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, 2018

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 (§232.405 of this chapter) 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	x	Accelerated filer	o
Non-accelerated filer	o  (Do not check if a smaller reporting company)	Smaller reporting company	o
Emerging growth company	¨	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, 2018, the registrant had 145,930,552 shares of Class A common stock, $0.000025 par value per share, and 33,206,369 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)	5
	Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
	Item 3	Quantitative and Qualitative Disclosures About Market Risk	46
	Item 4	Controls and Procedures	46
PART II.		OTHER INFORMATION
	Item 1	Legal Proceedings	47
	Item 1A	Risk Factors	47
	Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	75
	Item 3	Defaults Upon Senior Securities	75
	Item 4	Mine Safety Disclosures	75
	Item 5	Other Information	75
	Item 6	Exhibits	75
EXHIBIT INDEX			76
SIGNATURES			77

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 ("Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended ("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, entitlements and other services revenue and changes in research and development, sales and marketing and general and administrative expenses;

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

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

• our ability to develop new solutions, product features and technology 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;

• our plans 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 exposure to and ability to guard against cyber attacks;

• our ability to continue to expand internationally;

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

• anticipated capital expenditures;

• future acquisitions or investments in complementary companies, products, services or technologies and the ability to successfully integrate completed acquisitions;

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

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

• our ability to attract and retain qualified employees and key personnel;

• our plans for and the impact of changes to our business model, including our shift to a more subscription-based model;

• our expectations concerning future shifts in the mix of whether our solutions are sold as an appliance or as software-only, and in the mix of the types of appliances we sell; and

3

• the sufficiency of cash balances to meet cash needs for at least the next 12 months.

We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in Part II, Item 1A, "Risk Factors" in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment and new risks emerge from time to time. It is not possible for us to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and trends discussed in this 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)

	Page
Condensed Consolidated Balance Sheets as of July 31, 2018 and October 31, 2018	6
Condensed Consolidated Statements of Operations for the Three Months Ended October 31, 2017 and 2018	7
Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended October 31, 2017 and 2018	8
Condensed Consolidated Statements of Stockholders' Equity for the Three Months Ended October 31, 2017 and 2018	9
Condensed Consolidated Statements of Cash Flows for the Three Months Ended October 31, 2017 and 2018	10
Notes to Condensed Consolidated Financial Statements	11
Note 1: Overview and Basis of Presentation	11
Note 2: Business Combination	13
Note 3: Revenue, Deferred Revenue and Deferred Commissions	15
Note 4: Fair Value Measurements	17
Note 5: Balance Sheet Components	19
Note 6: Convertible Senior Notes	21
Note 7: Commitments and Contingencies	24
Note 8: Stockholders' Equity	25
Note 9: Equity Incentive Plans	25
Note 10: Income Taxes	27
Note 11: Net Loss Per Share	28
Note 12: Segment Information	29
Note 13: Related Party Transactions	29

5

NUTANIX, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

	As of
	July 31, 2018			October 31, 2018
	(in thousands, except share and per share data)
Assets
Current assets:
Cash and cash equivalents	$	305,975		$	399,786
Short-term investments	628,328			565,189
Accounts receivable, net	258,289			237,682
Deferred commissions—current	33,691			34,742
Prepaid expenses and other current assets	36,818			39,621
Total current assets	1,263,101			1,277,020
Property and equipment, net	85,111			104,750
Deferred commissions—non-current	80,688			87,365
Intangible assets, net	45,366			79,830
Goodwill	87,759			184,994
Other assets—non-current	37,855			39,127
Total assets	$	1,599,880		$	1,773,086
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	65,503		$	69,474
Accrued compensation and benefits	85,398			65,709
Accrued expenses and other current liabilities	31,682			28,552
Deferred revenue—current	275,648			307,195
Total current liabilities	458,231			470,930
Deferred revenue—non-current	355,559			394,605
Convertible senior notes, net	429,598			436,745
Other liabilities—non-current	29,713			39,487
Total liabilities	1,273,101			1,341,767
Commitments and contingencies (Note 7)
Stockholders’ equity:
Preferred stock, par value of $0.000025 per share— 200,000,000 shares authorized as of July 31, 2018 and October 31, 2018; no shares issued and outstanding as of July 31, 2018 and October 31, 2018	—			—
Common stock, par value of $0.000025 per share—1,200,000,000 (1,000,000,000 Class A, 200,000,000 Class B) shares authorized as of July 31, 2018 and October 31, 2018; 172,858,082 (135,109,672 Class A and 37,748,410 Class B) and 179,066,211 (141,366,331 Class A and 37,699,880 Class B) shares issued and outstanding as of July 31, 2018 and October 31, 2018	4			4
Additional paid-in capital	1,355,907			1,554,878
Accumulated other comprehensive loss	(1,002		)	(1,168		)
Accumulated deficit	(1,028,130		)	(1,122,395		)
Total stockholders’ equity	326,779			431,319
Total liabilities and stockholders’ equity	$	1,599,880		$	1,773,086

See the accompanying notes to condensed consolidated financial statements.

