For security and development and operations teams, Prisma Cloud removes the impedance mismatch between security and cloud-driven agility by integrating with continuous integration and continuous development (“CI/CD”) tool chains to provide full lifecycle vulnerability management, compliance, infrastructure-as-code scanning, and runtime defense. With a comprehensive library of compliance frameworks, it vastly simplifies the task of maintaining compliance. Prisma Cloud accomplishes this through deep context-sharing that spans infrastructure, PaaS, users, development platforms, data, and application workloads. Seamless integration with security orchestration tools ensures rapid remediation of vulnerabilities and security issues.
Prisma Cloud delivers cloud security posture management, cloud workload protection platform, cloud network security, cloud code security, and cloud identity security capabilities that provide continuous visibility and protection across an organization’s hybrid, and multi-cloud infrastructure.
Secure Access Service Edge:
•Prisma Access. Prisma Access is a cloud-delivered security offering that helps organizations deliver consistent security to remote networks and mobile users. Located in progress. It offers firewallsmore than 100 locations around the world, Prisma Access consistently inspects all traffic across all ports and provides bidirectional networking to enable branch-to-branch and branch-to-headquarter traffic. Prisma Access consolidates more point-products into a single converged cloud-delivered offering than any competing solution, transforming network security and allowing organizations to enable secure hybrid workforces. Unlike competing solutions, only Prisma Access protects all application traffic with accesscomplete, best-in-class security while ensuring an exceptional user experience with industry-leading service-level agreements (“SLA”s).
•Prisma SD-WAN. Our Prisma SD-WAN solution is a next-generation SD-WAN solution that makes the secure cloud-delivered branch possible. Prisma SD-WAN enables organizations to DNS signatures generatedreplace traditional Multiprotocol Label Switching (“MPLS”) based WAN architectures with affordable broadband and internet transport types that promote improved bandwidth availability, redundancy and performance at a reduced cost. Prisma SD-WAN leverages real-time application performance SLAs and visibility to control and intelligently steer application traffic to deliver an exceptional user experience. Unlike legacy SD-WAN solutions that introduce cost and complexity, our Prisma SD-WAN ensures an excellent user experience with application-defined policies and simplifies network and security operations using advanced predictive analysis and machine learning using malicious domain data from a growing threat intelligence sharing community.and automation.
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•Cortex Data Lake (formerly Logging Service) Subscription. This cloud-based subscription allows our end-customers to collect large amounts of context-rich data generated by our security offerings, including those of our Next-Generation Firewalls, Prisma Access (formerly GlobalProtect cloud service) subscription, and Traps, without needing to plan for local processing power and storage.
•Cortex Xpanse. This cloud-based subscription provides attack surface management, which is the ability for an organization to identify what an attacker would see amongst all of its sanctioned and unsanctioned Internet-facing assets. In addition, Cortex Xpanse detects risky or out-of-policy communications between Internet-connected assets that can be exploited for data breaches or ransomware attacks. Cortex Xpanse continuously identifies Internet assets, risky services or misconfigurations in third parties to help secure a supply chain or identify risks for mergers and acquisitions due diligence. Finally, compliance teams use Cortex Xpanse to improve their audit processes and stay in compliance by assessing their access controls against regulatory frameworks.
•Cortex Data Lake. This cloud-based subscription allows our customers to collect and analyze large amounts of context-rich network security data. This includes a collection of enhanced network logs generated by our security offerings, including those of our ML-Powered Next-Generation Firewalls and Prisma Access subscription, eliminating the need to plan for local data storage.
Support
Customer Support. Global customer support helps our customers achieve their security outcomes with services and support capabilities covering the customer's entire journey with Palo Alto Networks. This post-sales, global organization advances our customers’ security maturity, supporting them when, where, and how they need it. We offer Standard Support, Premium Support, Four-Hour Premium Support and four-hour PremiumPlatinum Support to our end-customers and channel partners. Our channel partners that operate a Palo Alto Networks Authorized Support Center (“ASC”) typically deliver level-one and level-two support. We provide level-three support 24 hours a day, seven days a week through regional support centers that are located worldwide. We also offer an annual subscription-based Service Account Managementa service offering called Focused Services that includes Customer Success Managers (“SAM”CSM”) service that providesto provide support for end-customers with unique or complex support requirements. We offer our end-customers ongoing support for both hardware, software and softwarecertain cloud offerings in order to receive ongoing security updates, PAN-OS upgrades, bug fixes, and repair. End-customers typically purchase these services for a one-year or longer term at the time of the initial product sale and typically renew for successive one-year or longer periods. Additionally, we provide expedited replacement for any defective hardware. We use a third-party logistics provider to manage our worldwide deployment of spare appliances and other accessories.
Threat Intelligence, Incident Response and Security Consulting. Unit 42 brings together world-renowned threat researchers, incident responders and security consultants to create an intelligence-driven, response-ready organization that is passionate about helping clients proactively manage cyber risk. We help security leaders assess and test their security controls, transform their security strategy with a threat-informed approach and respond to incidents rapidly. The Unit 42 Threat Intelligence team provides threat research that enables security teams to understand adversary intent and attribution, while enhancing protections offered by our products and services to stop advanced attacks. Our security consultants serve as trusted partners with state-of-the-art cyber risk expertise and incident response capabilities, helping customers focus on their business before, during, and after a breach.
Professional Services. Professional services are primarily delivered directly by Palo Alto Networks and through oura global network of authorized channel partners to our end-customers and include on-location and remote, hands-on experts who plan, design, and deploy effective security solutions tailored to our end-customers’ specific requirements. These services include architecture design and planning, implementation, configuration, and firewall migrations as well asfor all our products including Prisma and Cortex deployments. Customers can also purchase on-going technical experts to be part of customer’s security teams to aid in the implementation and operation of their Palo Alto Networks capabilities. Our education services provideinclude certifications, as well as free online technical courses and classroom-stylein-classroom training, andwhich are also primarily delivered through our authorized training partners.
Research and Development
Our research and development effort isefforts are focused on developing new hardware and software and on enhancing and improving our existing product and subscription offerings. We believe that hardware and software are both critical to expanding our leadership in the enterprise security market.industry. Our engineering team has deep networking, endpoint, and security expertise and works closely with end-customers to identify their current and future needs. In addition to our focus on hardware and software, our research and development team is focused on research into applications and threats, which allows us to respond to the rapidly changing application and threat landscape. We supplement our own research and development effortefforts with technologies and products that we license from third parties. We test our products thoroughly to certify and ensure interoperability with third-party hardware and software products.
We believe that innovation and timely development of new features and products is essential to meeting the needs of our end-customers and improving our competitive position. During fiscal 2019,2022, we introduced several new offerings, including: Prisma Cloud 3.0, Prisma Access 3.0, AIOps for NGFW, PAN-OS 9.0, with over 60 new features; our DNS Security Service10.2, and Cortex XDR subscriptions; and Prisma, our cloud security suite that secures public cloud environments, SaaS applications, internet access, mobile users, and remote locations through a cloud-based architecture.Cloud NGFW for AWS. Additionally, we acquired RedLock Inc. (“RedLock”), which expandedproductive investments that fit well within our security capabilities for the public cloud with the addition of RedLock’s cloud security analytics technology, Demisto, Inc. (“Demisto”), which expanded the functionality of our platform with the addition of Demisto’s SOAR product, and PureSec Ltd. (“PureSec”) and Twistlock Ltd. (“Twistlock”), which extend our Prisma cloud security strategy with the addition of PureSec’s security for serverless applications and Twistlock’s container security capabilities.long-term strategy.
We plan to continue to significantly invest in our research and development effortefforts as we evolve and extend the capabilities of our platform.portfolio.
Intellectual Property
Our industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding patent and other intellectual property rights. In particular, leading companies in the enterprise security industry have extensive patent portfolios and are regularly involved in both offensive and defensive litigation. We continue to grow our patent portfolio and own intellectual property and related intellectual property rights around the world that relate to our products, services, research and development, and other activities, and our success depends in part upon our ability to protect our core technology and intellectual property. We file patent applications to protect our intellectual property and believe that the duration of our issued patents is sufficient when considering the expected lives of our products.
We actively seek to protect our global intellectual property rights and to deter unauthorized use of our intellectual property by controlling access to and use of our proprietary software and other confidential information through the use of internal and external controls, including contractual protections with employees, contractors, end-customers and partners, and our software is protected by U.S. and international copyright laws. Despite our efforts to protect our intellectual property rights, our rights may not be successfully asserted in the future or may be invalidated, circumvented or challenged. In addition, the laws of various foreign countries where our offerings are distributed may not protect our intellectual property rights to the same extent as laws in the United States. See “Risk Factors-Claims by others that we infringe their proprietary technology or otherintellectual property rights could harm our business,” “Risk Factors-Our proprietary rights may be difficult to enforce or protect, which could enable others to copy or use aspects of our products or subscriptions without compensating us,” and “Legal Proceedings” below for additional information.
Government Regulation
We are subject to numerous U.S. federal, state, and foreign laws and regulations covering a wide variety of subject matters. Like other companies in the technology industry, we face scrutiny from both U.S. and foreign governments with respect to our compliance with laws and regulations. Our compliance with these laws and regulations may be onerous and could, individually or in the aggregate, increase our cost of doing business, impact our competitive position relative to our peers, and/or otherwise have an adverse impact on our business, reputation, financial condition, and operating results. For additional information about government regulation applicable to our business, see Part I, Item 1A “Risk Factors” in this Form 10-K.
Competition
We operate in the intensely competitive enterprise security marketindustry that is characterized by constant change and innovation. Changes in the application, threat, and technology landscape result in evolving customer requirements for the protection from threats and the safe enablement of applications. Our main competitors fall into threefive categories:
•large companies that incorporate security features in their products, such as Cisco Systems, Inc. (“Cisco”) and Juniper Networks, Inc. (“Juniper”), or those that have acquired, or may acquire, large network and endpoint security vendors and have the technical and financial resources to bring competitive solutions to the market;
•independent security vendors, such as Symantec Corporation (“Symantec”), Check Point Software Technologies Ltd. (“Check Point”), Fortinet, Inc. (“Fortinet”), and FireEye,Zscaler, Inc. (“FireEye”Zscaler”), that offer a mix of network and endpoint security products;
•startups and
•public cloud vendors and startups that offer solutions for cloud security services(private, public and hybrid cloud); and
•large and small companies, such as Crowdstrike, Inc. (“Crowdstrike”), that compete with someoffer solutions for security operations and endpoint security.
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As our market grows, it will attract more highly specialized vendors, as well as larger vendors that may continue to acquire or bundle their products more effectively.
The principal competitive factors in our market include:
•product features, reliability, performance, and effectiveness;
•product line breadth, diversity, and applicability;
•product extensibility and ability to integrate with other technology infrastructures;
•price and total cost of ownership;
•adherence to industry standards and certifications;
•strength of sales and marketing efforts; and
•brand awareness and reputation.
We believe we generally compete favorably with our competitors on the basis of these factors as a result of the features and performance of our platform,portfolio, the ease of integration of our products with technological infrastructures, and the relatively low total cost of ownership of our products. However, many of our competitors have substantially greater financial, technical, and other resources, greater name recognition, larger sales and marketing budgets, broader distribution, more diversified product lines, and larger and more mature intellectual property portfolios.
Sales, CustomerMarketing, Services and Support and Marketing
Customers.Our end-customers are predominantly medium to large enterprises, service providers, and government entities. Our end-customers operate in a variety of industries, including education, energy, financial services, government entities, healthcare, Internet and media, manufacturing, public sector, and telecommunications. Our end-customers deploy our platformportfolio of products for a variety of security functions across a variety of deployment scenarios. Typical deployment scenarios include the enterprise perimeter, the enterprise data center, and the distributed enterprise perimeter. Our end-customer deployments typically involve at least one pair of our products along with one or more of our subscriptions, depending on size, security needs and requirements, and network complexity.complexity. No single end-customer accounted for more than 10% of our total revenue in fiscal 2019, 2018,2022, 2021, or 2017.2020.
Distribution. We primarily sell our products and subscription and support offerings to end-customers through our channel partners utilizing a two-tier, indirect fulfillment model whereby we sell our products and subscription and support offerings to our distributors, which, in turn, sell to our resellers, which then sell to our end-customers. Sales are generally subject to our standard, non-exclusive distributor agreement, which provides for an initial term of one year, one-year renewal terms, termination by us with 30-9030 to 90 days written notice prior to the renewal date, and payment to us from the channel partner within 30-4530 to 45 calendar days of the date we issue an invoice for such sales. For fiscal 2019, 74.6%2022, 53.6% of our total revenue was derived from sales to fourthree distributors.
We also sell our VM-Series virtual firewalls directly to end-customers through Amazon’s AWS Marketplace, Microsoft’s Azure Marketplace, and Google’s Cloud Platform Marketplace under a usage-based licensing model.
Sales. Our sales organization is responsible for large-account acquisition and overall market development, which includes the management of the relationships with our channel partners, working with our channel partners in winning and supporting end-customers through a direct-touch approach, and acting as the liaison between our end-customers and our marketing and product development organizations. We expect to continue to grow our sales headcount to expand our reach in all of our principal markets and expand our presence into countries where we currently do not have a direct sales presence.key growth sectors.
Our sales organization is supported by sales engineers with responsibility for pre-sales technical support, solutions engineering for our end-customers, and technical training for our channel partners.
Channel Program. Our NextWave Channel Partner program is focused on building in-depth relationships with solutions-oriented distributors and resellers that have strong security expertise. The program rewards these partners based on a number of attainment goals, as well as provides them access to marketing funds, technical and sales training, and support. To ensurepromote optimal productivity, we operate a formal accreditation program for our channel partners’ sales and technical professionals. As of July 31, 2019,2022, we had more than 5,2006,700 channel partners.
Global Customer Support.Success.Our customer supportGlobal Customer Success (“GCS”) organization is responsible for delivering support, professional, educational and educationalsupport services directly to our channel partners and to end-customers. We leverage the capabilities of our channel partners and train them in
the delivery of support, professional, educational and educationalsupport services to ensureenable these services areto be locally delivered. We believe that a broad range of support services is essential to the successful customer deployment and ongoing support of our products, and we have hired support engineers with proven experience to provide those services.
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Marketing. Our marketing is focused on building our brand reputation and the market awareness of our platformportfolio and driving pipeline and end-customer demand. Our marketing team consists primarily of product marketing, brand, demand generation, field marketing, digital marketing, communications, including analyst relations and public relations, digital andmarketing analytics functions. Marketing activities include pipeline development through demand generation, social media and advertising programs, managing the corporate web sitewebsite and partner portal, trade shows and conferences, press, analyst andrelationships, customer relations,advocacy, and customer awareness. Every year we organize multiple signature events, such as our end-customer conference “Ignite.“Ignite” and focused conferences such as “Cortex Symphony” and “SASE Converge.” We also publish major marketthreat intelligence research papers such as the “Application Usage andUnit 42 Cloud Threat Report”Report and the “CloudUnit 42 IoT Threat Forecast Report,” which are based on the application and cyberthreat landscape ofdata from our end-customers.global threat intelligence team, Unit 42. These activities and tools benefit both our direct and indirect channels and are available at no cost to our channel partners.
Backlog. Orders for subscription and support offerings for multiple years are generally billed upfront shortly afterupon fulfillment of an order and are included in deferred revenue. Timing ofContract amounts that are not recorded in deferred revenue recognition foror revenue are considered backlog. We expect backlog related to subscription and support offerings may vary depending onwill change from period to period for various reasons, including the contractual period or when the subscriptiontiming and support offerings are rendered.duration of customer orders and varying billing cycles of those orders. Products are shipped and billed shortly after receipt of an order.upon shipment. The majority of our product revenue comes from orders that are received and shipped in the same quarter. However, insufficient supply and inventory may delay our hardware product shipments. As such, we do not believe that our product backlog at any particular time is meaningful and it is not necessarily indicative of our future operating results.
Seasonality. Our business is affected by seasonal fluctuations in customer spending patterns. We have begun to see seasonal patterns in our business, which we expect to become more pronounced as we continue to grow, with our strongest sequential revenue growth generally occurring in our fiscal second and fourth quarters.
Manufacturing
We outsource the manufacturing of our security products to various manufacturing partners, which include our electronics manufacturing services provider (“EMS provider”) and original design manufacturers. This approach allows us to reduce our costs as it reduces our manufacturing overhead and inventory and also allows us to adjust more quickly to changing end-customer demand. Our EMS provider is Flextronics International, Ltd. (“Flex”), who assembles our products using design specifications, quality assurance programs, and standards that we establish, and procures components and assembles our products based on our demand forecasts. These forecasts represent our estimates of future demand for our products based upon historical trends and analysis from our sales and product management functions as adjusted for overall market conditions.
The component parts within our products are either sourced by our manufacturing partners or by us from various component suppliers. WeOur manufacturing and supply contracts, generally, do not have any long-term manufacturing contracts that guarantee us anya certain level of supply or fixed capacity or pricing, which could increaseincreases our exposure to supply shortages or price fluctuations relatedincreases.
Human Capital
We believe our ongoing success depends on our employees. Development and investment in our people is central to raw materials.
FLEXWORK. Throughout the COVID-19 pandemic, while prioritizing the health and safety of our employees, we have learned how to collaborate in a distributed hybrid work reality and to create opportunities for employees to maintain a sense of belonging and focus on well-being. In the future, we aim to continue to disrupt the nature of work. Our philosophy is simple: place our employees at the center of their working life by providing employees flexibility, personalization, and choice regarding how they work, the benefits they choose, the way they consume learning and, where possible, where and when they work. We believe that the more our employees have choice and demonstrate mutual trust and respect, the more engaged they will be.
FLEXWORK adds even more opportunity to scale our efforts to improve Inclusion and Diversity (“I&D”). It further enables us to recognize each individual as unique, with their own priorities and needs, and gives the employee greater agency to personalize their decisions and utilize our programs and initiatives to meet those interests and desires.
Source & Hire. Sourcing and hiring diverse talent and enabling them to create and execute is central to our comprehensive approach to talent acquisition, which we refer to as “The Way We Hire.” Our talent acquisition team utilizes a number of methods to find subject experts in their respective fields, including the use of a variety of channels that focus on reaching underrepresented talents. Our university relations team partners with hundreds of academic institutions, including colleges and universities that focus on serving diverse populations, to provide career pathways for early-in-career candidates. We also encourage current employees to provide qualified referrals, and to utilize our internal mobility program to grow their careers. We equip hiring managers with training so that they are made aware of potential unconscious biases and interview for the values and competencies that we believe enhance our culture. We have diverse interview panels to deliver a quality interview experience to a diverse slate of candidates.
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Onboard & Integrate. We believe that a positive onboarding experience is foundational to our employees thriving and therefore to rapid productivity. During the COVID-19 pandemic, we built and utilized virtual learning platforms and employee communication channels to provide new employees with inspirational, often personalized, onboarding experiences. Onboarding is a journey of integration that extends through the first year at Palo Alto Networks for every employee. In addition, we have built specialist learning tracks for interns and new graduates that have been recognized as best in class externally. As part of our merger and acquisition strategy, we have also established a robust integration program with the goal to enable individuals joining our teams to feel part of our culture at speed.
Develop & Motivate. FLEXLearn is our unique approach to personalized employee development. FLEXLearn is a learning experience platform that provides employees with a path based on their needs, interests, style, and career journey. Through FLEXLearn, employees have full agency to direct their growth at their pace and choosing. Development information about core business elements, professional skill sets, working in a distributed hybrid environment, as well as required company-wide compliance training, such as Code of Conduct, privacy and security, anti-discrimination, anti-harassment, and anti-bribery training, is also deployed through the FLEXLearn platform for all employees. In addition, FLEXLearn provides employees with events and activities that motivate and spark critical thinking, on topics ranging from inclusion, to well-being and collaboration. On average, employees had 7,014 employees. Competitioncompleted 16 hours of development through the FLEXLearn platform during fiscal 2022.
Engage & Reward. We conduct regular executive listening sessions and “pulse surveys” to better understand employee engagement, sentiment, well-being, and the ability to transition to a distributed work model. Many of these sessions have informed our holistic People Strategy, our FLEXWORK philosophy, I&D strategies, and Internal Mobility program.
Employee sentiment has continued to be highly positive. We continue to use insights from an anonymous global employee engagement survey we conducted in 2021 to execute action plans that reinforce our culture of engagement. Our internal pulse surveys and other feedback mechanisms, including insights from external employee sentiment sources and employer brand recognition, indicate that employees have a strong sense of belonging, confidence in leadership, and an understanding of how their work contributes to the Company’s goals.
In addition to a comprehensive compensation and diverse benefits program, we believe in an always-on feedback and rewards philosophy. From recurring 1:1 sessions and quarterly performance feedback to use of our Cheers for qualified personnelPeers peer recognition program, employees get continuous input about the value they bring to the organization.
Inclusion & Diversity. We are intentional about including diverse points of view, perspectives, experiences, backgrounds and ideas in our industrydecision-making processes. We deeply believe that true diversity exists when we have representation of all ethnicities, genders, orientations and identities, and cultures in our workforce. Our I&D programs continue to advance those visions. The diversity of our board of directors, with women representing 33% of our board as of July 31, 2022, is intense,an example of that vision in action. We have nine employee network groups (“ENG”s) which are employee-led groups that play a vital role in building understanding and awareness. Over 26% of our global workforce was involved in at least one ENG as of July 31, 2022. Our ENGs are provided with a budget to fund activities for their communities and to make charitable grants to organizations advancing their causes. We involve our ENGs in listening sessions with executive teams and we work in partnership to develop our annual I&D plans, because we believe involvement is critical. Our I&D philosophy is fully embedded in our talent acquisition, learning and development and rewards and recognition programs.
Environmental, Social & Governance
We recognize our duty to address environmental, social and governance (“ESG”) practices. From our Climate Commitment and our social impact programs to our Supplier Responsibility initiatives and Code of Business Conduct and Ethics, we value the opportunity to have meaningful outcomes that reinforce our future success dependsintention to respect our planet, uplift our communities and advance our industry.
Environmental. We recognize climate change is a global crisis and are committed to doing our part to reduce environmental impacts. Aligned to the Climate Commitments we declared in part onFebruary 2021, we remain committed to utilizing 100% renewable energy, reducing our greenhouse gas (“GHG”) emissions and working across our value chain, and with coalitions, to achieve these goals by 2030. During fiscal 2022, we conducted a comprehensive analysis of our global environmental footprint and developed Science Based Targets aligned to a warming scenario of 1.5° Celsius. We joined The Climate Pledge during fiscal 2022 demonstrating our eagerness to engage in coalitions to advocate for climate action. We are committed to being transparent about our progress over time through annual reporting.
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Social. In addition to our FLEXWORK People Strategy described in the section titled “Human Capital” above, we prioritized the health and safety of our employees during the COVID-19 pandemic. Through the deployment of our Global Supplier Code of Conduct, we continued ability to hire, motivate,reach across our supply chain to communicate our expectations regarding labor standards, business practices and retain such personnel.workplace health and safety conditions. During fiscal 2022, we maintained our affiliate membership in the Responsible Business Alliance and maintained our commitment to Supplier Diversity. We value our role as a good corporate citizen and in fiscal 2022 continued to execute our social impact programs. In addition to ongoing efforts to help colleagues and communities impacted by the COVID-19 pandemic , we invested in education programs, scholarships, diversity and basic needs. We expanded our work to provide cybersecurity curriculum to schools, universities and nonprofit organizations to help youth protect their digital way of life and to prepare diverse adults for careers in cybersecurity. Employees continued to participate in our giving, matching and volunteer programs to make impacts in their local communities.
Governance. Integrity is one of our core values. Our corporate behavior and leadership practices model ethical decision making. Employees and suppliers are informed about our governance expectations through our Codes of Conduct, compliance training programs and ongoing communications. Our board of directors is governed by Corporate Governance Guidelines, which are amended from time to time to incorporate best practices in corporate governance. Reinforcing the importance of our ESG performance, the charter of the ESG and Nominating Committee of the board of directors includes the primary oversight of ESG.
Available Information
Our website is located at www.paloaltonetworks.com, and our investor relations website is located at investors.paloaltonetworks.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are available free of charge on the Investors portion of our web sitewebsite as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (“SEC”). We also provide a link to the section of the SEC’s website at www.sec.gov that has all of our public filings, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, all amendments to those reports, our Proxy Statements, and other ownership relatedownership-related filings.
We also use our investor relations website as a channel of distribution for important company information. For example, webcasts of our earnings calls and certain events we participate in or host with members of the investment community are on our investor relations website. Additionally, we announce investor information, including news and commentary about our business and financial performance, SEC filings, notices of investor events, and our press and earnings releases, on our investor relations website. Investors and others can receive notifications of new information posted on our investor relations website in real time by signing up for email alerts and RSS feeds. Further corporate governance information, including our corporate governance guidelines, board committee charters, and code of conduct, is also available on our investor relations website under the heading “Governance.” The contents of our websites are not incorporated by reference into this Annual Report on Form 10-K or in any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only. All trademarks, trade names, or service marks used or mentioned herein belong to their respective owners.
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ITEM 1A. RISK FACTORS
Our operations and financial results are subject to various risks and uncertainties including those described below. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, also may become important factors that affect us. If any of the following risks or others not specified below materialize, our business, financial condition, and operating results could be materially adversely affected, and the market price of our common stock could decline. In addition, the impacts of COVID-19 and any worsening of the economic environment may exacerbate the risks described below, any of which could have a material impact on us. This situation is changing rapidly, and additional impacts may arise that we are not currently aware of.
RISK FACTOR SUMMARY
Our business is subject to numerous risks and uncertainties. These risks include, but are not limited to, the following:
•The ongoing global COVID-19 pandemic could harm our business and results of operations.
•Our business and operations have experienced growth in recent periods, and if we do not effectively manage any future growth or are unable to improve our systems, processes, and controls, our operating results could be adversely affected.
•Our operating results may vary significantly from period to period and be unpredictable, which could cause the market price of our common stock to decline.
•Our operating results may be adversely affected by unfavorable economic and market conditions and the uncertain geopolitical environment.
•Our revenue growth rate in recent periods may not be indicative of our future performance.
•We have a history of losses, anticipate increasing our operating expenses in the future, and may not be able to achieve or maintain profitability or maintain or increase cash flow on a consistent basis, which could cause our business, financial condition, and operating results to suffer.
•If we are unable to sell new and additional product, subscription, and support offerings to our end-customers, our future revenue and operating results will be harmed.
•We face intense competition in our market and we may lack sufficient financial or other resources to maintain or improve our competitive position.
•A network or data security incident may allow unauthorized access to our network or data, harm our reputation, create additional liability and adversely impact our financial results.
•Reliance on shipments at the end of the quarter could cause our revenue for the applicable period to fall below expected levels.
•Seasonality may cause fluctuations in our revenue.
•If we are unable to hire, integrate, train, retain, and motivate qualified personnel and senior management, our business could suffer.
•If we are not successful in executing our strategy to increase sales of our products, subscriptions and support offerings to new and existing enterprise end-customers, our operating results may suffer.
•We rely on revenue from subscription and support offerings, and because we recognize revenue from subscription and support over the term of the relevant service period, downturns or upturns in sales of these subscription and support offerings are not immediately reflected in full in our operating results.
•Defects, errors, or vulnerabilities in our products, subscriptions, or support offerings, the failure of our products or subscriptions to block a virus or prevent a security breach or incident, misuse of our products, or risks of product liability claims could harm our reputation and adversely impact our operating results.
•False detection of applications, viruses, spyware, vulnerability exploits, data patterns, or URL categories could adversely affect our business.
•We rely on our channel partners to sell substantially all of our products, including subscriptions and support, and if these channel partners fail to perform, our ability to sell and distribute our products and subscriptions will be limited, and our operating results will be harmed.
•If we do not accurately predict, prepare for, and respond promptly to rapidly evolving technological and market developments and successfully manage product and subscription introductions and transitions to meet changing end-customer needs in the enterprise security industry, our competitive position and prospects will be harmed.
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•Our current research and development efforts may not produce successful products, subscriptions, or features that result in significant revenue, cost savings or other benefits in the near future, if at all.
•We may acquire other businesses, which could subject us to adverse claims or liabilities, require significant management attention, disrupt our business, adversely affect our operating results, may not result in the expected benefits of such acquisitions and may dilute stockholder value.
•Because we depend on manufacturing partners to build and ship our products, we are susceptible to manufacturing and logistics delays and pricing fluctuations that could prevent us from shipping customer orders on time, if at all, or on a cost-effective basis, which may result in the loss of sales and end-customers.
•Managing the supply of our products and product components is complex. Insufficient supply and inventory would result in lost sales opportunities or delayed revenue, while excess inventory would harm our gross margins.
•Because some of the key components in our products come from limited sources of supply, we are susceptible to supply shortages or supply changes, which has disrupted or delayed our scheduled product deliveries to our end-customers, increase our costs and may result in the loss of sales and end-customers.
•The sales prices of our products, subscriptions and support offerings may decrease, which may reduce our gross profits and adversely impact our financial results.
•We generate a significant amount of revenue from sales to distributors, resellers, and end-customers outside of the United States, and we are therefore subject to a number of risks associated with international sales and operations.
•We are exposed to fluctuations in foreign currency exchange rates, which could negatively affect our financial condition and operating results.
•We are exposed to the credit and liquidity risk of some of our channel partners and end-customers, and to credit exposure in weakened markets, which could result in material losses.
•A portion of our revenue is generated by sales to government entities, which are subject to a number of challenges and risks.
•Our ability to sell our products and subscriptions is dependent on the quality of our technical support services and those of our channel partners, and the failure to offer high-quality technical support services could have a material adverse effect on our end-customers’ satisfaction with our products and subscriptions, our sales, and our operating results.
•Claims by others that we infringe their intellectual property rights could harm our business.
•Our proprietary rights may be difficult to enforce or protect, which could enable others to copy or use aspects of our products or subscriptions without compensating us.
•Our use of open source software in our products and subscriptions could negatively affect our ability to sell our products and subscriptions and subject us to possible litigation.
•We license technology from third parties, and our inability to maintain those licenses could harm our business.
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Risks Related to Our Business and Our Industry
The ongoing global COVID-19 pandemic could harm our business and results of operations.
The novel strain of COVID-19 identified in late 2019 has spread globally, including within the United States, and has resulted in government authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place orders, and shutdowns. This pandemic has negatively impacted and will likely continue to have a negative impact on, worldwide economic activity and financial markets and has impacted, and will further impact, our workforce and operations, the operations of our end-customers, and those of our respective channel partners, vendors and suppliers. In light of the uncertain and rapidly evolving situation relating to the spread of this virus and various government restrictions and guidelines, we have taken measures intended to mitigate the spread of the virus and minimize the risk to our employees, channel partners, end-customers, and the communities in which we operate. Through our FLEXWORK program, our employees may choose to work from home or in the office for a set number of days per week. Although we continue to monitor the situation and may adjust our current policies as more information and public health guidance become available, including progress made through vaccinations, these precautionary measures that we have adopted could negatively affect our customer success efforts, sales and marketing efforts, delay and lengthen our sales cycles, and create operational or other challenges, any of which could harm our business and results of operations. In addition, COVID-19 will likely continue to disrupt the operations of our end-customers and channel partners for an indefinite period of time, including as a result of travel restrictions and/or business shutdowns, all of which could negatively impact our business and results of operations, including cash flows.
The ongoing impact of COVID-19 is fluid and uncertain, but it has caused and may continue to cause various negative effects, including an inability to meet with our existing or potential end-customers; our end-customers deciding to delay or abandon their planned purchases; increased requests for delayed payment terms or product discounts by our end-customers and channel partners; us delaying, canceling, or withdrawing from user and industry conferences and other marketing events, including some of our own; and changes in the demand for our products, which has caused us to reprioritize our engineering and research and development efforts and make changes to our original offering roadmap. We have also seen supply chain challenges increase significantly, including chip and component shortages (in some cases, attributable to labor shortages), and at times we do not have sufficient inventory of certain of our products to promptly meet customer demand. As a result, we have experienced at times extended delivery time and increased costs for chips and components compared to historic levels; our demand generation activities, and our ability to close transactions with end-customers and partners may be negatively impacted; our ability to provide 24x7 worldwide support and/or replacement parts to our end-customers may be adversely affected; and it has been and, until the COVID-19 outbreak is contained and global economic activity stabilizes, will continue to be more difficult for us to forecast our operating results.
More generally, the pandemic has not only significantly and adversely increased economic and demand uncertainty, but it has caused a global economic slowdown, and continuing global economic uncertainty which could decrease technology spending and adversely affect demand for our offerings and harm our business and results of operations.
Our business and operations have experienced rapid growth in recent periods, and if we do not effectively manage any future growth or are unable to improve our systems, processes, and controls, our operating results could be adversely affected.
We have experienced rapid growth and increased demand for our products and subscriptions over the last few years. As a result, our employee headcount has increased significantly, and we expect it to continue to grow over the next year. For example, from the end of fiscal 20182021 to the end of fiscal 2019,2022, our headcount increased from 5,34810,473 to 7,01412,561 employees. In addition, as we have grown, our number of end-customers has also increased significantly, and we have increasingly managed more complex deployments of our products and subscriptions with larger end-customers. The growth and expansion of our business and product, subscription, and support offerings places a significant strain on our management, operational, and financial resources. To manage any future growth effectively, we must continue to improve and expand our information technology and financial infrastructure, our operating and administrative systems and controls, and our ability to manage headcount, capital, and processes in an efficient manner.manner, all of which may be more difficult to accomplish the longer that our employees must work remotely from home.
We may not be able to successfully implement or scale improvements to our systems, processes, and controls in an efficient or timely manner. In addition, our existing systems, processes, and controls may not prevent or detect all errors, omissions, or fraud. We may also experience difficulties in managing improvements to our systems, processes, and controls or in connection with third-party software licensed to help us with such improvements. Any future growth would add complexity to our organization and require effective coordination throughout our organization. Failure to manage any future growth effectively could result in increased costs, disrupt our existing end-customer relationships, reduce demand for or limit us to smaller deployments of our platform,products, or harm our business performance and operating results.
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Our operating results may vary significantly from period to period and be unpredictable, which could cause the market price of our common stock to decline.
Our operating results, in particular, our revenues, gross margins, operating margins, and operating expenses, have historically varied from period to period, and even though we have experienced growth, we expect variation to continue as a result of a number of factors, many of which are outside of our control and may be difficult to predict, including:
•our ability to attract and retain new end-customers or sell additional products and subscriptions to our existing end-customers;
•the budgeting cycles, seasonal buying patterns, and purchasing practices of our end-customers;end-customers;
•changes in end-customer, distributor or reseller requirements, or market needs;
•price competition;
•the timing and success of new product and service introductions by us or our competitors or any other change in the competitive landscape of our industry, including consolidation among our competitors or end-customers and strategic partnerships entered into by and between our competitors;
•changes in the mix of our products, subscriptions, and support, including changes in multi-year subscriptions and support;
•our ability to successfully and continuously expand our business domestically and internationally;internationally, particularly in the current global economic slowdownand the escalation of military conflicts such as Russia’s invasion of Ukraine;
•changes in the growth rate of the enterprise security market;industry;
•deferral of orders from end-customers in anticipation of new products or product enhancements announced by us or our competitors;
•the timing and costs related to the development or acquisition of technologies or businesses or strategic partnerships;
•lack of synergy or the inability to realize expected synergies, resulting from acquisitions or strategic partnerships;
•our inability to execute, complete, or integrate efficiently any acquisitions that we may undertake;
•increased expenses, unforeseen liabilities, or write-downs and any impact on our operating results from any acquisitions we consummate;
•our ability to increase the size and productivity of our distribution channel;
•our obligation to repay the aggregate principal amount of the Notes as holders exercise their conversion rights under the Notes;
•decisions by potential end-customers to purchase security solutions from larger, more established security vendors or from their primary network equipment vendors;
•changes in end-customer penetration or attach and renewal rates for our subscriptions;
•timing of revenue recognition and revenue deferrals;
•our ability to manage production and manufacturing related costs, global customer service organization costs, inventory excess and obsolescence costs, and warranty costs;costs, especially due to disruptions in our supply chain as a result of COVID-19 and the global semiconductor chip and component shortage;
•our ability to manage cloud hosting service costs and scale the cloud-based subscription offerings;
•insolvency or credit difficulties confronting our end-customers, which couldincluding due to the continuing effects of COVID-19 and adversely affect their ability to purchase or pay for our products and subscription and support offerings in a timely manner or at all, or confronting our key suppliers, including our sole source suppliers, which could disrupt our supply chain;
•any disruption in our channel or termination of our relationships with important channel partners, including as a result of consolidation among distributors and resellers of security solutions;
•our inability to timely fulfill our end-customers’ orders due to supply chain delays or events that impact our manufacturers or their suppliers;suppliers, including due to the effects of COVID-19 and the global semiconductor chip and component shortage;
•the cost and potential outcomes of litigation, which could have a material adverse effect on our business;
•seasonality or cyclical fluctuations in our markets;
•future accounting pronouncements or changes in our accounting policies, including the impactpolicies;
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•increases or decreases in our expenses caused by fluctuations in foreign currency exchange rates, as an increasing amount of our expenses is incurred and paid in currencies other than the U.S. dollar;
•political, economic and social instability caused by the referendum in June 2016, in which voters in the United Kingdom (the “U.K.”) approved anKingdom’s exit from the European Union (the “E.U.”(“Brexit”) and the U.K. government subsequently notified the E.U., Russia’s invasion of its withdrawal, which is commonly referred to as “Brexit,”Ukraine, continued hostilities in the Middle East, terrorist activities, any disruptions from COVID-19 and any disruption these events may cause to the broader global industrial economy; and
•general macroeconomic conditions, both domestically and in our foreign markets that could impact some or all regions where we operate.operate, including inflation, and global economic uncertainty due to the continuing effects of COVID-19.
Any one of the factors above, or the cumulative effect of some of the factors referred to above, may result in significant fluctuations in our financial and other operating results. This variability and unpredictability could result in our failure to meet our revenue, margin, or other operating result expectations or those of securities analysts or investors for a particular period. If we fail to meet or exceed such expectations for these or any other reasons, the market price of our common stock could fall substantially, and we could face costly lawsuits, including securities class action suits.
We operate globally, and as a result, our business and revenues are impacted by global macroeconomiceconomic and geopolitical conditions. The global macroeconomic environment has been and may continue to be inconsistent and challenging due to instability in the global credit markets, inflation, shortages and delays related to the global supply chain challenges, uncertainties related to the timing of the lifting of governmental restrictions to mitigate the spread of COVID-19, the current economic challenges in China, falling demand for oil and other commodities, uncertainties regarding the effects of an increasingly prolonged and uncertain Brexit process, uncertainties related to elections and changes in public policies such as domestic and international regulations, taxes, increase in interest rates, fluctuations in foreign currency exchange rates, or international trade agreements, international trade disputes, government shutdowns, geopolitical turmoil and other disruptions to global and regional economies and markets. As a result,markets continue to add uncertainty to global economic conditions. Military actions or armed conflict, including Russia’s invasion of Ukraine and any related political or economic responses and counter-responses, and uncertainty about or changes in government and trade relationships, policies and treaties could also lead to worsening economic and market conditions and the geopolitical environment. In response to Russia’s invasion of Ukraine, the United States, along with the European Union, has imposed restrictive sanctions on Russia, Russian entities, and Russian citizens (“Sanctions on Russia”). We are subject to these governmental sanctions and export controls, which may subject us to liability if we are not in full compliance with applicable laws. Any continued or further uncertainty, weakness or deterioration in global macroeconomiceconomic and market conditions may causeor the geopolitical environment could have a material and adverse impact on our end-customers to modify spending priorities or delay purchasing decisions,business, financial condition and resultresults of operations, including reductions in lengthenedsales of our products and subscriptions, longer sales cycles, anyreductions in subscription or contract duration and value, slower adoption of which could harmnew technologies, alterations in the spending patterns or priorities of current and prospective customers (including delaying purchasing decisions), increased costs for the chips and components to manufacture our businessproducts and operating results.increased price competition.
Our revenue growth rate in recent periods may not be indicative of our future performance.
We have experienced revenue growth rates of 27.5%29.3% and 29.5%24.9% in fiscal 20192022 and fiscal 2018,2021, respectively. Our revenue for any prior quarterly or annual period should not be relied upon as an indication of our future revenue or revenue growth for any future period. If we are unable to maintain consistent or increasing revenue or revenue growth, the market price of our common stock could be volatile, and it may be difficult for us to achieve and maintain profitability or maintain or increase cash flow on a consistent basis.
We have a history of losses, anticipate increasing our operating expenses in the future, and may not be able to achieve or maintain profitability or maintain or increase cash flow on a consistent basis, which could cause our business, financial condition, and operating results to suffer.
Other than fiscal 2012, we have incurred losses in all fiscal years since our inception. As a result, we had an accumulated deficit of $900.9 million$1.7 billion as of July 31, 2019.2022. We anticipate that our operating expenses will continue to increase in the foreseeable future as we continue to grow our business. Our growth efforts may prove more expensive than we currently anticipate, and we may not succeed in increasing our revenues sufficiently, or at all, to offset increasing expenses. Revenue growth may slow or revenue may decline for a number of possible reasons, including the downturn in the global and U.S. economy due to COVID-19, slowing demand for our products or subscriptions, increasing competition, a decrease in the growth of, or a demand shift in, our overall market, or a failure to capitalize on growth opportunities. We have also entered into a substantial amount of capital commitments for operating lease obligations and other purchase commitments. Any failure to increase our revenue as we grow our business could prevent us from achieving or maintaining profitability or maintaining or increasing cash flow on a consistent basis.basis or satisfying our capital commitments. In addition, we may have difficulty achieving profitability under U.S. generally accepted accounting principles (“GAAP”)GAAP due to share-based compensation expense and other non-cash charges. If we are unable to navigate these challenges as we encounter them, our business, financial condition, and operating results may suffer.
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If we are unable to sell new and additional product, subscription, and support offerings to our end-customers, our future revenue and operating results will be harmed.
Our future success depends, in part, on our ability to expand the deployment of our platformportfolio with existing end-customers and create demand for our new offerings, including cloud security, and AI, and analytics offerings. This may require increasingly sophisticated and costly sales efforts that may not result in additional sales. The rate at which our end-customers purchase additional products, subscriptions, and support depends on a number of factors, including the perceived need for additional security products, including subscription and support offerings, as well as general economic conditions. Further, existing end-customers have no contractual obligation to and may not renew their subscription and support contracts after the completion of their initial contract period. Our end-customers’ renewal rates may decline or fluctuate as a result of a number of factors, including their level of satisfaction with our subscriptions and our support offerings, the frequency and severity of subscription outages, our product uptime or latency, and the pricing of our, or competing, subscriptions. Additionally, our end-customers may renew their subscription and support agreements for shorter contract lengths or on other terms that are less economically beneficial to us. We also cannot be certain that our end-customers will renew their subscription and support agreements. If our efforts to sell additional products and subscriptions to our end-customers are not successful or our end-customers do not renew their subscription and support agreements or renew them on less favorable terms, our revenues may grow more slowly than expected or decline.
We face intense competition in our market especially from larger, well-established companies, and we may lack sufficient financial or other resources to maintain or improve our competitive position.
The marketindustry for enterprise security products is intensely competitive, and we expect competition to increase in the future from established competitors and new market entrants. Our main competitors fall into threefive categories:
•large companies that incorporate security features in their products, such as Cisco and Juniper,Systems, Inc. (“Cisco”), or those that have acquired, or may acquire, large network and endpoint security vendors and have the technical and financial resources to bring competitive solutions to the market;
•independent security vendors, such as Symantec, Check Point Software Technologies Ltd. (“Check Point”), Fortinet, Inc. (“Fortinet”), and FireEye,Zscaler, Inc. (“Zscaler”), that offer a mix of network and endpoint security products;
•startups and
•public cloud vendors and startups that offer solutions for cloud security services(private, public and hybrid cloud); and
•large and small companies, such as Crowdstrike, Inc. (“Crowdstrike”), that compete with some of the features present in our platform.offer solutions for security operations and endpoint security.
Many of our existing competitors have, and some of our potential competitors could have, substantial competitive advantages such as:
•greater name recognition and longer operating histories;
•larger sales and marketing budgets and resources;
•broader distribution and established relationships with distribution partners and end-customers;
•greater customer support resources;
•greater resources to make strategic acquisitions or enter into strategic partnerships;
•lower levels of indebtedness;
•lower labor and development costs;
•newer or disruptive products or technologies;
•larger and more mature intellectual property portfolios; and
•substantially greater financial, technical, and other resources.
In addition, some of our larger competitors have substantially broader and more diverse product and services offerings, which may make them less susceptible to downturns in a particular market and allow them to leverage their relationships based on other products or incorporate functionality into existing products to gain business in a manner that discourages users from purchasing our products and subscriptions, including through selling at zero or negative margins, offering concessions, product bundling, or a closed technology platforms.offering. Many of our smaller competitors that specialize in providing protection from a single type of security threat are often able to deliver these specialized security products to the market more quickly than we can.
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Organizations that use legacy products and services may believe that these products and services are sufficient to meet their security needs or that our platformofferings only servesserve the needs of a portion of the enterprise security market.industry. Accordingly, these organizations may continue allocating their information technology budgets for legacy products and services and may not adopt our security platform.offerings. Further, many organizations have invested substantial personnel and financial resources to design and operate their networks and have established deep relationships with other providers of networking and security products. As a result, these organizations may prefer to purchase from their existing suppliers rather than add or switch to a new supplier such as us, regardless of product performance, features, or greater services offerings or may be more willing to incrementally add solutions to their existing security infrastructure from existing suppliers than to replace it wholesale with our solutions.
Conditions in our market could change rapidly and significantly as a result of technological advancements, partnering or acquisitions by our competitors, or continuing market consolidation. New start-up companies that innovate and large competitors that are making significant investments in research and development may invent similar or superior products and technologies that compete with our products and subscriptions. Some of our competitors have made or could make acquisitions of businesses that may allow them to offer more directly competitive and comprehensive solutions than they had previously offered and adapt more quickly to new technologies and end-customer needs. Our current and potential competitors may also establish cooperative relationships among themselves or with third parties that may further enhance their resources.
These competitive pressures in our market or our failure to compete effectively may result in price reductions, fewer orders, reduced revenue and gross margins, and loss of market share. Any failure to meet and address these factors could seriously harm our business and operating results.
A network or data security incident may allow unauthorized access to our network or data, harm our reputation, create additional liability and adversely impact our financial results.
Increasingly, companies are subject to a wide variety of attacks on their networks on an ongoing basis. In addition to traditional computer “hackers,” malicious code (such as viruses and worms), phishing attempts, employee theft or misuse, and denial of service attacks, sophisticated nation-state and nation-state supported actors engage in intrusions and attacks (including advanced persistent threat intrusions)intrusions and supply chain attacks) and add to the risks to our internal networks, cloud deployedcloud-deployed enterprise and customer facingcustomer-facing environments and the information they store and process. Despite significant effortsIncidences of cyberattacks and other cybersecurity breaches and incidents have increased and are likely to create security barrierscontinue to such threats, it is virtually impossible for us to entirely mitigate these risks.increase. We and our third-party service providers may face security threats and attacks from a variety of sources. OurDespite our efforts and processes to prevent breaches of our internal networks, systems and websites, our data, corporate systems, third-partyour systems and security measures, may be breachedas well as those of our third-party service providers, are still vulnerable to computer viruses, break-ins, phishing attacks, ransomware attacks, or other types of attacks from outside parties, or breaches due to the actions of outside parties, employee error, malfeasance, a combination of these, or otherwise,otherwise. We cannot guarantee that the measures we have taken to protect our networks, systems and as a result, an unauthorized party may obtain access to our data.websites will provide adequate security. Furthermore, as a well-known provider of security solutions, we may be a more attractive target for such attacks. The conflict in Ukraine and associated activities in Ukraine and Russia may increase the risk of cyberattacks on various types of infrastructure and operations, and the United States government has warned companies to be prepared for a significant increase in Russian cyberattacks in response to the Sanctions on Russia.
A security breach in our data securityor incident or an attack against our service availability suffered by us, or that of our third-party service providers, could impact our networks or networks secured by our products and subscriptions, creating system disruptions or slowdowns and exploiting security vulnerabilities of our products, and the information stored or otherwise processed on our networks or those of our third-party service providers could be accessed, publicly disclosed, altered, lost, stolen, rendered unavailable, or stolen,otherwise used or processed without authorization, which could subject us to liability and cause us financial harm. Although we have not yet experienced significant damages from unauthorized access by a third party of our internal network, anyAny actual or perceived breach of network security in our systems or networks, or any other actual or perceived data security incident we or our third-party service providers suffer, could result in significant damage to our reputation, negative publicity, loss of channel partners, end-customers and sales, loss of competitive advantages over our competitors, increased costs to remedy any problems and otherwise respond to any incident, regulatory investigations and enforcement actions, demands, costly litigation, and other liability. In addition, we may incur significant costs and operational consequences of investigating, remediating, eliminating and putting in place additional tools, devices, and devicesother measures designed to prevent actual or perceived security breaches and other security incidents, as well as the costs to comply with any notification obligations resulting from any security incidents. While we maintain cybersecurity insurance, our insurance may be insufficient to cover all liabilities incurred by these incidents, and any incidents may result in loss of, or increased costs of, our cybersecurity insurance. Any of these negative outcomes could adversely impact the market perception of our products and subscriptions and end-customer and investor confidence in our company and could seriously harm our business or operating results.
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Reliance on shipments at the end of the quarter could cause our revenue for the applicable period to fall below expected levels.
As a result of end-customer buying patterns and the efforts of our sales force and channel partners to meet or exceed their sales objectives, we have historically received a substantial portion of sales orders and generated a substantial portion of revenue during the last few weeks of each fiscal quarter. If expected revenue at the end of any fiscal quarter is delayed for any reason, including the
failure of anticipated purchase orders to materialize (particularly for large enterprise end-customers with lengthy sales cycles), our logistics partners’ inability to ship products prior to fiscal quarter-end to fulfill purchase orders received near the end of thea fiscal quarter (including due to the effects of COVID-19), our failure to manage inventory to meet demand, any failure of our systems related to order review and processing, or any delays in shipments based on trade compliance requirements (including new compliance requirements imposed by new or renegotiated trade agreements), revenue could fall below our expectations and the estimates of analysts for that quarter, which could adversely impact our business and operating results and cause a decline in the market price of our common stock.
Seasonality may cause fluctuations in our revenue.
We believe there are significant seasonal factors that may cause our second and fourth fiscal quarters to record greater revenue sequentially than our first and third fiscal quarters. We believe that this seasonality results from a number of factors, including:
•end-customers with a December 31 fiscal year-end choosing to spend remaining unused portions of their discretionary budgets before their fiscal year-end, which potentially results in a positive impact on our revenue in our second fiscal quarter;
•our sales compensation plans, which are typically structured around annual quotas and commission rate accelerators, which potentially results in a positive impact on our revenue in our fourth fiscal quarter;
•seasonal reductions in business activity during August in the United States, Europe and certain other regions, which potentially results in a negative impact on our first fiscal quarter revenue; and
•the timing of end-customer budget planning at the beginning of the calendar year, which can result in a delay in spending at the beginning of the calendar year potentially resulting in a negative impact on our revenue in our third fiscal quarter.
As we continue to grow, seasonal or cyclical variations in our operations may become more pronounced, and our business, operating results and financial position may be adversely affected.
If we are unable to hire, integrate, train, retain, and motivate qualified personnel and senior management, our business could suffer.
Our future success depends, in part, on our ability to continue to hire, integrate, train, and retain qualified and highly skilled personnel. We are substantially dependent on the continued service of our existing engineering personnel because of the complexity of our platform.offerings. Additionally, any failure to hire, integrate, train, and adequately incentivize our sales personnel or the inability of our recently hired sales personnel to effectively ramp to target productivity levels could negatively impact our growth and operating margins. Competition for highly skilled personnel, particularly in engineering, is often intense, especially in the San Francisco Bay Area, where we have a substantial presence and need for such personnel. Additionally, potential changes in U.S. immigration and work authorization laws and regulations, including in reaction to COVID-19, may make it difficult to renew or obtain visas for any highly skilled personnel that we have hired or are actively recruiting.
