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 October 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	27-0989767
(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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	o (Do not check if a smaller reporting company)	Smaller reporting company	o
Emerging growth company	x	If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.	o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act).    Yes  o    No  x

As of November 30, 2017, the registrant had 110,438,830 shares of Class A common stock, $0.000025 par value per share, and 49,986,397 shares of Class B common stock, $0.000025 par value per share, outstanding.

TABLE OF CONTENTS

			PAGE
PART I.		FINANCIAL INFORMATION
	Item 1	Financial Statements (Unaudited)
		Condensed Consolidated Balance Sheets as of October 31, 2017 and July 31, 2017	5
		Condensed Consolidated Statements of Operations for the Three Months Ended October 31, 2017 and 2016	6
		Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended October 31, 2017 and 2016	7
		Condensed Consolidated Statements of Cash Flows for the Three Months Ended October 31, 2017 and 2016	8
		Notes to Condensed Consolidated Financial Statements	9
	Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
	Item 3	Quantitative and Qualitative Disclosures About Market Risk	40
	Item 4	Controls and Procedures	41
PART II.		OTHER INFORMATION
	Item 1	Legal Proceedings	41
	Item 1A	Risk Factors	41
	Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	70
	Item 6	Exhibits	71
INDEX TO EXHIBITS			71
SIGNATURES			72

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, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or 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;

• our business plan and our ability to effectively manage our growth;

• anticipated trends, growth rates and challenges in our business and in the markets in which we operate, including the productivity of our sales team;

• our ability to develop new solutions, product features and technology, such as Nutanix Calm and Nutanix Xi Cloud Services, and bring them to market in a timely manner;

• market acceptance of new technology and recently introduced solutions;

• the interoperability and availability of our solutions with and on third-party hardware platforms, such as IBM Power Systems;

• 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;

• our ability to attract new end-customers, and retain and grow sales from our existing end-customers;

• our ability to maintain and strengthen our relationships with our channel and OEM partners;

• the effects of seasonal trends on our results of operations;

• our expectations concerning relationships with third parties, including our ability to compress and stabilize sales cycles;

• our ability to maintain, protect and enhance our intellectual property;

• our ability to continue to expand internationally;

• the effects of increased competition in our market and our ability to compete effectively;

• anticipated capital expenditures;

• future acquisitions or investments in complementary companies, products, services or technologies and the ability to successfully integrate acquisitions such as Calm and PernixData;

• our ability to stay in compliance with laws and regulations that currently apply or become applicable to our business both in the United States and internationally;

• economic and industry trends, projected growth or trend analysis;

• the attraction and retention of qualified employees and key personnel;

3

• 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. The forward-looking statements in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update, revise or publicly release the results of any revision to these forward-looking statements to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed on our forward-looking statements and you should not place undue reliance on our forward-looking statements.

4

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

NUTANIX, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data, unaudited)

	As of
	July 31, 2017 *As Adjusted			October 31, 2017
Assets
Current assets:
Cash and cash equivalents	$	138,359		$	132,459
Short-term investments	210,694			233,486
Accounts receivable—net	178,876			171,550
Deferred commissions—current	23,843			26,464
Prepaid expenses and other current assets	28,362			28,942
Total current assets	580,134			592,901
Property and equipment—net	58,072			67,575
Deferred commissions—non-current	49,684			55,520
Intangible assets—net	26,001			24,895
Goodwill	16,672			16,672
Other assets—non-current	7,649			7,347
Total assets	$	738,212		$	764,910
Liabilities, Convertible Preferred Stock and Stockholders’ Equity
Current liabilities:
Accounts payable	$	73,725		$	68,629
Accrued compensation and benefits	57,521			50,301
Accrued expenses and other current liabilities	9,707			9,431
Deferred revenue—current	170,123			190,592
Total current liabilities	311,076			318,953
Deferred revenue—non-current	198,933			218,252
Early exercised stock options liability	851			571
Other liabilities—non-current	10,289			10,554
Total liabilities	521,149			548,330
Commitments and contingencies (Note 6)
Stockholders’ equity:
Preferred stock, par value of $0.000025 per share— 200,000,000 shares authorized as of July 31, 2017 and October 31, 2017; no shares issued and outstanding as of July 31, 2017 and October 31, 2017	—			—
Common stock, par value of $0.000025 per share—1,200,000,000 (1,000,000,000 Class A, 200,000,000 Class B) shares authorized as of July 31, 2017 and October 31, 2017; 154,636,520 (93,570,171 Class A and 61,066,349 Class B) and159,887,325 (108,173,525 Class A and 51,713,800 Class B) shares issued and outstanding as of July 31, 2017 and October 31, 2017	4			4
Additional paid-in capital	948,134			1,009,268
Accumulated other comprehensive loss	(106		)	(236		)
Accumulated deficit	(730,969		)	(792,456		)
Total stockholders’ equity	217,063			216,580
Total liabilities and stockholders’ equity	$	738,212		$	764,910

* See Note 3 for a summary of adjustments related to the adoption of the new revenue recognition standard.

See the accompanying notes to condensed consolidated financial statements.

5

NUTANIX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share data, unaudited)

	Three Months Ended October 31,
	2016 *As Adjusted			2017
Revenue:
Product	$	153,536		$	219,052
Support and other services	35,025			56,500
Total revenue	188,561			275,552
Cost of revenue:
Product	52,210			85,162
Support and other services	17,552			23,460
Total cost of revenue	69,762			108,622
Gross profit	118,799			166,930
Operating expenses:
Sales and marketing	128,625			145,405
Research and development	75,281			64,512
General and administrative	29,372			16,052
Total operating expenses	233,278			225,969
Loss from operations	(114,479		)	(59,039		)
Other expense—net	(25,712		)	(189		)
Loss before provision for income taxes	(140,191		)	(59,228		)
Provision for income taxes	111			2,259
Net loss	$	(140,302	)	$	(61,487	)
Net loss per share attributable to Class A and Class B common stockholders—basic and diluted	$	(1.89	)	$	(0.39	)
Weighted-average shares used in computing net loss per share attributable to Class A and Class B common stockholders—basic and diluted	74,373,788			156,780,631

* See Note 3 for a summary of adjustments related to the adoption of the new revenue recognition standard.

See the accompanying notes to condensed consolidated financial statements.

6

NUTANIX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands, unaudited)

	Three Months Ended October 31,
	2016 *As Adjusted			2017
Net loss	$	(140,302	)	$	(61,487	)
Other comprehensive loss —net of tax:
Change in unrealized loss on available-for-sale securities, net of tax	(8		)	(130		)
Total other comprehensive loss —net of tax	(8		)	(130		)
Comprehensive loss	$	(140,310	)	$	(61,617	)

* See Note 3 for a summary of adjustments related to the adoption of the new revenue recognition standard.

See the accompanying notes to condensed consolidated financial statements.

7

NUTANIX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, unaudited

	Three Months Ended October 31,
	2016 *As Adjusted			2017
Cash flows from operating activities:
Net loss	$	(140,302	)	$	(61,487	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	8,572			11,333
Stock-based compensation	90,728			35,515
Loss on debt extinguishment	3,320			—
Change in fair value of convertible preferred stock warrant liability	21,133			—
Change in fair value of contingent consideration	186			282
Other	183			131
Changes in operating assets and liabilities:
Accounts receivable—net	(36,213		)	7,326
Deferred commission	(4,780		)	(8,457		)
Prepaid expenses and other assets	840			(307		)
Accounts payable	5,052			(6,504		)
Accrued compensation and benefits	3,518			(7,220		)
Accrued expenses and other liabilities	717			(293		)
Deferred revenue	51,206			39,788
Net cash provided by operating activities	4,160			10,107
Cash flows from investing activities:
Purchases of property and equipment	(11,915		)	(17,965		)
Purchases of investments	(87,448		)	(59,108		)
Maturities of investments	19,950			35,920
Sale of investments	31,638			—
Payments for business acquisitions, net of cash acquired	(184		)	—
Net cash used in investing activities	(47,959		)	(41,153		)
Cash flows from financing activities:
Proceeds from sales of shares through employee equity incentive plans, net of repurchases	1,472			25,231
Proceeds from initial public offering, net of underwriting discounts and commissions	254,455			—
Payments of offering costs, net	(2,243		)	(85		)
Repayment of senior notes	(75,000		)	—
Debt extinguishment costs	(1,580		)	—
Payment of debt in conjunction with a business acquisition	(7,124		)	—
Other	73			—
Net cash provided by financing activities	170,053			25,146
Net increase (decrease) in cash and cash equivalents	126,254			(5,900		)
Cash and cash equivalents—beginning of period	99,209			138,359
Cash and cash equivalents—end of period	$	225,463		$	132,459
Supplemental disclosures of cash flow information:
Cash paid for income taxes	$	698		$	2,066
Cash paid for interest	$	1,271		$	—
Supplemental disclosures of non-cash investing and financing information:
Vesting of early exercised stock options	$	499		$	249
Purchases of property and equipment included in accounts payable	$	5,033		$	7,084
Offering costs included in accounts payable	$	367		$	—
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 Note 3 for a summary of adjustments related to the adoption of the new revenue recognition standard.

See the accompanying notes to condensed consolidated financial statements.