6

NUTANIX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended October 31,
	2017			2018
	(in thousands, except share and per share data)
Revenue:
Product	$	219,052		$	224,346
Support, entitlements and other services	56,500			88,937
Total revenue	275,552			313,283
Cost of revenue:
Product	85,162			39,261
Support, entitlements and other services	23,460			34,845
Total cost of revenue	108,622			74,106
Gross profit	166,930			239,177
Operating expenses:
Sales and marketing	145,405			196,497
Research and development	64,512			110,531
General and administrative	16,052			27,339
Total operating expenses	225,969			334,367
Loss from operations	(59,039		)	(95,190		)
Other expense, net	(189		)	(2,703		)
Loss before provision for (benefit from) income taxes	(59,228		)	(97,893		)
Provision for (benefit from) income taxes	2,259			(3,628		)
Net loss	$	(61,487	)	$	(94,265	)
Net loss per share attributable to Class A and Class B common stockholders—basic and diluted	$	(0.39	)	$	(0.54	)
Weighted average shares used in computing net loss per share attributable to Class A and Class B common stockholders—basic and diluted	156,780,631			175,445,969

See the accompanying notes to condensed consolidated financial statements.

7

NUTANIX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

	Three Months Ended October 31,
	2017			2018
	(in thousands)
Net loss	$	(61,487	)	$	(94,265	)
Other comprehensive loss, net of tax:
Change in unrealized loss on available-for-sale securities, net of tax	(130		)	(166		)
Comprehensive loss	$	(61,617	)	$	(94,431	)

See the accompanying notes to condensed consolidated financial statements.

8

NUTANIX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Loss			Accumulated Deficit			Total Stockholders’  Equity
	Shares	Amount
	(in thousands, except share data)
Balance - July 31, 2017	154,636,520	$	4	$	948,134	$	(106	)	$	(730,969	)	$	217,063
Issuance of common stock through employee equity incentive plans, net of repurchases	3,989,701	—		7,968		—			—			7,968
Issuance of common stock from ESPP purchase	1,261,104	—		17,402		—			—			17,402
Vesting of early exercised stock options	—	—		249		—			—			249
Stock-based compensation	—	—		35,515		—			—			35,515
Other comprehensive loss	—	—		—		(130		)	—			(130		)
Net loss	—	—		—		—			(61,487		)	(61,487		)
Balance - October 31, 2017	159,887,325	$	4	$	1,009,268	$	(236	)	$	(792,456	)	$	216,580

	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Loss			Accumulated Deficit			Total Stockholders’  Equity
	Shares	Amount
	(in thousands, except share data)
Balance - July 31, 2018	172,858,082	$	4	$	1,355,907	$	(1,002	)	$	(1,028,130	)	$	326,779
Issuance of common stock through employee equity incentive plans	2,629,079	—		3,680		—			—			3,680
Issuance of common stock from ESPP purchase	1,127,728	—		26,318		—			—			26,318
Vesting of early exercised stock options	—	—		70		—			—			70
Issuance of common stock in connection with a business combination	2,451,322	—		102,978		—			—			102,978
Stock-based compensation	—	—		65,925		—			—			65,925
Other comprehensive loss	—	—		—		(166		)	—			(166		)
Net loss	—	—		—		—			(94,265		)	(94,265		)
Balance - October 31, 2018	179,066,211	$	4	$	1,554,878	$	(1,168	)	$	(1,122,395	)	$	431,319

See the accompanying notes to condensed consolidated financial statements.

9

NUTANIX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Three Months Ended October 31,
	2017			2018
	(in thousands)
Cash flows from operating activities:
Net loss	$	(61,487	)	$	(94,265	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	11,333			16,183
Stock-based compensation	35,515			65,925
Change in fair value of contingent consideration	282			(799		)
Amortization of debt discount and issuance costs	—			7,148
Other	131			(759		)
Changes in operating assets and liabilities:
Accounts receivable, net	7,326			23,497
Deferred commissions	(8,457		)	(7,728		)
Prepaid expenses and other assets (1)	(316		)	(3,812		)
Accounts payable	(6,504		)	1,292
Accrued compensation and benefits	(7,220		)	(19,689		)
Accrued expenses and other liabilities	(293		)	(7,442		)
Deferred revenue	39,788			70,273
Net cash provided by operating activities (1)	10,098			49,824
Cash flows from investing activities:
Maturities of investments	35,920			143,409
Purchases of investments	(59,108		)	(79,766		)
Purchases of property and equipment	(17,965		)	(29,832		)
Payment for a business combination, net of cash and restricted cash acquired	—			(18,662		)
Net cash (used in) provided by investing activities	(41,153		)	15,149
Cash flows from financing activities:
Proceeds from sales of shares through employee equity incentive plans, net of repurchases	25,231			29,890
Payment of debt in conjunction with a business combination	—			(991		)
Payment of convertible notes issuance costs	—			(75		)
Payment of offering costs	(85		)	—
Net cash provided by financing activities	25,146			28,824
Net (decrease) increase in cash, cash equivalents and restricted cash (1)	$	(5,909	)	$	93,797
Cash, cash equivalents and restricted cash—beginning of period (1)	139,497			307,098
Cash, cash equivalents and restricted cash—end of period (1)	$	133,588		$	400,895
Restricted cash (1)(2)	1,129			1,109
Cash and cash equivalents—end of period	$	132,459		$	399,786
Supplemental disclosures of cash flow information:
Cash paid for income taxes	$	2,066		$	3,910
Supplemental disclosures of non-cash investing and financing information:
Issuance of common stock in connection with a business combination	$	—		$	102,978
Purchases of property and equipment included in accounts payable and accrued liabilities	$	7,084		$	15,717
Vesting of early exercised stock options	$	249		$	70

(1) During the first quarter of fiscal 2019, we adopted Accounting Standards Update ("ASU") No. 2016-18, which requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents and restricted cash. We adopted the standard retrospectively for the prior period presented. Our adoption of ASU 2016-18 did not have any significant impact on our condensed consolidated statements of cash flows.

