UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 31, ~~2017~~2018

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-37570

Pure Storage, Inc.

(Exact Name of Registrant as Specified in its Charter)



Delaware	27-1069557
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

650 Castro Street, Suite 400

Mountain View, California

94041

(Address of principal executive offices, including zip code)

(Zip Code)

(800) 379-7873

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	x		Accelerated filer	o
Non-accelerated filer	o	(Do not check if a small reporting company)	Smaller reporting company	o
			Emerging growth company	o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided ~~pursant~~pursuant to section 13(a) of the Exchange Act. o

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

As of August ~~25, 2017~~24, 2018, the registrant had ~~97,037,611~~205,282,020 shares of its Class A common stock outstanding and ~~114,445,493~~30,892,432 shares of its Class B common stock outstanding.

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		Page
Note About Forward-Looking Statements		ii
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)	2
	Condensed Consolidated Balance Sheets as of January 31, ~~2017~~2018 and July 31, ~~2017~~2018	2
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended July 31, ~~2016~~2017 and ~~2017~~2018	3
	Condensed Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended July 31, ~~2016~~2017 and ~~2017~~2018	4
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended July 31, ~~2016~~2017 and ~~2017~~2018	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1625
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2637
Item 4.	Controls and Procedures	2738
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	2839
Item 1A.	Risk Factors	2839
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4657
Item 3.	Defaults Upon Senior Securities	4657
Item 4.	Mine Safety Disclosures	4657
Item 5.	Other Information	4657
Item 6.	Exhibits	4658
Signatures		47
~~Exhibit Index~~		4860

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NOTE ABOUT FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), about us and our industry that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this report, including statements regarding our future results of operations and financial condition, business strategy and plans and objectives of management for future operations, are forward-looking statements. In some cases, forward-looking statements may be identified by words such as “anticipate,” “believe,” “continue,” “could,” “design,” “estimate,” “expect,” “intend,” “may,” “plan,” “potentially,” “predict,” “project,” “should,” “will” or the negative of these terms or other similar expressions.

Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements regarding our ability to sustain or manage our expansion and growth, our expectations that average sales prices may decrease over time, our plans to expand and continue to invest internationally, our plans to expand the research and development organization as well as the sales and marketing function and channel programs, our expectations regarding fluctuations in our revenue and operating results, our expectations that we may continue to experience losses despite significant revenue growth, our ability to successfully attract, motivate, and retain qualified personnel and maintain our culture, our expectations regarding our technological leadership and market opportunity, our ability to realize benefits from our investments, our ability to innovate and introduce new or enhanced products, our expectations regarding product acceptance and our technologies, products and solutions, our competitive position and the effects of competition and industry dynamics, including those of retrofitted or new products from incumbent vendors, hyperconverged products, defined as server compute and storage combined within a single chassis, or public cloud, our expectations concerning relationships with third parties, including partners and customers, the adequacy of our intellectual property rights, and expectations concerning pending legal proceedings and related costs.

We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, and financial needs. These forward-looking statements are subject to a number of known and unknown risks, uncertainties and assumptions, including risks described in the section titled “Risk Factors.” These risks are not exhaustive. Other sections of this report include additional factors that could harm our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time, and it is not possible for our management to predict all risk factors nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ from those contained in, or implied by, any forward-looking statements.

Investors should not rely upon forward-looking statements as predictions of future events. We cannot assure investors that the events and circumstances reflected in the forward-looking statements will be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this report or to conform these statements to actual results or to changes in our expectations. Investors should read this Quarterly Report on Form 10-Q and the documents that we reference in this Quarterly Report on Form 10-Q and have filed as exhibits to this report with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

PURE STORAGE, INC.

Condensed Consolidated Balance Sheets

(in thousands, except per share data, unaudited)


