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. In February 2017,During fiscal 2022, we expanded our family of firewalls with the launch ofintroduced several new appliances: our PA-220, which is designedofferings, including: Prisma Cloud 3.0, Prisma Access 3.0, AIOps for small branch officesNGFW, PAN-OS 10.2, and remote locations; our PA-800 series, which are idealCloud NGFW for medium-sized networks and branch and remote office environments; our PA-5200 series, which deliver security for high throughput environments in a compact form factor; and three new VM-Series virtual firewall models, which support cloud and virtualization initiatives ranging from virtualized branch offices to data center and service provider deployments. We also delivered PAN-OS 8.0, an important software release that expands security for public and private clouds, provides new SaaS application security functionality, and also provides the capabilities to prevent the theft and abuse of stolen credentials.AWS. Additionally, in February 2017 we acquired LightCyber Ltd. (“LightCyber”), a privately-held cybersecurity company. LightCyber’s technology expands the functionality ofproductive investments that fit well within our platform through the addition of behavioral analytics, and will be the foundation for a new future subscription offering. We also expect to release two new cloud-based subscription offerings in September 2017: our GlobalProtect cloud service subscription, which provides our Next Generation Security Platform as a cloud-based service for remote offices and mobile users; and our Logging Service subscription, which functions as the central cloud-based repository for all application data and logs, and allows end-customers to collect data without needing to plan for local processing power and storage.long-term strategy.
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.
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. As of July 31, 2017, we had more than 42,500 end-customers worldwide.complexity. No single end-customer accounted for more than 10% of our total revenue in fiscal 2017, 2016,2022, 2021, or 2015.2020.
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 2017, 65.7%2022, 53.6% of our total revenue was derived from sales to three distributors.
We also sell our VM-Series virtual firewalls directly to end-customers through Amazon’s AWS Marketplace, and 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, 2017,2022, we had more than 4,4006,700 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.
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, programs marketing,brand, demand generation, field marketing, channeldigital marketing, communications, analyst relations and public relationsmarketing 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 UsageUnit 42 Cloud Threat Report and the Unit 42 IoT Threat 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.
Employees
Aswho we are, and will continue to be so. With a global workforce of 12,561 as of July 31, 2017,2022, we take our People Strategy and FLEXWORK philosophy seriously and care for our employees. This is a critical element of our overall company strategy. Our People Strategy is a comprehensive approach to source, hire, onboard, integrate, develop, engage and reward employees.
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.
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 4,562 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 thatinvolvement is critical. Our I&D philosophy is fully embedded in our future success depends in part on our continued ability to hire, motivate,talent acquisition, learning and retain such personnel.development and rewards and recognition programs.
Segment and Geographic InformationEnvironmental, 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 intention to respect our planet, uplift our communities and advance our industry.
Environmental. We recognize climate change is a global crisis and are organizedcommitted to doing our part to reduce environmental impacts. Aligned to the Climate Commitments we declared in February 2021, we remain committed to utilizing 100% renewable energy, reducing our greenhouse gas (“GHG”) emissions and operate inworking across our value chain, and with coalitions, to achieve these goals by 2030. During fiscal 2022, we conducted a single reportable segment, with 70.2%comprehensive analysis of our total revenueglobal 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.
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 to reach across our supply chain to communicate our expectations regarding labor standards, business practices and 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 20172022 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 Americas, 18.2% from Europe,importance of our ESG performance, the Middle East,charter of the ESG and Africa (“EMEA”), and 11.6% from Asia Pacific and Japan (“APAC”). Refer to Note 16. Segment InformationNominating Committee of Notes to Consolidated Financial Statements included in Part II, Item 8the board of this Annual Report on Form 10-K for more information about segments and revenue and assets by geographic region.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. Further, a copy of this Annual Report on Form 10-K is located at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330.
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.
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.
•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.
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 and number of end-customers havehas increased significantly, and we expect bothit to continue to grow over the next year. For example, from the end of fiscal 20162021 to the end of fiscal 2017,2022, our headcount increased from 3,79510,473 to 4,562 employees, and our number of end-customers increased from approximately 34,000 to more than 42,500.12,561 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.
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 end-customers;our 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 potential impactpolicies;
•increases or decreases in our expenses or fluctuations in our sales cycle 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 such as those caused by the upcoming elections in Europe, the recent referendum in which voters in the United Kingdom (the “U.K.”) approved anKingdom’s exit from the European Union (the “E.U.”(“Brexit”), Russia’s invasion of 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.
Uncertain or weakened globalOur operating results may be adversely affected by unfavorable economic and market conditions could have an adverse effect on our business and operating results.the uncertain geopolitical environment.
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 the “Brexit” decision, uncertainties related to 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, allreductions 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 27.8%29.3% and 48.5%24.9% in fiscal 20172022 and fiscal 2016,2021, 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 $836.7 million at$1.7 billion as of July 31, 2017.2022. 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.
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.end-customers and create demand for our new offerings, including cloud security, 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
small and large companies single-vertical vendors that offer pointindependent or emerging solutions and/oracross various areas of security;
•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.
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 now 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-deployed enterprise and customer-facing environments and the information they store and process. Incidences of cyberattacks and other cybersecurity breaches and incidents have increased and are likely to continue to increase. We and our third-party service providers face security threats and attacks from a variety of sources. Despite significantour efforts and processes to createprevent breaches of our internal networks, systems and websites, our data, corporate systems, our systems and security barriersmeasures, as well as those of our third-party service providers, are still vulnerable to such threats, it is virtually impossible for uscomputer viruses, break-ins, phishing attacks, ransomware attacks, or other types of attacks from outside parties, or breaches due to entirely mitigateemployee error, malfeasance, a combination of these, risks.or otherwise. We cannot guarantee that the measures we have taken to protect our networks, systems and 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 inor incident or an attack against our data securityservice availability suffered by us, or our third-party service providers, could compromiseimpact 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 internal 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.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 other 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.
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 attract,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 policyand 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 attract,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. Additionally, our chief financial officer recently advised us of his intent to retire from his position and if we are unable to timely attract, identify, hire and integrate a successor, our business and operating results could be harmed.
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.
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.
At the beginning of fiscal 2017, we experienced execution challenges with respect to certain elements of our go-to-market strategy. While we have and will continue to implement changes to our go-to-market strategy that are designed to address these challenges, such changes may be difficult to implement and result in further disruptions to our sales organization or, once implemented, fail to resolve these challenges, which could impact our results of operations. 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 59.7%75.2% of total revenue in fiscal 2017, 51.3%2022, 73.7% of total revenue in fiscal 2016,2021, and 46.9%68.8% of total revenue in fiscal 2015.2020. 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 monthly 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.
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 thatother 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.
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 the 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. 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.
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, adversely affect our operating results, may not result in the expected benefits of such acquisitions and may dilute stockholder value.
As part of our business strategy, we acquire and make investments in complementary companies, products, or technologies. The identification of suitable acquisition candidates is difficult, and we may not be able to complete such acquisitions on favorable terms, if at all. 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, our revenue and operating results 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 business.” 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.
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 a subsidiary ofour 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 primarily manufactured by our manufacturing partners at facilities located primarily in the United States. Over time, we intend to decreaseSome 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 manufactured outside the United States. The remaining portion of our products that are manufacturedsourced 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
manufacturing 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 partners whichin 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 recently 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.
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;
•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 newcurrent 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;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 ability to gain 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, on June 23, 2016,Brexit creates an uncertain political and economic environment in the United Kingdom (“U.K.”) and across European Union (“E.U.”) member states for the foreseeable future. On January 31, 2020 the U.K. held a referendum in which voters approved an exit from the E.U., commonly referred to as “Brexit.” As a result of the referendum, it is expected that the British government will begin negotiating the terms of the U.K.’s withdrawal fromleft the E.U. A withdrawal could, among other outcomes, disrupt the free movement of goods, services and people between the U.K. and the E.U., undermine bilateral cooperation in key policy areasEU/UK Trade and significantly disrupt trade between the U.K.Cooperation Agreement came into force on January 1, 2021. Our financial condition and the E.U.; however, the full effects of Brexit are uncertainoperating results may be impacted by such uncertainty with potential disruptions to our relationships with existing and will dependfuture customers, suppliers and employees all possibly having a material adverse impact on any agreements the U.K. makes to retain access to E.U. markets either during a transitional period or more permanently. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the U.K. determines which E.U. laws to replace or replicate. Given these possibilities and others we may not anticipate, as well as the lack of comparable precedent, the full extent to which our business, operating results andprospects, financial condition could be adversely affected by Brexit is uncertain.
The announcement of Brexit and the withdrawal of the U.K. from the E.U. may also create global economic uncertainty, which may cause our end-customers to closely monitor their costs and reduce their spending budgets. Any of these effects of Brexit, among others noted above, could adversely affect our business, financial condition,and/or operating results and cash flows.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. ReferAs of July 31, 2022, the total notional amount of our outstanding foreign currency forward contracts was $856.9 million. For more information on our hedging transactions, refer to Note 4.6. Derivative Instrumentsin Part II, Item 8 of this Annual Report on Form 10-K for more information on our hedging transactions.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.
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.
For fiscal 2017, three distributors represented 65.7% of our total revenue, and as of July 31, 2017, four distributors represented 75.9% of our gross accounts receivable. Most of our sales to our channel partners are made on an open credit basis. Beyond our open credit arrangements, we have also experienced demands for customer financing due to COVID-19 and our competitors’ offerings. The majority of these demands are currently facilitated by leasing and other financing arrangements provided by our distributors and resellers. To respond to this demand, our customer financing activities may increase in the future. We also provide financings to certain end-customers. We monitor customer payment capability in granting such financing arrangements, seek to limit such open credit to amounts we believe the end-customers can pay and maintain reserves we believe are adequate to cover exposure for doubtful accounts to mitigate credit risks of these end-customers. However, there can be no assurance that these programs will be effective in reducing our credit risks.
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. Finally, for purchases by the U.S. government,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.
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.
We may acquire other businesses, which could require significant management attention, disrupt our business, dilute stockholder value,Risks Related to Intellectual Property and adversely affect our operating results.
As part of our business strategy, we may acquire or 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”), and in February 2017 we acquired LightCyber. Our ability as an organization to acquire and integrate other companies, products, or technologies in a successful and timely manner is still relatively unproven. 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, we may be subject to claims or liabilities assumed from an acquired company, product, or technology, and any acquisitions we complete could be viewed negatively by our end-customers, investors, and securities analysts. In addition, if we are unsuccessful at integrating past or future acquisitions, or the technologies associated with such acquisitions, into our company, the 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. 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. 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 business” 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.
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.
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 re-engineerreengineer our products and subscriptions, to discontinue the sale of our products and subscriptions if re-engineeringreengineering 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.
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.
Risks Related to Privacy and Data Protection
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 security 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, provides for greater penalties for noncompliance than E.U. laws that previously 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. The E.U. GDPR requires, among other things, that personal data only be transferred outside of the E.U. to the United States and other jurisdictions that the European Commission has notyet recognized as having “adequate” data protection 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 (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 imposed 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 for 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.
Following the withdrawal of the U.K. from the E.U. (i.e., Brexit), and the expiry of the Brexit transition period, which ended on December 31, 2020, the E.U. GDPR has been implemented in the U.K. (as the “U.K. GDPR”). The U.K. GDPR sits alongside the U.K. Data Protection Act 2018, which implements certain derogations in the E.U. GDPR into English law. The requirements of the U.K. GDPR, which are (at this time) largely aligned with those under the E.U. GDPR, may lead to similar compliance and operational costs with potential fines of up to £17.5 million or 4% of total worldwide annual turnover.
In the United States, companies that do business in California are subject to the California Consumer Privacy Act (“CCPA”), which requires, among other things, covered companies to provide new disclosures to California consumers, afford such consumers certain rights regarding their personal information, and 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 July 1, 2020. The CCPA has been amended on multiple occasions and the California Attorney General has issued initial and revised regulations that also govern the CCPA. It remains unclear how this legislation will be 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 for compliance. Moreover, additional state privacy laws have been passed and will require potentially substantial efforts to 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. 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 Internet 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, of Cyveraincluding Cyber Secdo Ltd. (“Secdo”), PureSec Ltd. (“PureSec”) and LightCyber,Twistlock Ltd. (“Twistlock”), we have offices and employees located in Israel. As a result,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. There has been a significant increase in hostilities and political unrest between Hamas and Israel in the past few years. The effects of these 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.
Our failure to adequately protect personal information could have a material adverse effect on our business.
A wide varietyTable 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 data protection and privacy-related laws and regulations 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 recently adopted E.U. General Data Protection Regulation, effective in May 2018, imposes more stringent data protection requirements, and provides for greater penalties for noncompliance. Our failure to comply with applicable laws and regulations, or to protect personal data, could result in enforcement action against us, including fines, imprisonment of company officials and 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 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 of data. Even the perception of privacy concerns, whether or not valid, may harm our reputation and inhibit adoption of our products and subscriptions by current and future end-customers.Contents 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.
Our failure to raise additional capital or generate the significant capital necessary to expand our operationsTax, Accounting, Compliance 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 platform, 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. For example, in June 2014, we issued 0.0% Convertible Senior Notes due 2019 (the “Notes”) and any conversion of some or all of the Notes into common stock will dilute the ownership interests of existing stockholders to the extent we deliver shares upon conversion of any of the 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 otherwise will dilute all other stockholders.” Furthermore, if we engage in additional debt financing, the holders of our debt would have priority over the holders of our common stock, and we may be required to accept terms that restrict our ability to incur additional indebtedness. We may also be required to take other actions that would otherwise be in the interests of the debt holders and would require us to maintain specified liquidity or other ratios, any of which could harm our business, operating results, and financial condition. We may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly impaired, and our business may be adversely affected.Regulatory Risks
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, including proposed and potential new legislation to reform U.S. taxation of international business activities, and recent guidance regarding base erosion and profit shifting (“BEPS”) provided by the Organisation for Economic Co-operation and Development, 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.
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 U.S. 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 work toward adopting and implementing the new revenueIn general, if our estimates, judgments or assumptions relating to our critical accounting standard, management will make 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. It is possible that interpretation, industry practice, and guidance may evolve as we work toward implementing the new standard. If our assumptionspolicies 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.
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.
Our business is subject to the risks of earthquakes, fire, power outages, floods, 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, terrorism, 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 above should result in delays or cancellations of customer orders, the loss of customers, or the delay in the manufacture, deployment, or shipment of our products, our business, financial condition, and operating results would be adversely affected.
Risks Related to Our Notes
We may not have the ability to raise the funds necessary to settle conversions of theour Notes, or to repurchase theour Notes upon a fundamental change, or repay our 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.
HoldersIn July 2018 we issued our 2023 Notes (the “2023 Notes”) and in June 2020 we issued our 2025 Notes (the “2025 Notes,” together with the “2023 Notes,” the “Notes”). We will need to make cash payments (1) if holders of theour Notes will have the right to require us to repurchase all or a portion of their Notes upon the occurrence of a fundamental change (e.g., a change of control of Palo Alto Networks, Inc.) before the maturity date, (2) upon conversion of our Notes, or (3) to repay our Notes in cash at a repurchase price equal to 100%their maturity, unless earlier converted or repurchased. Effective August 1, 2022 through October 31, 2022, all of the 2023 Notes and 2025 Notes are convertible. If all of the Noteholders decided to convert their Notes, we would be obligated to pay the $3.7 billion principal amount of the Notes to be repurchased, plus accrued and
unpaid special interest, if any, to, but excluding,in cash. Under the fundamental change repurchase date. In addition, upon conversionterms of the Notes, we will be requiredalso have the option to make cash payments for each $1,000settle the amount of our conversion obligation in excess of the aggregate principal amount of the Notes convertedin cash or shares of at least the lesserour common stock. If our cash provided by operating activities, together with our existing cash, cash equivalents and investments, and existing sources of $1,000 and the sum of the daily conversion values. However,financing, are inadequate to satisfy these obligations, we will need to obtain third-party financing, which may not have enoughbe available cashto us on commercially reasonable terms or be ableat all, to obtain financing at the time we are required to make repurchases of Notes surrendered therefor or pay cash with respect to Notes being converted.meet these payment obligations.
In addition, our ability to repurchase or to pay cash upon conversion of theour 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 applicable indenture governing thesuch Notes or to pay cash upon conversion of thesuch Notes as required by the applicable indenture would constitute a default under the indenture. A default under the applicable 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 indenture governing theour 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 thesuch indenture governing theour Notes that could have the effect of diminishing our ability to make payments on theour 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 theour Notes only to the extent any such indebtedness or credit facility is not repaid or does not mature while theour Notes are outstanding.