8

NUTANIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 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, “we” or "our") has operations throughout North America, Europe, Asia-Pacific, Middle East, Latin America and Africa.

Our enterprise cloud operating system converges traditional silos of server, virtualization, storage and networking into one integrated solution and unifies private and public cloud into a single software fabric. We primarily sell our products and services to end-customers through distributors, resellers and original equipment manufacturers, or OEMs (collectively “Partners”).

Note 2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation and Significant Accounting Policies—The accompanying condensed consolidated financial statements, which include the accounts of Nutanix, Inc. and our wholly-owned subsidiaries, have been prepared in conformity with accounting principles generally accepted in the United States, or U.S. GAAP, and, except for the impact of the adoption of the new accounting guidance related to revenue recognition, consistent in all material respects with those applied in our Annual Report on Form 10-K for the fiscal year ended July 31, 2017, filed with the Securities and Exchange Commission, or SEC, on September 18, 2017. All intercompany accounts and transactions have been eliminated in consolidation. The condensed consolidated financial statements are unaudited, but include all adjustments of a normal recurring nature necessary for a fair presentation of our quarterly results. Certain prior period amounts have been adjusted as a result of our early adoption of new accounting guidance related to revenue recognition. Refer to “Summary of Significant Accounting Policies” and “Recent Accounting Pronouncements” below for more information.

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes in our Annual Report on Form 10-K for the fiscal year ended July 31, 2017.

Effective August 1, 2017, we adopted the requirements of Accounting Standards Update, or ASU, No. 2014-09, Revenue from Contracts with Customers, or ASC 606, as discussed in detail in Note 3. All amounts and disclosures set forth in this quarterly report on Form 10-Q have been updated to comply with ASC 606, as indicated by the "as adjusted" footnote.

Use of Estimates—The preparation of interim 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 standalone selling prices for products and related support; determination of fair value of stock-based awards; 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.

9

Concentration Risk:

Concentration of revenue and accounts receivable—We sell our products primarily through Partners and occasionally directly to end-customers. For the three months ended October 31, 2016 and 2017, no end-customer accounted for 10% or more of total revenue.

For each significant Partner, revenue as a percentage of total revenue and accounts receivable as a percentage of total accounts receivable, net are as follows:

	Revenue				Accounts Receivable as of
	Three Months Ended October 31,
Customers	2016 **As Adjusted		2017		July 31, 2017		October 31, 2017
Partner A	14	%	17	%	*		14	%
Partner B	20	%	28	%	12	%	17	%
Partner C	13	%	19	%	14	%	*
Partner D	12	%	10	%	20	%	16	%
Partner E	*		*		*		*
Partner F	*		12	%	18	%	11	%

___________________

* Less than 10%

** Adjusted to include the impact of the adoption of the new revenue recognition standard. Refer to Note 3 for more details on the impact of the adoption of this standard.

Summary of Significant Accounting Policies—Except for the accounting policies for revenue recognition, deferred revenue, and deferred commissions that were updated as a result of adopting ASC 606, there have been no changes to our significant accounting policies described in the Annual Report on Form 10-K for the fiscal year ended July 31, 2017, filed with the SEC on September 18, 2017, that have had a material impact on our condensed consolidated financial statements and related notes. See Note 3 for the summary of the new accounting policies under ASC 606.

Recently Adopted Accounting Pronouncement—In May 2014, the Financial Accounting Standards Board, or FASB, issued ASC 606. The standard is a comprehensive new revenue recognition model that requires revenue to be recognized in a manner to depict the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. The FASB has issued several amendments to the standard, including clarifications on disclosure of prior-period performance obligations and remaining performance obligations.

The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). The new standard would have been effective for us beginning August 1, 2018, and adoption as of the original effective date of August 1, 2017 was permitted. We elected to early adopt the standard effective August 1, 2017 using the full retrospective method, which required us to restate our historical financial information to be consistent with the new standard. Refer to Note 3 for the details of impacts to previously reported results.

In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting, which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The guidance is effective for annual periods beginning after December 15, 2017, with early adoption permitted, including adoption in any interim period for which financial statements have not yet been issued. We adopted this ASU effective August 1, 2017 and our adoption did not have a material impact on our condensed consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805) to clarify the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.  The guidance is effective for fiscal years beginning after December 15, 2017 including interim periods within those fiscal years. We adopted this ASU effective August 1, 2017 and as we did not have any business acquisition during the three months ended October 31, 2017, our adoption did not have any impact on our condensed consolidated financial statements.

10

Recently Issued and Not Yet Adopted Accounting Pronouncements—In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments, which clarifies how certain cash receipts and cash payments are presented and classified in the statement of cash flows. Further, in November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash or restricted cash equivalents should be included with cash and cash equivalents when reconciling beginning-of-period and end-of-period amounts shown on the statement of cash flows. ASU 2016-18 is effective for us beginning August 1, 2018, with early adoption permitted. We do not believe that adoption of this ASU will have a material impact on our condensed 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 us 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 us beginning August 1, 2018, with early adoption permitted. We are currently evaluating the effect the adoption of this guidance will have on our condensed 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 us beginning August 1, 2018. The new standard will require adoption on a retrospective basis unless it is impracticable to apply, in which case we would be required to apply the amendments prospectively as of the earliest date practicable. We are currently evaluating the effect the adoption of this guidance will have on our condensed 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 us beginning August 1, 2019, with early adoption permitted. This new standard requires a modified retrospective transition approach and provides certain optional transition relief. We are currently evaluating the effect the adoption of this guidance will have on our condensed consolidated financial statements.

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NUTANIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

Note 3. REVENUE, DEFERRED REVENUE AND DEFERRED COMMISSIONS

Revenue Recognition—Effective August 1, 2017, we adopted ASC 606 using the full retrospective method, which required us to restate our historical financial information to be consistent with the standard. The most significant impact of the standard related to the timing of revenue recognition for certain software licenses sold with post contract customer support, or PCS, for which we did not have vendor specific objective evidence, or VSOE, of fair value under the previous revenue recognition guidance. Under the new standard, the requirement to have VSOE for undelivered elements is eliminated and we now recognize revenue for such software licenses upon transfer of control to our customers. In addition, the adoption of ASC 606 has also resulted in differences in the timing of recognition of contract costs, such as sales commissions, as well as the corresponding impacts to provision for income taxes. The adoption of the standard had no significant impact to the provision for income taxes and had no impact to the net cash from or used in operating, investing, or financing on our condensed consolidated statements of cash flows. See ASC 606 Adoption Impact to Reported Results below for the impact of adoption of the standard on our condensed consolidated balance sheets and condensed consolidated statements of operations.

ASC 606 Adoption Impact to Previously Reported Results

We adjusted our condensed consolidated financial statements from amounts previously reported due to the adoption of ASC 606. Select condensed consolidated balance sheet line items, which reflects the adoption of ASC 606, are as follows:

Balance Sheet:	As of July 31, 2017
	As Previously Reported		Impact of Adoption				As Adjusted
	(in thousands)
Assets
Deferred commissions - current	$	27,679	$	(3,836	)	(1)	$	23,843
Deferred commissions - non-current	33,709		15,975			(1)	49,684
Total deferred commissions	$	61,388	$	12,139			$	73,527
Liabilities
Deferred revenue - current	$	233,498	$	(63,375	)	(2)	$	170,123
Deferred revenue - non-current	292,573		(93,640		)	(2)	198,933
Total deferred revenue	$	526,071	$	(157,015	)		$	369,056
Accrued expenses and other current liabilities	$	9,414	$	293		(3)	$	9,707
Stockholders' equity	$	48,202	$	168,861			$	217,063

_______________________

(1) Impact of cumulative change in commissions expense

(2) Impact of cumulative change in revenue

(3) Impact of cumulative change in provision for income taxes

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NUTANIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

Select unaudited condensed consolidated statement of operations line items, which reflects the adoption of ASC 606, are as follows:

	Three Months Ended October 31, 2016
	As Previously Reported			Impact of Adoption			As Adjusted
Revenue	(in thousands, except per share data)
Product	$	129,657		$	23,879		$	153,536
Support and other services	37,152			(2,127		)	35,025
Total revenue	$	166,809		$	21,752		$	188,561
Gross profit	$	97,047		$	21,752		$	118,799
Operating expenses
Sales and marketing expenses	$	128,775		$	(150	)	$	128,625
Loss from operations	$	(136,381	)	$	21,902		$	(114,479	)
Net Loss	$	(162,169	)	$	21,867		$	(140,302	)
Basic and diluted net loss per share	$	(2.18	)	$	0.29		$	(1.89	)

Unaudited revenue by geographic location based on bill-to location, which reflects the adoption of ASC 606, are as follows:

	Three Months Ended October 31, 2016
	As Previously Reported		Impact of Adoption		As Adjusted
	(in thousands)
U.S.	$	102,871	$	3,297	$	106,168
Europe, the Middle East and Africa	24,248		1,168		25,416
Asia-Pacific	28,908		16,939		45,847
Other Americas	10,782		348		11,130
Total revenue	$	166,809	$	21,752	$	188,561

The adoption impacted certain line items in the cash flows from operating activities as follows:

	Three Months Ended October 31, 2016
	As Previously Reported			Impact of Adoption			As Adjusted
Cash flows from operating activities:	(in thousands)
Net loss	$	(162,169	)	$	21,867		$	(140,302	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Deferred commissions	$	(4,630	)	$	(150	)	$	(4,780	)
Accrued expenses and other liabilities	$	682		$	35		$	717
Deferred revenue	$	72,958		$	(21,752	)	$	51,206

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(Unaudited)

The core principle of ASC 606 is to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled in exchange for those goods or services. This principle is achieved through applying the following five-step approach:

• Identification of the contract, or contracts, with a customer — A contract with a customer exists when (i) we enter into an enforceable contract with a customer that defines each party’s rights regarding the goods or services to be transferred and identifies the payment terms related to these goods or services, (ii) the contract has commercial substance and, (iii) we determine that collection of substantially all consideration for goods or services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. We apply judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer.