In addition, the industry in which we operate generally experiences high employee attrition. Although we have entered into employment offer letters with our key personnel, these agreements have no specific duration and constitute at-will employment. We do not maintain key person life insurance policies on any of our employees. The loss of one or more of our key employees, and any failure to have in place and execute an effective succession plan for key executives, could seriously harm our business. If we are unable to hire, integrate, train, or retain the qualified and highly skilled personnel required to fulfill our current or future needs, our business, financial condition, and operating results could be harmed.
Our future performance also depends on the continued services and continuing contributions of our senior management to execute on our business plan and to identify and pursue new opportunities and product innovations. The loss of services of senior management, the decrease in the effectiveness of such services due to working remotely from home, or the ineffective management of any leadership transitions, especially within our sales organization, could significantly delay or prevent the achievement of our development and strategic objectives, which could adversely affect our business, financial condition, and operating results.
Further, we believe that a critical contributor to our success and our ability to retain highly skilled personnel has been our corporate culture, which we believe fosters innovation, inclusion, teamwork, passion for end-customers, focus on execution, and the facilitation of critical knowledge transfer and knowledge sharing. As we grow and change, we may find it difficult to maintain these important aspects of our corporate culture. While we are taking steps to develop a more inclusive and diverse workforce, there is no guarantee that we will be able to do so. Any failure to preserve our culture as we grow could limit our ability to innovate and could negatively affect our ability to retain and recruit personnel, continue to perform at current levels or execute on our business strategy.
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If we are not successful in executing our strategy to increase sales of our products, subscriptions and subscriptionssupport offerings to new and existing medium and large enterprise end-customers, our operating results may suffer.
Our growth strategy is dependent, in part, upon increasing sales of our products, services, subscriptions and offerings to new and existing medium and large enterprise end-customers. Sales to these end-customers involve risks that may not be present, or that are present to a lesser extent, with sales to smaller entities. These risks include:
•competition from larger competitors, such as Cisco and Check Point, and Juniper, that traditionally target larger enterprises, service providers, and government entities and that may have pre-existing relationships or purchase commitments from those end-customers;
•increased purchasing power and leverage held by large end-customers in negotiating contractual arrangements with us;
•more stringent requirements in our worldwide support contracts, including stricter support response times and penalties for any failure to meet support requirements; and
•longer sales cycles, particularly during the current economic slowdown and in some cases over 12 months, and the associated risk that substantial time and resources may be spent on a potential end-customer that elects not to purchase our products and subscriptions.
In addition, product purchases by large enterprises are frequently subject to budget constraints, multiple approvals, and unplanned administrative, processing, and other delays. Finally, large enterprises typically have longer implementation cycles, require greater product functionality and scalability and a broader range of services, demand that vendors take on a larger share of risks, sometimes require acceptance provisions that can lead to a delay in revenue recognition, and expect greater payment flexibility from vendors. All of these factors can add further risk to business conducted with these end-customers. If we fail to realize an expected sale from a large end-customer in a particular quarter or at all, our business, operating results, and financial condition could be materially and adversely affected.
We rely on revenue from subscription and support offerings, and because we recognize revenue from subscription and support over the term of the relevant service period, downturns or upturns in sales of these subscription and support offerings are not immediately reflected in full in our operating results.
Subscription and support revenue accounts for a significant portion of our revenue, comprising 62.2%75.2% of total revenue in fiscal 2019, 61.3%2022, 73.7% of total revenue in fiscal 2018,2021, and 59.6%68.8% of total revenue in fiscal 2017.2020. Sales of new or renewal subscription and support contracts may decline and fluctuate as a result of a number of factors, including end-customers’ level of satisfaction with our products and subscriptions (including newly integrated products and services), the prices of our products and subscriptions, the prices of products and services offered by our competitors, and reductions in our end-customers’ spending levels. If our sales of new or renewal subscription and support contracts decline, our total revenue and revenue growth rate may decline, and our business will suffer. In addition, we recognize subscription and support revenue over the term of the relevant service period, which is typically one to five years. As a result, much of the subscription and support revenue we report each fiscal quarter is the recognition of deferred revenue from subscription and support contracts entered into during previous fiscal quarters. Consequently, a decline in new or renewed subscription or support contracts in any one fiscal quarter will not be fully or immediately reflected in revenue in that fiscal quarter but will negatively affect our revenue in future fiscal quarters. Also, it is difficult for us to rapidly increase our subscription and support revenue through additional subscription and support sales in any period, as revenue from new and renewal subscription and support contracts must be recognized over the applicable service period.
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Defects, errors, or vulnerabilities in our products, subscriptions, or support offerings, the failure of our products or subscriptions to block a virus or prevent a security breach or incident, misuse of our products, or risks of product liability claims could harm our reputation and adversely impact our operating results.
Because our products and subscriptions are complex, they have contained and may contain design or manufacturing defects or errors that are not detected until after their commercial release and deployment by our end-customers. For example, from time to time, certain of our end-customers have reported defects in our products related to performance, scalability, and compatibility. Additionally, defects may cause our products or subscriptions to be vulnerable to security attacks, cause them to fail to help secure networks, or temporarily interrupt end-customers’ networking traffic. Because the techniques used by computer hackers to access or sabotage networks change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques and provide a solution in time to protect our end-customers’ networks. In addition, due to the Russian invasion of Ukraine there could be a significant increase in Russian cyberattacks against our customers, resulting in an increased risk of a security breach of our end-customers’ systems. Furthermore, as a well-known provider of security solutions, our networks, products, including cloud-based technology, and subscriptions could be targeted by attacks specifically designed to disrupt our business and harm our reputation. In addition, defects or errors in our subscription updates or our products could result in a failure of our subscriptions to effectively update end-customers’ hardware and cloud-based products. Our data centers and networks may experience technical failures and downtime, may fail to distribute appropriate updates, or may fail to meet the increased requirements of a growing installed end-customer base, any of which could temporarily or permanently expose our end-customers’ networks, leaving their networks unprotected against the latest security threats. Moreover, our products must interoperate with our end-customers’ existing infrastructure, which often have different specifications, utilize multiple protocol standards, deploy
products from multiple vendors, and contain multiple generations of products that have been added over time. As a result, when problems occur in a network, it may be difficult to identify the sources of these problems.
The occurrence of any such problem in our products and subscriptions, whether real or perceived, could result in:
•expenditure of significant financial and product development resources in efforts to analyze, correct, eliminate, or work-around errors or defects or to address and eliminate vulnerabilities;
•loss of existing or potential end-customers or channel partners;
•delayed or lost revenue;
•delay or failure to attain market acceptance;
•an increase in warranty claims compared with our historical experience, or an increased cost of servicing warranty claims, either of which would adversely affect our gross margins; and
•litigation, regulatory inquiries, investigations, or investigations,other proceedings, each of which may be costly and harm our reputation.
Further, our products and subscriptions may be misused by end-customers or third parties that obtain access to our products and subscriptions. For example, our products and subscriptions could be used to censor private access to certain information on the Internet. Such use of our products and subscriptions for censorship could result in negative press coverage and negatively affect our reputation.
The limitation of liability provisions in our standard terms and conditions of sale may not fully or effectively protect us from claims as a result of federal, state, or local laws or ordinances, or unfavorable judicial decisions in the United States or other countries. The sale and support of our products and subscriptions also entails the risk of product liability claims. Although we may be indemnified by our third-party manufacturers for product liability claims arising out of manufacturing defects, because we control the design of our products and subscriptions, we may not be indemnified for product liability claims arising out of design defects. We maintain insurance to protect against certain claims associated with the use of our products and subscriptions, but our insurance coverage may not adequately cover any claim asserted against us. In addition, even claims that ultimately are unsuccessful could result in our expenditure of funds in litigation, divert management’s time and other resources, and harm our reputation.
False detection of applications, viruses, spyware, vulnerability exploits, data patterns, or URL categories could adversely affect our business.
Our classifications of application type, virus, spyware, vulnerability exploits, data, or URL categories may falsely detect, report and act on applications, content, or threats that do not actually exist. This risk is heightened by the inclusion of a “heuristics” feature in our products and subscriptions, which attempts to identify applications and other threats not based on any known signatures but based on characteristics or anomalies which indicate that a particular item may be a threat. These false positives may impair the perceived reliability of our products and subscriptions and may therefore adversely impact market acceptance of our products and subscriptions. If our products and subscriptions restrict important files or applications based on falsely identifying them as malware or some other item that should be restricted, this could adversely affect end-customers’ systems and cause material system failures. Any such false identification of important files or applications could result in damage to our reputation, negative publicity, loss of channel partners, end-customers and sales, increased costs to remedy any problem, and costly litigation.
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We rely on our channel partners to sell substantially all of our products, including subscriptions and support, and if these channel partners fail to perform, our ability to sell and distribute our products and subscriptions will be limited, and our operating results will be harmed.
Substantially all of our revenue is generated by sales through our channel partners, including distributors and resellers. We provide our channel partners with specific training and programs to assist them in selling our products, including subscriptions and support offerings, but there can be no assurance that these steps will be utilized or effective. In addition, our channel partners may be unsuccessful in marketing, selling, and supporting our products and subscriptions. We may not be able to incentivize these channel partners to sell our products and subscriptions to end-customers and, in particular, to large enterprises. These channel partners may also have incentives to promote our competitors’ products and may devote more resources to the marketing, sales, and support of competitive products. Our channel partners’ operations may also be negatively impacted by other effects COVID-19 is having on the global economy, such as increased credit risk of end-customers and the uncertain credit markets. Our agreements with our channel partners may generally be terminated for any reason by either party with advance notice prior to each annual renewal date. We cannot be certain that we will retain these channel partners or that we will be able to secure additional or replacement channel partners. In addition, any new channel partner requires extensive training and may take several months or more to achieve productivity. Our channel partner sales structure could subject us to lawsuits, potential liability, and reputational harm if, for example, any of our channel partners misrepresent the functionality of our products or subscriptions to end-customers or violate laws or our corporate policies. If we fail to effectively manage our sales channels or channel partners, our ability to sell our products and subscriptions and operating results will be harmed.
If we do not accurately predict, prepare for, and respond promptly to rapidly evolving technological and market developments and successfully manage product and subscription introductions and transitions to meet changing end-customer needs in the enterprise security market,industry, our competitive position and prospects will be harmed.
The enterprise security marketindustry has grown quickly and is expected to continue to evolve rapidly. Moreover, many of our end-customers operate in markets characterized by rapidly changing technologies and business plans, which require them to add numerous network access points and adapt increasingly complex enterprise networks, incorporating a variety of hardware, software applications, operating systems, and networking protocols. We must continually change our products and expand our business strategy in response to changes in network infrastructure requirements, including the expanding use of cloud computing. For example, organizations are moving portions of their data to be managed by third parties, primarily infrastructure, platform and application service providers, and may rely on such providers’ internal security measures. In 2019, we announced our new cloud security offerings, for securing access to the cloud, and our security offerings for securing the future of security operations, using an integrated AI-based continuous security platform with applications and services. While we have historically been successful in developing, acquiring, and marketing new products and product enhancements that respond to technological change and evolving industry standards, we may not be able to continue to do so, and there can be no assurance that our new or future offerings will be successful or will achieve widespread market acceptance. If we fail to accurately predict end-customers’ changing needs and emerging technological trends in the enterprise security industry, including in the areas of mobility, virtualization, cloud computing, and software defined networks (“SDN”), our business could be harmed. In addition, COVID-19 and the resulting increase in customer demand for work-from-home technologies and other technologies have caused us to reprioritize our engineering and R&D efforts and there can be no assurance that any product enhancements or new features will be successful or address our end-customer needs.
The technology in our platformportfolio is especially complex because it needs to effectively identify and respond to new and increasingly sophisticated methods of attack, while minimizing the impact on network performance. Additionally, some of our new platform features and related platform enhancements may require us to develop new hardware architectures that involve complex, expensive, and time-consuming research and development processes. The development of our platformportfolio is difficult and the timetable for commercial release and availability is uncertain as there can be long time periods between releases and availability of new platform features. If we experience unanticipated delays in the availability of new products, platform features and subscriptions, and fail to meet customer expectations for such availability, our competitive position and business prospects will be harmed.
Additionally, we must commit significant resources to developing new platform features and new cloud security, AI/analytics and other offerings before knowing whether our investments will result in products, subscriptions, and platform features the market will accept. The success of new platform features depends on several factors, including appropriate new product definition, differentiation of new products, subscriptions, and platform features from those of our competitors, and market acceptance of these products, services and platform features. Moreover, successful new product introduction and transition depends on a number of factors, including our ability to manage the risks associated with new product production ramp-up issues, the availability of application software for new products, the effective management of purchase commitments and inventory, the availability of products in appropriate quantities and costs to meet anticipated demand, and the risk that new products may have quality or other defects or deficiencies, especially in the early stages of introduction. There can be no assurance that we will successfully identify opportunities for new products and subscriptions, develop and bring new products and subscriptions to market in a timely manner, or achieve market acceptance of our products and subscriptions, including our product enhancement efforts in connection with COVID-19, or that products, subscriptions, and technologies developed by others will not render our products, subscriptions, or technologies obsolete or noncompetitive.
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Our current research and development efforts may not produce successful products, subscriptions, or platform features that result in significant revenue, cost savings or other benefits in the near future, if at all.
Developing our products, subscriptions, platform features, and related enhancements is expensive. Our investments in research and development may not result in significant design improvements, marketable products, subscriptions, or platform features, or may result in products, subscriptions, or platform features that are more expensive than anticipated. Additionally, we may not achieve the cost savings or the anticipated performance improvements we expect, and we may take longer to generate revenue, or generate less revenue, than we anticipate. Our future plans include significant investments in research and development and related product and subscription opportunities. We believe that we must continue to dedicate a significant amount of resources to our research and development efforts to maintain our competitive position. However, we may not receive significant revenue from these investments in the near future, if at all, or these investments may not yield the expected benefits, either of which could adversely affect our business and operating results.
We may acquire other businesses, which could subject us to adverse claims or liabilities, require significant management attention, disrupt our business, dilute stockholder value, and adversely affect our operating results.results, may not result in the expected benefits of such acquisitions and may dilute stockholder value.
As part of our business strategy, we may acquire orand make investments in complementary companies, products, or technologies. For example, in April 2014, we acquired Cyvera Ltd. (“Cyvera”), in May 2015, we acquired CirroSecure, Inc. (“CirroSecure”), in February 2017, we acquired LightCyber Ltd. (“LightCyber”), in March 2018, we acquired Evident.io, Inc. (“Evident.io”), in April 2018, we acquired Cyber Secdo Ltd. (“Secdo”), in October 2018, we acquired RedLock, in March 2019, we acquired Demisto, in June 2019, we acquired PureSec, and in July 2019, we acquired Twistlock. The identification of suitable acquisition candidates is
difficult, and we may not be able to complete such acquisitions on favorable terms, if at all. If we do complete future acquisitions, we may not ultimately strengthen our competitive position or achieve our goals and business strategy;In addition, we may be subject to claims or liabilities assumed from an acquired company, product, or technology; acquisitions we complete could be viewed negatively by our end-customers, investors, and securities analysts; and we may incur costs and expenses necessary to address an acquired company’s failure to comply with laws and governmental rules and regulations. Additionally, we may be subject to litigation or other claims in connection with the acquired company, including claims from terminated employees, customers, former stockholders, or other third parties, which may differ from or be more significant than the risks our business faces.
If we are unsuccessful at integrating past or future acquisitions in a timely manner, or the technologies and operations associated with such acquisitions, into our company, theour revenue and operating results of the combined company could be adversely affected. Any integration process may require significant time and resources, which may disrupt our ongoing business and divert management’s attention, and we may not be able to manage the integration process successfully or in a timely manner. We may not successfully evaluate or utilize the acquired technology or personnel, realize anticipated synergies from the acquisition, or accurately forecast the financial impact of an acquisition transaction and integration of such acquisition, including accounting charges and any potential impairment of goodwill and intangible assets recognized in connection with such acquisitions.
Our completed or future acquisitions may not ultimately strengthen our competitive position or achieve our goals and business strategy. We may find that the acquired businesses, products, or technologies do not further our business strategy as we expected. Our acquisitions may be viewed negatively by our customers, financial markets, or investors. We may experience difficulty integrating the operations and personnel of the acquired business, and we may have difficulty retaining the key personnel of the acquired business. We may have difficulty integrating the acquired technologies or products with our existing product lines and we may have difficulty maintaining uniform standards, controls, procedures, and policies across diverse or expanding geographic locations.
We may have to pay cash, incur debt, or issue equity or equity-linked securities to pay for any future acquisitions, each of which could adversely affect our financial condition or the market price of our common stock. Furthermore, the sale of equity or issuance of equity-linked debt to finance any future acquisitions could result in dilution to our stockholders. See the risk factors entitled “Our failure to raise additional capital or generate the significant capital necessary to expand our operations and invest in new products and subscriptions could reduce our ability to compete and could harm our businessbusiness.” and “The issuance of additional stock in connection with financings, acquisitions, investments, our stock incentive plans, the conversion of our Notes or exercise of the related Warrants, or otherwise will dilute all other stockholders.” The occurrence of any of these risks could harm our business, operating results, and financial condition.
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Risks Related to our Supply Chain
Because we depend on manufacturing partners to build and ship our products, we are susceptible to manufacturing and logistics delays and pricing fluctuations that could prevent us from shipping customer orders on time, if at all, or on a cost-effective basis, which may result in the loss of sales and end-customers.
We depend on manufacturing partners, primarily our electronics manufacturing service provider (“EMS provider”) Flex, to manufacture our EMS provider, as sole source manufacturers for ourhardware product lines. Our reliance on these manufacturing partners reduces our control over the manufacturing process and exposes us to risks, including reduced control over quality assurance, product costs, product supply, timing and transportation risk. Our products are manufactured by our manufacturing partners at facilities located primarily in the United States. Some of the components in our products are sourced either through Flex or directly by us from component suppliers outside the United States. The portion of our products that are sourced outside the United States may subject us to additional logistical risks (which may increase due to the global impact of COVID-19) or risks associated with complying with local rules and regulations in foreign countries. Significant changes to existing international trade agreements could lead to sourcing or logistics disruption resulting from import delays or the imposition of increased tariffs on our sourcing partners. For example, the United States and Chinese governments have each enacted, and discussed additional, import tariffs. These tariffs, depending on their ultimate scope and how they are implemented, could negatively impact our business by increasing our costs. For example, some components that we import for final manufacturing in the United States have been impacted by these recent tariffs. As a result, our costs have increased and we have raised, and may be required to further raise, prices on our hardware products. Each of these factors could severely impair our ability to fulfill orders.
In addition, we are subject to requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) to conduct due diligence, disclose, and report whether or not our products contain minerals originating from the Democratic Republic of the Congo and adjoining countries, or conflict minerals. Although the SEC has provided guidance with respect to a portion of the conflict minerals filing requirements that may somewhat reduce our reporting practices, we have incurred and expect to incur additional costs to comply with these disclosure requirements, including costs related to determining the source of any of the relevant minerals and metals used in our products. These requirements could adversely affect the sourcing, availability, and pricing of minerals used in the manufacture of semiconductor devices or other components used in our products. We may also encounter end-customers who require that all of the components of our products be certified as conflict free. If we are not able to meet this requirement, such end-customers may choose not to purchase our products.
Our manufacturing partners typically fulfill our supply requirements on the basis of individual purchase orders. We do not have long-term contracts with these manufacturers that guarantee capacity, the continuation of particular pricing terms, or the extension of credit limits. Accordingly, they are not obligated to continue to fulfill our supply requirements and the prices we pay for manufacturing services could be increased on short notice. Our contract with Flex permits them to terminate the agreement for their convenience, subject to prior notice requirements. If we are required to change manufacturing partners, our ability to meet our scheduled product deliveries to our end-customers could be adversely affected, which could cause the loss of sales to existing or potential end-customers, delayed revenue or an increase in our costs which could adversely affect our gross margins. COVID-19 and the global semiconductor shortage have in certain cases caused delays and challenges in obtaining components and inventory, as well as increases to freight and shipping costs, and may result in a material adverse effect on our results of operations. Any production interruptions for any reason, such as a natural disaster, epidemic or pandemic such as COVID-19, capacity shortages, or quality problems at one of our manufacturing partners would negatively affect sales of our product lines manufactured by that manufacturing partner and adversely affect our business and operating results.
Managing the supply of our products and product components is complex. Insufficient supply and inventory maywould result in lost sales opportunities or delayed revenue, while excess inventory maywould harm our gross margins.
Our manufacturing partners procure components and build our products based on our forecasts, and we generally do not hold inventory for a prolonged period of time. These forecasts are based on estimates of future demand for our products, which are in turn based on historical trends and analyses from our sales and product management organizations, adjusted for overall market conditions. COVID-19 has made forecasting more difficult and we may experience increased challenges to our supply chain due to the unpredictability of the impacts of COVID-19. In order to reduce manufacturing lead times and plan for adequate component supply, from time to time we may issue forecasts for components and products that are non-cancelable and non-returnable.
Our inventory management systems and related supply chain visibility tools may be inadequate to enable us to forecast accurately and effectively manage supply of our products and product components. If we ultimately determine that we have excess supply, we may have to reduce our prices and write-down inventory, which in turn could result in lower gross margins. If our actual component usage and product demand are lower than the forecast we provide to our manufacturing partners, we accrue for losses on manufacturing commitments in excess of forecasted demand. Alternatively, insufficient supply levels, including due to the recent global shortage of semiconductors, may lead to shortages that result in delayed product revenue or loss of sales opportunities altogether as potential end-customers turn to competitors’ products that are readily available. If we are unable to effectively manage our supply and inventory, our operating results could be adversely affected.
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Because some of the key components in our products come from limited sources of supply, we are susceptible to supply shortages or supply changes, which could disrupthas disrupted or delaydelayed our scheduled product deliveries to our end-customers, increase our costs and may result in the loss of sales and end-customers.
Our products rely on key components, including integrated circuit components, which our manufacturing partners purchase on our behalf from a limited number of component suppliers, including sole source providers. The manufacturing operations of some of our component suppliers are geographically concentrated in Asia and elsewhere, which makes our supply chain vulnerable to regional disruptions, such as natural disasters, fire, political instability, civil unrest, a power outage, or a localized health risk,risks, such as epidemics and pandemics like COVID-19, and as a result have impaired, and could impair in the future, the volume of components that we are able to obtain. Lead times for components have also been adversely impacted by factors outside of our control, including COVID-19 and the recent global shortage of semiconductors. For example, we have experienced, and could continue to experience, increased difficulties in obtaining a sufficient amount of materials in the semiconductor market, which could reduce our flexibility to react to product mix changes and unforecasted orders. In addition, we have experienced increased costs because of these shortages.
Further, we do not have volume purchase contracts with any of our component suppliers, and they could cease selling to us at any time. If we are unable to obtain a sufficient quantity of these components in a timely manner for any reason, sales of our products could be delayed or halted, or we could be forced to expedite shipment of such components or our products at dramatically increased costs. Our component suppliers also change their selling prices frequently in response to market trends, including industry-wide increases in demand, and becausedemand. Because we do not have, for the most part, volume purchase contracts with theseour component suppliers, we are susceptible to price fluctuations related to raw materials and components and may not be able to adjust our prices accordingly. Additionally, poor quality in any of the sole-sourced components in our products could result in lost sales or sales opportunities.
If we are unable to obtain a sufficient volume of the necessary components for our products on commercially reasonable terms or the quality of the components do not meet our requirements, we could also be forced to redesign our products and qualify new components from alternate component suppliers. The resulting stoppage or delay in selling our products and the expense of redesigning our products couldwould result in lost sales opportunities and damage to customer relationships, which would adversely affect our business and operating results.
Risks Related to Sales of our Products, Subscriptions and Support Offerings
The sales prices of our products, subscriptions and subscriptionssupport offerings may decrease, which may reduce our gross profits and adversely impact our financial results.
The sales prices for our products, subscriptions and subscriptionssupport offerings may decline for a variety of reasons, including competitive pricing pressures, discounts, a change in our mix of products, subscriptions and subscriptions,support offerings, anticipation of the introduction of new products, or subscriptions or support offerings, or promotional programs.programs or pricing pressures as a result of the economic downturn resulting from COVID-19. Competition continues to increase in the market segments in which we participate, and we expect competition to further increase in the future, thereby leading to increased pricing pressures. Larger competitors with more diverse product and service offerings may reduce the price of products or subscriptions that compete with ours or may bundle them with other products and subscriptions. Additionally, although we price our products, subscriptions and subscriptionssupport offerings worldwide in U.S. dollars, currency fluctuations in certain countries and regions may negatively impact actual prices that channel partners and end-customers are willing to pay in those countries and regions. Furthermore, we anticipate that the sales prices and gross profits for our products willcould decrease over product life cycles. We cannot guarantee that we will be successful in developing and introducing new offerings with enhanced functionality on a timely basis, or that our productproducts, subscriptions and subscriptionsupport offerings, if introduced, will enable us to maintain our prices and gross profits at levels that will allow us to achieve and maintain profitability.
We generate a significant amount of revenue from sales to distributors, resellers, and end-customers outside of the United States, and we are therefore subject to a number of risks associated with international sales and operations.
We have a limited history of marketing, selling, and supporting our products, subscriptions and subscriptionssupport offerings internationally. We may experience difficulties in recruiting, training, managing, and retaining an international staff, and specifically staff related to sales management and sales personnel. We also may not be able to maintain successful strategic distributor relationships internationally or
recruit additional companies to enter into strategic distributor relationships. Business practices in the international markets that we serve may differ from those in the United States and may require us in the future to include terms other than our standard terms related to payment, warranties, or performance obligations in end-customer contracts.
Additionally, our international sales and operations are subject to a number of risks, including the following:
•political, economic and social uncertainty around the world, health risks such as epidemics and pandemics like COVID-19, macroeconomic challenges in Europe, terrorist activities, Russia’s invasion of Ukraine, and continued hostilities in the Middle East;
•greater difficulty in enforcing contracts and accounts receivable collection and longer collection periods;
•the uncertainty of protection for intellectual property rights in some countries;
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•greater risk of unexpected changes in foreign and domestic regulatory practices, tariffs, and tax laws and treaties, including regulatory and trade policy changes adopted by the current administration, such as the recently imposed Sanctions on Russia, or foreign countries in response to regulatory changes adopted by the current administration;
•risks associated with trade restrictions and foreign legal requirements, including the importation, certification, and localization of our products required in foreign countries;
•greater risk of a failure of foreign employees, channel partners, distributors, and resellers to comply with both U.S. and foreign laws, including antitrust regulations, the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, U.S. or foreign sanctions regimes and export or import control laws, and any trade regulations ensuring fair trade practices, which non-compliance could include increased costs;
•heightened risk of unfair or corrupt business practices in certain geographies and of improper or fraudulent sales arrangements;
•increased expenses incurred in establishing and maintaining office space and equipment for our international operations;
•management communication and integration problems resulting from cultural and geographic dispersion; and
•fluctuations in exchange rates between the U.S. dollar and foreign currencies in markets where we do business and related impact on sales cycles.
These and other factors could harm our future international revenues and, consequently, materially impact our business, operating results, and financial condition. The expansion of our existing international operations and entry into additional international markets will require significant management attention and financial resources. Our failure to successfully manage our international operations and the associated risks effectively could limit the future growth of our business.
Further, we are subject to risks associated with changes in economic and political conditions in countries in which we operate or sell our products and subscriptions. For instance, the U.K.’s notification of its intention to leave the E.U.Brexit creates an uncertain political and economic environment in the United Kingdom (“U.K.”) and potentially across other European Union (“E.U.”) member states for the foreseeable future, including during any period whilefuture. On January 31, 2020 the terms of any U.K. exit fromleft the E.U. are being negotiated and/or during any transitional period connected to the U.K.’s eventual withdrawal from the E.U. Any agreements arising out of negotiations which the U.K. government makes to retain access to E.U. markets either during a transitional period or more permanently may lead to greater restrictions on the free movement of goods, services, people and capital between the U.K. and the remaining E.U. member states.EU/UK Trade and Cooperation Agreement came into force on January 1, 2021. Our financial condition and operating results in the U.K. and the E.U. may be impacted by such uncertainty with potential disruptions to our relationships with existing and future customers, suppliers and employees all possibly having a material adverse impact on our business, prospects, financial condition and/or operating results.
We are exposed to fluctuations in foreign currency exchange rates, which could negatively affect our financial condition and operating results.
Our sales contracts are primarily denominated in U.S. dollars, and therefore, substantially all of our revenue is not subject to foreign currency risk. However, including as a result of concerns regarding the impact of Brexit, there has been, and may continue to be, significant volatility in global stock markets and foreign currency exchange rates that result in the strengthening of the U.S. dollar against foreign currencies in which we conduct business. The strengthening of the U.S. dollar increases the real cost of our platformproducts to our end-customers outside of the United States and may lead to delays in the purchase of our products, subscriptions, and support, and the lengthening of our sales cycle. If the U.S. dollar continues to strengthen, this could adversely affect our financial condition and operating results. In addition, increased international sales in the future, including through our channel partners and other partnerships, may result in greater foreign currency denominated sales, increasing our foreign currency risk.
Our operating expenses incurred outside the United States and denominated in foreign currencies are increasing and are subject to fluctuations due to changes in foreign currency exchange rates. If we are not able to successfully hedge against the risks associated with foreign currency fluctuations, our financial condition and operating results could be adversely affected. We have entered into
forward contracts in an effort to reduce our foreign currency exchange exposure related to our foreign currency denominated expenditures. As of July 31, 2019,2022, the total notional amount of our outstanding foreign currency forward contracts was $307.2$856.9 million. For more information on our hedging transactions, refer to Note 5.6. Derivative Instrumentsin Part II, Item 8 of this Annual Report on Form 10-K. The effectiveness of our existing hedging transactions and the availability and effectiveness of any hedging transactions we may decide to enter into in the future may be limited and we may not be able to successfully hedge our exposure, which could adversely affect our financial condition and operating results.
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We are exposed to the credit and liquidity risk of some of our channel partners and end-customers, and to credit exposure in weakened markets, which could result in material losses.
We believe customer financing is a competitive factor in obtaining business. The loan financing arrangements provided by our distributors and resellers may include not only financing the acquisition of our products and services but also providing additional funds for other costs associated with network installation and integration of our products and services.
Our exposure to the credit risks relating to the financing activities described above may increase if our customers are adversely affected by a global economic downturn or periods of economic uncertainty. Although we have programs in place with our distributors and resellers that are designed to monitor and mitigate these risks, we cannot guarantee these programs will be effective in reducing ourthe credit risks, especially as we expand our business internationally. If we are unable to adequately control these risks, our business, operating results, and financial condition could be harmed.
In the past, we have experienced non-material losses due to bankruptcies among customers. If these losses increase due to COVID-19 or global economic conditions, they could harm our business and financial condition. A material portion of our sales is derived through our distributors.
For fiscal 2022,three distributors individually represented 10% or more of our total revenue, and in the aggregate represented 53.6% of our total revenue. As of July 31, 2022, three distributors individually represented 10% or more of our gross accounts receivable, and in the aggregate represented 47.7% of our gross accounts receivable.
Additionally, to the degree that turmoil in the credit markets makes it more difficult for some customers to obtain financing, those customers’ ability to pay could be adversely impacted, which in turn could have a material adverse impact on our business, operating results, and financial condition.
A portion of our revenue is generated by sales to government entities, which are subject to a number of challenges and risks.
Sales to government entities are subject to a number of risks. Selling to government entities can be highly competitive, expensive, and time-consuming, often requiring significant upfront time and expense without any assurance that these efforts will generate a sale. The substantial majority of our sales to date to government entities have been made indirectly through our channel partners. Government certification requirements for products and subscriptions like ours may change, thereby restricting our ability to sell into the federal government sector until we have attained the revised certification. If our products and subscriptions are late in achieving or fail to achieve compliance with these certifications and standards, or our competitors achieve compliance with these certifications and standards, we may be disqualified from selling our products, subscriptions and subscriptionssupport offerings to such governmental entity, or be at a competitive disadvantage, which would harm our business, operating results, and financial condition. Government demand and payment for our products, subscriptions and subscriptionssupport offerings may be impacted by government shutdowns, public sector budgetary cycles, contracting requirements, and funding authorizations, with funding reductions or delays adversely affecting public sector demand for our products, subscriptions and subscriptions.support offerings. Government entities may have statutory, contractual, or other legal rights to terminate contracts with our distributors and resellers for convenience or due to a default, and any such termination may adversely impact our future operating results. Governments routinely investigate and audit government contractors’ administrative processes, and any unfavorable audit could result in the government refusing to continue buying our products, subscriptions and subscriptions,support offerings, a reduction of revenue, or fines or civil or criminal liability if the audit uncovers improper or illegal activities, which could adversely impact our operating results in a material way. Additionally, the U.S. government may require certain of the products that it purchases to be manufactured in the United States and other relatively high cost manufacturing locations, and we may not manufacture all products in locations that meet such requirements, affecting our ability to sell these products, subscriptions and subscriptionssupport offerings to the U.S. government.
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Our ability to sell our products and subscriptions is dependent on the quality of our technical support services and those of our channel partners, and the failure to offer high-quality technical support services could have a material adverse effect on our end-customers’ satisfaction with our products and subscriptions, our sales, and our operating results.
After our products and subscriptions are deployed within our end-customers’ networks, our end-customers depend on our technical support services, as well as the support of our channel partners, to resolve any issues relating to our products. Our channel partners often provide similar technical support for third parties’ products and may therefore have fewer resources to dedicate to the support of our products and subscriptions. If we or our channel partners do not effectively assist our end-customers in deploying our products and subscriptions, succeed in helping our end-customers quickly resolve post-deployment issues, or provide effective ongoing support, our ability to sell additional products and subscriptions to existing end-customers would be adversely affected and our reputation with potential end-customers could be damaged. While we have been able to meet increased demand for support services in fiscal 2022, failure to do so in the future could have a material adverse effect on our business.
Many larger enterprise, service provider, and government entity end-customers have more complex networks and require higher levels of support than smaller end-customers. If we or our channel partners fail to meet the requirements of these larger end-customers, it may be more difficult to execute on our strategy to increase our coverage with larger end-customers. Additionally, if our channel partners do not effectively provide support to the satisfaction of our end-customers, we may be required to provide direct support to such end-customers, which would require us to hire additional personnel and to invest in additional resources. It can take several months to recruit, hire, and train qualified technical support employees. We may not be able to hire such resources fast enough to keep up with unexpected demand, particularly if the sales of our products exceed our internal forecasts. As a result, our ability, and the ability of our channel partners to provide adequate and timely support to our end-customers will be negatively impacted, and our end-customers’ satisfaction with our products and subscriptions will be adversely affected. Additionally, to the extent that we may need to rely on our sales engineers to provide post-sales support while we are ramping our support resources, our sales productivity will be negatively impacted, which would harm our revenues. Our
failure or our channel partners’ failure to provide and maintain high-quality support services could have a material adverse effect on our business, financial condition, and operating results.
Risks Related to Intellectual Property and Technology Licensing
Claims by others that we infringe their proprietary technology or otherintellectual property rights could harm our business.
Companies in the enterprise security industry own large numbers of patents, copyrights, trademarks, domain names, and trade secrets and frequently enter into litigation based on allegations of infringement, misappropriation, or other violations of intellectual property or otherrights. In addition, non-practicing entities also frequently bring claims of infringement of intellectual property rights. Third parties are asserting, have asserted and may in the future assert claims of infringement of intellectual property rights against us. For example, in December 2011, Juniper, one of our competitors, filed a lawsuit against us alleging patent infringement. In September 2013, we filed a lawsuit against Juniper alleging patent infringement. In May 2014, we entered into a Settlement, Release and Cross-License Agreement with Juniper to resolve all pending disputes between Juniper and us, including dismissal of all pending litigation.
Third parties may also assert such claims against our end-customers or channel partners, whom our standard license and other agreements obligate us to indemnify against claims that our products and subscriptions infringe the intellectual property rights of third parties. In addition, to the extent we hire personnel from competitors, we may be subject to allegations that they have been improperly solicited, that they have divulged proprietary or other confidential information, or that their former employers own their inventions or other work product. Furthermore, we may be unaware of the intellectual property rights of others that may cover some or all of our technology, or products, subscriptions and subscriptions.services. As the number of products and competitorswe expand our footprint, both in our market increasesplatforms, products, subscriptions and services and geographically, more overlaps occur and we may face more infringement claims may increase. both in the United States and abroad.
While we intend to increasehave been increasing the size of our patent portfolio, our competitors and others may now and in the future have significantly larger and more mature patent portfolios than we have. In addition, litigation mayhas involved and will likely continue to involve patent holding companies or other adverse patent owners who have no relevant product revenue and against whom our own patents may therefore provide little or no deterrence or protection. In addition, we have not registered our trademarks in all of our geographic markets and failure to secure those registrations could adversely affect our ability to enforce and defend our trademark rights. Any claim of infringement by a third party, even those without merit, could cause us to incur substantial costs defending against the claim, could distract our management from our business, and could require us to cease use of such intellectual property. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. A successful claimant could secure a judgment, or we may agree to a settlement that prevents us from distributing certain products or performing certain services or that requires us to pay substantial damages, royalties, or other fees. Any of these events could seriously harm our business, financial condition, and operating results.
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Our proprietary rights may be difficult to enforce or protect, which could enable others to copy or use aspects of our products or subscriptions without compensating us.
We rely and expect to continue to rely on a combination of confidentiality and license agreements with our employees, consultants, and third parties with whom we have relationships, as well as trademark, copyright, patent, and trade secret protection laws, to protect our proprietary rights. We have filed various applications for certain aspects of our intellectual property. Valid patents may not issue from our pending applications, and the claims eventually allowed on any patents may not be sufficiently broad to protect our technology or products and subscriptions. We cannot be certain that we were the first to make the inventions claimed in our pending patent applications or that we were the first to file for patent protection, which could prevent our patent applications from issuing as patents or invalidate our patents following issuance. Additionally, the process of obtaining patent protection is expensive and time-consuming, and we may not be able to prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. Any issued patents may be challenged, invalidated or circumvented, and any rights granted under these patents may not actually provide adequate defensive protection or competitive advantages to us. Additional uncertainty may result from changes to patent-related laws and court rulings in the United States and other jurisdictions. As a result, we may not be able to obtain adequate patent protection or effectively enforce any issued patents.
Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or subscriptions or obtain and use information that we regard as proprietary. We generally enter into confidentiality or license agreements with our employees, consultants, vendors, and end-customers, and generally limit access to and distribution of our proprietary information. However, we cannot be certain that we have entered into such agreements with all parties who may have or have had access to our confidential information or that the agreements we have entered into will not be breached. We cannot guarantee that any of the measures we have taken will prevent misappropriation of our technology. Because we may be an attractive target for computer hackers, we may have a greater risk of unauthorized access to, and misappropriation of, our proprietary information. In addition, the laws of some foreign countries do not protect our proprietary rights to as great an extent as the laws of the United States, and many foreign countries do not enforce these laws as diligently as government agencies and private parties in the United States. From time to time, we may need to take legal action to enforce our patents and other intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement or invalidity. Such litigation could result in substantial costs and diversion of resources and could negatively affect our business, operating results, and financial condition. Attempts to enforce our rights against third parties could also provoke these third parties to assert their own
intellectual property or other rights against us or result in a holding that invalidates or narrows the scope of our rights, in whole or in part. If we are unable to protect our proprietary rights (including aspects of our software and products protected other than by patent rights), we may find ourselves at a competitive disadvantage to others who need not incur the additional expense, time, and effort required to create the innovative products that have enabled us to be successful to date. Any of these events would have a material adverse effect on our business, financial condition, and operating results.
Our use of open source software in our products and subscriptions could negatively affect our ability to sell our products and subscriptions and subject us to possible litigation.
Our products and subscriptions contain software modules licensed to us by third-party authors under “open source” licenses. Some open source licenses contain requirements that we make available applicable source code for modifications or derivative works we create based upon the type of open source software we use. If we combine our proprietary software with open source software in a certain manner, we could, under certain open source licenses, be required to release the source code of our proprietary software to the public. This would allow our competitors to create similar products or subscriptions with lower development effort and time and ultimately could result in a loss of product sales for us.
Although we monitor our use of open source software to avoid subjecting our products and subscriptions to conditions we do not intend, the terms of many open source licenses have not been interpreted by United States courts, and there is a risk that these licenses could be construed in a way that could impose unanticipated conditions or restrictions on our ability to commercialize our products and subscriptions. From time to time, there have been claims against companies that distribute or use open source software in their products and subscriptions, asserting that open source software infringes the claimants’ intellectual property rights. We could be subject to suits by parties claiming infringement of intellectual property rights in what we believe to be licensed open source software. If we are held to have breached the terms of an open source software license, we could be required to seek licenses from third parties to continue offering our products and subscriptions on terms that are not economically feasible, to reengineer our products and subscriptions, to discontinue the sale of our products and subscriptions if reengineering could not be accomplished on a timely basis, or to make generally available, in source code form, our proprietary code, any of which could adversely affect our business, operating results, and financial condition.
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In addition to risks related to license requirements, usage of open source software can lead to greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or assurance of title or controls on origin of the software. In addition, many of the risks associated with usage of open source software, such as the lack of warranties or assurances of title, cannot be eliminated, and could, if not properly addressed, negatively affect our business. We have established processes to help alleviate these risks, including a review process for screening requests from our development organizations for the use of open source software, but we cannot be sure that our processes for controlling our use of open source software in our products and subscriptions will be effective.
We license technology from third parties, and our inability to maintain those licenses could harm our business.
We incorporate technology that we license from third parties, including software, into our products and subscriptions. We cannot be certain that our licensors are not infringing the intellectual property rights of third parties or that our licensors have sufficient rights to the licensed intellectual property in all jurisdictions in which we may sell our products and subscriptions. In addition, some licenses may be non-exclusive, and therefore our competitors may have access to the same technology licensed to us. Some of our agreements with our licensors may be terminated for convenience by them. We may also be subject to additional fees or be required to obtain new licenses if any of our licensors allege that we have not properly paid for such licenses or that we have improperly used the technologies under such licenses, and such licenses may not be available on terms acceptable to us or at all. If we are unable to continue to license any of this technology because of intellectual property infringement claims brought by third parties against our licensors or against us, or claims against us by our licensors, or if we are unable to continue our license agreements or enter into new licenses on commercially reasonable terms, our ability to develop and sell products and subscriptions containing such technology would be severely limited, and our business could be harmed. Additionally, if we are unable to license necessary technology from third parties, we may be forced to acquire or develop alternative technology, which we may be unable to do in a commercially feasible manner or at all, and we may be required to use alternative technology of lower quality or performance standards. This would limit and delay our ability to offer new or competitive products and subscriptions and increase our costs of production. As a result, our margins, market share, and operating results could be significantly harmed.
Our failure to adequately protect personal information could have a material adverse effect on our business.
A wide variety of provincial, state, national, and international laws and regulations apply to the collection, use, retention, protection, disclosure, transfer, and other processing of personal data. These laws and regulations relating to privacy, data protection and privacy-related laws and regulationssecurity are evolving and being tested in courts and may result in ever-increasing regulatory and public scrutiny, as well as escalating levels of enforcement and sanctions. Further, the interpretation and application of foreign laws and regulations in many cases is uncertain, and our legal and regulatory obligations in foreign jurisdictions are subject to frequent and unexpected changes, including the potential for various regulatory or other governmental bodies to enact new or additional laws or regulations, to issue rulings that invalidate prior laws or regulations, or to increase penalties significantly.
For example, the E.U. General Data Protection Regulation (“E.U. GDPR”), which became effective in May 2018, imposes more stringent data protection requirements, and provides for greater penalties for noncompliance than E.U. laws that previously applied.applied (up to the greater of €20 million or 4% of the total worldwide annual turnover), and confers a private right of action on data subjects and consumer associations to lodge complaints with supervisory authorities, seek judicial remedies and obtain compensation for damages resulting from violations of the E.U. GDPR. TheE.U. GDPR requires, among other things, that personal data only be transferred outside of the E.U. to certain jurisdictions, including the United States if steps are taken to legitimize thoseand other jurisdictions that the European Commission has notyet recognized as having “adequate” data transfers. We relyprotection laws (a “third country”), where a data transfer mechanism under the E.U. GDPR has been put in place. Historically, we have relied on the E.U.-U.S. and Swiss-U.S. Privacy Shield programs, and the use of model contractual clauses approved by the E.U. Commission, to legitimize these transfers. Bothtransfers (also referred to as standard contractual clauses or SCCs). In July 2020, the Court of Justice of the European Union in its “Schrems II” decision invalidated the E.U.-U.S. Privacy Shield for purposes of transfers to the U.S. and theseimposed a requirement for companies to carry out an assessment of the laws and practices governing access to personal data in the third country to ensure an essentially equivalent level of data protection to that afforded in the E.U. Though we no longer rely on the Privacy Shield programs and instead employ model contractual clauses have been subject to legal challenge, however, and it is unclear what effect these challenges will have and whether the means we presently use will continue as appropriate means for us to legitimize personal data transfers, the Schrems II decision raises questions as to implications under European and UK law and adequate data protection in the United States. Among other effects, we may experience additional costs associated with increased compliance burdens, putting in place any additional data transfer mechanisms and new contract negotiations with third parties that aid in processing data on our behalf. We may experience reluctance or refusal by current or prospective customers in the European Economic Area (“EEA”), Switzerland, and the U.K. (collectively, “Europe”) to use our products, and we may find it necessary or desirable to make further changes to our handling of personal data of residents of Europe. The regulatory environment applicable to the handling of European residents’ personal data, and our actions taken in response, may cause us to assume additional liabilities or incur additional costs and could result in our business, operating results and financial condition being harmed. Additionally, we and our customers may face risk of enforcement actions by data protection authorities in Europe relating to personal data transfers to us and by us from Europe. Any such enforcement actions could result in substantial costs and diversion of resources, distract management and technical personnel and negatively affect our business, operating results, and financial condition.
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Following the withdrawal of the U.K. from the E.U. or Switzerland to(i.e., Brexit), and the U.S.
In the United Kingdom will be regulatedStates, companies that do business in the event that the U.K.’s planned exit from the E.U. is completed. Additionally, California recently enacted legislation,are subject to the California Consumer Privacy Act (“CCPA”), that will,which requires, among other things, require covered companies to provide new disclosures to California consumers, and afford such consumers new abilities to opt-out of certain sales ofrights regarding their personal information, when it goes into effectand also affords a private right of action to individuals affected by a data breach, if the breach was caused by a lack of reasonable security. The enforcement of the CCPA by the California Attorney General commenced on JanuaryJuly 1, 2020. The CCPA washas been amended in 2018,on multiple occasions and legislators have proposed additional amendments to the CCPA before its effective date.California Attorney General has issued initial and revised regulations that also govern the CCPA. It remains unclear what, if any, additional modificationshow this legislation will be made to this legislation or how it will be interpreted.interpreted and enforced. The effects of the CCPA potentially are significant, however, and may require us to modify our data processing practices and policies and to incur substantial costs and expenses in an effortfor compliance. Moreover, additional state privacy laws have been passed and will require potentially substantial efforts to comply. obtain compliance. This includes the California Privacy Rights Act (“CPRA”) which was approved by California voters, and significantly modifies the CCPA. The U.S. federal government also is contemplating privacy legislation.
We may also from time to time be subject to, or face assertions that we are subject to, additional obligations relating to personal data by contract or due to assertions that self-regulatory obligations or industry standards apply to our practices. Other states have also expanded their data protection laws. Additionally, the Federal Trade Commission and many state attorneys general are interpreting federal and state consumer protection laws to impose standards for the online collection, use, dissemination, and security of data. Further, we may be or become subject to data localization laws mandating that data collected in a foreign country be processed and stored within that country. Each of these privacy, security, and data protection laws and regulations, and any other such changes or new laws or regulations, could impose significant limitations, or require changes to our business model or practices or growth strategy, which may increase our compliance expenses and make our business more costly or less efficient to conduct.
Our actual or perceived failure to comply with applicable laws and regulations or other obligations to which we are now or which we may be subject relating to personal data, or to protect personal data from unauthorized acquisition, use or other processing, could result in consequences such as enforcement actions and regulatory investigations against us, fines, public censure, claims for damages by end-customers and other affected individuals, damage to our reputation and loss of goodwill (both in relation to existing end-customers and prospective end-customers), any of which could have a material adverse effect on our operations, financial performance, and business. Evolving and changing definitions of personal data and personal information, within the E.U., the United States, and elsewhere, especially relating to classification of IPInternet Protocol (“IP”) addresses, machine identification, location data, and other information, may limit or inhibit our ability to operate or expand our business, including limiting strategic partnerships that may involve the sharing or uses of data, and may require significant expenditures and efforts in order to comply. Even the perception of privacy, data protection or information security concerns, whether or not valid, may harm our reputation and inhibit adoption of our products and subscriptions by current and future end-customers.
Risks Related to Operations Outside the United States
We face risks associated with having operations and employees located in Israel.
As a result of various of our acquisitions, including Cyber Secdo Ltd. (“Secdo”), PureSec Ltd. (“PureSec”) and Twistlock Ltd. (“Twistlock”), we have offices and employees located in Israel. Accordingly, political, economic, and military conditions in Israel directly affect our operations. The future of peace efforts between Israel and its Arab neighbors remains uncertain. The effects of hostilities and violence on the Israeli economy and our operations in Israel are unclear, and we cannot predict the effect on us of further increases in these hostilities or future armed conflict, political instability or violence in the region. Current or future tensions and conflicts in the Middle East could adversely affect our business, operating results, financial condition and cash flows.
In addition, many of our employees in Israel are obligated to perform annual reserve duty in the Israeli military and are subject to being called for active duty under emergency circumstances. We cannot predict the full impact of these conditions on us in the future, particularly if emergency circumstances or an escalation in the political situation occurs. If many of our employees in Israel are called for active duty for a significant period of time, our operations and our business could be disrupted and may not be able to function at full capacity. Any disruption in our operations in Israel could adversely affect our business.
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We are subject to governmental export and import controls that could subject us to liability or impair our ability to compete in international markets.
Because we incorporate encryption technology into our products, certain of our products are subject to U.S. export controls and may be exported outside the United States only with the required export license or through an export license exception. If we were to fail to comply with U.S. export licensing requirements, U.S. customs regulations, U.S. economic sanctions, or other laws, we could be subject to substantial civil and criminal penalties, including fines, incarceration for responsible employees and managers, and the possible loss of export or import privileges. Obtaining the necessary export license for a particular sale may be time-consuming and may result in the delay or loss of sales opportunities. Furthermore, U.S. export control laws and economic sanctions prohibit the shipment of certain products to U.S. embargoed or sanctioned countries, governments, and persons. Even though we take precautions to ensure that our channel partners comply with all relevant regulations, any failure by our channel partners to comply with such regulations could have negative consequences for us, including reputational harm, government investigations, and penalties.
In addition, various countries regulate the import of certain encryption technology, including through import permit and license requirements, and have enacted laws that could limit our ability to distribute our products or could limit our end-customers’ ability to implement our products in those countries. Changes in our products or changes in export and import regulations may create delays in the introduction of our products into international markets, prevent our end-customers with international operations from deploying our products globally or, in some cases, prevent or delay the export or import of our products to certain countries, governments, or persons altogether. Any change in export or import regulations, economic sanctions, such as the Sanctions on Russia, or related legislation, shift in the enforcement or scope of existing regulations, or change in the countries, governments, persons, or technologies targeted by such regulations, could result in decreased use of our products by, or in our decreased ability to export or sell our products to, existing or potential end-customers with international operations. Any decreased use of our products or limitation on our ability to export to or sell our products in international markets would likely adversely affect our business, financial condition, and operating results.
We have a corporate structure aligned with the international nature of our business activities, and if we do not achieve increased tax benefits as a result of our corporate structure, our financial condition and operating results could be adversely affected.