Risks Related to Ownership of 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.
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”). Since shares of our common stock were sold in our IPO in July 2012 at a price of $42.00 per share, the 2012. The reported high and low sales prices of our common stock hasduring the last 12 months have ranged from $200.55$367.21 to $39.08,$640.90 per share, as measured through August 24, 2017.22, 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 expectationexpectations 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.
The convertible note hedge and warrant transactions may affect the value of our common stock.
In connection with the sale of our 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 our Notes and/or offset any cash payments we are required to make in excess of the principal amount of any such converted 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 outstanding Notes (and are likely to do so during any applicable observation period related to a conversion of our Notes). This activity could also cause or avoid an increase or a decrease in the market price of our common stock or our Notes, which could affect a note holder’s ability to convert its Notes and, to the extent the activity occurs during any observation period related to a conversion of our Notes, it could affect the amount and value of the consideration that the note holder will receive upon conversion of 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 our 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,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,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.
On February 24, 2017,As of July 31, 2022, we had $85.0 million available under our board of directors authorized a $500.0 million increase to our existing share repurchase program bringing the total authorization to $1.0 billion, funded from available working capital. This authorization is an increase to the existing $500.0 million repurchase authorization previously approved by our board of directors in August 2016. Additionally, our board of directors extended the term of the repurchase authorization, which will now expire on December 31, 2018.2022. Such share repurchase program may be suspended or discontinued by the Company at any time without prior notice. Although our board of directors has authorized a share repurchase program, the share repurchase program doeswe are not obligate usobligated to repurchase any specific dollar amount or to acquire any specific number of shares.shares under the program. The share repurchase program could affect the price of our common stock, increase volatility 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 are subject to risks associated with our strategic investments. Other-than-temporary impairments in the value of our investments could negatively impact our financial results.
In June 2017, we announced our plans to form the $20.0 million Palo Alto Networks Venture Fund. The fund is aimed at seed-, early-, and growth-stage security companies with a cloud-based application approach. We may not realize a return on our
capital investments. Many such private companies generate net losses and the market for their products, services or technologies may be slow to develop, and, therefore, are dependent on the availability of later rounds of financing from banks or investors on favorable terms to continue their operations. The financial success of our investment in any company is typically dependent on a liquidity event, such as a public offering, acquisition or other favorable market event reflecting appreciation to the cost of our initial investment. The capital markets for public offerings and acquisitions are dynamic and the likelihood of liquidity events for the companies we have and intend to invest in could significantly change. Further, valuations of privately-held companies are inherently complex due to the lack of readily available market data and as such, the basis for these valuations is subject to the timing and accuracy of the data received from these companies. If we determine that any of our investments in such companies have experienced a decline in value, we may be required to record an other-than-temporary impairment, which could be material and negatively impact our financial results. All of our investments are subject to a risk of a partial or total loss of investment capital.
The convertible note hedge and warrant transactions may affect the value of our common stock.
In connection with the sale of the Notes, we entered into convertible note hedge transactions with certain counterparties. We also entered into warrant transactions with the counterparties pursuant to which we sold warrants for the purchase of our common stock. The convertible note hedge transactions are expected generally to reduce the potential dilution to our common stock upon any conversion of Notes and/or offset any cash payments we are required to make in excess of the principal amount of any converted Notes. The warrants could separately have a dilutive effect to the extent that the market price per share of our common stock exceeds the strike price of the warrants unless, subject to certain conditions, we elect to cash settle the warrants.
The 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 Notes (and are likely to do so during any observation period related to a conversion of Notes). This activity could also cause or avoid an increase or a decrease in the market price of our common stock or the Notes, which could affect a Note holder’s ability to convert the Notes and, to the extent the activity occurs during any observation period related to a conversion of Notes, it could affect the amount and value of the consideration that such Note holder will receive upon conversion of the 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 the 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.
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.
The requirementsOur charter documents and Delaware law, as well as certain provisions contained in the indentures governing our Notes, could discourage takeover attempts and lead to management entrenchment, which could also reduce the market price of beingour common stock.
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;
•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 affect our ability to attract and retain qualified board members.
As a public company, we are subjectrestated certificate of incorporation relating to the reporting requirementsissuance of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Act, the listing requirementspreferred stock and management of the New York Stock Exchange (“NYSE”),our business or our amended and other applicable securities rulesrestated bylaws;
•authorize our board of directors to amend our bylaws by majority vote; and regulations. Compliance
•establish advance notice procedures with these rules and regulations have increasedwhich 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 respectstockholders must comply to nominate candidates to our business and operating results. In addition, the Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. In orderboard of directors or to meet the requirements of this standard, significant resources andpropose matters to be acted upon at a stockholders’ meeting.
These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current 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.
In addition, changing laws, regulations, and standards related to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs, andby making some activities more time-consuming. These laws, regulations, and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations, and standards, and this investment may result in increased general and administrative expense and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations,
and standards differ from the activities intended by regulatory or governing bodies, regulatory authorities may initiate legal proceedings against us and our business may be harmed.
We also expect that being a public company and these new rules and regulations will make it more expensive for us to obtain and maintain director and officer liability insurance, and in the future, we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for usour stockholders to attract and retain qualifiedreplace members of our board of directors, particularlywhich is responsible for appointing the members of management. In addition, as a Delaware corporation, we are subject to serveSection 203 of the Delaware General Corporation Law. These provisions may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us for a certain period of time. Additionally, certain provisions contained in the indenture governing our Notes could make it more difficult or more expensive for a third party to acquire us. The application of Section 203 or certain provisions contained in the indenture governing our Notes also could have the effect of delaying or preventing a change in control of us. Any of these provisions could, under certain circumstances, depress the market price of our common stock.
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 above should result in delays or cancellations of customer orders, the loss of customers, or the delay in the manufacture, deployment, or shipment of our products, our business, financial condition, and operating results would be adversely affected.
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 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 would otherwise be in the interests of the debt holders and would require us to maintain specified liquidity or other ratios, any of which could harm our business, operating results, and financial condition. We may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our Audit Committeeability to continue to support our business growth and Compensation Committee,to respond to business challenges could be significantly impaired, and qualified executive officers.our business may be adversely affected.
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 20172022 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.
Our charter documents and Delaware law, as well as certain provisions of our Notes, could discourage takeover attempts and lead to management entrenchment, which could also reduce the market price of our common stock.
Provisions in our amended and restated certificate of incorporation and amended and restated bylaws may have the effect of delaying or preventing a change 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;
specify that special meetings of our stockholders may be called only by the chairman of our 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 restated certificate of incorporation relating to the issuance of preferred stock and management of our business or our amended and restated bylaws;
authorize our board of directors to amend our bylaws by majority vote; and
establish advance notice procedures with which our stockholders must comply to nominate candidates to our board of directors or to propose matters to be acted upon at a stockholders’ meeting.
These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for our stockholders to replace members of our board of directors, which is responsible for appointing the members of management. In addition, as a Delaware corporation, we are subject to Section 203 of the Delaware General Corporation Law. These provisions may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us for a certain period of time. Additionally, certain provisions of our Notes could make it more difficult or more expensive for a third party to acquire us. The application of Section 203 or certain provisions of our Notes also could have the effect of delaying or preventing a change in control of us. Any of these provisions could, under certain circumstances, depress the market price of our common stock.
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ITEM 1B. | ITEM 1B. UNRESOLVED STAFF COMMENTS |
None.
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. The leases for our previous corporate headquarters expire in April 2021 and July 2023. We also lease space for personnel in locations throughout the United States and various international locations, including Israel, the Netherlands, Singapore, Australia, and Japan.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 9. Commitments and Contingencies of Notes to Consolidated Financial Statements included11. Leases 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 9.12. 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.
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ITEM 4. | MINE SAFETY DISCLOSURES |
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
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ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
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 24, 2017,22, 2022, there were 88355 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.
Price Range of Our Common Stock
The following table sets forth the reported high and low sales prices of our common stock for the periods indicated, as regularly quoted on the NYSE:
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| | | | | | | |
| High | | Low |
Year Ended July 31, 2016 | | | |
First Quarter | $ | 191.00 |
| | $ | 140.39 |
|
Second Quarter | $ | 194.73 |
| | $ | 135.89 |
|
Third Quarter | $ | 165.29 |
| | $ | 111.09 |
|
Fourth Quarter | $ | 151.99 |
| | $ | 114.64 |
|
Year Ended July 31, 2017 | | | |
First Quarter | $ | 163.01 |
| | $ | 124.74 |
|
Second Quarter | $ | 165.69 |
| | $ | 123.57 |
|
Third Quarter | $ | 157.65 |
| | $ | 107.31 |
|
Fourth Quarter | $ | 143.90 |
| | $ | 108.15 |
|
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
ThereDuring the three months ended July 31, 2022, we issued a total of 35,004 shares of our unregistered common stock pursuant to post-closing obligations in connection with our previous acquisitions of The Crypsis Group, Gamma Networks, Inc., and Sinefa Group, Inc. (the “Transactions”).
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 2017.
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, 20172022 (in millions, except per share amounts):
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| | | | | | | | | | | | | | |
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, 2017 to May 31, 2017(2) | | — |
| | $ | 116.50 |
| | — |
| | $ | 704.9 |
|
June 1, 2017 to June 30, 2017(3) | | 0.5 |
| | $ | 133.82 |
| | 0.5 |
| | $ | 636.1 |
|
July 1, 2017 to July 31, 2017(3) | | 0.4 |
| | $ | 135.57 |
| | 0.4 |
| | $ | 580.0 |
|
Total | | 0.9 |
| | $ | 133.91 |
| | 0.9 |
| | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
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 | | | |
______________
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(1) | On August 26, 2016, our board of directors authorized a $500.0 million share repurchase which is funded from available working capital. On February 24, 2017, our board of directors authorized a $500.0 million increase to our repurchase program, bringing the total authorization to $1.0 billion. 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. The repurchase authorization will expire on December 31, 2018, and may be suspended or discontinued at any time. |
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(2) | Repurchases during the month ended May 31, 2017 include shares of restricted common stock delivered by certain employees upon vesting of equity awards to satisfy tax withholding requirements. The number of shares delivered by these employees to satisfy tax withholding requirements during the period was not significant. |
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(3) | Repurchases during the months ended June 30, 2017 and July 31, 2017 consisted of repurchases under our share repurchase program, for which the average price paid per share excludes costs associated with the repurchases. |
(1) On February 26, 2019, we announced that our board of directors authorized a $1.0 billion share repurchase program, which is 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 under our program are to be made at management’s discretion 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.
(2) Includes shares of restricted common stock delivered by certain employees upon vesting of equity awards to satisfy tax withholding requirements. The number of shares delivered by these employees to satisfy tax withholding requirements during the period was not significant.
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 comparesHistorically, we have compared the cumulative total return on our common stock with that of the NYSE Composite Index and the NYSE Arca Tech 100 Index. As a result of the change in our listing from the NYSE to Nasdaq in October 2021, we have added the Nasdaq 100 Index, the Standard & Poor’s 500 Index and the Standard & Poor’s Information Technology Index to the indexes that we have historically used.
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, 2017.2022. This performance graph assumes $100 was invested on July 31, 2012,2017, 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.
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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 | 7/31/2012 | | 7/31/2013 | | 7/31/2014 | | 7/31/2015 | | 7/31/2016 | | 7/31/2017 |
Palo Alto Networks, Inc. | $ | 100.00 |
| | $ | 85.65 |
| | $ | 141.51 |
| | $ | 325.22 |
| | $ | 229.07 |
| | $ | 230.63 |
|
NYSE Composite Index | $ | 100.00 |
| | $ | 121.55 |
| | $ | 136.40 |
| | $ | 138.38 |
| | $ | 137.15 |
| | $ | 152.18 |
|
NYSE Arca Tech 100 Index | $ | 100.00 |
| | $ | 125.69 |
| | $ | 152.74 |
| | $ | 169.47 |
| | $ | 171.17 |
| | $ | 211.12 |
|
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ITEM 6. | SELECTED FINANCIAL DATA |
The selected consolidated statementTable of operations data for fiscal 2017, 2016, and 2015 and the consolidated balance sheet data as of July 31, 2017 and 2016 are derived from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The selected consolidated statement of operations data for fiscal 2014 and 2013 and the consolidated balance sheet data as of July 31, 2015, 2014, and 2013 are derived from audited financial statements not included in this Annual Report on Form 10-K. Our historical results are not necessarily indicative of the results that may be expected in the future. The selected consolidated financial data below should be read in conjunction with the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Part II, Item 7 of this Annual Report on Form 10-K and our consolidated financial statements and related notes included in Part II, Item 8 of this Annual Report on Form 10-K. |
| | | | | | | | | | | | | | | | | | | |
| Year Ended July 31, |
| 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| (in millions) |
Selected Consolidated Statements of Operations Data: | | | | | | | | | |
Total revenue | $ | 1,761.6 |
| | $ | 1,378.5 |
| | $ | 928.1 |
| | $ | 598.2 |
| | $ | 396.1 |
|
Total gross profit | 1,285.0 |
| | 1,008.5 |
| | 676.6 |
| | 438.6 |
| | 286.4 |
|
Operating loss(1) | (179.8 | ) | | (157.3 | ) | | (99.8 | ) | | (196.2 | ) | | (9.9 | ) |
Net loss(1) | $ | (216.6 | ) | | $ | (192.7 | ) | | $ | (131.3 | ) | | $ | (207.4 | ) | | $ | (20.5 | ) |
Net loss per share, basic and diluted(1) | $ | (2.39 | ) | | $ | (2.21 | ) | | $ | (1.61 | ) | | $ | (2.79 | ) | | $ | (0.30 | ) |
Weighted-average shares used to compute net loss per share, basic and diluted | 90.6 |
| | 87.1 |
| | 81.6 |
| | 74.3 |
| | 68.7 |
|
|
| | | | | | | | | | | | | | | | | | | |
| July 31, |
| 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| (in millions) |
Selected Consolidated Balance Sheet Data: | | | | | | | | | |
Cash and cash equivalents | $ | 744.3 |
| | $ | 734.4 |
| | $ | 375.8 |
| | $ | 653.8 |
| | $ | 310.6 |
|
Investments | 1,420.0 |
| | 1,204.0 |
| | 952.0 |
| | 320.6 |
| | 126.3 |
|
Working capital(1)(2)(3) | 775.0 |
| | 927.2 |
| | 79.3 |
| | 630.9 |
| | 334.5 |
|
Total assets(1) | 3,438.3 |
| | 2,858.2 |
| | 2,026.1 |
| | 1,502.6 |
| | 603.9 |
|
Total deferred revenue | 1,773.5 |
| | 1,240.8 |
| | 713.7 |
| | 422.6 |
| | 249.2 |
|
Convertible senior notes, net(2)(3) | 524.7 |
| | 500.2 |
| | 476.8 |
| | 454.6 |
| | — |
|
Common stock and additional paid-in capital | 1,599.7 |
| | 1,515.5 |
| | 988.7 |
| | 804.4 |
| | 381.6 |
|
Total stockholders’ equity(1) | $ | 759.6 |
| | $ | 894.9 |
| | $ | 559.7 |
| | $ | 506.7 |
| | $ | 291.4 |
|
______________
| |
(1) | Prior period amounts have been adjusted due to our voluntary change in accounting policy for sales commissions. Refer to 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 more information. |
| |
(2) | Prior period amounts have been adjusted due to our adoption of new accounting guidance related to the presentation of debt issuance costs. Refer to 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 more information. |
| |
(3) | The convertible senior notes, net balance was classified as a current liability in our consolidated balance sheets as of July 31, 2015, and classified as a long-term liability for all other periods presented. |
| |
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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 20172022 to 2016fiscal 2021. For discussion and analysis related to our financial results comparing fiscal 20162021 to 2015.
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, 2017,2022, 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 allowsempower 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 running on their networks and by preventing successful 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 maintain the visibility and control needed to protect their valued data and critical control systems while pursuing technology initiatives, like cloud and mobility, that grow their business. We believe 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-alonesiloed point products. Our company focuses on delivering value in five fundamental areas:
Network Security:
•Our network security appliancesplatform, which includes our ML-Powered Next-Generation Firewalls, available in a number of form factors, including physical, virtual, and software products.