• Identification of the performance obligations in the contract —Performance obligations promised in a contract are identified based on the goods or services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the goods or service either on its own or together with other resources that are readily available from third parties or from us, and are distinct in the context of the contract, whereby the transfer of the goods or services is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised goods or services, we apply judgment to determine whether promised goods or services are capable of being distinct and distinct in the context of the contract. If these criteria are not met the promised goods or services are accounted for as a combined performance obligation.

• Determination of the transaction price —The transaction price is determined based on the consideration to which we will be entitled in exchange for transferring goods or services to the customer.

• Allocation of the transaction price to the performance obligations in the contract — If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price, or SSP, basis. We determine standalone selling price based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, we estimate the standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations.

• Recognition of revenue when, or as, we satisfy a performance obligation — We satisfy performance obligations either over time or at a point in time as discussed in further detail below. Revenue is recognized at the time the related performance obligation is satisfied by transferring a promised good or service to a customer.

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(Unaudited)

Disaggregation of Revenue

We generate revenue from the sale of our software solution, which can be delivered on a hardware appliance or on a stand-alone basis, PCS and professional services. A substantial portion of our revenue is generated via channel partners. We also sell our software solution through our OEM partners, Dell Technologies and Lenovo Group Ltd. These OEMs embed our software in their own hardware and we provide limited PCS on these transactions. All revenue recognized in the condensed consolidated statement of operations is considered to be revenue from contracts with customers. The following table depicts the disaggregation of revenue according to revenue type and is consistent with how we evaluate our financial performance:

	Three Months Ended October 31,
	2016		2017
	(in thousands)
Software revenue	$	104,745	$	138,214
Hardware revenue	48,791		80,838
Support and other services revenue	35,025		56,500
Total revenue	$	188,561	$	275,552

Software revenue —A substantial majority of our product revenue is generated from the sale of our software operating system, which is typically delivered on a hardware appliance that is configured to order, and can also be sold as stand-alone software, which is installed into our customers' separately procured hardware appliance. Software revenue includes our base operating system, which can be delivered through different platforms, and licenses to other additional features which are sold by us. Revenue from our software products is generally recognized upon transfer of control to our customers.

Hardware revenue —In transactions where we deliver the hardware appliance, we consider ourselves to be the principal in the transaction and we record revenue and costs of goods sold on a gross basis. In transactions where our customers procure hardware from another source, such as through our OEM partners, directly from our contract manufacturers, or from other manufacturers of Nutanix compatible hardware, we consider ourselves to be an agent for the hardware appliance. We consider the amount allocated to hardware revenue to be equivalent to the cost of the hardware procured. Hardware revenue is generally recognized upon transfer of control to our customers.

Support and other services revenue—We generate our support and other services revenue primarily from PCS contracts, and, to a lesser extent, from professional services. The majority of our product sales are sold in conjunction with PCS contracts with terms ranging from one to five years. We recognize revenue from PCS contracts ratably over the contractual service period. The service period typically commences upon transfer of control of the corresponding products to our customer. We recognize revenue related to professional services as they are performed.

Contracts with multiple performance obligations—Some of our contracts with customers contain multiple performance obligations. For these contracts, we account for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative SSP, basis. For deliverables that we routinely sell separately, such as support and maintenance on our core offerings, we determine SSP by evaluating the stand-alone sales over the trailing 12-months. For those that are not sold routinely, we determine SSP based on our overall pricing trends and objectives, taking into consideration market conditions and other factors, including the value of our contracts, the products sold and geographic locations.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

Contract Balances—The timing of revenue recognition may differ from the timing of invoicing to customers. Accounts receivable are recorded at the invoiced amount, net of an allowance for doubtful accounts. A receivable is recognized in the period we deliver goods or provide services or when our right to consideration is unconditional.

Payment terms on invoiced amounts are typically 30 days. The balance of accounts receivable, net of allowance for doubtful accounts, as of July 31, 2017 and October 31, 2017 is presented in the accompanying consolidated balance sheets.

Costs to obtain and fulfill a contract—We capitalize certain contract acquisition costs consisting primarily of commissions paid and the related payroll taxes when customer contracts are signed. Commission expenses paid to sales personnel and the related payroll taxes that are incremental to obtaining customer contracts are capitalized. The deferred sales commission amounts are amortized based on the expected future revenue streams under the customer contracts. Amortization of deferred sales commissions is included in sales and marketing expense in the accompanying consolidated statements of operations. We classify deferred commissions as current or non-current based on the timing of when we expect to recognize the expense. The short-term portion of these costs is deferred and shown as "Deferred commissions -current" and the long-term portion is shown as "Deferred commissions-non-current" in the condensed consolidated balance sheets. These costs are periodically reviewed for impairment. Significant changes in the balance of total deferred commissions (contract asset) during the three months ended October 31, 2017 are as follows:

	As of July 31, 2017 *As Adjusted		Additions		Commissions Recognized			As of October 31, 2017
	(in thousands)
Deferred commissions	$	73,527	$	33,807	$	(25,350	)	$	81,984

Of the $82.0 million total deferred commissions balance as of October 31, 2017, we expect to recognize approximately 32% as commission expense over the next 12 months and the remainder thereafter.

Deferred revenue— We record deferred revenue when cash payments are received in advance of our performance. The current portion of deferred revenue represents the amounts that are expected to be recognized as revenue within one year of the consolidated balance sheet date. Significant changes in the balance of total deferred revenue (contract liability) during the three months ended October 31, 2017 are as follows:

	As of July 31, 2017 *As Adjusted		Additions		Revenue Recognized			As of October 31, 2017
	(in thousands)
Deferred revenue	$	369,056	$	96,288	$	(56,500	)	$	408,844

* See details above for the summary of adjustments to deferred commission and deferred revenue as a result of the adoption of ASC 606.

During the three months ended October 31, 2017, we recognized $49.6 million pertaining to amounts deferred as of July 31, 2017. During the three months ended October 31, 2016, we recognized $29.6 million pertaining to amounts deferred as of July 31, 2016.

The majority of our contracted but not invoiced performance obligations are subject to cancellation terms. Revenue allocated to remaining performance obligations represent contracted revenue that has not yet been recognized (“contracted not recognized”), which includes deferred revenue and non-cancelable amounts that will be invoiced and recognized as revenue in future periods, and excludes performance obligations that are subject to cancellation terms. Contracted not recognized revenue was $442.4 million as of October 31, 2017, of which we expect to recognize approximately 49% of the revenue over the next 12 months and the remainder thereafter.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

Note 4. FAIR VALUE MEASUREMENTS

The fair value of our financial assets and liabilities measured on a recurring basis is as follows:

	As of July 31, 2017
	Level I		Level II		Level III		Total
	(in thousands)
Financial Assets:
Cash equivalents:
Money market funds	$	34,784	$	—	$	—	$	34,784
Commercial paper	—		23,041		—		23,041
Short-term investments:
Corporate bonds	—		160,634		—		160,634
Commercial paper	—		36,084		—		36,084
U.S. government securities	—		13,976				13,976
Total measured at fair value	34,784		233,735		—		268,519
Cash							80,534
Total cash, cash equivalents and short-term investments							$	349,053
Financial Liabilities:
Contingent consideration	$	—	$	—	$	4,295	$	4,295

	As of October 31, 2017
	Level I		Level II		Level III		Total
	(in thousands)
Financial Assets:
Cash equivalents:
Money market funds	$	30,561	$	—	$	—	$	30,561
Commercial paper	—		9,986		—		9,986
Short-term investments:
Corporate bonds	—		185,757		—		185,757
Commercial paper	—		36,768		—		36,768
U.S. government securities	—		10,961		—		10,961
Total measured at fair value	$	30,561	$	243,472	$	—	274,033
Cash							91,912
Total cash, cash equivalents and short-term investments							$	365,945
Financial Liabilities:
Contingent consideration	$	—	$	—	$	4,577	$	4,577

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

A summary of the changes in the fair value of our contingent consideration is as follows:

	Three Months Ended October 31,
	2016		2017
	(in thousands)
Contingent consideration—beginning balance	$	—	$	4,295
Assumed in a business acquisition	2,371		—
Change in fair value*	186		282
Contingent consideration—ending balance	$	2,557	$	4,577

____________

* Recorded in the condensed consolidated statements of operations within general and administrative expenses

We remeasure the fair value of our Level 3 contingent consideration liability using the Monte Carlo simulation on projected future payments. The fair value is determined by calculating the net present value of the expected payments using significant inputs that are not observable in the market, including the probability of achieving the milestone, estimated bookings and discount rates. The fair value of the contingent consideration will increase or decrease according to the movement of the inputs.