We have reorganized our corporate structure and intercompany relationships to more closely align with the international nature of our business activities. This corporate structure may allow us to reduce our overall effective tax rate through changes in how we use our intellectual property, international procurement, and sales operations. This corporate structure may also allow us to obtain financial and operational efficiencies. These efforts require us to incur expenses in the near term for which we may not realize related benefits. If the structure is not accepted by the applicable tax authorities, if there are any changes in, or interpretations of, domestic and international tax laws that negatively impact the structure, or if we do not operate our business consistent with the structure and applicable tax provisions, we may fail to achieve the reduction in our overall effective tax rate and the other financial and operational efficiencies that we anticipate as a result of the structure and our future financial condition and operating results may be negatively impacted. In addition, we continue to evaluate our corporate structure in light of current and pending tax legislation, and any changes to our corporate structure may require us to incur additional expenses and may impact our overall effective tax rate.
We may have exposure to greater than anticipated tax liabilities.
Our income tax obligations are based in part on our corporate structure and intercompany arrangements, including the manner in which we develop, value, and use our intellectual property and the valuations of our intercompany transactions. The tax laws applicable to our business, including the laws of the United States and other jurisdictions, are subject to interpretation and certain jurisdictions may aggressively interpret their laws in an effort to raise additional tax revenue. The tax authorities of the jurisdictions in which we operate may challenge our methodologies for valuing developed technology or intercompany arrangements, which could increase our worldwide effective tax rate and harm our financial position and operating results. It is possible that tax authorities may disagree with certain positions we have taken, and any adverse outcome of such a review or audit could have a negative effect on our financial position and operating results. Further, the determination of our worldwide provision for or benefit from income taxes and other tax liabilities requires significant judgment by management, and there are transactions where the ultimate tax determination is uncertain. Although we believe that our estimates are reasonable, the ultimate tax outcome may differ from the amounts recorded inon our consolidated financial statements and may materially affect our financial results in the period or periods for which such determination is made.
In addition, our future income tax obligations could be adversely affected by changes in, or interpretations of, tax laws in the United States or in other jurisdictions in which we operate. In the United States, the Tax Cuts and Jobs Act (“TCJA”) contains many significant changes to the U.S. federal income tax laws, the consequences
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If our estimates or judgments relating to our critical accounting policies are based on assumptions that change or prove to be incorrect, our operating results could fall below our publicly announced guidance or the expectations of securities analysts and investors, resulting in a decline in the market price of our common stock.
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported inon our consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets, liabilities, equity, revenue, and expenses that are not readily apparent from other sources. For more information, refer to the section entitled “Critical Accounting Estimates” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of this Annual Report on Form 10-K. Additionally, as we have worked toward adopting and implementing the new revenue accounting standard, management has made judgments and assumptions based on our interpretation of the new standard. The new revenue standard is principle based and interpretation of those principles may vary from company to company based on their unique circumstances. In general, if our estimates, judgments or assumptions relating to our critical accounting policies change or if actual circumstances differ from our estimates, judgments or assumptions, including uncertainty in the current economic environment due to COVID-19, our operating results may be adversely affected and could fall below our publicly announced guidance or the expectations of securities analysts and investors, resulting in a decline in the market price of our common stock.
Our reputation and/or business could be negatively impacted by ESG matters and/or our reporting of such matters.
There is an increasing focus from regulators, certain investors, and other stakeholders concerning environmental, social, and governance (“ESG”) matters, both in the United States and internationally. We communicate certain ESG-related initiatives, goals, and/or commitments regarding environmental matters, diversity, responsible sourcing and social investments, and other matters in our annual ESG Report, on our website, in our filings with the SEC, and elsewhere. These initiatives, goals, or commitments could be difficult to achieve and costly to implement. We could fail to achieve, or be perceived to fail to achieve, our ESG-related initiatives, goals, or commitments. In addition, we could be criticized for the timing, scope or nature of these initiatives, goals, or commitments, or for any revisions to them. To the extent that our required and voluntary disclosures about ESG matters increase, we could be criticized for the accuracy, adequacy, or completeness of such disclosures. Our actual or perceived failure to achieve our ESG-related initiatives, goals, or commitments could negatively impact our reputation, result in ESG-focused investors not purchasing and holding our stock, or otherwise materially harm our business.
Failure to comply with governmental laws and regulations could harm our business.
Our business is subject to regulation by various federal, state, local, and foreign governmental agencies, including agencies responsible for monitoring and enforcing employment and labor laws, workplace safety, product safety, environmental laws, consumer protection laws, privacy, data security, and data-protection laws, anti-bribery laws (including the U.S. Foreign Corrupt Practices Act and the U.K. Anti-Bribery Act), import/export controls, federal securities laws, and tax laws and regulations. In certain jurisdictions, these regulatory requirements may be more stringent than those in the United States. Noncompliance with applicable regulations or requirements could subject us to investigations, sanctions, mandatory product recalls, enforcement actions, disgorgement of profits, fines, damages, civil and criminal penalties, or injunctions. If any governmental sanctions are imposed, or if we do not prevail in any possible civil or criminal litigation resulting from any alleged noncompliance, our business, operating results, and financial condition could be materially adversely affected. In addition, responding to any action will likely result in a significant diversion of management’s attention and resources and an increase in professional fees. Enforcement actions, litigation, and sanctions could harm our business, operating results, and financial condition.
If we fail to comply with environmental requirements, our business, financial condition, operating results, and reputation could be adversely affected.
We are subject to various environmental laws and regulations including laws governing the hazardous material content of our products and laws relating to the collection of and recycling of electrical and electronic equipment. Examples of these laws and regulations include the E.U. Restriction on the Use of Certain Hazardous Substances in Electrical and Electronic Equipment Directive (“RoHS”) and the E.U. Waste Electrical and Electronic Equipment Directive (“WEEE Directive”), as well as the implementing legislation of the E.U. member states. Similar laws and regulations have been passed or are pending in China, South Korea, Norway,
and Japan and may be enacted in other regions, including in the United States, and we are, or may in the future be, subject to these laws and regulations.
The E.U. RoHS and the similar laws of other jurisdictions limit the content of certain hazardous materials such as lead, mercury, and cadmium in the manufacture of electrical equipment, including our products. Our current products comply with the E.U. RoHS requirements. However, if there are changes to this or other laws (or their interpretation) or if new similar laws are passed in other jurisdictions, we may be required to reengineer our products to use components compatible with these regulations. This reengineering and component substitution could result in additional costs to us or disrupt our operations or logistics.
The WEEE Directive requires electronic goods producers to be responsible for the collection, recycling, and treatment of such products. Changes in interpretation of the directive may cause us to incur costs or have additional regulatory requirements to meet in the future in order to comply with this directive, or with any similar laws adopted in other jurisdictions.
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We are also subject to environmental laws and regulations governing the management of hazardous materials, which we use in small quantities in our engineering labs. Our failure to comply with past, present, and future similar laws could result in reduced sales of our products, substantial product inventory write-offs, reputational damage, penalties, and other sanctions, any of which could harm our business and financial condition. We also expect that our products will be affected by new environmental laws and regulations on an ongoing basis. To date, our expenditures for environmental compliance have not had a material impact on our operating results or cash flows, and although we cannot predict the future impact of such laws or regulations, they will likely result in additional costs and may increase penalties associated with violations or require us to change the content of our products or how they are manufactured, which could have a material adverse effect on our business, operating results, and financial condition.
Risks Related to Our Notes
We may not have the ability to raise the funds necessary to settle conversions of theour Notes, repurchase theour Notes upon a fundamental change, or repay theour Notes in cash at their maturity, and our future debt may contain limitations on our ability to pay cash upon conversion or repurchase of theour Notes.
In addition, our ability to repurchase or to pay cash upon conversion of either series ofour Notes may be limited by law, regulatory authority or agreements governing our future indebtedness. Our failure to repurchase theour Notes at a time when the repurchase is required by the relevantapplicable indenture governing such Notes or to pay cash upon conversion of such Notes as required by the relevantapplicable indenture would constitute a default under suchthe indenture. A default under the relevantapplicable indenture or the fundamental change itself could also lead to a default under agreements governing our future indebtedness. If the payment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchase theour Notes or to pay cash upon conversion of theour Notes.
We may still incur substantially more debt or take other actions that would diminish our ability to make payments on theour Notes when due.
We and our subsidiaries may be able to incur substantial additional debt in the future, subject to the restrictions contained in our debt instruments, some of which may be secured debt. We are not restricted under the terms of the applicable indenture governing such series ofour Notes from incurring additional debt, securing existing or future debt, recapitalizing our debt or taking a number of other actions that are not limited by the terms of such indenture governing suchour Notes that could have the effect of diminishing our ability to make payments on suchour Notes when due. While the terms of any future indebtedness we may incur could restrict our ability to incur additional indebtedness, any such restrictions will indirectly benefit holders of the applicable series ofour Notes only to the extent any such indebtedness or credit facility is not repaid or does not mature while suchour Notes are outstanding.
Risks Related to Our Common Stock
Our actual operating results may differ significantly from our guidance.
From time to time, we have released, and may continue to release, guidance in our quarterly earnings releases, quarterly earnings conference calls, or otherwise, regarding our future performance that represents our management’s estimates as of the date of release. This guidance, which includes forward-looking statements, has been and will be based on projections prepared by our management. These projections are not prepared with a view toward compliance with published guidelines of the American Institute of Certified Public Accountants, and neither our registered public accountants nor any other independent expert or outside party compiles or examines the projections. Accordingly, no such person expresses any opinion or any other form of assurance with respect to the projections.
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Projections are based upon a number of assumptions and estimates that, while presented with numerical specificity, are inherently subject to significant business, economic, and competitive uncertainties and contingencies, many of which are beyond our control, such as COVID-19, and are based upon specific assumptions with respect to future business decisions, some of which will change. The rapidly evolving market in which we operate may make it difficult to evaluate our current business and our future prospects, including our ability to plan for and model future growth. We intend to state possible outcomes as high and low ranges which are intended to provide a sensitivity analysis as variables are changed. However, actual results will vary from our guidance and the variations may be material. The principal reason that we release guidance is to provide a basis for our management to discuss our business outlook as of the date of release with analysts and investors. We do not accept any responsibility for any projections or reports published by any such persons. Investors are urged not to rely upon our guidance in making an investment decision regarding our common stock.
Any failure to successfully implement our operating strategy or the occurrence of any of the events or circumstances set forth in this “Risk Factors” section in this Annual Report on Form 10-K could result in our actual operating results being different from our guidance, and the differences may be adverse and material.
The market price of our common stock historically has been volatile and the value of your investment could decline.
The market price of our common stock has been volatile since our initial public offering (“IPO”) in July 2012. The reported high and low sales prices of our common stock during the last 12 months have ranged from $260.63$367.21 to $160.08$640.90 per share, as measured through August 23, 2019.22, 2022. The marketmarket price of our common stock may fluctuate widely in response to various factors, some of which are beyond our control. These factors include:
•announcements of new products, subscriptions or technologies, commercial relationships, strategic partnerships, acquisitions, or other events by us or our competitors;
•price and volume fluctuations in the overall stock market from time to time;
•news announcements that affect investor perception of our industry, including reports related to the discovery of significant cyberattacks;
•significant volatility in the market price and trading volume of technology companies in general and of companies in our industry;
•fluctuations in the trading volume of our shares or the size of our public float;
•actual or anticipated changes in our operating results or fluctuations in our operating results;
•whether our operating results meet the expectations of securities analysts or investors;
•actual or anticipated changes in the expectations of securities analysts or investors, whether as a result of our forward- looking statements, our failure to meet such expectations or otherwise;
•inaccurate or unfavorable research reports about our business and industry published by securities analysts or reduced coverage of our company by securities analysts;
•litigation involving us, our industry, or both;
•actions instituted by activist shareholders or others;
•regulatory developments in the United States, foreign countries or both;
•major catastrophic events;events, such as COVID-19;
•sales or repurchases of large blocks of our common stock or substantial future sales by our directors, executive officers, employees and significant stockholders;
•sales of our common stock by investors who view theour Notes as a more attractive means of equity participation in us;
•hedging or arbitrage trading activity involving our common stock as a result of the existence of theour Notes;
•departures of key personnel; or
•economic uncertainty around the world, in particular, macroeconomic challenges in Europe.world.
The market price of our common stock could decline for reasons unrelated to our business, operating results, or financial condition and as a result of events that do not directly affect us. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. Securities litigation could result in substantial costs and divert our management’s attention and resources from our business. This could have a material adverse effect on our business, operating results, and financial condition.
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The convertible note hedge and warrant transactions may affect the value of our common stock.
In connection with the sale of each series ofour 2023 Notes and 2025 Notes, we entered into convertible note hedge transactions (the “Note Hedges”) with certain counterparties. In connection with each such sale of the Notes, we also entered into warrant transactions with the counterparties pursuant to which we sold warrants (the “Warrants”) for the purchase of our common stock. The Note Hedges for our 2023 Notes and 2025 Notes are expected generally to reduce the potential dilution to our common stock upon any conversion of either series ofour Notes and/or offset any cash payments we are required to make in excess of the principal amount of any such converted Notes of the applicable series.Notes. The Warrants could separately have a dilutive effect to the extent that the market price per share of our common stock exceeds the applicable strike price of the Warrants unless, subject to certain conditions, we elect to cash settle such Warrants.
The applicable counterparties or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions prior to the maturity of the applicable series ofoutstanding Notes (and are likely to do so during any applicable observation period related to a conversion of suchour Notes). This activity could also cause or avoid an increase or a decrease in the market price of our common stock or theour Notes, of a series, which could affect a Notenote holder’s ability to convert its Notes of such series and, to the extent the activity occurs during any observation period related to a conversion of suchour Notes, it could affect the amount and value of the consideration that such Notethe note holder will receive upon conversion of such Notes of such series.our Notes.
We do not make any representation or prediction as to the direction or magnitude of any potential effect that the transactions described above may have on the price of either series ofour Notes or our common stock. In addition, we do not make any representation that the counterparties or their respective affiliates will engage in these transactions or that these transactions, once commenced, will not be discontinued without notice.
The issuance of additional stock in connection with financings, acquisitions, investments, our stock incentive plans, the conversion of our Notes or exercise of the related Warrants, or otherwise will dilute all other stockholders.
Our amended and restated certificate of incorporation authorizes us to issue up to 1.0 billion shares of common stock and up to 100.0 million shares of preferred stock with such rights and preferences as may be determined by our board of directors. Subject to compliance with applicable rules and regulations, we may issue shares of common stock or securities convertible into shares of our common stock from time to time in connection with a financing, acquisition, investment, our stock incentive plans, the conversion of our Notes, the settlement of our Warrants related to each such series of the Notes, or otherwise. Any such issuance could result in substantial dilution to our existing stockholders and cause the market price of our common stock to decline.
We cannot guarantee that our recently announced share repurchase program will be fully consummated, or that it will enhance shareholder value, and share repurchases could affect the price of our common stock.
and diminish our cash reserves. In addition, itthe program may be suspended or terminated at any time, which may result in a decrease in the price of our common stock.
We do not intend to pay dividends for the foreseeable future.
We have never declared or paid any dividends on our common stock. We intend to retain any earnings to finance the operation and expansion of our business, and we do not anticipate paying any cash dividends in the future. As a result, you may only receive a return on your investment in our common stock if the market price of our common stock increases.
Provisions in our amended and restated certificate of incorporation and amended and restated bylaws may have the effect of delaying or preventing a publicchange in control of our company or changes in our management. Our amended and restated certificate of incorporation and amended and restated bylaws include provisions that:
•establish that our board of directors is divided into three classes, Class I, Class II and Class III, with three-year staggered terms;
•authorize our board of directors to issue shares of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval;
•provide our board of directors with the exclusive right to elect a director to fill a vacancy created by the expansion of our board of directors or the resignation, death or removal of a director;
•prohibit our stockholders from taking action by written consent;
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•specify that special meetings of our stockholders may strainbe called only by the chairman of our resources, divert management’s attention,board of directors, our president, our secretary, or a majority vote of our board of directors;
•require the affirmative vote of holders of at least 66 2/3% of the voting power of all of the then outstanding shares of the voting stock, voting together as a single class, to amend the provisions of our amended and affectrestated certificate of incorporation relating to the issuance of preferred stock and management of our abilitybusiness or our amended and restated bylaws;
•authorize our board of directors to attractamend our bylaws by majority vote; and retain qualified
•establish advance notice procedures with which our stockholders must comply to nominate candidates to our board members.of directors or to propose matters to be acted upon at a stockholders’ meeting.
General Risk Factors
Our business is subject to the risks of earthquakes, fire, power outages, floods, health risks and other catastrophic events, and to interruption by man-made problems such as terrorism.
Both our corporate headquarters and the location where our products are manufactured are located in the San Francisco Bay Area, a region known for seismic activity. In addition, other natural disasters, such as fire or floods, a significant power outage, telecommunications failure, terrorism, an armed conflict, cyberattacks, epidemics and pandemics such as COVID-19, or other geo-political unrest could affect our supply chain, manufacturers, logistics providers, channel partners, or end-customers or the economy as a whole and such disruption could impact our shipments and sales. These risks may be further increased if the disaster recovery plans for us and our suppliers prove to be inadequate. To the extent that any of the New York Stock Exchange (“NYSE”), and other applicable securities rules and regulations. Compliance with these rules and regulations have increasedabove should result in delays or cancellations of customer orders, the loss of customers, or the delay in the manufacture, deployment, or shipment of our legal and financial compliance costs, made some activities more difficult, time-consuming or costly, and increased demand on our systems and resources. Among other things, the Exchange Act requires that we file annual, quarterly, and current reports with respect toproducts, our business, financial condition, and operating results. In addition,results would be adversely affected.
Our failure to raise additional capital or generate the Sarbanes-Oxley Act requires,significant capital necessary to expand our operations and invest in new products and subscriptions could reduce our ability to compete and could harm our business.
We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges, including the need to develop new features to enhance our portfolio, improve our operating infrastructure, or acquire complementary businesses and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional equity or equity-linked financing, our stockholders may experience significant dilution of their ownership interests and the market price of our common stock could decline. Any conversion of the outstanding Notes into common stock will dilute the ownership interests of existing stockholders to the extent we deliver shares upon conversion of such Notes. See the risk factor entitled “The issuance of additional stock in connection with financings, acquisitions, investments, our stock incentive plans, the conversion of our Notes or exercise of the related Warrants, or otherwise will dilute all other stockholders.” The holders of our Notes have priority over holders of our common stock, and if we engage in future debt financings, the holders of such additional debt would also have priority over the holders of our common stock. Current and future indebtedness may also contain terms that, among other things, restrict our ability to incur additional indebtedness. We may also be required to take other actions that wewould otherwise be in the interests of the debt holders and would require us to maintain effective disclosure controls and procedures and internal control over financial reporting. In order to meet the requirementsspecified liquidity or other ratios, any of this standard, significant resources and management oversight may be required. As a result, management’s attention may be diverted from other business concerns, which could harm our business, and operating results. Although we have already hired additional employees to comply with these requirements, we may need to hire even more employees in the future, which will increase our costs and expenses.
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We are obligated to maintain proper and effective internal control over financial reporting. We may not complete our analysis of our internal control over financial reporting in a timely manner, or this internal control may not be determined to be effective, which may adversely affect investor confidence in our company and, as a result, the value of our common stock.
While we were able to determine in our management’s report for fiscal 20192022 that our internal control over financial reporting is effective, as well as provide an unqualified attestation report from our independent registered public accounting firm to that effect, we may not be able to complete our evaluation, testing, and any required remediation in a timely fashion, may be unable to assert that our internal controls are effective, or our independent registered public accounting firm may not be able to formally attest to the effectiveness of our internal control over financial reporting in the future. In the event that our chief executive officer, chief financial officer, or independent registered public accounting firm determines in the future that our internal control over financial reporting is not effective as defined under Section 404, we could be subject to one or more investigations or enforcement actions by state or federal regulatory agencies, stockholder lawsuits or other adverse actions requiring us to incur defense costs, pay fines, settlements or
judgments and causing investor perceptions to be adversely affected and potentially resulting in a decline in the market price of our stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
Our corporate headquarters is located in Santa Clara, California, where we lease approximately 941,000 square feet of space under three lease agreements that expire in July 2028, with options to extend the lease terms through July 2046. We also lease a total of approximately 422,000 square feet of space at two other locations in Santa Clara, which collectively served as our previous corporate headquarters through August 2017, when we relocated to our current campus. Approximately 122,000 square feet of our previous corporate headquarters space is being sublet, and the remaining 300,000 square feet of space is being actively marketed for sublease. The leases for our previous corporate headquarters expire in April 2021 and July 2023. We also lease space for personnel in Israel. In addition, we provide our cloud-based subscription offerings through data centers operated under co-location arrangements in the United States, Europe, and Asia. Refer to Note 11. Commitments and ContingenciesLeases in Part II, Item 8 of this Annual Report on Form 10-K for more information on our operating leases. Additionally, we own 10.4 acres of land adjacent to our headquarters in Santa Clara, California, which we intend to develop to accommodate future expansion, the speed of which development has been slowed due to the current environment.
We believe that our current facilities are adequate to meet our current needs. We intend to expand our facilities or add new facilities as we add employees and enter new geographic markets, and we believe that suitable additional or alternative space will be
available as needed to accommodate ongoing operations and any such growth. However, we expect to incur additional expenses in connection with such new or expanded facilities.
ITEM 3. LEGAL PROCEEDINGS
The information set forth under the “Litigation” subheading in Note 11.12. Commitments and Contingencies of Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K is incorporated herein by reference.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock, $0.0001 par value per share, began tradingis traded on the NYSENasdaq Global Select Market under the symbol “PANW.” Prior to October 22, 2021, our common stock traded on July 20, 2012, where its prices are quotedthe New York Stock Exchange (“NYSE”) under the symbol “PANW.”
Holders of Record
As of August 23, 2019,22, 2022, there were 83355 holders of record of our common stock. Because many of our shares of common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.
Dividend Policy
We have never declared or paid, and do not anticipate declaring or paying in the foreseeable future, any cash dividends on our capital stock. Any future determination as to the declaration and payment of dividends, if any, will be at the discretion of our board of directors, subject to applicable laws and will depend on then existing conditions, including our financial condition, operating results, contractual restrictions, capital requirements, business prospects, and other factors our board of directors may deem relevant.
Securities Authorized for Issuance under Equity Compensation Plans
See Part III, Item 12 “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” of this Annual Report on Form 10-K for more information regarding securities authorized for issuance.
Recent SaleSales of Unregistered Equity Securities
The Transactions did not involve any underwriters, any underwriting discounts or commissions, or any public offering. The issuances of the securities pursuant to the Transactions were no salesexempt from registration under the Securities Act of unregistered securities during fiscal 2019 other than those transactions previously reported on our Current Reports on Form 8-K.1933, as amended (the “Act”) by virtue of Section 4(a)(2) of the Act and Rule 506 of Regulation D promulgated thereunder.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table summarizes stock repurchases during the three months ended July 31, 2022 (in millions, except per share amounts):
| Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1) | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs(1) | ||||||||||||||||||||||
May 1, 2022 to May 31, 2022(1)(2) | 0.0 | $ | 436.37 | — | $ | 450.0 | ||||||||||||||||||||
June 1, 2022 to June 30, 2022(1)(2) | 0.5 | $ | 482.86 | 0.5 | $ | 196.3 | ||||||||||||||||||||
July 1, 2022 to July 31, 2022(1)(2) | 0.3 | $ | 486.05 | 0.3 | $ | 85.0 | ||||||||||||||||||||
| Total | 0.8 | $ | 483.50 | 0.8 | ||||||||||||||||||||||
______________
(1)On February 26, 2019, we announced that our board of directors authorized a $1.0 billion share repurchase program, which will beis funded from available working capital. In December 2020 and August 2021, we announced additional $700.0 million and $676.1 million increases to this share repurchase program, respectively, bringing the total authorization to $2.4 billion, with $85.0 million remaining as of July 31, 2022. The expiration date of this repurchase authorization was extended to December 31, 2022, and our repurchase program may be suspended or discontinued at any time. Repurchases mayunder our program are to be made at management’s discretion from time to time on the open market, through privately negotiated transactions, transactions structured through investment banking institutions, block purchase techniques, 10b5-1 trading plans, or a combination of the foregoing. The repurchase authorization will expire on December 31, 2020, and may be suspended or discontinued at any time. There were no shares repurchased under our share repurchase program during the three months ended July 31, 2019. As of July 31, 2019, $1.0 billion remained available for future share repurchases under our repurchase program.
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Stock Price Performance Graph
This performance graph shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or incorporated by reference into any filing of Palo Alto Networks, Inc. under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.
This performance graph compares the cumulative total return on our common stock with that of the Nasdaq 100 Index, the Standard & Poor’s 500 Index, the Standard & Poor Information Technology Index, the NYSE Composite Index and the NYSE Arca Tech 100 Index for the five years ended July 31, 2019.2022. This performance graph assumes $100 was invested on July 31, 2014,2017, in each of the common stock of Palo Alto Networks, Inc., the Nasdaq 100 Index, the Standard & Poor’s 500 Index, the Standard & Poor’s Information Technology Index, the NYSE Composite Index, and the NYSE Arca Tech 100 Index, and assumes the reinvestment of any dividends. The stock price performance on this performance graph is not necessarily indicative of future stock price performance.
| Company/Index | 7/31/2017 | 7/31/2018 | 7/31/2019 | 7/31/2020 | 7/31/2021 | 7/31/2022 | ||||||||||||||||||||||||||||||||
| Palo Alto Networks, Inc. | $ | 100.00 | $ | 150.45 | $ | 171.91 | $ | 194.20 | $ | 302.82 | $ | 378.74 | ||||||||||||||||||||||||||
| Nasdaq 100 Index | $ | 100.00 | $ | 122.99 | $ | 133.48 | $ | 185.46 | $ | 254.41 | $ | 220.19 | ||||||||||||||||||||||||||
| S&P 500 Index | $ | 100.00 | $ | 114.01 | $ | 120.65 | $ | 132.42 | $ | 177.92 | $ | 167.20 | ||||||||||||||||||||||||||
| S&P Information Technology Index | $ | 100.00 | $ | 126.83 | $ | 144.57 | $ | 198.12 | $ | 274.74 | $ | 257.30 | ||||||||||||||||||||||||||
| NYSE Composite Index | $ | 100.00 | $ | 108.32 | $ | 109.18 | $ | 104.16 | $ | 138.73 | $ | 128.08 | ||||||||||||||||||||||||||
| NYSE Arca Tech 100 Index | $ | 100.00 | $ | 124.87 | $ | 134.35 | $ | 155.18 | $ | 215.23 | $ | 187.52 | ||||||||||||||||||||||||||
ITEM 6. [RESERVED]
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| Company/Index | 7/31/2014 | 7/31/2015 | 7/31/2016 | 7/31/2017 | 7/31/2018 | 7/31/2019 | |||||||||||||||||
| Palo Alto Networks, Inc. | $ | 100.00 | $ | 229.82 | $ | 161.87 | $ | 162.97 | $ | 245.19 | $ | 280.16 | |||||||||||
| NYSE Composite Index | $ | 100.00 | $ | 101.45 | $ | 100.55 | $ | 111.57 | $ | 120.85 | $ | 121.82 | |||||||||||
| NYSE Arca Tech 100 Index | $ | 100.00 | $ | 110.96 | $ | 112.07 | $ | 138.23 | $ | 172.60 | $ | 185.71 | |||||||||||
Contents
| Year Ended July 31, | |||||||||||||||||||
| 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
| (in millions) | |||||||||||||||||||
| Selected Consolidated Statements of Operations Data: | |||||||||||||||||||
Total revenue(1) | $ | 2,899.6 | $ | 2,273.6 | $ | 1,755.1 | $ | 1,378.5 | $ | 928.1 | |||||||||
Total gross profit(1) | 2,091.2 | 1,628.5 | 1,278.7 | 1,008.5 | 676.6 | ||||||||||||||
Operating loss(1) | (54.1 | ) | (104.2 | ) | (165.8 | ) | (157.3 | ) | (99.8 | ) | |||||||||
Net loss(1) | $ | (81.9 | ) | $ | (122.2 | ) | $ | (203.0 | ) | $ | (192.7 | ) | $ | (131.3 | ) | ||||
Net loss per share, basic and diluted(1) | $ | (0.87 | ) | $ | (1.33 | ) | $ | (2.24 | ) | $ | (2.21 | ) | $ | (1.61 | ) | ||||
| Weighted-average shares used to compute net loss per share, basic and diluted | 94.5 | 91.7 | 90.6 | 87.1 | 81.6 | ||||||||||||||
| July 31, | |||||||||||||||||||
| 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
| (in millions) | |||||||||||||||||||
| Selected Consolidated Balance Sheet Data: | |||||||||||||||||||
| Cash and cash equivalents | $ | 961.4 | $ | 2,506.9 | $ | 744.3 | $ | 734.4 | $ | 375.8 | |||||||||
| Investments | 2,417.1 | 1,444.0 | 1,420.0 | 1,204.0 | 952.0 | ||||||||||||||
Working capital(1)(2) | 1,611.5 | 2,036.8 | 818.1 | 927.2 | 79.3 | ||||||||||||||
Total assets(1) | 6,592.2 | 5,948.9 | 3,538.5 | 2,858.2 | 2,026.1 | ||||||||||||||
Total deferred revenue(1) | 2,888.7 | 2,279.3 | 1,692.4 | 1,240.8 | 713.7 | ||||||||||||||
Convertible senior notes, net(2) | 1,430.0 | 1,920.1 | 524.7 | 500.2 | 476.8 | ||||||||||||||
| Common stock and additional paid-in capital | 2,490.9 | 1,967.4 | 1,599.7 | 1,515.5 | 988.7 | ||||||||||||||
Total stockholders’ equity(1) | $ | 1,586.3 | $ | 1,160.3 | $ | 927.8 | $ | 894.9 | $ | 559.7 | |||||||||
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. The following discussion and analysis contains forward-looking statements based on current expectations and assumptions that are subject to risks and uncertainties, which could cause our actual results to differ materially from those anticipated or implied by any forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Annual Report on Form 10-K, and in particular, the risks discussed under the caption “Risk Factors” in Part I, Item 1A of this report.
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is organized as follows:
•Overview.A discussion of our business and overall analysis of financial and other highlights in order to provide context for the remainder of MD&A.
•Key Financial Metrics. A summary of our GAAP and non-GAAP key financial metrics, which management monitors to evaluate our performance.
•Results of Operations. A discussion of the nature and trends in our financial results and an analysis of our financial results comparing fiscal 20192022 to 2018fiscal 2021. For discussion and analysis related to our financial results comparing fiscal 20182021 to 2017.
2020, refer to Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for fiscal 2021, which was filed with the Securities and Exchange Commission on September 3, 2021.•Liquidity and Capital Resources. An analysis of changes inon our balance sheets and cash flows, and a discussion of our financial condition and our ability to meet cash needs.
•Contractual Obligations and Commitments. An overview of our contractual obligations, contingent liabilities, commitments, and off-balance sheet arrangements outstanding as of July 31, 2019,2022, including expected payment schedules.
•Critical Accounting Estimates. A discussion of our accounting policies that require critical estimates, assumptions, and judgments.
•Recent Accounting Pronouncements. A discussion of expected impacts of impending accounting changes on financial information to be reported in the future.
Overview
We have pioneered the next generation of security through our innovative platform that empowersempower enterprises, organizations, service providers, and government entities to protect themselves against today’s most sophisticated cyber threats. Our cybersecurity platforms and services help secure their organizationsenterprise users, networks, clouds, and endpoints by safely enablingdelivering comprehensive cybersecurity backed by industry leading artificial intelligence and automation. We are a leading provider of zero trust solutions that start with the next-generation of zero trust network access to secure remote workforces and extend into securing all users, applications and data running in their networks, on their endpoints, and in the cloud, and by preventing breaches that stem from targeted cyberattacks.infrastructure with zero trust principles. Our platform uses an innovative traffic classification engine that identifies network traffic by application, user, and content and provides consistent security across the network, endpoint, and cloud. Accordingly, our platform enables our end-customerssolutions are designed to pursue transformative digital initiatives, like public cloud and mobility, that grow their business, while maintaining the visibility and control needed to protect their valued data and critical control systems. We believe the architecture of our platform offers superior performance compared to legacy approaches and reduces thereduce customers’ total cost of ownership for organizations by simplifying their security operations and infrastructureimproving operational efficiency and eliminating the need for multiple, stand-alone hardware and softwaresiloed point products. Our company focuses on delivering value in five fundamental areas:
Network Security:
•Our network security products, and consists of three primary areas of security capabilities.
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Secure Access Service Edge:
•Prisma Access is our next-generation Zero Trust Network Access (“ZTNA”) platform that provides secure network access for all employees with unified policy management and continuous threat inspection. We have recently introduced ZTNA 2.0, which addresses major shortcomings in the endpoints through our Traps advanced endpoint protection software, deliveredfirst-generation ZTNA products in the industry (which we refer to as ZTNA 1.0). Prisma Access delivers granular least-privileged access along with continuous trust verification and security inspection and protects security for all applications and data across the enterprise infrastructure. Prisma Access, when combined with Prisma SD-WAN, provides a light-weight software agent withcomprehensive single-vendor Secure Access Service Edge (“SASE”) offering that is used to secure remote workforces and enable the cloud-delivered branch.
Cloud Security:
•We enable cloud or on-premise management capabilities.
Security Operations:
•We deliver the next generation of endpoint security, security analytics and private clouds, as well as PureSec for protecting serverless functions in public clouds.
Threat Intelligence and Security Consulting (Unit 42):
•We enable security teams with up-to-date threat intelligence and deep cybersecurity expertise before, during and after attacks through our Unit 42 threat research and security consulting team. Unit 42 offers incident response, risk management, board advisory and proactive cybersecurity assessment services.
For fiscal 2019, 2018,2022 and 2017,2021, total revenue was $2.9 billion, $2.3$5.5 billion and $1.8$4.3 billion, respectively, representing year-over-year growth of 27.5% for fiscal 2019 and 29.5% for fiscal 2018.29.3%. Our growth reflects the increased adoption of our hybrid SaaS revenue model,portfolio, which consists of product, subscriptions, and support. We believe this modelour portfolio will enable us to benefit from recurring revenues and new revenues as we continue to grow our installed end-customer base. As of July 31, 2019,2022, we had end-customers in over 150180 countries. Our end-customers represent a broad range of industries, including education, energy, financial services, government entities, healthcare, Internet and media, manufacturing, public sector, and telecommunications, and include somealmost all of the largest Fortune 100 companies and a majority of the Global 2000 companies in the world. We maintain a field sales force that works closely with our channel partners in developing sales opportunities. We primarily use a two-tiered, indirect fulfillment model whereby we sell our products, subscriptions, and support to our distributors, which, in turn, sell to our resellers, which then sell to our end-customers.
Our product revenue grew to $1.1$1.4 billion or 37.8%24.8% of total revenue for fiscal 2019,2022, representing year-over-year growth of 24.6%21.7%. Product revenue is primarily generated from sales of our appliances, primarily our ML-Powered Next-Generation Firewall, which is available in a number of form factors, including as physical, virtual, and virtualized form.containerized appliances. Our ML-Powered Next-Generation Firewall incorporates our proprietary PAN-OS operating system, which provides a consistent set of capabilities across our entire network security product line. Our products are designed for different performance requirements throughout an organization, ranging from our PA-220,PA-410, which is designed for small organizations and remote or branch offices, to our top-of-the-line PA-7080, which is especially suiteddesigned for very large enterprise deploymentslarge-scale data centers and service provider customers.use. The same firewall functionality that is delivered in our physical appliances is also available in our VM-Series virtual firewalls, which secure virtualized and cloud-based computing environments.environments, and in our CN-Series container firewalls, which secure container environments and traffic.
Our subscription and support revenue grew to $1.8$4.1 billion or 62.2%75.2% of total revenue for fiscal 2019,2022, representing year-over-year growth of 29.4%32.0%. Our subscriptions provide our end-customers with near real-time access to the latest antivirus, intrusion prevention, web filtering, and modern malware prevention, data loss prevention, and cloud access security broker capabilities across the network, endpoints, and the cloud. When end-customers purchase our physical, virtual, or virtualcontainer firewall appliances, or certain cloud offerings, they typically purchase support in order to receive ongoing security updates, upgrades, bug fixes, and repairs. In addition to the subscriptions purchased with these appliances, end-customers may also purchase other subscriptions on a per-user, per-endpoint, or capacity-based basis. We also offer professional services, including incident response, risk management, and digital forensic services.
We continue to invest in innovation as we evolve and further extend the capabilities of our platform,portfolio, as we believe that innovation and timely development of new features and products isare essential to meeting the needs of our end-customers and improving our competitive position. For example: in October 2018, we acquired RedLock, which expanded our security capabilities for the public cloud with the addition of RedLock’s cloud security analytics technology; in February 2019,During fiscal 2022, we introduced several new offerings, including: Prisma Cloud 3.0, Prisma Access 3.0, AIOps for NGFW, PAN-OS 9.0, with over 60 new features, our new DNS Security Service subscription, which uses machine learning to proactively block malicious domains10.2, and stop attacks in progress, and Cortex XDR, our cloud-based detection, investigation, and response application that natively integrates network, endpoint, and cloud data; in March 2019, we acquired Demisto, which expanded the functionalityCloud NGFW for AWS.
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We believe that the growth of our business and our short-term and long-term success are dependent upon many factors, including our ability to extend our technology leadership, grow our base of end-customers, expand deployment of our platformportfolio and support offerings within existing end-customers, and focus on end-customer satisfaction. To manage any future growth effectively, we must continue to improve and expand our information technology and financial infrastructure, our operating and administrative systems and controls, and our ability to manage headcount, capital, and processes in an efficient manner. While these areas present significant opportunities for us, they also pose challenges and risks that we must successfully address in order to sustain the growth of our business and improve our operating results. For additional information regarding the challenges and risks we face, see the “Risk Factors” section in Part I, Item 1A of this Annual Report on Form 10-K.
Impact of COVID-19 and Other Macroeconomic Factors on Our Business
We are actively monitoring, evaluating, and responding to developments relating to COVID-19, which has resulted in and is expected to continue to result in significant global, social, and business disruption. While we instituted a global work-from-home policy beginning in March 2020, which has been modified to provide employees with the choice to work in our offices for a set number of days per week or completely remotely, we did not experience significant disruption in our work operations during fiscal 2022. We will continue to actively monitor the situation, including progress made through vaccinations, and we will make further changes to our business operations as may be required by federal, state, or local authorities or that we determine are in the best interests of our employees, end-customers, partners, suppliers, and stockholders. Our focus remains on the safety of our employees, and we strive to protect the health and well-being of the communities in which we operate, in part, by providing technology to our employees, end-customers, and partners to help them do their best work while working remotely.
COVID-19 has affected our end-customers’ spending and could lead them to delay or defer purchasing decisions, and lengthen sales cycles and payment terms, which could materially adversely impact our business, results of operations, and overall financial performance. The extent of the impact of COVID-19 on our operational and financial performance will depend on developments, including the duration and spread of the virus and its variants, impact on our end-customers’ spending, volume of sales and length of our sales cycles, impact on our partners, suppliers, and employees, actions that may be taken by governmental authorities, and other factors identified in Part I, Item 1A “Risk Factors” in this Form 10-K. The global supply chain and the semiconductor industry are experiencing significant challenges. We have seen supply chain challenges increase, including chip and component shortages, which have, in certain cases, caused delays for us in acquiring chips, components and inventory and have resulted in increased costs as compared to historic levels. While we incurred increased costs and experienced increased lead time for certain product deliveries to our end-customers, we continue to work to minimize the effects from supply chain challenges.
In addition, our overall performance depends in part on worldwide economic and geopolitical conditions. Worsening economic conditions, including inflation, higher interest rates, fluctuations in foreign exchange rates and other changes in economic conditions, may adversely affect our financial performance.
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Key Financial Metrics
We monitor the key financial metrics set forth in the tables below to help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts, and assess operational efficiencies. We discuss revenue, gross margin, and the components of operating loss and margin below under “—Results“Results of Operations.”
| July 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (in millions) | |||||||||||
| Total deferred revenue | $ | 6,994.0 | $ | 5,024.0 | |||||||
| Cash, cash equivalents, and investments | $ | 4,686.4 | $ | 3,789.4 | |||||||
| July 31, | |||||||
| 2019 | 2018 | ||||||
| (in millions) | |||||||
Total deferred revenue(1) | $ | 2,888.7 | $ | 2,279.3 | |||
| Cash, cash equivalents, and investments | $ | 3,378.5 | $ | 3,950.9 | |||
| Year Ended July 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (dollars in millions) | |||||||||||||||||
| Total revenue | $ | 5,501.5 | $ | 4,256.1 | $ | 3,408.4 | |||||||||||
| Total revenue year-over-year percentage increase | 29.3 | % | 24.9 | % | 17.5 | % | |||||||||||
| Gross margin | 68.8 | % | 70.0 | % | 70.7 | % | |||||||||||
| Operating loss | $ | (188.8) | $ | (304.1) | $ | (179.0) | |||||||||||
| Operating margin | (3.4) | % | (7.1) | % | (5.3) | % | |||||||||||
| Billings | $ | 7,471.5 | $ | 5,452.2 | $ | 4,301.7 | |||||||||||
| Billings year-over-year percentage increase | 37.0 | % | 26.7 | % | 23.3 | % | |||||||||||
| Cash flow provided by operating activities | $ | 1,984.7 | $ | 1,503.0 | $ | 1,035.7 | |||||||||||
| Free cash flow (non-GAAP) | $ | 1,791.9 | $ | 1,387.0 | $ | 821.3 | |||||||||||
| Year Ended July 31, | |||||||||||
| 2019 | 2018(1) | 2017(1) | |||||||||
| (dollars in millions) | |||||||||||
| Total revenue | $ | 2,899.6 | $ | 2,273.6 | $ | 1,755.1 | |||||
| Total revenue year-over-year percentage increase | 27.5 | % | 29.5 | % | 27.3 | % | |||||
| Gross margin | 72.1 | % | 71.6 | % | 72.9 | % | |||||
| Operating loss | $ | (54.1 | ) | $ | (104.2 | ) | $ | (165.8 | ) | ||
| Operating margin | (1.9 | )% | (4.6 | )% | (9.4 | )% | |||||
| Billings | $ | 3,489.8 | $ | 2,856.2 | $ | 2,251.7 | |||||
| Billings year-over-year percentage increase | 22.2 | % | 26.8 | % | 18.2 | % | |||||
| Cash flow provided by operating activities | $ | 1,055.6 | $ | 1,038.1 | $ | 868.8 | |||||
| Free cash flow (non-GAAP) | $ | 924.4 | $ | 926.1 | $ | 705.4 | |||||
•Deferred Revenue.Our deferred revenue primarily consists of amounts that have been invoiced but have not been recognized as revenue as of the period end. The majority of our deferred revenue balance consists of subscription and support revenue that is recognized ratably over the contractual service period. We monitor our deferred revenue balance because it represents a significant portion of revenue to be recognized in future periods.
•Billings.We define billings as total revenue plus the change in total deferred revenue, net of acquired deferred revenue, during the period. We consider billings to be a key metric used by management to manage our business given our hybrid SaaS revenue model, andbusiness. We believe billings provides investors with an important indicator of the health and visibility of our business because it includes subscription and support revenue, which is recognized ratably over the contractual service period, and product revenue, which is recognized at the time of shipment, provided that all other conditions for revenue recognition have been met. We consider billings to be a useful metric for management and investors, particularly if we continue to experience increased sales of subscriptions and strong renewal rates for subscription and support offerings, and as we monitor our near-term cash flows. While we believe that billings provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management, it is important to note that other companies, including companies in our industry, may not use billings, may calculate billings differently, may have different billing frequencies, or may use other financial measures to evaluate their performance, all of which could reduce the usefulness of billings as a comparative measure. We calculate billings in the following manner:
| Year Ended July 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Billings: | |||||||||||||||||
| Total revenue | $ | 5,501.5 | $ | 4,256.1 | $ | 3,408.4 | |||||||||||
| Add: change in total deferred revenue, net of acquired deferred revenue | 1,970.0 | 1,196.1 | 893.3 | ||||||||||||||
| Billings | $ | 7,471.5 | $ | 5,452.2 | $ | 4,301.7 | |||||||||||
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| Year Ended July 31, | |||||||||||
| 2019 | 2018(1) | 2017(1) | |||||||||
| (in millions) | |||||||||||
| Billings: | |||||||||||
| Total revenue | $ | 2,899.6 | $ | 2,273.6 | $ | 1,755.1 | |||||
| Add: change in total deferred revenue, net of acquired deferred revenue | 590.2 | 582.6 | 496.6 | ||||||||
| Billings | $ | 3,489.8 | $ | 2,856.2 | $ | 2,251.7 | |||||
• Cash Flow Provided by Operating Activities.We monitor cash flow provided by operating activities as a measure of our overall business performance. Our cash flow provided by operating activities is driven in large part by sales of our products and from up-front payments for subscription and support offerings. Monitoring cash flow provided by operating activities enables us to analyze our financial performance without the non-cash effects of certain items such as depreciation, amortization, and share-based compensation costs, thereby allowing us to better understand and manage the cash needs of our business.
• Free Cash Flow (non-GAAP).We define free cash flow, a non-GAAP financial measure, as cash provided by operating activities less purchases of property, equipment, and other assets. We consider free cash flow to be a profitability and liquidity measure that provides useful information to management and investors about the amount of cash generated by the business after necessary capital expenditures. A limitation of the utility of free cash flow as a measure of our financial performance and liquidity is that it does not represent the total increase or decrease in our cash balance for the period. In addition, it is important to note that other companies, including companies in our industry, may not use free cash flow, may calculate free cash flow in a different manner than we do, or may use other financial measures to evaluate their performance, all of which could reduce the usefulness of free cash flow as a comparative measure. A reconciliation of free cash flow to cash flow provided by operating activities, the most directly comparable financial measure calculated and presented in accordance with GAAP, is provided below:
| Year Ended July 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Free cash flow (non-GAAP): | |||||||||||||||||
| Net cash provided by operating activities | $ | 1,984.7 | $ | 1,503.0 | $ | 1,035.7 | |||||||||||
| Less: purchases of property, equipment, and other assets | 192.8 | 116.0 | 214.4 | ||||||||||||||
| Free cash flow (non-GAAP) | $ | 1,791.9 | $ | 1,387.0 | $ | 821.3 | |||||||||||
| Net cash provided by (used in) investing activities | $ | (933.4) | $ | (1,480.6) | $ | 288.0 | |||||||||||
| Net cash provided by (used in) financing activities | $ | (806.6) | $ | (1,104.0) | $ | 673.0 | |||||||||||
- 47 -
| Year Ended July 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (in millions) | |||||||||||
| Free cash flow (non-GAAP): | |||||||||||
Net cash provided by operating activities(1) | $ | 1,055.6 | $ | 1,038.1 | $ | 868.8 | |||||
| Less: purchases of property, equipment, and other assets | 131.2 | 112.0 | 163.4 | ||||||||
Free cash flow (non-GAAP)(1) | $ | 924.4 | $ | 926.1 | $ | 705.4 | |||||
| Net cash used in investing activities | $ | (1,825.9 | ) | $ | (520.0 | ) | $ | (472.6 | ) | ||
| Net cash provided by (used in) financing activities | $ | (773.9 | ) | $ | 1,245.6 | $ | (386.0 | ) | |||
Results of Operations
The following table summarizes our results of operations for the periods presented and as a percentage of our total revenue for those periods based on our consolidated statements of operations data. The period to period comparison of results is not necessarily indicative of results for future periods.
| Year Ended July 31, | |||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||||||||||||||||||||
| Amount | % of Revenue | Amount | % of Revenue | Amount | % of Revenue | ||||||||||||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||||||||||||||
| Product | $ | 1,363.1 | 24.8 | % | $ | 1,120.3 | 26.3 | % | $ | 1,064.2 | 31.2 | % | |||||||||||||||||||||||
| Subscription and support | 4,138.4 | 75.2 | % | 3,135.8 | 73.7 | % | 2,344.2 | 68.8 | % | ||||||||||||||||||||||||||
| Total revenue | 5,501.5 | 100.0 | % | 4,256.1 | 100.0 | % | 3,408.4 | 100.0 | % | ||||||||||||||||||||||||||
| Cost of revenue: | |||||||||||||||||||||||||||||||||||
| Product | 455.5 | 8.3 | % | 308.5 | 7.2 | % | 294.4 | 8.6 | % | ||||||||||||||||||||||||||
| Subscription and support | 1,263.2 | 22.9 | % | 966.4 | 22.8 | % | 705.1 | 20.7 | % | ||||||||||||||||||||||||||
Total cost of revenue(1) | 1,718.7 | 31.2 | % | 1,274.9 | 30.0 | % | 999.5 | 29.3 | % | ||||||||||||||||||||||||||
| Total gross profit | 3,782.8 | 68.8 | % | 2,981.2 | 70.0 | % | 2,408.9 | 70.7 | % | ||||||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||||||||||||||
| Research and development | 1,417.7 | 25.8 | % | 1,140.4 | 26.8 | % | 768.1 | 22.5 | % | ||||||||||||||||||||||||||
| Sales and marketing | 2,148.9 | 39.0 | % | 1,753.8 | 41.1 | % | 1,520.2 | 44.7 | % | ||||||||||||||||||||||||||
| General and administrative | 405.0 | 7.4 | % | 391.1 | 9.2 | % | 299.6 | 8.8 | % | ||||||||||||||||||||||||||
Total operating expenses(1) | 3,971.6 | 72.2 | % | 3,285.3 | 77.1 | % | 2,587.9 | 76.0 | % | ||||||||||||||||||||||||||
| Operating loss | (188.8) | (3.4) | % | (304.1) | (7.1) | % | (179.0) | (5.3) | % | ||||||||||||||||||||||||||
| Interest expense | (27.4) | (0.5) | % | (163.3) | (3.8) | % | (88.7) | (2.6) | % | ||||||||||||||||||||||||||
| Other income, net | 9.0 | 0.1 | % | 2.4 | 0.0 | % | 35.9 | 1.1 | % | ||||||||||||||||||||||||||
| Loss before income taxes | (207.2) | (3.8) | % | (465.0) | (10.9) | % | (231.8) | (6.8) | % | ||||||||||||||||||||||||||
| Provision for income taxes | 59.8 | 1.1 | % | 33.9 | 0.8 | % | 35.2 | 1.0 | % | ||||||||||||||||||||||||||
| Net loss | $ | (267.0) | (4.9) | % | $ | (498.9) | (11.7) | % | $ | (267.0) | (7.8) | % | |||||||||||||||||||||||
______________
(1)Includes share-based compensation as follows:
| Year Ended July 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Cost of product revenue | $ | 9.3 | $ | 6.2 | $ | 5.7 | |||||||||||
| Cost of subscription and support revenue | 110.2 | 93.0 | 77.7 | ||||||||||||||
| Research and development | 471.1 | 428.9 | 274.6 | ||||||||||||||
| Sales and marketing | 304.7 | 269.9 | 214.5 | ||||||||||||||
| General and administrative | 118.1 | 128.9 | 92.0 | ||||||||||||||
| Total share-based compensation | $ | 1,013.4 | $ | 926.9 | $ | 664.5 | |||||||||||
| Year Ended July 31, | ||||||||||||||||||||
| 2019 | 2018(1) | 2017(1) | ||||||||||||||||||
| Amount | % of Revenue | Amount | % of Revenue | Amount | % of Revenue | |||||||||||||||
| (dollars in millions) | ||||||||||||||||||||
| Revenue: | ||||||||||||||||||||
| Product | $ | 1,096.2 | 37.8 | % | $ | 879.8 | 38.7 | % | $ | 708.5 | 40.4 | % | ||||||||
| Subscription and support | 1,803.4 | 62.2 | % | 1,393.8 | 61.3 | % | 1,046.6 | 59.6 | % | |||||||||||
| Total revenue | 2,899.6 | 100.0 | % | 2,273.6 | 100.0 | % | 1,755.1 | 100.0 | % | |||||||||||
| Cost of revenue: | ||||||||||||||||||||
| Product | 315.9 | 10.9 | % | 272.4 | 12.0 | % | 201.4 | 11.5 | % | |||||||||||
| Subscription and support | 492.5 | 17.0 | % | 372.7 | 16.4 | % | 275.0 | 15.6 | % | |||||||||||
Total cost of revenue(2) | 808.4 | 27.9 | % | 645.1 | 28.4 | % | 476.4 | 27.1 | % | |||||||||||
| Total gross profit | 2,091.2 | 72.1 | % | 1,628.5 | 71.6 | % | 1,278.7 | 72.9 | % | |||||||||||
| Operating expenses: | ||||||||||||||||||||
| Research and development | 539.5 | 18.6 | % | 400.7 | 17.6 | % | 347.4 | 19.8 | % | |||||||||||
| Sales and marketing | 1,344.0 | 46.4 | % | 1,074.2 | 47.3 | % | 898.8 | 51.2 | % | |||||||||||
| General and administrative | 261.8 | 9.0 | % | 257.8 | 11.3 | % | 198.3 | 11.3 | % | |||||||||||
Total operating expenses(2) | 2,145.3 | 74.0 | % | 1,732.7 | 76.2 | % | 1,444.5 | 82.3 | % | |||||||||||
| Operating loss | (54.1 | ) | (1.9 | )% | (104.2 | ) | (4.6 | )% | (165.8 | ) | (9.4 | )% | ||||||||
| Interest expense | (83.9 | ) | (2.9 | )% | (29.6 | ) | (1.3 | )% | (24.5 | ) | (1.4 | )% | ||||||||
| Other income, net | 63.4 | 2.2 | % | 28.5 | 1.3 | % | 10.2 | 0.5 | % | |||||||||||
| Loss before income taxes | (74.6 | ) | (2.6 | )% | (105.3 | ) | (4.6 | )% | (180.1 | ) | (10.3 | )% | ||||||||
| Provision for income taxes | 7.3 | 0.2 | % | 16.9 | 0.8 | % | 22.9 | 1.3 | % | |||||||||||
| Net loss | $ | (81.9 | ) | (2.8 | )% | $ | (122.2 | ) | (5.4 | )% | $ | (203.0 | ) | (11.6 | )% | |||||
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| Year Ended July 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (in millions) | |||||||||||
| Cost of product revenue | $ | 5.6 | $ | 7.0 | $ | 7.3 | |||||
| Cost of subscription and support revenue | 71.3 | 66.7 | 56.2 | ||||||||
| Research and development | 186.8 | 145.2 | 152.6 | ||||||||
| Sales and marketing | 221.9 | 208.0 | 186.5 | ||||||||
| General and administrative | 102.1 | 77.0 | 73.1 | ||||||||
| Total share-based compensation | $ | 587.7 | $ | 503.9 | $ | 475.7 | |||||
Revenue
Our revenue consists of product revenue and subscription and support revenue. Revenue is recognized upon transfer of control of the corresponding promised products and subscriptions and support to our customers in an amount that reflects the consideration we expect to be entitled to in exchange for those products and subscriptions and support. We expect our revenue to vary from quarter to quarter based on seasonal and cyclical factors.
