the United States. We have recorded a full valuation allowance related to our federal and state net operating losses and other net deferred tax assets due to the uncertainty of the ultimate realization of the future benefits of those assets.
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. The period to period comparison of results is not necessarily indicative of results for future periods.
|
| | | | | | | |
| Three Months Ended October 31, |
| 2015 | | 2016 |
| (In thousands) |
Consolidated Statements of Operations Data: | |
Revenue: | |
Product | $ | 70,396 |
| | $ | 129,657 |
|
Support and other services | 17,360 |
| | 37,152 |
|
Total revenue | 87,756 |
| | 166,809 |
|
Cost of revenue: |
| |
|
Product (1)(2) | 27,657 |
| | 52,210 |
|
Support and other services (1) | 7,422 |
| | 17,552 |
|
Total cost of revenue | 35,079 |
| | 69,762 |
|
Gross profit | 52,677 |
| | 97,047 |
|
Operating expenses: |
| |
|
Sales and marketing (1)(2) | 58,599 |
| | 128,775 |
|
Research and development (1) | 23,857 |
| | 75,281 |
|
General and administrative (1) | 7,375 |
| | 29,372 |
|
Total operating expenses | 89,831 |
| | 233,428 |
|
Loss from operations | (37,154 | ) | | (136,381 | ) |
Other expense—net | (871 | ) | | (25,712 | ) |
Loss before provision for income taxes | (38,025 | ) | | (162,093 | ) |
Provision for income taxes | 520 |
| | 76 |
|
Net loss | $ | (38,545 | ) | | $ | (162,169 | ) |
| | | |
(1) Includes stock-based compensation expense as follows: | | | |
Product Cost of sales | $ | 109 |
| | $ | 966 |
|
Support Cost of sales | 293 |
| | 3,350 |
|
Sales and marketing | 2,118 |
| | 33,891 |
|
Research and development | 1,629 |
| | 34,026 |
|
General and administrative | 1,237 |
| | 18,495 |
|
Total stock-based compensation | $ | 5,386 |
| | $ | 90,728 |
|
| | | |
(2) Includes amortization of intangible assets as follows: | | | |
Product Cost of sales | $ | — |
| | $ | 238 |
|
Sales and marketing | — |
| | 167 |
|
Total amortization of intangible assets | $ | — |
| | $ | 405 |
|
|
| | | | | |
| Three Months Ended October 31, |
| 2015 | | 2016 |
| (As a percentage of total revenue) |
Consolidated Statements of Operations Data: | | | |
Revenue: | | | |
Product | 80 | % | | 78 | % |
Support and other services | 20 | % | | 22 | % |
Total revenue | 100 | % | | 100 | % |
Cost of revenue: | | | |
Product | 32 | % | | 31 | % |
Support and other services | 8 | % | | 11 | % |
Total cost of revenue | 40 | % | | 42 | % |
Gross profit | 60 | % | | 58 | % |
Operating expenses: | | | |
Sales and marketing | 67 | % | | 77 | % |
Research and development | 27 | % | | 45 | % |
General and administrative | 8 | % | | 18 | % |
Total operating expenses | 102 | % | | 140 | % |
Loss from operations | (42 | )% | | (82 | )% |
Other expense—net | (1 | )% | | (15 | )% |
Loss before provision for income taxes | (43 | )% | | (97 | )% |
Provision for income taxes | 1 | % | | 0 | % |
Net loss | (44 | )% | | (97 | )% |
Comparison of the Three Months Ended October 31, 2015 and 2016
Revenue
|
| | | | | | | | | | | | | | |
| Three Months Ended October 31 | | | | |
| 2015 | | 2016 | | $ Change | | % Change |
| (In thousands, except percentages) |
Product | $ | 70,396 |
| | $ | 129,657 |
| | $ | 59,261 |
| | 84 | % |
Support and other services | 17,360 |
| | 37,152 |
| | 19,792 |
| | 114 | % |
Total revenue | $ | 87,756 |
| | $ | 166,809 |
| | $ | 79,053 |
| | 90 | % |
|
| | | | | | | | | | | | | | |
| Three Months Ended October 31 | | | | |
| 2015 | | 2016 | | $ Change | | % Change |
| (In thousands, except percentages) |
U.S. | $ | 56,728 |
| | $ | 102,871 |
| | $ | 46,143 |
| | 81 | % |
Europe, the Middle East and Africa | 16,361 |
| | 24,248 |
| | 7,887 |
| | 48 | % |
Asia-Pacific | 11,154 |
| | 28,908 |
| | 17,754 |
| | 159 | % |
Other Americas | 3,513 |
| | 10,782 |
| | 7,269 |
| | 207 | % |
Total revenue | $ | 87,756 |
| | $ | 166,809 |
| | $ | 79,053 |
| | 90 | % |
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 2,144 as of October 31, 2015 to 4,473 as of October 31, 2016.
