10-Q 1 ntnx-1312017x10q.htm 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2017
OR
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)
 
 
Delaware
 
20-0989767
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
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):
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 February 28, 2017, the registrant had 49,229,484 shares of Class A common stock, $0.000025 par value per share, and 93,984,946 shares of Class B common stock, $0.000025 par value per share, outstanding.



TABLE OF CONTENTS
 
 
 
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
INDEX TO EXHIBITS

2




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:
our future revenue, cost of revenue, and operating expenses, as well as changes in the cost of product revenue, component costs, product gross margins and support and other services revenue, and changes in research and development, sales and marketing and general and administrative expenses;
anticipated trends, growth rates and challenges in our business and in the markets in which we operate, including the productivity of our sales team;
our 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;
our ability to increase sales of our solutions;
maintaining and expanding our end-customer base and our relationships with our channel and OEM partners;
our expectations concerning relationships with third parties, including our ability to compress and stabilize sales cycles;
our expectations concerning future shifts in the mix of whether our solutions are sold as an appliance or as software-only, and in the mix of the types of appliances we sell; and
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.


3


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)

NUTANIX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, unaudited)
 
As of
 
July 31,
2016
 
January 31,
2017
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
99,209

 
$
226,006

Short-term investments
85,991

 
129,147

Accounts receivable—net
110,659

 
151,224

Deferred commissions—current
17,864

 
19,230

Prepaid expenses and other current assets
16,138

 
18,192

Total current assets
329,861

 
543,799

Property and equipment—net
42,218

 
51,944

Deferred commissions—non-current
19,029

 
25,712

Intangible assets—net

 
27,217

Goodwill

 
16,784

Other assets—non-current
7,978

 
5,261

Total assets
$
399,086

 
$
670,717

 
 
 
 
Liabilities, Convertible Preferred Stock and Stockholders’ (Deficit) Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
52,111

 
$
65,231

Accrued compensation and benefits
24,547

 
36,645

Accrued expenses and other liabilities
5,537

 
6,404

Deferred revenue—current
130,569

 
186,255

Total current liabilities
212,764

 
294,535

Deferred revenue—non-current
165,896

 
234,361

Senior notes
73,260

 

Convertible preferred stock warrant liability
9,679

 

Early exercised stock options liability
2,320

 
1,509

Other liabilities—non-current
1,103

 
8,429

Total liabilities
465,022

 
538,834

Commitments and contingencies (Note 7)

 

Convertible preferred stock:
 
 
 
Convertible preferred stock
310,379

 

Stockholders’ (deficit) equity:
 
 
 
Common stock
1

 
4

Additional paid-in capital
65,629

 
829,249

Accumulated other comprehensive loss
(12
)
 
(170
)
Accumulated deficit
(441,933
)
 
(697,200
)
Total stockholders’ (deficit) equity
(376,315
)
 
131,883

Total liabilities, convertible preferred stock and stockholders’ (deficit) equity
$
399,086

 
$
670,717

See the accompanying notes to condensed consolidated financial statements.

4


NUTANIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data, unaudited)
 
Three Months Ended
January 31,
 
Six Months Ended
January 31,
 
2016
 
2017
 
2016
 
2017
Revenue:
 
 
 
 
 
 
 
Product
$
81,229

 
$
138,508

 
$
151,625

 
$
268,165

Support and other services
21,468

 
43,687

 
38,828

 
80,839

Total revenue
102,697

 
182,195

 
190,453

 
349,004

Cost of revenue:
 
 
 
 
 
 
 
Product
29,977

 
58,403

 
57,634

 
110,613

Support and other services
7,959

 
18,443

 
15,381

 
35,995

Total cost of revenue
37,936

 
76,846

 
73,015

 
146,608

Gross profit
64,761

 
105,349

 
117,438

 
202,396

Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
66,128

 
111,244

 
124,727

 
240,019

Research and development
26,024

 
70,914

 
49,881

 
146,195

General and administrative
7,840

 
15,481

 
15,215

 
44,853

Total operating expenses
99,992

 
197,639

 
189,823

 
431,067

Loss from operations
(35,231
)
 
(92,290
)
 
(72,385
)
 
(228,671
)
Other income (expense)—net
2,646

 
(421
)
 
1,775

 
(26,133
)
Loss before provision for income taxes
(32,585
)
 
(92,711
)
 
(70,610
)
 
(254,804
)
Provision for income taxes
620

 
501

 
1,140

 
577

Net loss
$
(33,205
)
 
$
(93,212
)
 
$
(71,750
)
 
$
(255,381
)
Net loss per share attributable to common stockholders—basic and diluted
$
(0.76
)
 
$
(0.66
)
 
$
(1.66
)
 
$
(2.36
)
Weighted-average shares used in computing net loss per share attributable to common stockholders—basic and diluted
43,666,825

 
141,996,600

 
43,252,879

 
108,185,194

See the accompanying notes to condensed consolidated financial statements.

