(EDGAR Online via COMTEX) -- 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) audited consolidated financial statements and notes thereto and management's discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended January 31, 2019. This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements are often identified by the use of words such as "may," "will," "expect," "believe," "anticipate," "intend," "could," "estimate," or "continue," and similar expressions or variations. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified herein, and those discussed in the section titled "Risk Factors", set forth in Part II, Item 1A of this Form 10-Q and in our other SEC filings. We disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. Our fiscal year end is January 31. Overview We help innovators to build a better world with data. As data continues to grow and organizations strive to mine intelligence from data the need for real-time analytics increases, we are focused on delivering software-defined data storage solutions that are uniquely fast and cloud-capable, enabling customers to maximize the value of data, gain competitive advantage and keep pace with cutting edge developments. Our innovative data platform replaces storage systems designed for mechanical disk with all-flash systems optimized end-to-end for solid-state memory. Pure1, our cloud-based management and support platform, helps predictively resolve potential issues and simplify storage administration. We provide a customer first business model that replaces the traditional forklift upgrade cycle with an Evergreen Storage subscription model built to keep customers on the cutting edge without downtime or performance impact. We were incorporated in October 2009 and are headquartered in Mountain View, California, with operations throughout the world. Our primary offerings include our FlashArray and FlashBlade products, inclusive of our Purity Operating Environment (Purity OE) software, our Pure1 cloud-based management and support software, FlashStack and Artificial Intelligence Ready Infrastructure (AIRI), our joint converged Infrastructure offerings, and our Pure as-a-Service offering, a cloud-like, storage consumption offering that enables customers to purchase on-premises or offsite-hosted private storage on a pay-per-month-per-terabyte basis, after a baseline commitment. Since launching in 2012, our customer base has grown to more than 7,000 customers, including over 40% of the Fortune 500. Our customers include enterprise and commercial organizations, cloud, global systems integrators, and service providers across a diverse set of industry verticals, consumer web, education, energy, financial services, governments, healthcare, manufacturing, media, retail and telecommunications. Our data services are used for a broad set of use cases, including database applications, large-scale analytics, artificial intelligence / machine learning, private and public cloud infrastructure and webscale applications, virtual server infrastructure and virtual desktop infrastructure. Our data platform helps customers scale their businesses through real-time and more accurate analytics, increase employee productivity, improve operational efficiency, and deliver more compelling user experiences to their customers and partners. We define a customer as an end user that purchases our products and services either from one of our channel partners or from us directly. No end user customer represented 10% or more of revenue in the three and nine months ended October 31, 2018. One end user customer represented more than 10% of revenue in the three months ended October 31, 2019, and no end user customer represented 10% or more of revenue in the nine months ended October 31, 2019. We have continued to experience substantial growth, with revenue for the three months ended October 31, 2018 and 2019 of $372.8 million and $428.4 million, representing year-over-year growth of 15%. For the nine months ended October 31, 2018 and 2019 our revenue was $937.6 million and $1,151.4 million, representing year-over-year growth of 23%. Our revenue growth rate may continue to decline as our business scales, even if our revenue continues to grow in absolute terms. We have continued to make significant expenditures and investments, including in personnel-related costs, sales and marketing, infrastructure and operations, and have incurred net losses in each period since our inception, including net losses of $28.2 million and $30.0 million for the three Table of Contents months ended October 31, 2018 and 2019, and $152.6 million and $196.3 million for the nine months ended October 31, 2018 and 2019. Since our founding, we have invested heavily in growing our business. Our headcount increased from over 2,800 employees as of January 31, 2019 to over 3,350 employees as of October 31, 2019. We intend to continue to invest in our research and development organization to extend our technology leadership, enhance the functionality of our existing products and introduce new products. By investing in research and development, we believe we will be well positioned to continue our rapid growth and take advantage of our large market opportunity. We also intend to continue to invest in and expand our sales and marketing functions and channel programs, including expanding our global network of channel partners, hiring sales personnel and carrying out associated marketing activities in key geographies. By investing in sales and technical training, demand generation and partner programs, we believe we can enable many of our partners to independently identify, qualify, sell and upgrade customers, with limited involvement from us. In addition, we intend to expand and continue to invest in our international operations, which we believe will be an important factor in our continued growth. Our revenue generated from customers outside of the United States was 28% and 27% for the nine months ended October 31, 2018 and 2019. As a result of our strategy to increase our investments in research and development, sales, marketing, support and international expansion, we expect to continue to incur operating losses and may incur negative cash flows from operations in the near future and require additional capital resources to execute strategic initiatives to grow our business. Recent Developments
New fiscal year end
In September 2019, we adopted a fiscal year consisting of four 13-week quarters, which will be effective for our fourth quarter beginning on November 1, 2019 and ending on February 2, 2020. Each quarter will start on a Monday and end on a Sunday. Fiscal year 2021 will start on February 3, 2020 and end on January 31, 2021, and will be comprised of four fiscal quarters ending on May 3, 2020, August 2, 2020, November 1, 2020 and January 31, 2021, respectively. The updated calendar will occasionally include a 14-week fourth quarter, which will first occur in fiscal year 2022, starting on November 1, 2021 and ending on February 6, 2022.
In October 2019, Tim Riitters resigned as our Chief Financial Officer. Mr. Riitters will continue to provide transitional consulting services through February 2, 2020. In December 2019, Kevan Krysler joined as our Chief Financial Officer.