Our Next-Generation Security Platform consists of three major elements: our Next-Generation Firewall, our Advanced Endpoint Protection, and our Threat Intelligence Cloud. Our Next-Generation Firewall comes in several physical and cloud-based software form-factors and delivers application, user, and content visibility and controlcontainerized appliances, as well as protection against network-based cyberthreats integrated withina cloud-delivered service, has been a leader in the firewallindustry for ten consecutive years. Our network security platform also includes our Cloud-Delivered Security Services, such as Threat Prevention, Advanced Threat Prevention, WildFire®, Advanced URL Filtering, DNS Security, IoT Security, GlobalProtect™, SD-WAN, Enterprise Data Loss Prevention (“Enterprise DLP”), SaaS Security API and SaaS Security Inline. Through these add-on security services, our customers are able to secure their content, applications, users, and devices across our network security platform as well as the Prisma® and Cortex® product lines. Panorama™, our network security management solution, available as hardware or virtual machine, can centrally manage our network security platform irrespective of form factor, location, or scale.
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 first-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 comprehensive 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 native security through our proprietary hardwarePrisma Cloud platform. As a comprehensive Cloud Native Application Protection Platform (“CNAPP”), Prisma Cloud secures hybrid and multi-cloud environments for applications, data, and the entire cloud native technology stack across the full development lifecycle; from code to runtime. For inline network security on multi and hybrid-cloud environments, we also offer our VM-Series and CN-Series Firewall offerings.
Security Operations:
•We deliver the next generation of endpoint security, security analytics and security automation solutions through our Cortex portfolio. These include our industry-leading extended detection and response platform Cortex XDR® to prevent, detect, and respond to complex cybersecurity attacks, Cortex XSOAR® for security orchestration, automation, and response (“SOAR”), Cortex Xpanse® for attack surface management (“ASM”) and Cortex Data Lake allowing our customers to collect and analyze large amounts of context-rich data across endpoints, networks, and clouds. These products are delivered as software architecture. Our Advanced Endpoint Protection software prevents cyberattacks that aim to run malicious code or exploit software vulnerabilities on a broad variety of fixed, mobile, and virtual endpoints and servers. Our SaaS subscriptions.
Threat Intelligence Cloud provides centraland Security Consulting (Unit 42):
•We enable security teams with up-to-date threat intelligence capabilities,and deep cybersecurity expertise before, during and after attacks through our Unit 42 threat research and security for SaaS applications,consulting team. Unit 42 offers incident response, risk management, board advisory and automated delivery of preventative measures against cyberattacks.proactive cybersecurity assessment services.
For fiscal 2017, 2016,2022 and 2015,2021, total revenue was $1.8 billion, $1.4$5.5 billion and $928.1 million,$4.3 billion, respectively, representing year-over-year growth of 27.8% for fiscal 2017 and 48.5% for fiscal 2016.29.3%. 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, 2017,2022, we had more than 42,500 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 servicessupport to our distributors, which, in turn, sell to our resellers, which then sell to our end-customers.
Our product revenue grew to $709.1 million$1.4 billion or 40.3%24.8% of total revenue for fiscal 2017,2022, representing year-over-year growth of 5.7%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-200,PA-410, which is designed for enterprisesmall 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 $1.1$4.1 billion or 59.7%75.2% of total revenue for fiscal 2017,2022, representing year-over-year growth of 48.7%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 fixedthe network, endpoints, and mobile devices.the cloud. When end-customers purchase an appliance,our physical, virtual, or container firewall appliances, or certain cloud offerings, they typically purchase one or more of our subscriptions for additional functionality, as well as 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. In February 2017,During fiscal 2022, we expanded our family of firewalls with the launch ofintroduced several new appliances: our PA-220, which is designedofferings, including: Prisma Cloud 3.0, Prisma Access 3.0, AIOps for small branch officesNGFW, PAN-OS 10.2, and remote locations; our PA-800 series, which are idealCloud NGFW for medium-sized networks and branch and remote office environments; our PA-5200 series, which deliver security for high throughput environments in a compact form factor; and three new VM-Series virtual firewall models, which support cloud and virtualization initiatives ranging from virtualized branch offices to data center and service provider deployments. We also delivered PAN-OS 8.0, an important software release that expands security for public and private clouds, provides new SaaS application security functionality, and also provides the capabilities to prevent the theft and abuseAWS.
We plan to continue our investment in innovation as we evolve and further extend the capabilities of our platform. For example, in June 2017, we announced the next phase in the evolution of our Next-Generation Security Platform: our Palo Alto Networks Application Framework. Our cloud-based Application Framework will introduce a new SaaS consumption model under which our end-customers will be able to rapidly implement cloud-based security applications developed by us, third-party developers, or other security vendors, without having to deploy or manage additional products. We expect our Application Framework to become generally available in the early 2018 calendar year, with continuous and ongoing introduction of new security applications.
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.
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 | |
| | | | | | | | | | | | | | | | | |
| 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 | |
|
| | | | | | | |
| July 31, |
| 2017 | | 2016 |
| (in millions) |
Total deferred revenue | $ | 1,773.5 |
| | $ | 1,240.8 |
|
Cash, cash equivalents, and investments | $ | 2,164.3 |
| | $ | 1,938.4 |
|
|
| | | | | | | | | | | |
| Year Ended July 31, |
| 2017 | | 2016 | | 2015 |
| (dollars in millions) |
Total revenue | $ | 1,761.6 |
| | $ | 1,378.5 |
| | $ | 928.1 |
|
Total revenue year-over-year percentage increase | 27.8 | % | | 48.5 | % | | 55.1 | % |
Gross margin | 72.9 | % | | 73.2 | % | | 72.9 | % |
Operating loss(1) | $ | (179.8 | ) | | $ | (157.3 | ) | | $ | (99.8 | ) |
Operating margin(1) | (10.2 | )% | | (11.4 | )% | | (10.8 | )% |
Billings | $ | 2,293.4 |
| | $ | 1,905.6 |
| | $ | 1,219.1 |
|
Billings year-over-year percentage increase | 20.4 | % | | 56.3 | % | | 58.0 | % |
Cash flow provided by operating activities(2) | $ | 868.5 |
| | $ | 658.6 |
| | $ | 352.8 |
|
Free cash flow (non-GAAP)(2) | $ | 705.1 |
| | $ | 586.1 |
| | $ | 319.0 |
|
______________
| |
(1) | Prior period amounts have been adjusted due to our voluntary change in accounting policy for sales commissions. Refer to 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 more information. |
| |
(2) | Prior period amounts have been adjusted due to our early adoption of new share-based payment accounting guidance. Refer to 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 more information. |
•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 measuremetric 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 criteria 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 termnear-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 | |
|
| | | | | | | | | | | |
| Year Ended July 31, |
| 2017 | | 2016 | | 2015 |
| (in millions) |
Billings: | | | | | |
Total revenue | $ | 1,761.6 |
| | $ | 1,378.5 |
| | $ | 928.1 |
|
Add: change in total deferred revenue, net of acquired deferred revenue | 531.8 |
| | 527.1 |
| | 291.0 |
|
Billings | $ | 2,293.4 |
| | $ | 1,905.6 |
| | $ | 1,219.1 |
|
• 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 | |
|
| | | | | | | | | | | |
| Year Ended July 31, |
| 2017 | | 2016 | | 2015 |
| (in millions) |
Free cash flow (non-GAAP): | | | | | |
Net cash provided by operating activities(1) | $ | 868.5 |
| | $ | 658.6 |
| | $ | 352.8 |
|
Less: purchases of property, equipment, and other assets | 163.4 |
| | 72.5 |
| | 33.8 |
|
Free cash flow (non-GAAP)(1) | $ | 705.1 |
| | $ | 586.1 |
| | $ | 319.0 |
|
Net cash used in investing activities | $ | (472.6 | ) | | $ | (338.9 | ) | | $ | (679.0 | ) |
Net cash provided by (used in) financing activities(1) | $ | (386.0 | ) | | $ | 38.9 |
| | $ | 48.2 |
|
______________
| |
(1) | Prior period amounts have been adjusted due to our early adoption of new share-based payment accounting guidance. Refer to 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 more information. |
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, |
| 2017 | | 2016 | | 2015 |
| Amount | | % of Revenue | | Amount(1) | | % of Revenue(1) | | Amount(1) | | % of Revenue(1) |
| (dollars in millions) |
Revenue: | | | | | | | | | | | |
Product | $ | 709.1 |
| | 40.3 | % | | $ | 670.8 |
| | 48.7 | % | | $ | 492.7 |
| | 53.1 | % |
Subscription and support | 1,052.5 |
| | 59.7 | % | | 707.7 |
| | 51.3 | % | | 435.4 |
| | 46.9 | % |
Total revenue | 1,761.6 |
| | 100.0 | % | | 1,378.5 |
| | 100.0 | % | | 928.1 |
| | 100.0 | % |
Cost of revenue: | | | | | | | | | | | |
Product | 201.4 |
| | 11.4 | % | | 175.4 |
| | 12.7 | % | | 131.1 |
| | 14.1 | % |
Subscription and support | 275.2 |
| | 15.7 | % | | 194.6 |
| | 14.1 | % | | 120.4 |
| | 13.0 | % |
Total cost of revenue(2) | 476.6 |
| | 27.1 | % | | 370.0 |
| | 26.8 | % | | 251.5 |
| | 27.1 | % |
Total gross profit | 1,285.0 |
| | 72.9 | % | | 1,008.5 |
| | 73.2 | % | | 676.6 |
| | 72.9 | % |
Operating expenses: | | | | | | | | | | | |
Research and development | 347.4 |
| | 19.7 | % | | 284.2 |
| | 20.6 | % | | 185.8 |
| | 20.0 | % |
Sales and marketing | 919.1 |
| | 52.2 | % | | 743.2 |
| | 53.9 | % | | 489.0 |
| | 52.7 | % |
General and administrative | 198.3 |
| | 11.2 | % | | 138.4 |
| | 10.1 | % | | 101.6 |
| | 11.0 | % |
Total operating expenses(2) | 1,464.8 |
| | 83.1 | % | | 1,165.8 |
| | 84.6 | % | | 776.4 |
| | 83.7 | % |
Operating loss | (179.8 | ) | | (10.2 | )% | | (157.3 | ) | | (11.4 | )% | | (99.8 | ) | | (10.8 | )% |
Interest expense | (24.5 | ) | | (1.4 | )% | | (23.4 | ) | | (1.7 | )% | | (22.3 | ) | | (2.4 | )% |
Other income, net | 10.2 |
| | 0.6 | % | | 8.4 |
| | 0.6 | % | | 0.2 |
| | — | % |
Loss before income taxes | (194.1 | ) | | (11.0 | )% | | (172.3 | ) | | (12.5 | )% | | (121.9 | ) | | (13.2 | )% |
Provision for income taxes | 22.5 |
| | 1.3 | % | | 20.4 |
| | 1.5 | % | | 9.4 |
| | 1.0 | % |
Net loss | $ | (216.6 | ) | | (12.3 | )% | | $ | (192.7 | ) | | (14.0 | )% | | $ | (131.3 | ) | | (14.2 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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) | Certain prior period amounts have been adjusted due to our voluntary change in accounting policy for sales commissions. Refer to 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 more information. |
(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 | |
| |
(2) | Includes share-based compensation as follows: |
|
| | | | | | | | | | | |
| Year Ended July 31, |
| 2017 | | 2016 | | 2015 |
| (in millions) |
Cost of product revenue | $ | 7.3 |
| | $ | 6.2 |
| | $ | 3.9 |
|
Cost of subscription and support revenue | 56.2 |
| | 40.9 |
| | 20.4 |
|
Research and development | 152.6 |
| | 132.9 |
| | 74.8 |
|
Sales and marketing | 186.5 |
| | 152.4 |
| | 84.1 |
|
General and administrative | 73.1 |
| | 60.5 |
| | 38.2 |
|
Total share-based compensation | $ | 475.7 |
| | $ | 392.9 |
| | $ | 221.4 |
|
Revenue
Our revenue consists of product revenue and subscription and support revenue. Revenue is recognized when persuasive evidenceupon transfer of control of the corresponding promised products and subscriptions and support to our customers in an arrangement exists, delivery has occurred,amount that reflects the fee is fixed or determinable,consideration we expect to be entitled to in exchange for those products and collectability is reasonably assured.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 PanoramaPanorama. Our appliances and the VM-Series.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 provided that all other revenue recognition criteria have been met.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended July 31, | | | | Year Ended July 31, | | |
| 2017 | | 2016 | | Change | | 2016 | | 2015 | | Change |
| Amount | | Amount | | Amount | | % | | Amount | | Amount | | Amount | | % |
| (dollars in millions) |
Product | $ | 709.1 |
| | $ | 670.8 |
| | $ | 38.3 |
| | 5.7 | % | | $ | 670.8 |
| | $ | 492.7 |
| | $ | 178.1 |
| | 36.2 | % |
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 | % |
Product revenue increased year-over-year for fiscal 2017 due2022 compared to demand for our newly introduced appliances. Product revenue increased year-over-year for fiscal 20162021 primarily due to increased demand for our higher end appliances. The change in product revenue due to pricing was not significant for either period.new generation of products, which includes customer transition from our 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 termscontracts are typically one to five years. We recognize revenue from subscriptions and support over time as the contractual service period.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. Prior to fiscal 2017, subscription and support revenue was referred to as services revenue. The composition of subscription and support revenue has not been modified. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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, | | |
| 2017 | | 2016 | | Change | | 2016 | | 2015 | | Change |
| Amount | | Amount | | Amount | | % | | Amount | | Amount | | Amount | | % |
| (dollars in millions) |
Subscription | $ | 550.8 |
| | $ | 357.0 |
| | $ | 193.8 |
| | 54.3 | % | | $ | 357.0 |
| | $ | 212.7 |
| | $ | 144.3 |
| | 67.8 | % |
Support | 501.7 |
| | 350.7 |
| | 151.0 |
| | 43.1 | % | | 350.7 |
| | 222.7 |
| | 128.0 |
| | 57.5 | % |
Total subscription and support | $ | 1,052.5 |
| | $ | 707.7 |
| | $ | 344.8 |
| | 48.7 | % | | $ | 707.7 |
| | $ | 435.4 |
| | $ | 272.3 |
| | 62.5 | % |
Subscription and support revenue increased year-over-year for both fiscal 2017 and2022 compared to fiscal 2016. The increases in both periods were 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 customers. The change in subscription and support revenue due to changes in pricing was not significant for either period.end-customers.
Revenue by Geographic Theater
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended July 31, | |
| | Year Ended July 31, | |
|
| 2017 | | 2016 | | Change | | 2016 | | 2015 | | Change |
| Amount | | Amount | | Amount | | % | | Amount | | Amount | | Amount | | % |
| (dollars in millions) |
Americas | $ | 1,237.4 |
| | $ | 973.2 |
| | $ | 264.2 |
| | 27.1 | % | | $ | 973.2 |
| | $ | 639.4 |
| | $ | 333.8 |
| | 52.2 | % |
EMEA | 320.1 |
| | 247.1 |
| | 73.0 |
| | 29.5 | % | | 247.1 |
| | 178.7 |
| | 68.4 |
| | 38.2 | % |
APAC | 204.1 |
| | 158.2 |
| | 45.9 |
| | 29.0 | % | | 158.2 |
| | 110.0 |
| | 48.2 |
| | 43.8 | % |
Total revenue | $ | 1,761.6 |
| | $ | 1,378.5 |
| | $ | 383.1 |
| | 27.8 | % | | $ | 1,378.5 |
| | $ | 928.1 |
| | $ | 450.4 |
| | 48.5 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | % |
With respect to geographic theaters, the Americas contributed the largest portion of the year-over-year increases in revenue for both fiscal 2017 and fiscal 20162022 due to its larger and more established sales force compared to our other theaters. Revenue from both EMEAEurope, the Middle East, and APACAfrica (“EMEA”) and Asia Pacific and Japan (“APAC”) increased year-over-year for both fiscal 2017 and fiscal 20162022 due to ourincreasing investment in increasing the size of ourglobal sales force in order to support our growth and numberinnovation.