5


NUTANIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands, unaudited)
 
Three Months Ended
January 31,
 
Six Months Ended
January 31,
 
2016
 
2017
 
2016
 
2017
Net loss
$
(33,205
)
 
$
(93,212
)
 
$
(71,750
)
 
$
(255,381
)
Other comprehensive loss—net of tax:
 
 
 
 
 
 
 
Change in unrealized loss on available-for-sale securities, net of tax
(26
)
 
(150
)
 
(1
)
 
(158
)
Total other comprehensive loss—net of tax
(26
)
 
(150
)
 
(1
)
 
(158
)
Comprehensive loss
$
(33,231
)
 
$
(93,362
)
 
$
(71,751
)
 
$
(255,539
)
See the accompanying notes to condensed consolidated financial statements.

6



NUTANIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
 
Six Months Ended
January 31,
 
2016
 
2017
Cash flows from operating activities:
 
 
 
Net loss
$
(71,750
)
 
$
(255,381
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
 
 
 
Depreciation and amortization
11,822

 
18,172

Stock-based compensation
10,336

 
143,335

Loss on debt extinguishment

 
3,320

Change in fair value of convertible preferred stock warrant liability
(1,904
)
 
21,133

Other
(327
)
 
929

Changes in operating assets and liabilities:
 
 
 
Accounts receivable—net
(13,374
)
 
(39,730
)
Deferred commission
(9,179
)
 
(8,049
)
Prepaid expenses and other assets
2,088

 
(2,707
)
Accounts payable
(8,034
)
 
11,342

Accrued compensation and benefits
1,484

 
11,811

Accrued expenses and other liabilities
(3,514
)
 
1,594

Deferred revenue
81,209

 
118,143

Net cash (used in) provided by operating activities
(1,143
)
 
23,912

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(20,021
)
 
(24,616
)
Purchases of investments
(31,546
)
 
(117,550
)
Maturities of investments
40,285

 
41,200

Sale of investments

 
32,640

Payments for business acquisitions, net of cash acquired

 
(184
)
Net cash used in investing activities
(11,282
)
 
(68,510
)
Cash flows from financing activities:
 
 
 
Proceeds from initial public offering, net of underwriting discounts and commissions

 
254,455

Payments of offering costs, net
(2,659
)
 
(1,609
)
Proceeds from exercise of stock options, net of repurchases
1,978

 
2,180

Repayment of senior notes

 
(75,000
)
Debt extinguishment costs

 
(1,580
)
Payment of debt in conjunction with a business acquisition

 
(7,124
)
Other
836

 
73

Net cash provided by financing activities
155

 
171,395

Net (decrease) increase in cash and cash equivalents
(12,270
)
 
126,797

Cash and cash equivalents—beginning of period
67,879

 
99,209

Cash and cash equivalents—end of period
$
55,609

 
$
226,006

Supplemental disclosures of cash flow information:
 
 
 
Cash paid for income taxes
$
1,489

 
$
2,344

Cash paid for interest
$

 
$
1,271

Supplemental disclosures of non-cash investing and financing information:
 
 
 
Vesting of early exercised stock options
$
1,995

 
$
920

Purchases of property and equipment included in accounts payable
$
5,771

 
$
6,983

Offering costs included in accounts payable
$
803

 
$
51

Conversion of convertible preferred stock to common stock, net of issuance costs
$

 
$
310,379

Reclassification of convertible preferred stock warrant liability to additional paid-in capital
$

 
$
30,812

Issuance of common stock for business acquisitions
$

 
$
27,063

See the accompanying notes to condensed consolidated financial statements.

7


NUTANIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


1.
ORGANIZATION
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 $5.2 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.
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 and six months ended January 31, 2016 and 2017, no end-customer accounted for 10% or more of total revenue.

8


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:
 