In November 2019, David Hatfield transitioned from President to Vice Chair and President Emeritus, and Paul Mountford joined as our Chief Operating Officer. Our Business Model
Demand for Data in the Multi-Cloud Environment
In today's multi-cloud environment, data is the strategic core that enables competitiveness and differentiation for businesses -- collecting vast amounts of data, analyzing it rapidly, discovering new insights, and ultimately delivering new innovations and experiences otherwise impossible without data. We continue to make significant investments in our business to enable data-centric architecture to support today and tomorrow's volume and velocity of data and to ensure the performance and reliability required for new data-driven applications, while substantially reducing costs and complexity for our customers. We believe that the shift in consumption models, like our Pure as-a-Service offering, and in deployment models, as demonstrated by the desire for hybrid deployment technologies, like our Cloud Data Services, are at the core of the trend toward multi-cloud environments. Data-centric architecture supports a wide range of classic business applications as well as modern webscale-architecture applications enabling our customers can manage their existing applications more efficiently while they modernize their applications both on-premise and in the cloud.
Adoption of All-Flash Storage Systems
Organizations are replacing traditional disk-based systems with all-flash storage systems, including those based on NVMe technologies, due to their higher performance, reliability and efficiency. Flash continues to penetrate the data center at a steady rate, and our success depends on the continued adoption of all-flash storage systems. To the extent more organizations recognize the benefits of all-flash storage and the adoption of all-flash storage increases, our target customer base will expand, and demand for all-flash storage will rise.
Adding New Customers and Expanding Sales to Our Existing Customer Base
In order to capture long-term strategic opportunities, we intend to continue to target new customers, including large enterprises, service providers and government organizations, by continuing to invest in our field sales force Table of Contents
Seasonality in our Business Operations
Consistent with the seasonality of enterprise IT as a whole, we generally experience the lowest demand for our products and services in the first quarter of our fiscal year and the greatest demand for our products and services in the last quarter of our fiscal year. Furthermore, we typically focus investments into our sales organization, along with significant product launches, in the first half of our fiscal year. As a result, we expect that our business and results of operations will fluctuate from quarter to quarter, reflecting seasonally softer revenue and operating margin in the first half of our fiscal year, followed by a stronger second half, the relative impact of which will grow as we operate at a larger scale.
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Results of Operations The following tables set forth our results of operations for the periods presented in dollars and as a percentage of total revenue (dollars in thousands, unaudited): Nine Months Ended Three Months Ended October 31, October 31, 2018 2019 2018 2019 Consolidated Statements of Operations Data: Revenue: Product $ 298,863 $ 323,268 $ 735,449 $ 862,137 Support subscription 73,916 105,141 202,159 289,299 Total revenue 372,779 428,409 937,608 1,151,436 Cost of revenue: Product (1) 96,610 89,998 241,292 259,460 Support subscription (1) 27,049 37,773 74,716 106,632 Total cost of revenue 123,659 127,771 316,008 366,092 Gross profit 249,120 300,638 621,600 785,344 Operating expenses: Research and development (1) 90,783 106,663 253,306 318,758 Sales and marketing (1) 146,903 184,819 413,019 537,633 General and administrative (1) 38,651 37,416 99,572 119,542 Total operating expenses 276,337 328,898 765,897 975,933 Loss from operations (27,217) (28,260) (144,297) (190,589) Other income (expense), net (2,889) 9 (7,920) (2,459) Loss before provision (benefit) for income taxes (30,106) (28,251) (152,217) (193,048) Income tax provision (benefit) (1,926) 1,731 390 3,288 Net loss $ (28,180) $ (29,982) $ (152,607) $ (196,336) ____________________________________ (1)Includes stock-based compensation expense as follows (in thousands): Nine Months Ended Three Months Ended October 31, October 31, 2018 2019 2018 2019 Cost of revenue-product $ 862 $ 912 $ 2,190 $ 2,843 Cost of revenue-support subscription 3,327 3,517 8,940 11,101 Research and development 24,634 27,827 67,956 85,180 Sales and marketing 18,681 16,802 49,890 51,171 General and administrative 10,825 5,171 26,962 24,495 Total stock-based compensation expense $ 58,329 $ 54,229 $ 155,938 $ 174,790
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Nine Months Ended Three Months Ended October 31, October 31, 2018 2019 2018 2019 Condensed Consolidated Statements of Operations Data: Revenue: Product 80.2 % 75.5 % 78.4 % 74.9 % Support subscription 19.8 24.5 21.6 25.1 Total revenue 100.0 100.0 100.0 100.0 Cost of revenue: Product 25.9 21.0 25.7 22.5 Support subscription 7.3 8.8 8.0 9.3 Total cost of revenue 33.2 29.8 33.7 31.8 Gross profit 66.8 70.2 66.3 68.2 Operating expenses: Research and development 24.4 24.9 27.0 27.7 Sales and marketing 39.4 43.2 44.1 46.7 General and administrative 10.3 8.7 10.6 10.4 Total operating expenses 74.1 76.8 81.7 84.8 Loss from operations (7.3) (6.6) (15.4) (16.6) Other income (expense), net (0.8) - (0.8) (0.2) Loss before provision for income taxes (8.1) (6.6) (16.2) (16.8) Income tax provision (0.5) 0.4 0.1 0.3 Net loss (7.6) % (7.0) % (16.3) % (17.1) % Revenue Three Months Ended Nine Months Ended October 31, Change October 31, Change 2018 2019 $ % 2018 2019 $ % (dollars in thousands, unaudited) Product revenue $ 298,863 $ 323,268 $ 24,405 8 % $ 735,449 $ 862,137 $ 126,688 17 % Support subscription revenue 73,916 105,141 31,225 42 % 202,159 289,299 87,140 43 % Total revenue $ 372,779 $ 428,409 $ 55,630 15 % $ 937,608 $ 1,151,436 $ 213,828 23 %
Total revenue increased by $55.6 million, or 15%, during the three months ended October 31, 2019 compared to the three months ended October 31, 2018 and . . .
Dec 09, 2019
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