(2) Included within other assets—non-current in the condensed consolidated balance sheets.

See the accompanying notes to condensed consolidated financial statements.

10

NUTANIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1.    OVERVIEW AND BASIS OF PRESENTATION

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," "us," "our" or "Nutanix") has operations throughout North America, Europe, Asia Pacific, the Middle East, Latin America and Africa.

We provide a leading enterprise cloud platform that digitizes the traditional silos of enterprise computing, converging compute, virtualization, storage, networking, desktop, governance and security services into one integrated solution. We primarily sell our products and services to end customers through distributors, resellers and original equipment manufacturers ("OEMs") (collectively, "Partners").

Principles of Consolidation and Significant Accounting Policies

The accompanying condensed consolidated financial statements, which include the accounts of Nutanix, Inc. and its wholly-owned subsidiaries, have been prepared in conformity with accounting principles generally accepted in the United States ("U.S. GAAP") and are consistent in all material respects with those included in our Annual Report on Form 10-K for the fiscal year ended July 31, 2018, filed with the Securities and Exchange Commission ("SEC"), on September 24, 2018. 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 reclassifications have been made to the prior year financial statements to conform to the current year presentation. These reclassifications had no impact on the previously reported net loss or accumulated deficit.

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, 2018.

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 condensed consolidated financial statements and accompanying notes. Such management estimates include, but are not limited to, the best estimate of selling prices for products and related support; useful lives of intangible assets and property and equipment; allowance for doubtful accounts; determination of fair value of stock-based awards; accounting for income taxes, including the valuation allowance on deferred tax assets and uncertain tax positions; warranty liability; fair value of contingent consideration in a business combination; sales commissions expense; and contingencies and litigation. Management evaluates these estimates and assumptions on an ongoing basis using historical experience and other factors and makes adjustments when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could materially differ from those estimates and assumptions.

Concentration of Risk

Concentration of revenue and accounts receivable—We sell our products primarily through our Partners and occasionally directly to end customers. For the three months ended October 31, 2017 and 2018, no end customer accounted for more than 10% of total revenue.

11

NUTANIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

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

	Revenue				Accounts Receivable as of
	Three Months Ended October 31,
Partners	2017		2018		July 31, 2018		October 31, 2018
Partner A	17	%	12	%	16	%	14	%
Partner B	28	%	11	%	13	%	(1)
Partner C	19	%	22	%	15	%	16	%
Partner D	10	%	(1)		(1)		11	%
Partner E	12	%	12	%	12	%	13	%

(1) Less than 10%

Summary of Significant Accounting Policies

There have been no changes to our significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended July 31, 2018, filed with the SEC on September 24, 2018, that have had a material impact on our condensed consolidated financial statements and related notes.

Recently Adopted Accounting Pronouncements

In October 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, which requires us to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The new standard was effective for fiscal years beginning after December 15, 2017, with early adoption permitted, including interim reporting periods within those fiscal years. We adopted this ASU effective August 1, 2018 using a modified retrospective approach. The adoption of the new standard did not have a material impact on our condensed consolidated financial statements, as the increase in our U.S. deferred tax assets was offset by a valuation allowance.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which 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. The new standard was effective for fiscal years beginning after December 15, 2017, with early adoption permitted, including interim reporting periods within those fiscal years. We adopted the new standard effective August 1, 2018, using the retrospective transition approach. The reclassified restricted cash balances from operating activities to changes in cash, cash equivalents and restricted cash on the condensed consolidated statements of cash flows were not material for any period presented.

In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which aligns the accounting for share-based payment awards issued to nonemployees with the guidance applicable to grants to employees. Under the new standard, equity-classified share-based payment awards issued to nonemployees will be measured on the grant date, instead of the current requirement to remeasure the awards through the performance completion date. The new standard is effective for fiscal years beginning after December 15, 2018, with early adoption permitted, including interim reporting periods within those fiscal years. We early adopted the standard effective August 1, 2018, using the prospective approach, and our adoption did not have a material impact on the condensed consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other (Topic 350): Internal-Use Software, which standard aligns the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The new standard is effective for fiscal years beginning after December 15, 2018, with early adoption permitted, including interim reporting periods within those fiscal years. We early adopted the standard effective August 1, 2018, using the prospective approach, and our adoption did not have a significant impact on our condensed consolidated financial statements.

12

NUTANIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

In August 2018, the SEC issued Securities Act Release No. 33-10532, which amends certain disclosure requirements, including extending to interim periods the annual requirement to disclose changes in stockholders’ equity.  Under the new requirements, registrants must now analyze changes in stockholders’ equity, in the form of a reconciliation, for the current and comparative year-to-date interim periods, with subtotals for each interim period. The final rule was effective in November 2018. We adopted this new guidance during the first quarter of fiscal 2019 and have included a reconciliation of the changes in stockholders' equity in this Quarterly Report on Form 10-Q.