Revenue
 
Accounts Receivable
as of
 
Three Months Ended
January 31,
 
Six Months Ended
January 31,
 
Customers
2016
 
2017
 
2016
 
2017
 
July 31, 2016
 
January 31,
2017
Partner A
13
%
 
*

 
16
%
 
12
%
 
   *

 
*

Partner B
19
%
 
19
%
 
20
%
 
20
%
 
17
%
 
15
%
Partner C
13
%
 
16
%
 
12
%
 
15
%
 
12
%
 
*

Partner D
   *

 
*

 
*

 
*

 
23
%
 
16
%
Partner E
12
%
 
11
%
 
12
%
 
10
%
 
11
%
 
13
%
Partner F
19
%
 
13
%
 
18
%
 
12
%
 
   *

 
*

___________________
*
Less than 10%
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

9


NUTANIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

the requirement to defer recognition of an excess tax benefit until the benefit is realized through a reduction to taxes payable, (iv) modifies statutory withholding tax requirements and (v) provides for a policy election to account for forfeitures as they occur. The Company early adopted ASU 2016-09 during the three months ended October 31, 2016. As a result of the adoption of ASU 2016-09, the Company recorded excess tax benefits prospectively in its provision for income taxes. Upon adoption, the Company recognized the previously unrecognized foreign excess tax benefits, which resulted in a cumulative effect adjustment of $0.1 million that reduced its accumulated deficit and increased its foreign deferred tax assets, using a modified retrospective transition method. The previously unrecognized U.S. excess tax benefits were recorded as a deferred tax asset, which was fully offset by a valuation allowance resulting in no impact to the accumulated deficit. Additionally, the Company elected to account for forfeitures as they occur using a modified retrospective transition method, which requires the Company to record cumulative-effect adjustment to accumulated deficit, and determined that the cumulative impact was immaterial. The Company presents its excess tax benefits as a component of operating cash flows rather than financing cash flows on a prospective basis.
Recently Issued and Not Yet Adopted Accounting Pronouncements—In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805) to clarify the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.  The guidance is effective for fiscal years beginning after December 15, 2017 including interim periods within those fiscal years.  Early adoption is permitted under certain circumstances.   The Company is currently evaluating the effect the adoption of this guidance will have on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. An impairment charge will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for the Company beginning August 1, 2020, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the effect the adoption of this guidance will have on its consolidated financial statements.
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 does not believe that adoption of this ASU will have a material impact on its consolidated financial statements.
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

10


NUTANIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

exchange for those goods or services. The FASB has issued several amendments to the standard, including clarifications on disclosure of prior-period performance obligations and remaining performance obligations.
The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). The new standard will be effective for the Company beginning August 1, 2018, and adoption as of the original effective date of August 1, 2017 is permitted. The Company is currently evaluating early adoption of the standard, as well as the method of adoption. The Company's ability to early adopt is dependent on system readiness, and the completion of its analysis of information necessary to restate prior period financial statements if the full retrospective method is utilized. While the Company is continuing to assess all potential impacts of the standard, it currently believes the most significant impact relates to the timing of revenue recognition for certain software licenses sold with post contract support ("PCS") for which it does not have vendor-specific objective evidence of fair value ("VSOE") under current guidance. Under the new standard the requirement to have VSOE for undelivered elements is eliminated and the Company will recognize revenue for such software licenses upon transfer of control to its customers.
3.
BUSINESS COMBINATIONS
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 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 six months ended January 31, 2016 and 2017, 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 PernixData Acquisition, the preliminary purchase price allocation was as follows (in thousands):

11


NUTANIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

Cash and cash equivalents
$
1,051

Accounts receivable
718

Goodwill
11,965

Intangible assets
24,270

Other assets
667

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):
 
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 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):
 
Six Months Ended
January 31,
 
2016
 
2017
Revenue
$
194,883

 
$
349,970

Net loss
(87,864
)
 
(256,293
)
Basic and diluted net loss per share
(1.95
)
 
(2.36
)
4.
FAIR VALUE MEASUREMENTS
The fair value of the Company’s financial assets and liabilities measured on a recurring basis is as follows (in thousands):

12


NUTANIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)


 
As of July 31, 2016
 
Level I
 
Level II
 
Level III
 
Total 
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

 
As of January 31, 2017
 
Level I
 
Level II
 
Level III 
 
Total 
Financial Assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
115,806

 
$

 
$

 
$
115,806

Commercial paper

 
44,364

 

 
44,364

Short-term investments:
 
 
 
 
 
 


Corporate bonds

 
95,228

 

 
95,228

Commercial paper

 
23,910

 

 
23,910

U.S. government securities

 
10,009

 

 
10,009

Total measured at fair value
$
115,806

 
$
173,511

 
$

 
289,317

Cash
 
 
 
 
 
 
65,836

Total cash, cash equivalents and short-term investments
 
 
 
 
 
 
$
355,153

Financial Liabilities:
 
 
 
 
 
 
 
Contingent consideration
$

 
$

 
$
2,843

 
$
2,843


A summary of the changes in the fair value of the Company’s convertible preferred stock warrant liability is as follows (in thousands):
 
Six Months Ended
January 31,
 
2016
 
2017
Convertible preferred stock warrant liability—beginning balance
$
11,683

 
$
9,679

Change in fair value*
(1,904
)
 
21,133

Reclassification of unexercised warrants to additional paid-in capital upon the IPO

 
(30,812
)
Convertible preferred stock warrant liability—ending balance
$
9,779

 
$

______________
*
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 (in thousands):

13


NUTANIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

 
Six Months Ended January 31, 2017
Contingent consideration—beginning balance
$

Assumed in the PernixData Acquisition
2,371

Change in fair value*
472

Contingent consideration—ending balance
$
2,843

______________
*
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.

14


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 January 31, 2017, unrealized gains or losses from the Company’s short-term investments were immaterial and there were no securities 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
January 31, 2017
Due within 1 year
$
87,169