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
|
| | | | | | | | | | | | | | |
| Three Months Ended October 31 | | | | |
| 2015 | | 2016 | | $ Change | | % Change |
| (In thousands, except percentages) |
Cost of product revenue | $ | 27,657 |
| | $ | 52,210 |
| | $ | 24,553 |
| | 89 | % |
Product gross margin | 61 | % | | 60 | % | | | | |
Cost of support and other revenue | $ | 7,422 |
| | $ | 17,552 |
| | $ | 10,130 |
| | 136 | % |
Support and other services gross margin | 57 | % | | 53 | % | | | | |
Total gross margin percentage | 60 | % | | 58 | % | | | | |
Cost of product revenue
Cost of product revenue included a cumulative catch-up of $1.0 million of stock-based compensation related to performance stock awards. The increase in cost of product revenue also increased due to the corresponding increase in product sales, and due to the amortization of intangible assets acquired in the acquisitions of PernixData and Calm. Product gross margin decreased primarily due to the above, and was offset by cost savings achieved from our procurement process.
Cost of support and other services revenue
Cost of support and other services revenue included a cumulative catch-up of $3.3 million of stock-based compensation related to the performance stock awards. The increase in cost of support and other services revenue also increased due to higher personnel costs of our global customer support organization, as our customer support and services headcount increased by 137% compared to the prior year period. Support and other services gross margin decreased primarily due to the above, but was offset by the continued leverage of our support organization.
Operating Expenses
Sales and Marketing
|
| | | | | | | | | | | | | | |
| Three Months Ended October 31 | | | | |
| 2015 | | 2016 | | $ Change | | % Change |
| (In thousands, except percentages) |
Sales and marketing | $ | 58,599 |
| | $ | 128,775 |
| | $ | 70,176 |
| | 120 | % |
Percent of total revenue | 67 | % | | 77 | % | | | | |
Sales and marketing expense included a cumulative catch-up of $30.5 million of stock-based compensation related to the performance stock awards. The increase in sales and marketing expense was also due to higher personnel costs and sales commissions, as our sales and marketing headcount increased by 64% compared to the prior year period. 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
|
| | | | | | | | | | | | | | |
| Three Months Ended October 31 | | | | |
| 2015 | | 2016 | | $ Change | | % Change |
| (In thousands, except percentages) |
Research and development | $ | 23,857 |
| | $ | 75,281 |
| | $ | 51,424 |
| | 216 | % |
Percent of total revenue | 27 | % | | 45 | % | | | | |
Research and development expense included a cumulative catch-up of $31.7 million of stock-based compensation related to the performance stock awards. The increase in research and development expense was also due to higher personnel costs, as our research and development headcount increased by 76% (inclusive of the additional headcount from the Calm and PernixData acquisition) as we continued the expansion of our product development activities.
General and Administrative
|
| | | | | | | | | | | | | | |
| Three Months Ended October 31 | | | | |
| 2015 | | 2016 | | $ Change | | % Change |
| (In thousands, except percentages) |
General and administrative | $ | 7,375 |
| | $ | 29,372 |
| | $ | 21,997 |
| | 298 | % |
Percent of total revenue | 8 | % | | 18 | % | | | | |
General and administrative expense included a cumulative catch-up of $16.5 million of stock-based compensation related to the performance stock awards. The increase in general and administrative expense was also due to higher personnel costs, as our general and administrative headcount increased by 48% to support our growing operations and international footprint.