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, | | |
| 2017 | | 2016 | | Change | | 2016 | | 2015 | | Change |
| Amount | | Amount | | Amount | | % | | Amount | | Amount | | Amount | | % |
| (dollars in millions) |
Cost of product revenue | $ | 201.4 |
| | $ | 175.4 |
| | $ | 26.0 |
| | 14.8 | % | | $ | 175.4 |
| | $ | 131.1 |
| | $ | 44.3 |
| | 33.8 | % |
Number of employees at period end | 96 |
| | 91 |
| | 5 |
| | 5.5 | % | | 91 |
| | 67 |
| | 24 |
| | 35.8 | % |
revenue. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 20172022 compared to fiscal 2016 primarily due to higher product costs related to our newly introduced appliances.
Cost of product revenue increased for fiscal 2016 compared to fiscal 20152021 primarily due to an increase in the volume of product unit volume for our higher end appliances.
sold. The remaining increase in costs was primarily 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 allocatedcapitalized software development costs, and shared costs. We expect our cost of subscription and support revenue to increase as our installed end-customer base grows. Prior to fiscal 2017, costgrows and adoption of our cloud-based subscription and support revenue was referred to as cost of services revenue. The composition of cost of subscription and support revenue has not been modified.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, | | |
| 2017 | | 2016 | | Change | | 2016 | | 2015 | | Change |
| Amount | | Amount | | Amount | | % | | Amount | | Amount | | Amount | | % |
| (dollars in millions) |
Cost of subscription and support revenue | $ | 275.2 |
| | $ | 194.6 |
| | $ | 80.6 |
| | 41.4 | % | | $ | 194.6 |
| | $ | 120.4 |
| | $ | 74.2 |
| | 61.7 | % |
Number of employees at period end | 725 |
| | 539 |
| | 186 |
| | 34.5 | % | | 539 |
| | 357 |
| | 182 |
| | 51.0 | % |
Cost of subscription and support revenue increased for fiscal 20172022 compared to fiscal 20162021 primarily due to an increase in personnelincreased costs whichto support the growth of our subscription and support offerings. Personnel costs grew $45.3$135.4 millionto $155.4$547.8 million largely for fiscal 2022 compared to fiscal 2021 primarily due to headcount growth. The remaining increase was primarily driven byprimarily due to increased cloud hosting service costs to expandsupport our customercloud-based subscription offerings, outside service capabilities and infrastructure,costs for global customer support costs, and allocated costs. The increase in allocated costs was primarily due to our expansion of facilities to supportresulting from the growth of our business.
Cost of subscription and support revenue increased for fiscal 2016 compared to fiscal 2015 primarily due to an increase in personnel costs, which grew $42.1 million to $104.1 million, largely due to headcount growth. The remaining increase was due to expansionexpansions of our customer service capabilitiesbase and infrastructure to support our growing installed end-customer base.product portfolio, and shared costs.
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, manufacturingcloud hosting service costs, the introduction of new products,personnel costs, the mix of products sold, and the mix of revenue between product and subscription and support offerings. For sales of our products, our higher endOur virtual and higher-end firewall products generally have higher gross margins than our lower endlower-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, |
| 2017 | | 2016 | | 2015 |
| Amount | | Gross Margin | | Amount | | Gross Margin | | Amount | | Gross Margin |
| (dollars in millions) |
Product | $ | 507.7 |
| | 71.6 | % | | $ | 495.4 |
| | 73.9 | % | | $ | 361.6 |
| | 73.4 | % |
Subscription and support | 777.3 |
| | 73.9 | % | | 513.1 |
| | 72.5 | % | | 315.0 |
| | 72.3 | % |
Total gross profit | $ | 1,285.0 |
| | 72.9 | % | | $ | 1,008.5 |
| | 73.2 | % | | $ | 676.6 |
| | 72.9 | % |
Product gross margin decreased for fiscal 20172022 compared to fiscal 20162021 primarily due to higher product costs related to our newly introduced appliances, which will have lower product margins. Product gross margin increased for fiscal 2016 compared to fiscal 2015 due to our continued focus on material cost reductions.offerings driven by supply chain challenges.
Subscription and support gross margin increasedwas relatively flat for fiscal 20172022 compared to fiscal 2016 due to contributions from our higher margin subscription offerings. Subscription and support gross margin was flat for fiscal 2016 compared to fiscal 2015.2021.
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, 2017,2022, we expect to recognize approximately $906.8 million$1.8 billion of share-based compensation expense over a weighted-average period of approximately 2.6 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, | | |
| 2017 | | 2016 | | Change | | 2016 | | 2015 | | Change |
| Amount | | Amount | | Amount | | % | | Amount | | Amount | | Amount | | % |
| (dollars in millions) |
Research and development | $ | 347.4 |
| | $ | 284.2 |
| | $ | 63.2 |
| | 22.2 | % | | $ | 284.2 |
| | $ | 185.8 |
| | $ | 98.4 |
| | 52.9 | % |
Number of employees at period end | 766 |
| | 637 |
| | 129 |
| | 20.3 | % | | 637 |
| | 475 |
| | 162 |
| | 34.1 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 2017 and2022 compared to fiscal 2016. The increases in both periods were driven by increases2021 primarily due to an increase in personnel costs, which grew $46.4$193.5 million to $286.0 million for fiscal 2017 compared to fiscal 2016 and grew $86.8 million to $236.4 million for fiscal 2016 compared to fiscal 2015. The increases in personnel costs in both periods were$1.1 billion, primarily due to headcount growth. The remaining increase for fiscal 2017in research and development expense was primarilyfurther driven by an increase in allocatedincreased shared costs due to our expansion of facilities to support the growth of our business, and third-party product development costs related to investments in our new and future offerings.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 | % |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended July 31, | | | | Year Ended July 31, | | |
| 2017 | | 2016 | | Change | | 2016 | | 2015 | | Change |
| Amount | | Amount | | Amount | | % | | Amount | | Amount | | Amount | | % |
| (dollars in millions) |
Sales and marketing(1) | $ | 919.1 |
| | $ | 743.2 |
| | $ | 175.9 |
| | 23.7 | % | | $ | 743.2 |
| | $ | 489.0 |
| | $ | 254.2 |
| | 52.0 | % |
Number of employees at period end | 2,418 |
| | 2,092 |
| | 326 |
| | 15.6 | % | | 2,092 |
| | 1,443 |
| | 649 |
| | 45.0 | % |
______________
| |
(1) | Prior period amounts have been adjusted due to our voluntary change in accounting policy for sales commissions. Refer to 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 more information. |
Sales and marketing expense increased year-over-year for both fiscal 2017 and2022 compared to fiscal 2016. The increases in both periods were driven by increases2021 primarily due to an increase in personnel costs, which grew $145.0$291.8 million to $716.1 million for fiscal 2017 compared to fiscal 2016 and grew $186.1 million to $520.2 million for fiscal 2016 compared to fiscal 2015. The increases in personnel costs in both periods were$1.6 billion, primarily due to headcount growth.growth and increased travel and entertainment expenses. The remaining increase for fiscal 2017in sales and marketing expense was primarilyfurther driven by an increase in allocated costs due to our expansionassociated with marketing activities.
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, insurance, and investor relations,to support our business growth, although our general and administrative expense may fluctuate as a percentage of total revenue.
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended July 31, | | | | Year Ended July 31, | | |
| 2017 | | 2016 | | Change | | 2016 | | 2015 | | Change |
| Amount | | Amount | | Amount | | % | | Amount | | Amount | | Amount | | % |
| (dollars in millions) |
General and administrative | $ | 198.3 |
| | $ | 138.4 |
| | $ | 59.9 |
| | 43.3 | % | | $ | 138.4 |
| | $ | 101.6 |
| | $ | 36.8 |
| | 36.2 | % |
Number of employees at period end | 557 |
| | 436 |
| | 121 |
| | 27.8 | % | | 436 |
| | 295 |
| | 141 |
| | 47.8 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 20172022 compared to fiscal 20162021 primarily due to anpersonnel costs, which grew $24.6 million to $268.6 million, partially offset by a decrease in acquisition-related costs. The increase in personnel costs which grew $29.3 million to $128.1 million, largelywas primarily due to headcount growth, and a fiscal 2017 impairment loss of $20.9 million on property and equipmentpartially offset by lower share-based compensation related to accelerated vesting of equity awards in connection with acquisitions.
Interest Expense
Interest expense primarily consists of interest expense related to our 0.75% Convertible Senior Notes due 2023 (the “2023 Notes”) and the relocation0.375% Convertible Senior Notes due 2025 (the “2025 Notes,” and together with “2023 Notes,” the “Notes”). | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 decreased for fiscal 2022 compared to fiscal 2021 primarily because we no longer recognize interest expense for amortization of our corporate headquarters. We expect to recognizethe debt discount as a lossresult of approximately $15.4 million on the leaseadoption of our previous headquarter facilities in the first quarter of fiscal 2018, when we officially cease use of such facilities.new debt guidance. Refer to Note 9. Commitments1. Description of Business and ContingenciesSummary of Significant Accounting Policies and Note 18. Subsequent Events10. Debt in Part II, Item 8 of this Annual Report on Form 10-K for more information. The remaining increase for fiscal 2017 was primarily driven by an increase in allocated costs due to our expansion of facilities to support the growth of our business.
General and administrative expense increased for fiscal 2016 compared to fiscal 2015 primarily due to an increase in personnel costs, which grew $32.9 million to $96.5 million, largely due to headcount growth.
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.
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| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended July 31, | | | | Year Ended July 31, | | |
| 2017 | | 2016 | | Change | | 2016 | | 2015 | | Change |
| Amount | | Amount | | Amount | | % | | Amount | | Amount | | Amount | | % |
| (dollars in millions) |
Other income, net | $ | 10.2 |
| | $ | 8.4 |
| | $ | 1.8 |
| | NM | | $ | 8.4 |
| | $ | 0.2 |
| | $ | 8.2 |
| | NM |
transactions. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 20172022 compared to fiscal 20162021 primarily due to an increase inincreased foreign currency exchange gains and higher interest income earned on our cash, cash equivalent, and investment balances as a result of higher interest rates for fiscal 2022 compared to fiscal 2021, partially offset by increased foreign currency remeasurement losses.losses related to non-designated derivative instruments.
Other income, net increased for fiscal 2016 compared to fiscal 2015 due to an increase in interest income and higher foreign currency remeasurement gains.
Provision for Income Taxes
Provision for income taxes consists primarily of income taxes in foreign jurisdictions in which we conduct business and withholding taxes, federal and state income taxes in the United States, and amortization of our deferred tax charges.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.
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended July 31, | | | | | | Year Ended July 31, | | | | |
| 2017 | | 2016 | | Change | | 2016 | | 2015 | | Change |
| Amount | | Amount | | Amount | | % | | Amount | | Amount | | Amount | | % |
| (dollars in millions) |
Provision for income taxes(1) | $ | 22.5 |
| | $ | 20.4 |
| | $ | 2.1 |
| | 10.3 | % | | $ | 20.4 |
| | $ | 9.4 |
| | $ | 11.0 |
| | 117.0 | % |
Effective tax rate(1) | (11.6 | )% | | (11.8 | )% | | | | | | (11.8 | )% | | (7.7 | )% | | | | |
______________
| |
(1) | Prior period amounts have been adjusted due to our voluntary change in accounting policy for sales commissions. Refer to 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 more information. |
We recorded an income tax provision for fiscal 2017 due to foreign income taxes, withholding taxes, and amortization of our deferred tax charges. The provision for income taxes increased for fiscal 2017 compared to fiscal 2016 primarily due to increases in foreign withholding taxes and U.S. income taxes related to intercompany transactions, offset by tax benefits from our adoption of new share-based payment accounting guidance in fiscal 2017. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 20162022. The provision for income taxes for fiscal 2022 was primarily due to federal, state, and foreign income taxes in profitable foreign jurisdictions and withholding taxes, and amortization of our deferred tax charges. Thetaxes. Our provision for income taxes increased for fiscal 20162022 compared to fiscal 20152021, primarily due to an increaseforeign income and withholding taxes. Refer to Note 15. Income Taxes in foreign taxes and amortizationPart II, Item 8 of our deferred tax charges.this Annual Report on Form 10-K for more information.
Liquidity and Capital Resources
| | | | | | | | July 31, |
| July 31, | | 2022 | | 2021 |
| 2017 | | 2016 | | | | |
| (in millions) | | (in millions) |
Working capital(1) | $ | 775.0 |
| | $ | 927.2 |
| Working capital(1) | $ | (1,891.4) | | | $ | (469.4) | |
Cash, cash equivalents, and investments: | | | | Cash, cash equivalents, and investments: | |
Cash and cash equivalents | $ | 744.3 |
| | $ | 734.4 |
| Cash and cash equivalents | $ | 2,118.5 | | | $ | 1,874.2 | |
Investments | 1,420.0 |
| | 1,204.0 |
| Investments | 2,567.9 | | | 1,915.2 | |
Total cash, cash equivalents, and investments | $ | 2,164.3 |
| | $ | 1,938.4 |
| Total cash, cash equivalents, and investments | $ | 4,686.4 | | | $ | 3,789.4 | |
______________
| |
(1) | Prior period amount has been adjusted due to our voluntary change in accounting policy for sales commissions. Refer to Note 1. Description(1)Current liabilities included net carrying amounts of convertible senior notes of $3.7 billion and $1.6 billion as of Business and Summary of Significant Accounting Policies in Part II, Item 8 of this Annual Report on Form 10-K for more information. |
At July 31, 2017,2022 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, 2022, our total cash, cash equivalents, and investments of $2.2$4.7 billion were held for general corporate purposes, of which approximately $223.0 million was held outside of the United States.purposes. As of July 31, 2017,2022, we had no unremitted earnings when evaluating our outside basis differencesdifference relating to our U.S. investment in foreign subsidiaries; accordingly,subsidiaries. However, there is no restriction on the usecould 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 funds.lower tier earnings are not expected to be material.
As
Debt
In July 2018, we issued the 2023 Notes with an aggregate principal amount of July 31, 2017, all$1.7 billion. In June 2020, we issued the 2025 Notes with an aggregate principal amount of the Notes remained outstanding.$2.0 billion. The 2023 Notes mature on July 1, 2019,2023 and the 2025 Notes mature on June 1, 2025; however, prior to January 1, 2019,under certain circumstances, holders may surrender their Notes of a series for early conversion under certain circumstances.prior to the applicable maturity date. Upon conversion of the Notes of a series, we will pay cash equal to the aggregate principal amount of the 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 until maturity on July 1, 2023. As of July 31, 2022, substantially all of our Notes remained outstanding. Refer to Note 8. Convertible Senior Notes included10. Debt in Part II, Item 8 of this Annual Report on Form 10-K for more information on the Notes.
In August 2016,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 Facility by up to an additional $350.0 million, subject to certain conditions. As of July 31, 2022, there were no amounts outstanding, and we were in compliance with all covenants under the Credit Agreement. Refer to Note 10. Debt in Part II, Item 8 of this Annual Report on Form 10-K for more information on the Credit Agreement.
Capital Return
In February 2019, our board of directors authorized a $500.0 million$1.0 billion share repurchase program. In December 2020 and in February 2017,August 2021, our board of directors authorized a $500.0additional $700.0 million increase to our repurchase program,and $676.1 million increases, respectively, bringing the total authorization under this share repurchase program to $1.0$2.4 billion. Repurchases arewill be funded from available working capital and may be made at management’s discretion from time to time. The expiration date of this repurchase authorization will expire onwas extended to December 31, 2018,2022, and our repurchase program may be suspended or discontinued at any time. As of July 31, 2017, $580.02022, 85.0 million wasremained available for future share repurchases under this repurchase program. In February 2020, our board of directors approved the 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 10.13. Stockholders’ Equity in Part II, Item 8 of this Annual Report on Form 10-K for information on these 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 repurchase authorization.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, 2017, 2016,2022, 2021, and 2015:2020: | | | | | | | | | | | | | | | | | |
| 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, |
2017 | | 2016 | | 2015 |
| (in millions) |
Net cash provided by operating activities(1) | $ | 868.5 |
| | $ | 658.6 |
| | $ | 352.8 |
|
Net cash used in investing activities | (472.6 | ) | | (338.9 | ) | | (679.0 | ) |
Net cash provided by (used in) financing activities(1) | (386.0 | ) | | 38.9 |
| | 48.2 |
|
Net increase (decrease) in cash and cash equivalents | $ | 9.9 |
| | $ | 358.6 |
| | $ | (278.0 | ) |
______________
| |
(1) | Prior period amounts have been adjusted due to our early adoption of new share-based payment accounting guidance. Refer to 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 more information. |
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 new corporate headquarters, andinfrastructure to support the adoption of our cloud-based subscription offerings, the repayment obligations associated with our Notes, 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 induring fiscal 20172022 was $868.5 million,$2.0 billion, an increase of $209.9$481.7 million compared to fiscal 2016.2021. The increase was primarily due to growth of our business as reflected by an increaseincreases in billings and an increase in collections onaccounts receivable during fiscal 2017.