Product Revenue
Product revenue is derived primarily from sales of our appliances, primarily our ML-Powered Next-Generation Firewall, which is available in a number of form factors, including as physical, virtual, and containerized appliances. Product revenue also includes revenue derived from software licenses of Panorama and the VM-Series.Panorama. Our appliances and software licenses include a broad set of built-in networking and security features and functionalities. We recognize product revenue at the time of hardware shipment or delivery of software license.
| Year Ended July 31, | Year Ended July 31, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | Change | 2021 | 2020 | Change | ||||||||||||||||||||||||||||||||||||||||||
| Amount | Amount | Amount | % | Amount | Amount | Amount | % | ||||||||||||||||||||||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||||||||||||||||||||||||||
| Product | $ | 1,363.1 | $ | 1,120.3 | $ | 242.8 | 21.7 | % | $ | 1,120.3 | $ | 1,064.2 | $ | 56.1 | 5.3 | % | |||||||||||||||||||||||||||||||
| Year Ended July 31, | Year Ended July 31, | ||||||||||||||||||||||||||||
| 2019 | 2018(1) | Change | 2018(1) | 2017(1) | Change | ||||||||||||||||||||||||
| Amount | Amount | Amount | % | Amount | Amount | Amount | % | ||||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||||||||
| Product | $ | 1,096.2 | $ | 879.8 | $ | 216.4 | 24.6 | % | $ | 879.8 | $ | 708.5 | $ | 171.3 | 24.2 | % | |||||||||||||
Product revenue increased for fiscal 20192022 compared to fiscal 20182021 primarily due to increased demand for our appliances. Product revenue increased for fiscal 2018 compared to fiscal 2017 due to increased demand fornew generation of products, which includes customer transition from our newly introduced appliances. The change in product revenue due to pricing was not significant for either period.legacy products.
Subscription and Support Revenue
Subscription and support revenue is derived primarily from sales of our subscription and support offerings. Our contractual subscription and support contracts are typically one to five years. We recognize revenue from subscriptions and support over time as the services are performed. As a percentage of total revenue, we expect our subscription and support revenue to vary from quarter to quarter and increase over the long term as we introduce new subscriptions, renew existing subscription and support contracts, and expand our installed end-customer base.
| Year Ended July 31, | Year Ended July 31, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | Change | 2021 | 2020 | Change | ||||||||||||||||||||||||||||||||||||||||||
| Amount | Amount | Amount | % | Amount | Amount | Amount | % | ||||||||||||||||||||||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||||||||||||||||||||||||||
| Subscription | $ | 2,539.0 | $ | 1,898.8 | $ | 640.2 | 33.7 | % | $ | 1,898.8 | $ | 1,405.3 | $ | 493.5 | 35.1 | % | |||||||||||||||||||||||||||||||
| Support | 1,599.4 | 1,237.0 | 362.4 | 29.3 | % | 1,237.0 | 938.9 | 298.1 | 31.7 | % | |||||||||||||||||||||||||||||||||||||
| Total subscription and support | $ | 4,138.4 | $ | 3,135.8 | $ | 1,002.6 | 32.0 | % | $ | 3,135.8 | $ | 2,344.2 | $ | 791.6 | 33.8 | % | |||||||||||||||||||||||||||||||
| Year Ended July 31, | Year Ended July 31, | ||||||||||||||||||||||||||||
| 2019 | 2018(1) | Change | 2018(1) | 2017(1) | Change | ||||||||||||||||||||||||
| Amount | Amount | Amount | % | Amount | Amount | Amount | % | ||||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||||||||
| Subscription | $ | 1,032.7 | $ | 758.1 | $ | 274.6 | 36.2 | % | $ | 758.1 | $ | 548.8 | $ | 209.3 | 38.1 | % | |||||||||||||
| Support | 770.7 | 635.7 | 135.0 | 21.2 | % | 635.7 | 497.8 | 137.9 | 27.7 | % | |||||||||||||||||||
| Total subscription and support | $ | 1,803.4 | $ | 1,393.8 | $ | 409.6 | 29.4 | % | $ | 1,393.8 | $ | 1,046.6 | $ | 347.2 | 33.2 | % | |||||||||||||
Subscription and support revenue increased year-over-year for both fiscal 2019 and2022 compared to fiscal 2018. The increase in both periods was 2021 due to increased demand for our subscription and support offerings from both new and existingour end-customers. The mix between subscription revenue and support revenue will fluctuate over time, depending on the introduction of new subscription offerings, renewals of support services, and our ability to increase sales to new and existing end-customers. The change in subscription and support revenue due to changes in pricing was not significant for either period.
Revenue by Geographic Theater
| Year Ended July 31, | Year Ended July 31, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | Change | 2021 | 2020 | Change | ||||||||||||||||||||||||||||||||||||||||||
| Amount | Amount | Amount | % | Amount | Amount | Amount | % | ||||||||||||||||||||||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||||||||||||||||||||||||||
| Americas | $ | 3,802.6 | $ | 2,937.5 | $ | 865.1 | 29.5 | % | $ | 2,937.5 | $ | 2,318.0 | $ | 619.5 | 26.7 | % | |||||||||||||||||||||||||||||||
| EMEA | 1,055.8 | 817.3 | 238.5 | 29.2 | % | 817.3 | 671.9 | 145.4 | 21.6 | % | |||||||||||||||||||||||||||||||||||||
| APAC | 643.1 | 501.3 | 141.8 | 28.3 | % | 501.3 | 418.5 | 82.8 | 19.8 | % | |||||||||||||||||||||||||||||||||||||
| Total revenue | $ | 5,501.5 | $ | 4,256.1 | $ | 1,245.4 | 29.3 | % | $ | 4,256.1 | $ | 3,408.4 | $ | 847.7 | 24.9 | % | |||||||||||||||||||||||||||||||
| Year Ended July 31, | Year Ended July 31, | ||||||||||||||||||||||||||||
| 2019 | 2018(1) | Change | 2018(1) | 2017(1) | Change | ||||||||||||||||||||||||
| Amount | Amount | Amount | % | Amount | Amount | Amount | % | ||||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||||||||
| Americas | $ | 1,982.3 | $ | 1,558.7 | $ | 423.6 | 27.2 | % | $ | 1,558.7 | $ | 1,230.6 | $ | 328.1 | 26.7 | % | |||||||||||||
| EMEA | 564.8 | 439.6 | 125.2 | 28.5 | % | 439.6 | 320.3 | 119.3 | 37.2 | % | |||||||||||||||||||
| APAC | 352.5 | 275.3 | 77.2 | 28.0 | % | 275.3 | 204.2 | 71.1 | 34.8 | % | |||||||||||||||||||
| Total revenue | $ | 2,899.6 | $ | 2,273.6 | $ | 626.0 | 27.5 | % | $ | 2,273.6 | $ | 1,755.1 | $ | 518.5 | 29.5 | % | |||||||||||||
With respect to geographic theaters, the Americas contributed the largest portion of the year-over-year increases in revenue for both fiscal 2019 and fiscal 20182022 due to its larger and more established sales force compared to our other theaters. Revenue from both Europe, the Middle East, and Africa (“EMEA”) and Asia Pacific and Japan (“APAC”) increased year-over-year for both fiscal 2019 and fiscal 20182022 due to ourincreasing investment in increasing the size of ourglobal sales force in order to support our growth and numberinnovation.
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Cost of Revenue
Our cost of revenue consists of cost of product revenue and cost of subscription and support revenue.
Cost of Product Revenue
Cost of product revenue primarily includes costs paid to our manufacturing partners.partners for procuring components and manufacturing our products. Our cost of product revenue also includes personnel costs, which consist of salaries, benefits, bonuses, share-based compensation and travel and entertainment associated with our operations organization, amortization of intellectual property licenses, product testing costs, shipping and tariff costs, and allocatedshared costs. AllocatedShared costs consist of certain facilities, depreciation, benefits, recruiting, and information technology costs that we allocate based on headcount. We expect our cost of product revenue to increase asfluctuate with our product revenue increases.
| Year Ended July 31, | Year Ended July 31, | ||||||||||||||||||||||||||||
| 2019 | 2018 | Change | 2018 | 2017 | Change | ||||||||||||||||||||||||
| Amount | Amount | Amount | % | Amount | Amount | Amount | % | ||||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||||||||
| Cost of product revenue | $ | 315.9 | $ | 272.4 | $ | 43.5 | 16.0 | % | $ | 272.4 | $ | 201.4 | $ | 71.0 | 35.3 | % | |||||||||||||
| Number of employees at period end | 102 | 97 | 5 | 5.2 | % | 97 | 96 | 1 | 1.0 | % | |||||||||||||||||||
| Year Ended July 31, | Year Ended July 31, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | Change | 2021 | 2020 | Change | ||||||||||||||||||||||||||||||||||||||||||
| Amount | Amount | Amount | % | Amount | Amount | Amount | % | ||||||||||||||||||||||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||||||||||||||||||||||||||
| Cost of product revenue | $ | 455.5 | $ | 308.5 | $ | 147.0 | 47.6 | % | $ | 308.5 | $ | 294.4 | $ | 14.1 | 4.8 | % | |||||||||||||||||||||||||||||||
| Number of employees at period end | 149 | 127 | 22 | 17.3 | % | 127 | 117 | 10 | 8.5 | % | |||||||||||||||||||||||||||||||||||||
Cost of product revenue increased for fiscal 20192022 compared to fiscal 20182021 primarily due to an increase in product unit volume. Costthe volume of product revenue increased for fiscal 2018 compared to fiscal 2017sold. The remaining increase in costs was primarily due to higher product costs related to our newly introduced appliances.driven by supply chain challenges.
Cost of Subscription and Support Revenue
Cost of subscription and support revenue includes personnel costs for our global customer support and technical operations organizations, customer support and repair costs, third-party professional services costs, data center and cloud hosting service costs, amortization of acquired intangible assets and capitalized software development costs, and allocatedshared costs. We expect our cost of subscription and support revenue to increase as our installed end-customer base grows and adoption of our cloud-based subscription offerings increases.
| Year Ended July 31, | Year Ended July 31, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | Change | 2021 | 2020 | Change | ||||||||||||||||||||||||||||||||||||||||||
| Amount | Amount | Amount | % | Amount | Amount | Amount | % | ||||||||||||||||||||||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||||||||||||||||||||||||||
| Cost of subscription and support revenue | $ | 1,263.2 | $ | 966.4 | $ | 296.8 | 30.7 | % | $ | 966.4 | $ | 705.1 | $ | 261.3 | 37.1 | % | |||||||||||||||||||||||||||||||
| Number of employees at period end | 2,515 | 2,108 | 407 | 19.3 | % | 2,108 | 1,402 | 706 | 50.4 | % | |||||||||||||||||||||||||||||||||||||
| Year Ended July 31, | Year Ended July 31, | ||||||||||||||||||||||||||||
| 2019 | 2018 | Change | 2018 | 2017 | Change | ||||||||||||||||||||||||
| Amount | Amount | Amount | % | Amount | Amount | Amount | % | ||||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||||||||
Cost of subscription and support revenue(1) | $ | 492.5 | $ | 372.7 | $ | 119.8 | 32.1 | % | $ | 372.7 | $ | 275.0 | $ | 97.7 | 35.5 | % | |||||||||||||
| Number of employees at period end | 1,219 | 932 | 287 | 30.8 | % | 932 | 725 | 207 | 28.6 | % | |||||||||||||||||||
Cost of subscription and support revenue increased for fiscal 20192022 compared to fiscal 20182021 primarily due to an increase inincreased costs to support the growth of our subscription and support business. Personnelofferings. Personnel costs grew $45.7$135.4 millionto $254.5$547.8 million primarily due to headcount growth. Amortization of purchased intangible assets increased $26.2 million for fiscal 20192022 compared to fiscal 2018 as a result of our recent acquisitions. The remaining increase was primarily due to an increase in data center and cloud hosting costs to support the adoption of our cloud-based subscription offerings and costs to expand our customer service capabilities.
Gross Margin
Gross margin or gross profit as a percentage of revenue, has been and will continue to be affected by a variety of factors, including the introduction of new products, manufacturing costs, the average sales price of our products, cloud hosting service costs, personnel costs, the mix of products sold, and the mix of revenue between product and subscription and support offerings. For sales of our products, ourOur virtual and higher-end firewall products generally have higher gross margins than our lower-end firewall products within each product series. For sales of our subscription and support offerings, our subscription offerings typically have higher gross margins than our support offerings. We expect our gross margins to fluctuatevary over time depending on the factors described above.
| Year Ended July 31, | |||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||||||||||||||||||||
| Amount | Gross Margin | Amount | Gross Margin | Amount | Gross Margin | ||||||||||||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||||||||||||||
| Product | $ | 907.6 | 66.6 | % | $ | 811.8 | 72.5 | % | $ | 769.8 | 72.3 | % | |||||||||||||||||||||||
| Subscription and support | 2,875.2 | 69.5 | % | 2,169.4 | 69.2 | % | 1,639.1 | 69.9 | % | ||||||||||||||||||||||||||
| Total gross profit | $ | 3,782.8 | 68.8 | % | $ | 2,981.2 | 70.0 | % | $ | 2,408.9 | 70.7 | % | |||||||||||||||||||||||
| Year Ended July 31, | ||||||||||||||||||||
| 2019 | 2018(1) | 2017(1) | ||||||||||||||||||
| Amount | Gross Margin | Amount | Gross Margin | Amount | Gross Margin | |||||||||||||||
| (dollars in millions) | ||||||||||||||||||||
| Product | $ | 780.3 | 71.2 | % | $ | 607.4 | 69.0 | % | $ | 507.1 | 71.6 | % | ||||||||
| Subscription and support | 1,310.9 | 72.7 | % | 1,021.1 | 73.3 | % | 771.6 | 73.7 | % | |||||||||||
| Total gross profit | $ | 2,091.2 | 72.1 | % | $ | 1,628.5 | 71.6 | % | $ | 1,278.7 | 72.9 | % | ||||||||
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Product gross margin decreased for fiscal 20182022 compared to fiscal 2017, driven by2021 primarily due to higher product costs related to our newly introduced appliances, which had lower product margins.offerings driven by supply chain challenges.
Subscription and support gross margin decreasedwas relatively flat for fiscal 20192022 compared to fiscal 2018, primarily due to higher amortization of purchased intangibles as a result of our recent acquisitions and costs to support the adoption of our cloud-based subscription offerings, partially offset by increased leverage of our global customer support organization. Subscription and support gross margin decreased slightly for fiscal 2018 compared to fiscal 2017, primarily due to higher data center and cloud hosting costs to support the adoption of our cloud-based subscription offerings and costs to expand our customer service capabilities, partially offset by a decrease in customer support and repair costs.2021.
Operating Expenses
Our operating expenses consist of research and development, sales and marketing, and general and administrative expense.expenses. Personnel costs are the most significant component of operating expenses and consist of salaries, benefits, bonuses, share-based compensation, travel and entertainment, and with regard to sales and marketing expense, sales commissions. Our operating expenses also include allocatedshared costs, which consist of certain facilities, depreciation, benefits, recruiting, and information technology costs that we allocate based on headcount.headcount to each department. We expect operating expenses generally to increase in absolute dollars and decrease over the long term as a percentage of revenue as we continue to scale our business. As of July 31, 2019,2022, we expect to recognize approximately $1.5$1.8 billion of share-based compensation expense over a weighted-average period of approximately 2.72.6 years, excluding additional share-based compensation expense related to any future grants of share-based awards. Share-based compensation expense is generally recognized on a straight-line basis over the requisite service periods of the awards.
Research and Development
Research and development expense consists primarily of personnel costs. Research and development expense also includes prototype related expenses and allocatedshared costs. 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.
| Year Ended July 31, | Year Ended July 31, | ||||||||||||||||||||||||||||
| 2019 | 2018 | Change | 2018 | 2017 | Change | ||||||||||||||||||||||||
| Amount | Amount | Amount | % | Amount | Amount | Amount | % | ||||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||||||||
| Research and development | $ | 539.5 | $ | 400.7 | $ | 138.8 | 34.6 | % | $ | 400.7 | $ | 347.4 | $ | 53.3 | 15.3 | % | |||||||||||||
| Number of employees at period end | 1,507 | 947 | 560 | 59.1 | % | 947 | 766 | 181 | 23.6 | % | |||||||||||||||||||
| Year Ended July 31, | Year Ended July 31, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | Change | 2021 | 2020 | Change | ||||||||||||||||||||||||||||||||||||||||||
| Amount | Amount | Amount | % | Amount | Amount | Amount | % | ||||||||||||||||||||||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||||||||||||||||||||||||||
| Research and development | $ | 1,417.7 | $ | 1,140.4 | $ | 277.3 | 24.3 | % | $ | 1,140.4 | $ | 768.1 | $ | 372.3 | 48.5 | % | |||||||||||||||||||||||||||||||
| Number of employees at period end | 3,268 | 2,595 | 673 | 25.9 | % | 2,595 | 1,821 | 774 | 42.5 | % | |||||||||||||||||||||||||||||||||||||
Research and development expense increased year-over-year for both fiscal 2019 and2022 compared to fiscal 2018. The increase in both periods was2021 primarily due to an increase in personnel costs, which grew $105.8$193.5 million to $436.7 million for fiscal 2019 compared to fiscal 2018 and grew $36.8 million to $330.9 million for fiscal 2018 compared to fiscal 2017. The increase in personnel costs in both periods was$1.1 billion, primarily due to headcount growth. The remaining increase for both fiscal 2019in research and 2018development expense was primarilyfurther driven by an increase in allocatedincreased shared costs and third-party product development costs.
Sales and Marketing
Sales and marketing expense consists primarily of personnel costs, including commission expense. Sales and marketing expense also includes costs for market development programs, promotional and other marketing costs, professional services, and allocatedshared costs. We continue to thoughtfullystrategically invest in headcount and have substantially grown our sales presence internationally.presence. We expect sales and marketing expense to continue to increase in absolute dollars as we increase the size of our sales and marketing organizations to grow our customer base, increase touch points with end-customers, and to expand our internationalglobal presence, although our sales and marketing expense may fluctuate as a percentage of total revenue.
| Year Ended July 31, | Year Ended July 31, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | Change | 2021 | 2020 | Change | ||||||||||||||||||||||||||||||||||||||||||
| Amount | Amount | Amount | % | Amount | Amount | Amount | % | ||||||||||||||||||||||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||||||||||||||||||||||||||
| Sales and marketing | $ | 2,148.9 | $ | 1,753.8 | $ | 395.1 | 22.5 | % | $ | 1,753.8 | $ | 1,520.2 | $ | 233.6 | 15.4 | % | |||||||||||||||||||||||||||||||
| Number of employees at period end | 5,167 | 4,493 | 674 | 15.0 | % | 4,493 | 3,800 | 693 | 18.2 | % | |||||||||||||||||||||||||||||||||||||
| Year Ended July 31, | Year Ended July 31, | ||||||||||||||||||||||||||||
| 2019 | 2018 | Change | 2018 | 2017 | Change | ||||||||||||||||||||||||
| Amount | Amount | Amount | % | Amount | Amount | Amount | % | ||||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||||||||
Sales and marketing(1) | $ | 1,344.0 | $ | 1,074.2 | $ | 269.8 | 25.1 | % | $ | 1,074.2 | $ | 898.8 | $ | 175.4 | 19.5 | % | |||||||||||||
| Number of employees at period end | 3,382 | 2,704 | 678 | 25.1 | % | 2,704 | 2,418 | 286 | 11.8 | % | |||||||||||||||||||
Sales and marketing expense increased year-over-year for both fiscal 2019 and2022 compared to fiscal 2018. The increase in both periods was2021 primarily due to an increase in personnel costs, which grew $181.7$291.8 million to $1.0$1.6 billion, for fiscal 2019 comparedprimarily due to fiscal 2018headcount growth and grew $133.8 million to $829.6 million for fiscal 2018 compared to fiscal 2017.increased travel and entertainment expenses. The increase in personnel costs in both periodssales and marketing expense was largely due to headcount growth. The remaining increase for fiscal 2019 was primarilyfurther driven by an increase in allocated costs, an increase in costs associated with marketing-related activities, and higher amortizationmarketing activities.
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General and Administrative
General and administrative expense consists primarily of personnel costs and shared costs for our executive, finance, human resources, legal,information technology, and information technologylegal organizations, and professional services costs, which consist primarily of legal, auditing, accounting, and other consulting costs. General and administrative expense also includes certain non-recurring general expenses and impairment losses. Certain facilities, depreciation, benefits, recruiting, and information technology costs are allocated to other organizations based on headcount. We expect general and administrative expense to increase in absolute dollars due toas we increase the size of our general and administrative organizations and incur additional costs associated with accounting, compliance, and insurance,to support our business growth, although our general and administrative expense may fluctuate as a percentage of total revenue.
| Year Ended July 31, | Year Ended July 31, | ||||||||||||||||||||||||||||
| 2019 | 2018 | Change | 2018 | 2017 | Change | ||||||||||||||||||||||||
| Amount | Amount | Amount | % | Amount | Amount | Amount | % | ||||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||||||||
| General and administrative | $ | 261.8 | $ | 257.8 | $ | 4.0 | 1.6 | % | $ | 257.8 | $ | 198.3 | $ | 59.5 | 30.0 | % | |||||||||||||
| Number of employees at period end | 804 | 668 | 136 | 20.4 | % | 668 | 557 | 111 | 19.9 | % | |||||||||||||||||||
| Year Ended July 31, | Year Ended July 31, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | Change | 2021 | 2020 | Change | ||||||||||||||||||||||||||||||||||||||||||
| Amount | Amount | Amount | % | Amount | Amount | Amount | % | ||||||||||||||||||||||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||||||||||||||||||||||||||
| General and administrative | $ | 405.0 | $ | 391.1 | $ | 13.9 | 3.6 | % | $ | 391.1 | $ | 299.6 | $ | 91.5 | 30.5 | % | |||||||||||||||||||||||||||||||
| Number of employees at period end | 1,462 | 1,150 | 312 | 27.1 | % | 1,150 | 874 | 276 | 31.6 | % | |||||||||||||||||||||||||||||||||||||
General and administrative expenseexpenses increased for fiscal 20192022 compared to fiscal 20182021 primarily due to an increase in personnel costs, which grew $28.0$24.6 million to $173.8$268.6 million, for fiscal 2019 compared to fiscal 2018, and an increasepartially offset by a decrease in legal expenses.acquisition-related costs. The increase in personnel costs was primarily due to headcount growth, and expensepartially offset by lower share-based compensation related to the accelerated vesting of certain equity awards in connection with our business acquisitions in fiscal 2019. These increases were substantially offset by a net decrease of $32.2 million in cease-use losses recognized on the lease of our previous corporate headquarter facilities. Refer to Note 11. Commitments and Contingencies in Part II, Item 8 of this Annual Report on Form 10-K for more information.acquisitions.
Interest Expense
Interest expense primarily consists of non-cash interest expense from the amortization of the debt discount and debt issuance costs related to our 0.0% Convertible Senior Notes due 2019 (the “2019 Notes”) and 0.75% Convertible Senior Notes due 2023 (the “2023 Notes”) and the 0.375% Convertible Senior Notes due 2025 (the “2025 Notes,” and together with the 2019“2023 Notes,” the “Notes”), and also includes the contractual interest expense related to our 2023 Notes.
| Year Ended July 31, | Year Ended July 31, | ||||||||||||||||||||||||||||
| 2019 | 2018 | Change | 2018 | 2017 | Change | ||||||||||||||||||||||||
| Amount | Amount | Amount | % | Amount | Amount | Amount | % | ||||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||||||||
| Interest expense | $ | 83.9 | $ | 29.6 | $ | 54.3 | 183.4 | % | $ | 29.6 | $ | 24.5 | $ | 5.1 | 20.8 | % | |||||||||||||
| Year Ended July 31, | Year Ended July 31, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | Change | 2021 | 2020 | Change | ||||||||||||||||||||||||||||||||||||||||||
| Amount | Amount | Amount | % | Amount | Amount | Amount | % | ||||||||||||||||||||||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||||||||||||||||||||||||||
| Interest expense | $ | 27.4 | $ | 163.3 | $ | (135.9) | (83.2) | % | $ | 163.3 | $ | 88.7 | $ | 74.6 | 84.1 | % | |||||||||||||||||||||||||||||||
Interest expense increased year-over-yeardecreased for both fiscal 2019 and2022 compared to fiscal 2018. The increase in both periods was2021 primarily due to interest expense recognized on the 2023 Notes issued in July 2018. The increase inbecause we no longer recognize interest expense for fiscal 2019 was partially offset by a reduction in interest expense recognized on the 2019 Notes due to conversionsamortization of the 2019 Notes beforedebt discount as a result of the adoption of new debt guidance. Refer to Note 1. Description of Business and upon maturity in July 2019. Refer toSummary of Significant Accounting Policies and Note 10. Debt in Part II, Item 8 of this Annual Report on Form 10-K for more information on the Notes.information.
Other Income, Net
Other income, net includes interest income earned on our cash, cash equivalents, and investments, and gains and losses from foreign currency remeasurement gains and losses, and foreign currency transaction gains and losses.
| Year Ended July 31, | Year Ended July 31, | ||||||||||||||||||||||||||||
| 2019 | 2018 | Change | 2018 | 2017 | Change | ||||||||||||||||||||||||
| Amount | Amount | Amount | % | Amount | Amount | Amount | % | ||||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||||||||
| Other income, net | $ | 63.4 | $ | 28.5 | $ | 34.9 | 122.5 | % | $ | 28.5 | $ | 10.2 | $ | 18.3 | 179.4 | % | |||||||||||||
| Year Ended July 31, | Year Ended July 31, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | Change | 2021 | 2020 | Change | ||||||||||||||||||||||||||||||||||||||||||
| Amount | Amount | Amount | % | Amount | Amount | Amount | % | ||||||||||||||||||||||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||||||||||||||||||||||||||
| Other income, net | $ | 9.0 | $ | 2.4 | $ | 6.6 | 275.0 | % | $ | 2.4 | $ | 35.9 | $ | (33.5) | (93.3) | % | |||||||||||||||||||||||||||||||
Other income, net increased for fiscal 20192022 compared to fiscal 20182021 primarily driven bydue to increased foreign currency exchange gains and higher interest income earned on our cash, cash equivalent, and investment balances as a $42.6 million increase inresult of higher interest income,rates for fiscal 2022 compared to fiscal 2021, partially offset by an increase in foreign currency remeasurement and transaction losses. Other income, net increased for fiscal 2018 comparedlosses related to fiscal 2017 primarily driven by a $12.4 million increase in interest income and an increase in foreign currency remeasurement gains. The increase in interest income in both periods was largely due to higher cash, cash equivalents and investments balances and higher yields on these balances during the respective periods.non-designated derivative instruments.
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Provision for Income Taxes
Provision for income taxes consists primarily of income taxes in foreign jurisdictions in which we conduct business withholding taxes, and U.S. state incomewithholding taxes. We maintain a full valuation allowance for domestic and certain foreign deferred tax assets, including net operating loss carryforwards and certain domestic tax credits. In recent years, we reorganized our corporate structure and intercompany relationships to more closely align with the international nature of our business activities. Our corporate structurevaluation allowance has caused, and may continue to cause, disproportionate relationships between our overall effective tax rate and other jurisdictional measures. To the extent we revisit our corporate structure, it may have an impact on our tax provision.
| Year Ended July 31, | Year Ended July 31, | ||||||||||||||||||||||||||||
| 2019 | 2018(1) | Change | 2018(1) | 2017(1) | Change | ||||||||||||||||||||||||
| Amount | Amount | Amount | % | Amount | Amount | Amount | % | ||||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||||||||
| Provision for income taxes | $ | 7.3 | $ | 16.9 | $ | (9.6 | ) | (56.8 | )% | $ | 16.9 | $ | 22.9 | $ | (6.0 | ) | (26.2 | )% | |||||||||||
| Effective tax rate | (9.8 | )% | (16.0 | )% | (16.0 | )% | (12.7 | )% | |||||||||||||||||||||
| Year Ended July 31, | Year Ended July 31, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | Change | 2021 | 2020 | Change | ||||||||||||||||||||||||||||||||||||||||||
| Amount | Amount | Amount | % | Amount | Amount | Amount | % | ||||||||||||||||||||||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||||||||||||||||||||||||||
| Provision for income taxes | $ | 59.8 | $ | 33.9 | $ | 25.9 | 76.4 | % | $ | 33.9 | $ | 35.2 | $ | (1.3) | (3.7) | % | |||||||||||||||||||||||||||||||
| Effective tax rate | (28.9) | % | (7.3) | % | (7.3) | % | (15.2) | % | |||||||||||||||||||||||||||||||||||||||
We recorded an income tax provision for fiscal 20182022. The provision for income taxes for fiscal 2022 was primarily due to foreign income taxes in profitable foreign jurisdictions and withholding taxes, and amortization of our deferred tax charges.taxes. Our provision for income taxes decreasedincreased for fiscal 20182022 compared to fiscal 20172021, primarily due to changes in our valuation allowance related to the acquisition of Evident.ioforeign income and future benefits from alternative minimum tax credits under the TCJA, which was enacted into law in December 2017.withholding taxes. Refer to Note 14.15. Income Taxes in Part II, Item 8 of this Annual Report on Form 10-K for more information on the TCJA and its impact.information.
Liquidity and Capital Resources
| July 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (in millions) | |||||||||||
Working capital(1) | $ | (1,891.4) | $ | (469.4) | |||||||
| Cash, cash equivalents, and investments: | |||||||||||
| Cash and cash equivalents | $ | 2,118.5 | $ | 1,874.2 | |||||||
| Investments | 2,567.9 | 1,915.2 | |||||||||
| Total cash, cash equivalents, and investments | $ | 4,686.4 | $ | 3,789.4 | |||||||
| July 31, | |||||||
| 2019 | 2018 | ||||||
| (in millions) | |||||||
Working capital(1)(2) | $ | 1,611.5 | $ | 2,036.8 | |||
| Cash, cash equivalents, and investments: | |||||||
| Cash and cash equivalents | $ | 961.4 | $ | 2,506.9 | |||
| Investments | 2,417.1 | 1,444.0 | |||||
| Total cash, cash equivalents, and investments | $ | 3,378.5 | $ | 3,950.9 | |||
(1)Current liabilities included net carrying amounts of convertible senior notes of $3.7 billion and $1.6 billion as of July 31, 2022 and 2021, respectively. Refer to Note 10. Debt in Part II, Item 8 of this Annual Report on Form 10-K for information on the Notes.
As of July 31, 2019,2022, our total cash, cash equivalents, and investments of $3.4$4.7 billion were held for general corporate purposes, of which approximately $243.5 million was held outside of the United States.purposes. As of July 31, 2019,2022, we had no unremitted earnings when evaluating our outside basis difference relating to our U.S. investment in foreign subsidiaries. However, there could be local withholding taxes payable due to various foreign countries if certain lower tier earnings are distributed. Withholding taxes that would be payable upon remittance of these lower tier earnings are not expected to be material.
In July 2018, we issued the 2023 Notes with an aggregate principal amount of $1.7 billion. In June 2020, we issued the 2025 Notes with an aggregate principal amount of $2.0 billion. The 2023 Notes mature on July 1, 2023;2023 and the 2025 Notes mature on June 1, 2025; however, under certain circumstances, holders may surrender their 2023 Notes of a series for conversion prior to the applicable maturity date. Upon conversion of the 2023 Notes of a series, we will pay cash equal to the aggregate principal amount of the 2023 Notes of such series to be converted, and, at our election, will pay or deliver cash and/or shares of our common stock for the amount of our conversion obligation in excess of the aggregate principal amount of the Notes of such series being converted. The sale price condition for the Notes was met during the fiscal quarter ended July 31, 2022, and as a result, holders may convert their Notes at any time during the fiscal quarter ending October 31, 2022. If all of the holders of the Notes converted their Notes during this period, we would be obligated to settle the $3.7 billion principal amount of the Notes in cash. We believe that our cash provided by operating activities, our existing cash, cash equivalents and investments, and existing sources of and access to financing will be sufficient to meet our anticipated cash needs should the holders choose to convert their Notes during the fiscal quarter ending October 31, 2022 or hold the 2023 Notes being converted.until maturity on July 1, 2023. As of July 31, 2019,2022, substantially all of the 2023our Notes remained outstanding. Refer to Note 10. Debt in Part II, Item 8 of this Annual Report on Form 10-K for more information on the Notes.
In September 2018, we entered into a credit agreement (the “Credit Agreement”) that provides for a $400.0 million unsecured revolving credit facility (the “Credit Facility”), with an option to increase the amount of the credit facilityCredit Facility by up to an additional $350.0 million, subject to certain conditions.conditions. As of July 31, 2019,2022, there were no amounts outstanding, and we were in compliance with all covenants under the Credit Agreement. Refer to Note 10.10. Debt in Part II, Item 8 of this Annual Report on Form 10-K for more information on the Credit Agreement.
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Capital Return
In February 2019, our board of directors authorized a new $1.0 billion share repurchase program. In December 2020 and August 2021, our board of directors authorized additional $700.0 million and $676.1 million increases, respectively, bringing the total authorization under this share repurchase program to $2.4 billion. Repurchases will be funded from available working capital and may be made at management’s discretion from time to time. ThisThe expiration date of this repurchase program will expire onauthorization was extended to December 31, 2020,2022, and our repurchase program may be suspended or discontinued at any time. As of July 31, 2019, $1.0 billion2022, 85.0 million remained available for future share repurchases under this repurchase program. In February 2020, our board of directors approved the new repurchase of $1.0 billion of our common stock through an accelerated share repurchase (“ASR”) transaction, which was in addition to our current authorization. During fiscal 2020, we completed the ASR transaction with an aggregate of 5.2 million shares of our common stock repurchased and retired. Refer to Note 12.13. Stockholders’ Equity in Part II, Item 8 of this Annual Report on Form 10-K for information on thethese repurchase programs.
Leases and Other Material Cash Requirements
We have entered into various non-cancelable operating leases primarily for our facilities with original lease periods expiring through the year ending July 31, 2032, with the most significant leases relating to our corporate headquarters in Santa Clara, California. As of July 31, 2022, we have total operating lease obligations of $338.4 million recorded on our consolidated balance sheet.
As of July 31, 2022, our commitments to purchase products, components, cloud and other services totaled $2.4 billion. Refer to Note 12. Commitments and Contingencies in Part II, Item 8 of this Annual Report on Form 10-K for more information on these commitments.
Cash Flows
The following table summarizes our cash flows for the years ended July 31, 2019, 2018,2022, 2021, and 2017:2020:
| Year Ended July 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Net cash provided by operating activities | $ | 1,984.7 | $ | 1,503.0 | $ | 1,035.7 | |||||||||||
| Net cash provided by (used in) investing activities | (933.4) | (1,480.6) | 288.0 | ||||||||||||||
| Net cash provided by (used in) financing activities | (806.6) | (1,104.0) | 673.0 | ||||||||||||||
| Net increase (decrease) in cash, cash equivalents, and restricted cash | $ | 244.7 | $ | (1,081.6) | $ | 1,996.7 | |||||||||||
| Year Ended July 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (in millions) | |||||||||||
Net cash provided by operating activities(1) | $ | 1,055.6 | $ | 1,038.1 | $ | 868.8 | |||||
| Net cash used in investing activities | (1,825.9 | ) | (520.0 | ) | (472.6 | ) | |||||
| Net cash provided by (used in) financing activities | (773.9 | ) | 1,245.6 | (386.0 | ) | ||||||
Net increase (decrease) in cash, cash equivalents, and restricted cash(1) | $ | (1,544.2 | ) | $ | 1,763.7 | $ | 10.2 | ||||
Cash from operations could be affected by various risks and uncertainties, including, but not limited to, the effects of COVID-19 and other risks detailed in Part I, Item 1A “Risk Factors” in this Form 10-K. We believe that our cash flow from operations with existing cash and cash equivalents will be sufficient to meet our anticipated cash needs for at least the next 12 months and thereafter for the foreseeable future. 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 products and subscription and support offerings, the costs to acquire or invest in complementary businesses and technologies, the costs to ensure access to adequate manufacturing capacity, the investments in our infrastructure to support the adoption of our cloud-based subscription offerings, the investments inrepayment obligations associated with our new corporate headquarters, andNotes, the continuing market acceptance of our products and subscription and support offerings.offerings and macroeconomic events such as COVID-19. In addition, from time to time, we may incur additional tax liability in connection with certain corporate structuring decisions.
We may also choose to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it 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 may be adversely affected.
Operating Activities
Our operating activities have consisted of net losses adjusted for certain non-cash items and changes in assets and liabilities. Our largest source of cash provided by our operations is receipts from our product revenue and subscription and support revenue.
Cash provided by operating activities during fiscal 20192022 was $1.1$2.0 billion, an increase of $17.5$481.7 million compared to fiscal 20182021. The increase was primarily due to growth of our business as reflected by an increaseincreases in billings and collections during fiscal 2019. This was2022, partially offset by repayments of the 2019 Notes attributablehigher cash expenditure to the debt discount of $97.6 million during fiscal 2019.
Investing Activities
Our investing activities have consisted of capital expenditures, net investment purchases, sales, and maturities, and business acquisitions. We expect to continue such activities as our business grows.
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Cash used in investing activities during fiscal 20192022 was $1.8 billion, an increase$933.4 million, a decrease of $1.3 billion$547.2 million compared to fiscal 2018. 2021. The increasedecrease was primarily due to higher net purchases of investments and an increasea decrease in net cash payments for business acquisitions during fiscal 2019.
Financing Activities
Our financing activities have consisted of net proceeds from the issuancecash used to repurchase shares of the Notes and related transactions, repayments of the 2019 Notes,our common stock, proceeds from sales of shares through employee equity incentive plans, cash used to repurchase shares of our common stock, and payments for tax withholding obligations of certain employees related to the net share settlement of equity awards.
Cash used in financing activities during fiscal 20192022 was $773.9$806.6 million, a changedecrease of $2.0 billion$297.4 million compared to fiscal 2018.2021. The changedecrease was primarily due to net proceedsa decrease in repurchases of $1.5 billion from the issuance of the 2023 Notes, issuance of warrants, and purchase of note hedges receivedour common stock during fiscal 2018 and repayments of the 2019 Notes during fiscal 2019.2022.
Payments Due by Period | |||||||||||||||||||
| Total | Less Than 1 Year | 1-3 Years | 3-5 Years | More Than 5 Years | |||||||||||||||
| (in millions) | |||||||||||||||||||
| 0.75% Convertible Senior Notes due 2023 | $ | 1,693.0 | $ | — | $ | — | $ | 1,693.0 | $ | — | |||||||||
Operating lease obligations(1) | 491.8 | 74.1 | 130.1 | 105.7 | 181.9 | ||||||||||||||
Purchase obligations(2) | 427.6 | 119.2 | 85.9 | 125.0 | 97.5 | ||||||||||||||
Total(3) | $ | 2,612.4 | $ | 193.3 | $ | 216.0 | $ | 1,923.7 | $ | 279.4 | |||||||||
Critical Accounting Estimates
Our consolidated financial statements have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Actual results maycould differ materially from these estimates.those estimates due to risks and uncertainties, including uncertainty in the current economic environment. To the extent that there are material differences between these estimates and our actual results, our future consolidated financial statements will be affected.
We believe that of our significant accounting policies described in Note 1. Description of Business and Summary of Significant Accounting Policies in Part II, Item 8 of this Annual Report on Form 10-K, the critical accounting policies requiring estimates, assumptions, and judgments that have the most significant impact on our consolidated financial statements are described below.
Revenue Recognition
The majority of our contracts with our customers include various combinations of our products and subscriptions and support. Our appliances and software licenses have significant standalone functionalities and capabilities and, accordingly, are distinct from our subscriptions and support services, as the customer can benefit from the product without these services and such services are separately identifiable within the contract. We account for multiple agreements with a single customer as a single contract if the contractual terms and/or substance of those agreements indicate that they may be so closely related that they are, in effect, parts of a single contract. The amount we are due in exchange for delivering on the contract is allocated to each performance obligation based on its relative standalone selling price.
We establish standalone selling price using the prices charged for a deliverable when sold separately. If not observable through past transactions, we estimate the standalone selling price based on our pricing model and our go-to-market strategy, which include
factors such as type of sales channel (reseller, distributor,(channel partner or end-customer), the geographies in which our offerings were sold (domestic or international) and offering type (products, subscriptions, or support). As our business offerings evolve over time, we may be required to modify our estimated standalone selling prices, and as a result the timing and classification of our revenue could be affected.
Deferred Contract Costs
We defer contract costs that are recoverable and incremental to obtaining customer sales contracts. Contract costs, which primarily consist of sales commissions, are amortized on a systematic basis that is consistent with the transfer to the customer of the goods or services to which the asset relates. Sales commissions for initial contracts that are not commensurate with renewal commissions are amortized over a benefit period of five years, consistent with the revenue recognition pattern of the performance obligations in the related contracts including expected renewals. The benefit period is determined by taking into consideration of contract length, technology life, and other quantitative and qualitative factors. The expected renewals are estimated based on historical renewal trends. Sales commissions for initial contracts that are commensurate and sales commissions for renewal contracts are amortized over the related contractual period in proportion to the revenue recognized.
Income Taxes
We account for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our consolidated financial statements or tax returns. In addition, deferred tax assets are recorded for the future benefit of utilizing net operating losses and research and development credit carryforwards. Valuation allowances are provided when necessary to reduce deferred tax assets to the amount expected to be realized.
Significant judgment is required in determining any valuation allowance recorded against deferred tax assets. In assessing the need for a valuation allowance, we consider all available evidence, including past operating results, estimates of future taxable income, and the feasibility of tax planning strategies. In the event that we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made.
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We recognize liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step requires us to estimate and measure the tax benefit as the largest amount that is more likely than not to be realized upon ultimate settlement.
Significant judgment is also required in evaluating our uncertain tax positions and determining our provision for income taxes. Although we believe our reserves are reasonable, no assurance can be given that the final tax outcome of these matters will not be different from that which is reflected in our historical income tax provisions and accruals. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences may impact the provision for income taxes in the period in which such determination is made.
Manufacturing Partner and Supplier Liabilities
We outsource most of our manufacturing, repair, and supply chain management operations to our EMS provider, which procures components and assembles our products based on our demand forecasts. These forecasts of future demand are based upon historical trends and analysis from our sales and product management functions as adjusted for overall market conditions. We accrue for costs for manufacturing purchase commitments in excess of our forecasted demand, including costs for excess components or for carrying costs incurred by our manufacturing partners and component suppliers. Actual component usage and product demand may be materially different from our forecast and could be caused by factors outside of our control, which could have an adverse impact on our results of operations. To date, we have not accrued significant costs associated with this exposure.
Loss Contingencies
We are subject to the possibility of various loss contingencies arising in the ordinary course of business. We accrue for loss contingencies when it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated. If we determine that a loss is possible and the range of the loss can be reasonably determined, then we disclose the range of the possible loss. We regularly evaluate current information available to us to determine whether an accrual is required, an accrual should be adjusted, or a range of possible loss should be disclosed.
From time to time, we are involved in disputes, litigation, and other legal actions. However, there are many uncertainties associated with any litigation, and these actions or other third-party claims against us may cause us to incur substantial settlement charges, which are inherently difficult to estimate and could adversely affect our results of operations. The actual liability in any such
matters may be materially different from our estimates, which could result in the need to adjust our liability and record additional expenses.
Goodwill, Intangibles, and Other Long-Lived Assets
We make significant estimates, assumptions, and judgments when valuing goodwill and other purchased intangible assets in connection with the initial purchase price allocation of an acquired entity, as well as when evaluating impairment of goodwill and other purchased intangible assets on an ongoing basis. These estimates are based upon a number of factors, including historical experience, market conditions, and information obtained from the management of the acquired company. Critical estimates in valuing certain intangible assets include, but are not limited to, cash flows that an asset is expected to generate in the future, discount rates, the time and expense that would be necessary to recreate the assets, and the profit margin a market participant would receive. The amounts and useful lives assigned to identified intangible assets impactsimpact the amount and timing of future amortization expense.
We evaluate goodwill for impairment on an annual basis in our fourth fiscal quarter or more frequently if we believe impairment indicators exist. We have elected to first assess qualitative factors to determine whether it is more likely than not that the fair value of our reporting unit is less than its carrying amount, including goodwill. The qualitative assessment includes our evaluation of relevant events and circumstances affecting our single reporting unit, including macroeconomic, industry, and market conditions, our overall financial performance, and trends in the market price of our common stock. If qualitative factors indicate that it is more likely than not that our reporting unit’s fair value is less than its carrying amount, then we will perform the quantitative impairment test by comparing our reporting unit’s carrying amount, including goodwill, to its fair value. If the carrying amount of our reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to that excess.excess but limited to the total amount of goodwill. To date, the results of our qualitative assessment have indicated that the quantitative goodwill impairment test is not necessary.
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We evaluate long-livedpurchased intangible assets such as property, equipment, and purchased intangibleother long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Such events or changes in circumstances include, but are not limited to, a significant decrease in the fair value of the underlying asset or asset group, a significant decrease in the benefits realized from the acquired assets, difficulty and delays in integrating the business, or a significant change in the operations of the acquired assets or use of an asset or asset group. A long-lived asset is considered impaired if its carrying amount exceeds the estimated future undiscounted cash flows the asset or asset group is expected to generate. Critical estimates in determining whether a long-lived asset is considered impaired include the amount and timing of future cash flows that the asset or asset group is expected to generate. If a long-lived asset is considered to be impaired, the impairment to be recognized is the amount by which the carrying amount of the asset exceeds the fair value of the asset or asset group, which is estimated using a present value technique. Critical estimates in determining the fair value of an asset or asset group and the amount of impairment to recognize include, but are not limited to, the amount and timing of future cash flows that the asset or asset group is expected to generate and the discount rate. Determining the fair value of an asset or asset group is highly judgmental in nature and involves the use of significant estimates and assumptions for market participants. We base our fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. Actual future results may differ from those estimates.
Recent Accounting Pronouncements
Refer to “Recently Issued Accounting Pronouncements” in Note 1. Description of Business and Summary of Significant Accounting Policies in Part II, Item 8 of this Annual Report on Form 10-K for a description of recent accounting pronouncements and our expectation of their impact, if any, on our results of operations and financial condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Exchange Risk
Our sales contracts are primarily denominated in U.S. dollars. A portion of our operating expenses are incurred outside of the United States and are denominated in foreign currencies and are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the euro, British pound, Singapore dollar, Israeli shekel, and Japanese yen.rates. Additionally, fluctuations in foreign currency exchange rates may cause us to recognize transaction gains and losses in our statement of operations. The effect of an immediate 10% adverse change in foreign exchange rates on monetary assets and liabilities at July 31, 20192022 would not be material to
our financial condition or results of operations. As of July 31, 2019,2022, foreign currency transaction gains and losses and exchange rate fluctuations have not been material to our consolidated financial statements. We enter into foreign currency derivative contracts with maturities of 1516 months or less which we designate as cash flow hedges to manage the foreign currency exchange rate risk associated with our foreign currency denominated operating expenditures. The effectiveness of our existing hedging transactions and the availability and effectiveness of any hedging transactions we may decide to enter into in the future may be limited, and we may not be able to successfully hedge our exposure, which could adversely affect our financial condition and operating results. Refer to Note 5.6. Derivative Instruments in Part II, Item 8 of this Annual Report on Form 10-K for more information.
As our international operations grow, our risks associated with fluctuationfluctuations in foreign currency exchange rates will become greater, and we will continue to reassess our approach to managing this risk. In addition, a weakening U.S. dollar can increase the costs of our international expansion and a strengthening U.S. dollar can increase the real cost of our products to our end-customers outside of the United States, leading to delays in the purchase of our products and services. For additional information, see the risk factor entitled “We“We are exposed to fluctuations in foreign currency exchange rates, which could negatively affect our financial condition and operating results”results.” in Part 1, Item 1A of this Annual Report on Form 10-K.
Interest Rate Risk
The primary objectives of our investment activities are to preserve principal, provide liquidity, and maximize income without significantly increasing risk. SomeMost of the securities we invest in are subject to interest rate risk. To minimize this risk, we maintain our portfolio of cash, cash equivalents, and short-term investments in a variety of securities, including commercial paper, money market funds, U.S. government and agency securities, and corporate debt securities, and asset-backed securities. DueTo assess the interest rate risk, we performed a sensitivity analysis to determine the short duration and conservative nature of our investment portfolio,impact a movement of 10%change in market interest rates would not have on the value of the investment portfolio. Based on investment positions as of July 31, 2022, a material impact on our operating results andhypothetical 100 basis point increase in interest rates across all maturities would result in a $20.6 million decline in the totalfair market value of the portfolio. The effect of an immediate 10% changeSuch losses would only be realized if we sold the investments prior to maturity. Conversely, a hypothetical 100 basis point decrease in interest rates at July 31, 2019 would not have been materiallead to our operating results anda $20.6 million increase in the totalfair market value of the portfolio assuming consistent investment levels.