Note 5. BALANCE SHEET COMPONENTS

Short-Term Investments—The amortized cost of our short-term investments approximate their fair value. As of July 31, 2017 and October 31, 2017, unrealized gains or losses from our 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 our investments in marketable debt securities, by the contractual maturity date:

	As of October 31, 2017
	(in thousands)
Due within 1 year	$	153,044
Due after 1 year through 3 years	80,442
Total	$	233,486

Property and Equipment—Net—Property and equipment, net consists of the following:

	Estimated Useful Life (In months)	As of
		July 31, 2017			October 31, 2017
		(in thousands)
Computer, production, engineering and other equipment	36	$	85,280		$	97,027
Demonstration units	12	46,387			49,109
Leasehold improvements	*	10,562			14,605
Furniture and fixtures	60	4,744			5,483
Total property and equipment—gross		146,973			166,224
Less accumulated depreciation and amortization		(88,901		)	(98,649		)
Total property and equipment—net		$	58,072		$	67,575

____________

* 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 our property and equipment was $8.2 million and $10.2 million for the three months ended October 31, 2016 and 2017, respectively.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

Intangible Assets—Net—Intangible assets, net consists of the following:

	As of
	July 31, 2017			October 31, 2017
	(in thousands
Indefinite-lived intangible asset:
In-process R&D*	$	16,100		$	—
Finite-lived intangible assets:
Developed technology*	7,300			23,400
Customer relationships	4,830			4,830
Total finite-lived intangible assets, gross	12,130			28,230
Total intangible assets, gross	28,230			28,230
Less:
Accumulated amortization of developed technology	(1,314		)	(2,209		)
Accumulated amortization of customer relationships	(915		)	(1,126		)
Total accumulated amortization	(2,229		)	(3,335		)
Intangible assets, net	$	26,001		$	24,895

* We started amortizing the in-process R&D during the first quarter of fiscal 2018 because the related technology was completed and released in the first quarter of fiscal 2018. We are amortizing the developed technology using the straight-line method over a useful life of 5 years. Based on the foregoing, the balance of in-process R&D is now presented as part of developed technology under finite-lived intangible assets as of October 31, 2017.

The amortization expense of finite-lived intangible assets is being recognized in the condensed consolidated statement of operations within product cost of revenue for developed technology and sales and marketing expenses for customer relationships.

Estimated future amortization expense of finite-lived intangible assets is as follows:

Year Ending July 31:	(In thousands)
2018 (remaining nine months)	$	4,066
2019	5,421
2020	5,421
2021	5,421
2022	4,224
Thereafter	342
Total	$	24,895

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

Accrued Compensation and Benefits—Accrued compensation and benefits consists of the following:

	As of
	July 31, 2017		October 31, 2017
	(in thousands)
Accrued commissions	$	20,388	$	19,410
Accrued vacation	6,286		6,984
Contributions to ESPP withheld	14,371		6,008
Accrued bonus	7,342		5,384
Payroll taxes payable	3,434		6,603
Other	5,700		5,912
Total accrued compensation and benefits	$	57,521	$	50,301

Accrued Expenses and Other Current Liabilities—Accrued expenses and other current liabilities consists of the following:

	As of
	July 31, 2017		October 31, 2017
	(in thousands)
Accrued professional services	$	4,167	$	3,635
Income taxes payable*	3,873		3,929
Other	1,667		1,867
Total accrued expenses and other current liabilities	$	9,707	$	9,431

* Balance as of July 31, 2017 was adjusted to reflect the impact of the adoption of ASC 606 on income taxes. See Note 3 for a summary of adjustments.

Note 6.    COMMITMENTS AND CONTINGENCIES

Except for the items below, there have been no material changes to our commitments compared to the commitments described in Note 7, Commitments and Contingencies, in Notes to Consolidated Financial Statements in Item 8 of Part II of the Form 10-K for the fiscal year ended July 31, 2017.

Purchase Commitments—In the normal course of business, we make commitments with our third-party hardware contract manufacturers to manufacture our inventories and non-standard components based on our forecasts. These commitments consist of obligations for on-hand inventories and non-cancelable purchase orders for non-standard components. We record a charge for firm, non-cancelable and unconditional purchase commitments with our third-party hardware contract manufacturers for non-standard components when and if quantities exceed our future demand forecasts through a charge to cost of product sales. As of October 31, 2017, we had approximately $23.6 million of non-cancelable purchase commitments pertaining to our normal operations, and approximately $79.0 million of other purchase obligations with our contract manufacturers.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

Note 7. STOCKHOLDERS’ EQUITY

Preferred Stock

Upon the closing of our initial public offering, or IPO, in October 2016, we 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 our Board of Directors, or the Board. As of October 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 or outstanding.

Common Stock

We have two classes of authorized common stock, Class A common stock and Class B common stock. As of October 31, 2017, we had 1,000,000,000 shares of Class A common stock authorized with a par value of $0.000025 per share and 200,000,000 shares of Class B common stock authorized with a par value of $0.000025 per share. As of October 31, 2017, 108,173,525 shares of Class A common stock were issued and outstanding and 51,713,800 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. Shares issued in connection with exercises of stock options, vesting of restricted stock units, or shares purchased under the employee stock purchase plan are generally automatically converted into shares of our Class A common stock. Shares issued in connection with an exercise of the common stock warrants are converted into shares of our Class B common stock.

Note 8. EQUITY AWARD PLANS

Stock Plans—In June 2010, we adopted the 2010 Stock Plan, or the 2010 Plan, and in December 2011, we adopted the 2011 Stock Plan, or 2011 Plan. In December 2015, the Board adopted the 2016 Equity Incentive Plan, or the 2016 Plan, and together with the 2010 Plan and 2011 Plan, the Stock Plans, which was amended in September 2016. Our stockholders approved the 2016 Plan in March 2016 and it became effective in connection with our IPO in October 2016. As a result, upon the IPO, we 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, we may grant incentive stock options, or ISOs, non-statutory stock options, or NSOs, restricted stock, or RS, restricted stock units, or RSUs, and stock appreciation rights, or SARs, to employees, directors and consultants. We have initially reserved 22,400,000 shares of our 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 also includes 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 our immediately preceding fiscal year, or such other amount as may be determined by the Board. Accordingly, on August 1, 2017, the number of shares of Class A common stock available for issuance under our 2016 Plan increased by 7,731,826 shares pursuant to these provisions. As of October 31, 2017, we had reserved a total of 56,636,515 shares for the issuance of equity awards under the Stock Plans, of which 22,201,692 shares were still available for grant.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

Restricted Stock Units

Performance RSUs. We granted RSUs that contain both service and performance conditions to our executives and employees, which we refer to as Performance RSUs. Vesting of the Performance RSUs is subject to continuous service with us and satisfaction of certain of our liquidity events, including the expiration of a lock-up period established in connection with the IPO, or both certain liquidity events and specified performance targets. While we recognize 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, we began to recognize Performance RSUs with liquidity event performance conditions as the satisfaction of the performance conditions for vesting became probable.

The summary of RSU activity under the Stock Plans is as follows:

	Number of Shares		Grant Date Fair Value per Share
Outstanding—July 31, 2017	17,376,090		$	18.85
Granted	1,553,392		$	23.72
Released	(1,412,978	)	$	16.04
Canceled/forfeited	(771,957	)	$	23.58
Outstanding—October 31, 2017	16,744,547		$	19.32

Subsequent to October 31, 2017, we granted 7,311,448 RSUs to our employees with a weighted-average grant date fair value of $34.39 per share.

Stock Options—We did not grant any stock options during the three months ended October 31, 2017. A total of 2,580,224 stock options were exercised during the three months ended October 31, 2017 for an average exercise price of $3.09. As of October 31, 2017, 17,656,096 stock options remained outstanding.

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 our stockholders in March 2016, or the 2016 ESPP. The 2016 ESPP became effective in connection with our 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 also includes an annual increase on the first day of each fiscal year beginning in fiscal 2018, equal to the lesser of: 3,800,000 shares, 1% of the outstanding shares of classes of common stock as of the last day of our immediately preceding fiscal year, or such other amount as may be determined by the Board. Accordingly, on August 1, 2017, the number of shares of Class A common stock available for issuance under 2016 ESPP increased by 1,546,365 shares pursuant to these provisions.

The 2016 ESPP allows eligible employees to purchase shares of our Class A common stock at a discount through payroll deductions of up to 15% of eligible compensation, subject to caps of $25,000 in any calendar year and 1,000 shares on any purchase date. The 2016 ESPP provides for 12-month offering periods generally beginning March and September of each year, and each offering period consists of two six-month purchase periods.

On each purchase date, participating employees will purchase Class A common stock at a price per share equal to 85% of the lesser of the fair market value of our Class A common stock on (i) the first trading day of the applicable offering period and (2) the last trading day of each purchase period in the applicable offering period. If the stock price of our Class A common stock on any purchase date in an offering period is lower than the stock price on the enrollment date of that offering period, the offering period will immediately reset after the purchase of shares on such purchase date and automatically roll into a new offering period.