Recently Issued and Not Yet Adopted Accounting Pronouncements

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, except for short-term leases, on the balance sheet of lessees. The new standard is effective for fiscal years beginning after December 15, 2018, with early adoption permitted, including interim reporting periods within those fiscal years. We will adopt ASU 2016-02 effective August 1, 2019. This new standard requires a modified retrospective transition approach and provides certain optional transition relief. We currently anticipate that the adoption of this standard will have a material impact on our condensed consolidated balance sheets, given that we had operating lease commitments in excess of $100 million as of October 31, 2018. We expect that most of our operating lease commitments will be subject to the new standard and recognized as lease liabilities and right-of-use assets upon adoption, which will increase the total assets and total liabilities reported. However, we do not anticipate that the adoption of this standard will have a material impact on our condensed consolidated statements of operations, as the expense recognition under this new standard will be similar to current practice. We do not expect the adoption of this ASU to have a material impact on our condensed consolidated statements of cash flows.

In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which provides companies with an option to reclassify stranded tax effects resulting from the enactment of the Tax Cuts and Jobs Act ("TCJA") from accumulated other comprehensive income to retained earnings. The new standard is effective for fiscal years beginning after December 15, 2018, with early adoption permitted, including interim reporting periods within those fiscal years, and will be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the tax rate as a result of TCJA is recognized. We have not made a determination as to which alternative method we will use upon adoption of the standard, but we do not expect the adoption of this ASU to have a material impact on our condensed consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of the FASB's disclosure framework project. The new standard is effective for fiscal years beginning after December 15, 2019, with early adoption permitted, including interim reporting periods within those fiscal years. We do not expect the adoption of this ASU to have a significant impact on our quarterly or annual disclosures.

Note 2. BUSINESS COMBINATION

Mainframe2, Inc.

On August 24, 2018, we completed the acquisition of Mainframe2, Inc. ("Frame"), a privately held Delaware corporation with its principal offices in San Mateo, California ("Frame Acquisition"). Frame provides a cloud-based Windows desktop and application delivery service. The aggregate preliminary purchase price of approximately $129.7 million consisted of approximately $26.7 million in cash and 1,807,576 shares of our Class A common stock, with an aggregate fair value of approximately $103.0 million. The fair value of the shares of common stock issued was determined to be $56.97 per share, the closing price of our stock on August 24, 2018. Certain portions of the consideration for the acquisition, both cash and shares of our Class A common stock, have been placed in escrow to secure the indemnification obligations of certain Frame security holders.

13

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

We also entered into employee holdback or deferred payment arrangements with certain employees of Frame who joined Nutanix after the acquisition, totaling approximately $43.3 million, of which $6.6 million will be paid in cash and $36.7 million will be paid in shares. As payment of these deferred payments is contingent upon the continuous service of the employees, they are being accounted for as post-combination compensation expense over the required service period of three years. As part of the share holdback arrangements, we issued 643,746 shares of our Class A common stock with a fair value of $56.97 per share, the closing price of our Class A common stock on August 24, 2018. This holdback is being accounted for as stock-based compensation over the required three-year service period. On September 21, 2018, we filed a Form S-3 registration statement with the SEC for the 2,451,322 shares of our Class A common stock that were issued as partial consideration in the Frame Acquisition.

Acquisition-related costs are expensed as incurred as general and administrative expenses on our condensed consolidated statement of operations. We incurred approximately $0.9 million of acquisition-related costs in connection with the Frame Acquisition, of which approximately $0.2 million was recognized during the three months ended October 31, 2018.

The following table presents the preliminary aggregate purchase price allocation related to our acquisition of Frame as of October 31, 2018:

	Estimated Fair Value
	(in thousands)
Goodwill	$	97,143
Amortizable intangible assets	38,180
Tangible assets acquired	10,811
Liabilities assumed	(16,474		)
Total consideration	$	129,660

The $38.2 million of amortizable intangible assets includes $31.8 million related to developed technology and $2.2 million related to customer relationships, which will be amortized over an estimated economic life of five years, and $4.2 million related to trade name, which will be amortized over an estimated economic life of four years. Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. The goodwill recognized in this acquisition is primarily attributable to the synergies expected from the expanded market opportunities with our offerings and the knowledgeable and experienced workforce that joined us as part of the acquisition. Goodwill will not be amortized, but will instead be tested for impairment annually or more frequently if certain indicators of impairment are present. Goodwill is not expected to be deductible for income tax purposes.

The purchase price allocation for Frame reflects various preliminary fair value estimates and analyses, including certain tangible assets acquired and liabilities assumed, the valuation of intangible assets acquired, income taxes and goodwill, which are subject to change within the measurement period as preliminary valuations are finalized. Measurement period adjustments are recorded in the reporting period in which the estimates are finalized and adjustment amounts are determined. We determined the fair values of the intangible assets with the assistance of a valuation firm. The estimation of the fair value of the intangible assets required the use of valuation techniques and entailed consideration of all the relevant factors that might affect the fair value, such as present value factors and estimates of future revenues and costs.

Our condensed consolidated financial statements for the three months ended October 31, 2018 include the operations of Frame from the date of the acquisition. Pro forma results of operations have not been presented because they are not material to our condensed consolidated financial statements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

Note 3.    REVENUE, DEFERRED REVENUE AND DEFERRED COMMISSIONS

Disaggregation of Revenue and Revenue Recognition

We generate revenue primarily from the sale of our enterprise cloud platform, which can be delivered pre-installed on an appliance that is configured to order or delivered separately to be utilized on a variety of certified hardware platforms. Software delivered on configured to order appliances is not portable to other appliances and has a term equal to the life of the associated appliance, while separately purchased software typically has a term of one to five years. Configured to order appliances, including our Nutanix-branded NX hardware line, can be purchased from one of our OEM partners or directly from Nutanix. Our platform is typically purchased with one or more years of support and entitlements, which includes the right to software upgrades and enhancements as well as technical support. A substantial portion of sales are made through channel partners and OEM relationships. The following table depicts the disaggregation of revenue by revenue type, consistent with how we evaluate our financial performance:

	Three Months Ended October 31,
	2017		2018
	(in thousands)
Non-portable software	$	126,897	$	146,570
Subscription	62,376		126,976
Hardware	80,838		32,547
Professional services	5,441		7,190
Total revenue	$	275,552	$	313,283

Prior to the first quarter of fiscal 2019, we disaggregated revenue into the following categories: software revenue, hardware revenue and support, entitlements and other services revenue. Software revenue included non-portable software and term-based software licenses. Under the new disaggregated revenue categories, included in the table above, term-based software licenses are included within subscription revenue and non-portable software is presented separately. Support, entitlements and other services revenue included software entitlement and support subscriptions and professional services. Under the new disaggregated revenue categories, software entitlement and support subscriptions are included within subscription revenue and professional services revenue is presented separately. There was no change to the presentation of hardware revenue.

Non-portable software revenue — Non-portable software revenue includes sales of our software operating system when delivered on a configured to order appliance by us or one of our OEM partners. The software licenses associated with these sales are typically non-portable and have a term equal to the life of the appliance the software is delivered on. Revenue from our non-portable software products is generally recognized upon transfer of control to the customer.

Subscription revenue — Subscription revenue is generated from the sales of software entitlement and support subscriptions, separately purchased software term-based licenses and cloud-based Software as a Service ("SaaS") offerings. We recognize revenue from software entitlement and support subscriptions and SaaS offerings ratably over the contractual service period. These offerings represented approximately $51.1 million and $83.0 million of our subscription revenue for the three months ended October 31, 2017 and 2018, respectively. Revenue from our separately purchased software term-based licenses is generally recognized upon transfer of control to the customer, which happens when we make the software available to the customer. These software term-based licenses represented approximately $11.3 million and $44.0 million of our subscription revenue for the three months ended October 31, 2017 and 2018, respectively. For the quarter ended October 31, 2018, the weighted average term for these subscriptions was approximately 3.6 years.

Hardware revenue — In transactions where we deliver the hardware appliance, we consider ourselves to be the principal in the transaction and we record revenue and costs of goods sold on a gross basis. We consider the amount allocated to hardware revenue to be equivalent to the cost of the hardware procured. Hardware revenue is generally recognized upon transfer of control to the customer.

Professional services revenue — We also sell professional services with our products. We recognize revenue related to professional services as they are performed.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

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 standalone selling price ("SSP") basis. For deliverables that we routinely sell separately, such as software entitlement and support subscriptions on our core offerings, we determine SSP by evaluating the standalone sales over the trailing 12 months. For those that are not sold routinely, we determine SSP based on our overall pricing trends and objectives, taking into consideration market conditions and other factors, including the value of our contracts, the products sold and geographic locations.

Contract balances — The timing of revenue recognition may differ from the timing of invoicing to customers. Accounts receivable are recorded at the invoiced amount, net of an allowance for doubtful accounts. A receivable is recognized in the period we deliver goods or provide services, or when our right to consideration is unconditional. In situations where revenue recognition occurs before invoicing, an unbilled receivable is created, which represents a contract asset. Unbilled accounts receivable, included in accounts receivable, net on the condensed consolidated balance sheets, was not material for any of the periods presented.

Payment terms on invoiced amounts are typically 30 days. The balance of accounts receivable, net of allowance for doubtful accounts, as of July 31, 2018 and October 31, 2018 is presented in the accompanying condensed consolidated balance sheets.

Costs to obtain and fulfill a contract — We capitalize commissions paid to sales personnel and the related payroll taxes when customer contracts are signed. These costs are recorded as deferred commissions in the condensed consolidated balance sheets, current and non-current. We determine whether costs should be deferred based on our sales compensation plans, if the commissions are incremental and would not have been incurred absent the execution of the customer contract. Sales commissions for renewals of customer contracts are not commensurate with the commissions paid for the acquisition of the initial contract given the substantive difference in commission rates in proportion to their respective contract values. Commissions paid upon the initial acquisition of a contract are amortized over the estimated period of benefit, which may exceed the term of the initial contract. Accordingly, the amortization of deferred costs is recognized on a systematic basis that is consistent with the pattern of revenue recognition allocated to each performance obligation and included in sales and marketing expense in the condensed consolidated statements of operations. We determine the estimated period of benefit by evaluating the expected renewals of customer contracts, the duration of relationships with our customers, customer retention data, our technology development lifecycle and other factors. Deferred costs are periodically reviewed for impairment.

Deferred revenue — Deferred revenue primarily consists of amounts that have been invoiced but not yet recognized as revenue and primarily pertain to support subscriptions and professional services. The current portion of deferred revenue represents the amounts that are expected to be recognized as revenue within one year of the condensed consolidated balance sheet date.

Significant changes in the balance of deferred revenue (contract liability) and total deferred commissions (contract asset) for the periods presented are as follows:

	Three Months Ended October 31, 2018
	Deferred Revenue			Deferred Commissions
	(in thousands)
Balance as of July 31, 2018	$	631,207		$	114,379
Additions	159,210			33,958
Revenue/commissions recognized	(88,937		)	(26,230		)
Assumed in a business combination	320			—
Balance as of October 31, 2018	$	701,800		$	122,107

Of the $122.1 million deferred commissions balance as of October 31, 2018, we expect to recognize approximately 28% as commission expense over the next 12 months, and the remainder thereafter.