In July 2018, we issued $1.7 billion aggregate principal amount of 0.75% Convertible Senior Notes due 2023 (the “2023 Notes”) and in June 2020, we issued $2.0 billion aggregate principal amount of 0.375% Convertible Senior Notes due 2025 (the “2025 Notes”). We carry these instruments at face value less unamortized discount and unamortized issuance costs on our consolidated balance sheets. As these instruments have a fixed annual interest rate, we have no financial and economic interest exposure associated with changes in interest rates. However, the fair value of fixed rate instruments fluctuates when interest rates change, and additionally, in the case of either series of Notes, when the market price of our common stock fluctuates.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firm (PCAOB ID: 42) | |||||
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Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Palo Alto Networks, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Palo Alto Networks, Inc. (the Company) as of July 31, 20192022 and 2018,2021, the related consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for each of the three years in the period ended July 31, 2019,2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at July 31, 20192022 and 2018,2021, and the results of its operations and its cash flows for each of the three years in the period ended July 31, 2019,2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of July 31, 2019,2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated September 9, 20196, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit MattersMatter
The critical audit mattersmatter communicated below are mattersis a matter arising from the current period audit of the financial statements that werewas communicated or required to be communicated to the audit committee and that: (1) relaterelates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit mattersmatter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit mattersmatter below, providing a separate opinionsopinion on the critical audit mattersmatter or on the accounts or disclosures to which they relate.
it relates.
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| Revenue Recognition | ||||||||
| Description of the Matter | As described in Note 1 to the consolidated financial statements, the Auditing the Company’s revenue recognition was | |||||||
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of the Company’s process and controls to identify and determine the distinct performance obligations and the timing of revenue recognition. | |||||||
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2009.
San Jose, California
September 9, 20196, 2022
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Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Palo Alto Networks, Inc.
Opinion on Internal Control Over Financial Reporting
We have audited Palo Alto Networks, Inc.’s internal control over financial reporting as of July 31, 2019,2022, based on criteria established in Internal Control–Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Palo Alto Networks, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of July 31, 2019,2022, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of July 31, 20192022 and 2018,2021, the related consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for each of the three years in the period ended July 31, 2019,2022, and the related notes and our report dated September 9, 20196, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
San Jose, California
September 9, 20196, 2022
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PALOALTO NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except per share data)
| July 31, | July 31, | |||||||||||||||||
| 2019 | 2018 | 2022 | 2021 | |||||||||||||||
| (As Adjusted) | ||||||||||||||||||
| Assets | Assets | |||||||||||||||||
| Current assets: | Current assets: | |||||||||||||||||
| Cash and cash equivalents | $ | 961.4 | $ | 2,506.9 | Cash and cash equivalents | $ | 2,118.5 | $ | 1,874.2 | |||||||||
| Short-term investments | 1,841.7 | 896.5 | Short-term investments | 1,516.0 | 1,026.9 | |||||||||||||
| Accounts receivable, net of allowance for doubtful accounts of $0.8 and $1.2 at July 31, 2019 and July 31, 2018, respectively | 582.4 | 467.0 | ||||||||||||||||
| Accounts receivable, net of allowance for credit losses of $8.9 and $11.2 at July 31, 2022 and July 31, 2021, respectively | Accounts receivable, net of allowance for credit losses of $8.9 and $11.2 at July 31, 2022 and July 31, 2021, respectively | 2,142.5 | 1,240.4 | |||||||||||||||
| Short-term deferred contract costs | Short-term deferred contract costs | 317.7 | 276.5 | |||||||||||||||
| Prepaid expenses and other current assets | 279.3 | 268.1 | Prepaid expenses and other current assets | 320.2 | 229.3 | |||||||||||||
| Total current assets | 3,664.8 | 4,138.5 | Total current assets | 6,414.9 | 4,647.3 | |||||||||||||
| Property and equipment, net | 296.0 | 273.1 | Property and equipment, net | 357.8 | 318.4 | |||||||||||||
| Operating lease right-of-use assets | Operating lease right-of-use assets | 242.0 | 262.9 | |||||||||||||||
| Long-term investments | 575.4 | 547.5 | Long-term investments | 1,051.9 | 888.3 | |||||||||||||
| Long-term deferred contract costs | Long-term deferred contract costs | 550.1 | 494.6 | |||||||||||||||
| Goodwill | 1,352.3 | 522.8 | Goodwill | 2,747.7 | 2,710.1 | |||||||||||||
| Intangible assets, net | 280.6 | 140.8 | Intangible assets, net | 384.5 | 498.6 | |||||||||||||
| Other assets | 423.1 | 326.2 | Other assets | 504.7 | 421.4 | |||||||||||||
| Total assets | $ | 6,592.2 | $ | 5,948.9 | Total assets | $ | 12,253.6 | $ | 10,241.6 | |||||||||
| Liabilities, temporary equity, and stockholders’ equity | ||||||||||||||||||
| Liabilities, temporary equity and stockholders’ equity | Liabilities, temporary equity and stockholders’ equity | |||||||||||||||||
| Current liabilities: | Current liabilities: | |||||||||||||||||
| Accounts payable | $ | 73.3 | $ | 49.4 | Accounts payable | $ | 128.0 | $ | 56.9 | |||||||||
| Accrued compensation | 235.5 | 163.7 | Accrued compensation | 461.1 | 430.6 | |||||||||||||
| Accrued and other liabilities | 162.4 | 124.6 | Accrued and other liabilities | 399.2 | 329.4 | |||||||||||||
| Deferred revenue | 1,582.1 | 1,213.6 | Deferred revenue | 3,641.2 | 2,741.9 | |||||||||||||
| Convertible senior notes, net | — | 550.4 | Convertible senior notes, net | 3,676.8 | 1,557.9 | |||||||||||||
| Total current liabilities | 2,053.3 | 2,101.7 | Total current liabilities | 8,306.3 | 5,116.7 | |||||||||||||
| Convertible senior notes, net | 1,430.0 | 1,369.7 | Convertible senior notes, net | — | 1,668.1 | |||||||||||||
| Long-term deferred revenue | 1,306.6 | 1,065.7 | Long-term deferred revenue | 3,352.8 | 2,282.1 | |||||||||||||
| Long-term operating lease liabilities | Long-term operating lease liabilities | 276.1 | 313.4 | |||||||||||||||
| Other long-term liabilities | 216.0 | 229.6 | Other long-term liabilities | 108.4 | 97.7 | |||||||||||||
| Commitments and contingencies (Note 11) | ||||||||||||||||||
| Total liabilities | Total liabilities | 12,043.6 | 9,478.0 | |||||||||||||||
| Commitments and contingencies (Note 12) | Commitments and contingencies (Note 12) | |||||||||||||||||
| Temporary equity | — | 21.9 | Temporary equity | — | 129.1 | |||||||||||||
| Stockholders’ equity: | Stockholders’ equity: | |||||||||||||||||
| Preferred stock; $0.0001 par value; 100.0 shares authorized; none issued and outstanding at July 31, 2019 and July 31, 2018 | — | — | ||||||||||||||||
| Common stock and additional paid-in capital; $0.0001 par value; 1,000.0 shares authorized; 96.8 and 93.6 shares issued and outstanding at July 31, 2019 and July 31, 2018, respectively | 2,490.9 | 1,967.4 | ||||||||||||||||
| Preferred stock; $0.0001 par value; 100.0 shares authorized; none issued and outstanding at July 31, 2022 and July 31, 2021 | Preferred stock; $0.0001 par value; 100.0 shares authorized; none issued and outstanding at July 31, 2022 and July 31, 2021 | — | — | |||||||||||||||
| Common stock and additional paid-in capital; $0.0001 par value; 1,000.0 shares authorized; 99.6 and 97.3 shares issued and outstanding at July 31, 2022 and July 31, 2021, respectively | Common stock and additional paid-in capital; $0.0001 par value; 1,000.0 shares authorized; 99.6 and 97.3 shares issued and outstanding at July 31, 2022 and July 31, 2021, respectively | 1,932.7 | 2,311.2 | |||||||||||||||
| Accumulated other comprehensive loss | (3.7 | ) | (16.4 | ) | Accumulated other comprehensive loss | (55.6) | (9.9) | |||||||||||
| Accumulated deficit | (900.9 | ) | (790.7 | ) | Accumulated deficit | (1,667.1) | (1,666.8) | |||||||||||
| Total stockholders’ equity | 1,586.3 | 1,160.3 | Total stockholders’ equity | 210.0 | 634.5 | |||||||||||||
| Total liabilities, temporary equity, and stockholders’ equity | $ | 6,592.2 | $ | 5,948.9 | ||||||||||||||
| Total liabilities, temporary equity and stockholders’ equity | Total liabilities, temporary equity and stockholders’ equity | $ | 12,253.6 | $ | 10,241.6 | |||||||||||||
See notes to consolidated financial statements.
- 62 -
PALO ALTO NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
| Year Ended July 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Revenue: | |||||||||||||||||
| Product | $ | 1,363.1 | $ | 1,120.3 | $ | 1,064.2 | |||||||||||
| Subscription and support | 4,138.4 | 3,135.8 | 2,344.2 | ||||||||||||||
| Total revenue | 5,501.5 | 4,256.1 | 3,408.4 | ||||||||||||||
| Cost of revenue: | |||||||||||||||||
| Product | 455.5 | 308.5 | 294.4 | ||||||||||||||
| Subscription and support | 1,263.2 | 966.4 | 705.1 | ||||||||||||||
| Total cost of revenue | 1,718.7 | 1,274.9 | 999.5 | ||||||||||||||
| Total gross profit | 3,782.8 | 2,981.2 | 2,408.9 | ||||||||||||||
| Operating expenses: | |||||||||||||||||
| Research and development | 1,417.7 | 1,140.4 | 768.1 | ||||||||||||||
| Sales and marketing | 2,148.9 | 1,753.8 | 1,520.2 | ||||||||||||||
| General and administrative | 405.0 | 391.1 | 299.6 | ||||||||||||||
| Total operating expenses | 3,971.6 | 3,285.3 | 2,587.9 | ||||||||||||||
| Operating loss | (188.8) | (304.1) | (179.0) | ||||||||||||||
| Interest expense | (27.4) | (163.3) | (88.7) | ||||||||||||||
| Other income, net | 9.0 | 2.4 | 35.9 | ||||||||||||||
| Loss before income taxes | (207.2) | (465.0) | (231.8) | ||||||||||||||
| Provision for income taxes | 59.8 | 33.9 | 35.2 | ||||||||||||||
| Net loss | $ | (267.0) | $ | (498.9) | $ | (267.0) | |||||||||||
| Net loss per share, basic and diluted | $ | (2.71) | $ | (5.18) | $ | (2.76) | |||||||||||
| Weighted-average shares used to compute net loss per share, basic and diluted | 98.5 | 96.4 | 96.9 | ||||||||||||||
| Year Ended July 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (As Adjusted) | (As Adjusted) | ||||||||||
| Revenue: | |||||||||||
| Product | $ | 1,096.2 | $ | 879.8 | $ | 708.5 | |||||
| Subscription and support | 1,803.4 | 1,393.8 | 1,046.6 | ||||||||
| Total revenue | 2,899.6 | 2,273.6 | 1,755.1 | ||||||||
| Cost of revenue: | |||||||||||
| Product | 315.9 | 272.4 | 201.4 | ||||||||
| Subscription and support | 492.5 | 372.7 | 275.0 | ||||||||
| Total cost of revenue | 808.4 | 645.1 | 476.4 | ||||||||
| Total gross profit | 2,091.2 | 1,628.5 | 1,278.7 | ||||||||
| Operating expenses: | |||||||||||
| Research and development | 539.5 | 400.7 | 347.4 | ||||||||
| Sales and marketing | 1,344.0 | 1,074.2 | 898.8 | ||||||||
| General and administrative | 261.8 | 257.8 | 198.3 | ||||||||
| Total operating expenses | 2,145.3 | 1,732.7 | 1,444.5 | ||||||||
| Operating loss | (54.1 | ) | (104.2 | ) | (165.8 | ) | |||||
| Interest expense | (83.9 | ) | (29.6 | ) | (24.5 | ) | |||||
| Other income, net | 63.4 | 28.5 | 10.2 | ||||||||
| Loss before income taxes | (74.6 | ) | (105.3 | ) | (180.1 | ) | |||||
| Provision for income taxes | 7.3 | 16.9 | 22.9 | ||||||||
| Net loss | $ | (81.9 | ) | $ | (122.2 | ) | $ | (203.0 | ) | ||
| Net loss per share, basic and diluted | $ | (0.87 | ) | $ | (1.33 | ) | $ | (2.24 | ) | ||
| Weighted-average shares used to compute net loss per share, basic and diluted | 94.5 | 91.7 | 90.6 | ||||||||
See notes to consolidated financial statements.
- 63 -
PALO ALTO NETWORKS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In millions)
| Year Ended July 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Net loss | $ | (267.0) | $ | (498.9) | $ | (267.0) | |||||||||||
| Other comprehensive income (loss), net of tax: | |||||||||||||||||
| Change in unrealized gains (losses) on investments | (25.0) | (3.0) | 1.0 | ||||||||||||||
| Cash flow hedges: | |||||||||||||||||
| Change in unrealized gains (losses) | (54.0) | 1.1 | 8.3 | ||||||||||||||
| Net realized (gains) losses reclassified into earnings | 33.3 | (18.5) | 4.9 | ||||||||||||||
| Net change on cash flow hedges | (20.7) | (17.4) | 13.2 | ||||||||||||||
| Other comprehensive income (loss) | (45.7) | (20.4) | 14.2 | ||||||||||||||
| Comprehensive loss | $ | (312.7) | $ | (519.3) | $ | (252.8) | |||||||||||
| Year Ended July 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (As Adjusted) | (As Adjusted) | ||||||||||
| Net loss | $ | (81.9 | ) | $ | (122.2 | ) | $ | (203.0 | ) | ||
| Other comprehensive income (loss), net of tax: | |||||||||||
| Change in unrealized gains (losses) on investments | 10.4 | (7.5 | ) | (4.3 | ) | ||||||
| Change in unrealized gains (losses) on cash flow hedges | 2.3 | (5.5 | ) | (0.1 | ) | ||||||
| Other comprehensive income (loss) | 12.7 | (13.0 | ) | (4.4 | ) | ||||||
| Comprehensive loss | $ | (69.2 | ) | $ | (135.2 | ) | $ | (207.4 | ) | ||
See notes to consolidated financial statements.statements.
- 64 -
PALO ALTO NETWORKS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In millions)
| Common Stock and Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Accumulated Deficit | Total Stockholders’ Equity | ||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||
| Balance as of July 31, 2019 | 96.8 | $ | 2,490.9 | $ | (3.7) | $ | (900.9) | $ | 1,586.3 | ||||||||||||||||||||
| Net loss | — | — | — | (267.0) | (267.0) | ||||||||||||||||||||||||
| Other comprehensive income | — | — | 14.2 | — | 14.2 | ||||||||||||||||||||||||
| Issuance of common stock in connection with employee equity incentive plans | 3.6 | 84.0 | — | — | 84.0 | ||||||||||||||||||||||||
| Taxes paid related to net share settlement of equity awards | — | (22.7) | — | — | (22.7) | ||||||||||||||||||||||||
| Share-based compensation for equity-based awards | — | 674.4 | — | — | 674.4 | ||||||||||||||||||||||||
| Repurchase and retirement of common stock | (6.1) | (1,198.1) | — | — | (1,198.1) | ||||||||||||||||||||||||
| Settlement of warrants | 2.0 | — | — | — | — | ||||||||||||||||||||||||
| Equity component of convertible senior notes, net | — | 398.7 | — | — | 398.7 | ||||||||||||||||||||||||
| Issuance of warrants | — | 202.8 | — | — | 202.8 | ||||||||||||||||||||||||
| Purchase of note hedges | — | (370.8) | — | — | (370.8) | ||||||||||||||||||||||||
| Balance as of July 31, 2020 | 96.3 | 2,259.2 | 10.5 | (1,167.9) | 1,101.8 | ||||||||||||||||||||||||
| Net loss | — | — | — | (498.9) | (498.9) | ||||||||||||||||||||||||
| Other comprehensive loss | — | — | (20.4) | — | (20.4) | ||||||||||||||||||||||||
| Issuance of common stock in connection with employee equity incentive plans | 3.7 | 104.0 | — | — | 104.0 | ||||||||||||||||||||||||
| Taxes paid related to net share settlement of equity awards | — | (28.9) | — | — | (28.9) | ||||||||||||||||||||||||
| Share-based compensation for equity-based awards | — | 943.4 | — | — | 943.4 | ||||||||||||||||||||||||
| Repurchase and retirement of common stock | (4.0) | (1,178.1) | — | — | (1,178.1) | ||||||||||||||||||||||||
| Issuance of common and restricted common stock in connection with acquisitions | 1.3 | 340.7 | — | — | 340.7 | ||||||||||||||||||||||||
| Temporary equity reclassification | — | (129.1) | — | — | (129.1) | ||||||||||||||||||||||||
| Balance as of July 31, 2021 | 97.3 | 2,311.2 | (9.9) | (1,666.8) | 634.5 | ||||||||||||||||||||||||
| Cumulative-effect adjustment from adoption of new accounting pronouncement | — | (581.9) | — | 266.7 | (315.2) | ||||||||||||||||||||||||
| Net loss | — | — | — | (267.0) | (267.0) | ||||||||||||||||||||||||
| Other comprehensive loss | — | — | (45.7) | — | (45.7) | ||||||||||||||||||||||||
| Issuance of common stock in connection with employee equity incentive plans | 4.1 | 137.3 | — | — | 137.3 | ||||||||||||||||||||||||
| Taxes paid related to net share settlement of equity awards | — | (50.3) | — | — | (50.3) | ||||||||||||||||||||||||
| Share-based compensation for equity-based awards | — | 1,031.4 | — | — | 1,031.4 | ||||||||||||||||||||||||
| Repurchase and retirement of common stock | (1.8) | (915.0) | — | — | (915.0) | ||||||||||||||||||||||||
| Balance as of July 31, 2022 | 99.6 | $ | 1,932.7 | $ | (55.6) | $ | (1,667.1) | $ | 210.0 | ||||||||||||||||||||
Common Stock and Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Accumulated Deficit | Total Stockholders’ Equity | |||||||||||||||
| Shares | Amount | |||||||||||||||||
| (As Adjusted) | (As Adjusted) | |||||||||||||||||
| Balance as of July 31, 2016 | 90.5 | $ | 1,515.5 | $ | 1.0 | $ | (467.0 | ) | $ | 1,049.5 | ||||||||
| Cumulative-effect adjustment from adoption of new accounting pronouncement | — | 2.0 | — | 1.5 | 3.5 | |||||||||||||
| Net loss | — | — | — | (203.0 | ) | (203.0 | ) | |||||||||||
| Other comprehensive loss | — | — | (4.4 | ) | — | (4.4 | ) | |||||||||||
| Issuance of common stock in connection with employee equity incentive plans | 4.3 | 46.3 | — | — | 46.3 | |||||||||||||
| Repurchase and retirement of common stock | (3.3 | ) | (420.1 | ) | — | — | (420.1 | ) | ||||||||||
| Taxes paid related to net share settlement of equity awards | — | (21.4 | ) | — | — | (21.4 | ) | |||||||||||
| Share-based compensation for equity-based awards | — | 477.4 | — | — | 477.4 | |||||||||||||
| Balance as of July 31, 2017 | 91.5 | 1,599.7 | (3.4 | ) | (668.5 | ) | 927.8 | |||||||||||
| Net loss | — | — | — | (122.2 | ) | (122.2 | ) | |||||||||||
| Other comprehensive loss | — | — | (13.0 | ) | — | (13.0 | ) | |||||||||||
| Issuance of common stock in connection with employee equity incentive plans | 3.8 | 55.0 | — | — | 55.0 | |||||||||||||
| Repurchase and retirement of common stock | (1.7 | ) | (250.0 | ) | — | — | (250.0 | ) | ||||||||||
| Taxes paid related to net share settlement of equity awards | — | (43.7 | ) | — | — | (43.7 | ) | |||||||||||
| Share-based compensation for equity-based awards | — | 502.5 | — | — | 502.5 | |||||||||||||
| Temporary equity reclassification | — | (21.9 | ) | — | — | (21.9 | ) | |||||||||||
| Equity component of convertible senior notes, net | — | 312.4 | — | — | 312.4 | |||||||||||||
| Issuance of warrants | — | 145.4 | — | — | 145.4 | |||||||||||||
| Purchase of note hedges | — | (332.0 | ) | — | — | (332.0 | ) | |||||||||||
| Balance as of July 31, 2018 | 93.6 | 1,967.4 | (16.4 | ) | (790.7 | ) | 1,160.3 | |||||||||||
| Cumulative-effect adjustment from adoption of new accounting pronouncement | — | — | — | (28.3 | ) | (28.3 | ) | |||||||||||
| Net loss | — | — | — | (81.9 | ) | (81.9 | ) | |||||||||||
| Other comprehensive income | — | — | 12.7 | — | 12.7 | |||||||||||||
| Issuance of common stock in connection with employee equity incentive plans | 3.8 | 72.0 | — | — | 72.0 | |||||||||||||
| Taxes paid related to net share settlement of equity awards | — | (33.2 | ) | — | — | (33.2 | ) | |||||||||||
| Share-based compensation for equity-based awards | — | 575.5 | — | — | 575.5 | |||||||||||||
| Repurchase and retirement of common stock | (1.9 | ) | (330.0 | ) | — | — | (330.0 | ) | ||||||||||
| Settlement of convertible notes | 2.5 | (12.2 | ) | — | — | (12.2 | ) | |||||||||||
| Common stock received from exercise of note hedges | (2.5 | ) | — | — | — | — | ||||||||||||
| Issuance of common and restricted common stock in connection with acquisitions | 1.3 | 229.5 | — | — | 229.5 | |||||||||||||
| Temporary equity reclassification | — | 21.9 | — | — | 21.9 | |||||||||||||
| Balance as of July 31, 2019 | 96.8 | $ | 2,490.9 | $ | (3.7 | ) | $ | (900.9 | ) | $ | 1,586.3 | |||||||
See notes to consolidated financial statements.
- 65 -
PALO ALTO NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
| Year Ended July 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Cash flows from operating activities | |||||||||||||||||
| Net loss | $ | (267.0) | $ | (498.9) | $ | (267.0) | |||||||||||
| Adjustments to reconcile net loss to net cash provided by operating activities: | |||||||||||||||||
| Share-based compensation for equity-based awards | 1,011.1 | 894.5 | 658.4 | ||||||||||||||
| Depreciation and amortization | 282.6 | 260.4 | 206.1 | ||||||||||||||
| Gain related to facility exit | — | — | (3.1) | ||||||||||||||
| Amortization of deferred contract costs | 362.1 | 298.0 | 254.4 | ||||||||||||||
| Amortization of debt discount and debt issuance costs | 7.2 | 142.9 | 73.9 | ||||||||||||||
| Reduction of operating lease right-of-use assets | 54.4 | 44.5 | 47.4 | ||||||||||||||
| Amortization of investment premiums, net of accretion of purchase discounts | 13.5 | 13.1 | (6.2) | ||||||||||||||
| Repayments of convertible senior notes attributable to debt discount | — | (0.1) | — | ||||||||||||||
| Changes in operating assets and liabilities, net of effects of acquisitions: | |||||||||||||||||
| Accounts receivable, net | (902.0) | (172.4) | (435.6) | ||||||||||||||
| Deferred contract costs | (458.8) | (440.8) | (407.4) | ||||||||||||||
| Prepaid expenses and other assets | (141.0) | (299.1) | (1.6) | ||||||||||||||
| Accounts payable | 69.3 | (11.8) | (12.8) | ||||||||||||||
| Accrued compensation | 30.4 | 105.1 | 75.7 | ||||||||||||||
| Accrued and other liabilities | (47.1) | (28.5) | (39.8) | ||||||||||||||
| Deferred revenue | 1,970.0 | 1,196.1 | 893.3 | ||||||||||||||
| Net cash provided by operating activities | 1,984.7 | 1,503.0 | 1,035.7 | ||||||||||||||
| Cash flows from investing activities | |||||||||||||||||
| Purchases of investments | (2,271.7) | (1,958.9) | (1,180.8) | ||||||||||||||
| Proceeds from sales of investments | 449.2 | 131.1 | 314.0 | ||||||||||||||
| Proceeds from maturities of investments | 1,118.9 | 1,240.5 | 1,952.7 | ||||||||||||||
| Business acquisitions, net of cash acquired | (37.0) | (777.3) | (583.5) | ||||||||||||||
| Purchases of property, equipment, and other assets | (192.8) | (116.0) | (214.4) | ||||||||||||||
| Net cash provided by (used in) investing activities | (933.4) | (1,480.6) | 288.0 | ||||||||||||||
| Cash flows from financing activities | |||||||||||||||||
| Repayments of convertible senior notes | (0.6) | (0.9) | — | ||||||||||||||
| Payments for debt issuance costs | — | (0.2) | — | ||||||||||||||
| Proceeds from borrowings on convertible senior notes, net | — | — | 1,979.1 | ||||||||||||||
| Proceeds from issuance of warrants | — | — | 202.8 | ||||||||||||||
| Purchase of note hedges | — | — | (370.8) | ||||||||||||||
| Repurchases of common stock | (892.3) | (1,178.1) | (1,198.1) | ||||||||||||||
| Proceeds from sales of shares through employee equity incentive plans | 136.6 | 104.0 | 84.0 | ||||||||||||||
| Payments for taxes related to net share settlement of equity awards | (50.3) | (28.8) | (22.7) | ||||||||||||||
| Payment of deferred consideration related to prior year business acquisition | — | — | (1.3) | ||||||||||||||
| Net cash provided by (used in) financing activities | (806.6) | (1,104.0) | 673.0 | ||||||||||||||
| Net increase (decrease) in cash, cash equivalents, and restricted cash | 244.7 | (1,081.6) | 1,996.7 | ||||||||||||||
| Cash, cash equivalents, and restricted cash—beginning of period | 1,880.1 | 2,961.7 | 965.0 | ||||||||||||||
| Cash, cash equivalents, and restricted cash—end of period | $ | 2,124.8 | $ | 1,880.1 | $ | 2,961.7 | |||||||||||
| Reconciliation of cash, cash equivalents, and restricted cash to the consolidated balance sheets | |||||||||||||||||
| Cash and cash equivalents | $ | 2,118.5 | $ | 1,874.2 | $ | 2,958.0 | |||||||||||
| Restricted cash included in prepaid expenses and other current assets | 6.3 | 5.4 | 2.8 | ||||||||||||||
| Restricted cash included in other assets | — | 0.5 | 0.9 | ||||||||||||||
| Total cash, cash equivalents, and restricted cash | $ | 2,124.8 | $ | 1,880.1 | $ | 2,961.7 | |||||||||||
| Non-cash investing and financing activities | |||||||||||||||||
| Equity consideration for business acquisitions | $ | (2.5) | $ | (365.4) | $ | (11.0) | |||||||||||
| Supplemental disclosures of cash flow information | |||||||||||||||||
| Cash paid for income taxes | $ | 34.6 | $ | 24.9 | $ | 17.2 | |||||||||||
| Cash paid for contractual interest | $ | 20.2 | $ | 20.0 | $ | 13.5 | |||||||||||
| Year Ended July 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (As Adjusted) | (As Adjusted) | ||||||||||
| Cash flows from operating activities | |||||||||||
| Net loss | $ | (81.9 | ) | $ | (122.2 | ) | $ | (203.0 | ) | ||
| Adjustments to reconcile net loss to net cash provided by operating activities: | |||||||||||
| Share-based compensation for equity-based awards | 567.7 | 496.7 | 474.5 | ||||||||
| Depreciation and amortization | 153.8 | 96.4 | 59.8 | ||||||||
| Cease-use loss and asset impairment related to facility exit | 7.0 | 41.1 | 20.9 | ||||||||
| Amortization of deferred contract costs | 223.8 | 149.8 | 107.4 | ||||||||
| Amortization of debt discount and debt issuance costs | 70.2 | 28.8 | 24.5 | ||||||||
| Amortization of investment premiums, net of accretion of purchase discounts | (17.5 | ) | 0.5 | 2.7 | |||||||
| Loss on conversions of convertible senior notes | 2.6 | — | — | ||||||||
| Repayments of convertible senior notes attributable to debt discount | (97.6 | ) | — | — | |||||||
| Changes in operating assets and liabilities, net of effects of acquisitions: | |||||||||||
| Accounts receivable, net | (108.7 | ) | (33.7 | ) | (42.1 | ) | |||||
| Prepaid expenses and other assets | (332.5 | ) | (299.1 | ) | (175.3 | ) | |||||
| Accounts payable | 32.3 | 3.7 | 5.9 | ||||||||
| Accrued compensation | 66.8 | 44.2 | 42.8 | ||||||||
| Accrued and other liabilities | (20.6 | ) | 49.3 | 54.1 | |||||||
| Deferred revenue | 590.2 | 582.6 | 496.6 | ||||||||
| Net cash provided by operating activities | 1,055.6 | 1,038.1 | 868.8 | ||||||||
| Cash flows from investing activities | |||||||||||
| Purchases of investments | (2,984.6 | ) | (725.7 | ) | (995.9 | ) | |||||
| Proceeds from sales of investments | 6.5 | — | — | ||||||||
| Proceeds from maturities of investments | 2,057.1 | 691.8 | 777.4 | ||||||||
| Business acquisitions, net of cash acquired | (773.7 | ) | (374.1 | ) | (90.7 | ) | |||||
| Purchases of property, equipment, and other assets | (131.2 | ) | (112.0 | ) | (163.4 | ) | |||||
| Net cash used in investing activities | (1,825.9 | ) | (520.0 | ) | (472.6 | ) | |||||
| Cash flows from financing activities | |||||||||||
| Repayments of convertible senior notes attributable to principal and equity component | (477.4 | ) | — | — | |||||||
| Payments for debt issuance costs | (3.7 | ) | — | — | |||||||
| Proceeds from borrowings on convertible senior notes, net | — | 1,682.4 | — | ||||||||
| Proceeds from issuance of warrants | — | 145.4 | — | ||||||||
| Purchase of note hedges | — | (332.0 | ) | — | |||||||
| Repurchases of common stock | (330.0 | ) | (259.1 | ) | (411.0 | ) | |||||
| Proceeds from sales of shares through employee equity incentive plans | 71.7 | 52.6 | 46.4 | ||||||||
| Payments for taxes related to net share settlement of equity awards | (33.2 | ) | (43.7 | ) | (21.4 | ) | |||||
| Payment of deferred consideration related to prior year business acquisition | (1.3 | ) | — | — | |||||||
| Net cash provided by (used in) financing activities | (773.9 | ) | 1,245.6 | (386.0 | ) | ||||||
| Net increase (decrease) in cash, cash equivalents, and restricted cash | (1,544.2 | ) | 1,763.7 | 10.2 | |||||||
| Cash, cash equivalents, and restricted cash—beginning of period | 2,509.2 | 745.5 | 735.3 | ||||||||
| Cash, cash equivalents, and restricted cash—end of period | $ | 965.0 | $ | 2,509.2 | $ | 745.5 | |||||
| Year Ended July 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (As Adjusted) | (As Adjusted) | ||||||||||
| Reconciliation of cash, cash equivalents, and restricted cash to the consolidated balance sheets | |||||||||||
| Cash and cash equivalents | $ | 961.4 | $ | 2,506.9 | $ | 744.3 | |||||
| Restricted cash included in prepaid expenses and other current assets | 1.9 | 1.1 | 0.6 | ||||||||
| Restricted cash included in other assets | 1.7 | 1.2 | 0.6 | ||||||||
| Total cash, cash equivalents, and restricted cash | $ | 965.0 | $ | 2,509.2 | $ | 745.5 | |||||
| Non-cash investing and financing activities | |||||||||||
| Equity consideration for business acquisitions | $ | (229.5 | ) | $ | — | $ | — | ||||
| Property and equipment acquired through lease incentives | $ | — | $ | 37.8 | $ | — | |||||
| Supplemental disclosures of cash flow information | |||||||||||
| Cash paid for income taxes | $ | 22.0 | $ | 11.2 | $ | 9.0 | |||||
| Cash paid for contractual interest | $ | 13.5 | $ | 0.8 | $ | — | |||||
See notes to consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business and Summary of Significant Accounting Policies
Description of Business
Palo Alto Networks, Inc. (the “Company,” “we,” “us,” or “our”), locatedheadquartered in Santa Clara, California, was incorporated in March 2005 under the laws of the State of Delaware and commenced operations in April 2005. We offer a platform that empowersempower enterprises, organizations, service providers, and government entities to secure their organizationsusers, networks, clouds and endpoints by safely enabling applicationsdelivering comprehensive cybersecurity backed by artificial intelligence and data running in their networks, on their endpoints, and in the cloud, and by preventing breaches that stem from targeted cyberattacks.automation.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”). The consolidated financial statements include all adjustments necessary for a fair presentation of our annual results. All adjustments are of a normal recurring nature. Certain prior period amounts have been reclassified to conform to our current period presentation. In addition, certain prior period amounts have been adjusted due to our retrospective adoption of new accounting guidance related to revenue from contracts with customers and new accounting guidance related to the presentation of restricted cash and cash equivalents in the statement of cash flows. Refer to “Recently Adopted Accounting Pronouncements” below for more information.
Principles of Consolidation
The consolidated financial statements include our accounts and our wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date ofdisclosed in the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Such managementaccompanying notes. We evaluate our estimates on an ongoing basis. Management estimates include, but are not limited to, the standalone selling price for our products and services, share-based compensation, fair value of assets acquired and liabilities assumed in business combinations, the assessment of recoverability of our property and equipment, identified intangibles and goodwill, future taxable income,valuation allowance against deferred tax assets, manufacturing partner and supplier liabilities, fair value of debt component of convertible notes, cease-use loss related to facility exit, deferred contract cost benefit period, and loss contingencies. We base our estimates on assumptions, both historical experience and also on assumptionsforward looking, that we believe are reasonable. Actual results could differ materially from those estimates.estimates due to risks and uncertainties, including uncertainty in the current economic environment.
Concentrations
Financial instruments that subject us to concentrations of credit risk consist primarily of cash and cash equivalents, investments, derivative contracts, accounts receivable and derivative contracts.financing receivables.
We invest only in high-quality credit instruments and maintain our cash and cash equivalents and available-for-sale investments inconsist primarily of fixed income securities. Management believes that the financial institutions that hold our investments are financially sound and, accordingly, are subject to minimal credit risk. Deposits held with banks may exceed the amount of insurance provided on such deposits.
Our derivative contracts expose us to credit risk to the extent that the counterparties may be unable to meet the terms of the arrangement. We mitigate this credit risk by transacting with major financial institutions with high credit ratings and also enter into master netting arrangements, which permit net settlement of transactions with the same counterparty. We are not required to pledge, and are not entitled to receive, cash collateral related to these derivative instruments. We do not enter into derivative contracts for trading or speculative purposes.
Our accounts receivablesreceivable are primarily derived from our distributors representingin various geographical locations. Our financing receivables are with qualified end-customers. We perform ongoing credit evaluations and generally do not require collateral on accounts receivable. We maintain an allowance for doubtful accounts for estimated potential credit losses. receivable or financing receivables.
As of July 31, 2019,2022, three distributors individually represented 29.9%, 18.9%,10% or more of our gross accounts receivable, and 14.2%in the aggregate represented 47.7% of our gross accounts receivable. As of July 31, 2022, two end-customers represented 10% or more of our gross financing receivables, and in aggregate represented 33.7% of our gross financing receivables.
For fiscal 2019, four2022, three distributors represented 31.8%, 22.1%, 10.7%, and 10.0%10% or more of our total revenue.revenue, representing 29.7%, 12.4%, and 11.5%, respectively. No single end-customer accounted for more than 10% of our total revenue in fiscal 2022, 2021, or 2020.
We rely on an electronics manufacturing services provider (“EMS provider”) to assemble most of our products and sole source component suppliers for a certain number of our components.
Comprehensive Loss
Comprehensive loss is comprised of net loss and other comprehensive income (loss). Our other comprehensive income (loss) includes unrealized gains and losses on available-for-sale investments and unrealized gains and losses on cash flow hedges.
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Foreign Currency Transactions
The functional currency of our foreign subsidiaries is the U.S. dollar. Monetary assets and liabilities denominated in foreign currencies have been remeasured into U.S. dollars using the exchange rates in effect at the balance sheet dates. Foreign currency denominated income and expenses have been remeasured using the average exchange rates in effect during each period. Foreign currency remeasurement gains and losses and foreign currency transaction gains and losses are not significant to the consolidated financial statements.
Fair Value
We define fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities which are required to be recorded at fair value, we consider the principal or most advantageous market in which to transact and the market-based risk.
We applycategorize assets and liabilities recorded or disclosed at fair value accountingon our consolidated balance sheets based upon the level of judgment associated with inputs used to measure their fair value. The categories are as follows:
•Level 1—Inputs are unadjusted quoted prices in active markets for allidentical assets or liabilities.
•Level 2—Inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the assets or liabilities, either directly or indirectly through market corroboration, for substantially the full term of the financial instruments.
•Level 3—Inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. The inputs require significant management judgment or estimation.
Our financial assets and liabilities that are recognized or disclosedmeasured at fair value in the financial statements on a recurring basis.basis include marketable securities and derivative financial instruments. Goodwill, intangible assets, and other long-lived assets are measured at fair value on a nonrecurring basis, only if impairment is indicated. The carrying amounts reported in the consolidated financial statements approximate the fair value for cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities, due to their short-term nature.
Cash, Cash Equivalents, and Investments
We consider all highly liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents. Investments not considered cash equivalents, and with maturities of one year or less from the consolidated balance sheet date, are classified as short-term investments. Investments with maturities greater than one year from the consolidated balance sheet date are classified as long-term investments.
We classifydetermine the classification of our investments in marketable debt securities as available-for-sale at the time of purchase since it is our intent that these investmentsand reevaluate such determination at each balance sheet date. Our marketable debt securities are available for current operations, and include these investments on our consolidated balance sheetsclassified as cash equivalents, short-term investments, or long-term investments depending on their maturity. These investmentsavailable-for-sale. Debt securities in an unrealized loss position are considered impaired when a decline in fair value is judgedwritten down to be other-than-temporary. We consult with our investment managers and consider available quantitative and qualitative evidence in evaluating potential impairment of our investments on a quarterly basis. If the cost of an individual investment exceeds its fair value with the corresponding charge recorded in other income, net in our consolidated statements of operations, if it is more likely than not that we evaluate, among other factors, general marketwill be required to sell the impaired security before recovery of its amortized cost basis, or we have the intention to sell the security. If neither of these conditions are met, we determine whether a credit loss exists by comparing the duration and extent to whichpresent value of the fair value is less thanexpected cash flows of the security with its amortized cost and our intent and ability to hold the investment. Once a decline in fair value is determined to be other-than-temporary, an impairment chargebasis. An allowance for credit losses is recorded and a new cost basis in other income, net in our consolidated statements of operations for an amount not to exceed the investment is established.unrealized loss. Unrealized losses that are not credit-related are included in accumulated other comprehensive income (loss) (“AOCI”) in stockholders’ equity.
Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount, net of allowances for doubtful accounts.credit losses. The allowance for doubtful accountscredit losses is based on our assessment of the collectability of accounts.collectability. Management regularly reviews the adequacy of the allowance for doubtful accountscredit losses on a collective basis by considering the age of each outstanding invoice, each channel partner’scustomer’s expected ability to pay and the collection history, with each channel partner, when applicable, to determine whether a specific allowance is appropriate.current market conditions, and reasonable and supportable forecasts of future economic conditions. Accounts receivable deemed uncollectible are charged against the allowance for doubtful accounts when identified. As ofcredit losses. For the years ended July 31, 20192022 and 2018,2021, the allowance for doubtful accountscredit losses activity was not significant.
Financing Receivables
We provide financing arrangements for certain qualified end-user customers to purchase our products and services. Payment terms on these financing arrangements are up to five years. Financing receivables are recorded at amortized cost, which approximates fair value. We may sell, in certain instances, these financing arrangements on a non-recourse basis to third party financial institutions. The financing receivables are derecognized upon transfer as these sales qualify as true sales.
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We evaluate the allowance for credit losses by assessing the risks and losses inherent in our financing receivables on either an individual or a collective basis. Our assessment considers various factors, including lifetime expected losses determined using customer risk profile, current economic conditions that may affect a customer’s ability to pay, and forward-looking economic considerations. Financing receivables deemed uncollectible are charged against the allowance for credit losses. Short-term financing receivables are included in prepaid expenses and other current assets, and long-term financing receivables are included in other assets on our consolidated balance sheets.
Derivatives
We are exposed to foreign currency exchange risk. Substantially all of our revenue is transacted in U.S. dollars, however, a portion of our operating expenditures are incurred outside of the United States and are denominated in foreign currencies, making them subject to fluctuations in foreign currency exchange rates. We enter into foreign currency derivative contracts with maturities of 16 months or less, which we designate as cash flow hedges, to manage the foreign currency exchange risk associated with our operating expenditures.
Our derivative financial instruments are recorded at fair value, on a gross basis, as either assets or liabilities inon our consolidated balance sheets. Gains or losses related to our cash flow hedges are recorded as a component of accumulated other comprehensive income (loss) (“AOCI”) inAOCI on our consolidated balance sheets and are reclassified into the financial statement line item associated with the underlying hedged transaction in our consolidated statements of operations when the underlying hedged transaction is recognized in earnings. If it becomes probable that the hedged transaction will not occur, the cumulative unrealized gain or loss is reclassified immediately from AOCI into the financial statement line item associated with the underlying hedged transaction in our consolidated statements of operations. Gains or losses related to non-designated derivative instruments are recognized in other income, (expense), net in our consolidated statements of operations for each period until the instrument matures, is terminated, is re-designated as a qualified cash flow hedge, or is sold. Derivatives designated as cash flow hedges are classified in our consolidated statements of cash flows in the same manner as the underlying hedged transaction, primarily within cash flows from operating activities.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally three to ten years. Leasehold improvements are depreciated over the shorter of the estimated useful lives of the improvements or the remaining lease term. Land is not depreciated.
Business Combinations
We include the results of operations of the businesses that we acquire as of the respective dates of acquisition. We allocate the fair value of the purchase price of our acquisitions to the tangible assets acquired and liabilities assumed, and intangible assets acquired,generally based on their estimated fair values. The excess of the purchase price over the fair values of these identifiable assets and liabilities is recorded as goodwill. Additional information existing as of the acquisition date but unknown to us may become known during the remainder of the measurement period, not to exceed 12 months from the acquisition date, which may result in changes to the amounts and allocations recorded.
Intangible Assets
Purchased intangible assets with finite lives are carried at cost, less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets. Acquisition-related in-process research and development represents the fair value of incomplete research and development projects that have not reached technological feasibility as of the date of acquisition. Initially, these assets are not subject to amortization. Assets related to projects that have been completed are transferred to developed technology, which are subject to amortization.
Impairment of Goodwill, Intangible Assets, and Other Long-Lived Assets
Goodwill is evaluated for impairment on an annual basis in the fourth quarter of our fiscal year, and whenever events or changes in circumstances indicate the carrying amount of goodwill may not be recoverable. We have elected to first assess qualitative factors to determine whether it is more likely than not that the fair value of our single reporting unit is less than its carrying amount, including goodwill. If we determine that it is more likely than not that the fair value of our single reporting unit is less than its carrying amount, then the quantitative impairment test will be performed. Under the quantitative impairment test, if the carrying amount of our single reporting unit exceeds its fair value, we will recognize an impairment loss in an amount equal to that excess but limited to the total amount of goodwill.
We evaluate events and changes in circumstances that could indicate carrying amounts of purchased intangible assets and other long-lived assets may not be recoverable. When such events or changes in circumstances occur, we assess the recoverability of these assets or asset groups by determining whether or not the carrying amount will be recovered through undiscounted expected future cash flows. If the total of the future undiscounted cash flows is less than the carrying amount of an asset or asset group, we record an impairment loss for the amount by which the carrying amount of the asset exceeds the fair value of the asset.asset or asset group.
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Manufacturing Partner and Supplier Liabilities
We outsource most of our manufacturing, repair, and supply chain management operations to our EMS provider and payments to it are a significant portion of our cost of product revenue. Although we could beare contractually obligated to purchase manufactured products and components, we generally do not own the components and manufactured products and components.products. Product title transfers from our EMS provider to us and immediately to our channel partnerscustomers upon shipment. Our EMS provider assembles our products using design specifications, quality assurance programs, and standards that we establish, and it procures components and assembles our products based on our demand forecasts. These forecasts represent our estimates of future demand for our products based upon historical trends and analysis from our sales and product management functions as adjusted for overall market conditions. If the actual component usage and product demand are significantly lower than forecast, we record a liability for manufacturing purchase commitments in excess of our forecasted demand including costs for excess components or for carrying costs incurred by our manufacturing partners and component suppliers. Through July 31, 2019,2022, we have not accrued any significant costs associated with this exposure.
Convertible Senior Notes
was not remeasured as long as it continuescontinued to meet the conditions for equity classification. In accounting for the transactionTransaction costs related to the issuance of the notes we allocate the total amount incurredwere allocated to the liability and equity components using the same proportions as the proceeds from the notes. Transaction costs attributable to the liability component arewere netted with the liability component and amortized to interest expense using the effective interest method over the term of the notes. Transaction costs attributable to the equity component arewere netted with the equity component of the notes in additional paid-in capital in the consolidated balance sheets. Whencapital. Upon the notes arebecoming convertible, the net carrying amount of the notes isliability component was classified as a current liability and a portion of the equity component representing the conversion option iswas reclassified to temporary equity in our consolidated balance sheets.equity. The portion of the equity component classified as temporary equity iswas measured as the difference between the principal and net carrying amount of the notes, excluding debt issuance costs.
Upon adoption of the new debt guidance on August 1, 2021, our convertible senior notes are accounted for entirely as a liability and measured at their amortized cost. Transaction costs related to the issuance of the notes are netted with the liability and are amortized on a straight-line basis, which approximates the effective interest rate method, to interest expense over the term of the notes.
Revenue Recognition
Our revenue consists of product revenue and subscription and support revenue. Revenue is recognized when control of promised products, subscriptions and support services are transferred to customers, within an amount that reflects the expected consideration in exchange for those products and services. Depending on who the contract is with, our customers are either our channel partners or our end-customers.
We determine revenue recognition through the following steps:
•Identification of the contract, or contracts, with a customer.
•Identification of the performance obligations in the contract.
•Determination of the transaction price.
•Allocation of the transaction price to the performance obligations in the contract.
•Recognition of revenue when, or as, we satisfy a performance obligation.
Revenues are reported net of sales taxes. Shipping charges billed to channel partnersour customers are included in revenues and related costs are included in cost of revenue.
Product Revenue
Product revenue is derived primarily from sales of our appliances. Product revenue also includes revenue derived from software licenses of Panorama and the VM-Series. Our appliances and software licenses include a broad set of built-in networking and security features and functionalities. We recognize product revenue at the time of hardware shipment or delivery of software license.
Subscription and Support Revenue
Subscription and support revenue is derived primarily from sales of our subscription and support offerings. We recognize subscription and support revenue over time as the services are performed. Our contractual subscription and support contracts are typically one to five years.
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Contracts with Multiple Performance Obligations
The majority of our contracts with our customers include various combinations of our products and subscriptions and support. Our appliances and software licenses have significant standalone functionalities and capabilities. Accordingly, these appliances and software licenses are distinct from our subscriptions and support services as the customer can benefit from the product without these services and such services are separately identifiable within the contract. We account for multiple agreements with a single customer as a single contract if the contractual terms and/or substance of those agreements indicate that they may be so closely related that they are, in effect, parts of a single contract. The amount of consideration we expect to receive in exchange for delivering on the contract is allocated to each performance obligation based on its relative standalone selling price. If a contract contains a single performance obligation, no allocation is required.
We establish standalone selling price using the prices charged for a deliverable when sold separately. If the standalone selling price is not observable through past transactions, we estimate the standalone selling price based on our pricing model and our go-to-market strategy, which include factors such as type of sales channel (reseller, distributor, or end-customer), the geographies in which our offerings were sold (domestic or international), and offering type (products, subscriptions, or support).
Deferred Revenue
We record deferred revenue when cash payments are received or due in advance of our performance. Our payment terms typically require payment within 30 to 45 days of the date we issue an invoice. 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.
Deferred Contract Costs
We defer contract costs that are recoverable and incremental to obtaining customer sales contracts. Contract costs, which primarily consist of sales commissions, are amortized on a systematic basis that is consistent with the transfer to the customer of the goods or services to which the asset relates. Sales commissions paid for initial contracts are generally not commensurate with the commissions paid for renewal contracts, given the substantive difference in commission rates in proportion to their respective contract values. Sales commissions for initial contracts that are not commensurate are amortized over a benefit period of five years, consistent with the revenue recognition pattern of the performance obligations in the related contracts including expected renewals. The benefit period is determined by taking into consideration contract length, technology life, and other quantitative and qualitative factors. The expected renewals are estimated based on historical renewal trends. Sales commissions for initial contracts that are commensurate and sales commissions for renewal contracts are amortized over the related contractual period in proportion to the revenue recognized.
We classify deferred contract costs as short-term or long-term based on when we expect to recognize the expense. Short-term deferred contract costs are included in prepaid expenses and other current assets and long-term deferred contract costs are included in other assets in our consolidated balance sheets. Deferred contract costs are periodically reviewed for impairment. The amortization of deferred contract costs is included in sales and marketing expense in our consolidated statements of operations. Deferred contract costs are periodically reviewed for impairment. We did not recognize any impairment losses on our deferred contract costs during the years ended July 31, 2022, 2021, or 2020.
Software Development Costs
Internally developed software includes security software developed to meet our internal needs to provide cloud-based subscription offerings to our end-customers and business software that we customize to meet our specific operational needs. These capitalized costs consist of internal compensation related costs and external direct costs incurred during the application development stage and will be amortized over a useful life of three to five years. As of July 31, 20192022 and 2018,2021, we capitalized as other assets on our consolidated balance sheets $44.9$130.9 million and $23.0$114.8 million in costs, respectively, net of accumulated amortization, for security software developed to meet our internal needs to provide our cloud-based subscription offerings. We recognized amortization expense of $12.9$62.4 million, $4.3$47.8 million, and $1.2$31.3 million related to these capitalized costs as cost of subscription and support revenue in our consolidated statements of operations during the years ended July 31, 2019, 2018,2022, 2021, and 2017,2020, respectively.
The costs to develop software that is marketed externally have not been capitalized as we believe our current software development process is essentially completed concurrent with the establishment of technological feasibility. As such, all related software development costs are expensed as incurred and included in research and development expense in our consolidated statements of operations.
Share-Based Compensation
Compensation expense related to share-based transactions including employee and non-employee director awards, is measured and recognized in the consolidated financial statements based on fair value on the grant date. We recognize share-based compensation expense for awards with only service conditions on a straight-line basis over the requisite service period of the related award. We recognize share-based compensation expense for awards with market conditions and awards with performance conditions on a straight-line basis over the requisite service period for each separately vesting portion of the award and, for awards with performance conditions, when it is probable that the performance condition will be achieved. We account for forfeitures of all share-based payment awards when they occur.
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Leases
We rent our facilities underdetermine if an arrangement is a lease at inception. We evaluate the classification of leases at commencement and, as necessary, at modification. Operating leases related balances are included in operating lease agreementsright-of-use assets, accrued and recognizeother liabilities, and long-term operating lease liabilities on our consolidated balance sheets. We did not have any material finance leases in any of the periods presented.
Operating lease right-of-use assets represent our right to use an underlying asset for the lease term. Operating lease liabilities represent our obligation to make payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized at the present value of the future lease payments at the lease commencement date. The interest rate used to determine the present value of the future lease payments is our incremental borrowing rate, because the interest rates implicit in most of our leases are not readily determinable. Our incremental borrowing rate is estimated to approximate the interest rate on a collateralized basis with similar terms and payments, and in economic environments where the leased asset is located. Operating lease right-of-use assets also include adjustments related to lease incentives, prepaid or accrued rent expenseand initial direct lease costs. Operating lease right-of-use assets are subject to evaluation for impairment or disposal on a basis consistent with other long-lived assets.