Other expense-net
|
| | | | | | | | | | | | | | |
| Three Months Ended October 31 | | | | |
| 2015 | | 2016 | | $ Change | | % Change |
| (In thousands, except percentages) |
Other expense | $ | (871 | ) | | $ | (25,712 | ) | | $ | (24,841 | ) | | 2,852 | % |
The increase in other expense-net was primarily due to $20.4 million of higher charges resulting from changes in the fair value of our convertible preferred stock warrant liability and $3.3 million loss on debt extinguishment resulting from early extinguishment of our senior notes.
Provision for Income Taxes
|
| | | | | | | | | | | | | | |
| Three Months Ended October 31 | | | | |
| 2015 | | 2016 | | $ Change | | % Change |
| (In thousands, except percentages) |
Provision for income taxes | $ | 520 |
| | $ | 76 |
| | $ | (444 | ) | | (85 | )% |
The decrease in tax provision was primarily due to the partial release of the U.S. valuation allowance from the PernixData acquisition, partially offset by an increase in taxable income from our foreign operations as we continued our global expansion. The net deferred tax liability from the PernixData acquisition provided an additional source of taxable income to support the realizability of the pre-existing deferred tax assets and, as a result, we released a portion of the U.S. deferred tax asset valuation allowance.
Liquidity and Capital Resources
As of October 31, 2016, we had $225.5 million of cash and cash equivalents and $121.6 million of short-term investments.
Prior to our IPO, we satisfied our liquidity needs primarily through the sale of convertible preferred stock, borrowings from our credit facilities and proceeds from the exercise of stock options. In October 2016, we completed our IPO of Class A common stock and received net proceeds of $254.5 million after deducting underwriting discounts and commissions of $19.2 million, but before deducting offering costs of $5.1 million. Additionally, in September 2016, we fully repaid the outstanding balance of our senior notes. As of October 31, 2016, we did not have any outstanding borrowings.
We believe that our cash and cash equivalents and short-term investments will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. Our future capital requirements will depend on many factors, including our growth rate, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced product and service offerings, and the continuing market acceptance of our products. In the event that additional financing is required from outside sources, we may not be able to raise such financing on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, operating results, and financial condition would be adversely affected.
Cash Flows
The following table summarizes our cash flows for the periods presented:
|
| | | | | | | |
| Three Months Ended October 31 |
| 2015 | | 2016 |
| (In thousands) |
Net cash (used in) provided by operating activities | $ | (5,616 | ) | | $ | 4,160 |
|
Net cash used in investing activities | (8,483 | ) | | (47,959 | ) |
Net cash provided by financing activities | 1,081 |
| | 170,053 |
|
| $ | (13,018 | ) | | $ | 126,254 |
|
Cash Flows from Operating Activities
Net cash used in operating activities was $5.6 million for the three months ended October 31, 2015 and we generated net cash from operating activities of $4.2 million for the three months ended October 31, 2016. The generation of cash for the three months ended October 31, 2016 was primarily due to higher billings and collections, partially offset by higher operating expenses as we continued to invest in the longer term growth of our business.
Cash Flows from Investing Activities
Net cash used in investing activities of $48.0 million for the three months ended October 31, 2016 was due to $87.4 million of purchases of investments, $11.9 million of purchases of property and equipment and $0.2 million of payments for the Calm and PernixData acquisitions, partially offset by $31.6 million of sales and investments and $20.0 million of maturities of investments.
Net cash used in investing activities of $8.5 million for the three months ended October 31, 2015 included $14.1 million purchases of investments and $9.6 million of purchases of property and equipment as we continue to invest in the longer term growth of our business. This was partially offset by $15.2 million of maturities of investments.
Cash Flows from Financing Activities
Net cash provided by financing activities of $170.1 million for the three months ended October 31, 2016 was primarily due to net proceeds of $254.5 million, after deducting underwriting discounts and commission from our IPO, partially offset by $76.6 million of repayment of our senior notes including debt extinguishment costs, $7.1 million payment of debt in conjunction with the PernixData acquisition and $2.2 million of payments of offering costs.
Net cash provided by financing activities of $1.1 million for the three months ended October 31, 2015 primarily consisted of $1.3 million of proceeds from exercises of stock options, net of repurchases, partially offset by $0.8 million of payments of offering costs.
Debt Obligations
In April 2016, we issued an aggregate principal amount of $75.0 million of senior notes due on April 15, 2019 to Goldman Sachs Specialty Lending Group, L.P. In September 2016, we repaid the entire outstanding principal amount of the senior notes and incurred $3.3 million of loss on debt extinguishment.