Cash provided by operating activities in fiscal 2016 was $658.6 million, an increase of $305.8 million compared to fiscal 2015. The increase was due to growth of our business and changes in our assets and liabilities during fiscal 2016, which included an increase in sales of subscription and support contracts to new and existing customers as reflected by an increase in deferred revenue, and was2022, partially offset by an increase in accounts receivable duehigher cash expenditure to an increase in sales near the end of the period.support our business growth.
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.
Cash used in investing activities during fiscal 20172022 was $472.6$933.4 million, an increasea decrease of $133.7$547.2 million compared to fiscal 2016,2021. The decrease was primarily due to increased investmenta decrease in facilities to support the growth of our business and a net cash payment of $90.7 millionpayments for our acquisition of LightCyber,business acquisitions, partially offset by loweran increase in net investment purchases, of available-for-sale investmentssales and maturities during fiscal 2017.
Cash used in investing activities during fiscal 2016 was $338.9 million, a decrease of $340.1 million compared to fiscal 2015, due to lower net purchases of available-for-sale investments and a payment of $15.1 million related to our acquisition of CirroSecure in fiscal 2015, partially offset by increased investment in infrastructure and facilities to support the growth of our business.2022.
Financing Activities
Our financing activities have consisted of cash used to repurchase shares of 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 20172022 was $386.0$806.6 million, a changedecrease of $424.9$297.4 million compared to fiscal 2016,2021. The decrease was primarily due to the repurchase of $411.0 milliona decrease in repurchases of our common stock and payments for tax withholding obligations of certain employees related to the net share settlement of equity awards of $21.4 million during fiscal 2017.2022.
Cash provided by financing activities during fiscal 2016 was $38.9 million, a decrease of $9.3 million compared to fiscal 2015, due to a payment of deferred consideration related to our acquisition of Cyvera and lower proceeds from the sale of shares through employee equity incentive plans.
Contractual Obligations and Commitments
The following summarizes our contractual obligations and commitments as of July 31, 2017:
|
| | | | | | | | | | | | | | | | | | | |
| Payments Due by Period |
| Total | | Less Than 1 Year | | 1-3 Years | | 3-5 Years | | More Than 5 Years |
| | | (in millions) | | |
0.0% Convertible Senior Notes due 2019 | $ | 575.0 |
| | $ | — |
| | $ | 575.0 |
| | $ | — |
| | $ | — |
|
Operating lease obligations(1) | 517.5 |
| | 31.0 |
| | 110.8 |
| | 111.2 |
| | 264.5 |
|
Purchase obligations(2) | 104.1 |
| | 98.5 |
| | 5.6 |
| | — |
| | — |
|
Total(3) | $ | 1,196.6 |
| | $ | 129.5 |
| | $ | 691.4 |
| | $ | 111.2 |
| | $ | 264.5 |
|
______________
| |
(1) | Consists of contractual obligations from our non-cancelable operating leases. Excludes contractual sublease proceeds of $2.1 million, which will be received in less than one year. Refer to Note 9. Commitments and Contingencies of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for more information on our operating leases. |
| |
(2) | Consists of minimum purchase commitments of products and components with our manufacturing partners and component suppliers. Obligations under contracts that we can cancel without a significant penalty are not included in the table above. |
| |
(3) | No amounts related to income taxes are included. As of July 31, 2017, we had approximately $62.2 million of tax liabilities recorded related to uncertainty in income tax positions. |
Off-Balance Sheet Arrangements
Through July 31, 2017, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Critical Accounting Estimates
Our consolidated financial statements have been prepared in accordance with U.S. 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.
TheWe 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 we believe have the most significant impact on our consolidated financial statements are described below.
Revenue Recognition
We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is reasonably assured. MostThe majority of our arrangements, other than renewalscontracts 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 contracts,services, as the customer can benefit from the product without these services and such services are multiple-element arrangementsseparately identifiable within the contract. We account for multiple agreements with a combinationsingle customer as a single contract if the contractual terms and/or substance of hardware, software, subscriptions, support, and other services. For multiple-element arrangements,those agreements indicate that they may be so closely related that they are, in effect, parts of a single contract. The amount we allocate revenueare due in exchange for delivering on the contract is allocated to each unit of accountingperformance obligation based on an estimatedits relative standalone selling price at the arrangement inception. The estimated selling price for each element is based upon the following hierarchy:
Vendor-specific objective evidence (“VSOE”) of selling price, if available,
Third-party evidence (“TPE”) of selling price, if VSOE of selling price is not available, or
Best estimate of selling price (“BESP”), if neither VSOE of selling price nor TPE of selling price are available.price.
We establish VSOE ofstandalone selling price using the prices charged for a deliverable when sold separately. We establish TPE ofIf not observable through past transactions, we estimate the standalone selling price by evaluating similar and interchangeable competitor products or services in standalone arrangements with similarly situated partners. We establish BESP primarily based on historical transaction pricing, whereby historical transactions are segregated 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 products and servicesofferings were sold (domestic or international), and offering type (products, subscriptions, or services)support). To further support BESP as determined by the historical transaction pricing or when such information is unavailable, such as when there are limited sales of a new product or service, we consider the same factors we have established through our pricing model and go-to-market strategy. The determination of BESP is made through consultation with and approval by our management. In determining BESP, we rely on certain assumptions and apply significant judgment. As our business offerings evolve over time, we may be required to modify our estimated standalone selling prices, in subsequent periods, and as a result the timing and classification of our revenue recognition 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 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.
We apply the authoritative accounting guidance prescribing a threshold and measurement attribute for the financial recognition and measurement
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.
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.
To date, we have not recognized any impairment losses on our goodwill and intangible assets. In fiscal 2017, we recognized an impairment loss of $20.9 million on property and equipment related to the relocation of our corporate headquarters. We did not recognize any impairment losses on our other long-lived assets prior to fiscal 2017.
Recent Accounting Pronouncements
Refer to “Recently Issued Accounting Pronouncements” in Note 1. Description of Business and Summary of Significant Accounting Policies of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.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.
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ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
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, 20172022 would not be material to our financial condition or results of operations. As of July 31, 2017,2022, 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 1216 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 4.6. 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, 2017 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.
Market Risk and Market Interest Riskportfolio.
In June 2014,July 2018, we issued $575.0 million$1.7 billion aggregate principal amount of 0.0%0.75% Convertible Senior Notes due 20192023 (the “Notes”“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 this instrumentthese instruments at face value less unamortized discount and unamortized issuance costs on our consolidated balance sheets. As this instrument does not bearthese 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 theeither series of Notes, when the market price of our common stock fluctuates.
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ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TheReport of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors and Stockholders
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, 20172022 and 2016, and2021, 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, 2017. These2022, and the related notes (collectively referred to as the “consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States)statements”). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Palo Alto Networks, Inc.the Company at July 31, 20172022 and 2016,2021, and the consolidated results of its operations and its cash flows for each of the three years in the period ended July 31, 2017,2022, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, in the second quarter of fiscal 2017, the Company changed its method of accounting for share-based payments as a result of the adoption of the amendments to the FASB Accounting Standards Codification resulting from Accounting Standards Update No. 2016-09, “Improvements to Employee Share-Based Payment Accounting”.
As discussed in Note 1 to the consolidated financial statements, in the first quarter of fiscal 2017, the Company elected to change its method of accounting for sales commissions that are incremental and directly related to non-cancelable customer sales contracts from recording an expense when incurred, to deferral and amortization of the sales commissions over the term of the related contracts in proportion to the recognized revenue.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), Palo Alto Networks, Inc.’sthe Company’s internal control over financial reporting as of July 31, 2017,2022, 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 7, 20176, 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 Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates 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 matter 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 matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
| | | | | | | | |
| | Revenue Recognition |
Description of the Matter | | As described in Note 1 to the consolidated financial statements, the Company’s contracts with customers sometimes contain multiple performance obligations, which are accounted for separately if they are distinct. In such cases, the transaction price is then allocated to the distinct performance obligations on a relative standalone selling price basis, and revenue is recognized when control of the distinct performance obligation is transferred. For example, product revenue is recognized at the time of hardware shipment or delivery of software license, and subscription and support revenue is recognized over time as the services are performed.
Auditing the Company’s revenue recognition was complex, including the identification and determination of distinct performance obligations and the timing of revenue recognition. For example, there were nonstandard terms and conditions that required judgment to determine the distinct performance obligations and the impact on the timing of revenue recognition. |
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.
To test the identification and determination of the distinct performance obligations and the timing of revenue recognition, our audit procedures included, among others, reading the executed contract and purchase order to understand the contract, identifying the performance obligation(s), determining the distinct performance obligations, and evaluating the timing of revenue recognition for a sample of individual sales transactions. We evaluated the accuracy of the Company’s contract summary documentation, specifically related to the identification and determination of distinct performance obligations and the timing of revenue recognition. |
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/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2009.
San Jose, California
September 7, 20176, 2022
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMReport of Independent Registered Public Accounting Firm
TheTo the Stockholders and the Board of Directors and Stockholders
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, 2017,2022, based on criteria established in Internal 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.’s (the Company) maintained, in all material respects, effective internal control over financial reporting as of July 31, 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, 2022 and 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, 2022, and the related notes and our report dated September 6, 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 Overover Financial Reporting. Our responsibility is to express an opinion on the company’sCompany’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 Public Company Accounting Oversight Board (United States).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.
In our opinion, Palo Alto Networks, Inc. maintained, in all material respects, effective internal control over financial reporting as of July 31, 2017, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Palo Alto Networks, Inc. as of July 31, 2017 and 2016, and 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, 2017 of Palo Alto Networks, Inc. and our report dated September 7, 2017 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
San Jose, California
September 7, 20176, 2022
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management’s Report on Internal Control Over Financial Reporting
The management of Palo Alto Networks, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934 for the Company. The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s principal executive and principal financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
The Company’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. 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 (iii) 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 Consolidated 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.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of July 31, 2017, based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control - Integrated Framework (2013 framework). Based on that assessment, management concluded that, as of July 31, 2017, the Company’s internal control over financial reporting was effective.
The effectiveness of the Company’s internal control over financial reporting as of July 31, 2017, has been audited by Ernst & Young LLP, the independent registered public accounting firm that audits the Company’s Consolidated Financial Statements, as stated in their report preceding this report, which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of July 31, 2017.
PALOALTO NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except per share data)
| | | July 31, | | July 31, |
| 2017 | | 2016 | | 2022 | | 2021 |
| | | (As Adjusted) | | | | |
Assets | | | | Assets | | |
Current assets: | | | | Current assets: | | | |
Cash and cash equivalents | $ | 744.3 |
| | $ | 734.4 |
| Cash and cash equivalents | $ | 2,118.5 | | | $ | 1,874.2 | |
Short-term investments | 630.7 |
| | 551.2 |
| Short-term investments | 1,516.0 | | | 1,026.9 | |
Accounts receivable, net of allowance for doubtful accounts of $0.7 and $2.4 at July 31, 2017 and July 31, 2016, respectively | 432.1 |
| | 348.7 |
| |
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 | 169.2 |
| | 139.7 |
| Prepaid expenses and other current assets | 320.2 | | | 229.3 | |
Total current assets | 1,976.3 |
| | 1,774.0 |
| Total current assets | 6,414.9 | | | 4,647.3 | |
Property and equipment, net | 211.1 |
| | 117.2 |
| 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 | 789.3 |
| | 652.8 |
| Long-term investments | 1,051.9 | | | 888.3 | |
Long-term deferred contract costs | | Long-term deferred contract costs | 550.1 | | | 494.6 | |
Goodwill | 238.8 |
| | 163.5 |
| Goodwill | 2,747.7 | | | 2,710.1 | |
Intangible assets, net | 53.7 |
| | 44.0 |
| Intangible assets, net | 384.5 | | | 498.6 | |
Other assets | 169.1 |
| | 106.7 |
| Other assets | 504.7 | | | 421.4 | |
Total assets | $ | 3,438.3 |
| | $ | 2,858.2 |
| Total assets | $ | 12,253.6 | | | $ | 10,241.6 | |
Liabilities and stockholders’ equity | | | | |
Liabilities, temporary equity and stockholders’ equity | | Liabilities, temporary equity and stockholders’ equity | | | |
Current liabilities: | | | | Current liabilities: | |
Accounts payable | $ | 35.5 |
| | $ | 30.2 |
| Accounts payable | $ | 128.0 | | | $ | 56.9 | |
Accrued compensation | 117.5 |
| | 73.5 |
| Accrued compensation | 461.1 | | | 430.6 | |
Accrued and other liabilities | 79.9 |
| | 39.2 |
| Accrued and other liabilities | 399.2 | | | 329.4 | |
Deferred revenue | 968.4 |
| | 703.9 |
| Deferred revenue | 3,641.2 | | | 2,741.9 | |
Convertible senior notes, net | | Convertible senior notes, net | 3,676.8 | | | 1,557.9 | |
Total current liabilities | 1,201.3 |
| | 846.8 |
| Total current liabilities | 8,306.3 | | | 5,116.7 | |
Convertible senior notes, net | 524.7 |
| | 500.2 |
| Convertible senior notes, net | — | | | 1,668.1 | |
Long-term deferred revenue | 805.1 |
| | 536.9 |
| 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 | 147.6 |
| | 79.4 |
| Other long-term liabilities | 108.4 | | | 97.7 | |
Commitments and contingencies (Note 9) |
|
| |
|
| |
Total liabilities | | Total liabilities | 12,043.6 | | | 9,478.0 | |
Commitments and contingencies (Note 12) | | Commitments and contingencies (Note 12) | | | |
Temporary equity | | 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, 2017 and July 31, 2016 | — |
| | — |
| |
Common stock and additional paid-in capital; $0.0001 par value; 1,000.0 shares authorized; 91.5 and 90.5 shares issued and outstanding at July 31, 2017 and July 31, 2016, respectively | 1,599.7 |
| | 1,515.5 |
| |
Accumulated other comprehensive income (loss) | (3.4 | ) | | 1.0 |
| |
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 | | Accumulated other comprehensive loss | (55.6) | | | (9.9) | |
Accumulated deficit | (836.7 | ) | | (621.6 | ) | Accumulated deficit | (1,667.1) | | | (1,666.8) | |
Total stockholders’ equity | 759.6 |
| | 894.9 |
| Total stockholders’ equity | 210.0 | | | 634.5 | |
Total liabilities and stockholders’ equity | $ | 3,438.3 |
| | $ | 2,858.2 |
| |
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.
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, |
| 2017 | | 2016 | | 2015 |
| | | (As Adjusted) | | (As Adjusted) |
Revenue: | | | | | |
Product | $ | 709.1 |
| | $ | 670.8 |
| | $ | 492.7 |
|
Subscription and support | 1,052.5 |
| | 707.7 |
| | 435.4 |
|
Total revenue | 1,761.6 |
| | 1,378.5 |
| | 928.1 |
|
Cost of revenue: | | | | | |
Product | 201.4 |
| | 175.4 |
| | 131.1 |
|
Subscription and support | 275.2 |
| | 194.6 |
| | 120.4 |
|
Total cost of revenue | 476.6 |
| | 370.0 |
| | 251.5 |
|
Total gross profit | 1,285.0 |
| | 1,008.5 |
| | 676.6 |
|
Operating expenses: | | | | | |
Research and development | 347.4 |
| | 284.2 |
| | 185.8 |
|
Sales and marketing | 919.1 |
| | 743.2 |
| | 489.0 |
|
General and administrative | 198.3 |
| | 138.4 |
| | 101.6 |
|
Total operating expenses | 1,464.8 |
| | 1,165.8 |
| | 776.4 |
|
Operating loss | (179.8 | ) | | (157.3 | ) | | (99.8 | ) |
Interest expense | (24.5 | ) | | (23.4 | ) | | (22.3 | ) |
Other income, net | 10.2 |
| | 8.4 |
| | 0.2 |
|
Loss before income taxes | (194.1 | ) | | (172.3 | ) | | (121.9 | ) |
Provision for income taxes | 22.5 |
| | 20.4 |
| | 9.4 |
|
Net loss | $ | (216.6 | ) | | $ | (192.7 | ) | | $ | (131.3 | ) |
Net loss per share, basic and diluted | $ | (2.39 | ) | | $ | (2.21 | ) | | $ | (1.61 | ) |
Weighted-average shares used to compute net loss per share, basic and diluted | 90.6 |
| | 87.1 |
| | 81.6 |
|
See notes to consolidated financial statements.