Our lease terms may include periods under options to extend or terminate the lease when it is reasonably certain that we will exercise that option. We generally use the base, non-cancelable lease term when determining the lease assets and liabilities. Operating lease cost is recognized on a straight-line basis over the lease term.
We account for lease and non-lease components as a single lease component and do not recognize right-of-use assets and lease liabilities for leases with a term of the lease. Some of12 months or less. Payments under our lease arrangements are primarily fixed, however, certain lease agreements contain rent holidays, scheduled rent increases, lease incentives,variable payments, which are expensed as incurred and renewal options. Rent holidays and scheduled rent increases arenot included in the determinationoperating lease right-of-use assets and liabilities. Variable lease payments are primarily comprised of rent expense to be recorded over the lease term. Lease incentives are recognized as a reduction of rent expense on a straight-line basis over the term of the lease. Renewals are not assumed in the determination of the lease term unless they are deemed to be reasonably assured at the inception of the lease. We begin recognizing rent expense on the date that we obtain the legal right to usereal estate taxes, common area maintenance charges, and control the leased space.
Income Taxes
We account for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our consolidated financial statements or tax returns. In addition, deferred tax assets are recorded for the future benefit of utilizing net operating losses and research and development credit carryforwards. Valuation allowances are provided when necessary to reduce deferred tax assets to the amount expected to be realized.
Significant judgment is required in determining any valuation allowance recorded against deferred tax assets. In assessing the need for a valuation allowance, we consider all available evidence, including past operating results, estimates of future taxable income, and the feasibility of tax planning strategies. In the event that we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made.
Loss Contingencies
We are subject to the possibility of various loss contingencies arising in the ordinary course of business. In determining loss contingencies, we consider the likelihood of loss or impairment of an asset, or the incurrence of a liability, as well as our ability to reasonably estimate the amount of loss. An estimated loss contingency is accrued when it is probable that an asset has been impaired, or a liability has been incurred and the amount of loss can be reasonably estimated. If we determine that a loss is possible and the range of the loss can be reasonably determined, then we disclose the range of the possible loss. We regularly evaluate current information available to us to determine whether an accrual is required, an accrual should be adjusted, or a range of possible loss should be disclosed.
Recently Adopted Accounting Pronouncements
In August 2018,October 2021, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance on customers’ accounting for implementation costs incurredthat requires companies to apply revenue guidance to recognize and measure contract assets and contract liabilities from contracts with customers acquired in a cloud computing arrangement that is a service contract, which requires customers to apply internal-use software guidance to determinebusiness combination on the implementation costs that are able to be capitalized. Under the new standard, capitalized implementation costs are generally amortized over the termacquisition date, instead of the arrangement, beginning when the module or component of the hosting arrangement is ready for its intended use.measuring them at fair value. We early adopted this standardguidance in our secondfirst quarter of fiscal 20192022 on a prospective basis. The adoption of thethis standard did not have a material impact on our consolidated financial statements.
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Debt with Conversion Options
In January 2017,August 2020, the FASB issued authoritative guidance clarifyingthat simplifies the definitionaccounting for certain financial instruments with characteristics of a businessliabilities and equity, including convertible instruments. The standard reduces the number of models used to assist companies with evaluating whether transactions should be accountedaccount for as acquisitions (or disposals)convertible instruments and simplifies the classification of assets or businesses. debt on the balance sheet.
We adopted this standard in our first quarter of fiscal 2019 on a prospective basis.2022 using the modified-retrospective approach, under which financial results reported in periods prior to fiscal 2022 were not adjusted. The adoption of the standard did not have an impact on our consolidated financial statements.
| Year Ended July 31, 2018 | Year Ended July 31, 2017 | ||||||||||||||||||||||
| As Previously Reported | Impact of Adoption | As Adjusted | As Previously Reported | Impact of Adoption | As Adjusted | ||||||||||||||||||
| Consolidated Statements of Operations | |||||||||||||||||||||||
| Product revenue | $ | 871.5 | $ | 8.3 | $ | 879.8 | $ | 709.1 | $ | (0.6 | ) | $ | 708.5 | ||||||||||
| Subscription and support revenue | 1,401.6 | (7.8 | ) | 1,393.8 | 1,052.5 | (5.9 | ) | 1,046.6 | |||||||||||||||
| Total revenue | 2,273.1 | 0.5 | 2,273.6 | 1,761.6 | (6.5 | ) | 1,755.1 | ||||||||||||||||
| Total cost of revenue | 645.3 | (0.2 | ) | 645.1 | 476.6 | (0.2 | ) | 476.4 | |||||||||||||||
| Total operating expenses | 1,756.9 | (24.2 | ) | 1,732.7 | 1,464.8 | (20.3 | ) | 1,444.5 | |||||||||||||||
| Operating loss | (129.1 | ) | 24.9 | (104.2 | ) | (179.8 | ) | 14.0 | (165.8 | ) | |||||||||||||
| Provision for income taxes | 17.7 | (0.8 | ) | 16.9 | 22.5 | 0.4 | 22.9 | ||||||||||||||||
| Net loss | $ | (147.9 | ) | $ | 25.7 | $ | (122.2 | ) | $ | (216.6 | ) | $ | 13.6 | $ | (203.0 | ) | |||||||
| Net loss per share, basic and diluted | $ | (1.61 | ) | $ | 0.28 | $ | (1.33 | ) | $ | (2.39 | ) | $ | 0.15 | $ | (2.24 | ) | |||||||
| July 31, 2018 | |||||||||||
| As Previously Reported | Impact of Adoption | As Adjusted | |||||||||
| Consolidated Balance Sheet | |||||||||||
| Accounts receivable, net | $ | 467.3 | $ | (0.3 | ) | $ | 467.0 | ||||
| Prepaid expenses and other current assets | 261.3 | 6.8 | 268.1 | ||||||||
| Other assets | 206.8 | 119.4 | 326.2 | ||||||||
| Accrued and other liabilities | 107.0 | 17.6 | 124.6 | ||||||||
| Deferred revenue | 1,268.9 | (55.3 | ) | 1,213.6 | |||||||
| Long-term deferred revenue | 1,096.0 | (30.3 | ) | 1,065.7 | |||||||
| Accumulated deficit | $ | (984.6 | ) | $ | 193.9 | $ | (790.7 | ) | |||
2. Revenue
Disaggregation of Revenue
The following table presents revenue by geographic theater (in millions):
| Years Ended July 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (As Adjusted) | (As Adjusted) | ||||||||||
| Revenue: | |||||||||||
| Americas | |||||||||||
| United States | $ | 1,830.3 | $ | 1,446.7 | $ | 1,149.7 | |||||
| Other Americas | 152.0 | 112.0 | 80.9 | ||||||||
| Total Americas | 1,982.3 | 1,558.7 | 1,230.6 | ||||||||
| Europe, the Middle East, and Africa (“EMEA”) | 564.8 | 439.6 | 320.3 | ||||||||
| Asia Pacific and Japan (“APAC”) | 352.5 | 275.3 | 204.2 | ||||||||
| Total revenue | $ | 2,899.6 | $ | 2,273.6 | $ | 1,755.1 | |||||
| Year Ended July 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Revenue: | |||||||||||||||||
| Americas | |||||||||||||||||
| United States | $ | 3,560.3 | $ | 2,747.8 | $ | 2,157.6 | |||||||||||
| Other Americas | 242.3 | 189.7 | 160.4 | ||||||||||||||
| Total Americas | 3,802.6 | 2,937.5 | 2,318.0 | ||||||||||||||
| Europe, the Middle East, and Africa (“EMEA”) | 1,055.8 | 817.3 | 671.9 | ||||||||||||||
| Asia Pacific and Japan (“APAC”) | 643.1 | 501.3 | 418.5 | ||||||||||||||
| Total revenue | $ | 5,501.5 | $ | 4,256.1 | $ | 3,408.4 | |||||||||||
The following table presents revenue for groups of similar products and services (in millions):
| Years Ended July 31, | ||||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | Year Ended July 31, | |||||||||||||||||||||||||
| (As Adjusted) | (As Adjusted) | 2022 | 2021 | 2020 | ||||||||||||||||||||||||
| Revenue: | Revenue: | |||||||||||||||||||||||||||
| Product | $ | 1,096.2 | $ | 879.8 | $ | 708.5 | Product | $ | 1,363.1 | $ | 1,120.3 | $ | 1,064.2 | |||||||||||||||
| Subscription and support | Subscription and support | |||||||||||||||||||||||||||
| Subscription | 1,032.7 | 758.1 | 548.8 | Subscription | 2,539.0 | 1,898.8 | 1405.3 | |||||||||||||||||||||
| Support | 770.7 | 635.7 | 497.8 | Support | 1,599.4 | 1,237.0 | 938.9 | |||||||||||||||||||||
| Total subscription and support | 1,803.4 | 1,393.8 | 1,046.6 | Total subscription and support | 4,138.4 | 3,135.8 | 2,344.2 | |||||||||||||||||||||
| Total revenue | $ | 2,899.6 | $ | 2,273.6 | $ | 1,755.1 | Total revenue | $ | 5,501.5 | $ | 4,256.1 | $ | 3,408.4 | |||||||||||||||
Deferred Revenue
During the yearyears ended July 31, 2019,2022 and 2021, we recognized approximately $1.2$2.7 billion and $2.0 billion of revenue pertaining to amounts that were deferred as of July 31, 2018.2021 and 2020, respectively.
Remaining Performance Obligations
Revenue expected to be recognized from remaining performance obligations was $3.1$8.2 billion as of July 31, 2019,2022, of which we expect to recognize approximately $1.7$4.1 billion over the next 12 months and the remainder thereafter.
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3. Fair Value Measurements
The following table presents the fair value of our financial assets and liabilities measured at fair value on a recurring basis using the above input categories as of July 31, 20192022 and July 31, 20182021 (in millions):
| July 31, 2022 | July 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||||||||||||||||||||
| Cash equivalents: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Money market funds | $ | 1,205.2 | $ | — | $ | — | $ | 1,205.2 | $ | 124.2 | $ | — | $ | — | $ | 124.2 | ||||||||||||||||||||||||||||||||||
| Certificates of deposit | — | 155.3 | — | 155.3 | — | 150.4 | — | 150.4 | ||||||||||||||||||||||||||||||||||||||||||
| Commercial paper | — | 69.1 | — | 69.1 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Corporate debt securities | — | 19.5 | — | 19.5 | — | 1.0 | — | 1.0 | ||||||||||||||||||||||||||||||||||||||||||
| U.S. government and agency securities | — | 10.0 | — | 10.0 | — | 116.3 | — | 116.3 | ||||||||||||||||||||||||||||||||||||||||||
| Non-U.S. government and agency securities | — | 5.1 | — | 5.1 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Total cash equivalents | 1,205.2 | 259.0 | — | 1,464.2 | 124.2 | 267.7 | — | 391.9 | ||||||||||||||||||||||||||||||||||||||||||
| Short-term investments: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Certificates of deposit | — | 116.4 | — | 116.4 | — | 12.4 | — | 12.4 | ||||||||||||||||||||||||||||||||||||||||||
| Commercial paper | — | 79.0 | — | 79.0 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Corporate debt securities | — | 505.0 | — | 505.0 | — | 208.9 | — | 208.9 | ||||||||||||||||||||||||||||||||||||||||||
| U.S. government and agency securities | — | 798.2 | — | 798.2 | — | 762.1 | — | 762.1 | ||||||||||||||||||||||||||||||||||||||||||
| Non-U.S. government and agency securities | — | 17.4 | — | 17.4 | — | 43.5 | — | 43.5 | ||||||||||||||||||||||||||||||||||||||||||
| Total short-term investments | — | 1,516.0 | — | 1,516.0 | — | 1,026.9 | — | 1,026.9 | ||||||||||||||||||||||||||||||||||||||||||
| Long-term investments: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Certificates of deposit | — | — | — | — | — | 5.0 | — | 5.0 | ||||||||||||||||||||||||||||||||||||||||||
| Corporate debt securities | — | 761.2 | — | 761.2 | — | 180.7 | — | 180.7 | ||||||||||||||||||||||||||||||||||||||||||
| U.S. government and agency securities | — | 118.2 | — | 118.2 | — | 674.1 | — | 674.1 | ||||||||||||||||||||||||||||||||||||||||||
| Non-U.S. government and agency securities | — | — | — | — | — | 28.5 | — | 28.5 | ||||||||||||||||||||||||||||||||||||||||||
| Asset-backed securities | — | 172.5 | — | 172.5 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Total long-term investments | — | 1,051.9 | — | 1,051.9 | — | 888.3 | — | 888.3 | ||||||||||||||||||||||||||||||||||||||||||
| Prepaid expenses and other current assets: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency forward contracts | — | 2.4 | — | 2.4 | — | 4.1 | — | 4.1 | ||||||||||||||||||||||||||||||||||||||||||
| Total prepaid expenses and other current assets | — | 2.4 | — | 2.4 | — | 4.1 | — | 4.1 | ||||||||||||||||||||||||||||||||||||||||||
| Other assets: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency forward contracts | — | 0.7 | — | 0.7 | — | 0.1 | — | 0.1 | ||||||||||||||||||||||||||||||||||||||||||
| Total other assets | — | 0.7 | — | 0.7 | — | 0.1 | — | 0.1 | ||||||||||||||||||||||||||||||||||||||||||
| Total assets measured at fair value | $ | 1,205.2 | $ | 2,830.0 | $ | — | $ | 4,035.2 | $ | 124.2 | $ | 2,187.1 | $ | — | $ | 2,311.3 | ||||||||||||||||||||||||||||||||||
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| July 31, 2019 | July 31, 2018 | |||||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||
| Cash equivalents: | ||||||||||||||||||||||||||||||||
| Money market funds | $ | 369.1 | $ | — | $ | — | $ | 369.1 | $ | 1,512.3 | $ | — | $ | — | $ | 1,512.3 | ||||||||||||||||
| Certificates of deposit | — | 12.0 | — | 12.0 | — | — | — | — | ||||||||||||||||||||||||
| Commercial paper | — | 19.3 | — | 19.3 | — | 52.0 | — | 52.0 | ||||||||||||||||||||||||
| U.S. government and agency securities | — | 54.4 | — | 54.4 | — | 397.3 | — | 397.3 | ||||||||||||||||||||||||
| Total cash equivalents | 369.1 | 85.7 | — | 454.8 | 1,512.3 | 449.3 | — | 1,961.6 | ||||||||||||||||||||||||
| Short-term investments: | ||||||||||||||||||||||||||||||||
| Certificates of deposit | — | 17.5 | — | 17.5 | — | 5.4 | — | 5.4 | ||||||||||||||||||||||||
| Non-U.S. government securities | — | — | — | — | — | 20.0 | — | 20.0 | ||||||||||||||||||||||||
| Commercial paper | — | 8.9 | — | 8.9 | — | 22.3 | — | 22.3 | ||||||||||||||||||||||||
| Corporate debt securities | — | 375.5 | — | 375.5 | — | 139.8 | — | 139.8 | ||||||||||||||||||||||||
| U.S. government and agency securities | — | 1,439.8 | — | 1,439.8 | — | 709.0 | — | 709.0 | ||||||||||||||||||||||||
| Total short-term investments | — | 1,841.7 | — | 1,841.7 | — | 896.5 | — | 896.5 | ||||||||||||||||||||||||
| Long-term investments: | ||||||||||||||||||||||||||||||||
| Corporate debt securities | — | 214.3 | — | 214.3 | — | 153.6 | — | 153.6 | ||||||||||||||||||||||||
| U.S. government and agency securities | — | 361.1 | — | 361.1 | — | 393.9 | — | 393.9 | ||||||||||||||||||||||||
| Total long-term investments | — | 575.4 | — | 575.4 | — | 547.5 | — | 547.5 | ||||||||||||||||||||||||
| Prepaid expenses and other current assets: | ||||||||||||||||||||||||||||||||
| Foreign currency forward contracts | — | 1.3 | — | 1.3 | — | — | — | — | ||||||||||||||||||||||||
| Total prepaid expenses and other current assets | — | 1.3 | — | 1.3 | — | — | — | — | ||||||||||||||||||||||||
| Total assets measured at fair value | $ | 369.1 | $ | 2,504.1 | $ | — | $ | 2,873.2 | $ | 1,512.3 | $ | 1,893.3 | $ | — | $ | 3,405.6 | ||||||||||||||||
| Accrued and other liabilities: | ||||||||||||||||||||||||||||||||
| Foreign currency forward contracts | $ | — | $ | 3.8 | $ | — | $ | 3.8 | $ | — | $ | 6.9 | $ | — | $ | 6.9 | ||||||||||||||||
| Total accrued and other liabilities | — | 3.8 | — | 3.8 | — | 6.9 | — | 6.9 | ||||||||||||||||||||||||
| Total liabilities measured at fair value | $ | — | $ | 3.8 | $ | — | $ | 3.8 | $ | — | $ | 6.9 | $ | — | $ | 6.9 | ||||||||||||||||
| July 31, 2022 | July 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||||||||||||||||||||
| Accrued and other liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency forward contracts | $ | — | $ | 32.4 | $ | — | $ | 32.4 | $ | — | $ | 6.4 | $ | — | $ | 6.4 | ||||||||||||||||||||||||||||||||||
| Total accrued and other liabilities | — | 32.4 | — | 32.4 | — | 6.4 | — | 6.4 | ||||||||||||||||||||||||||||||||||||||||||
| Other long-term liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency forward contracts | — | 0.8 | — | 0.8 | — | 0.5 | — | 0.5 | ||||||||||||||||||||||||||||||||||||||||||
| Total other long-term liabilities | — | 0.8 | — | 0.8 | — | 0.5 | — | 0.5 | ||||||||||||||||||||||||||||||||||||||||||
| Total liabilities measured at fair value | $ | — | $ | 33.2 | $ | — | $ | 33.2 | $ | — | $ | 6.9 | $ | — | $ | 6.9 | ||||||||||||||||||||||||||||||||||
Refer to Note 10. Convertible Senior NotesDebt, for the carrying amount and estimated fair value of our convertible senior notes as of July 31, 20192022 and July 31, 2018.2021.
4. Cash Equivalents and Investments
Available-for-sale Debt Securities
The following tables summarize the amortized cost, unrealized gains and losses, and fair value of our available-for-sale debt securities (in millions):
| July 31, 2022 | |||||||||||||||||||||||
| Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | ||||||||||||||||||||
| Cash equivalents: | |||||||||||||||||||||||
| Certificates of deposit | $ | 155.3 | $ | — | $ | — | $ | 155.3 | |||||||||||||||
| Commercial paper | 69.1 | — | — | 69.1 | |||||||||||||||||||
| Corporate debt securities | 19.5 | — | — | 19.5 | |||||||||||||||||||
| U.S. government and agency securities | 10.0 | — | — | 10.0 | |||||||||||||||||||
| Non-U.S. government and agency securities | 5.0 | 0.1 | — | 5.1 | |||||||||||||||||||
| Total available-for-sale cash equivalents | $ | 258.9 | $ | 0.1 | $ | — | $ | 259.0 | |||||||||||||||
| Investments: | |||||||||||||||||||||||
| Certificates of deposit | $ | 116.5 | $ | — | $ | (0.1) | $ | 116.4 | |||||||||||||||
| Commercial paper | 79.1 | — | (0.1) | 79.0 | |||||||||||||||||||
| Corporate debt securities | 1,276.8 | 1.3 | (11.9) | 1,266.2 | |||||||||||||||||||
| U.S. government and agency securities | 928.1 | 0.1 | (11.8) | 916.4 | |||||||||||||||||||
| Non-U.S. government and agency securities | 17.6 | — | (0.2) | 17.4 | |||||||||||||||||||
| Asset-backed securities | 173.4 | 0.2 | (1.1) | 172.5 | |||||||||||||||||||
| Total available-for-sale investments | $ | 2,591.5 | $ | 1.6 | $ | (25.2) | $ | 2,567.9 | |||||||||||||||
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| July 31, 2021 | |||||||||||||||||||||||
| Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | ||||||||||||||||||||
| Cash equivalents: | |||||||||||||||||||||||
| Certificates of deposit | $ | 150.4 | $ | — | $ | — | $ | 150.4 | |||||||||||||||
| Corporate debt securities | 1.0 | — | — | 1.0 | |||||||||||||||||||
| U.S. government and agency securities | 116.3 | — | — | 116.3 | |||||||||||||||||||
| Total available-for-sale cash equivalents | $ | 267.7 | $ | — | $ | — | $ | 267.7 | |||||||||||||||
| Investments: | |||||||||||||||||||||||
| Certificates of deposit | $ | 17.4 | $ | — | $ | — | $ | 17.4 | |||||||||||||||
| Corporate debt securities | 389.2 | 0.5 | (0.1) | 389.6 | |||||||||||||||||||
| U.S. government and agency securities | 1,435.1 | 1.1 | — | 1,436.2 | |||||||||||||||||||
| Non-U.S. government and agency securities | 72.0 | — | — | 72.0 | |||||||||||||||||||
| Total available-for-sale investments | $ | 1,913.7 | $ | 1.6 | $ | (0.1) | $ | 1,915.2 | |||||||||||||||
As of July 31, 2022, the gross unrealized losses that have been in a continuous unrealized loss position for less than 12 months were $24.8 million, which were related to $2.0 billion of available-for-sale debt securities, and the gross unrealized losses that have been in a continuous unrealized loss position for more than 12 months were not material. The gross unrealized losses on our available-for-sale debt securities as of July 31, 2019 and July 31, 2018 (in millions):
| July 31, 2019 | |||||||||||||||
| Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | ||||||||||||
| Cash equivalents: | |||||||||||||||
| Certificates of deposit | $ | 12.0 | $ | — | $ | — | $ | 12.0 | |||||||
| Commercial paper | 19.3 | — | — | 19.3 | |||||||||||
| U.S. government and agency securities | 54.4 | — | — | 54.4 | |||||||||||
| Total available-for-sale cash equivalents | $ | 85.7 | $ | — | $ | — | $ | 85.7 | |||||||
| Investments: | |||||||||||||||
| Certificates of deposit | $ | 17.5 | $ | — | $ | — | $ | 17.5 | |||||||
| Commercial paper | 8.9 | — | — | 8.9 | |||||||||||
| Corporate debt securities | 587.8 | 2.3 | (0.3 | ) | 589.8 | ||||||||||
| U.S. government and agency securities | 1,799.5 | 2.6 | (1.2 | ) | 1,800.9 | ||||||||||
| Total available-for-sale investments | $ | 2,413.7 | $ | 4.9 | $ | (1.5 | ) | $ | 2,417.1 | ||||||
| July 31, 2018 | |||||||||||||||
| Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | ||||||||||||
| Cash equivalents: | |||||||||||||||
| Commercial paper | $ | 52.0 | $ | — | $ | — | $ | 52.0 | |||||||
| U.S. government and agency securities | 397.3 | — | — | 397.3 | |||||||||||
| Total available-for-sale cash equivalents | $ | 449.3 | $ | — | $ | — | $ | 449.3 | |||||||
| Investments: | |||||||||||||||
| Certificates of deposit | $ | 5.4 | $ | — | $ | — | $ | 5.4 | |||||||
| Non-U.S. government securities | 20.0 | — | — | 20.0 | |||||||||||
| Commercial paper | 22.3 | — | — | 22.3 | |||||||||||
| Corporate debt securities | 295.9 | — | (2.5 | ) | 293.4 | ||||||||||
| U.S. government and agency securities | 1,110.6 | — | (7.7 | ) | 1,102.9 | ||||||||||
| Total available-for-sale investments | $ | 1,454.2 | $ | — | $ | (10.2 | ) | $ | 1,444.0 | ||||||
Unrealized losses related to theseour available-for-sale debt securities are due to interest rate fluctuations as opposed to credit quality. In addition, weWe do not intend to sell any of the securities in an unrealized loss position and it is not likely that we would be required to sell these securities before recovery of their amortized cost basis, which may be at maturity. As a result, there were no other-than-temporary impairments for theseWe did not recognize any credit losses related to our available-for-sale debt securities atduring the years ended July 31, 20192022 and 2018.2021.
The following table summarizes the amortized cost and fair value of our available-for-sale debt securities as of July 31, 2019,2022, by contractual years-to-maturity (in millions):
| Amortized Cost | Fair Value | ||||||
| Due within one year | $ | 1,926.7 | $ | 1,927.4 | |||
| Due between one and three years | 572.7 | 575.4 | |||||
| Total | $ | 2,499.4 | $ | 2,502.8 | |||
| Amortized Cost | Fair Value | ||||||||||
| Due within one year | $ | 1,789.4 | $ | 1,775.0 | |||||||
| Due between one and three years | 965.2 | 956.4 | |||||||||
| Due between three to five years | 91.5 | 91.2 | |||||||||
| Due between five to ten years | 4.3 | 4.3 | |||||||||
| Total | $ | 2,850.4 | $ | 2,826.9 | |||||||
Marketable Equity Securities
Marketable equity securities consist of money market funds and are included in cash and cash equivalents inon our consolidated balance sheets. As of July 31, 20192022 and 2018,2021, the carrying value of our marketable equity securities were $369.1$1.2 billion and $124.2 million, and
5. Financing Receivables
The following table summarizes our short-term and long-term financing receivables (in millions):
| July 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Short-term financing receivables, gross | $ | 112.6 | $ | 80.0 | |||||||
| Allowance for credit losses | (1.3) | (1.0) | |||||||||
| Short-term financing receivables, net | $ | 111.3 | $ | 79.0 | |||||||
| Long-term financing receivables, gross | $ | 194.6 | $ | 198.6 | |||||||
| Allowance for credit losses | (2.5) | (4.3) | |||||||||
| Long-term financing receivables, net | $ | 192.1 | $ | 194.3 | |||||||
There was no significant activity in allowance for credit losses during the years ended July 31, 2022 and 2021. Past due amounts on financing receivables were not material as of July 31, 2022 and 2021.
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6. Derivative Instruments
As of July 31, 20192022 and 2018,2021, the total notional amount of our outstanding foreign currency forward contracts was $307.2$856.9 million and $288.5$531.9 million, respectively. Refer to Note 3. Fair Value Measurements for the fair value of our derivative instruments as reported on our consolidated balance sheets as of July 31, 2019.2022.
Fiscal 20192022
Fiscal 2021
Bridgecrew Inc.
On July 9, 2019,March 2, 2021, we completed our acquisition of 100% of the voting equity interest of Twistlock Ltd.Bridgecrew Inc. (“Twistlock”Bridgecrew”), a privately-held company specializing in container security. The acquisition extends our cloud security strategy withcompany. We expect the addition of Twistlock toacquisition will expand our Prisma cloudCloud offering to deliver security offerings.across the full application lifecycle. The total purchase consideration for the acquisition of TwistlockBridgecrew was $378.1$156.9 million, which consisted of the following (in millions):
| Amount | |||
| Cash | $ | 375.4 | |
| Fair value of replacement equity awards | 2.7 | ||
| Total purchase consideration | $ | 378.1 | |
| Amount | |||||
| Cash | $ | 155.9 | |||
| Fair value of replacement awards | 1.0 | ||||
| Total | $ | 156.9 | |||
As part of the acquisition, we issued $42.5 million of replacement equity awards, which included 0.1 million shares of our restricted common stock. The total fair value of the replacement equity awards was $51.8 million, of which the portion attributable to services performed prior to the acquisition date was allocated to the purchase consideration. The remaining fair value was allocated to future services and will be expensed over the remaining service periods as share-based compensation.
We have accounted for this transaction as a business combination and allocated the purchase consideration to assets acquired and liabilities assumed based on preliminary estimated fair values, as presented in the following table (in millions):
| Amount | |||
| Goodwill | $ | 300.6 | |
| Identified intangible assets | 54.1 | ||
| Cash and cash equivalents | 14.0 | ||
| Net assets acquired | 9.4 | ||
| Total | $ | 378.1 | |
| Amount | |||||
| Goodwill | $ | 129.6 | |||
| Identified intangible assets | 21.6 | ||||
| Cash | 9.0 | ||||
| Net liabilities assumed | (3.3) | ||||
| Total | $ | 156.9 | |||
Goodwill generated from this business combination is primarily attributable to the assembled workforce and expected post-acquisition synergies from integrating Twistlock’s productBridgecrew technology into our platform.platforms. The goodwill is expected to benot deductible for U.S. income tax purposes.
The following table presents details of the identified intangible assetsasset acquired (in millions, except years):
| Fair Value | Estimated Useful Life | ||||||||||
| Developed technology | $ | 21.6 | 6 years | ||||||||
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| Fair Value | Estimated Useful Life | ||||
| Developed technology | $ | 51.5 | 7 years | ||
| Customer relationships | 2.6 | 8 years | |||
| Total | $ | 54.1 | |||
On June 12, 2019,December 15, 2020, we completed our acquisition of 100% of the voting equity interest of PureSec Ltd.Expanse Inc. (“PureSec”Expanse”), a privately-held company specializing in cybersecurity solutions for serverless architectures. Theattack surface management. We expect the acquisition extendswill enrich our cloud security strategy withCortex offerings and provide organizations an integrated view of the addition of PureSecenterprise to our Prisma cloud security offerings.combine external, internal, and threat data. The total purchase consideration for the acquisition of PureSecExpanse was $36.8$797.2 million, which consisted of the following (in millions):
| Amount | |||
| Cash | $ | 35.9 | |
| Fair value of replacement equity awards | 0.9 | ||
| Total purchase consideration | $ | 36.8 | |
| Amount | |||||
| Cash | $ | 434.9 | |||
| Common stock (1.1 million shares) | 340.7 | ||||
| Fair value of replacement awards | 21.6 | ||||
| Total | $ | 797.2 | |||
As part of the acquisition, we issued replacement equity awards.awards, which included 0.2 million shares of our restricted common stock. The total fair value of the replacement equity awards was $9.1$160.0 million, of which the portion attributable to services performed prior to the acquisition date was allocated to the purchase consideration. The remaining fair value was allocated to future services and will be expensed over the remaining service periods as share-based compensation.
We have accounted for this transaction as a business combination and allocated the purchase consideration to assets acquired and liabilities assumed based on preliminary estimated fair values, as presented in the following table (in millions):
| Amount | |||
| Goodwill | $ | 24.4 | |
| Identified intangible assets | 7.4 | ||
| Cash | 4.0 | ||
| Net assets acquired | 1.0 | ||
| Total | $ | 36.8 | |
| Amount | |||||
| Goodwill | $ | 598.2 | |||
| Identified intangible assets | 160.3 | ||||
| Cash | 51.1 | ||||
| Net liabilities assumed | (12.4) | ||||
| Total | $ | 797.2 | |||
Goodwill generated from this business combination is primarily attributable to the assembled workforce and expected post-acquisition synergies from integrating PureSec’s productExpanse technology into our platform.platforms. The goodwill is expected to benot deductible for U.S. income tax purposes.
The following table presents details of the identified intangible assets acquired (in millions, except years):
| Fair Value | Estimated Useful Life | ||||||||||
| Developed technology | $ | 123.4 | 6 years | ||||||||
| Customer relationships | 36.9 | 10 years | |||||||||
| Total | $ | 160.3 | |||||||||
Sinefa Group, Inc.
| Fair Value | Estimated Useful Life | ||||
| Developed technology | $ | 7.4 | 5 years | ||
| Total | $ | 7.4 | |||
On March 28, 2019,November 24, 2020, we completed our acquisition of 100% of the voting equity interest of Demisto,Sinefa Group, Inc. and its wholly owned subsidiaries (“Demisto”Sinefa”), a privately-held security company specializing in security orchestration, automation and response (“SOAR”). Thedigital experience monitoring company. We expect the acquisition expands the functionality ofwill extend our platform with the addition of Demisto’s SOAR product.Prisma Access offering. The total purchase consideration for the acquisition of DemistoSinefa was $474.2$27.0 million, which consisted of the following (in millions):
| Amount | |||
| Cash | $ | 250.0 | |
| Common stock (0.9 million shares) | 214.7 | ||
| Fair value of replacement equity awards | 9.5 | ||
| Total purchase consideration | $ | 474.2 | |
| Amount | |||||
| Cash | $ | 26.9 | |||
| Fair value of replacement awards | 0.1 | ||||
| Total | $ | 27.0 | |||
As part of the acquisition, we issued $11.5 million of replacement equity awards, which included 0.3 million shares of our restricted common stock. The total fair value of the replacement equity awards was $105.2 million, of which the portion attributable to services performed prior to the acquisition date was allocated to the purchase consideration. The remaining fair value was allocated to future services and will be expensed over the remaining service periods as share-based compensation.
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We have accounted for this transaction as a business combination and allocated the purchase consideration to assets acquired and liabilities assumed based on preliminary estimated fair values, as presented in the following table (in millions):
| Amount | |||
| Goodwill | $ | 387.8 | |
| Identified intangible assets | 76.3 | ||
| Cash | 25.9 | ||
| Net liabilities assumed | (15.8 | ) | |
| Total | $ | 474.2 | |
| Amount | |||||
| Goodwill | $ | 13.7 | |||
| Identified intangible assets | 20.4 | ||||
| Net liabilities assumed | (7.1) | ||||
| Total | $ | 27.0 | |||
Goodwill generated from this business combination is primarily attributable to the assembled workforce and expected post-acquisition synergies from integrating Demisto’s productSinefa technology into our platform.platforms. The goodwill is not deductible for income tax purposes.
The following table presents details of the identified intangible assets acquired (in millions, except years):
| Fair Value | Estimated Useful Life | ||||||||||
| Developed technology | $ | 18.6 | 6 years | ||||||||
| Customer relationships | 1.8 | 8 years | |||||||||
| Total | $ | 20.4 | |||||||||
The Crypsis Group
| Fair Value | Estimated Useful Life | ||||
| Developed technology | $ | 56.6 | 6 years | ||
| Customer relationships | 19.7 | 6 years | |||
| Total | $ | 76.3 | |||
On October 12, 2018,September 17, 2020, we completed our acquisition of 100% ofThe Crypsis Group (“Crypsis”), an incident response, risk management, and digital forensics consulting firm. We expect the voting equity interest of RedLock Inc. (“RedLock”), a privately-held cloud security company. The acquisition expandswill expand our security capabilities for the public cloud with the addition of RedLock’s cloud security analytics technology.and strengthen our Cortex strategy. The total purchase consideration for the acquisition of RedLockCrypsis was $158.2$227.7 million, which consisted of $155.0the following (in millions):
| Amount | |||||
| Cash | $ | 225.7 | |||
| Fair value of replacement awards | 2.0 | ||||
| Total | $ | 227.7 | |||
As part of the acquisition, we issued $27.1 million in cash paid upon closing and $3.2 million in fair value of unvested equityreplacement awards, of which the portion attributable to services performed prior to the acquisition date.
We have accounted for this transaction as a business combination and allocated the purchase consideration to assets acquired and liabilities assumed based on preliminary estimated fair values, as presented in the following table (in millions):
| Amount | |||
| Goodwill | $ | 113.6 | |
| Identified intangible assets | 54.8 | ||
| Net liabilities assumed | (10.2 | ) | |
| Total | $ | 158.2 | |
| Amount | |||||
| Goodwill | $ | 157.6 | |||
| Identified intangible assets | 54.4 | ||||
| Net assets acquired | 15.7 | ||||
| Total | $ | 227.7 | |||
Goodwill generated from this business combination is primarily attributable to the assembled workforce and expected post-acquisition synergies from integrating RedLock’sCrypsis technology into our platform.platforms. The goodwill is not deductible for income tax purposes.
The following table presents details of the identified intangible assets acquired (in millions, except years):
| Fair Value | Estimated Useful Life | ||||||||||
| Developed technology | $ | 6.9 | 3 years | ||||||||
| Customer relationships | 47.5 | 7 years | |||||||||
| Total | $ | 54.4 | |||||||||
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| Fair Value | Estimated Useful Life | ||||
| Developed technology | $ | 48.6 | 4 years | ||
| Customer relationships | 5.3 | 8 years | |||
| Trade name and trademarks | 0.9 | 6 months | |||
| Total | $ | 54.8 | |||
Fiscal 20182020
On March 26, 2018,April 21, 2020, we completed our acquisition of all outstanding shares of Evident.io,CloudGenix, Inc. (“Evident.io”CloudGenix”), a privately-held cloud security company.company. We believe the acquisition will strengthen our secure access service edge (“SASE”) offering. The acquisition expanded our API-based security capabilitiestotal purchase consideration for the public cloud withacquisition of CloudGenix was $402.7 million, which consisted of the additionfollowing (in millions):
| Amount | |||||
| Cash | $ | 396.1 | |||
| Fair value of replacement awards | 6.6 | ||||
| Total | $ | 402.7 | |||
As part of Evident.io’s cloudthe acquisition, we issued $30.3 million of replacement awards, of which the portion attributable to services infrastructure protection technology.performed prior to the acquisition date was allocated to purchase consideration. The remaining fair value was allocated to future services and will be expensed over the remaining service periods as share-based compensation.
We have accounted for this transaction as a business combination and allocated the purchase consideration to assets acquired and liabilities assumed based on estimated fair values, as presented in the following table (in millions):
| Amount | |||||
| Goodwill | $ | 301.2 | |||
| Identified intangible assets | 109.9 | ||||
| Cash | 8.3 | ||||
| Net liabilities assumed | (16.7) | ||||
| Total | $ | 402.7 | |||
Goodwill generated from this business combination is primarily attributable to the assembled workforce and expected post-acquisition synergies from integrating CloudGenix technology into our portfolio. The goodwill is not deductible for income tax purposes.
The following table presents details of the identified intangible assets acquired (in millions, except years):
| Fair Value | Estimated Useful Life | ||||||||||
| Developed technology | $ | 67.2 | 5 years | ||||||||
| Customer relationships | 42.7 | 10 years | |||||||||
| Total | $ | 109.9 | |||||||||
Aporeto, Inc.
On December 23, 2019, we completed our acquisition of Aporeto, Inc. (“Aporeto”), a privately-held machine identity-based microsegmentation company. We believe the acquisition will strengthen our cloud-native security platform capabilities delivered by Prisma Cloud. The total purchase consideration for the acquisition of Evident.ioAporeto was $292.9$144.1 million, in cash,which consisted of the following (in millions):
| Amount | |||||
| Cash | $ | 139.8 | |||
| Fair value of replacement awards | 4.3 | ||||
| Total | $ | 144.1 | |||
As part of the acquisition, we issued $16.4 million of replacement awards, of which $4.0 million was accrued and was paid over a period of five months fromthe portion attributable to services performed prior to the acquisition date.date was allocated to purchase consideration. The remaining fair value was allocated to future services and will be expensed over the remaining service periods as share-based compensation.
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We have accounted for this transaction as a business combination and allocated the purchase consideration to assets acquired and liabilities assumed based on their estimated fair values, as presented in the following table (in millions):
| Amount | |||
| Goodwill | $ | 209.8 | |
| Identified intangible assets | 85.1 | ||
| Net liabilities assumed | (2.0 | ) | |
| Total | $ | 292.9 | |
| Amount | |||||
| Goodwill | $ | 111.3 | |||
| Identified intangible assets | 23.8 | ||||
| Cash | 10.5 | ||||
| Net liabilities assumed | (1.5) | ||||
| Total | $ | 144.1 | |||
Goodwill generated from this business combination is primarily attributable to the assembled workforce and expected post-acquisition synergies from integrating Evident.io’sAporeto’s technology into our platform and sales opportunities of Evident.io’s software as a service (“SaaS”) offerings.platform. The goodwill is not deductible for income tax purposes.
The following table presents details of the identified intangible assets acquired (in millions, except years):
| Fair Value | Estimated Useful Life | ||||||||||
| Developed technology | $ | 20.5 | 7 years | ||||||||
| Customer relationships | 3.3 | 4 years | |||||||||
| Total | $ | 23.8 | |||||||||
| Fair Value | Estimated Useful Life | ||||
| Developed technology | $ | 68.4 | 4.5 years | ||
| Trade name and trademarks | 8.5 | 1 year | |||
| Customer relationships | 8.2 | 8 years | |||
| Total | $ | 85.1 | |||
On April 24, 2018,September 20, 2019, we completed our acquisition of all outstanding shares of Cyber Secdo Ltd.Zingbox, Inc. (“Secdo”Zingbox”), a privately-held company specializing in endpoint detectionInternet of Things (“IoT”) security company. We believe the acquisition will accelerate our delivery of IoT security through our ML-Powered Next-Generation Firewall and response (“EDR”). The acquisition expands the functionality of our platform by adding EDR capabilities.Cortex offerings. The total purchase consideration for the acquisition of SecdoZingbox was $82.7$66.4 million in cash.
As part of the acquisition, we issued replacement equity awards with a total fair value of $5.7 million, which will be expensed over the remaining service periods as share-based compensation.
We have accounted for this transaction as a business combination and allocated the purchase consideration to assets acquired and liabilities assumed based on their estimated fair values, as presented in the following table (in millions):
| Amount | |||
| Goodwill | $ | 68.6 | |
| Identified intangible assets | 17.3 | ||
| Net liabilities assumed | (3.2 | ) | |
| Total | $ | 82.7 | |
| Amount | |||||
| Goodwill | $ | 48.1 | |||
| Identified intangible assets | 20.4 | ||||
| Net liabilities assumed | (2.1) | ||||
| Total | $ | 66.4 | |||
Goodwill generated from this business combination is primarily attributable to the assembled workforce and expected post-acquisition synergies from integrating Secdo’sZingbox’s technology into our advanced endpoint protection offering and our platform.portfolio. The goodwill is not deductible for income tax purposes.
The following table presents details of the identified intangible assets acquired (in millions, except years):
| Fair Value | Estimated Useful Life | ||||
| Developed technology | $ | 16.4 | 5 years | ||
| Customer relationships | 0.9 | 2 years | |||
| Total | $ | 17.3 | |||
| Amount | |||
| Cash | $ | 12.4 | |
| Goodwill | 75.3 | ||
| Identified intangible assets | 19.5 | ||
| Net liabilities assumed | (4.1 | ) | |
| Total | $ | 103.1 | |
| Fair Value | Estimated Useful Life | ||||
| Developed technology | $ | 16.6 | 8 years | ||
| Customer relationships | 2.9 | 8 years | |||
| Total | $ | 19.5 | |||
| Fair Value | Estimated Useful Life | ||||||||||
| Developed technology | $ | 18.6 | 5 years | ||||||||
| Customer relationships | 1.8 | 8 years | |||||||||
| Total | $ | 20.4 | |||||||||
Additional Acquisition-Related Information
Additional information related to our acquisitions completed in fiscal 2019,2022, such as that related to income tax and other contingencies, existing as of the acquisition date but unknown to us may become known during the remainder of the measurement
period, not to exceed 12 months from the respective acquisition date, which may result in changes to the amounts and allocations recorded.
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Goodwill
The following table presents details of our goodwill during the year ended July 31, 20192022 (in millions):
| Amount | |||
| Balance as of July 31, 2018 | $ | 522.8 | |
| Goodwill acquired | 829.5 | ||
| Balance as of July 31, 2019 | $ | 1,352.3 | |
| Amount | |||||
| Balance as of July 31, 2021 | $ | 2,710.1 | |||
| Goodwill acquired | 37.6 | ||||
| Balance as of July 31, 2022 | $ | 2,747.7 | |||
Purchased Intangible Assets
The following table presents details of our purchased intangible assets as of July 31, 2019 and July 31, 2018 (in millions):
| July 31, | |||||||||||||||||||||||
| 2019 | 2018 | ||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||
| Intangible assets subject to amortization: | |||||||||||||||||||||||
| Developed technology | $ | 318.8 | $ | (78.7 | ) | $ | 240.1 | $ | 154.7 | $ | (38.2 | ) | $ | 116.5 | |||||||||
| Customer relationships | 39.8 | (4.7 | ) | 35.1 | 12.2 | (1.2 | ) | 11.0 | |||||||||||||||
| Acquired intellectual property | 8.9 | (5.1 | ) | 3.8 | 8.9 | (4.5 | ) | 4.4 | |||||||||||||||
| Trade name and trademarks | 9.4 | (9.4 | ) | — | 8.5 | (0.4 | ) | 8.1 | |||||||||||||||
| Other | 2.2 | (2.2 | ) | — | 2.2 | (2.2 | ) | — | |||||||||||||||
| Total intangible assets subject to amortization | 379.1 | (100.1 | ) | 279.0 | 186.5 | (46.5 | ) | 140.0 | |||||||||||||||
| Intangible assets not subject to amortization: | |||||||||||||||||||||||
| In-process research and development | 1.6 | — | 1.6 | 0.8 | — | 0.8 | |||||||||||||||||
| Total purchased intangible assets | $ | 380.7 | $ | (100.1 | ) | $ | 280.6 | $ | 187.3 | $ | (46.5 | ) | $ | 140.8 | |||||||||
| July 31, | |||||||||||||||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||||||||||||||
| Intangible assets subject to amortization: | |||||||||||||||||||||||||||||||||||
| Developed technology | $ | 600.7 | $ | (347.9) | $ | 252.8 | $ | 596.2 | $ | (243.8) | $ | 352.4 | |||||||||||||||||||||||
| Customer relationships | 172.7 | (52.2) | 120.5 | 172.7 | (30.6) | 142.1 | |||||||||||||||||||||||||||||
| Acquired intellectual property | 11.3 | (4.8) | 6.5 | 7.9 | (3.8) | 4.1 | |||||||||||||||||||||||||||||
| Trade name and trademarks | 9.4 | (9.4) | — | 9.4 | (9.4) | — | |||||||||||||||||||||||||||||
| Other | 0.9 | (0.1) | 0.8 | 1.8 | (1.8) | — | |||||||||||||||||||||||||||||
| Total intangible assets subject to amortization | 795.0 | (414.4) | 380.6 | 788.0 | (289.4) | 498.6 | |||||||||||||||||||||||||||||
| Intangible assets not subject to amortization: | |||||||||||||||||||||||||||||||||||
| In-process research and development | 3.9 | — | 3.9 | — | — | — | |||||||||||||||||||||||||||||
| Total purchased intangible assets | $ | 798.9 | $ | (414.4) | $ | 384.5 | $ | 788.0 | $ | (289.4) | $ | 498.6 | |||||||||||||||||||||||
We recognized amortization expense of $53.6$126.9 million, $16.3$117.8 million, and $9.8$77.3 million for the years ended July 31, 2019, 2018,2022, 2021, and 2017,2020, respectively.
The following table summarizes estimated future amortization expense of our intangible assets subject to amortization as of July 31, 20192022 (in millions):
| Fiscal years ending July 31, | |||||||||||||||||||||||||||||||||||||||||
| Total | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 and Thereafter | |||||||||||||||||||||||||||||||||||
| Future amortization expense | $ | 380.6 | $ | 101.1 | $ | 91.1 | $ | 77.4 | $ | 55.6 | $ | 28.5 | $ | 26.9 | |||||||||||||||||||||||||||
| Amount | |||
| Years ending July 31: | |||
| 2020 | $ | 66.1 | |
| 2021 | 64.1 | ||
| 2022 | 59.6 | ||
| 2023 | 33.6 | ||
| 2024 | 26.1 | ||
| 2025 and thereafter | 29.5 | ||
| Total future amortization expense | $ | 279.0 | |
| July 31, 2019 | July 31, 2018 | ||||||
| Short-term deferred contract costs | $ | 151.1 | $ | 113.2 | |||
| Long-term deferred contract costs | 324.2 | 224.8 | |||||
| Total deferred contract costs | $ | 475.3 | $ | 338.0 | |||
9. Property and Equipment
The following table presents details of our property and equipment, net (in millions):
| July 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Computers, equipment, and software | $ | 404.3 | $ | 352.1 | |||||||
| Leasehold improvements | 249.3 | 231.6 | |||||||||
| Land | 87.2 | 49.6 | |||||||||
| Demonstration units | 41.6 | 43.8 | |||||||||
| Furniture and fixtures | 45.1 | 40.3 | |||||||||
| Total property and equipment, gross | 827.5 | 717.4 | |||||||||
| Less: accumulated depreciation | (469.7) | (399.0) | |||||||||
| Total property and equipment, net | $ | 357.8 | $ | 318.4 | |||||||
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During the year ended July 31, 2022, we purchased 4.6 acres of land adjacent to our headquarters in Santa Clara, California, along with the associated buildings, for $39.5 million to accommodate future expansion of our headquarters. This amount was recorded in property and equipment, net on our consolidated balance sheet as of July 31, 2019 and July 31, 2018 (in millions):
| July 31, | |||||||
| 2019 | 2018 | ||||||
| Computers, equipment, and software | $ | 264.1 | $ | 217.9 | |||
| Leasehold improvements | 204.8 | 159.5 | |||||
| Demonstration units | 40.7 | 33.0 | |||||
| Furniture and fixtures | 30.6 | 24.6 | |||||
| Total property and equipment | 540.2 | 435.0 | |||||
| Less: accumulated depreciation | (244.2 | ) | (161.9 | ) | |||
| Total property and equipment, net | $ | 296.0 | $ | 273.1 | |||
We recognized depreciation expense of $86.2$92.8 million, $74.7$94.2 million, and $48.6$96.0 million related to property and equipment during the years ended July 31, 2019, 2018,2022, 2021, and 2017,2020, respectively.
10. Debt
Convertible Senior Notes
In June 2014, we issued $575.0 million aggregate principal amount of 0.0% Convertible Senior Notes due 2019 (the “2019 Notes”) and in July 2018, we issued $1.7 billion aggregate principal amount of 0.75% Convertible Senior Notes due 2023 (the “2023 Notes”) and, in June 2020, we issued $2.0 billion aggregate principal amount of 0.375% Convertible Senior Notes due 2025 (the “2025 Notes,” and together with the 20192023 Notes, the “Notes”). The 2023 Notes bear interest at a fixed rate of 0.75% per year, payable semi-annually in arrears on January 1 and July 1 of each year, beginning on January 1, 2019. The 2025 Notes bear interest at a fixed rate of 0.375% per year, payable semi-annually in arrears on June 1 and December 1 of each year, beginning on December 1, 2020. Each series of Notesthe convertible notes is governed by an indenture between us, as the issuer, and U.S. Bank National Association, as Trustee (individually, each an “Indenture,” and together, the “Indentures”). The Notes of each series are unsecured, unsubordinated obligations and the applicable Indenture governing each series of Notes does not contain any financial covenants or restrictions on the payments of dividends, the incurrence of indebtedness, or the issuance or repurchase of securities by us or any of our subsidiaries. The 20192023 Notes were converted prior to or settled onand the maturity date of July 1, 2019, in accordance with their terms. The 20232025 Notes mature on July 1, 2023.2023 and June 1, 2025, respectively. We cannot redeem the 2023 Notes prior to maturity. We may redeem for cash all or any portion of the 2025 Notes, at our option, on or after June 5, 2023, and prior to the 31st scheduled trading day immediately preceding the maturity date if the last reported sale price of our common stock has been at least 130% of the conversion price then in effect for at least 20 trading days during any 30 consecutive trading day period ending on and including the trading day preceding the date on which we provide notice of redemption. The redemption will be at a price equal to 100% of the principal amount of the 2025 Notes and adjusted for interest. If we call any or all of the 2025 Notes for redemption, holders may convert such 2025 Notes called for redemption at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date.
The following table presents details of theour Notes (number of shares in millions):
| Conversion Rate per $1,000 Principal | Initial Conversion Price | Convertible Date | Initial Number of Shares | ||||||||
| 2019 Notes | 9.0680 | $ | 110.28 | January 1, 2019 | 5.2 | ||||||
| 2023 Notes | 3.7545 | $ | 266.35 | April 1, 2023 | 6.4 | ||||||
| Conversion Rate per $1,000 Principal | Initial Conversion Price | Convertible Date | Initial Number of Shares | ||||||||||||||||||||
| 2023 Notes | 3.7545 | $ | 266.35 | April 1, 2023 | 6.4 | ||||||||||||||||||
| 2025 Notes | 3.3602 | $ | 297.60 | March 1, 2025 | 6.7 | ||||||||||||||||||
Holders of the Notes may surrender their Notes for conversion at their option at any time prior to the close of business on the business day immediately preceding their respective convertible dates only under the following circumstances:
•during any fiscal quarter commencing after the fiscal quarters ending on October 31, 20142018 and October 31, 2018,2020 for the 20192023 Notes and 2023the 2025 Notes, respectively (and only during such fiscal quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days
ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the applicable conversion price for the respective Notes on each applicable trading day (the “sale price condition”);
•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 the applicable series 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 common stock and the applicable conversion rate for the respective Notes on each such trading day; or
•upon the occurrence of specified corporate events.