During the three months ended October 31, 2017, we recognized revenue of approximately $49.6 million pertaining to amounts deferred as of July 31, 2017. During the three months ended October 31, 2018, we recognized revenue of approximately $78.8 million pertaining to amounts deferred as of July 31, 2018.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

The majority of our contracted but not invoiced performance obligations are subject to cancellation terms. Revenue allocated to remaining performance obligations represents contracted revenue that has not yet been recognized ("contracted not recognized"), which includes deferred revenue and non-cancelable amounts that will be invoiced and recognized as revenue in future periods and excludes performance obligations that are subject to cancellation terms. Contracted not recognized revenue was approximately $719.7 million as of October 31, 2018, of which we expect to recognize approximately 45% over the next 12 months, and the remainder thereafter.

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, 2018
	Level I		Level II		Level III		Total
	(in thousands)
Financial Assets:
Cash equivalents:
Money market funds	$	41,763	$	—	$	—	$	41,763
Commercial paper	—		77,818		—		77,818
U.S. government securities	—		4,985		—		4,985
Short-term investments:
Corporate bonds	—		448,458		—		448,458
Commercial paper	—		120,772		—		120,772
U.S. government securities	—		59,098		—		59,098
Total measured at fair value	$	41,763	$	711,131	$	—	$	752,894
Cash							181,409
Total cash, cash equivalents and short-term investments							$	934,303
Financial Liabilities:
Contingent consideration	$	—	$	—	$	1,872	$	1,872

	As of October 31, 2018
	Level I		Level II		Level III		Total
	(in thousands)
Financial Assets:
Cash equivalents:
Money market funds	$	59,957	$	—	$	—	$	59,957
Commercial paper	—		106,600		—		106,600
U.S. government securities	—		4,985		—		4,985
Short-term investments:
Corporate bonds	—		458,674		—		458,674
Commercial paper	—		57,247		—		57,247
U.S. government securities	—		49,268		—		49,268
Total measured at fair value	$	59,957	$	676,774	$	—	$	736,731
Cash							228,244
Total cash, cash equivalents and short-term investments							$	964,975
Financial Liabilities:
Contingent consideration	$	—	$	—	$	1,073	$	1,073

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

Financial Instruments Not Recorded at Fair Value on a Recurring Basis

We report our financial instruments at fair value, with the exception of the 0% Convertible Senior Notes, due in 2023 (the "Notes"). Financial instruments that are not recorded at fair value are measured at fair value on a quarterly basis for disclosure purposes. The carrying values and estimated fair values of financial instruments not recorded at fair value are as follows:

	As of July 31, 2018				As of October 31, 2018
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
	(in thousands)
Convertible senior notes, net	$	429,598	$	685,527	$	436,745	$	634,513

The carrying value of the Notes as of October 31, 2018 was net of the unamortized debt discount of $130.9 million and unamortized debt issuance costs of $7.3 million.

The total estimated fair value of the Notes was determined based on the closing trading price per $100 of the Notes as of the last day of trading for the period. We consider the fair value of the Notes to be a Level 2 measurement due to the limited trading activity.

A summary of the changes in the fair value of our contingent consideration, characterized as Level 3 in the fair value hierarchy, is as follows:

	Three Months Ended October 31,
	2017		2018
	(in thousands)
Contingent consideration—beginning balance	$	4,295	$	1,872
Change in fair value (1)	282		(799		)
Contingent consideration—ending balance	$	4,577	$	1,073

(1) Recognized 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 a 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.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

Note 5.    BALANCE SHEET COMPONENTS

Short-Term Investments

The amortized cost of our short-term investments approximates their fair value. As of July 31, 2018 and October 31, 2018, unrealized gains and losses from our short-term investments were not material. As of July 31, 2018 and October 31, 2018, unrealized losses from securities that were in an unrealized loss position for more than 12 months were not material. Unrealized losses related to our short-term investments are due to interest rate fluctuations, as opposed to credit quality. In addition, unless we need cash to support our current operations, we do not intend to sell and it is not likely that we would be required to sell these investments before recovery of their amortized cost basis, which may be at maturity. As a result, at July 31, 2018 and October 31, 2018, there were no other-than-temporary impairments for these investments.

The following table summarizes the estimated fair value of our investments in marketable debt securities by their contractual maturity dates:

	As of October 31, 2018
	(in thousands)
Due within one year	$	434,191
Due in one year through three years	130,998
Total	$	565,189

Property and Equipment, Net

Property and equipment, net consists of the following:

	Estimated Useful Life	As of
		July 31, 2018			October 31, 2018
	(in months)	(in thousands)
Computer, production, engineering and other equipment	36	$	131,805		$	153,647
Demonstration units	12	53,547			54,387
Leasehold improvements	(1)	19,916			26,138
Furniture and fixtures	60	7,636			9,580
Total property and equipment, gross		212,904			243,752
Less: accumulated depreciation		(127,793		)	(139,002		)
Total property and equipment, net		$	85,111		$	104,750

(1) Leasehold improvements are amortized over the shorter of the estimated useful lives of the improvements or the remaining lease term.

Depreciation expense related to our property and equipment was $10.2 million and $12.5 million for the three months ended October 31, 2017 and 2018, respectively.