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, |
| 2017 | | 2016 | | 2015 |
| | | (As Adjusted) | | (As Adjusted) |
Net loss | $ | (216.6 | ) | | $ | (192.7 | ) | | $ | (131.3 | ) |
Other comprehensive income (loss), net of tax: | | | | | |
Change in unrealized gains (losses) on investments | (4.3 | ) | | 1.1 |
| | — |
|
Change in unrealized gains (losses) on cash flow hedges | (0.1 | ) | | — |
| | — |
|
Other comprehensive income (loss) | (4.4 | ) | | 1.1 |
| | — |
|
Comprehensive loss | $ | (221.0 | ) | | $ | (191.6 | ) | | $ | (131.3 | ) |
See notes to consolidated financial statements.statements.
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, 2014 | 79.5 |
| | $ | 804.4 |
| | $ | (0.1 | ) | | $ | (297.6 | ) | | $ | 506.7 |
|
Net loss | — |
| | — |
| | — |
| | (131.3 | ) | | (131.3 | ) |
Issuance of common stock in connection with employee equity incentive plans and related excess tax benefit | 5.3 |
| | 50.9 |
| | — |
| | — |
| | 50.9 |
|
Share-based compensation for equity based awards | — |
| | 221.3 |
| | — |
| | — |
| | 221.3 |
|
Temporary equity reclassification | — |
| | (87.9 | ) | | — |
| | — |
| | (87.9 | ) |
Balance as of July 31, 2015 | 84.8 |
| | 988.7 |
| | (0.1 | ) | | (428.9 | ) | | 559.7 |
|
Net loss | — |
| | — |
| | — |
| | (192.7 | ) | | (192.7 | ) |
Other comprehensive income | — |
| | — |
| | 1.1 |
| | — |
| | 1.1 |
|
Issuance of common stock in connection with employee equity incentive plans and related excess tax benefit | 5.7 |
| | 45.8 |
| | — |
| | — |
| | 45.8 |
|
Share-based compensation for equity based awards | — |
| | 393.1 |
| | — |
| | — |
| | 393.1 |
|
Temporary equity reclassification | — |
|
| 87.9 |
|
| — |
|
| — |
|
| 87.9 |
|
Balance as of July 31, 2016 | 90.5 |
| | 1,515.5 |
| | 1.0 |
| | (621.6 | ) | | 894.9 |
|
Cumulative-effect adjustment from adoption of new accounting pronouncement
| — |
| | 2.0 |
| | — |
| | 1.5 |
| | 3.5 |
|
Net loss | — |
| | — |
| | — |
| | (216.6 | ) | | (216.6 | ) |
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 | ) | | $ | (836.7 | ) | | $ | 759.6 |
|
See notes to consolidated financial statements.
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, |
| 2017 | | 2016 | | 2015 |
| | | (As Adjusted) | | (As Adjusted) |
Cash flows from operating activities | | | | | |
Net loss | $ | (216.6 | ) | | $ | (192.7 | ) | | $ | (131.3 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | |
Share-based compensation for equity based awards | 474.5 |
| | 392.8 |
| | 221.3 |
|
Depreciation and amortization | 59.8 |
| | 42.8 |
| | 28.9 |
|
Asset impairment related to facility exit | 20.9 |
| | — |
| | — |
|
Amortization of investment premiums, net of accretion of purchase discounts | 2.7 |
| | 3.0 |
| | 3.2 |
|
Amortization of debt discount and debt issuance costs | 24.5 |
| | 23.4 |
| | 22.3 |
|
Changes in operating assets and liabilities, net of effects of acquisitions: | | | | | |
Accounts receivable, net | (82.9 | ) | | (136.4 | ) | | (76.8 | ) |
Prepaid expenses and other assets | (48.1 | ) | | (31.2 | ) | | (69.0 | ) |
Accounts payable | 5.9 |
| | 15.1 |
| | (3.5 | ) |
Accrued compensation | 42.8 |
| | (6.3 | ) | | 31.1 |
|
Accrued and other liabilities | 53.2 |
| | 21.0 |
| | 35.6 |
|
Deferred revenue | 531.8 |
| | 527.1 |
| | 291.0 |
|
Net cash provided by operating activities | 868.5 |
| | 658.6 |
| | 352.8 |
|
Cash flows from investing activities | | | | | |
Purchases of investments | (995.9 | ) | | (1,037.0 | ) | | (987.6 | ) |
Proceeds from sales of investments | — |
| | 141.9 |
| | 18.5 |
|
Proceeds from maturities of investments | 777.4 |
| | 628.7 |
| | 339.0 |
|
Business acquisitions, net of cash acquired | (90.7 | ) | | — |
| | (15.1 | ) |
Purchases of property, equipment, and other assets | (163.4 | ) | | (72.5 | ) | | (33.8 | ) |
Net cash used in investing activities | (472.6 | ) | | (338.9 | ) | | (679.0 | ) |
Cash flows from financing activities | | | | | |
Repurchases of common stock | (411.0 | ) | | — |
| | — |
|
Proceeds from sales of shares through employee equity incentive plans | 46.4 |
| | 45.3 |
| | 48.2 |
|
Payments for taxes related to net share settlement of equity awards | (21.4 | ) | | — |
| | — |
|
Payment of deferred consideration related to prior year business acquisition | — |
| | (6.4 | ) | | — |
|
Net cash provided by (used in) financing activities | (386.0 | ) | | 38.9 |
| | 48.2 |
|
Net increase (decrease) in cash and cash equivalents | 9.9 |
| | 358.6 |
| | (278.0 | ) |
Cash and cash equivalents—beginning of period | 734.4 |
| | 375.8 |
| | 653.8 |
|
Cash and cash equivalents—end of period | $ | 744.3 |
| | $ | 734.4 |
| | $ | 375.8 |
|
Supplemental disclosures of cash flow information | | | | | |
Cash paid for income taxes | $ | 9.0 |
| | $ | 7.1 |
| | $ | 17.5 |
|
See notes to consolidated financial statements.
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 next-generation security platform that empowersempower enterprises, organizations, service providers, and government entities to secure their organizationsusers, networks, clouds and endpoints by safely enabling applications running on their networksdelivering comprehensive cybersecurity backed by artificial intelligence 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 adjusted due to our voluntary change in accounting policy for sales commissions, our early adoption of new accounting guidance related to share-based payments, and our adoption of new accounting guidance related to debt issuance costs. Refer to “Change in Accounting Policy for Sales Commissions” and “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 U.S. 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 best estimate ofstandalone 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, 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, 2017, four2022, three distributors individually represented 28.5%, 21.2%, 15.0%,10% or more of our gross accounts receivable, and 11.2%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 2017,2022, three distributors represented 32.4%, 23.3%, 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.
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 classify our investments as available-for-sale at the time of purchase since it is our intent that these investments are available for current operations, and include these investments on our consolidated balance sheets as cash equivalents, short-term investments, or long-term investments depending on their maturity.
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.
Investments are considered impaired when a decline in fair value is judged to be other-than-temporary. We consult with our investment managers and consider available quantitative and qualitative evidence in evaluating potential impairmentdetermine the classification of our investments on a quarterly basis. Ifin marketable debt securities at the costtime of purchase and reevaluate such determination at each balance sheet date. Our marketable debt securities are classified as available-for-sale. Debt securities in an individual investment exceedsunrealized loss position are written down to 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, 20172022 and 2016,2021, 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.
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 the effective portion of our cash flow hedges are recorded as a component of accumulated other comprehensive income (“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. Any gains or losses related to the ineffective portion of our cash flow hedges are recorded immediately in other income (expense), net in our consolidated statements of operations. If it becomes probable that the hedged transaction will not occur, the cumulative unrealized gain or loss is reclassified immediately from AOCI into other income (expense), net. 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.
Through July 31, 2017, we have not recognized any impairment losses on our goodwill and intangible assets. During the year ended July 31, 2017, we recognized an impairment loss of $20.9 million on property and equipment related to the relocation of our corporate headquarters. We did not recognize any impairment losses on our goodwill, intangible assets, or other long-lived assets prior to fiscal 2017.during the years ended July 31, 2022, 2021, and 2020.
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, 2017,2022, we have not accrued any significant costs associated with this exposure.
Convertible Senior Notes
On June 30, 2014, we issued $575.0 million aggregate principal amount of 0.0% Convertible Senior Notes due 2019 (the “Notes”). In accounting for the issuance of the Notes, wePrior to August 1, 2021, our convertible senior notes were separated the Notes into a liability and an equity components.component. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that doesdid not have an associated convertible feature.feature, using a discounted cash flow model with a risk-adjusted yield. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the Notesnotes as a whole. This difference representsrepresented a debt discount that iswas amortized to interest expense using the effective interest method over the term of the Notes.notes. The equity component iswas 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, wenotes were allocated the total amount incurred to the liability and equity components using the same proportions as the proceeds from the Notes.notes. Transaction costs attributable to the liability component arewere netted with the liability component and are being amortized to interest expense using the effective interest method over the term of the Notes.notes. Transaction costs attributable to the equity component arewere netted with the equity component of the Notesnotes in additional paid-in capital incapital. Upon the consolidated balance sheets. When the Notes arenotes becoming convertible, the net carrying amount of the Notes will beliability component was classified as a current liability and a portion of the equity component representing the conversion option will bewas reclassified to temporary equity. The portion of the equity incomponent classified as temporary equity was 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 consolidated balance sheets.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
We generateOur revenue from the salesconsists of hardwareproduct revenue and software products, subscriptions,subscription and support and other services primarily through a direct sales force and indirect relationships with channel partners, and, to a lesser extent, directly to end-customers.
revenue. Revenue is recognized when allcontrol of promised products, subscriptions and support services are transferred to customers, in an amount that reflects the expected consideration in exchange for those products and services.
We determine revenue recognition through the following steps:
•Identification of the following criteriacontract, 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 met:reported net of sales taxes. Shipping charges billed to our customers are included in revenues and related costs are included in cost of revenue.
Product Revenue
Persuasive EvidenceProduct revenue is derived primarily from sales of an Arrangement Exists. We rely upon non-cancelable sales agreementsour appliances. Product revenue also includes revenue derived from software licenses of Panorama and purchase orders to determine the existenceVM-Series. Our appliances and software licenses include a broad set of an arrangement.
Delivery has Occurred. We use shipping documents or transmissions of product or subscriptionbuilt-in networking and support contract registration codes to determine delivery.
The Fee is Fixed or Determinable. We assess whether the fee is fixed or determinable based on the payment terms associated with the transaction.
Collectability is Reasonably Assured. We assess collectability based on credit analysissecurity features and payment history.
functionalities. We recognize product revenue at the time of hardware shipment provided that all otheror delivery of software license.
Subscription and Support Revenue
Subscription and support revenue recognition criteria have been met. Our channel partners generally receive an orderis derived primarily from an end-customer prior to placing an order with us. In addition, payment fromsales of our channel partners is not contingent on the partner’s success in sales to end-customers. Our channel partners generally do not stock appliancessubscription and only have limited stock rotation rights and no price protection rights. When necessary, we make certain estimates and maintain allowances for sales returns and other programs based on our historical experience. To date, these estimates have not been significant.support offerings. We recognize subscription and support revenue ratably over time as the services are performed. Our contractual service period, which issubscription and support contracts are typically one to five years. Other services revenue is recognized as the services are rendered.
Contracts with Multiple Performance Obligations
The majority of our arrangements, other than renewalscontracts 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 contracts, are multiple-element arrangements with a combination of hardware, software, subscriptions, support, and other services. Products, subscriptions, support, and other services generally qualify as separate units of accounting. Our hardware deliverables typically include proprietary operating system software, which together deliver the essential functionality of our products. For multiple-element arrangements, we allocate revenue to each unit of accounting based on an estimated selling price at the arrangement inception. The estimated selling price for each element is based upon the following hierarchy: vendor-specific objective evidence (“VSOE”) of selling price, if available, third-party evidence (“TPE”) of selling price, if VSOE of selling price is not available, or best estimate of selling price (“BESP”), if neither VSOE of selling price nor TPE of selling price are available. The total arrangement consideration is allocated to each separate unit of accounting using the relative estimated selling prices of each unit based on the aforementioned selling price hierarchy. We limit the amount of revenue recognized for delivered elements to an amount that is not contingent upon future delivery of additional products or services or meeting of any specified performance conditions.
In multiple-element arrangements where software deliverables are included, revenue is allocated to each separate unit of accounting for each of the non-software deliverables and to the software deliverables as a group using the relative estimated selling prices of each of the deliverables in the arrangement based on the aforementioned estimated selling price hierarchy. The arrangement consideration allocated to the software deliverables as a group is then allocated to each software deliverable using the residual method when VSOE of fair value of the undelivered items exists. Under the residual method, the amount of revenue allocated to delivered elements equals the total arrangement consideration less the aggregate fair value of any undelivered elements. In determining VSOE of fair value, we evaluate whether a substantial majority of the historical prices charged for a product or service sold on a standalone basis, as represented by a percentage of list price, fall within a reasonably narrow range. If VSOE of fair value of one or more undelivered items does not exist, revenuecustomer can benefit from the software portion ofproduct without these services and such services are separately identifiable within the arrangement is deferred and recognized at the earlier of: (i) delivery of those elements or (ii) when fair value can be established unless support is the only undelivered element, in which case, the entire software arrangement fee is recognized ratably over the contractual service period.
contract. We account for multiple agreements with a single partnercustomer as one arrangementa 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 arrangement.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.
Revenues are reported netWe 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 taxes. Shipping charges billed to channel partners are included(reseller, distributor, or end-customer), the geographies in revenueswhich our offerings were sold (domestic or international), and related costs are included in cost of revenue. After receipt of a partner order, any amounts billed in excess of revenue recognized are recorded as deferred revenue.
offering type (products, subscriptions, or support).
Deferred CommissionsRevenue
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 incrementalnot 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 directly related to non-cancelable customerother 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 deferred and amortized over the term of the related contractcontractual period in proportion to the recognized revenue. Referrevenue recognized.
We classify deferred contract costs as short-term or long-term based on when we expect to “Change in Accounting Policy for Sales Commissions” below for more information.
Advertising Costs
Advertisingrecognize the expense. The amortization of deferred contract costs which are expensed andis included in sales and marketing expense when incurred, were $13.7 million, $6.6 million, and $4.8 million,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, 2017, 2016, and 2015, respectively.2022, 2021, or 2020.
Software Development Costs
Internally developed software includes security software developed to meet our internal needs to provide cloud-based subscription servicesofferings 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, 2022 and 2021, we capitalized as other assets on our consolidated balance sheets $130.9 million and $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 $62.4 million, $47.8 million, and $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, 2022, 2021, and 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 andaward. 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.
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.insurance costs.
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.
We apply the authoritative accounting guidance prescribing a threshold and measurement attribute for the financial recognition and measurement of a tax position taken or expected to be taken in a tax return. 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.
We record deferred tax charges in prepaid expenses and other current assets and other assets on our consolidated balance sheets. These deferred tax charges are amortized on a straight-line basis over the life of the associated assets as a component of provision for income taxes in our consolidated statements of operations.
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.
Change in Accounting Policy for Sales Commissions
Effective August 1, 2016, we voluntarily changed our accounting policy for sales commissions that are incremental and directly related to non-cancelable customer sales contracts from recording an expense when incurred to deferral and amortization of the sales commissions over the term of the related contract in proportion to the recognized revenue. We believe this change in accounting policy is preferable as the direct and incremental commission costs are closely related to the associated revenue, and therefore should be deferred and recognized as an expense over the same period that the related revenue is recognized.
Short-term deferred commissions are included in prepaid expenses and other current assets, while long-term deferred commissions are included in other assets in our consolidated balance sheets. The amortization of deferred commissions is included in sales and marketing expense in our consolidated statements of operations.
The adoption of this accounting policy change has been applied retrospectively to all prior periods presented in this Annual Report on Form 10-K, in which the cumulative effect of the change of $38.1 million has been reflected in accumulated deficit as of August 1, 2014, the beginning of the earliest period presented.