On or after the respective convertible date, holders may surrender all or any portion of their Notes for conversion at any time prior to the close of business on the second scheduled trading day immediately preceding the applicable maturity date regardless of the foregoing conditions, and such conversions will be settled upon the applicable maturity date. Upon conversion, holders of the Notes of a series will receive cash equal to the aggregate principal amount of the Notes of such series to be converted, and, at our election, cash and/or shares of our common stock for any amounts in excess of the aggregate principal amount of the Notes of such series being converted.
The conversion price will be subject to adjustment in some events. Holders of the Notes of a series who convert their Notes of such series in connection with certain corporate events that constitute a “make-whole fundamental change” under the applicable Indenture are, under certain circumstances, entitled to an increase in the conversion rate for such series of Notes. Additionally, upon the occurrence of a corporate event that constitutes a “fundamental change” under the applicable Indenture, holders of the Notes of such series may require us to repurchase for cash all or a portion of the Notes of such series at a repurchase price equal to 100% of the principal amount of the Notes of such series plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
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The sale price condition was met for the 2019 Notes was met during the fiscal quartersquarter ended July 31, 20182022, and October 31, 2018. Asas a result, holders were able to earlymay convert their 2019Notes at any time during the fiscal quarter ending October 31, 2022. The net carrying amount of the Notes was classified as a current liability on our consolidated balance sheet as of July 31, 2022.
The sale price condition for the 2023 Notes was met during the fiscal quarter ended July 31, 2021, and as a result, holders may convert their 2023 Notes at any time during the fiscal quarter ended October 31, 2018 and up to January 1, 2019. Conversion requests for the 2019 Notes received on or after January 1, 2019 were settled on the maturity date. During the year ended July 31, 2019, we repaid $575.0 million in aggregate principal amount of the 2019 Notes, of which $415.6 million in aggregate principal amount pertained to early conversions submitted by the holders prior to January 1, 2019. The remaining $159.4 million in aggregate principal amount was repaid on the July 1, 2019 maturity date. We issued 2.5 million shares of common stock to the holders of the 2019 Notes for the conversion value in excess of the principal amount during the year ended July 31, 2019. These shares were fully offset by shares received from the corresponding exercise of the associated note hedges.
| Year Ended | |||
| July 31, 2019 | |||
| 2019 Notes principal early converted and repaid in cash: | |||
Allocated to liability component(1) | $ | 403.4 | |
Allocated to equity component(2) | 12.2 | ||
| Total principal early converted and repaid in cash | $ | 415.6 | |
Loss on early conversions of convertible senior notes(3) | $ | 2.6 | |
The following table sets forth the components of the Notes as of July 31, 2019 and July 31, 2018 (in millions):
July 31, 2022(1) | July 31, 2021 | ||||||||||||||||||||||||||||||||||
| 2023 Notes | 2025 Notes | Total | 2023 Notes | 2025 Notes | Total | ||||||||||||||||||||||||||||||
| Liability component: | |||||||||||||||||||||||||||||||||||
| Principal | $ | 1,691.9 | $ | 1,999.4 | $ | 3,691.3 | $ | 1,692.0 | $ | 2,000.0 | $ | 3,692.0 | |||||||||||||||||||||||
| Less: debt discount and debt issuance costs, net of amortization | (2.6) | (11.9) | (14.5) | (134.1) | (331.9) | (466.0) | |||||||||||||||||||||||||||||
| Net carrying amount | $ | 1,689.3 | $ | 1,987.5 | $ | 3,676.8 | $ | 1,557.9 | $ | 1,668.1 | $ | 3,226.0 | |||||||||||||||||||||||
| Equity component (including amounts classified as temporary equity) | $ | — | $ | — | $ | — | $ | 315.0 | $ | 403.0 | $ | 718.0 | |||||||||||||||||||||||
______________
| July 31, 2019 | July 31, 2018 | ||||||||||||||||||||||
| 2019 Notes | 2023 Notes | Total | 2019 Notes | 2023 Notes | Total | ||||||||||||||||||
| Liability component: | |||||||||||||||||||||||
| Principal | $ | — | $ | 1,693.0 | $ | 1,693.0 | $ | 575.0 | $ | 1,693.0 | $ | 2,268.0 | |||||||||||
| Less: debt discount and debt issuance costs, net of amortization | — | 263.0 | 263.0 | 24.6 | 323.3 | 347.9 | |||||||||||||||||
| Net carrying amount | $ | — | $ | 1,430.0 | $ | 1,430.0 | $ | 550.4 | $ | 1,369.7 | $ | 1,920.1 | |||||||||||
| Equity component (including amounts classified as temporary equity) | $ | — | $ | 315.0 | $ | 315.0 | $ | 109.8 | $ | 315.0 | $ | 424.8 | |||||||||||
The total estimated fair value of the 2023 Notes was $1.9and 2025 Notes were $3.2 billion and $3.5 billion at July 31, 2019. The total estimated fair value of the Notes was $2.72022, respectively and $2.6 billion and $2.9 billion at July 31, 2018.2021, respectively. The fair value was determined based on the closing trading price per $100 of the applicable series of the Notes as of the last day of trading for the period. We consider the fair value of the Notes at July 31, 20192022 and July 31, 20182021 to be a Level 2 measurement. The fair value of the Notes is primarily affected by the trading price of our common stock and market interest rates. Based on the closing price of our common stock on July 31, 2019, the if-converted value of the 2023 Notes was less than its principal amount.
The following table sets forth interest expense recognized related to the Notes (dollars in millions):
| Year Ended July 31, 2022 | Year Ended July 31, 2021 | Year Ended July 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| 2023 Notes | 2025 Notes | Total | 2023 Notes | 2025 Notes | Total | 2023 Notes | 2025 Notes | Total | |||||||||||||||||||||||||||||||||||||||||||||
| Contractual interest expense | $ | 12.7 | $ | 7.5 | $ | 20.2 | $ | 12.7 | $ | 7.5 | $ | 20.2 | $ | 12.7 | $ | 1.1 | $ | 13.8 | |||||||||||||||||||||||||||||||||||
Amortization of debt discount(1) | — | — | — | 63.5 | 74.3 | 137.8 | 60.9 | 10.5 | 71.4 | ||||||||||||||||||||||||||||||||||||||||||||
| Amortization of debt issuance costs | 2.8 | 4.4 | 7.2 | 2.3 | 2.8 | 5.1 | 2.1 | 0.4 | 2.5 | ||||||||||||||||||||||||||||||||||||||||||||
| Total interest expense recognized | $ | 15.5 | $ | 11.9 | $ | 27.4 | $ | 78.5 | $ | 84.6 | $ | 163.1 | $ | 75.7 | $ | 12.0 | $ | 87.7 | |||||||||||||||||||||||||||||||||||
| Effective interest rate of the liability component | 0.9 | % | 0.6 | % | 5.2 | % | 5.4 | % | 5.2 | % | 5.4 | % | |||||||||||||||||||||||||||||||||||||||||
______________
| Year Ended July 31, 2019 | Year Ended July 31, 2018 | Year Ended July 31, 2017 | |||||||||||||||||||||||||||||||||
| 2019 Notes | 2023 Notes | Total | 2019 Notes | 2023 Notes | Total | 2019 Notes | 2023 Notes | Total | |||||||||||||||||||||||||||
| Contractual interest expense | $ | — | $ | 12.7 | $ | 12.7 | $ | — | $ | 0.7 | $ | 0.7 | $ | — | $ | — | $ | — | |||||||||||||||||
| Amortization of debt discount | 8.7 | 58.5 | 67.2 | 22.9 | 3.0 | 25.9 | 22.0 | — | 22.0 | ||||||||||||||||||||||||||
| Amortization of debt issuance costs | 1.1 | 1.9 | 3.0 | 2.8 | 0.1 | 2.9 | 2.5 | — | 2.5 | ||||||||||||||||||||||||||
| Total interest expense recognized | $ | 9.8 | $ | 73.1 | $ | 82.9 | $ | 25.7 | $ | 3.8 | $ | 29.5 | $ | 24.5 | $ | — | $ | 24.5 | |||||||||||||||||
| Effective interest rate of the liability component | 4.8 | % | 5.2 | % | 4.8 | % | 5.2 | % | 4.8 | % | — | % | |||||||||||||||||||||||
Note Hedges
To minimize the impact of potential economic dilution upon conversion of the Notes,our convertible senior notes, we entered into separate convertible note hedge transactions (the “2019 Note Hedges,” with respect to the 2019 Notes, and the “2023 Note Hedges,” with respect to the 2023 Notes, the “2025 Note Hedges,” with respect to the 2025 Notes, and collectively,the 2023 Notes Hedges together with 2025 Note Hedges, the “Note Hedges”) with respect to our common stock concurrent with the issuance of each series of the Notes.
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The following table presents details of theour Note Hedges (in millions):
| Initial Number of Shares | Aggregate Purchase | |||||
| 2019 Note Hedges | 5.2 | $ | 111.0 | |||
| 2023 Note Hedges | 6.4 | $ | 332.0 | |||
| Initial Number of Shares | Aggregate Purchase | ||||||||||
| 2023 Note Hedges | 6.4 | $ | 332.0 | ||||||||
| 2025 Note Hedges | 6.7 | $ | 370.8 | ||||||||
The Note Hedges cover shares of our common stock at a strike price per share that corresponds to the initial applicable conversion price of the applicable series of the Notes, which are also subject to adjustment, and are exercisable upon conversion of the applicable series of the Notes. The Note Hedges will expire upon maturity of the applicable series of the Notes. The Note Hedges are separate transactions and are not part of the terms of the applicable series of the Notes. Holders of the Notes of either series will not have any rights with respect to the Note Hedges. Any shares of our common stock receivable by us under the Note Hedges are excluded from the calculation of diluted earnings per share as they are antidilutive. The aggregate amounts paid for the Note Hedges are included in additional paid-in capital inon our consolidated balance sheets.
Warrants
Separately, but concurrently with the issuance of each series of Notes,our convertible senior notes, we entered into transactions whereby we sold warrants (the “2019 Warrants,” with respect to the 2019 Notes, and the “2023 Warrants,” with respect to the 2023 Notes, the “2025 Warrants,” with respect to the 2025 Notes, and collectively,the 2023 Warrants together with the 2025 Warrants, the “Warrants”) to acquire shares of our common stock, subject to anti-dilution adjustments. The 20192023 Warrants and 20232025 Warrants are exercisable beginning October 20192023 and October 2023,September 2025, respectively.
The following table presents details of theour Warrants (in millions, except per share data):
| Initial Number of Shares | Strike Price per Share | Aggregate Proceeds | ||||||||
| 2019 Warrants | 5.2 | $ | 137.85 | $ | 78.3 | |||||
| 2023 Warrants | 6.4 | $ | 417.80 | $ | 145.4 | |||||
| Initial Number of Shares | Strike Price per Share | Aggregate Proceeds | |||||||||||||||
| 2023 Warrants | 6.4 | $ | 417.80 | $ | 145.4 | ||||||||||||
| 2025 Warrants | 6.7 | $ | 408.47 | $ | 202.8 | ||||||||||||
The shares issuable under the Warrants will be included in the calculation of diluted earnings per share when the average market value per share of our common stock for the reporting period exceeds the applicable strike price for such series of Warrants. The Warrants are separate transactions and are not part of either series of Notes or Note Hedges and are not remeasured through earnings each reporting period. Holders of the Notes of either series will not have any rights with respect to the Warrants. The aggregate proceeds received from the sale of the Warrants are included in additional paid-in capital inon our consolidated balance sheets.
Revolving Credit Facility
On September 4, 2018, we entered into a credit agreement (the “Credit Agreement”) with certain institutional lenders that provides for a $400.0 million unsecured revolving credit facility (the “Credit Facility”), with an option to increase the amount of the Credit Facility by up to an additional $350.0 million, subject to certain conditions. The Credit Facility matures on the earlier of (i) September 4, 2023 and (ii) the date that is 91 days prior to the stated maturity of our 2023 Notes if (a) any of the 2023 Notes are still outstanding and (b) our unrestricted cash and cash equivalents are less than the then outstanding principal amount of our 2023 Notes plus $400.0 million.
The borrowings under the Credit Facility currently bear interest, at our option, at a base rate plus a spread of 0.00% to 0.75%, or an adjusted LIBO rateRate plus a spread of 1.00% to 1.75%, in each case with such spread being determined based on our leverage ratio. We are obligated to pay an ongoing commitment fee on undrawn amounts at a rate of 0.125% to 0.250%, depending on our leverage ratio. In March 2021, the ICE Benchmark Administration, the administrator of LIBO Rate, announced that it will cease publication of LIBO Rate by June 2023. Under the terms of our Credit Facility, in the event of the discontinuance of the LIBO Rate, a mutually agreed-upon alternative benchmark rate will be established to replace the LIBO Rate, which may include the Secured Overnight Financing Rate (“SOFR”). We do not anticipate that the discontinuance of the LIBO Rate will materially impact our liquidity or financial position.
As of July 31, 2019,2022, there were no amounts outstanding and we were in compliance with all covenants under the Credit Agreement.
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11. Commitments and Contingencies
Leases
We lease our facilities underhave entered into various non-cancelable operating leases which expireprimarily for our facilities with original lease periods expiring through the year ending July 31, 2028.2032, with the most significant leases relating to corporate headquarters in Santa Clara.
In May 2015 and October 2015, we entered into a total of three lease agreements for approximately 941,000 square feet of corporate office space in Santa Clara, California, which serves as our newcurrent corporate headquarters. The leases contain rent holiday periods, scheduled rent increases, lease incentives, and renewal options which allow the lease terms to be extended beyond their expiration dates of July 2028 through July 2046. In September 2017, per the terms of the lease agreements, the landlords exercised their option to amend our lease payment schedules and eliminate our rent holiday periods, which increased our rental payments by $24.4 million, $11.8 million, and $2.0 million for fiscal 2018, 2019, and 2020, respectively. In exchange, we received an upfront cash reimbursement of $38.2 million during the three months ended October 31, 2017, which we have applied and will apply against the future additional rental payments when due. As amended, rentalRental payments under the three lease agreements are approximately $412.0 million over the lease term.
In September 2012, we entered into two lease agreements for a total of approximately 300,000 square feet of space in Santa Clara, California, which served as our previous corporate headquarters through August 2017, when we relocated to our newcurrent corporate campus. TheIn December 2019, we terminated these leases contain rent holiday periods and two separate five-year optionsprior to extend the lease term beyond their expiration dates ofdate. The early termination fee is $25.0 million, payable in equal quarterly installments from April 2020 through July 2023. Rental payments under theseUpon termination, we recorded a decrease of $13.6 million in operating lease agreements are approximately $94.3liabilities based on the payment schedule of the early termination fee discounted by the incremental borrowing rate for the remaining payment term. We also decreased right-of-use assets by $8.7 million overupon surrendering possession of the lease term. In August 2017, we exited our previous corporate headquarter facilities and relocated to our new corporate campus, which resulted in the recognition ofproperties. As a cease-use loss of $39.2 millionresult, during the year ended July 31, 2018. Due to changes2020, we recorded a gain of $3.1 million net of other related fees of $1.8 million in market conditions, and the resulting changes to the amount and timing of estimated cash flows from sublease rentals that could be reasonably obtained, we
During the years ended July 31, 20192022, 2021 and 2018, we released $10.02020, our net cost for operating leases was $89.7 million, $75.2 million, and $10.1$80.4 million, respectively, primarily consisting of operating lease costs of $67.6 million, $59.3 million, and $63.5 million, respectively. Our net cost for operating leases also included variable lease costs, short-term lease costs and sublease income in the cease-use liability through rental payments. periods presented.
The following tables present additional information for our operating leases (in millions, except for years and percentages):
| Year Ended July 31, | |||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||||||||||||||||||||
| Operating cash flows used in payments of operating lease liabilities | $ | 81.5 | $ | 81.7 | $ | 78.3 | |||||||||||||||||||||||||||||
| Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 33.0 | $ | 48.6 | $ | 28.4 | |||||||||||||||||||||||||||||
| July 31, 2022 | July 31, 2021 | ||||||||||||||||||||||||||||
| Weighted-average remaining lease term | 5.5 years | 6.1 years | |||||||||||||||||||||||||||
| Weighted-average discount rate | 4.0 | % | 3.8 | % | |||||||||||||||||||||||||
The following table presents maturities of operating lease liabilities as of July 31, 2022 (in millions):
________________________
| Amount | |||||
| Fiscal years ending July 31: | |||||
| 2023 | $ | 73.5 | |||
| 2024 | 66.6 | ||||
| 2025 | 64.5 | ||||
| 2026 | 62.1 | ||||
| 2027 | 56.0 | ||||
| 2028 and thereafter | 57.4 | ||||
| Total operating lease payments | 380.1 | ||||
| Less: imputed interest | (41.7) | ||||
| Present value of operating lease liabilities | $ | 338.4 | |||
Current portion of operating lease liabilities(1) | $ | 62.3 | |||
| Long-term operating lease liabilities | $ | 276.1 | |||
(1) Current portion of operating lease liabilities is included in accrued and other liabilities on our consolidated balance sheet.
As of July 31, 2019 and 2018, the remaining balance of the cease-use liability was $26.1 million and $29.1 million, respectively. The remaining balance as of July 31, 2019 is expected to be paid through the end of the lease term in July 2023.
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| Amount | |||
| Years ending July 31: | |||
| 2020 | $ | 74.1 | |
| 2021 | 67.2 | ||
| 2022 | 62.9 | ||
| 2023 | 60.2 | ||
| 2024 | 45.5 | ||
| 2025 and thereafter | 181.9 | ||
| Committed gross lease payments | 491.8 | ||
| Less: proceeds from sublease rentals | 9.8 | ||
| Net operating lease obligation | $ | 482.0 | |
12. Commitments and Contingencies
Purchase Commitments
Manufacturing Purchase Commitments
| Fiscal years ending July 31, | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 and Thereafter | |||||||||||||||||||||||||||||||||||||||||
| Manufacturing purchase commitments | $ | 331.7 | $ | 226.7 | $ | 30.0 | $ | 35.0 | $ | 40.0 | $ | — | $ | — | |||||||||||||||||||||||||||||||||
Other Purchase Commitments
We have entered into various non-cancelable agreements with third-partycertain service providers, for our use of certain cloud and other services, under which we are committed to minimum or fixed purchases through the year ending July 31, 2026.purchases. The following table presents details of the aggregate future non-cancelable purchase commitments under these agreements as of July 31, 20192022 (in millions):
| Fiscal years ending July 31, | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 and Thereafter | |||||||||||||||||||||||||||||||||||||||||
| Other purchase commitments | $ | 1,881.4 | $ | 82.7 | $ | 368.5 | $ | 413.9 | $ | 531.6 | $ | 483.9 | $ | 0.8 | |||||||||||||||||||||||||||||||||
| Amount | |||
| Fiscal years ending July 31: | |||
| 2020 | $ | 10.0 | |
| 2021 | 30.1 | ||
| 2022 | 55.8 | ||
| 2023 | 57.5 | ||
| 2024 | 67.5 | ||
| 2025 and thereafter | 97.5 | ||
| Total other purchase commitments | $ | 318.4 | |
Mutual Covenant Not to Sue and Release Agreement
In January 2020, we executed a Mutual Covenant Not to Sue and Release Agreement for $50.0 million to extend an existing covenant not to sue for seven years. As the primary benefit of the arrangement was attributable to future use, the amount was recorded in other assets on our consolidated balance sheets and is amortized to cost of product revenue in our consolidated statements of operations over the estimated period of benefit of seven years.
Litigation
We are subject to legal proceedings, claims, and litigation arising in the ordinary course of business, including intellectual property litigation. Such matters are subject to many uncertainties and outcomes are not predictable with assurance. We accrue for contingencies when we believe that a loss is probable and that we can reasonably estimate the amount of any such loss.
To the extent there is a reasonable possibility that a loss exceeding amounts already recognized may be incurred and the amount of such additional loss would be material, we will either disclose the estimated additional loss or state that such an estimate cannot be made. As of July 31, 2019,2022, we have not recorded any significant accruals for loss contingencies associated with such legal proceedings, determined that an unfavorable outcome is probable or reasonably possible, or determined that the amount or range of any possible loss is reasonably estimable.
Indemnification
Under the indemnification provisions of our standard sales related contracts, we agree to defend our end-customers against third-party claims asserting infringement of certain intellectual property rights, which may include patents, copyrights, trademarks, or trade secrets, and to pay judgments entered on such claims. Our exposure under these indemnification provisions is generally limited to payments made to us for the alleged infringing products over the preceding twelve months under the agreement. However, certain agreements include indemnification provisions that could potentially expose us to losses in excess of these payments. In addition, we indemnify our officers, directors, and certain key employees while they are serving in good faith in their company capacities. To date, we have not recorded any accruals for loss contingencies associated with indemnification claims or determined that an unfavorable outcome is probable or reasonably possible.
13. Stockholders’ Equity
Share Repurchase Program
In February 2019, our board of directors authorized a new $1.0 billion share repurchase program, which will beis funded from available working capitalcapital. In December 2020 and August 2021, our board of directors authorized additional $700.0 million and $676.1 million increases to this share repurchase program, respectively, bringing the total authorization under this share repurchase program to $2.4 billion (our “current authorization”). The expiration date of our current authorization was extended to December 31, 2022, and our repurchase program may be suspended or discontinued at any time. Repurchases may be made at management’s discretion from time to time on the open market, through privately negotiated transactions, transactions structured through investment banking institutions, block purchase techniques, 10b5-1 trading plans, or a combination of the foregoing. This
The following table summarizes the share repurchase activity under our share repurchase program will expire on December 31, 2020, and may be suspended or discontinued at any time. (in millions, except per share amounts):
| Year Ended July 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Number of shares repurchased | 1.8 | 4.0 | 0.9 | ||||||||||||||
Weighted average price per share (1) | $ | 512.49 | $ | 294.87 | $ | 209.12 | |||||||||||
Aggregate purchase price (1) | $ | 915.0 | $ | 1,178.1 | $ | 198.1 | |||||||||||
______________
(1) Includes transaction costs
As of July 31, 2019, $1.0 billion2022, $85.0 million remained available for future share repurchases under our current repurchase authorization. The total price of the shares repurchased and related transaction costs are reflected as a reduction to common stock and additional paid-in capital on our consolidated balance sheets.
During the fiscal year ended July 31, 2020, we completed the ASR transaction with an aggregate of 5.2 million shares of our common stock repurchased and retired. The total price of the ASR transaction is reflected as a reduction to common stock and additional paid-in capital on our consolidated balance sheet.
14. Equity Award Plans
Share-Based Compensation Plans
Our 2021 Equity Incentive Plan
Upon effectiveness of the 2021 Plan, the 2012 Plan was terminated and no further awards will be granted under the 2012 Plan. Awards grantedthat were outstanding upon such termination remained outstanding pursuant to their original terms, and any subsequent expiration, cancellation or forfeiture of awards under our 2012 Plan are returned to our 2021 Plan.
The majority of our equity awards are RSUs, which generally vest over the periods determined by the boarda period of directors, generally three to four years from the date of grant, and our options expire no more than ten years after the date of grant. Since our IPO in 2012, awards granted under our 2012 Plan consist primarily of RSUs. Until vested, RSUs do not have the voting and dividend participation rights of common stock and the shares underlying the awards are not considered issued and outstanding. Our options expire no more than ten years after the date of grant.
We grant awards with performance conditions (PSAs and PSUs)PSUs to certain employees, which vest over a period of threeone to four years from the date of grant. The actual number of PSAs and PSUs earned and eligible to vest is determined based on the level of achievement against revenue growth, pre-established billings and operating margin goals, or revenue growthpre-defined individual performance targets for the fiscal year.year, and market conditions, if applicable. During the year ended July 31, 2022, we granted 0.1 million shares of PSUs, which contain service, performance and market conditions. The performance condition is based on revenue growth, whereas the market condition measures our total shareholder return (“TSR”) relative to the TSR of the companies listed in the Standard & Poor’s 500 index. In addition to this grant, we have also approved the future grant of 0.1 million shares of PSUs with similar terms, which will be considered granted at the time their related vesting conditions are established in the next two years.
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We have also granted PSOs with both a market condition and a service condition to certain executives. The market condition for PSOs granted in the fiscal years 2018 and 2019 requires the price of our common stock to equal or exceed $297.75, $397.00, $496.25, and $595.50 (the “stockbased on the average closing price targets”)for 30 consecutive trading days during the four-four-, five-five-, six-six-, and seven-yearseven-and-a-half-year periods following the date of grant in fiscal year 2018 and 2019, respectively. The market condition for PSOs granted in the fiscal year 2021 requires the price of our common stock to equal or exceed $397.00, $496.25, $595.50 and $700.00 based on the average closing price for 30 consecutive trading days during the three-, four-, five-, and six-and-a-half-year periods following the date of grant. All of the PSOs granted in the fiscal year 2021 were forfeited in the same fiscal year and are no longer outstanding. To the extent that the stock price targets havemarket condition has been met, one-fourth of the PSOs will vest on theeach anniversary date of the grant date for such PSOs, subject to continued service. All outstanding PSOs may be exercised prior to vesting (“early exercised”exercise”). Shares of common stock issued upon early exercise of the PSOs will be restricted and, at our option, subject to repurchase if the option holder ceases to be a service provider. The maximum contractual term of our outstanding PSOs is seven to seven and a half years from the date of grant, depending on vesting period. As of July 31, 2022, all stock price targets for our outstanding PSOs have been satisfied.
We net-share settle equity awards held by certain employees by withholding shares upon vesting to satisfy tax withholding obligations. The shares withheld to satisfy employee tax withholding obligations are returned to our 20122021 Plan and will be available for future issuance. Payments for employees’ tax obligations to the tax authorities are recognized as a reduction to additional paid-in capital and reflected as financing activities in our consolidated statements of cash flows.
A total of 18.813.1 million shares of our common stock are reserved for issuance pursuant to our 2012 Planequity incentive plans as of July 31, 2019. This includes shares that are (i) reserved but unissued under our 2005 Plan on the effective date of our 2012 Plan or (ii) returned to our 2005 Plan as a result of expiration or termination of options. On the first day of each fiscal year, the number of shares in the reserve may be increased by the lesser of (i) 8,000,000 shares, (ii) 4.5% of the outstanding shares of common stock on the last day of our immediately preceding fiscal year, or (iii) such other amount as determined by our board of directors.2022.
2012 Employee Stock Purchase Plan
Our 2012 Employee Stock Purchase Plan was adopted by our board of directors and approved by the stockholders on June 5, 2012, and was effective upon completion of our IPO.initial public offering (“IPO”). On August 29, 2017, we amended and restated our 2012 Employee Stock Purchase Plan (our “2012 ESPP”) to extend the length of our offering periods from 6 to 24 months.
Our 2012 ESPP permits eligible employees to acquire shares of our common stock at 85% of the lower of the fair market value of our common stock on the first trading day of each offering period or on the purchase date. If the fair market value of our common stock on the purchase date is lower than the first trading day of the offering period, the current offering period will be cancelled after purchase and a new 24-month offering period will begin. Under our 2012 ESPP, each 24-month offering period consists of four consecutive 6-month purchase periods, with purchase dates on the first trading day on or after February 28 and August 31 of each year. Participants may purchase shares of common stock through payroll deductions of up to 15% of their eligible compensation, subject to purchase limits of 625 shares per six-month purchase period and $25,000 worth of stock for each calendar year. DuringShares purchased under our 2012 ESPP during the yearfiscal years ended July 31, 2019, employees purchased 0.52022, 2021 and 2020 were 0.7 million, shares of common stock under our 2012 ESPP0.6 million and 0.6 million, at an average exercise price of $128.81$192.81 per share.share, $161.07 per share and $146.90 per share respectively.
A total of 3.94.9 million shares of our common stock are available for sale under our 2012 ESPP as of July 31, 2019.2022. On the first day of each fiscal year, the number of shares in the reserve may be increased by the lesser of (i) 2,000,000 shares, (ii) 1% of the outstanding shares of our common stock on the first day of the fiscal year, or (iii) such other amount as determined by our board of directors.
Assumed Share-basedShare-Based Compensation Plans
In connection with our acquisitions, we have assumed equity incentive plans of RedLock, Demisto, and Twistlock, we assumed RedLock’s 2015 Stock Plan, as amended, Demisto’s 2015 Stock Option Plan, as amended, and Twistlock’s 2015 Share Option Plan, as amended and restated (together, the “assumedcertain acquired companies (collectively “the Assumed Plans”). The equity awards assumed in connection with each acquisition were granted from their respective assumed Plans.plans. The assumed equity awards will be settled in shares of our common stock and will retain the terms and conditions under which they were originally granted. No additional equity awards will be granted under and forfeited awards will not be returned to the assumedAssumed Plans. Refer to Note 6.7. Acquisitions for more information on our acquisitions and the related equity awards assumed.
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Table of RedLock, Demisto, PureSec, and Twistlock during the year ended July 31, 2019, we issued a total of 0.5 million shares of restricted common stock as replacement equity awards which are subject to additional time-based vesting requirements and continued service by the award holder.Contents
Stock Option Activities
The following table summarizes the stock option and PSO activity under our stock plans during the years ended July 31, 2019, 2018,2022, 2021, and 20172020 (in millions, except per share amounts):
| Stock Options Outstanding | PSOs Outstanding | ||||||||||||||||||||||||||||||||||||||||||||||
| Number of Shares | Weighted-Average Exercise Price Per Share | Weighted-Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | Number of Shares | Weighted-Average Exercise Price Per Share | Weighted-Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | ||||||||||||||||||||||||||||||||||||||||
| Balance—July 31, 2019 | 0.3 | $ | 14.53 | 2.2 | $ | 81.4 | 3.7 | $ | 193.99 | 6.2 | $ | 120.1 | |||||||||||||||||||||||||||||||||||
| Exercised | (0.2) | $ | 11.46 | — | $ | — | |||||||||||||||||||||||||||||||||||||||||
| Forfeited | — | $ | — | (0.9) | $ | 193.51 | |||||||||||||||||||||||||||||||||||||||||
| Balance—July 31, 2020 | 0.1 | $ | 19.59 | 1.5 | $ | 34.2 | 2.8 | $ | 194.14 | 5.2 | $ | 170.9 | |||||||||||||||||||||||||||||||||||
| Granted | — | $ | — | 0.2 | $ | 304.29 | |||||||||||||||||||||||||||||||||||||||||
| Exercised | 0.0 | $ | 12.82 | — | $ | — | |||||||||||||||||||||||||||||||||||||||||
| Forfeited | — | $ | 7.84 | (0.2) | $ | 304.29 | |||||||||||||||||||||||||||||||||||||||||
| Balance—July 31, 2021 | 0.1 | $ | 26.20 | 0.8 | $ | 27.4 | 2.8 | $ | 194.14 | 4.2 | $ | 566.8 | |||||||||||||||||||||||||||||||||||
| Exercised | (0.1) | $ | 18.72 | — | $ | — | |||||||||||||||||||||||||||||||||||||||||
| Forfeited | — | $ | — | (0.1) | $ | 184.24 | |||||||||||||||||||||||||||||||||||||||||
| Balance—July 31, 2022 | 0.0 | $ | 55.36 | 0.5 | $ | 6.7 | 2.7 | $ | 194.55 | 3.2 | $ | 809.3 | |||||||||||||||||||||||||||||||||||
| Exercisable—July 31, 2022 | 0.0 | $ | 55.36 | 0.5 | $ | 6.7 | 2.7 | $ | 194.55 | 3.2 | $ | 809.3 | |||||||||||||||||||||||||||||||||||
| Stock Options Outstanding | PSOs Outstanding | ||||||||||||||||||||||||
| Number of Shares | Weighted-Average Exercise Price Per Share | Weighted-Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | Number of Shares | Weighted-Average Exercise Price Per Share | Weighted-Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | ||||||||||||||||||
| Balance—July 31, 2016 | 2.1 | $ | 13.42 | 5.2 | $ | 244.9 | — | $ | — | 0.0 | $ | — | |||||||||||||
| Granted | — | $ | — | — | $ | — | |||||||||||||||||||
| Exercised | (0.5 | ) | $ | 14.44 | — | $ | — | ||||||||||||||||||
| Forfeited | — | $ | — | — | $ | — | |||||||||||||||||||
| Balance—July 31, 2017 | 1.6 | $ | 13.11 | 4.2 | $ | 190.6 | — | $ | — | 0.0 | $ | — | |||||||||||||
| Granted | — | $ | — | 1.2 | $ | 198.50 | |||||||||||||||||||
| Exercised | (0.6 | ) | $ | 12.76 | — | $ | — | ||||||||||||||||||
| Forfeited | — | $ | — | — | $ | — | |||||||||||||||||||
| Balance—July 31, 2018 | 1.0 | $ | 13.28 | 3.1 | $ | 199.8 | 1.2 | $ | 198.50 | 7.0 | $ | — | |||||||||||||
| Granted | — | $ | — | 2.6 | $ | 191.97 | |||||||||||||||||||
| Exercised | (0.7 | ) | $ | 12.61 | — | $ | — | ||||||||||||||||||
| Forfeited | — | $ | 1.24 | (0.1 | ) | $ | 193.51 | ||||||||||||||||||
| Balance—July 31, 2019 | 0.3 | $ | 14.53 | 2.2 | $ | 81.4 | 3.7 | $ | 193.99 | 6.2 | $ | 120.1 | |||||||||||||
| Exercisable—July 31, 2019 | 0.3 | $ | 14.53 | 2.2 | $ | 81.4 | 3.7 | $ | 193.99 | 6.2 | $ | 120.1 | |||||||||||||
The weighted-average grant-date fair value of PSOs granted during the years ended July 31, 2019 and July 31, 2018 was $59.11 and $56.14 per share, respectively. No stock options or PSOs were granted during the year ended July 31, 2017. No options vested during the years ended July 31, 2019, 2018 or 2017.2021 was $82.12 per share. The intrinsic value of options exercised during the years ended July 31, 2019, 2018,2022, 2021, and 20172020 was $139.5$29.2 million, $85.0$22.2 million and $61.2$50.2 million, respectively.
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| RSAs Outstanding | PSAs Outstanding | ||||||||||||
| Number of Shares | Weighted- Average Grant-Date Fair Value Per Share | Number of Shares | Weighted- Average Grant-Date Fair Value Per Share | ||||||||||
| Balance—July 31, 2016 | 1.1 | $ | 170.97 | — | $ | — | |||||||
Granted(1) | 0.1 | $ | 148.54 | 0.2 | $ | 148.54 | |||||||
| Vested | (0.4 | ) | $ | 170.97 | — | $ | — | ||||||
| Forfeited | — | $ | — | — | $ | — | |||||||
| Balance—July 31, 2017 | 0.8 | $ | 166.86 | 0.2 | $ | 148.54 | |||||||
Granted(1) | — | $ | — | — | $ | — | |||||||
| Vested | (0.5 | ) | $ | 169.38 | — | $ | 148.54 | ||||||
| Forfeited | (0.1 | ) | $ | 166.05 | (0.1 | ) | $ | 148.54 | |||||
| Balance—July 31, 2018 | 0.2 | $ | 163.14 | 0.1 | $ | 148.54 | |||||||
Granted(1) | — | $ | — | — | $ | — | |||||||
| Vested | (0.2 | ) | $ | 166.83 | — | $ | 148.54 | ||||||
| Forfeited | — | $ | 152.09 | — | $ | 148.54 | |||||||
| Balance—July 31, 2019 | — | $ | 148.54 | 0.1 | $ | 148.54 | |||||||
RSU and PSU Activities
The following table summarizes the RSU and PSU activity under our stock plans during the years ended July 31, 2019, 2018,2022, 2021, and 20172020 (in millions, except per share amounts):
| RSUs Outstanding | PSUs Outstanding | ||||||||||||||||||||||||||||||||||||||||||||||
| Number of Shares | Weighted- Average Grant-Date Fair Value Per Share | Aggregate Intrinsic Value | Number of Shares | Weighted- Average Grant-Date Fair Value Per Share | Aggregate Intrinsic Value | ||||||||||||||||||||||||||||||||||||||||||
| Balance—July 31, 2019 | 6.9 | $ | 188.16 | $ | 1,554.0 | 0.3 | $ | 197.86 | $ | 67.0 | |||||||||||||||||||||||||||||||||||||
Granted(1)(2) | 3.5 | $ | 211.38 | 0.4 | $ | 248.55 | |||||||||||||||||||||||||||||||||||||||||
Vested(3) | (2.8) | $ | 181.19 | (0.1) | $ | 166.90 | |||||||||||||||||||||||||||||||||||||||||
| Forfeited | (1.0) | $ | 188.18 | 0.0 | $ | 175.88 | |||||||||||||||||||||||||||||||||||||||||
| Balance—July 31, 2020 | 6.6 | $ | 203.30 | $ | 1,688.1 | 0.6 | $ | 231.42 | $ | 147.2 | |||||||||||||||||||||||||||||||||||||
Granted(1)(2) | 4.1 | $ | 297.89 | 0.8 | $ | 321.45 | |||||||||||||||||||||||||||||||||||||||||
Vested(3) | (2.9) | $ | 200.91 | (0.1) | $ | 195.60 | |||||||||||||||||||||||||||||||||||||||||
| Forfeited | (0.9) | $ | 226.79 | 0.0 | $ | 235.98 | |||||||||||||||||||||||||||||||||||||||||
| Balance—July 31, 2021 | 6.9 | $ | 257.56 | $ | 2,760.2 | 1.3 | $ | 292.93 | $ | 498.4 | |||||||||||||||||||||||||||||||||||||
Granted(1) | 1.9 | $ | 494.54 | 0.3 | $ | 351.14 | |||||||||||||||||||||||||||||||||||||||||
Vested(3) | (3.0) | $ | 257.07 | (0.4) | $ | 250.42 | |||||||||||||||||||||||||||||||||||||||||
| Forfeited | (0.9) | $ | 286.49 | (0.2) | $ | 321.92 | |||||||||||||||||||||||||||||||||||||||||
| Balance—July 31, 2022 | 4.9 | $ | 346.54 | $ | 2,456.9 | 1.0 | $ | 319.15 | $ | 513.7 | |||||||||||||||||||||||||||||||||||||
______________
| RSUs Outstanding | PSUs Outstanding | ||||||||||||||||||||||||
| Number of Shares | Weighted- Average Grant-Date Fair Value Per Share | Weighted- Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | Number of Shares | Weighted- Average Grant-Date Fair Value Per Share | Weighted- Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | ||||||||||||||||||
| Balance—July 31, 2016 | 6.5 | $ | 130.14 | 1.1 | $ | 852.7 | — | $ | — | 0.0 | $ | — | |||||||||||||
| Granted | 3.9 | $ | 141.35 | — | $ | — | |||||||||||||||||||
| Vested | (3.3 | ) | $ | 119.88 | — | $ | — | ||||||||||||||||||
| Forfeited | (0.6 | ) | $ | 139.56 | — | $ | — | ||||||||||||||||||
| Balance—July 31, 2017 | 6.5 | $ | 141.16 | 1.3 | $ | 854.1 | — | $ | — | 0.0 | $ | — | |||||||||||||
Granted(1) | 3.9 | $ | 171.74 | 0.2 | $ | 149.73 | |||||||||||||||||||
| Vested | (3.3 | ) | $ | 138.93 | — | $ | — | ||||||||||||||||||
| Forfeited | (0.6 | ) | $ | 144.33 | — | $ | — | ||||||||||||||||||
| Balance—July 31, 2018 | 6.5 | $ | 160.70 | 1.6 | $ | 1,291.4 | 0.2 | $ | 149.73 | 1.4 | $ | 43.7 | |||||||||||||
Granted(1)(2) | 3.9 | $ | 210.14 | 0.2 | $ | 215.64 | |||||||||||||||||||
Vested(3) | (2.7 | ) | $ | 160.87 | (0.1 | ) | $ | 149.73 | |||||||||||||||||
| Forfeited | (0.8 | ) | $ | 162.73 | — | $ | 155.38 | ||||||||||||||||||
| Balance—July 31, 2019 | 6.9 | $ | 188.16 | 1.5 | $ | 1,554.0 | 0.3 | $ | 197.86 | 1.8 | $ | 67.0 | |||||||||||||
(2) Includes 0.4 million RSUs assumed in connection with the acquisitions of Crypsis, Sinefa, Expanse and Bridgecrew, with weighted-average grant-date fair value of $241.43, $297.17, $317.45 and $354.66, respectively, for the year ended July 31, 2021, and 0.1 million RSUs assumed in connection with the acquisitions of Zingbox, Aporeto and CloudGenix, with weighted-average grant-date fair value of $208.25, $231.30 and $181.48, respectively, for the year ended July 31, 2020.
(3) Includes time-based vesting for PSUs.
The aggregate fair value, as of the respective vesting dates, of RSUs vested during the years ended July 31, 2019, 2018,2022, 2021, and 20172020 was $566.4 million, $546.3$1.6 billion, $986.4 million, and $462.6$615.7 million, respectively. The aggregate fair value, as of the respective vesting dates, of PSUs vested during the year ended July 31, 20192022, 2021, and 2020 was $17.2 million. No PSUs vested during the years ended July 31, 2018$184.0 million, $20.8 million and 2017.
$11.9 million, respectively.
Shares Available for Grant
The following table presents the stock activity and the total number of shares available for grant under our stockequity incentive plans as of July 31, 20192022 (in millions):
| Number of shares | |||||
| Balance—July 31, | |||||
| Authorized | |||||
| Cancelled upon effectiveness of the 2021 Plan | (14.6) | ||||
| RSUs and PSUs granted | (2.2) | ||||
| PSOs, RSUs, and PSUs | |||||
| Shares withheld for taxes | 0.1 | ||||
| Balance—July 31, | |||||
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Share-Based Compensation
We record share-based compensation awards based on estimated fair value as of the grant date. The fair value of RSUs and PSUs RSAs, and PSAsnot subject to market conditions is based on the closing market price of our common stock on the date of grant.
The fair value of the PSUs subject to the market condition is estimated on the grant date using a Monte Carlo simulation model. No such PSUs were granted during the years ended July 31, 2021 or 2020. The following table summarizes the assumptions used and the resulting grant-date fair value of our PSUs subject to the market condition granted during the year ended July 31, 2022:
| Year Ended July 31, 2022 | |||||
| Volatility | 36.0% - 41.1% | ||||
| Expected term (in years) | 1.4 - 3.0 | ||||
| Dividend yield | — | % | |||
| Risk-free interest rate | 0.2% - 2.0% | ||||
| Grant-date fair value per share | $411.49 - $782.13 | ||||
The expected volatility is based on the historical volatility of our common stock. The expected term is based on the length of each tranche’s performance period from the grant date. The dividend yield assumption is based on our current expectations about our anticipated dividend policy. The risk-free interest rate is based on the implied yield available on U.S. Treasury zero-coupon issues with maturities that approximate the expected term.
The fair value of PSOs is estimated on the grant date using a Monte Carlo simulation model, which predicts settlement of the options midway between the vesting term and the contractual term. No PSOs were granted during the years ended July 31, 2022 or 2020. The following table summarizes the assumptions used and the resulting grant-date fair values of our PSOs:PSOs granted during the year ended July 31, 2021:
| Year Ended July 31, | |||||||
| 2019 | 2018 | ||||||
| Volatility | 35.6% - 36.5% | 33.3 | % | ||||
| Dividend yield | — | % | — | % | |||
| Risk-free interest rate | 3.1% - 3.2% | 2.9 | % | ||||
| Weighted-average grant-date fair value per share | $ | 59.11 | $ | 56.14 | |||
| Year Ended July 31, 2021 | |||||||||||
| Volatility | 35.9 | % | |||||||||
| Dividend yield | — | % | |||||||||
| Risk-free interest rate | 0.6 | % | |||||||||
| Weighted-average grant-date fair value per share | $ | 82.12 | |||||||||
The expected volatility is based on a combination of implied volatility from traded options on our common stock and the historical volatility of our common stock. The dividend yield assumption is based on our current expectations about our anticipated dividend policy. The risk-free interest rate is based on the implied yield available on U.S. Treasury zero-coupon issues with terms equal to the contractual terms of each tranche.
The fair value of shares issued under our 2012 ESPP are estimated on the grant date using the Black-Scholes option pricing model. The following table summarizes the assumptions used and the resulting grant-date fair values of our ESPP:
| Year Ended July 31, | ||||||||
| 2019 | 2018 | 2017 | ||||||
| Volatility | 30.0% - 34.5% | 26.8% - 43.6% | 41.0% - 50.1% | |||||
| Expected term (in years) | 0.5 - 2.0 | 0.5 - 2.0 | 0.5 | |||||
| Dividend yield | — | % | — | % | — | % | ||
| Risk-free interest rate | 2.3% - 2.6% | 1.2% - 2.3% | 0.5% - 0.9% | |||||
| Grant-date fair value per share | $55.03 - $87.04 | $34.94 - $65.04 | $34.15 - $39.65 | |||||
| Year Ended July 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Volatility | 33.6% - 39.4% | 34.9% - 42.6% | 31.0% - 35.7% | ||||||||||||||
| Expected term (in years) | 0.5 - 2.0 | 0.5 - 2.0 | 0.5 - 2.0 | ||||||||||||||
| Dividend yield | — | % | — | % | — | % | |||||||||||
| Risk-free interest rate | 0.1% - 1.4% | 0.1% | 0.9% - 1.9% | ||||||||||||||
| Grant-date fair value per share | $112.76 - $222.30 | $69.48 - $129.05 | $46.75 - $66.47 | ||||||||||||||
The expected volatility is based on a combination of implied volatility from traded options on our common stock and the historical volatility of our common stock. The expected term represents the term from the first day of the offering period to the purchase dates within each offering period. The dividend yield assumption is based on our current expectations about our anticipated dividend policy. The risk-free interest rate is based on the implied yield available on U.S. Treasury zero-coupon issues with maturities that approximate the expected term.
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The following table summarizes share-based compensation included in costs and expenses (in millions):
| Year Ended July 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Cost of product revenue | $ | 5.6 | $ | 7.0 | $ | 7.3 | |||||
| Cost of subscription and support revenue | 71.3 | 66.7 | 56.2 | ||||||||
| Research and development | 186.8 | 145.2 | 152.6 | ||||||||
| Sales and marketing | 221.9 | 208.0 | 186.5 | ||||||||
| General and administrative | 102.1 | 77.0 | 73.1 | ||||||||
| Total share-based compensation | $ | 587.7 | $ | 503.9 | $ | 475.7 | |||||
| Year Ended July 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Cost of product revenue | $ | 9.3 | $ | 6.2 | $ | 5.7 | |||||||||||
| Cost of subscription and support revenue | 110.2 | 93.0 | 77.7 | ||||||||||||||
| Research and development | 471.1 | 428.9 | 274.6 | ||||||||||||||
| Sales and marketing | 304.7 | 269.9 | 214.5 | ||||||||||||||
| General and administrative | 118.1 | 128.9 | 92.0 | ||||||||||||||
| Total share-based compensation | $ | 1,013.4 | $ | 926.9 | $ | 664.5 | |||||||||||
As of July 31, 2019,2022, total compensation cost related to unvested share-based awards not yet recognized was $1.5$1.8 billion. This cost is expected to be amortized over a weighted-average period of approximately 2.72.6 years. Future grants will increase the amount of compensation expense to be recorded in these periods.
The following table presents the components of income (loss) before income taxes (in millions):
| Year Ended July 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| United States | $ | (152.3) | $ | (482.2) | $ | (56.1) | |||||||||||
| Foreign | (54.9) | 17.2 | (175.7) | ||||||||||||||
| Total | $ | (207.2) | $ | (465.0) | $ | (231.8) | |||||||||||
| Year Ended July 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (As Adjusted) | (As Adjusted) | ||||||||||
| United States | $ | (198.1 | ) | $ | (181.1 | ) | $ | (205.8 | ) | ||
| Foreign | 123.5 | 75.8 | 25.7 | ||||||||
| Total | $ | (74.6 | ) | $ | (105.3 | ) | $ | (180.1 | ) | ||
The following table summarizes our provision for income taxes (in millions):
| Year Ended July 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (As Adjusted) | (As Adjusted) | ||||||||||
| Federal: | |||||||||||
| Current | $ | (1.3 | ) | $ | (0.6 | ) | $ | 3.4 | |||
| Deferred | (11.3 | ) | (3.3 | ) | — | ||||||
| State: | |||||||||||
| Current | (0.9 | ) | 1.6 | 0.9 | |||||||
| Deferred | (3.0 | ) | (1.3 | ) | — | ||||||
| Foreign: | |||||||||||
| Current | 27.5 | 23.3 | 19.7 | ||||||||
| Deferred | (3.7 | ) | (2.8 | ) | (1.1 | ) | |||||
| Total | $ | 7.3 | $ | 16.9 | $ | 22.9 | |||||
| Year Ended July 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Federal: | |||||||||||||||||
| Current | $ | 2.6 | $ | 3.3 | $ | 3.8 | |||||||||||
| Deferred | (0.3) | (5.9) | (1.3) | ||||||||||||||
| State: | |||||||||||||||||
| Current | 1.5 | 1.7 | 1.3 | ||||||||||||||
| Deferred | 0.1 | 0.1 | 0.1 | ||||||||||||||
| Foreign: | |||||||||||||||||
| Current | 58.8 | 41.3 | 39.2 | ||||||||||||||
| Deferred | (2.9) | (6.6) | (7.9) | ||||||||||||||
| Total | $ | 59.8 | $ | 33.9 | $ | 35.2 | |||||||||||
For the year ended July 31, 2019,2022, our provision for income taxes decreasedincreased compared to the year ended July 31, 2018,2021, primarily due to changes in our valuation allowance related to acquisitions completed during fiscal 2019foreign income and our adoption of accounting guidance requiring the recognition of income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. These decreases were partially offset by an increase in our foreign taxes due to growth in non-U.S. operations.
withholding taxes.
For the year ended July 31, 2018,2021, our provision for income taxes decreased slightly compared to the year ended July 31, 2017,2020, primarily due to tax benefits from changes in our valuation allowance related to our acquisitionallowances.