Due after 1 year through 3 years
41,978

Total
$
129,147

Property and Equipment—Net—Property and equipment, net consists of the following (in thousands):
 
Estimated
Useful Life
(In months)
 
As of
 
 
July 31,
2016
 
January 31,
2017
Computer, production, engineering and other equipment
36
 
$
54,161

 
$
70,219

Demonstration units
12
 
33,184

 
40,962

Leasehold improvements
   *
 
6,619

 
8,213

Furniture and fixtures
60
 
3,641

 
4,001

Total property and equipment—gross
 
 
97,605


123,395

Less accumulated depreciation and amortization
 
 
(55,387
)
 
(71,451
)
Total property and equipment—net
 
 
$
42,218


$
51,944

______________
*
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 $6.3 million and $11.8 million, respectively, for the three and six months ended January 31, 2016. Depreciation and amortization expense related to the Company's property and equipment was $9.0 million and $17.2 million, respectively, for the three and six months ended January 31, 2017.
Intangible Assets—Net—Intangible assets, net consists of the following (in thousands):

15


NUTANIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

 
As of January 31, 2017
Indefinite-lived intangible asset:
 
In-process R&D
$
16,100

Finite-lived intangible assets:
 
Developed technology
7,300

Customer relationships
4,830

Total finite-lived intangible assets, gross
12,130

Total intangible assets, gross
28,230

Less:
 
Accumulated amortization of developed technology
(598
)
Accumulated amortization of customer relationships
(415
)
Total accumulated amortization
(1,013
)
Intangible assets, net
$
27,217

Changes in the net book value of intangible assets are as follows (in thousands):
 
Six Months Ended
January 31, 2017
Intangible assets, net—beginning balance
$

Acquired in the Calm Acquisition
3,960

Acquired in the PernixData Acquisition
24,270

Amortization of intangible assets *
(1,013
)
Intangible assets, net—ending balance
$
27,217

______________
*
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 six months)
$
1,215

2018
2,220

2019
2,201

2020
2,201

2021
2,201

Thereafter
1,079

Total
$
11,117

Accrued Compensation and Benefits—Accrued compensation and benefits consists of the following (in thousands):

16


NUTANIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

 
As of
 
July 31,
2016
 
January 31,
2017
Accrued commissions
$
14,203

 
$
10,270

Accrued vacation
3,490

 
4,513

Contributions to ESPP withheld

 
13,337

Accrued bonus
3,592

 
3,486

Other
3,262

 
5,039

Total accrued compensation and benefits
$
24,547


$
36,645

Accrued Expenses and Other Liabilities—Accrued expenses and other liabilities consists of the following (in thousands):
 
As of
 
July 31,
2016
 
January 31,
2017
Accrued professional services
$
3,585

 
$
3,184

Income taxes payable
1,417

 
1,812

Other
535

 
1,408

Total accrued expenses and other liabilities
$
5,537


$
6,404

6.
DEBT
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 January 31, 2017 are as follows:
Year Ending July 31:
(In thousands)
2017 (remaining six months)
$
6,086

2018
10,847

2019
10,820

2020
10,402

2021
7,556

Thereafter
2,929

Total
$
48,640


17


NUTANIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

Rent expense incurred under operating leases was $1.5 million and $2.9 million for the three and six months ended January 31, 2016, respectively. Rent expense incurred under operating leases was $2.9 million and $5.8 million for the three and six months ended January 31, 2017, 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 January 31, 2017, the Company had approximately $20.7 million of non-cancellable purchase commitments pertaining to its normal operations, and approximately $18.6 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 prior to the IPO were as follows (in thousands, except for share and per share amounts):
 
 
 
 
 
 
 
 
 
Fair Value as of
Class of Shares
Issuance Date
 
Contractual Term
 
Number of
Shares
 
Exercise
Price per
Share
 
July 31,
2016
 
IPO Date(1)
Series A warrants
December 21, 2009
 
10 years
 
683,644

 
$
0.234

 
$
8,259

 
$
25,883

Series A warrants
May 10, 2010
 
10 years
 
85,450

 
0.234

 
1,032

 
3,235

Series D warrants
November 26, 2013
 
10 years
 
10,000

 
7.289

 
77

 
308

Series D warrants
December 12, 2013
 
7 years
 
45,000

 
7.289

 
311

 
1,386

 
 
 
 
 
824,094

 
 
 
$
9,679

(2)
$
30,812

______________
(1)
Immediately prior to the closing of the Company’s IPO.
(2) Reflected in the consolidated balance sheets as convertible preferred stock warrant liability.
Immediately prior to the closing of the Company’s IPO, all outstanding convertible preferred stock warrants automatically converted to common stock warrants, and then were reclassified as Class B common stock warrants. As a result of the automatic conversion of the convertible preferred stock warrants to Class B common stock warrants, the Company revalued the convertible preferred stock warrants as of the completion of the IPO and reclassified the outstanding preferred stock warrant liability balance to additional paid-in capital with no further remeasurements as the common stock warrants are now deemed permanent equity. During the three and six months ended January 31, 2017, a total of 717,824 and 772,824 Class B common stock warrants, respectively, were exercised. As a result, during the three and six months ended January 31, 2017, the Company issued a total of 711,935 and 758,464 shares of Class B common stock, respectively, as the contracts allow a net share settlement for Class B common stock. As of January 31, 2017, there were 51,270 Class B common stock warrants outstanding.