The following tables present the changes to financial statement line items as a result of the accounting policy change for the periods presented in our consolidated financial statements (in millions, except per share data):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| July 31, 2017 | | July 31, 2016 |
| Computed under Prior Method | | Impact of Commission Adjustment | | As Reported | | As Previously Reported | | Impact of Commission Adjustment | | As Adjusted |
Consolidated Balance Sheets | | | | | | | | | | | |
Prepaid expenses and other current assets | $ | 95.8 |
| | $ | 73.4 |
| | $ | 169.2 |
| | $ | 84.8 |
| | $ | 54.9 |
| | $ | 139.7 |
|
Other assets | 97.8 |
| | 71.3 |
| | 169.1 |
| | 64.6 |
| | 50.1 |
| | 114.7 |
|
Accumulated deficit | $ | (981.4 | ) | | $ | 144.7 |
| | $ | (836.7 | ) | | $ | (726.6 | ) | | $ | 105.0 |
| | $ | (621.6 | ) |
|
| | | | | | | | | | | |
| Year Ended July 31, 2017 |
| Computed under Prior Method | | Impact of Commission Adjustment | | As Reported |
Consolidated Statements of Operations | | | | | |
Sales and marketing | $ | 958.4 |
| | $ | (39.3 | ) | | $ | 919.1 |
|
Operating loss | (219.1 | ) | | 39.3 |
| | (179.8 | ) |
Provision for income taxes | 22.9 |
| | (0.4 | ) | | 22.5 |
|
Net loss | $ | (256.3 | ) | | $ | 39.7 |
| | $ | (216.6 | ) |
Net loss per share, basic and diluted | $ | (2.83 | ) | | $ | 0.44 |
| | $ | (2.39 | ) |
Weighted-average shares used to compute net loss per share, basic and diluted | 90.6 |
| | — |
| | 90.6 |
|
| | | | | |
Consolidated Statements of Comprehensive Loss | | | | | |
Net loss | $ | (256.3 | ) | | $ | 39.7 |
| | $ | (216.6 | ) |
Comprehensive loss | $ | (260.7 | ) | | $ | 39.7 |
| | $ | (221.0 | ) |
|
| | | | | | | | | | | |
| Year Ended July 31, 2016 |
| As Previously Reported | | Impact of Commission Adjustment | | As Adjusted |
Consolidated Statements of Operations | | | | | |
Sales and marketing | $ | 776.0 |
| | $ | (32.8 | ) | | $ | 743.2 |
|
Operating loss | (190.1 | ) | | 32.8 |
| | (157.3 | ) |
Provision for income taxes | 20.8 |
| | (0.4 | ) | | 20.4 |
|
Net loss | $ | (225.9 | ) | | $ | 33.2 |
| | $ | (192.7 | ) |
Net loss per share, basic and diluted | $ | (2.59 | ) | | $ | 0.38 |
| | $ | (2.21 | ) |
Weighted-average shares used to compute net loss per share, basic and diluted | 87.1 |
| | — |
| | 87.1 |
|
| | | | | |
Consolidated Statements of Comprehensive Loss | | | | | |
Net loss | $ | (225.9 | ) | | $ | 33.2 |
| | $ | (192.7 | ) |
Comprehensive loss | $ | (224.8 | ) | | $ | 33.2 |
| | $ | (191.6 | ) |
|
| | | | | | | | | | | |
| Year Ended July 31, 2015 |
| As Previously Reported | | Impact of Commission Adjustment | | As Adjusted |
Consolidated Statements of Operations | | | | | |
Sales and marketing | $ | 522.7 |
| | $ | (33.7 | ) | | $ | 489.0 |
|
Operating loss | (133.5 | ) | | 33.7 |
| | (99.8 | ) |
Provision for income taxes | 9.4 |
| | — |
| | 9.4 |
|
Net loss | $ | (165.0 | ) | | $ | 33.7 |
| | $ | (131.3 | ) |
Net loss per share, basic and diluted | $ | (2.02 | ) | | $ | 0.41 |
| | $ | (1.61 | ) |
Weighted-average shares used to compute net loss per share, basic and diluted | 81.6 |
| | — |
| | 81.6 |
|
| | | | | |
Consolidated Statements of Comprehensive Loss | | | | | |
Net loss | $ | (165.0 | ) | | $ | 33.7 |
| | $ | (131.3 | ) |
Comprehensive loss | $ | (165.0 | ) | | $ | 33.7 |
| | $ | (131.3 | ) |
This change in accounting policy does not affect our balance of cash and cash equivalents and, as a result, did not change net cash flows from operating, investing, or financing activities, or materially impact any individual line items presented in our consolidated statement of cash flows for the years ended July 31, 2016 and 2015.
Recently Adopted Accounting Pronouncements
Goodwill ImpairmentAcquired Contract Assets and Contract Liabilities
In January 2017,October 2021, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance simplifyingthe subsequent measurement of goodwill. The standard eliminates Step 2 of the current goodwill impairment test, whichthat requires companies to determine the implied fair value of goodwill when measuring the amount of impairment loss. Under the new standard, goodwill impairment will be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, with the loss limited to the total amount of goodwill allocated to that reporting unit. We elected to early adopt the standard in our fourth quarter of fiscal 2017 on a prospective basis. Our adoption of this standard did not have an impact on our consolidated financial statements.
Share-Based Payment Accounting
In March 2016, the FASB issued authoritativeapply revenue guidance simplifying several aspects of the accounting for employee share-based payment transactions. The new standard requires us to recognize excess tax benefits or deficiencies as income tax expense or benefitand measure contract assets and contract liabilities from contracts with customers acquired in a business combination on the period in which they occur, rather than additional paid-in capital, and also requires us to recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. In addition, excess tax benefits should be classified as an operating activity, along with other income tax cash flows,acquisition date, instead of a financing activity in our consolidated statements of cash flows. The
standard also allows us to make an accounting policy election to account for forfeitures of share-based payment awards when they occur, rather than estimate expected forfeitures.
measuring them at fair value. We elected to early adopt the standard in our second quarter of fiscal 2017, which required us to reflect any adjustments related to the adoption as of the beginning of the fiscal year. The impact of the adoption on our consolidated financial statements was as follows:
Income tax accounting - We adopted the guidance related to the timing of when excess tax benefits are recognized on a modified retrospective basis. As a result, we recorded the cumulative effect of the change as a $3.5 million reduction to accumulated deficit as of August 1, 2016, to reflect the recognition of excess tax benefits in prior years, with a corresponding adjustment to deferred tax assets and long-term tax liabilities. We adopted the guidance related to the recognition of excess tax benefits and deficiencies as income tax expense or benefit on a prospective basis.
Cash flow presentation of excess tax benefits - We elected to adopt the guidance related to the presentation of excess tax benefits in our consolidated statements of cash flows on a retrospective basis, which increased net cash provided by operating activities by $0.5 million and $2.5 million for the years ended July 31, 2016 and 2015, respectively, with corresponding decreases to net cash provided by financing activities.
Forfeitures - We elected to account for forfeitures when they occur and adopted this change on a modified retrospective basis. As a result, we recorded the cumulative effect of the change as a $2.0 million increase to accumulated deficit as of August 1, 2016.
The adoption of the standard also impacted our previously reported results for the three months ended October 31, 2016, as presented in the following tables (in millions, except per share data):
|
| | | | | | | | | | | |
| October 31, 2016 |
| As Previously Reported | | Impact of Adoption | | As Adjusted |
Consolidated Balance Sheets | | | | | |
Other assets | $ | 102.0 |
| | $ | 1.7 |
| | $ | 103.7 |
|
Other long-term liabilities | 85.8 |
| | (5.6 | ) | | 80.2 |
|
Common stock and additional paid-in capital | 1,542.2 |
| | 0.9 |
| | 1,543.1 |
|
Accumulated deficit | $ | (683.4 | ) | | $ | 6.4 |
| | $ | (677.0 | ) |
|
| | | | | | | | | | | |
| Three Months Ended October 31, 2016 |
| As Previously Reported | | Impact of Adoption | | As Adjusted |
Consolidated Statements of Operations | | | | | |
Total cost of revenue(1) | $ | 101.3 |
| | $ | (0.1 | ) | | $ | 101.2 |
|
Total operating expenses(1) | 346.7 |
| | (0.8 | ) | | 345.9 |
|
Provision for income taxes | 8.4 |
| | (4.0 | ) | | 4.4 |
|
Net loss | $ | (61.8 | ) | | $ | 4.9 |
| | $ | (56.9 | ) |
Net loss per share, basic and diluted | $ | (0.69 | ) | | $ | 0.06 |
| | $ | (0.63 | ) |
Weighted-average shares used to compute net loss per share, basic and diluted | 89.8 |
| | — |
| | 89.8 |
|
| | | | | |
Consolidated Statements of Comprehensive Loss | | | | | |
Net loss | $ | (61.8 | ) | | $ | 4.9 |
| | $ | (56.9 | ) |
Comprehensive loss | $ | (64.7 | ) | | $ | 4.9 |
| | $ | (59.8 | ) |
| | | | | |
Consolidated Statements of Cash Flows | | | | | |
Net cash provided by operating activities | $ | 203.3 |
| | $ | 0.2 |
| | $ | 203.5 |
|
Net cash used in financing activities | $ | (27.1 | ) | | $ | (0.2 | ) | | $ | (27.3 | ) |
______________
| |
(1) | Adjustments consist of share-based compensation, which was impacted by our policy election to account for forfeitures when they occur. The impact of adoption on each cost and expense line item within these subtotals was not significant. |
Cloud Computing Arrangements
In April 2015, the FASB issued new authoritative guidance on fees paid in a cloud computing arrangement. The standard requires customers in a cloud computing arrangement to evaluate whether the arrangement includes a software license. If the arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If the arrangement does not include a software license, the customer should account for the arrangement as a service contract. We adopted the standard in our first quarter of fiscal 20172022 on a prospective basis. OurThe adoption of this standard did not have a material impact on our consolidated financial statements.
Debt Issuance Costswith Conversion Options
In April 2015,August 2020, the FASB issued updated authoritative guidance that simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments. The standard reduces the number of models used to simplifyaccount for convertible instruments and simplifies the presentationclassification of debt issuance costs. The amended standard requires that debt issuance costs related to a recognized debt liability be presented inon the balance sheet as a direct deduction from the carrying amount of the related debt liability, consistent with the presentation of debt discounts, instead of being presented as an asset. sheet.
We adopted thethis standard in our first quarter of fiscal 2017 on a retrospective basis, and as a result, we reduced other assets and2022 using the modified-retrospective approach, under which financial results reported in periods prior to fiscal 2022 were not adjusted. The adoption of this standard resulted in an increase to convertible senior notes, net by $8.0of $444.3 million, on our consolidated balance sheets asa decrease to accumulated deficit of July 31, 2016.$266.7 million, and a decrease to additional paid-in capital and temporary equity of $711.0 million upon adoption.
Recently Issued Accounting Pronouncements
Business Combinations - Definition of a Business
In January 2017, the FASB issued authoritative guidance clarifying the definition of a business to assist companies with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The standard is effective for us for our first quarter of fiscal 2019 and will be applied on a prospective basis. Early adoption is permitted. We do not expect the adoption of the standard will have a material impact on our consolidated financial statements.
Statement of Cash Flows - Restricted Cash
In November 2016, the FASB issued authoritative guidance on the presentation of restricted cash or restricted cash equivalents in the statement of cash flows. Under the new standard, restricted cash or restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The standard is effective for us for our first quarter of fiscal 2019 and will be applied on a retrospective basis. Early adoption is permitted. We do not expect the adoption of the standard will have a material impact on our consolidated financial statements because our restricted cash balance has not been material.
Income Taxes - Intra-Entity Asset Transfers
In October 2016, the FASB issued authoritative guidance requiring the recognition of income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The standard is effective for us for our first quarter of fiscal 2019 and will be applied on a modified retrospective basis. Early adoption is permitted. We plan to adopt the standard in our first quarter of fiscal 2019 and are currently evaluating whether this standard will have a material impact on our consolidated financial statements.
Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments
In August 2016, the FASB issued new authoritative guidance addressing eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain transactions are presented and classified in the statement of cash flows. The standard is effective for us for our first quarter of fiscal 2019 and will be applied on a retrospective basis. Early adoption is permitted. We do not expect the adoption of the standard will have a material impact on our consolidated financial statements.
Financial Instruments - Credit Losses
In June 2016, the FASB issued new authoritative guidance on the accounting for credit losses on most financial assets and certain financial instruments. The standard replaces the existing incurred loss model with an expected credit loss model for financial assets measured at amortized cost, including trade receivables, and requires that credit losses on available-for-sale debt securities be presented as an allowance rather than as a write-down. The standard is effective for us for our first quarter of fiscal 2021 and will be applied on a modified retrospective basis. Early adoption is permitted beginning our first quarter of fiscal 2020. We are currently evaluating whether this standard will have a material impact on our consolidated financial statements.
Leases
In February 2016, the FASB issued new authoritative guidance on lease accounting. Among its provisions, the standard requires lessees to recognize right-of-use assets and lease liabilities on the balance sheet for operating leases and also requires additional qualitative and quantitative disclosures about lease arrangements. The standard is effective for us for our first quarter of fiscal 2020 and will be applied on a modified retrospective basis, with the option to elect certain practical expedients. Early adoption is permitted. We are currently evaluating whether this standard will have a material impact on our consolidated financial statements.
Revenue Recognition
In May 2014, the FASB issued new authoritative guidance on revenue from contracts with customers. The new standard provides principles for recognizing revenue for the transfer of promised goods or services to customers with the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard also requires significantly expanded disclosures about revenue recognition. The FASB subsequently delayed the effective date of the standard by one year and as a result, the standard is now effective for us for our first quarter of fiscal 2019 using either of two methods: (i) retrospective to each prior reporting period presented with the option to elect certain practical expedients as defined within the guidance (“full retrospective method”); or (ii) retrospective with the cumulative effect of initially applying the guidance recognized at the date of initial application and providing certain additional disclosures as defined per the guidance (“modified retrospective method”). Early adoption as of the original effective date is permitted.
We do not plan to early adopt the new standard, and accordingly, we will adopt the standard in our first quarter of fiscal 2019. We currently plan to adopt using the full retrospective method, however, our ability to apply the full retrospective method is dependent on system readiness and the completion of our analysis of information necessary to restate prior period financial statements.
We are continuing to evaluate the impact of the new standard on our accounting policies, processes, internal controls over financial reporting, and system requirements, and have assigned cross-functional internal resources and engaged third-party service providers to assist in our evaluation and system implementation. Furthermore, we have made and will continue to make investments in systems to enable timely and accurate reporting under the new standard.
We are also continuing to evaluate the impact the standard will have on our consolidated financial statements, including reviewing the provisions of our customer contracts and identifying performance obligations under the requirements of the new standard and comparing to our current accounting policies and practices. Although we have not yet determined whether the effect will be material, we believe the new standard will impact our accounting for revenue arrangements in the following areas:
removal of the current limitation on contingent revenue may result in revenue being recognized earlier for certain contracts;
term license revenue associated with our virtual firewalls will be recognized upfront;
allocation of revenue related to software due to the removal of the residual method of revenue recognition; and
amortization period for deferred commissions.
We will continue to assess the new standard along with industry trends and additional interpretive guidance, and may adjust our implementation plan accordingly.
2. Fair Value MeasurementsRevenue
We categorize assets and liabilities recorded or disclosed at fair value on our consolidated balance sheets based upon the levelDisaggregation of judgment associated with inputs used to measure their fair value. Revenue
The categories are as follows:
Level 1—Inputs are unadjusted quoted prices in active markets for identical 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.
following table presents revenue by geographic theater (in millions): | | | | | | | | | | | | | | | | | |
| 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):
| | | | | | | | | | | | | | | | | |
| Year Ended July 31, |
| 2022 | | 2021 | | 2020 |
Revenue: | | | | | |
Product | $ | 1,363.1 | | | $ | 1,120.3 | | | $ | 1,064.2 | |
Subscription and support | | | | | |
Subscription | 2,539.0 | | | 1,898.8 | | | 1405.3 |
Support | 1,599.4 | | | 1,237.0 | | | 938.9 |
Total subscription and support | 4,138.4 | | | 3,135.8 | | | 2,344.2 | |
Total revenue | $ | 5,501.5 | | | $ | 4,256.1 | | | $ | 3,408.4 | |
Deferred Revenue
During the fair valueyears ended July 31, 2022 and 2021, we recognized approximately $2.7 billion and $2.0 billion of revenue pertaining to amounts that were deferred as of July 31, 2021 and 2020, respectively.