For the three months ended October 31, 2017, 1,261,104 shares of common stock were purchased for an aggregate amount of $17.4 million. As of October 31, 2017, 2,839,207 shares were available for future issuance under the 2016 ESPP.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

We use the Black-Scholes option-pricing model to determine the fair value of shares purchased under the 2016 ESPP with the following weighted-average assumptions on the date of grant:

	Three Months Ended October 31,
	2016		2017
Expected term (in years)	0.75		0.75
Risk-free interest rate	0.6	%	1.25	%
Volatility	50.6	%	50.2	%
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 October 31,
	2016		2017
	(in thousands)
Cost of revenue:
Product	$	966	$	570
Support and other services	3,350		2,072
Sales and marketing	33,891		13,766
Research and development	34,026		15,542
General and administrative	18,495		3,565
Total stock-based compensation expense	$	90,728	$	35,515

Stock-based compensation expense for the three months ended October 31, 2016 included cumulative stock-compensation expense related to stock awards with performance conditions, which vesting was deemed probable in the first quarter of fiscal 2017 upon the successful completion of our IPO. Prior to fiscal 2017, no expense was recognized related to these stock awards with performance conditions as vesting was not deemed probable. The cumulative stock-based compensation expense recorded in the first quarter of fiscal 2017 was for the portion of the awards for which the relevant service condition had been satisfied and we have continued to recognize the remaining expense over the remaining service period. Stock-based compensation expense related to stock awards without performance conditions is recognized on a straight-line basis over the requisite service period.

As of October 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 2.2 years.

Note 9. INCOME TAXES

During the three months ended October 31, 2017, the income tax provision of $2.3 million primarily consisted of foreign taxes on our international operations and U.S. state income taxes. During the three months ended October 31, 2016, the income tax provision of $0.1 million primarily consisted of foreign taxes on our 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 a business acquisition completed during the three months ended October 31, 2016 and tax benefit related to the early adoption of ASU 2016-09. The net deferred tax liability recorded in connection with a business acquisition completed during the three months ended October 31, 2016 provided an additional source of taxable income to support the realizability of the pre-existing deferred tax assets and as a result, we released a portion of the U.S. valuation allowance.

23

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

Note 10. NET LOSS PER SHARE

We compute basic net income (loss) per share using the weighted average number of common shares outstanding during the period. We compute diluted net income (loss) per share using the weighted average number of common shares and dilutive potential common shares outstanding during the period. Dilutive potential common shares include shares issuable upon the exercise of stock options, the exercise of common stock warrants, the vesting of RSUs, and each purchase under our ESPP, under the treasury stock method.

In loss periods, basic net loss per share and diluted net loss per share are the same since the effect of potential common shares is anti-dilutive and therefore excluded.

The rights, including the liquidation and dividend rights, of the holders of our Class A and Class B common stock are identical, except with respect to voting. As the liquidation and dividend rights are identical, our undistributed earnings or losses are allocated on a proportionate basis among the holders of both Class A and Class B common stock. As a result, the net income (loss) per share attributed to common stockholders will, therefore, be the same for both Class A and Class B common stock on an individual or combined basis.

Net Loss Per Share Attributable to Class A and Class B Common Stockholders—The computation of basic and diluted net loss per share is as follows (in thousands, except share and per share data):

	Three Months Ended October 31,
	2016 *As Adjusted			2017
Numerator:
Net loss	$	(140,302	)	$	(61,487	)
Denominator:
Weighted-average shares—basic and diluted	74,373,788			156,780,631
Net loss per share attributable to common stockholders—basic and diluted	$	(1.89	)	$	(0.39	)

* See Note 3 for a summary of adjustments related to the adoption of the new revenue recognition standard.

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:

	Three Months Ended October 31,
	2016	2017
Outstanding stock options and RSUs	40,764,842	34,400,643
Employee stock purchase plan	2,304,960	2,089,383
Common stock subject to repurchase	727,254	152,558
Common stock warrants	769,094	34,180
Total	44,566,150	36,676,764

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

Note 11. SEGMENT INFORMATION

Our chief operating decision maker is a group which is comprised of our Chief Executive Officer, Chief Financial Officer and President. This group reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. Accordingly, we have a single reportable segment.

The following table sets forth revenue by geographic location based on bill-to location:

	Three Months Ended October 31,
	2016 *As Adjusted		2017
	(in thousands)
U.S.	$	106,168	$	187,365
Europe, the Middle East and Africa	25,416		37,444
Asia-Pacific	45,847		44,859
Other Americas	11,130		5,884
Total revenue	$	188,561	$	275,552

* See Note 3 for a summary of adjustments related to the adoption of the new revenue recognition standard.

Pursuant to our arrangement with one of our OEMs, prior to the fourth quarter of fiscal 2017, billings to one of our OEMs were entirely attributed to Asia-Pacific. Beginning in the fourth quarter of fiscal 2017, billings were attributed to various geographic locations.

As of July 31, 2017 and October 31, 2017, $63.3 million and $72.7 million, respectively, of our net long-lived assets were located in the U.S.

Note 12. RELATED PARTY TRANSACTIONS

We enter into various transactions with our related parties in the normal course of business. During the three months ended October 31,2016 and 2017, our purchases of goods or services from related parties totaled $0.2 million and $0.3 million, respectively. We did not have any payables outstanding to related parties as of July 31, 2017 and October 31, 2017. Revenue from related parties for the three months ended October 31,2016 and 2017 were $0.1 million and $0.3 million, respectively. We did not have any receivables outstanding from related parties as of July 31, 2017 and October 31, 2017.

One member of our Board is affiliated with Lightspeed Venture Partners. As of October 31, 2017, entities affiliated with Lightspeed Venture partners owned approximately 7.3% of all our outstanding Class A common stock and Class B common stock combined.

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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, 2017 included in our Annual Report on Form 10-K filed on September 18, 2017. 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 operating system that converges traditional silos of server, virtualization, storage and networking into one integrated solution and unifies private and public cloud into a single software fabric. Our software delivers the agility, scalability and pay-as-you-grow economics of the public cloud, while addressing enterprise requirements of application mobility, security, data integrity and control. We provide our customers with the flexibility to selectively utilize the public cloud for suitable workloads and specific use cases by enabling increasing levels of application mobility across private and public clouds. We have combined advanced web-scale technologies with elegant consumer-grade design to deliver a powerful enterprise cloud operating system that elevates IT organizations by enabling them to focus on the applications and services that power their businesses. Our invisible infrastructure provides constant availability and low-touch management, enables application mobility across computing environments and reduces inefficiencies in IT planning.

Our solution can be delivered either as an appliance that is configured to order or as software-only. When end-customers purchase our operating system, they typically also purchase one or more years of support and maintenance in order to receive software upgrades, bug fixes and, where applicable, parts replacement. Product revenue is generated primarily from the sales of our solution, and is generally recognized upon transfer of control to the customers. Support and other services revenue is primarily derived from the related support and maintenance contracts, and is recognized ratably over the term of the support contracts. Delivery of our solution through appliance sales have comprised the bulk of our historical product revenue; however, starting in the first quarter of fiscal year 2018, we began the process of transitioning our business to focus primarily on software-only sales, which we expect to complete in a year and a half.

We had a broad and diverse base of 7,813 end-customers as of October 31, 2017, including 608 Global 2000 enterprises. We define the number of end-customers as the number of end-customers for which we have received an order by the last day of the period, excluding partners to which we have sold products for their own demonstration purposes. A single organization or customer may represent multiple end-customers for separate divisions, segments or subsidiaries. Since shipping our first product in fiscal 2012, our end-customer base has grown rapidly. The number of end-customers grew from 4,473 as of October 31, 2016 to 7,813 as of October 31, 2017. Our operating system is primarily sold through channel partners, including distributors and resellers, and original equipment manufacturers, or OEMs, 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 operating system to provide a variety of cloud-based services to their customers.

We continue to invest heavily in the growth of our business, including the development of our solutions and build-out of our global sales force. The number of our full-time employees increased from 2,357 as of October 31, 2016 to 3,009 as of October 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 operating system, introduce new products and features and build upon our technology leadership, as well as continue to expand our global sales and marketing teams. 

Our total revenue was $188.6 million and $275.6 million for the three months ended October 31,2016 and 2017, respectively, representing year-over-year growth of 46%. Our net losses were $140.3 million and $61.5 million for the three months ended October 31,2016 and 2017, respectively. Net cash generated from operations was $4.2 million and $10.1 million for the three months ended October 31, 2016 and October 31, 2017, respectively. Free cash flow was an outflow of $7.8 million for the three months ended October 31, 2016 and an outflow of $7.9 million for the three months ended October 31, 2017. As of October 31, 2017, we had an accumulated deficit of $792.5 million.

New Accounting Standard

We adopted the new accounting standard related to revenue recognition effective August 1, 2017. Prior period information presented here has been adjusted to reflect the adoption of this new standard. See Note 3 of Part I, Item 1 of this Quarterly Report on Form 10-Q for the summary of adjustments.