18


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.
10.
STOCKHOLDERS’ EQUITY
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 January 31, 2017, 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 January 31, 2017, 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 January 31, 2017, 33,500,377 shares of Class A common stock were issued and outstanding and 109,713,179 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.
11.
EQUITY AWARD PLANS
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

19


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 lesser 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 Board. 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 January 31, 2017, the Company had reserved a total of 81,873,371 shares for the issuance of equity awards under the Stock Plans, of which 18,206,697 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 Performance RSUs with liquidity event performance conditions as the satisfaction of the performance conditions for vesting became probable.
The Company’s summary of Performance RSUs activity under the Stock Plans is as follows:
 
Number of
Shares
 
Grant Date Fair Value per Share
Outstanding—July 31, 2016
12,265,369

 
$
13.23

Granted
8,020,980

 
21.98

Released
(4,375
)
 
14.80

Canceled/forfeited
(410,208
)
 
14.82

Outstanding—January 31, 2017
19,871,766

 
16.74

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 2016 ESPP became effective in connection with the Company’s IPO. A total of 3,800,000 shares of Class A common stock were initially reserved for issuance under the 2016 ESPP. The number of shares of Class A common stock available for sale under the 2016 ESPP will also include an annual increase on the first day of each fiscal year beginning in fiscal 2018, equal to the lesser of: 3,800,000 shares, 1% of the outstanding shares of classes of common stock as of the last day of the Company’s immediately preceding fiscal year, or such other amount as may be determined by the Board.

20


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 Class A common stock on (i) the first trading day of the applicable offering period and (2) the last trading day of each purchase period in the applicable offering period. If the stock price of the Company's Class A common stock on any purchase date in an offering period is lower than the stock price on the enrollment date of that offering period, the offering period will immediately reset after the purchase of shares on such purchase date and automatically roll into a new offering period.
For the first offering period, which began on September 30, 2016, the fair market value of the common stock used for the first offering period was $16, the IPO price of the Company’s Class A common stock.
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):
 
Six Months Ended
January 31, 2017
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 (in thousands):
 
Three Months Ended
January 31,
 
Six Months Ended
January 31,
 
2016
 
2017
 
2016
 
2017
Cost of revenue:
 
 
 
 
 
 
 
Product
$
104

 
$
848

 
$
213

 
$
1,814

Support and other services
241

 
2,389

 
534

 
5,739

Sales and marketing
1,964

 
15,528

 
4,082

 
49,419

Research and development
1,612

 
28,759

 
3,241

 
62,785

General and administrative
1,029

 
5,083

 
2,266

 
23,578

Total stock-based compensation expense
$
4,950


$
52,607

 
$
10,336

 
$
143,335


21


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 (in thousands):
 
Three Months Ended
January 31,
 
Six Months Ended
January 31,
 
2016
 
2017
 
2016
 
2017
RSUs *
$

 
$
36,677

 
$

 
$
119,008

Stock options *
4,950

 
5,121

 
10,336

 
11,013

ESPP

 
10,809

 

 
13,314

Total stock-based compensation expense
$
4,950


$
52,607

 
$
10,336

 
$
143,335

_____________
*
Includes stock-compensation expense related to stock awards with performance conditions, which vesting was deemed probable during the six months ended January 31, 2017.
As of January 31, 2017, unrecognized stock-based compensation expense related to the outstanding stock awards was approximately $272.6 million and is expected to be recognized over a weighted-average period of approximately 1.9 years.
12.
INCOME TAXES
During the six months ended January 31, 2017, the income tax provision of $0.6 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 January 31, 2017, 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. During the three and six months ended January 31, 2016, the income tax provision of $0.6 million and $1.1 million, respectively, primarily consisted of foreign taxes on our international operations and state income taxes in the U.S.
13.
NET LOSS PER SHARE
The computation of basic and diluted net loss per share is as follows (in thousands, except share and per share data):
 
Three Months Ended
January 31,
 
Six Months Ended
January 31,
 
2016
 
2017
 
2016
 
2017
Numerator:
 
 
 
 
 
 
 
Net loss
$
(33,205
)
 
$
(93,212
)
 
$
(71,750
)
 
$
(255,381
)
Denominator:
 