Contractual Obligations
The following table summarizes our contractual obligations as of October 31, 2016:
|
| | | | | | | | | | | | | | | | | | | |
| | | Payments Due by Period |
| Total | | Less than 1 year | | 1 year to 3 Years | | 3 to 5 Years | | More than 5 Years |
| (In thousands) |
Contractual Obligations: | | | | | | | | | |
Operating lease obligations | $ | 47,814 |
| | $ | 9,970 |
| | $ | 20,205 |
| | $ | 15,110 |
| | $ | 2,529 |
|
Other purchase commitments (1) | 19,457 |
| | 19,457 |
| | — |
| | — |
| | — |
|
Purchase commitments with contract manufacturers (2) | 19,847 |
| | 19,847 |
| | — |
| | — |
| | — |
|
Contingent consideration (3) | 5,690 |
| | — |
| | 5,690 |
| | — |
| | — |
|
| $ | 92,808 |
| | $ | 49,274 |
| | $ | 25,895 |
| | $ | 15,110 |
| | $ | 2,529 |
|
_____________________
(1) Purchase obligations pertaining to our normal operations.
(2) Commitments with our contract manufacturers, which consist of obligations for on-hand inventories and non-cancellable purchase orders for non-standard components.
(3) Represents $7.5 million contingent payments, net of $1.8 million working capital adjustment, assumed in the PernixData acquisition. The amount is remeasured at fair value every reporting period with the change in fair value recorded in general and administrative expenses (see Note 3 and Note 4, of Part I, Item 1 of this Quarterly Report on Form 10-Q). The actual amount ultimately paid out may be different depending on the level of achievement of certain operating milestones.
As of October 31, 2016, payments related to our above outstanding non-cancellable lease obligations will be made through fiscal 2021.
From time to time, we make commitments with our contract manufacturers, which consist of obligations for on-hand inventories and non-cancellable purchase orders for non-standard components. We record a charge to cost of product sales for firm, non-cancellable and unconditional purchase commitments with the contract manufacturers for non-standard components when and if quantities exceed our future demand forecasts. Our historical charges have not been material.
As of October 31, 2016, 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 October 31, 2016, 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.
Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of these financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures. We evaluate our estimates, assumptions and judgments on an ongoing basis. Our estimates, assumptions and judgments are based on historical experience and various other factors that we believe to be reasonable under the circumstances. Different assumptions and judgments would change the estimates used in the preparation of our financial statements, which, in turn, could change the results from those reported. Please see Note 2 of Part I, Item 1 of this Quarterly Report on Form 10-Q for a summary of significant accounting policies. In addition, please see "Critical Accounting Estimates" in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of our Prospectus.
Item 3. 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. 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, U.S. government securities 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.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this report. Based on management’s evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective at a reasonable assurance level.
In designing and evaluating our disclosure controls and procedures, management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the three months ended October 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are not currently a party to any material legal proceedings that we believe to be material to our business or financial condition. From time to time we may become party to various litigation matters and subject to claims that arise in the ordinary course of business.
Item 1A. Risk Factors
You should carefully consider the risks and uncertainties described below, together with all of the other information contained in this Quarterly Report on Form 10-Q and the Prospectus, including our consolidated financial statements and related notes, before making a decision to invest in our Class A common stock. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that affect our business. If any of the following risks occur, our business, financial condition, operating results and prospects could be materially harmed. In that event, the price of our Class A common stock could decline, and you could lose part or all of your investment.
Risks Related to Our Business and Industry
We have a history of losses and we may not be able to achieve or maintain profitability in the future.
We have incurred net losses in all periods since our inception, and we expect that we will continue to incur net losses for the foreseeable future. We experienced net losses of $84.0 million, $126.1 million, $168.5 million and $162.2 million for fiscal 2014, fiscal 2015, fiscal 2016 and the three months ended October 31, 2016, respectively. As of October 31, 2016, we had an accumulated deficit of $604.0 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, or if customers in these markets shift their spending to public cloud solutions more quickly or more extensively than expected, our solutions may not compete as effectively, if at all. It is also difficult to predict end-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.