Key Financial and Performance Metrics

We monitor the following key financial and performance metrics:

	As of and for the
	Three Months Ended October 31,
	2016			2017
	(Dollars in thousands)
Total revenue	$	188,561		$	275,552
Billings	$	239,767		$	315,340
Gross profit	$	118,799		$	166,930
Adjusted gross profit	$	123,353		$	170,467
Gross margin	63		%	61		%
Adjusted gross margin	65		%	62		%
Total deferred revenue	$	275,696		$	408,844
Net cash provided by operating activities	$	4,160		$	10,107
Free cash flow	$	(7,755	)	$	(7,858	)
Non-GAAP operating expenses	145,841			192,603
Total end-customers	4,473			7,813

Non-GAAP Financial Measures and Key Performance Measures

We regularly monitor billings, adjusted gross profit, adjusted gross margin, free cash flow and non-GAAP operating expenses, which are non-GAAP financial measures and key performance measures, to help us evaluate our growth and operational efficiencies, measure our performance 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.

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Billings is a performance measure which our management believes provides useful information to investors because it represents the amounts under binding purchase orders received by us during a given period that have been billed. Free cash flow is a performance measure that our management believes provides useful information to management and investors about the amount of cash (used in) generated by the business after necessary capital expenditures. Adjusted gross profit, adjusted gross margin and non-GAAP operating expense are performance measures which our management believes provides useful information to investors because they provide meaningful supplemental information regarding our performance and liquidity by excluding certain expenses and expenditures, such as stock-based compensation expense that may not be indicative of our ongoing core business operating results. We use these non-GAAP financial and key performance measures for financial and operational decision-making and as a means to evaluate period-to-period comparisons. Billings, adjusted gross profit, adjusted gross margin, free cash flow and non-GAAP operating expenses 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 profit, adjusted gross margin, free cash flow and non-GAAP operating expenses are not substitutes for total revenue, gross profit, gross margin, cash (used in) provided by operating activities, or GAAP operating expenses, respectively. In addition, other companies, including companies in our industry, may calculate non-GAAP financial measures and key performance measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures and key performance measures as tools for comparison. We urge you to review the reconciliation of our non-GAAP financial measures and key performance measures to the most directly comparable GAAP financial measures included below, and not to rely on any single financial measure to evaluate our business.

We calculate our non-GAAP measures as follows:

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

Adjusted gross profit and adjusted gross margin—We calculate adjusted gross margin as adjusted gross profit divided by total revenue. We define adjusted gross profit as our gross profit adjusted to exclude stock-based compensation and amortization of acquired intangible assets. Our presentation of adjusted gross profit 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.

Non-GAAP operating expenses—We define non-GAAP operating expenses as total operating expenses adjusted to exclude stock-based compensation and costs associated with business acquisitions (such as amortization of acquired intangible assets, revaluation of contingent consideration and other acquisition-related costs). Our presentation of non-GAAP operating expenses should not be construed as implying that our future results will not be affected by any recurring expenses or any unusual or non-recurring items that we exclude from our calculation of this non-GAAP financial measure.

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The following table presents a reconciliation of billings, adjusted gross profit, adjusted gross margin, free cash flow and non-GAAP operating expenses to the most directly comparable GAAP financial measures, for each of the periods indicated:

	Three Months Ended October 31,
	2016			2017
	(Dollars in thousands)
Total revenue	$	188,561		$	275,552
Change in deferred revenue (net of acquisitions)	51,206			39,788
Billings (non-GAAP)	$	239,767		$	315,340
Gross profit	$	118,799		$	166,930
Stock-based compensation	4,316			2,642
Amortization of intangible assets	238			895
Adjusted gross profit (non-GAAP)	$	123,353		$	170,467
Gross margin	63		%	61		%
Stock-based compensation	2		%	1		%
Amortization of intangible assets	—		%	—		%
Adjusted gross margin (non-GAAP)	65		%	62		%
Net cash provided by (used in) operating activities	$	4,160		$	10,107
Purchases of property and equipment	(11,915		)	(17,965		)
Free cash flow (non-GAAP)	$	(7,755	)	$	(7,858	)
Operating expenses	$	233,278		$	225,969
Stock-based compensation	(86,412		)	(32,873		)
Change in fair value of contingent consideration	(186		)	(282		)
Amortization of intangible assets	(167		)	(211		)
Business acquisition-related costs	(672		)	—
Operating expenses (non-GAAP)	$	145,841		$	192,603

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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 in committed value. We have significantly increased our sales and marketing personnel, which grew by 32% from October 31, 2016 to October 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 October 31, 2017, we considered 63% of our global sales team members to be fully productive, while the remaining 37% of our global sales team members are in the process of ramping up. As we shift the focus of some of our new and existing sales team members to major accounts and large deals, it may take longer for these sales team members to become fully productive, and there may also be an impact to the overall productivity of our sales team. We are focused on actively managing this realignment, and expect continuing improvement over the coming quarters. We intend to continue to grow our global sales and marketing team to acquire new end-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 operating system. We believe that these investments will contribute to our long-term growth, although they may adversely affect our profitability in the near term.

Market Adoption of Our Products

The public cloud has changed IT buyer expectations about the simplicity, agility, scalability and pay-as-you-grow economics of IT resources, which represent a major architectural shift and business model evolution. A key focus of our sales and marketing efforts is creating market awareness about the benefits of our operating system, both as compared to traditional data center architectures as well as the public cloud, particularly as we continue to pursue large enterprises and mission critical workloads. The broad nature of the technology shift that our operating system represents and the relationships our end-customers have with existing IT vendors sometimes lead to unpredictable sales cycles, which we hope to compress and stabilize as market adoption increases, as we gain leverage with our channel partners and as our sales and marketing efforts expand. Our business and operating results will be significantly affected by the degree to and speed with which organizations adopt our operating system.

Leveraging Channel and OEM Partners

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

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Continued Purchases and Upgrades within Existing Customer Base

Our end-customers typically deploy our technology for a specific workload initially. After a new end-customer's initial order, which includes the product and associated maintenance, support and services, we focus on expanding our footprint by serving more workloads. We also generate recurring revenue from our support and maintenance renewals. We view continued purchases and upgrades as critical drivers of our success, as the sales cycles are typically shorter compared to new end-customer deployments and selling efforts are typically less. As of October 31, 2017, approximately 72% of our end-customers who have been with us for 18 months or longer have made a repeat purchase, which is defined as any purchase activity, including support and maintenance renewals, subsequent to the initial purchase. Additionally, end-customers who have been with us for 18 months or longer have total lifetime orders (which includes the initial order) to date in an amount that is more than 4.1x greater, on average, than their initial order. This number increases to approximately 8.6x, on average, for Global 2000 end-customers who have been with us for 18 months or longer, and to more than 21.3x, on average, for our top 25 end-customers as of October 31, 2017. 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. Historically, most of our solutions have been delivered on an appliance and our revenue thus included the revenue associated with the hardware from such appliances. However, starting in the first quarter of fiscal year 2018, we began the process of transitioning our business to focus primarily on software-only sales and thus selling less hardware. As a result, we expect there to be an overall product mix shift towards sales of our solutions as software-only licenses, which we expect will be reflected in corresponding changes to our revenue and gross margins.

Revenue for the solutions, whether sold on an appliance, or as a stand-alone software are generally recognized upon transfer of control to our customers. For additional information on our revenue recognition, see Note 3 of Part I, Item 1 of this Quarterly Report on Form 10-Q.

Revenue from Contracts with Customers

In May 2014, the Financial Accounting Standards Board, or FASB, issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), or ASC 606. The standard is a comprehensive new revenue recognition model that requires revenue to be recognized in a manner to depict the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. The FASB has issued several amendments to the standard, including clarifications on disclosure of prior-period performance obligations and remaining performance obligations.

The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). The new standard would have been effective for the Company beginning August 1, 2018, and adoption as of the original effective date of August 1, 2017 was permitted. The Company elected to early adopt the standard effective August 1, 2017 using the full retrospective method, which required us to restate our historical financial information to be consistent with the new standard. The most significant impact of the standard related to the timing of revenue recognition for certain software licenses sold with post contract support, or PCS, for which we do not have vendor specific objective evidence, or VSOE, under the previous revenue recognition 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. In addition, the adoption of ASC 606 also resulted in differences in the timing of recognition of contract costs, such as sales commissions, as well as the corresponding impacts to provision for income taxes. For additional information on the impacts to previously reported results, see Note 3 of Part I, Item 1 of this Quarterly Report on Form 10-Q.     

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Components of Our Results of Operations

Our results of operations for the three months ended October 31, 2016 included significant (i) cumulative stock-based compensation expense related to stock awards with performance conditions, referred to as the performance stock awards, due to our initial public offering, or IPO, and (ii) the impact of business acquisitions, which closed during the three months ended October 31, 2016. Beginning in the fiscal 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 these performance stock awards during the three months ended October 31, 2016 as the performance condition, a liquidity event or IPO, was deemed probable of achievement. The cumulative stock-based compensation expense recognized in the first quarter of fiscal 2017 was approximately $83.0 million and it was for the portion of the awards for which the relevant service condition had been satisfied. We continue to amortize the remaining expense over the remaining service period. Amortization during the three months ended October 31, 2017 related to these performance stock awards was approximately $6.3 million.