 
 
 
 
 
 
Weighted-average shares—basic and diluted
43,666,825

 
141,996,600

 
43,252,879

 
108,185,194

Net loss per share attributable to common stockholders—basic and diluted
$
(0.76
)
 
$
(0.66
)
 
$
(1.66
)
 
$
(2.36
)
The 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:

22


NUTANIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

 
Three and Six Months Ended
January 31,
 
2016
 
2017
Stock awards
34,306,230

 
44,813,334

Common stock subject to repurchase
1,504,001

 
551,750

Common stock warrants

 
51,270

Convertible preferred stock
76,319,511

 

Convertible preferred stock warrants
824,094

 

Total
112,953,836


45,416,354


23


NUTANIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

14.
SEGMENT INFORMATION
The following table sets forth revenue by geographic area based on bill-to location (in thousands):
 
Three Months Ended
January 31,
 
Six Months Ended
January 31,
 
2016
 
2017
 
2016
 
2017
U.S.
$
61,720

 
$
102,173

 
$
118,448

 
$
205,044

Europe, the Middle East and Africa
20,982

 
33,272

 
37,343

 
57,520

Asia-Pacific
13,681

 
37,382

 
24,835

 
66,290

Other Americas
6,314

 
9,368

 
9,827

 
20,150

Total revenue
$
102,697


$
182,195

 
$
190,453

 
$
349,004

As of July 31, 2016 and January 31, 2017, $30.0 million and $58.0 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 January 31, 2016 and 2017, the Company’s purchases of goods or services from related parties totaled $0.3 million and $0.5 million, respectively. During the six months ended January 31, 2016 and 2017, the Company’s purchases of goods or services from related parties totaled $0.7 million and $0.7 million, respectively. Amounts payable to related parties as of July 31, 2016 and January 31, 2017 were immaterial. Revenue from related parties for the three months ended January 31, 2016 and 2017 were immaterial. Revenue from related parties for the six months ended January 31, 2016 and 2017 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 January 31, 2017, 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 Board are affiliated with Lightspeed Venture Partners.
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

24



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 5,382 end-customers as of January 31, 2017, including 473 Global 2000 enterprises. We define the number of end-customers as the number of end-customers for which we have received an order by the last day of the period, excluding partners to which we have sold product for their own demonstration purposes. A single organization or customer may represent multiple end-customers for separate divisions, segments or subsidiaries. Since shipping our first product in fiscal 2012, our end-customer base has grown rapidly. The number of end-customers grew from 2,638 as of January 31, 2016 to 5,382 as of January 31, 2017. 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, build-out of our global sales force and the acquisitions of Calm.io Pte. Ltd., or Calm, and PernixData, Inc., or PernixData, during the six months ended January 31, 2017. The number of our full-time employees increased from 1,589 as of January 31, 2016 to 2,559 as of January 31, 2017. 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, as well as 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 $5.2 million.
Our total revenue was $190.5 million and $349.0 million for the six months ended January 31, 2016 and 2017, respectively, representing year-over-year growth of 83.2%. Our net losses were $71.8 million and $255.4 million for the six months ended January 31, 2016 and 2017, respectively. Net cash used in operating activities was $1.1 million for the six months ended January 31, 2016 and net cash generated from operations was $23.9 million for the six months ended January 31, 2017. Free cash flow was an outflow of $21.2 million for the six months ended January 31, 2016 and an outflow of $0.7 million for the six months ended January 31, 2017. Our cash flow amounts for the six months ended January 31, 2017 include approximately $13.3 million of ESPP contributions withheld from employees. As of January 31, 2017, we had an accumulated deficit of $697.2 million.
Key Financial and Performance Metrics
We monitor the following key financial and performance metrics:

25



 
As of and for the
 
Three Months Ended January 31,
 
Six Months Ended January 31,
 
2016
 
2017
 
2016
 
2017
 
(Dollars in thousands)
Total revenue
$
102,697

 
$
182,195

 
$
190,453

 
$
349,004

Billings
$
143,373

 
$
227,380

 
$
271,662

 
$
467,147

Gross margin percentage
63
%
 
58
%
 
62
%
 
58
%
Adjusted gross margin percentage
63
%
 
60
%
 
62
%
 
60
%
Total deferred revenue
$
184,807

 
$
420,616

 
$
184,807

 
$
420,616

Net cash provided by (used in) operating activities
$
4,473

 
$
19,752

 
$
(1,143
)
 
$
23,912

Free cash flow
$
(5,906
)
 
$
7,051

 
$
(21,164
)
 
$
(704
)
Total end-customers
2,638

 
5,382

 
2,638

 
5,382

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:

26




Three Months Ended January 31,
 
Six Months Ended January 31,

2016
 
2017
 
2016
 
2017
 
(Dollars in thousands)
Total revenue
$
102,697

 
$
182,195

 
$
190,453

 
$
349,004

Change in deferred revenue (net of acquisitions)
40,676

 
45,185

 
81,209

 
118,143

Billings
$
143,373

 
$
227,380

 
$
271,662

 
$
467,147

 
 