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The following table presents the items accounting for the difference between income taxes computed at the federal statutory income tax rate and our provision for income taxes:
| Year Ended July 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Federal statutory rate | 21.0 | % | 21.0 | % | 21.0 | % | |||||||||||
| Effect of: | |||||||||||||||||
| State taxes, net of federal tax benefit | 2.7 | 1.3 | 3.0 | ||||||||||||||
| Effects of non-U.S. operations | (16.5) | (3.1) | 667.5 | ||||||||||||||
| Change in valuation allowance | (158.7) | (40.7) | (714.1) | ||||||||||||||
| Share-based compensation | 83.6 | 5.0 | (5.1) | ||||||||||||||
| Tax credits | 41.5 | 9.9 | 17.9 | ||||||||||||||
| Non-deductible expenses | (2.5) | (1.3) | (3.9) | ||||||||||||||
| Other, net | — | 0.6 | (1.5) | ||||||||||||||
| Total | (28.9) | % | (7.3) | % | (15.2) | % | |||||||||||
| Year Ended July 31, | ||||||||
| 2019 | 2018 | 2017 | ||||||
| (As Adjusted) | (As Adjusted) | |||||||
| Federal statutory rate | 21.0 | % | 26.8 | % | 35.0 | % | ||
| Effect of: | ||||||||
| State taxes, net of federal tax benefit | 7.9 | 5.7 | 3.2 | |||||
| Effects of non-U.S. operations | 89.3 | 19.9 | (15.3 | ) | ||||
| Change in valuation allowance | (196.9 | ) | 39.2 | (40.3 | ) | |||
| Effect of U.S. tax law change | 0.6 | (129.3 | ) | — | ||||
| Share-based compensation | 44.9 | 10.6 | 1.7 | |||||
| Amortization of deferred tax charges | — | (8.0 | ) | (3.9 | ) | |||
| Research credits | 35.0 | 31.4 | 10.9 | |||||
| Non-deductible expenses | (11.5 | ) | (6.1 | ) | (3.2 | ) | ||
| Other, net | (0.1 | ) | (6.2 | ) | (0.8 | ) | ||
| Total | (9.8 | )% | (16.0 | )% | (12.7 | )% | ||
The following table presents the components of our deferred tax assets and liabilities as of July 31, 20192022 and July 31, 20182021 (in millions):
| July 31, | |||||||
| 2019 | 2018 | ||||||
| (As Adjusted) | |||||||
| Deferred tax assets: | |||||||
| Accruals and reserves | $ | 53.3 | $ | 59.6 | |||
| Deferred revenue | 212.8 | 128.0 | |||||
| Net operating loss carryforwards | 269.9 | 189.5 | |||||
| Research and development and foreign tax credits | 143.3 | 113.4 | |||||
| Share-based compensation | 25.9 | 21.4 | |||||
| Gross deferred tax assets | 705.2 | 511.9 | |||||
| Valuation allowance | (561.9 | ) | (388.0 | ) | |||
| Total deferred tax assets | 143.3 | 123.9 | |||||
| Deferred tax liabilities: | |||||||
| Fixed assets and intangible assets | (26.0 | ) | (43.3 | ) | |||
| Deferred commissions | (94.6 | ) | (54.4 | ) | |||
| Other deferred tax liabilities | (15.7 | ) | (17.7 | ) | |||
| Total deferred tax liabilities | (136.3 | ) | (115.4 | ) | |||
| Total | $ | 7.0 | $ | 8.5 | |||
| July 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Deferred tax assets: | |||||||||||
| Accruals and reserves | $ | 227.1 | $ | 125.0 | |||||||
| Deferred revenue | 475.5 | 364.9 | |||||||||
| Net operating loss carryforwards | 759.1 | 556.7 | |||||||||
| Tax credits | 317.4 | 230.8 | |||||||||
| Share-based compensation | 59.2 | 53.9 | |||||||||
| Fixed assets and intangible assets | 1,742.6 | 1,789.6 | |||||||||
| Interest carryforward | 55.8 | 19.2 | |||||||||
| Gross deferred tax assets | 3,636.7 | 3,140.1 | |||||||||
| Valuation allowance | (3,414.1) | (2,933.3) | |||||||||
| Total deferred tax assets | 222.6 | 206.8 | |||||||||
| Deferred tax liabilities: | |||||||||||
| Deferred contract costs | (183.6) | (165.4) | |||||||||
| Other deferred tax liabilities | (27.8) | (32.3) | |||||||||
| Total deferred tax liabilities | (211.4) | (197.7) | |||||||||
| Net deferred tax assets | $ | 11.2 | $ | 9.1 | |||||||
A valuation allowance is provided when it is more likely than not that the deferred tax asset will not be realized. Realization of deferred tax assets is dependent upon future taxable income, if any, the amount and timing of which are uncertain. At such time, if it is determined that it is more likely than not that the deferred tax assets are realizable, the valuation allowance will be adjusted. As of July 31, 2019,2022, we have provided a valuation allowance for our federal, state, United Kingdom and certain other foreign deferred tax assets that we believe will, more likely than not, be unrealizable. The net valuation allowance increased by $173.9 million$0.5 billion from the year ended July 31, 20182021 to the year ended July 31, 2019,2022, primarily due to increasesan increase in our U.S. net operating lossesNOL carryforwards and deferred revenue.revenue as a result of current year operations.
As of July 31, 2019,2022, we had federal, state, and foreign NOL carryforwards of approximately $1.6$2.0 billion, $775.6 million,$1.0 billion, and $111.6 million,$1.8 billion, respectively, as reported on our tax returns, available to reduce future taxable income, if any. If not utilized, our federal and state NOL carryforwards will expire in various amounts at various dates beginning in the years ending July 31, 20272033 and July 31, 2019,2023, respectively. Our foreign NOL will carry forward indefinitely.
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As of July 31, 2019,2022, we had federal and state research and development tax credit carryforwards of approximately $92.1$243.8 million and $81.2$197.4 million, respectively, as reported on our tax returns. If not utilized, the federal credit carryforwards will expire in various amounts at various dates beginning in the year ending July 31, 2026. The state credit will carry forward indefinitely.
As of July 31, 2019,2022, we had foreign tax credit carryforwards of $5.4$3.5 million as reported on our tax returns. If not utilized, the foreign tax credit carryforwards will expire in various amounts at various dates beginning in the year ending July 31, 2021.2023.
Utilization of the NOL carryforwards and credits may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitation may result in the expiration of NOLs and credits before utilization.
As of July 31, 2019,2022, we had $314.5$414.0 million of unrecognized tax benefits, $68.0$76.1 million of which would affect income tax expense if recognized, after consideration of our valuation allowance in the United States and other assets. As of July 31, 2018,2021, we had $337.7$372.9 million of unrecognized tax benefits, $48.0$68.7 million of which would affect income tax expense if recognized, after consideration of our valuation allowance in the United States and other assets. As of July 31, 2019, our federal, state, and foreign returns for the tax years 2008 through the current period remain subject to adjustment due to examination. Fiscal years outside the normal statute of limitation remain open to audit by tax authorities due to tax attributes generated in earlier years, which have been carried forward and may be audited in subsequent years when utilized. We do not expect the amount of unrecognized tax benefits as of July 31, 20192022 to materially change significantly over the next 12 months.
We file federal, state, and foreign income tax returns in jurisdictions with varying statutes of limitations. Generally, all years remain subject to adjustment due to our NOL and credit carryforwards. We currently have ongoing tax audits in various jurisdictions and at various times. The primary focus of these audits is, generally, profit allocation. The ultimate amount and timing of any future settlements cannot be predicted with reasonable certainty.
We recognize both interest and penalties associated with uncertain tax positions as a component of income tax expense. During the years ended July 31, 2019, 2018,2022, 2021, and 2017,2020, we recognized income tax expense related to interest and penalties of $2.3$5.2 million, $2.9$3.5 million, and $2.1$1.6 million, respectively. We had accrued interest and penalties on our consolidated balance sheets related to unrecognized tax benefits of $10.6$20.9 million and $8.3$15.7 million as of July 31, 20192022 and 2018,2021, respectively. The ultimate amount and timing of any future cash settlements cannot be predicted with reasonable certainty.
The following table presents a reconciliation of the beginning and ending amount of our gross unrecognized tax benefits (in millions):
| Year Ended July 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Unrecognized tax benefits at the beginning of the period | $ | 337.7 | $ | 301.3 | $ | 127.7 | |||||
| Additions for tax positions taken in prior years | 0.3 | 3.1 | 3.1 | ||||||||
| Reductions for tax positions taken in prior years | (33.4 | ) | (6.3 | ) | — | ||||||
| Additions for tax positions taken in the current year | 9.9 | 39.6 | 170.5 | ||||||||
| Unrecognized tax benefits at the end of the period | $ | 314.5 | $ | 337.7 | $ | 301.3 | |||||
| Year Ended July 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Unrecognized tax benefits at the beginning of the period | $ | 372.9 | $ | 326.4 | $ | 314.5 | |||||||||||
| Additions for tax positions taken in prior years | 3.5 | 26.5 | 3.2 | ||||||||||||||
| Reductions for tax positions taken in prior years | (7.4) | (2.5) | (1.6) | ||||||||||||||
| Additions for tax positions taken in the current year | 45.0 | 22.5 | 10.3 | ||||||||||||||
| Unrecognized tax benefits at the end of the period | $ | 414.0 | $ | 372.9 | $ | 326.4 | |||||||||||
During the year ended July 31, 2019,2022 and 2021, our additions for tax positions taken in the current year were primarily attributable to intercompany transactions.
During the year ended July 31, 2017,2020, our additions for tax positions taken in the currentgiven year were primarily attributable to uncertainties related to intercompany transactions.
As of July 31, 2019,2022, we had no unremitted earnings when evaluating our outside basis difference relating to our U.S. investment in foreign subsidiaries. However, there could be local withholding taxes payable due to various foreign countries if certain lower tier earnings are distributed. Withholding taxes that would be payable upon remittance of these lower tier earnings are not expected to be material.
Basic net loss per share is computed by dividing net loss by basic weighted-average shares outstanding during the period. Diluted net loss per share is computed by dividing net loss by diluted weighted-average shares outstanding, including potentially dilutive securities.
The following table presents the computation of basic and diluted net loss per share of common stock (in millions, except per share data):
| Year Ended July 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Net loss | $ | (267.0) | $ | (498.9) | $ | (267.0) | |||||||||||
| Weighted-average shares used to compute net loss per share, basic and diluted | 98.5 | 96.4 | 96.9 | ||||||||||||||
| Net loss per share, basic and diluted | $ | (2.71) | $ | (5.18) | $ | (2.76) | |||||||||||
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| Year Ended July 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (As Adjusted) | (As Adjusted) | ||||||||||
| Net loss | $ | (81.9 | ) | $ | (122.2 | ) | $ | (203.0 | ) | ||
| Weighted-average shares used to compute net loss per share, basic and diluted | 94.5 | 91.7 | 90.6 | ||||||||
| Net loss per share, basic and diluted | $ | (0.87 | ) | $ | (1.33 | ) | $ | (2.24 | ) | ||
The following securities were excluded from the computation of diluted net loss per share of common stock for the periods presented as their effect would have been antidilutive (in millions):
| Year Ended July 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Convertible senior notes | 13.1 | 13.1 | 13.1 | ||||||||||||||
| Warrants related to the issuance of convertible senior notes | 13.1 | 13.1 | 13.1 | ||||||||||||||
| RSUs and PSUs | 5.9 | 8.2 | 7.2 | ||||||||||||||
| Options to purchase common stock, including PSOs | 2.7 | 2.9 | 2.9 | ||||||||||||||
| RSAs and PSAs | 0.1 | 0.3 | 0.1 | ||||||||||||||
| ESPP shares | 0.2 | 0.3 | 0.3 | ||||||||||||||
| Total | 35.1 | 37.9 | 36.7 | ||||||||||||||
| Year Ended July 31, | ||||||||
| 2019 | 2018 | 2017 | ||||||
| Convertible senior notes | 6.4 | 11.6 | 5.2 | |||||
| Warrants related to the issuance of convertible senior notes | 11.6 | 11.6 | 5.2 | |||||
| RSUs and PSUs | 7.2 | 6.7 | 6.5 | |||||
| Options to purchase common stock, including PSOs | 4.0 | 2.2 | 1.6 | |||||
| RSAs and PSAs | 0.1 | 0.3 | 1.0 | |||||
| ESPP shares | 0.2 | 0.2 | 0.2 | |||||
| Total | 29.5 | 32.6 | 19.7 | |||||
The following table sets forth the components of other income, net (in millions):
| Year Ended July 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Interest income | $ | 15.6 | $ | 8.5 | $ | 41.4 | |||||||||||
| Foreign currency exchange gains (losses), net | 1.8 | (5.4) | (6.7) | ||||||||||||||
| Other | (8.4) | (0.7) | 1.2 | ||||||||||||||
| Total other income, net | $ | 9.0 | $ | 2.4 | $ | 35.9 | |||||||||||
| Year Ended July 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Interest income | $ | 69.8 | $ | 27.1 | $ | 14.7 | |||||
| Foreign currency exchange gains (losses), net | (3.5 | ) | 1.7 | (3.4 | ) | ||||||
| Other | (2.9 | ) | (0.3 | ) | (1.1 | ) | |||||
| Total other income, net | $ | 63.4 | $ | 28.5 | $ | 10.2 | |||||
18. Segment Information
We conduct business globally and sales are primarily managed on a geographic theater basis. Our chief operating decision maker reviews financial information presented on a consolidated basis accompanied by information about revenue by geographic region for purposes of allocating resources and evaluating financial performance. We have one business activity and there are no segment managers who are held accountable for operations, operating results, and plans for levels, components, or types of products or services below the consolidated unit level. Accordingly, we are considered to be in a single reportable segment and operating unit structure.
The following table presents our long-lived assets, which consist of property and equipment, net and operating lease right-of-use assets, by geographic region (in millions):
| Year Ended July 31, | |||||||
| 2019 | 2018 | ||||||
| Property and equipment, net: | |||||||
| United States | $ | 240.5 | $ | 228.4 | |||
| International | 55.5 | 44.7 | |||||
| Total property and equipment, net | $ | 296.0 | $ | 273.1 | |||
| Year Ended July 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Long-lived assets: | |||||||||||
| United States | $ | 446.1 | $ | 461.1 | |||||||
| Israel | 55.4 | 61.9 | |||||||||
| Other countries | 98.3 | 58.3 | |||||||||
| Total long-lived assets | $ | 599.8 | $ | 581.3 | |||||||
Refer to Note 2. Revenue for revenue by geographic theater and revenue for groups of similar products and services for the years ended July 31, 2019, 2018,2022, 2021, and 2017.2020.
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19. Selected Quarterly Financial Data (Unaudited)Subsequent Events
| Three Months Ended | |||||||||||||||
October 31, 2018 | January 31, 2019 | April 30, 2019 | July 31, 2019 | ||||||||||||
| Revenue: | |||||||||||||||
| Product | $ | 240.5 | $ | 271.6 | $ | 278.4 | $ | 305.7 | |||||||
| Subscription and support | 415.5 | 439.6 | 448.2 | 500.1 | |||||||||||
| Total revenue | 656.0 | 711.2 | 726.6 | 805.8 | |||||||||||
| Cost of revenue: | |||||||||||||||
| Product | 73.2 | 82.5 | 78.0 | 82.2 | |||||||||||
| Subscription and support | 110.3 | 120.1 | 126.9 | 135.2 | |||||||||||
| Total cost of revenue | 183.5 | 202.6 | 204.9 | 217.4 | |||||||||||
| Total gross profit | 472.5 | 508.6 | 521.7 | 588.4 | |||||||||||
| Operating expenses: | |||||||||||||||
| Research and development | 113.4 | 128.3 | 139.1 | 158.7 | |||||||||||
| Sales and marketing | 314.6 | 320.0 | 339.0 | 370.4 | |||||||||||
| General and administrative | 76.6 | 53.7 | 62.3 | 69.2 | |||||||||||
| Total operating expenses | 504.6 | 502.0 | 540.4 | 598.3 | |||||||||||
| Operating income (loss) | (32.1 | ) | 6.6 | (18.7 | ) | (9.9 | ) | ||||||||
| Interest expense | (22.7 | ) | (20.6 | ) | (20.6 | ) | (20.0 | ) | |||||||
| Other income, net | 13.0 | 16.0 | 18.2 | 16.2 | |||||||||||
| Income (loss) before income taxes | (41.8 | ) | 2.0 | (21.1 | ) | (13.7 | ) | ||||||||
| Provision for (benefit from) income taxes | (3.5 | ) | 4.6 | (0.9 | ) | 7.1 | |||||||||
| Net loss | $ | (38.3 | ) | $ | (2.6 | ) | $ | (20.2 | ) | $ | (20.8 | ) | |||
| Net loss per share, basic and diluted | $ | (0.41 | ) | $ | (0.03 | ) | $ | (0.21 | ) | $ | (0.22 | ) | |||
| Three Months Ended | |||||||||||||||
October 31, 2017 | January 31, 2018 | April 30, 2018 | July 31, 2018 | ||||||||||||
| (As Adjusted) | (As Adjusted) | (As Adjusted) | (As Adjusted) | ||||||||||||
| Revenue: | |||||||||||||||
| Product | $ | 184.8 | $ | 204.8 | $ | 218.1 | $ | 272.1 | |||||||
| Subscription and support | 317.0 | 340.8 | 349.6 | 386.4 | |||||||||||
| Total revenue | 501.8 | 545.6 | 567.7 | 658.5 | |||||||||||
| Cost of revenue: | |||||||||||||||
| Product | 57.6 | 63.9 | 68.9 | 82.0 | |||||||||||
| Subscription and support | 83.7 | 95.5 | 91.0 | 102.5 | |||||||||||
| Total cost of revenue | 141.3 | 159.4 | 159.9 | 184.5 | |||||||||||
| Total gross profit | 360.5 | 386.2 | 407.8 | 474.0 | |||||||||||
| Operating expenses: | |||||||||||||||
| Research and development | 94.2 | 96.6 | 99.6 | 110.3 | |||||||||||
| Sales and marketing | 254.1 | 258.8 | 271.4 | 289.9 | |||||||||||
| General and administrative | 65.7 | 53.3 | 82.1 | 56.7 | |||||||||||
| Total operating expenses | 414.0 | 408.7 | 453.1 | 456.9 | |||||||||||
| Operating income (loss) | (53.5 | ) | (22.5 | ) | (45.3 | ) | 17.1 | ||||||||
| Interest expense | (6.3 | ) | (6.4 | ) | (6.5 | ) | (10.4 | ) | |||||||
| Other income, net | 4.8 | 4.9 | 8.6 | 10.2 | |||||||||||
| Income (loss) before income taxes | (55.0 | ) | (24.0 | ) | (43.2 | ) | 16.9 | ||||||||
| Provision for (benefit from) income taxes | 8.2 | 1.6 | (2.8 | ) | 9.9 | ||||||||||
| Net income (loss) | $ | (63.2 | ) | $ | (25.6 | ) | $ | (40.4 | ) | $ | 7.0 | ||||
| Net income (loss) per share, basic | $ | (0.70 | ) | $ | (0.28 | ) | $ | (0.44 | ) | $ | 0.08 | ||||
| Net income (loss) per share, diluted | $ | (0.70 | ) | $ | (0.28 | ) | $ | (0.44 | ) | $ | 0.07 | ||||
Stock Split Effected in the Form of a Stock Dividend (“Stock Split”)
On August 22, 2022, we announced that our board of directors had approved a three-for-one stock split of our outstanding shares of Demisto immediately priorcommon stock to completionbe effected in the form of our acquisitiona stock dividend. Each stockholder of Demistorecord at the close of business on March 28, 2019September 6, 2022 (the “record date”), will receive, after the close of business on September 13, 2022, two additional shares for every share held on the record date, and astrading will begin on a result, received purchase consideration valued at $85.6 million during the year ended July 31, 2019. Refer to Note 6. Acquisitions for more informationsplit-adjusted basis on our acquisitionSeptember 14, 2022.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In designing and evaluating the disclosure controls and procedures, management recognizes that any 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.
Based on our evaluation, our chief executive officer and chief financial officer concluded that, as of July 31, 2019,2022, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission (“SEC”) rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control over Financial Reporting
The effectiveness of our internal control over financial reporting as of July 31, 2022 has been audited by Ernst & Young LLP, the independent registered public accounting firm that audits our consolidated financial statements, as stated in their report underwhich is included in Part II, Item 8 of this Annual Report on Form 10-K, which report is incorporated herein by reference.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended July 31, 20192022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item will be contained in our definitive proxy statement to be filed with the SEC in connection with our 20192022 annual meeting of stockholders (the “Proxy Statement”), which is expected to be filed not later than 120 days after the end of our fiscal year ended July 31, 2019,2022, and is incorporated in this report by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be set forth in the Proxy Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item will be set forth in the Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item will be set forth in the Proxy Statement and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item will be set forth in the Proxy Statement and is incorporated herein by reference.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Documents filed as part of this Annual Report on Form 10-K are as follows:
1.Consolidated Financial Statements
Our Consolidated Financial Statements are listed in the “Index to Consolidated Financial Statements” under Part II, Item 8 of this Annual Report on Form 10-K.
2.Financial Statement Schedules
Financial statement schedules have been omitted because they are not required, not applicable, not present in amounts sufficient to require submission of the schedule, or the required information is shown in the Consolidated Financial Statements or the notes thereto.
3.Exhibits
The following documents are incorporated by reference or are filed with this Annual Report on Form 10-K, in each case as indicated therein (numbered in accordance with Item 601 of Regulation S-K).
EXHIBIT INDEX
| Exhibit Number | Exhibit Description | Incorporated by Reference | ||||||||||||||||||||||||||||||||||||
| Form | File No. | Exhibit | Filing Date | |||||||||||||||||||||||||||||||||||
| Restated Certificate of Incorporation of the Registrant. | 10-K | 001-35594 | 3.1 | October 4, 2012 | ||||||||||||||||||||||||||||||||||
| Amended and Restated Bylaws of the Registrant. | 8-K | 001-35594 | 3.1 | May 23, 2022 | ||||||||||||||||||||||||||||||||||
| Certificate of Change of Location of Registered Agent and/or Registered Office. | 8-K | 001-35594 | 3.1 | August 30, 2016 | ||||||||||||||||||||||||||||||||||
| Indenture between the Registrant and U.S. Bank National Association, dated as of July 12, 2018. | 8-K | 001-35594 | 4.1 | July 13, 2018 | ||||||||||||||||||||||||||||||||||
| Indenture between the Registrant and U.S. Bank National Association, dated as of June 8, 2020. | 8-K | 001-35594 | 4.1 | June 8, 2020 | ||||||||||||||||||||||||||||||||||
| Form of Global 0.75% Convertible Senior Note due 2023 (included in Exhibit 4.1). | 8-K | 001-35594 | 4.2 | July 13, 2018 | ||||||||||||||||||||||||||||||||||
| Form of Global 0.375% Convertible Senior Note due 2023 (included in Exhibit 4.1). | 8-K | 001-35594 | 4.2 | June 8, 2020 | ||||||||||||||||||||||||||||||||||
| Description of Registrant’s Securities. | ||||||||||||||||||||||||||||||||||||||
10.1* | Form of Indemnification Agreement between the Registrant and its directors and officers. | S-1/A | 333-180620 | 10.1 | July 9, 2012 | |||||||||||||||||||||||||||||||||
| 2012 Equity Incentive Plan and related form agreements. | 10-Q | 001-35594 | 10.2 | November 26, 2019 | ||||||||||||||||||||||||||||||||||
| Form of 2012 Equity Incentive Plan Performance-Based Restricted Stock Unit Award Agreement | 10-Q | 001-35594 | 10.4 | November 19, 2021 | ||||||||||||||||||||||||||||||||||
| 2021 Equity Incentive Plan | S-8 | 333-261697 | 99.1 | December 16, 2021 | ||||||||||||||||||||||||||||||||||
10.5* | Form of 2021 Equity Incentive Plan Global Stock Option Award Agreement | S-8 | 333-261697 | 99.2 | December 16, 2021 | |||||||||||||||||||||||||||||||||
| Form of 2021 Equity Incentive Plan Global Restricted Stock Unit Award Agreement | S-8 | 333-261697 | 99.3 | December 16, 2021 | ||||||||||||||||||||||||||||||||||
10.7* | 2012 Employee Stock Purchase Plan, as amended and restated, and related form agreements. | |||||||||||||||||||||||||||||||||||||
| RedLock Inc. 2015 Stock Plan, as amended, and related form agreements under RedLock Inc. 2015 Stock Plan, as amended. | S-8 | 333-227901 | 99.1 | October 19, 2018 | ||||||||||||||||||||||||||||||||||
| Demisto, Inc. 2015 Stock Option Plan, as amended. | S-8 | 333-230663 | 99.1 | April 1, 2019 | ||||||||||||||||||||||||||||||||||
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Exhibit Number | Exhibit Description | Incorporated by Reference | ||||||||
| Form | File No. | Exhibit | Filing Date | |||||||
| Restated Certificate of Incorporation of the Registrant. | 10-K | 001-35594 | 3.1 | October 4, 2012 | ||||||
| Amended and Restated Bylaws of the Registrant. | 8-K | 001-35594 | 3.1 | September 14, 2018 | ||||||
| Certificate of Change of Location of Registered Agent and/or Registered Office. | 8-K | 001-35594 | 3.1 | August 30, 2016 | ||||||
| Warrant to Purchase Stock by Juniper Networks, Inc. | 8-K | 001-35594 | 4.1 | June 4, 2014 | ||||||
| Indenture between the Registrant and U.S. Bank National Association, dated as of June 30, 2014. | 8-K | 001-35594 | 4.1 | July 1, 2014 | ||||||
| Indenture between the Registrant and U.S. Bank National Association, dated as of July 12, 2018. | 8-K | 001-35594 | 4.1 | July 13, 2018 | ||||||
| Form of Global 0.75% Convertible Senior Note due 2023 (included in Exhibit 4.3). | 8-K | 001-35594 | 4.2 | July 13, 2018 | ||||||
| Description of Registrant’s Securities. | ||||||||||
10.1* | Form of Indemnification Agreement between the Registrant and its directors and officers. | S-1/A | 333-180620 | 10.1 | July 9, 2012 | |||||
10.2* | 2005 Equity Incentive Plan and related form agreements under 2005 Equity Incentive Plan. | S-1/A | 333-180620 | 10.2 | July 9, 2012 | |||||
10.3* | 2012 Equity Incentive Plan and related form agreements under 2012 Equity Incentive Plan, as amended. | 10-Q | 001-35594 | 10.1 | February 27, 2019 | |||||
10.4* | 2012 Employee Stock Purchase Plan and related form agreements under 2012 Employee Stock Purchase Plan, as amended and restated. | 10-K | 001-35594 | 10.4 | September 7, 2017 | |||||
10.5* | RedLock Inc. 2015 Stock Plan, as amended, and related form agreements under RedLock Inc. 2015 Stock Plan, as amended. | S-8 | 333-227901 | 99.1 | October 19, 2018 | |||||
10.6* | Demisto, Inc. 2015 Stock Option Plan, as amended. | S-8 | 333-230663 | 99.1 | April 1, 2019 | |||||
10.7* | Twistlock Ltd. Amended and Restated 2015 Share Option Plan. | S-8 | 333-232672 | 99.1 | July 16, 2019 | |||||
Exhibit Number | Exhibit Description | Incorporated by Reference | ||||||||
| Form | File No. | Exhibit | Filing Date | |||||||
10.8* | Employee Incentive Compensation Plan, as amended and restated. | 10-Q | 001-35594 | 10.2 | November 25, 2014 | |||||
10.9* | Clawback Policy, adopted as of August 29, 2017. | 10-Q | 001-35594 | 10.3 | November 21, 2017 | |||||
| Executive Incentive Plan effective December 8, 2017. | 10-Q | 001-35594 | 10.2 | February 27, 2018 | ||||||
| Letter Agreement between the Registrant and Nir Zuk, dated December 19, 2011. | S-1 | 333-180620 | 10.8 | April 6, 2012 | ||||||
| Amended Offer Letter between the Registrant and René Bonvanie, dated July 10, 2019. | 8-K | 001-35594 | 10.1 | July 11, 2019 | ||||||
| Offer Letter between the Registrant and Frank Calderoni, dated February 24, 2016. | 8-K | 001-35594 | 10.1 | February 25, 2016 | ||||||
| Offer Letter between the Registrant and Mary Pat McCarthy, dated October 13, 2016. | 8-K | 001-35594 | 10.1 | October 24, 2016 | ||||||
| Offer Letter between the Registrant and Sridhar Ramaswamy, dated August 29, 2017. | 8-K | 001-35594 | 10.1 | August 31, 2017 | ||||||
| Offer Letter between the Registrant and Kathleen Bonanno, dated November 17, 2017. | 8-K | 001-35594 | 10.1 | November 20, 2017 | ||||||
| Offer Letter between the Registrant and Jean Compeau, dated February 22, 2018. | 8-K | 001-35594 | 10.1 | February 26, 2018 | ||||||
| New Offer Letter between the Registrant and Mark D. McLaughlin, dated May 31, 2018. | 8-K | 001-35594 | 10.1 | June 4, 2018 | ||||||
| Offer Letter between the Registrant and Nikesh Arora, dated May 30, 2018. | 8-K | 001-35594 | 10.2 | June 4, 2018 | ||||||
| Offer Letter between the Registrant and Amit K. Singh, dated October 11, 2018. | 8-K | 001-35594 | 10.1 | October 15, 2018 | ||||||
| Confirmatory Employment Letter between the Registrant and Lee Klarich, dated December 19, 2011. | 10-Q | 001-35594 | 10.4 | November 30, 2018 | ||||||
| Offer Letter between the Registrant and Lorraine Twohill, dated April 10, 2019. | 8-K | 001-35594 | 10.1 | April 15, 2019 | ||||||
| Offer Letter between the Registrant and Rt Hon Sir John Key, dated April 10, 2019. | 8-K | 001-35594 | 10.2 | April 15, 2019 | ||||||
| Lease between the Registrant and Santa Clara Office Partners LLC, dated October 20, 2010, as amended. | S-1 | 333-180620 | 10.14 | April 6, 2012 | ||||||
| Amendment No. 2 to Lease between the Registrant and Santa Clara Office Partners LLC, dated July 2, 2013. | 10-K | 001-35594 | 10.17 | September 25, 2013 | ||||||
| Lease between the Registrant and SI 34 LLC, dated September 17, 2012. | 10-K | 001-35594 | 10.16 | October 4, 2012 | ||||||
| Lease between the Registrant and SI 34 LLC, dated September 17, 2012. | 10-K | 001-35594 | 10.17 | October 4, 2012 | ||||||
10.28** | Amended and Restated Flextronics Manufacturing Services Agreement, by and between the Registrant and Flextronics Telecom Systems Ltd., dated April 1, 2019. | 10-Q | 001-35594 | 10.1 | May 30, 2019 | |||||
| Settlement, Release and Cross-License Agreement, dated May 27, 2014, by and between the Registrant and Juniper Networks, Inc. | 8-K | 001-35594 | 10.1 | May 28, 2014 | ||||||
Exhibit Number | Exhibit Description | Incorporated by Reference | ||||||||
| Form | File No. | Exhibit | Filing Date | |||||||
| Share Purchase Agreement between the Registrant, Cyvera Ltd., Palo Alto Networks Holding B.V., the shareholders of Cyvera Ltd. and Shareholder Representative Services LLC, dated March 22, 2014. | 10-Q | 001-35594 | 10.1 | June 3, 2014 | ||||||
| Amendment No. 1 to the Share Purchase Agreement between the Registrant, Cyvera Ltd., Palo Alto Networks Holding B.V., the shareholders of Cyvera Ltd. and Shareholder Representative Services LLC, dated April 9, 2014. | 10-Q | 001-35594 | 10.2 | June 3, 2014 | ||||||
| Purchase Agreement, dated June 24, 2014, by and among the Registrant and J.P. Morgan Securities LLC, RBC Capital Markets, LLC and Citigroup Global Markets Inc., as representatives of the initial purchasers named therein. | 8-K | 001-35594 | 10.1 | June 26, 2014 | ||||||
| Form of Convertible Note Hedge Confirmation. | 8-K | 001-35594 | 10.2 | June 26, 2014 | ||||||
| Form of Warrant Confirmation. | 8-K | 001-35594 | 10.3 | June 26, 2014 | ||||||
| Purchase Agreement, dated July 10, 2018, by and among the Registrant and Citigroup Global Markets Inc. and Wells Fargo Securities, LLC, as representatives of the several Initial Purchasers named therein. | 8-K | 001-35594 | 10.1 | July 13, 2018 | ||||||
| Form of Convertible Note Hedge Confirmation. | 8-K | 001-35594 | 10.2 | July 13, 2018 | ||||||
| Form of Warrant Confirmation. | 8-K | 001-35594 | 10.3 | July 13, 2018 | ||||||
| Lease between the Registrant and Santa Clara Campus Property Owner I LLC, dated May 28, 2015. | 10-K | 001-35594 | 10.29 | September 17, 2015 | ||||||
| Lease between the Registrant and Santa Clara Campus Property Owner I LLC, dated May 28, 2015. | 10-K | 001-35594 | 10.30 | September 17, 2015 | ||||||
| Lease between the Registrant and Santa Clara Campus Property Owner I LLC, dated May 28, 2015. | 10-K | 001-35594 | 10.31 | September 17, 2015 | ||||||
| Lease by and between the Registrant and Santa Clara Campus Property Owner I LLC, dated October 7, 2015. | 8-K | 001-35594 | 10.1 | October 19, 2015 | ||||||
| Amendment No. 1 to Lease by and between the Registrant and Santa Clara Phase I Property LLC, dated November 9, 2015. | 10-Q | 001-35594 | 10.2 | November 24, 2015 | ||||||
| Amendment No. 1 to Lease by and between the Registrant and Santa Clara Campus Property Owner I LLC, dated November 9, 2015. | 10-Q | 001-35594 | 10.3 | November 24, 2015 | ||||||
| Amendment No. 1 to Lease by and between the Registrant and Santa Clara Campus Property Owner I LLC, dated September 16, 2016. | 10-Q | 001-35594 | 10.1 | November 22, 2016 | ||||||
| Amendment No. 1 to Lease by and between the Registrant and Santa Clara Campus Property Owner I LLC, dated September 16, 2016. | 10-Q | 001-35594 | 10.2 | November 22, 2016 | ||||||
| Amendment No. 2 to Lease by and between the Registrant and Santa Clara Campus Property Owner I LLC, dated September 16, 2016. | 10-Q | 001-35594 | 10.3 | November 22, 2016 | ||||||
| Amendment No. 2 to Lease by and between the Registrant and Santa Clara Campus Property Owner I LLC, dated November 16, 2016. | 10-Q | 001-35594 | 10.1 | March 1, 2017 | ||||||
Exhibit Number | Exhibit Description | Incorporated by Reference | ||||||||
| Form | File No. | Exhibit | Filing Date | |||||||
| Amendment No. 2 to Lease by and between the Registrant and Santa Clara Campus Property Owner I LLC, dated November 16, 2016. | 10-Q | 001-35594 | 10.2 | March 1, 2017 | ||||||
| Amendment No. 3 to Lease by and between the Registrant and Santa Clara Campus Property Owner I LLC, dated November 16, 2016. | 10-Q | 001-35594 | 10.3 | March 1, 2017 | ||||||
| Amendment No. 3 to Lease by and between the Registrant and Santa Clara EFH LLC, dated June 22, 2017. | 10-K | 001-35594 | 10.40 | September 7, 2017 | ||||||
| Amendment No. 3 to Lease by and between the Registrant and Santa Clara G LLC, dated June 22, 2017. | 10-K | 001-35594 | 10.41 | September 7, 2017 | ||||||
| Amendment No. 4 to Lease by and between the Registrant and Santa Clara EFH LLC, dated June 22, 2017. | 10-K | 001-35594 | 10.42 | September 7, 2017 | ||||||
| Amendment No. 4 to Lease by and between the Registrant and Santa Clara Phase III EFH LLC, dated September 29, 2017. | 10-Q | 001-35594 | 10.5 | November 21, 2017 | ||||||
| Amendment No. 4 to Lease by and between the Registrant and Santa Clara Phase III G LLC, dated September 29, 2017. | 10-Q | 001-35594 | 10.6 | November 21, 2017 | ||||||
| Amendment No. 5 to Lease by and between the Registrant and Santa Clara Phase III EFH LLC, dated September 29, 2017. | 10-Q | 001-35594 | 10.7 | November 21, 2017 | ||||||
| Credit Agreement, dated as of September 4, 2018, by and among the Registrant, the lenders from time to time party thereto and Citibank, N.A., as administrative agent. | 8-K | 001-35594 | 10.1 | September 6, 2018 | ||||||
| List of subsidiaries of the Registrant. | ||||||||||
| Consent of Independent Registered Public Accounting Firm. | ||||||||||
| Power of Attorney (contained in the signature page to this Annual Report on Form 10-K). | ||||||||||
| Certification of the Chief Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002. | ||||||||||
| Certification of the Chief Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002. | ||||||||||
32.1† | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |||||||||
32.2† | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |||||||||
| 101.INS | XBRL Instance Document. | |||||||||
| 101.SCH | XBRL Taxonomy Schema Linkbase Document. | |||||||||
| 101.CAL | XBRL Taxonomy Calculation Linkbase Document. | |||||||||
| 101.DEF | XBRL Taxonomy Definition Linkbase Document. | |||||||||
| 101.LAB | XBRL Taxonomy Labels Linkbase Document. | |||||||||
| 101.PRE | XBRL Taxonomy Presentation Linkbase Document. | |||||||||
Number | ||||||||||||||||||||||||||||||||||||||
| Exhibit Description | Incorporated by Reference | |||||||||||||||||||||||||||||||
| File No. | Exhibit | Filing Date | ||||||||||||||||||||||||||||||||||||
| Twistlock Ltd. Amended and Restated 2015 Share Option Plan. | S-8 | 333-232672 | 99.1 | July 16, 2019 | ||||||||||||||||||||||||||||||||||
| Zingbox, Inc. Stock Incentive Plan, as amended and restated. | S-8 | 333-234059 | 99.1 | October 2, 2019 | ||||||||||||||||||||||||||||||||||
| Aporeto, Inc. Amended and Restated 2015 Stock Option and Grant Plan. | S-8 | 333-235854 | 99.1 | January 8, 2020 | ||||||||||||||||||||||||||||||||||
| CloudGenix Inc. 2013 Equity Incentive Plan. | S-8 | 333-238014 | 99.1 | May 5, 2020 | ||||||||||||||||||||||||||||||||||
| Crypsis Group Holdings, LLC 2017 Equity Incentive Plan. | S-8 | 333-249387 | 99.1 | October 8, 2020 | ||||||||||||||||||||||||||||||||||
| Sinefa Group, Inc. 2020 Stock Plan. | S-8 | 333-251423 | 99.1 | December 17, 2020 | ||||||||||||||||||||||||||||||||||
| Expanse Holding Company, Inc. Amended and Restated 2012 Stock Incentive Plan. | S-8 | 333-251425 | 99.1 | December 17, 2020 | ||||||||||||||||||||||||||||||||||
| Gamma Networks, Inc. 2018 Stock Option and Grant Plan | S-8 | 333-259327 | 99.1 | September 3, 2021 | ||||||||||||||||||||||||||||||||||
| Bridgecrew, Inc. 2019 Stock Incentive Plan. | S-8 | 333-254042 | 99.1 | March 9, 2021 | ||||||||||||||||||||||||||||||||||
| Employee Incentive Compensation Plan, as amended and restated. | 10-Q | 001-35594 | 10.2 | November 25, 2014 | ||||||||||||||||||||||||||||||||||
| Clawback Policy, adopted as of August 29, 2017. | 10-Q | 001-35594 | 10.3 | November 21, 2017 | ||||||||||||||||||||||||||||||||||
| Amended and Restated Outside Director Compensation Policy (last amended February 16, 2022) | 10-Q | 001-35594 | 10.4 | February 23, 2022 | ||||||||||||||||||||||||||||||||||
| Continued Service Policy | 10-Q | 001-35594 | 10.3 | May 20, 2022 | ||||||||||||||||||||||||||||||||||
| Palo Alto Networks, Inc. Deferred Compensation Plan effective June 1, 2022 | ||||||||||||||||||||||||||||||||||||||
| New Offer Letter between the Registrant and Mark D. McLaughlin, dated May 31, 2018. | 8-K | 001-35594 | 10.1 | June 4, 2018 | ||||||||||||||||||||||||||||||||||
| Employment Agreement between Palo Alto Networks (Israel Analytics) Ltd. and Nir Zuk, dated August 18, 2020. | 10-Q | 001-35594 | 10.1 | November 19, 2020 | ||||||||||||||||||||||||||||||||||
| Offer Letter between the Registrant and Nikesh Arora, dated May 30, 2018. | 8-K | 001-35594 | 10.1 | June 4, 2018 | ||||||||||||||||||||||||||||||||||
| Offer Letter between the Registrant and Josh Paul, dated August 5, 2021. | 8-K | 001-35594 | 10.1 | September 8, 2021 | ||||||||||||||||||||||||||||||||||
| Confirmatory Employment Letter with Updated Change in Control Protection between the Registrant and Lee Klarich, dated December 19, 2011. | 10-Q | 001-35594 | 10.4 | November 30, 2018 | ||||||||||||||||||||||||||||||||||
| Addendum to Employment Offer Letter by and between the Registrant and Dipak Golechha, dated March 17, 2021. | 8-K | 001-35594 | 10.1 | March 19, 2021 | ||||||||||||||||||||||||||||||||||
| Addendum to Employment Offer Letter by and between the Registrant and Dipak Golechha, dated February 18, 2022. | 10-Q | 001-35594 | 10.1 | May 20, 2022 | ||||||||||||||||||||||||||||||||||
| Employment Offer Letter by and between the Registrant and William “BJ” Jenkins, dated July 27, 2021. | 8-K | 001-35594 | 10.1 | August 12, 2021 | ||||||||||||||||||||||||||||||||||
| Addendum to Employment Offer Letter between the Registrant and William “BJ” Jenkins dated February 18, 2022. | 10-Q | 001-35594 | 10.2 | May 20, 2022 | ||||||||||||||||||||||||||||||||||
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| Exhibit Number | Exhibit Description | Incorporated by Reference | ||||||||||||||||||||||||||||||||||||
| Form | File No. | Exhibit | Filing Date | |||||||||||||||||||||||||||||||||||
| Offer Letter between the Registrant and Amit K. Singh, dated October 11, 2018. | 8-K | 001-35594 | 10.1 | October 15, 2018 | ||||||||||||||||||||||||||||||||||
| Addendum to Employment Offer Letter by and between the Registrant and Amit Singh, dated October 19, 2021. | 10-Q | 001-35594 | 10.2 | November 19, 2021 | ||||||||||||||||||||||||||||||||||
| Second Addendum to Employment Offer Letter by and between the Registrant and Amit Singh, dated January 28, 2022. | 10-Q | 001-35594 | 10.5 | February 23, 2022 | ||||||||||||||||||||||||||||||||||
| Form of Offer Letter between the Registrant and its directors. | 10-K | 001-35594 | 10.27 | September 3, 2021 | ||||||||||||||||||||||||||||||||||
| Amended and Restated Flextronics Manufacturing Services Agreement, by and between the Registrant and Flextronics Telecom Systems Ltd., dated April 1, 2019. | 10-Q | 001-35594 | 10.1 | May 30, 2019 | ||||||||||||||||||||||||||||||||||
| Vendor Information Security Terms between the Registrant and Flextronics Telecom Systems Ltd. dated July 23, 2021 | 10-K | 001-35594 | 10.29 | September 3, 2021 | ||||||||||||||||||||||||||||||||||
| Settlement, Release and Cross-License Agreement, dated May 27, 2014, by and between the Registrant and Juniper Networks, Inc. | 8-K | 001-35594 | 10.1 | May 28, 2014 | ||||||||||||||||||||||||||||||||||
| Purchase Agreement, dated July 10, 2018, by and among the Registrant and Citigroup Global Markets Inc. and Wells Fargo Securities, LLC, as representatives of the several Initial Purchasers named therein. | 8-K | 001-35594 | 10.1 | July 13, 2018 | ||||||||||||||||||||||||||||||||||
| Form of Convertible Note Hedge Confirmation. | 8-K | 001-35594 | 10.2 | July 13, 2018 | ||||||||||||||||||||||||||||||||||
| Form of Warrant Confirmation. | 8-K | 001-35594 | 10.3 | July 13, 2018 | ||||||||||||||||||||||||||||||||||
| Purchase Agreement, dated June 3, 2020, by and among the Registrant and Morgan Stanley & Co. LLC and Citigroup Global Markets Inc., as representatives of the several Initial Purchasers named therein. | 8-K | 001-35594 | 10.1 | June 8, 2020 | ||||||||||||||||||||||||||||||||||
| Form of Convertible Note Hedge Confirmation. | 8-K | 001-35594 | 10.2 | June 8, 2020 | ||||||||||||||||||||||||||||||||||
| Form of Warrant Confirmation. | 8-K | 001-35594 | 10.3 | June 8, 2020 | ||||||||||||||||||||||||||||||||||
| Lease between the Registrant and Santa Clara Campus Property Owner I LLC, dated May 28, 2015. | 10-K | 001-35594 | 10.29 | September 17, 2015 | ||||||||||||||||||||||||||||||||||
| Lease between the Registrant and Santa Clara Campus Property Owner I LLC, dated May 28, 2015. | 10-K | 001-35594 | 10.30 | September 17, 2015 | ||||||||||||||||||||||||||||||||||
| Lease between the Registrant and Santa Clara Campus Property Owner I LLC, dated May 28, 2015. | 10-K | 001-35594 | 10.31 | September 17, 2015 | ||||||||||||||||||||||||||||||||||
| Lease by and between the Registrant and Santa Clara Campus Property Owner I LLC, dated October 7, 2015. | 8-K/A | 001-35594 | 10.1 | October 19, 2015 | ||||||||||||||||||||||||||||||||||
| Amendment No. 1 to Lease by and between the Registrant and Santa Clara Phase I Property LLC, dated November 9, 2015. | 10-Q | 001-35594 | 10.2 | November 24, 2015 | ||||||||||||||||||||||||||||||||||
| Amendment No. 1 to Lease by and between the Registrant and Santa Clara Campus Property Owner I LLC, dated November 9, 2015. | 10-Q | 001-35594 | 10.3 | November 24, 2015 | ||||||||||||||||||||||||||||||||||
| Amendment No. 1 to Lease by and between the Registrant and Santa Clara Campus Property Owner I LLC, dated September 16, 2016. | 10-Q | 001-35594 | 10.1 | November 22, 2016 | ||||||||||||||||||||||||||||||||||
| Amendment No. 1 to Lease by and between the Registrant and Santa Clara Campus Property Owner I LLC, dated September 16, 2016. | 10-Q | 001-35594 | 10.2 | November 22, 2016 | ||||||||||||||||||||||||||||||||||
- 102 -
| Exhibit Number | Exhibit | Incorporated by Reference | ||||||||||||||||||||||||||||||||||||
| Form | File No. | Exhibit | Filing Date | |||||||||||||||||||||||||||||||||||
| Amendment No. 2 to Lease by and | 10-Q | 001-35594 | 10.3 | November 22, 2016 | ||||||||||||||||||||||||||||||||||
| Amendment No. 2 to Lease by and between the Registrant and Santa Clara Campus Property Owner I LLC, dated November 16, 2016. | 10-Q | 001-35594 | 10.1 | March 1, 2017 | ||||||||||||||||||||||||||||||||||
| Amendment No. 2 to Lease by and between the Registrant and Santa Clara Campus Property Owner I LLC, dated November 16, 2016. | 10-Q | 001-35594 | 10.2 | March 1, 2017 | ||||||||||||||||||||||||||||||||||
| Amendment No. 3 to Lease by and between the Registrant and Santa Clara Campus Property Owner I LLC, dated November 16, 2016. | 10-Q | 001-35594 | 10.3 | March 1, 2017 | ||||||||||||||||||||||||||||||||||
| Amendment No. 3 to Lease by and between the Registrant and Santa Clara EFH LLC, dated June 22, 2017. | 10-K | 001-35594 | 10.40 | September 7, 2017 | ||||||||||||||||||||||||||||||||||
| Amendment No. 3 to Lease by and between the Registrant and Santa Clara G LLC, dated June 22, 2017. | 10-K | 001-35594 | 10.41 | September 7, 2017 | ||||||||||||||||||||||||||||||||||
| Amendment No. 4 to Lease by and between the Registrant and Santa Clara EFH LLC, dated June 22, 2017. | 10-K | 001-35594 | 10.42 | September 7, 2017 | ||||||||||||||||||||||||||||||||||
| Amendment No. 4 to Lease by and between the Registrant and Santa Clara Phase III EFH LLC, dated September 29, 2017. | 10-Q | 001-35594 | 10.5 | November 21, 2017 | ||||||||||||||||||||||||||||||||||
| Amendment No. 4 to Lease by and between the Registrant and Santa Clara Phase III G LLC, dated September 29, 2017. | 10-Q | 001-35594 | 10.6 | November 21, 2017 | ||||||||||||||||||||||||||||||||||
| Amendment No. 5 to Lease by and between the Registrant and Santa Clara Phase III EFH LLC, dated September 29, 2017. | 10-Q | 001-35594 | 10.7 | November 21, 2017 | ||||||||||||||||||||||||||||||||||
| Credit Agreement, dated as of September 4, 2018, by and among the Registrant, the lenders from time to time party thereto and Citibank, N.A., as administrative agent. | 8-K | 001-35594 | 10.1 | September 6, 2018 | ||||||||||||||||||||||||||||||||||
| List of subsidiaries of the Registrant. | ||||||||||||||||||||||||||||||||||||||
| Consent of Independent Registered Public Accounting Firm. | ||||||||||||||||||||||||||||||||||||||
| Power of Attorney (contained in the signature page to this Annual Report on Form | ||||||||||||||||||||||||||||||||||||||
| Certification of the | ||||||||||||||||||||||||||||||||||||||
| Certification of the | ||||||||||||||||||||||||||||||||||||||
32.1† | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as | |||||||||||||||||||||||||||||||||||||
32.2† | Certification of | |||||||||||||||||||||||||||||||||||||
| 101.INS | XBRL Instance Document. | |||||||||||||||||||||||||||||||||||||
| 101.SCH | XBRL Taxonomy Schema Linkbase Document. | |||||||||||||||||||||||||||||||||||||
| 101.CAL | XBRL Taxonomy Calculation Linkbase Document. | |||||||||||||||||||||||||||||||||||||
- 103 -
| Exhibit Number | Exhibit Description | Incorporated by Reference | ||||||||||||||||||||||||||||||||||||
| Form | File No. | Exhibit | Filing Date | |||||||||||||||||||||||||||||||||||
| 101.DEF | XBRL Taxonomy Definition Linkbase Document. | |||||||||||||||||||||||||||||||||||||
| 101.LAB | XBRL Taxonomy Labels Linkbase Document. | |||||||||||||||||||||||||||||||||||||
| 101.PRE | XBRL Taxonomy Presentation Linkbase Document. | |||||||||||||||||||||||||||||||||||||
| 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in | |||||||||||||||||||||||||||||||||||||
* Indicates a management contract or compensatory plan or arrangement.
** Certain portions of this exhibit have been omitted as the Registrant has determined (i) the omitted information is not material and (ii) the omitted information would likely cause harm to the Registrant if publicly disclosed.
† The certifications attached as Exhibit 32.1 and Exhibit 32.2 that accompany this Annual Report on Form 10-K, are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of the Registrant under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Annual Report on Form 10-K, irrespective of any general incorporation language contained in such filing.
- 104 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on September 9, 2019.6, 2022.
| PALO ALTO NETWORKS, INC. | |||||
| By: | /s/ NIKESH ARORA | ||||
| Nikesh Arora | |||||
| Chairman and Chief Executive Officer | |||||
- 105 -
POWER OF ATTORNEY
KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Nikesh Arora, Kathleen Bonanno,Dipak Golechha, and Jean Compeau,Josh Paul, and each of them, as his or her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their, his or her substitutes, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
| Signature | Title | Date | ||||||||||||
| /s/ NIKESH ARORA | Chairman, Chief Executive Officer and Director (Principal Executive Officer) | September 6, 2022 | ||||||||||||
| Nikesh Arora | ||||||||||||||
/s/ DIPAK GOLECHHA | ||||||||||||||
| Chief Financial Officer | September | |||||||||||||
/s/ JOSH PAUL | Chief Accounting Officer | September | ||||||||||||
/s/ MCLAUGHLIN | Vice Chairman and Director | September | ||||||||||||
| Mark D. McLaughlin | ||||||||||||||
/s/ NIR ZUK | Chief | September | ||||||||||||
| Nir Zuk | ||||||||||||||
/s/ APARNA BAWA | Director | September | ||||||||||||
/s/ ASHEEM CHANDNA | Director | September | ||||||||||||
| Asheem Chandna | ||||||||||||||
/s/ DONOVAN | Director | September | ||||||||||||
| John M. Donovan | ||||||||||||||
/s/ CARL ESCHENBACH | Director | September | ||||||||||||
| Carl Eschenbach | ||||||||||||||
/s/ DR. HELENE D. GAYLE | Director | September | ||||||||||||
| Dr. Helene D. Gayle | ||||||||||||||
| /s/ JAMES J. GOETZ | Director | September 6, 2022 | ||||||||||||
| James J. Goetz | ||||||||||||||
/s/ RT HON SIR JOHN KEY | Director | September | ||||||||||||
| Rt Hon Sir John Key | ||||||||||||||
/s/ MARY PAT MCCARTHY | Director | September | ||||||||||||
| Mary Pat McCarthy | ||||||||||||||
/s/ LORRAINE TWOHILL | Director | September | ||||||||||||
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