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 web-scale architecture 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 $127.1 million, $241.4 million and $444.9 million for fiscal 2014, fiscal 2015 and fiscal 2016, respectively, and total revenue of $87.8 million and $166.8 million for the three months ended October 31, 2015 and 2016, respectively. You should not consider our revenue growth in recent periods as indicative of our future performance. While we have recently experienced significant revenue growth, we may not achieve similar revenue growth in future periods. Accordingly, you should not rely on our revenue growth for any prior periods as an indication of our future revenue or revenue growth.
We have experienced rapid growth in recent periods and we may not be able to sustain or manage any future growth effectively.
We have expanded our overall business and operations significantly in recent periods. Our employee headcount increased from 247 as of July 31, 2013 to 1,980 as of July 31, 2016, and to 2,357 as of October 31, 2016, 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. In particular, our success depends heavily on our ability to ramp new sales teams in a fast and effective manner. We must also continue to improve and expand our 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 software to build and operate enterprise clouds, integrated systems, and standalone storage and servers. These markets are characterized by constant change and rapid innovation. Our main competitors fall into the following categories:
| |
• | software providers such as VMware, Inc., or VMware, and Red Hat, Inc., that offer a broad range of virtualization, infrastructure and management products to build and operate enterprise clouds; |
| |
• | traditional IT systems vendors such as Hewlett Packard Enterprise Company, or HPE, Cisco Systems, Inc., Lenovo Group Ltd., Dell Technologies Inc., or 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 |
| |
• | traditional storage array vendors such as Dell, NetApp, Inc. and Hitachi Data Systems, which typically sell centralized storage products. |
In addition, we compete against vendors of hyperconverged infrastructure and software-defined storage products such as VMware, Inc., Cisco Systems, Inc., HPE, Dell and many smaller emerging companies. As our market grows, we expect it will continue to 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.
In September 2016, EMC Corporation, or EMC, was acquired by Dell. In discussing the benefits of the acquisition, EMC and Dell emphasized the companies’ complementary product portfolios, that Dell would give EMC a leading server platform and that the transaction would give Dell an opportunity to combine the storage businesses of the two companies. Dell is not just a competitor but also is an OEM partner of ours and has accounted for a meaningful portion of our total billings over the past few fiscal quarters. As a result of the acquisition, Dell may be more likely to promote and sell its own solutions over our products or cease selling or promoting our products entirely. Also, after the completion of the acquisition, Dell now holds a majority of outstanding voting power in VMware, and could combine the Dell, EMC and VMware product portfolios into unified offerings optimized for their platforms. If Dell decides to sell its own solutions over our products, that could adversely impact our OEM sales and harm our business, operating results and prospects, and our stock price could decline.
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 a relatively limited historical financial data, and we operate in a rapidly evolving market. Our relatively limited operating history makes it difficult to evaluate our current business and our future prospects, including our ability to plan for and model future growth. 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 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 and harm our ability to achieve a return on the investments and resources that we have dedicated to ensuring compatibility. Developing solutions that interoperate properly requires substantial partnering, capital investment and employee resources, as well as the cooperation of the vendors or developers of the software applications and hypervisors both with respect to product development and product support. Vendors may not provide us with early or any access to their technology and products, assist us in these development efforts, certify our solutions, share with or sell to us any APIs, formats, or protocols we may need, or cooperate with us to support end-customers. 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 solutions and integrate these solutions across hardware platforms. To compete successfully, we must design, develop, market and sell new or enhanced solutions that provide increasingly higher levels of performance, capacity, scalability, security 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 and investments in research and development or efforts to optimize our engineering cost structure may not be successful. If we fail to introduce new or enhanced solutions that meet the needs of our end-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:
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• | 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 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; we estimate based on past experience that sales team members typically do not fully ramp and are not fully productive until around the time of the start of their fourth quarter of employment with us. Our recent hires and planned hires may not become productive as quickly as we expect, and we may be unable to hire or retain sufficient numbers of qualified individuals in the markets where we do business or plan to do business. Furthermore, hiring sales personnel in new countries requires additional set up, upfront and ongoing costs that we may not recover if the sales personnel fail to achieve full productivity. In addition, as a result of our rapid growth, a large percentage of our sales force is new to our company and our solutions and therefore less effective than our more seasoned employees. If these new employees do not become fully productive on the timelines that we have projected, our revenue will not increase at anticipated levels and our ability to achieve long term projections may be negatively impacted. If we are unable to hire 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, our hardware OEM partners, value added resellers and system integrators. Our OEM partners in turn distribute our solutions through their own networks of channel partners with whom we have no direct relationships.