Remaining Performance Obligations
Revenue expected to be recognized from remaining performance obligations was $8.2 billion as of July 31, 2022, of which we expect to recognize approximately $4.1 billion over the next 12 months and the remainder thereafter.
3. Fair Value Measurements
The following table presents our financial assets and liabilities measured at fair value on a recurring basis using the above input categories as of July 31, 20172022 and July 31, 20162021 (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 | |
| | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | July 31, 2017 | | July 31, 2016 |
| | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
Short-term investments: | | | | | | | | | | | | | | | | |
Commercial paper | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 3.0 |
| | $ | — |
| | $ | 3.0 |
|
Corporate debt securities | | — |
| | 159.4 |
| | — |
| | 159.4 |
| | — |
| | 121.4 |
| | — |
| | 121.4 |
|
U.S. government and agency securities | | — |
| | 471.3 |
| | — |
| | 471.3 |
| | — |
| | 426.8 |
| | — |
| | 426.8 |
|
Total short-term investments | | — |
| | 630.7 |
| | — |
| | 630.7 |
| | — |
| | 551.2 |
| | — |
| | 551.2 |
|
Long-term investments: | | | | | | | | | | | | | | | | |
Certificates of deposit | | — |
| | 5.4 |
| | — |
| | 5.4 |
| | — |
| | 5.4 |
| | — |
| | 5.4 |
|
Corporate debt securities | | — |
| | 186.5 |
| | — |
| | 186.5 |
| | — |
| | 166.1 |
| | — |
| | 166.1 |
|
U.S. government and agency securities | | — |
| | 597.4 |
| | — |
| | 597.4 |
| | — |
| | 481.3 |
| | — |
| | 481.3 |
|
Total long-term investments | | — |
| | 789.3 |
| | — |
| | 789.3 |
| | — |
| | 652.8 |
| | — |
| | 652.8 |
|
Total assets measured at fair value | | $ | — |
| | $ | 1,420.0 |
| | $ | — |
| | $ | 1,420.0 |
| | $ | — |
| | $ | 1,204.0 |
| | $ | — |
| | $ | 1,204.0 |
|
As of July 31, 2017, we determined that certain property and equipment related to our prior corporate headquarters were impaired. In connection with our planned relocation to our new corporate headquarters, we assessed the recoverability of certain leasehold improvements and other long-lived assets associated with our previous headquarter facilities and determined that the carrying amount of these assets exceeded their fair value of $4.2 million. The resulting impairment loss of $20.9 million was recorded as general and administrative expense in our consolidated statements of operations during the year ended July 31, 2017. We calculated the fair value of the leasehold improvements and other long-lived assets based on estimated future discounted cash flows and classified the fair value as a Level 3 measurement due to the significance of unobservable inputs, which included the amount and timing of estimated sublease rental receipts that we could reasonably obtain over the remaining lease term and the discount rate. Refer to Note 9. Commitments and Contingencies for more information on the relocation of our corporate headquarters. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 8. Convertible Senior Notes10. Debt, for the carrying amount and estimated fair value of our convertible senior notes as of July 31, 20172022 and July 31, 2016.2021.
3.4. 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 investmentsdebt 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 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| 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, 2017 and July 31, 2016 (in millions):
|
| | | | | | | | | | | | | | | |
| July 31, 2017 |
| Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Estimated Fair Value |
Certificates of deposit | $ | 5.4 |
| | $ | — |
| | $ | — |
| | $ | 5.4 |
|
Corporate debt securities | 346.1 |
| | 0.3 |
| | (0.5 | ) | | 345.9 |
|
U.S. government and agency securities | 1,071.2 |
| | 0.1 |
| | (2.6 | ) | | 1,068.7 |
|
Total | $ | 1,422.7 |
| | $ | 0.4 |
| | $ | (3.1 | ) | | $ | 1,420.0 |
|
|
| | | | | | | | | | | | | | | |
| July 31, 2016 |
| Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Estimated Fair Value |
Certificates of deposit | $ | 5.4 |
| | $ | — |
| | $ | — |
| | $ | 5.4 |
|
Commercial paper | 3.0 |
| | — |
| | — |
| | 3.0 |
|
Corporate debt securities | 286.7 |
| | 0.8 |
| | — |
| | 287.5 |
|
U.S. government and agency securities | 907.3 |
| | 0.9 |
| | (0.1 | ) | | 908.1 |
|
Total | $ | 1,202.4 |
| | $ | 1.7 |
| | $ | (0.1 | ) | | $ | 1,204.0 |
|
2021 were not material.
Unrealized losses related to these investmentsour 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 investmentssecurities before recovery of their amortized cost basis, which may be at maturity. As a result, there were no other-than-temporary impairments for these investments at July 31, 2017 and 2016.
We received proceeds of $141.9 million and $18.5 million from sales of investmentsdid not recognize any credit losses related to our available-for-sale debt securities during the years ended July 31, 20162022 and 2015, respectively. We did not sell any investments during the year ended July 31, 2017. We use the specific identification method to determine the cost basis of investments sold.2021.
The following table summarizes the amortized cost and fair value of our available-for-sale investmentsdebt securities as of July 31, 2017,2022, by contractual years-to-maturity (in millions): | | | | | | | | | | | |
| 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 on our consolidated balance sheets. As of July 31, 2022 and 2021, the carrying value of our marketable equity securities were $1.2 billion and $124.2 million, respectively. There were no unrealized gains or losses recognized for these securities during the years ended July 31, 2022, 2021, and 2020.
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.
|
| | | | | | | |
| Amortized Cost | | Fair Value |
Due within one year | $ | 631.6 |
| | $ | 630.7 |
|
Due between one and three years | 791.1 |
| | 789.3 |
|
Total | $ | 1,422.7 |
| | $ | 1,420.0 |
|
4.6. Derivative Instruments
As a global business, we are exposed to currency exchange rate risk. Substantially allof July 31, 2022 and 2021, the total notional amount 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 12 months or less which we designate as cash flow hedges to manage the foreign currency exchange rate risk associated with these expenditures.
Beginning August 2016, we entered into forward contracts to hedge the foreign currency exchange rate risk arising from our foreign currency denominated expenditures to be incurred during the year ended July 31, 2017. All of theseoutstanding foreign currency forward contracts maturedwas $856.9 million and were settled during$531.9 million, respectively. Refer to Note 3. Fair Value Measurements for the year ended July 31, 2017. Accordingly, we did not have any forward contracts outstandingfair value of our derivative instruments as reported on our consolidated balance sheets as of July 31, 2017. 2022.
As of July 31, 2022, unrealized losses in AOCI related to our cash flow hedges were $24.8 million, of which $22.0 million of losses are expected to be recognized into earnings within the next 12 months. As of July 31, 2021, unrealized gains and losses in AOCI related to our cash flow hedges were not material.
7. Acquisitions
Fiscal 2022
During the year ended July 31, 2017, both unrealized losses recognized in AOCI related to the effective portion2022, we completed acquisitions for a combined total purchase consideration of our cash flow hedges$40.1 million, which was primarily cash. We have accounted for these transactions as business combinations, and amounts reclassified into earnings wererecorded goodwill of $37.6 million. The goodwill is not material.
5. Acquisitionsdeductible for income tax purposes.
Fiscal 20172021
LightCyber Ltd.Bridgecrew Inc.
On February 27, 2017,March 2, 2021, we completed our acquisition of all outstanding shares of LightCyber Ltd.Bridgecrew Inc. (“LightCyber”Bridgecrew”), a privately-held cybersecurity company,cloud security company. We expect the acquisition will expand our Prisma Cloud offering to deliver security across the full application lifecycle. The total purchase consideration for total considerationthe acquisition of $103.1Bridgecrew was $156.9 million, in cash.which consisted of the following (in millions): | | | | | |
| 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 awards, of which the portion attributable to services performed prior to the acquisition date was allocated to purchase consideration. The acquisition expandsremaining fair value was allocated to future services and will be expensed over the functionality of our next-generation security platform with the addition of LightCyber’s behavioral analytics technology. 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 preliminary estimated fair values, as presented in the following table (in millions): | | | | | |
| 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 Bridgecrew technology into our platforms. The goodwill is not deductible for income tax purposes.
The following table presents details of the identified intangible asset acquired (in millions, except years): | | | | | | | | | | | |
| Fair Value | | Estimated Useful Life |
Developed technology | $ | 21.6 | | | 6 years |
| | | |
| | | |
|
| | | |
| Amount |
Cash | $ | 12.4 |
|
Goodwill | 75.3 |
|
Identified intangible assets | 19.5 |
|
Net liabilities assumed | (4.1 | ) |
Total | $ | 103.1 |
|
Expanse Inc.On December 15, 2020, we completed our acquisition of Expanse Inc. (“Expanse”), a privately-held company specializing in attack surface management. We expect the acquisition will enrich our Cortex offerings and provide organizations an integrated view of the enterprise to combine external, internal, and threat data. The total purchase consideration for the acquisition of Expanse was $797.2 million, which consisted of the following (in millions): | | | | | |
| 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, which included 0.2 million shares of our restricted common stock. The total fair value of the replacement equity awards was $160.0 million, of which the portion attributable to services 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 preliminary estimated fair values, as presented in the following table (in millions): | | | | | |
| 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 Expanse technology into our 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 | $ | 123.4 | | | 6 years |
Customer relationships | 36.9 | | | 10 years |
Total | $ | 160.3 | | | |
Sinefa Group, Inc.
On November 24, 2020, we completed our acquisition of Sinefa Group, Inc. and its wholly owned subsidiaries (“Sinefa”), a privately-held digital experience monitoring company. We expect the acquisition will extend our Prisma Access offering. The total purchase consideration for the acquisition of Sinefa was $27.0 million, which consisted of the following (in millions): | | | | | |
| 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, of which the portion attributable to services 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 preliminary estimated fair values, as presented in the following table (in millions): | | | | | |
| 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 Sinefa technology into our platforms. The goodwill is 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
On September 17, 2020, we completed our acquisition of The Crypsis Group (“Crypsis”), an incident response, risk management, and digital forensics consulting firm. We expect the acquisition will expand our capabilities and strengthen our Cortex strategy. The total purchase consideration for the acquisition of Crypsis was $227.7 million, which consisted of the 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 of replacement awards, of which the portion attributable to services 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 preliminary estimated fair values, as presented in the following table (in millions): | | | | | |
| 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 Crypsis technology into our platforms. The goodwill is 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 | | | |
Fiscal 2020
CloudGenix Inc.
On April 21, 2020, we completed our acquisition of CloudGenix, Inc. (“CloudGenix”), a privately-held company. We believe the acquisition will strengthen our secure access service edge (“SASE”) offering. The total purchase consideration for the acquisition of CloudGenix was $402.7 million, which consisted of the following (in millions): | | | | | |
| Amount |
Cash | $ | 396.1 | |
Fair value of replacement awards | 6.6 | |
Total | $ | 402.7 | |
As part of the acquisition, we issued $30.3 million of replacement awards, of which the portion attributable to services 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 Aporeto was $144.1 million, 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 the portion attributable to services 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 | $ | 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 Aporeto’s technology into our 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 | | | |
Zingbox, Inc.
On September 20, 2019, we completed our acquisition of Zingbox, Inc. (“Zingbox”), a privately-held Internet of Things (“IoT”) security company. We believe the acquisition will accelerate our delivery of IoT security through our ML-Powered Next-Generation Firewall and Cortex offerings. The total purchase consideration for the acquisition of Zingbox was $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 estimated fair values, as presented in the following table (in millions): | | | | | |
| 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 Zingbox’s 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 | $ | 18.6 | | | 5 years |
Customer relationships | 1.8 | | | 8 years |
Total | $ | 20.4 | | | |
Additional Acquisition-Related Information
Pro forma results of operations have not been presented because the effects of the acquisitions were not material to our consolidated statements of operations.
Additional information related to our acquisitions completed in fiscal 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.
The following table presents details of the identified intangible assets acquired (in millions, except years):
|
| | | | | |
| Fair Value | | Estimated Useful Life |
Developed technology | $ | 16.6 |
| | 8 years |
Customer relationships | 2.9 |
| | 8 years |
Total | $ | 19.5 |
| | |
Goodwill generated from this business combination is primarily attributable to the assembled workforce and expected synergies from integrating the LightCyber technology into our platform. The goodwill is not deductible for income tax purposes.
LightCyber’s operating results are included in our consolidated statements of operations from the date of acquisition. Pro forma results of operations have not been presented as the impact to our consolidated statements of operations is not material.
Fiscal 2015
CirroSecure, Inc.
On May 22, 2015, we completed our acquisition of CirroSecure, Inc. (“CirroSecure”), a privately-held cybersecurity company. The acquisition expands the functionality of our next-generation security platform by providing additional security for SaaS applications. We accounted for this transaction as a business combination in exchange for total cash consideration of $15.3 million.
We allocated the purchase consideration to the assets acquired and liabilities assumed based on their estimated fair values and as a result, recorded a developed technology intangible asset of $11.0 million, goodwill of $8.1 million, and net liabilities of $3.8 million in our consolidated balance sheets as of the acquisition date. The developed technology is being amortized over an estimated useful life of seven years. The goodwill is attributable to the assembled workforce and expected post-acquisition synergies and is not deductible for income tax purposes.
6.8. Goodwill and Intangible Assets
Goodwill
The following table presents details of our goodwill during the year ended July 31, 20172022 (in millions):
|
| | | |
| Amount |
Balance as of July 31, 2016 | $ | 163.5 |
|
Goodwill acquired | 75.3 |
|
Balance as of July 31, 2017 | $ | 238.8 |
|
Through July 31, 2017, we have not recognized any impairment losses on our goodwill. | | | | | |
| 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, 2017 and July 31, 2016 (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| July 31, |
| 2017 | | 2016 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Developed technology | $ | 69.7 |
| | $ | (23.8 | ) | | $ | 45.9 |
| | $ | 53.1 |
| | $ | (15.4 | ) | | $ | 37.7 |
|
Acquired intellectual property | 8.9 |
| | (3.8 | ) | | 5.1 |
| | 8.9 |
| | (2.9 | ) | | 6.0 |
|
Customer relationships | 2.9 |
| | (0.2 | ) | | 2.7 |
| | — |
| | — |
| | — |
|
Other | 2.4 |
| | (2.4 | ) | | — |
| | 2.4 |
| | (2.1 | ) | | 0.3 |
|
Total purchased intangible assets | $ | 83.9 |
| | $ | (30.2 | ) | | $ | 53.7 |
| | $ | 64.4 |
| | $ | (20.4 | ) | | $ | 44.0 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 $9.8$126.9 million, $9.4$117.8 million, and $7.9$77.3 million for the years ended July 31, 2017, 2016,2022, 2021, and 2015,2020, respectively.
The following table summarizes our estimated future amortization expense of our intangible assets subject to amortization as of July 31, 20172022 (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 | |
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 January 1, 2019,their respective convertible dates only under the following circumstances:
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” perunder the applicable Indenture are, under certain circumstances, entitled to an increase in the conversion rate.rate for such series of Notes. Additionally, upon the occurrence of a corporate event that constitutes a “fundamental change” perunder 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 purchaserepurchase price equal to 100% of the principal amount of the Notes of such series plus accrued and unpaid contingent interest.interest to, but excluding, the fundamental change repurchase date.
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. The leases commenced in November 2012 and August 2013, expire in July 2023, and allow for two separate five-year options to extend the lease term. Payments underIn December 2019, we terminated these leases are approximately $94.3prior to their expiration date. The early termination fee is $25.0 million, overpayable in equal quarterly installments from April 2020 through July 2023. Upon termination, we recorded a decrease of $13.6 million in operating lease liabilities based on the lease term. Each lease has a rent holiday, which was included inpayment schedule of the determination of rent expense.
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, 2017,2022, 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.
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.
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 exercisepurchase date. EachIf 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 approximately six months startingcancelled 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 dateday on or after March 15February 28 and September 15August 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 during aper six-month purchase period orand $25,000 worth of stock for each calendar year. DuringShares purchased under our 2012 ESPP during the yearfiscal years ended July 31, 2017, employees purchased 0.42022, 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 $110.13$192.81 per share.share, $161.07 per share and $146.90 per share respectively.