Goodwill and Intangible Assets, Net

The changes in the carrying value of goodwill during the three months ended October 31, 2018 were as follows:

	Carrying Amount
	(in thousands)
Balance as of July 31, 2018	$	87,759
Acquired in Frame Acquisition	97,143
Other	92
Balance as of October 31, 2018	$	184,994

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

Intangible assets, net consists of the following:

	As of
	July 31, 2018			October 31, 2018
	(in thousands)
Developed technology	$	47,500		$	79,300
Customer relationships	6,650			8,860
Trade name	—			4,170
Total intangible assets, gross	54,150			92,330
Less:
Accumulated amortization of developed technology	(6,956		)	(10,122		)
Accumulated amortization of customer relationships	(1,828		)	(2,204		)
Accumulated amortization of trade name	—			(174		)
Total accumulated amortization	(8,784		)	(12,500		)
Total intangible assets, net	$	45,366		$	79,830

Amortization expense related to our intangible assets is being recognized in the condensed consolidated statements of operations within product cost of revenue for developed technology and sales and marketing expense for customer relationships and trade name.

The estimated future amortization expense of our intangible assets is as follows:

Fiscal Year Ending July 31:	Amount
	(in thousands)
2019 (remaining nine months)	$	13,060
2020	17,380
2021	17,380
2022	16,183
2023	10,856
Thereafter	4,971
Total	$	79,830

Other Assets—Non-Current

Other assets—non-current consists of the following:

	As of
	July 31, 2018		October 31, 2018
	(in thousands)
Other tax assets—non-current	$	30,927	$	31,460
Deferred tax assets—non-current	2,860		2,810
Other	4,068		4,857
Total other assets—non-current	$	37,855	$	39,127

Other tax assets—non-current as of July 31, 2018 and October 31, 2018 represents a receivable associated with alternative minimum tax credit carryforwards which will be refundable as a result of the Tax Cuts and Jobs Act. For additional details, refer to Note 10.

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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, 2018		October 31, 2018
	(in thousands)
Accrued commissions	$	21,660	$	17,721
Accrued vacation	10,548		12,069
Payroll taxes payable	9,563		9,718
Contributions to ESPP withheld	21,931		8,907
Accrued bonus	12,129		7,848
Other	9,567		9,446
Total accrued compensation and benefits	$	85,398	$	65,709

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consists of the following:

	As of
	July 31, 2018		October 31, 2018
	(in thousands)
Income taxes payable	$	20,863	$	19,571
Accrued professional services	5,838		3,124
Other	4,981		5,857
Total accrued expenses and other current liabilities	$	31,682	$	28,552

Note 6.     CONVERTIBLE SENIOR NOTES

In January 2018, we issued Convertible Senior Notes with a 0% interest rate for an aggregate principal amount of $575.0 million, due in 2023 (the "Notes"), in a private placement to qualified institutional buyers pursuant to Rule144A under the Securities Act of 1933, as amended. This included $75.0 million in aggregate principal amount of the Notes that we issued resulting from initial purchasers fully exercising their option to purchase additional notes. There are no required principal payments prior to the maturity of the Notes. The total net proceeds from the Notes are as follows:

	Amount
	(in thousands)
Principal amount	$	575,000
Less: initial purchasers' discount	(10,781		)
Less: cost of the bond hedges	(143,175		)
Add: proceeds from the sale of warrants	87,975
Less: other issuance costs	(707		)
Net proceeds	$	508,312

The Notes do not bear any interest and will mature on January 15, 2023, unless earlier converted or repurchased in accordance with their terms. The Notes are unsecured and do not contain any financial covenants or any restrictions on the payment of dividends, or the issuance or repurchase of securities by us.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

Each $1,000 of principal of the Notes will initially be convertible into 20.4705 shares of our Class A common stock, which is equivalent to an initial conversion price of approximately $48.85 per share, subject to adjustment upon the occurrence of specified events. Holders of these Notes may convert their Notes at their option at any time prior to the close of the business day immediately preceding October 15, 2022, only under the following circumstances:

1) during any fiscal quarter commencing after the fiscal quarter ending on April 30, 2018 (and only during such fiscal quarter), if the last reported sale price of our Class A common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter, is greater than or equal to 130% of the conversion price on each applicable trading day;

2) during the five business day period after any five consecutive trading day period (the "measurement period") in which the trading price per $1,000 principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our Class A common stock and the conversion rate for the Notes on each such trading day; or

3) upon the occurrence of certain specified corporate events.

Based on the closing price of our Class A common stock of $41.51 on October 31, 2018, the if-converted value of the Notes was greater than the principal amount. However, since the price of our Class A common stock was not greater than or equal to 130% of the conversion price for 20 or more trading days during the 30 consecutive trading days ending on the last trading day of the quarter ended October 31, 2018, the Notes are not convertible for the fiscal quarter commencing after October 31, 2018.

On or after October 15, 2022, holders may convert all or any portion of their Notes at any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date, regardless of the foregoing conditions.

Upon conversion of the Notes, we will pay or deliver, as the case may be, cash, shares of our Class A common stock or a combination of cash and shares of Class A common stock, at our election. We intend to settle the principal of the Notes in cash.

The conversion rate will be subject to adjustment in some events, but will not be adjusted for any accrued or unpaid interest. A holder who converts their Notes in connection with certain corporate events that constitute a "make-whole fundamental change" per the indenture governing the Notes are, under certain circumstances, entitled to an increase in the conversion rate. In addition, if we undergo a fundamental change prior to the maturity date, holders may require us to repurchase for cash all or a portion of their Notes at a repurchase price equal to 100% of the principal amount of the repurchased Notes, plus accrued and unpaid interest.