We rely, to a significant degree, on our channel partners to select, screen and maintain relationships with their distribution networks and to distribute our solutions in a manner that is consistent with applicable law, regulatory requirements and our quality standards. If our channel partners or a partner in their distribution network violates applicable law or regulatory requirements or misrepresents the functionality of our solutions, our reputation could be damaged and we could be subject to potential liability. Additionally, if we are unable to establish relationships with strong channel partners in key growth regions, our ability to sell our solutions in these regions may be adversely affected. Our agreements with our channel partners are non-exclusive, meaning our channel partners may offer end-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 limited or no notice and with little or no penalty. The loss of a substantial number of our channel partners, together with our inability to replace them, or the failure to recruit additional channel partners or establish an alternative distribution network could materially and adversely affect our business and operating results. For example, sales through Carahsoft Technology Corp. and Promark Technology Inc. to our end-customers represented 23% and 15%, respectively, of our total revenue for fiscal 2015, represented 15% and 20%, respectively, of our total revenue for fiscal 2016, and represented 16% and 22%, respectively, of our total revenue for the three months ended October 31, 2016. In addition, if a channel partner offers its own products or services that are competitive to our solutions, is acquired by a competitor or reorganizes or divests its reseller business units, our revenue derived from that partner may be adversely impacted or eliminated altogether.
Recruiting and retaining qualified channel partners and training them in the use of our technologies require significant time and resources. If we fail to devote sufficient resources to support and expand our network of channel partners, our business may be adversely affected. Maintaining strong indirect sales channels for our products and effectively leveraging our channel partners and OEMs is important to our growth strategy, and the failure to effectively manage these relationships may lead to higher costs and reduced revenue. Also, in certain international markets we are in the process of transitioning our distribution model from contracting directly with hundreds of individual resellers to contracting with a smaller number of larger global distributors. Although we believe that this transition will make our sales channels more efficient and broader reaching in the long term in these markets, there is no guarantee that this new distribution model will increase our sales in the short term or allow us to sustain our gross margins. Any potential delays or confusion during the transition process to our new partners may negatively affect our relationship with our existing end-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. Additionally, we sometimes rely on our channel partners to satisfy certain regulatory obligations that we would otherwise have to satisfy if we sold directly to the government entities, and our channel partners may be unable or unwilling to satisfy these obligations in the future. In the event of such termination or change, it may be difficult for us to arrange for another channel partner to sell our solutions to these government entities in a timely manner, and we could lose sales opportunities during the transition. Governments routinely investigate and audit government contractors’ administrative processes, and any unfavorable audit could result in the government refusing to continue buying our solutions, our channel partners changing their business models or refusing to continue to sell our solutions under current models, a reduction of revenue or fines, or civil or criminal liability if the audit uncovers improper or illegal activities.
If our indirect distribution channel is disrupted, particularly if we are reliant on a fewer number of channel partners, 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 Class A common stock would likely decline. Factors that are difficult to predict and that could cause our operating results to fluctuate include:
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• | the timing and magnitude of orders, shipments and acceptance of our solutions in any quarter; |
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• | 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; |
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• | the timing of revenue recognition for our sales; |
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• | reductions in end-customers’ budgets for information technology purchases; |
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• | delays in end-customers’ purchasing cycles or deferments of end-customers’ purchases in anticipation of new products or updates from us or our competitors; |
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• | fluctuations in demand and competitive pricing pressures for our solutions; |
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• | the mix of solutions, the mix between appliance and software-only sales, sold and the mix of revenue between products and support and other services; |
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• | our ability to develop, introduce and ship in a timely manner new solutions and platform enhancements that meet customer requirements; |
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• | the timing of product releases or upgrades or announcements by us or our competitors; |
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• | any change in the competitive dynamics of our markets, including consolidation among our competitors or resellers, new entrants or discounting of prices; |
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• | the amount and timing of expenses to grow our business and the extent to which we are able to take advantage of economies of scale or to leverage our relationships with OEM or channel partners; |
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• | the costs associated with acquiring new businesses and technologies and the follow-on costs of integrating and consolidating the results of acquired businesses; |
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• | the amount and timing of stock-based compensation expenses; |
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• | our ability to control the costs of our solutions and their key components, or to pass along any cost increases to our end-customers; |
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• | general economic, industry and market conditions; and |
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• | 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 Class A common stock to decline.