Revenue

We generate revenue from the sale of our software solution, which can be delivered on a hardware appliance or on a stand-alone basis, PCS and professional services. A substantial portion of sales are made via channel partners. We also generate a significant portion of our revenue through OEM relationships, such as with Dell Technologies and Lenovo Group Ltd. These OEMs embed our software in their own hardware and we provide limited PCS on these transactions.

Product revenue —A substantial majority of our product revenue is generated from the sale of our software operating system, which can be delivered on a hardware appliance that is configured to order, or sold as stand-alone software, for which our customers separately procure their own hardware appliance. Revenue from our software products delivered on a hardware appliance, or as stand-alone software is generally recognized upon transfer of control to our customers, which is typically upon shipment for sales including a hardware appliance. In our standard distributor or reseller agreements, title and risk of loss pass to customer upon shipment.

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 ratably over the contractual service period. The service period typically commences upon transfer of control of the corresponding products to our customer. We recognize revenue related to professional services as they are performed.

Cost of Revenue

Cost of product revenue.  Cost of product revenue consists of costs paid to third-party contract manufacturers, which includes hardware costs, personnel costs (consisting of salaries, benefits, bonuses and stock-based compensation) associated with our operations function and allocated costs (which consist of certain facilities, depreciation and amortization, recruiting, and information technology costs allocated based on headcount). We expect our cost of product revenue to decrease as a percentage of revenue as we expect an increasing percentage of our sales to move to software-only model.

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.

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Operating Expenses

Our operating expenses consist of sales and marketing, research and development, and general and administrative expenses. The largest component of our operating expenses is personnel costs. Personnel costs consist of wages, benefits, bonuses, and, with respect to sales and marketing expenses, sales commissions. Personnel costs also include stock-based compensation expense.

Sales and marketing.  Sales and marketing expense consists primarily of personnel costs. Sales and marketing expense also includes sales commissions, costs for promotional activities and other marketing costs, travel costs, and costs associated with demonstration units, including depreciation and allocated costs. Commissions are deferred and recognized as we recognize the associated revenue. We expect sales and marketing expense to continue to increase in absolute dollars as we increase the size of our global sales and marketing organizations. Our 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 our growth, although our general and administrative expense may fluctuate as a percentage of total revenue.

Other Income (Expense)—net

Other income (expense)—net consists primarily of interest income and expense, foreign currency exchange gains or losses and gains or losses on investments. Upon the completion of our IPO during the three months ended October 31, 2016, we reclassified the convertible preferred stock warrants, which, prior to our IPO, were classified as a liability on our consolidated balance sheet and re-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 remeasured them at fair value or incurred 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.

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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. We adopted the new accounting standard related to revenue recognition effective August 1, 2017. Prior period information presented here has been adjusted to reflect the adoption of this new standard. See Note 3 of Part I, Item 1 of this Quarterly Report on Form 10-Q for the summary of adjustments.

	Three Months Ended October 31,
	2016			2017
	(In thousands)
Consolidated Statements of Operations Data:
Revenue:
Product	$	153,536		$	219,052
Support and other services	35,025			56,500
Total revenue	188,561			275,552
Cost of revenue:
Product (1)(2)	52,210			85,162
Support and other services (1)	17,552			23,460
Total cost of revenue	69,762			108,622
Gross profit	118,799			166,930
Operating expenses:
Sales and marketing (1)(2)	128,625			145,405
Research and development (1)	75,281			64,512
General and administrative (1)	29,372			16,052
Total operating expenses	233,278			225,969
Loss from operations	(114,479		)	(59,039		)
Other expense—net	(25,712		)	(189		)
Loss before provision for income taxes	(140,191		)	(59,228		)
Provision for income taxes	111			2,259
Net loss	$	(140,302	)	$	(61,487	)
(1) Includes stock-based compensation expense as follows:
Product cost of sales	$	966		$	570
Support cost of sales	3,350			2,072
Sales and marketing	33,891			13,766
Research and development	34,026			15,542
General and administrative	18,495			3,565
Total stock-based compensation	$	90,728		$	35,515
(2) Includes amortization of intangible assets as follows:
Product cost of sales	$	238		$	895
Sales and marketing	167			211
Total amortization of intangible assets	$	405		$	1,106

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	Three Months Ended October 31,
	2016		2017
	(As a percentage of total revenue)
Consolidated Statements of Operations Data:
Revenue:
Product	81	%	79	%
Support and other services	19	%	21	%
Total revenue	100	%	100	%
Cost of revenue:
Product	28	%	31	%
Support and other services	9	%	8	%
Total cost of revenue	37	%	39	%
Gross profit	63	%	61	%
Operating expenses:
Sales and marketing	68	%	53	%
Research and development	40	%	23	%
General and administrative	16	%	6	%
Total operating expenses	124	%	82	%
Loss from operations	(61	)%	(21	)%
Other expense—net	(14	)%	—	%
Loss before provision for income taxes	(75	)%	(21	)%
Provision for income taxes	0	%	1	%
Net loss	(75	)%	(22	)%

Comparison of the Three Months Ended October 31, 2016 and 2017

Revenue

	Three Months Ended October 31,				Change
	2016		2017		$		%
	(In thousands, except percentages)
Product	$	153,536	$	219,052	$	65,516	43	%
Support and other services	35,025		56,500		21,475		61	%
Total revenue	$	188,561	$	275,552	$	86,991	46	%

	Three Months Ended October 31,				Change
	2016		2017		$			%
	(In thousands, except percentages)
U.S.	$	106,168	$	187,365	$	81,197		76	%
Europe, the Middle East and Africa	25,416		37,444		12,028			47	%
Asia-Pacific	45,847		44,859		(988		)	(2	)%
Other Americas	11,130		5,884		(5,246		)	(47	)%
Total revenue	$	188,561	$	275,552	$	86,991		46	%

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The increase in product revenue for the three months ended October 31, 2017 reflects increased domestic and international demand for our solutions as we continued to penetrate and expand in global markets through increased sales and marketing activities. Our total end-customer count increased from 4,473 as of October 31, 2016 to 7,813 as of October 31, 2017.

Support and other services revenue increased in the three months ended October 31, 2017 compared to the same period in prior year in conjunction with the growth of our end-customer base and the related support and software maintenance contracts.

Cost of Revenue and Gross Margin

	Three Months Ended October 31,						Change
	2016			2017			$		%
	(In thousands, except percentages)
Cost of product revenue	$	52,210		$	85,162		$	32,952	63	%
Product gross margin	66		%	61		%
Cost of support and other services revenue	$	17,552		$	23,460		$	5,908	34	%
Support and other services gross margin	50		%	58		%
Total gross margin percentage	63		%	61		%

Cost of product revenue

Cost of product revenue increased in the three months ended October 31, 2017 due to the corresponding increase in product sales compared to the corresponding prior year period. Additionally, during the three months ended October 31, 2017, the cost of certain of our hardware components, specifically DRAM and NAND, continued to increase due to supply constraints.

The decrease in product gross margin was driven primarily by the increase in hardware component costs indicated above, partially offset by higher software mix during the three months ended October 31, 2017 compared to the same prior year period. We expect to see continued pressure on the costs of DRAM as a result of continued supply constraints in the three months ending January 31, 2018 and we expect these costs to continue to increase so long as the DRAM market remains supply constrained.

Cost of support and other services revenue

Cost of support and other services revenue increased in the three months ended October 31, 2017 compared to the same prior year period due to higher personnel costs of our global customer support organization. The increase in personnel costs was primarily due to an increase in our customer support and other services headcount of 40% from October 31, 2016 to October 31, 2017. This increase was partially offset by lower stock-based compensation expense, as compared to the corresponding prior year period, in which we recognized a cumulative expense related to pre-IPO grants that we started expensing during the three months ended October 31, 2016. Support and other services gross margin increased during the three months ended October 31, 2017 compared to the same prior year period, primarily due to efficiencies gained in our support organization and headcount or personnel related costs growing at a slower rate than support and other services revenue.

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Operating Expenses

Sales and Marketing

	Three Months Ended October 31,						Change
	2016			2017			$		%
	(In thousands, except percentages)
Sales and marketing	$	128,625		$	145,405		$	16,780	13	%
Percent of total revenue	68		%	53		%

Sales and marketing expense increased in the three months ended October 31, 2017 compared to the same prior year period primarily due to higher personnel costs and sales commissions, as our sales and marketing headcount increased by 32% from October 31, 2016 to October 31, 2017. Additionally, as part of our efforts to penetrate and expand in global markets, we have continually increased our marketing activities related to brand awareness, promotions, trade shows and partner programs. This increase in personnel costs and sales commissions was partially offset by lower stock-based compensation expense as compared to the corresponding prior year period, in which we recognized a cumulative expense related to pre-IPO grants that we started expensing during the three months ended October 31, 2016.

Research and Development

	Three Months Ended October 31,						Change
	2016			2017			$			%
	(In thousands, except percentages)
Research and development	$	75,281		$	64,512		$	(10,769	)	(14	)%
Percent of total revenue	40		%	23		%

Research and development expense decreased in the three months ended October 31, 2017, primarily due to lower stock-based compensation expense as compared to the corresponding prior year period. In the first quarter of fiscal 2017, we recognized a cumulative stock-based compensation expense related to pre-IPO grants that we started expensing during the three months ended October 31, 2016. The lower stock-based compensation expense was partially offset by higher personnel costs as our research and development headcount increased by 18% from October 31, 2016 to October 31, 2017, as we have continued the expansion of our product development activities.