 
 
 
 
 
 
Gross profit
$
64,761

 
$
105,349

 
$
117,438

 
$
202,396

Stock-based compensation
345

 
3,237

 
747

 
7,553

Amortization of intangible assets

 
360

 

 
598

Adjusted gross profit (non-GAAP)
$
65,106

 
$
108,946

 
$
118,185

 
$
210,547

Adjusted gross margin percentage (non-GAAP)
63
%
 
60
%
 
62
%
 
60
%

 
 
 
 
 
 
 
Net cash provided by (used in) operating activities
$
4,473

 
$
19,752

 
$
(1,143
)
 
$
23,912

Purchases of property and equipment
(10,379
)
 
(12,701
)
 
(20,021
)
 
(24,616
)
Free cash flow (non-GAAP)
$
(5,906
)
 
$
7,051

 
$
(21,164
)
 
$
(704
)
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, and as part of this, we intend to specifically expand our focus on opportunities with major accounts and large deals, which we define as transactions over $500,000. We have significantly increased our sales and marketing personnel, which grew by 55% from January 31, 2016 to January 31, 2017. We estimate, based on past experience, that sales team members typically become fully ramped 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 January 31, 2017, we considered 54% of our global sales team members to be fully productive, while the remaining 46% of our global sales team members are in the process of ramping up. As we shift the focus of some of our sales team members to major accounts and large deals, it may take longer for these sales team members to become fully productive, and there may also be an impact to the overall productivity of our sales team. For example, this realignment caused what we believe is a short-term impact on the overall productivity of our North American sales teams during the quarter ended January 31, 2017, which we expect to improve over the next few quarters, as well as a reduction in the portion of our billings attributable to large deals. 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

27



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 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 January 31, 2017, approximately 75% 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 3.8x greater, on average, than their initial order. This number increases to approximately 7.4x, on average, for our 473 Global 2000 end-customers and to more than 16.1x, 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 typically reflect higher gross margins and lower revenue in a given period, since the sale does not include the revenue or cost of the hardware components in an appliance. 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.
Revenue from Contracts with Customers

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 will be effective for us beginning August 1, 2018 and permits us the ability to early adopt on August 1, 2017. The standard permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). We are currently evaluating early adoption of the standard, as well as the method of adoption.
While we are continuing to assess all potential impacts of the standard, we currently believe the most significant impact relates to the timing of revenue recognition for certain software licenses sold with PCS for which we do not have VSOE under current guidance. Under the new standard the requirement to have VSOE for undelivered elements is eliminated and we will recognize revenue for such software licenses upon transfer of control to our customers.
Components of Our Results of Operations
Our results of operations for the three and six months ended January 31, 2017 include (i) stock-based compensation related to stock awards with performance conditions, referred to as the performance stock awards, due to our IPO and (ii) the impact of the Calm and PernixData acquisitions, which closed during the six months ended

28



January 31, 2017. No expense associated with the performance stock awards was recorded prior to our IPO, as the qualifying event (IPO) had not been deemed probable (see Note 11 of Part I, Item 1 of this Quarterly Report on Form 10-Q). Beginning in the year ended July 31, 2014, we began granting performance stock awards with vesting subject to (i) continuous service with us and (ii) satisfaction of one or more performance conditions (a liquidity event or both a liquidity event and certain performance targets). As a result of our IPO, we began to recognize stock-based compensation expense related to the performance stock awards during the three months ended October 31, 2016 as the performance condition, a liquidity event or IPO, was deemed probable of achievement.
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, as well as insurance and other costs associated with being a public company 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

29



Other income (expense)—net consists primarily of interest income and expense, foreign exchange gains or losses and gains or losses on investments. Upon the completion of our 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.



30



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 January 31,
 
Six Months Ended January 31,
 
2016
 
2017
 
2016
 
2017
 
(In thousands)
Consolidated Statements of Operations Data:
 
 
 
 
 
Revenue:
 
 
 
 
 
Product
$
81,229

 
$
138,508

 
$
151,625

 
$
268,165

Support and other services
21,468

 
43,687

 
38,828

 
80,839

Total revenue
102,697

 
182,195

 
190,453

 
349,004

Cost of revenue:
 
 
 
 
 
 
 
Product (1)(2)
29,977

 
58,403

 
57,634

 
110,613

Support and other services (1)
7,959

 
18,443

 
15,381

 
35,995

Total cost of revenue
37,936

 
76,846

 
73,015

 
146,608

Gross profit
64,761

 
105,349

 
117,438

 
202,396

Operating expenses:
 
 
 
 
 
 
 