Our gross margins are impacted by a variety of factors and may be subject to variation from period to period.
Our gross margins may be affected by a variety of factors, including shifts in the mix of whether our solutions are sold as an appliance or as software-only, fluctuations in the pricing of our products, including as a result of competitive pricing pressures or increases in component pricing, and the degree to which we are successful in selling the value of incremental feature improvements and upgrades, changes in the cost of components of our hardware appliances, changes in the mix between direct versus indirect sales, changes in the mix of products sold, including whether they are sold as appliances or as software-only, and the timing and amount of recognized and deferred revenue. 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. Increasing competition and the emergence of new hyperconverged infrastructure product offerings often result in customers evaluating multiple vendors at the same time, which can further lengthen the sales cycle. We spend substantial time and resources on our sales efforts without any assurance that our efforts will produce any sales. Platform purchases are frequently subject to budget constraints, multiple approvals and unanticipated administrative, processing and other delays. The broad nature of the technology shift that our solutions represent and the legacy relationships our end-customers have with existing IT vendors sometimes lead 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 contract manufacturers to assemble and test our hardware appliances, we are susceptible to delays and pricing fluctuations that could prevent us from shipping orders on time, if at all, or on a cost-effective basis, which would cause our business to be adversely affected.
We rely substantially on Super Micro Computer, Inc., or Super Micro, and, to a lesser extent, Avnet, Inc., or Avnet, to assemble and test our appliances. Our reliance on these contract manufacturers reduces our control over the manufacturing process and exposes us to risks, including reduced control over quality assurance, product costs and product supply and timing. Furthermore, our orders represent a relatively small percentage of the overall orders received by our third-party manufacturers from their customers. Therefore, fulfilling our orders may not be a priority in guiding their business decisions and operational commitments. If we fail to manage our relationships with these contract manufacturers effectively, inaccurately forecast our component requirements, or if either of them experience delays or increased manufacturing lead-times, disruptions, capacity constraints or quality control problems in their operations or are unable to meet our requirements for timely delivery, or we are unable to shift operations from one contract manufacturer to the other, our ability to ship high-quality solutions to our end-customers could be severely impaired, we could incur substantial costs, such as costs relating to the procurement of non-standard components and inventory costs, and our business and operating results, competitive position and reputation could be harmed.
Our agreements with Super Micro and Avnet expire in May 2017 and May 2019, respectively, with the option to terminate upon each annual renewal thereafter, and do not contain any minimum long-term commitment to manufacture our solutions. Further, any orders are fulfilled only after a purchase order has been delivered and accepted. If we are required to change contract manufacturers, we may lose revenue, incur increased costs and damage our channel partner and end-customer relationships. We may also decide to switch or bring on additional contract manufacturers in order to better meet our needs. Switching to or bringing on a new contract manufacturer and commencing production is expensive and time-consuming and may cause delays in order fulfillment at our existing contract manufacturers or cause other disruptions. Our agreements with Super Micro and Avnet do not contain any price assurances, and any increases in component costs, without a corresponding increase in the price of our solutions, could harm our gross margins. Furthermore, we may need to increase our component purchases, manufacturing capacity and internal test and quality functions if we experience increased demand. The inability of Super Micro 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 and component costs, timely delivery and capacity. It also exposes us to the potential inability to obtain an adequate supply of required components because we do not have long-term supply commitments, and replacing some of these components would require a product qualification process that could take months to complete. Furthermore, we extensively test and qualify the components that are used in our appliances to ensure that they meet certain quality and performance specifications. If our supply of certain components is disrupted or delayed, or if we need to replace our existing suppliers, there can be no assurance that additional supplies or components can serve as adequate replacements for the existing components, will be available when required or that supplies will be available on terms that are favorable to us, and we may be required to modify our solutions to interoperate with the replacement components. Any of these developments could extend our lead times, increase the costs of our components or costs of product development 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