General and Administrative

	Three Months Ended October 31,						Change
	2016			2017			$			%
	(In thousands, except percentages)
General and administrative	$	29,372		$	16,052		$	(13,320	)	(45	)%
Percent of total revenue	16		%	6		%

General and administrative expense decreased in the three months ended October 31, 2017, primarily due to lower stock-based compensation expense as compared to the corresponding prior year period. In the first quarter of fiscal 2017, we recognized a cumulative stock-based compensation expense related to pre-IPO grants that we started expensing during the three months ended October 31, 2016. The lower stock-based compensation expense was partially offset by higher personnel costs as our general and administrative headcount increased by 20% from October 31, 2016 to October 31, 2017 to support our growing operations and international footprint.

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Other Expense-net

	Three Months Ended October 31,						Change
	2016			2017			$		%
	(In thousands, except percentages)
Other expense-net	$	(25,712	)	$	(189	)	$	25,523	(99	)%

Other expense-net for the three months ended October 31, 2017, was primarily related to foreign currency losses, mostly offset by interest earned on short-term investments. Other expense-net for the three months ended October 31, 2016 was primarily related to $21.1 million change in the fair value of our convertible preferred stock warrant liability and $3.3 million loss on debt extinguishment resulting from the early extinguishment of our senior notes.

Provision for Income Taxes

	Three Months Ended October 31,				Change
	2016		2017		$		%
	(In thousands, except percentages)
Provision for income taxes	$	111	$	2,259	$	2,148	1,935	%

The increase in income tax provision during the three months ended October 31, 2017, as compared to the three months ended October 31, 2016, was primarily due to increase in foreign taxes as we continued our global expansion. The income tax provision during the three months ended October 31, 2016 was partially offset by a $1.5 million partial release of the U.S. valuation allowance from a business acquisition completed during the three months ended October 31, 2016 and tax benefit related to the early adoption of ASU 2016-09. The net deferred tax liability from the business acquisition provided an additional source of taxable income to support the realizability of the pre-existing deferred tax assets and, as a result, we released a portion of the U.S. deferred tax asset valuation allowance.

Liquidity and Capital Resources

As of October 31, 2017, we had $132.5 million of cash and cash equivalents and $233.5 million of short-term investments which were held for general corporate purposes. Our cash and cash equivalents primarily consist of bank deposits and money market accounts. Our short-term investments consist of highly rated debt instruments of the U.S. government and its agencies and debt instruments of highly rated corporations.

We believe that our cash and cash equivalents and short-term investments will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. Our future capital requirements will depend on many factors, including our growth rate, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced product and service offerings, and the continuing market acceptance of our products. In the event that additional financing is required from outside sources, we may not be able to raise such financing on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, operating results, and financial condition would be adversely affected.

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Cash Flows

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

	Three Months Ended October 31,
	2016			2017
	(in thousands)
Net cash provided by operating activities	$	4,160		$	10,107
Net cash used in investing activities	(47,959		)	(41,153		)
Net cash provided by financing activities	170,053			25,146
	$	126,254		$	(5,900	)

Cash Flows from Operating Activities

Net cash provided by operating activities was $10.1 million for the three months ended October 31, 2017, an increase of $5.9 million compared to $4.2 million in net cash generated from operating activities for the three months ended October 31, 2016. The increase in cash generated from operating activities for the three months ended October 31, 2017 was primarily due to higher billings and collections, partially offset by higher operating expenses as we continued to invest in the longer-term growth of our business.

Cash Flows from Investing Activities

Net cash used in investing activities of $41.2 million for the three months ended October 31, 2017 was due to $59.1 million of short-term investment purchases and $18.0 million of purchases of property and equipment, partially offset by $35.9 million of maturities of short-term investments.

Net cash used in investing activities of $48.0 million for the three months ended October 31, 2016 included $87.4 million of short-term investment purchases and $11.9 million of purchases of property and equipment as we continue to invest in the longer-term growth of our business. This was partially offset by $31.6 million of sales of short-term investments and $20.0 million of maturities of short-term investments.

Cash Flows from Financing Activities

Net cash provided by financing activities of $25.1 million for the three months ended October 31, 2017 was primarily related to $25.2 million of net proceeds from sales of shares through employee equity incentive plans.

Net cash provided by financing activities of $170.1 million for the three months ended October 31, 2016 primarily consisted of $254.5 million of proceeds from our IPO, net of underwriting discounts and commission, and $1.5 million of net proceeds from sales of shares through employee equity incentive plans, partially offset by $76.6 million of repayment of our senior notes including debt extinguishment costs, $7.1 million payment of debt in conjunction with a business acquisition completed during the three months ended October 31, 2016 and $2.2 million of payments of offering costs for our IPO.

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Contractual Obligations

From time to time, we make commitments with our contract manufacturers, which consist of obligations for on-hand inventories and non-cancelable purchase orders for non-standard components. We record a charge to cost of product sales for firm, non-cancelable and unconditional purchase commitments with the contract manufacturers for non-standard components when and if quantities exceed our future demand forecasts. Our historical charges have not been material.

As of October 31, 2017, we had $79.0 million in purchase commitments with our third-party contract manufacturers, which consist of obligations for on hand inventories and non-cancelable purchase orders for non-standard components, and $23.6 million of other purchase obligations pertaining to our normal operations. There have been no other significant changes during the three months ended October 31, 2017 to the contractual obligations disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations, set forth in Part II, Item 7, of our Annual Report on Form 10-K for the fiscal year ended July 31, 2017.

As of October 31, 2017, we had accrued liabilities related to uncertain tax positions, which are reflected on our consolidated balance sheet. These accrued liabilities are not reflected in the table above since it is unclear when these liabilities will be paid.

Off-Balance Sheet Arrangements

As of October 31, 2017, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Critical Accounting Policies and Estimates

Our financial statements are prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP. The preparation of these financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures. We evaluate our estimates, assumptions and judgments on an ongoing basis. Our estimates, assumptions and judgments are based on historical experience and various other factors that we believe to be reasonable under the circumstances. Different assumptions and judgments would change the estimates used in the preparation of our financial statements, which, in turn, could change the results from those reported.

Except for accounting policies related to our early adoption of ASC 606, there have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in our Annual Report on Form 10-K for the fiscal year ended July 31, 2017. See Note 3 of Part I, Item 1 of this Quarterly Report on Form 10-Q for the critical accounting policies resulting from our early adoption of ASC 606.

Recent Accounting Pronouncements

See Note 2 of Part I, Item 1 of this Quarterly Report on Form 10-Q for a full description of recent accounting pronouncements.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk.

We have operations both within the United States and internationally, and we are exposed to market risk in the ordinary course of our business. We are exposed to market risk in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in foreign currency exchange rates and interest rates.

Foreign Currency Risk

Our consolidated results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates. Historically, our revenue contracts have been denominated in U.S. dollars. Our expenses are generally denominated in the currencies in which our operations are located. To date, we have not entered into any hedging arrangements with respect to foreign currency risk or other derivative instruments. In the event our foreign sales and expenses increase, our operating results may be more greatly affected by foreign currency exchange rate fluctuations, which can affect our operating income or loss. The effect of a hypothetical 10% change in foreign currency exchanges rates on our non-U.S. dollar monetary assets and liabilities would not have had a material impact on our historical consolidated financial statements. Foreign currency transaction gains and losses and exchange rate fluctuations have not been material to our consolidated financial statements.

A hypothetical 10% decrease in the U.S. Dollar against other currencies would result in an increase in operating loss of approximately $4.1million and $6.1 million for the three months ended October 31, 2016 and 2017, respectively. The change in hypothetical increase in operating loss for the three months ended October 31, 2017 compared to the three months ended October 31, 2016 is due to an increase in foreign currency expenses. This analysis disregards the possibilities that rates can move in opposite directions and that losses from one geographic area may be offset by gains from another geographic area.

Interest Rate Risk

Our investment objective is to conserve capital and maintain liquidity to support our operations; therefore, we generally invest in highly liquid securities, consisting primarily of bank deposits, money market funds, commercial paper, U.S. government securities and corporate bonds. Such fixed and floating interest-earning instruments carry a degree of interest rate risk. Fixed income securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than predicted if interest rates fall. Due to the short-term nature of our investment portfolio, we do not believe an immediate 10% increase or decrease in interest rates would have a material effect on the fair market value of our portfolio. Therefore, we do not expect our operating results or cash flows to be materially affected by a sudden change in interest rates.

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Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this report.  Based on management’s evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective at a reasonable assurance level.

In designing and evaluating our disclosure controls and procedures, management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Changes in Internal Control over Financial Reporting

Except for the implementation of certain internal controls related to the adoption of ASC 606, there were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the three months ended October 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We implemented certain internal controls to ensure we adequately evaluated our contracts and properly assessed the impact of the new revenue recognition standard on our financial statements to facilitate its adoption effective August 1, 2017. In addition, we have made some changes to certain internal controls to reflect new processes that were implemented as a result of the adoption of ASC 606.

PART II. OTHER INFORMATION

Item 1.Legal Proceedings