Sales and marketing (1)(2)
66,128

 
111,244

 
124,727

 
240,019

Research and development (1)
26,024

 
70,914

 
49,881

 
146,195

General and administrative (1)
7,840

 
15,481

 
15,215

 
44,853

Total operating expenses
99,992

 
197,639

 
189,823

 
431,067

Loss from operations
(35,231
)
 
(92,290
)
 
(72,385
)
 
(228,671
)
Other expense—net
2,646

 
(421
)
 
1,775

 
(26,133
)
Loss before provision for income taxes
(32,585
)
 
(92,711
)
 
(70,610
)
 
(254,804
)
Provision for income taxes
620

 
501

 
1,140

 
577

Net loss
$
(33,205
)
 
$
(93,212
)
 
$
(71,750
)
 
$
(255,381
)
 
 
 
 
 
 
 
 
(1) Includes stock-based compensation expense as follows:
 
 
 
 
 
 
 
Product Cost of sales
$
104

 
$
848

 
$
213

 
$
1,814

Support Cost of sales
241

 
2,389

 
534

 
5,739

Sales and marketing
1,964

 
15,528

 
4,082

 
49,419

Research and development
1,612

 
28,759

 
3,241

 
62,785

General and administrative
1,029

 
5,083

 
2,266

 
23,578

       Total stock-based compensation
$
4,950

 
$
52,607

 
$
10,336

 
$
143,335

 
 
 
 
 
 
 
 
(2) Includes amortization of intangible assets as follows:
 
 
 
 
 
 
 
Product Cost of sales
$

 
$
360

 
$

 
$
598

Sales and marketing

 
248

 

 
415

       Total amortization of intangible assets
$

 
$
608

 
$

 
$
1,013




31



 
Three Months Ended January 31,
 
Six Months Ended January 31,
 
2016
 
2017
 
2016
 
2017
 
(As a percentage of total revenue)
Consolidated Statements of Operations Data:
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
Product
79
 %
 
76
 %
 
80
 %
 
77
 %
Support and other services
21
 %
 
24
 %
 
20
 %
 
23
 %
Total revenue
100
 %
 
100
 %
 
100
 %
 
100
 %
Cost of revenue:
 
 
 
 
 
 
 
Product
29
 %
 
32
 %
 
30
 %
 
32
 %
Support and other services
8
 %
 
10
 %
 
8
 %
 
10
 %
Total cost of revenue
37
 %
 
42
 %
 
38
 %
 
42
 %
Gross profit
63
 %
 
58
 %
 
62
 %
 
58
 %
Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
64
 %
 
62
 %
 
66
 %
 
69
 %
Research and development
25
 %
 
39
 %
 
26
 %
 
42
 %
General and administrative
8
 %
 
8
 %
 
8
 %
 
13
 %
Total operating expenses
97
 %
 
109
 %
 
100
 %
 
124
 %
Loss from operations
(34
)%
 
(51
)%
 
(38
)%
 
(66
)%
Other income (expense)—net
3
 %
 
0
 %
 
1
 %
 
(7
)%
Loss before provision for income taxes
(31
)%
 
(51
)%
 
(37
)%
 
(73
)%
Provision for income taxes
1
 %
 
0
 %
 
1
 %
 
0
 %
Net loss
(32
)%
 
(51
)%
 
(38
)%
 
(73
)%
Comparison of the Three and Six Months Ended January 31, 2016 and 2017
Revenue
 
Three Months Ended January 31,
 
Change
 
Six Months Ended January 31,
 
Change
 
2016
 
2017
 
$
 
%
 
2016
 
2017
 
$
 
%
 
(In thousands, except percentages)
Product
$
81,229

 
$
138,508

 
$
57,279

 
71
%
 
$
151,625

 
$
268,165

 
$
116,540

 
77
%
Support and other services
21,468

 
43,687

 
22,219

 
103
%
 
38,828

 
80,839

 
42,011

 
108
%
Total revenue
$
102,697

 
$
182,195

 
$
79,498

 
77
%
 
$
190,453

 
$
349,004

 
$
158,551

 
83
%
 
Three Months Ended January 31,
 
Change
 
Six Months Ended January 31,
 
Change
 
2016
 
2017
 
$
 
%
 
2016
 
2017
 
$
 
%
 
(In thousands, except percentages)
U.S.
$
61,720

 
$
102,173

 
$
40,453

 
66
%
 
$
118,448

 
$
205,044

 
$
86,596

 
73
%
Europe, the Middle East and Africa
20,982

 
33,272

 
12,290

 
59
%
 
37,343

 
57,520

 
20,177

 
54
%
Asia-Pacific
13,681

 
37,382

 
23,701

 
173
%
 
24,835

 
66,290

 
41,455

 
167
%
Other Americas
6,314

 
9,368

 
3,054

 
48
%
 
9,827

 
20,150

 
10,323

 
105
%
Total revenue
$
102,697

 
$
182,195

 
$
79,498