We may not redeem the Notes prior to the maturity date, and no sinking fund is provided for the Notes.

In accounting for the issuance of the Notes, we separated the Notes into liability and equity components. The carrying amount of the liability component of approximately $423.4 million was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component of approximately $151.6 million, representing the conversion option, was determined by deducting the fair value of the liability component from the par value of the Notes. The difference between the principal amount of the Notes and the liability component (the "debt discount") is amortized to interest expense using the effective interest method over the term of the Notes. The equity component of the Notes is included in additional paid-in capital in the condensed consolidated balance sheets and is not remeasured as long as it continues to meet the conditions for equity classification.

We incurred transaction costs related to the issuance of the Notes of approximately $11.5 million, consisting of an initial purchasers' discount of $10.8 million and other issuance costs of approximately $0.7 million. In accounting for the transaction costs, we allocated the total amount incurred to the liability and equity components using the same proportions as the proceeds from the Notes. Transaction costs attributable to the liability component were approximately $8.5 million, recorded as debt issuance costs (presented as contra debt in the condensed consolidated balance sheets), and are being amortized to interest expense over the term of the Notes. The transaction costs attributable to the equity component were approximately $3.0 million and were net with the equity component within stockholders’ equity.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

The Notes consisted of the following:

	As of October 31, 2018
	(in thousands)
Principal amounts:
Principal	$	575,000
Unamortized debt discount (1)	(130,949		)
Unamortized debt issuance costs (1)	(7,306		)
Net carrying amount	$	436,745
Carrying amount of equity component (2)	$	148,598

(1) Included in the condensed consolidated balance sheets within convertible senior notes, net and amortized over the remaining life of the Notes using the effective interest rate method. The effective interest rate is 6.62%.

(2) Included in the condensed consolidated balance sheets within additional paid-in capital, net of $3.0 million in equity issuance costs.

As of October 31, 2018, the remaining life of the Notes was approximately 50 months.

The following table sets forth the total interest expense recognized related to the Notes:

	Three Months Ended October 31, 2018
	(in thousands)
Interest expense related to amortization of debt discount	$	6,770
Interest expense related to amortization of debt issuance costs	378
Total interest expense	$	7,148

Note Hedges and Warrants

Concurrently with the offering of the Notes in January 2018, we entered into convertible note hedge transactions with certain bank counterparties, whereby we have the initial option to purchase a total of approximately 11.8 million shares of our Class A common stock at a conversion price of approximately $48.85 per share, subject to adjustment for certain specified events. The total cost of the convertible note hedge transactions was approximately $143.2 million. In addition, we sold warrants to certain bank counterparties, whereby the holders of the warrants have the initial option to purchase a total of approximately 11.8 million shares of our Class A common stock at a price of $73.46 per share, subject to adjustment for certain specified events. We received approximately $88.0 million in cash proceeds from the sale of these warrants.

Taken together, the purchase of the convertible note hedges and the sale of warrants are intended to offset any actual dilution from the conversion of the Notes and to effectively increase the overall conversion price from $48.85 to $73.46 per share. As these transactions meet certain accounting criteria, the convertible note hedges and warrants are recorded within stockholders’ equity and are not accounted for as derivatives. The net cost incurred in connection with the convertible note hedge and warrant transactions of approximately $55.2 million was recorded as a reduction to additional paid-in capital in the condensed consolidated balance sheets as of July 31, 2018 and October 31, 2018. The fair value of the note hedges and warrants are not remeasured each reporting period. The amounts paid for the note hedges are tax deductible expenses, while the proceeds received from the warrants are not taxable.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

Impact to Earnings per Share

The Notes will have no impact to diluted earnings per share ("EPS") until they meet the criteria for conversion, as discussed above, as we intend to settle the principal amount of the Notes in cash upon conversion. Under the treasury stock method, in periods when we report net income, we are required to include the effect of additional shares that may be issued under the Notes when the price of our Class A common stock exceeds the conversion price. Under this method, the cumulative dilutive effect of the Notes would be approximately 3.9 million shares if the average price of our Class A common stock was $73.46. However, upon conversion, there will be no economic dilution from the Notes, as exercise of the note hedges eliminate any dilution that would have otherwise occurred. The note hedges are required to be excluded from the calculation of diluted earnings per share, as they would be antidilutive under the treasury stock method.

The warrants will have a dilutive effect when the average share price exceeds the warrant strike price of $73.46 per share. As the price of our Class A common stock continues to increase above the warrant strike price, additional dilution would occur at a declining rate so that a $10 increase from the warrant strike price would yield a cumulative dilution of approximately 4.9 million diluted shares for EPS purposes. However, upon conversion, the note hedges would neutralize the dilution from the Notes so that there would only be dilution from the warrants, which would result in an actual dilution of approximately 1.4 million shares at a common stock price of $83.46.

Note 7.    COMMITMENTS AND CONTINGENCIES

Operating Leases

We have commitments for future payments related to our office facility leases and other contractual obligations. We lease our office facilities under non-cancelable operating lease agreements expiring through 2024. Certain of these lease agreements have free or escalating rent payments. We recognize rent expense under such agreements on a straight-line basis over the lease term, with any free or escalating rent payments amortized as a reduction or addition of rent expense over the lease term.

Future minimum payments due under operating leases as of October 31, 2018 are as follows:

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Fiscal Year Ending July 31:	Amount
	(in thousands)
2019 (remaining nine months)	$	22,196
2020	28,084
2021