							As of January 31, 2018			As of July 31, 2018
	As of January 31, 2017			As of July 31, 2017			(As Adjusted*)
ASSETS
Current assets:
Cash and cash equivalents	$	183,675		$	171,894		$	244,057		$	370,457
Marketable securities	362,986			351,123			353,289			736,205
Accounts receivable, net of allowance of $2,000 and $2,020 as of January 31, 2017 and July 31, 2017	168,978			168,404
Accounts receivable, net of allowance of $1,062 and $957 as of January 31, 2018 and July 31, 2018							243,001			242,409
Inventory	23,498			33,660			34,497			41,673
Deferred commissions, current	15,787			19,700			21,088			23,521
Prepaid expenses and other current assets	25,157			24,494			47,552			36,071
Total current assets	780,081			769,275			943,484			1,450,336
Property and equipment, net	81,695			81,850			89,142			101,718
Intangible assets, net	6,560			5,808			5,057			4,305
Deferred income taxes, non-current	844			877			1,060			1,534
Restricted cash							14,763			15,778
Deferred commissions, non-current							66,225			67,948
Other assets, non-current	30,565			32,322			4,264			4,610
Total assets	$	899,745		$	890,132		$	1,123,995		$	1,646,229
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	52,719		$	52,092		$	84,420		$	68,058
Accrued compensation and benefits	39,252			42,537			59,898			51,654
Accrued expenses and other liabilities	21,697			18,309			26,829			27,049
Deferred revenue, current	158,095			169,638			191,229			213,100
Liability related to early exercised stock options	1,362			816			320			—
Total current liabilities	273,125			283,392			362,696			359,861
Convertible senior notes, net							—			436,687
Deferred revenue, non-current	145,031			157,961			182,873			200,147
Other liabilities, non-current	3,159			3,373			4,025			5,140
Total liabilities	421,315			444,726			549,594			1,001,835
Commitments and contingencies (Note 5)
Commitments and contingencies (Note 6)
Stockholders’ equity:
Preferred stock, par value of $0.0001 per share— 20,000 shares authorized as of January 31, 2017 and July 31, 2017; no shares issued and outstanding as of January 31, 2017 and July 31, 2017	—			—
Class A and Class B common stock, par value of $0.0001 per share— 2,250,000 (Class A 2,000,000, Class B 250,000) shares authorized as of January 31, 2017 and July 31, 2017; 204,364 (Class A 87,027, Class B 117,337) and 210,975 (Class A 96,478, Class B 114,497) shares issued and outstanding as of January 31, 2017 and July 31, 2017	20			20
Preferred stock, par value of $0.0001 per share— 20,000 shares authorized as of January 31, 2018 and July 31, 2018; no shares issued and outstanding as of January 31, 2018 and July 31, 2018							—			—
Class A and Class B common stock, par value of $0.0001 per share— 2,250,000 (Class A 2,000,000, Class B 250,000) shares authorized as of January 31, 2018 and July 31, 2018; 220,979 (Class A 129,502, Class B 91,477) and 235,412 (Class A 204,052, Class B 31,360) shares issued and outstanding as of January 31, 2018 and July 31, 2018							22			24
Additional paid-in capital	1,281,452			1,372,221			1,479,883			1,675,210
Accumulated other comprehensive loss	(562		)	(280		)	(1,917		)	(2,826		)
Accumulated deficit	(802,480		)	(926,555		)	(903,587		)	(1,028,014		)
Total stockholders’ equity	478,430			445,406			574,401			644,394
Total liabilities and stockholders’ equity	$	899,745		$	890,132		$	1,123,995		$	1,646,229

*Prior period information has been adjusted to reflect the adoption impact of Accounting Standards Codification 606, Revenue from Contracts with Customers (ASC 606), which we adopted on February 1, 2018.

See the accompanying notes to condensed consolidated financial statements.

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PURE STORAGE, INC.

Condensed Consolidated Statements of Operations

(in thousands, except per share data, unaudited)


													Three Months Ended July 31,						Six Months Ended July 31,
	Three Months Ended July 31,						Six Months Ended July 31,						2017			2018			2017			2018
	2016			2017			2016			2017			(As Adjusted*)						(As Adjusted*)
Revenue:
Product	$	130,920		$	175,013		$	242,658		$	313,438		$	179,669		$	241,137		$	322,519		$	436,586
Support	32,294			49,448			60,503			93,654
Support subscription													45,001			67,747			84,796			128,243
Total revenue	163,214			224,461			303,161			407,092			224,670			308,884			407,315			564,829

Cost of revenue:
Product	42,847			57,252			76,893			103,897			57,252			78,262			103,897			144,682
Support	14,000			19,199			26,934			36,102
Support subscription													19,199			24,457			36,102			47,667
Total cost of revenue	56,847			76,451			103,827			139,999			76,451			102,719			139,999			192,349

Gross profit	106,367			148,010			199,334			267,093			148,219			206,165			267,316			372,480

Operating expenses:
Research and development	58,635			69,361			111,573			134,789			69,361			84,031			134,789			162,523
Sales and marketing	87,583			120,633			170,681			217,597			117,552			143,749			209,315			266,116
General and administrative	19,630			22,162			41,211			42,258			22,162			33,591			42,258			60,921
Total operating expenses	165,848			212,156			323,465			394,644			209,075			261,371			386,362			489,560

Loss from operations	(59,481		)	(64,146		)	(124,131		)	(127,551		)	(60,856		)	(55,206		)	(119,046		)	(117,080		)
Other income, net	37			3,266			1,319			5,261
Other income (expense), net													3,266			(4,032		)	5,261			(5,031		)
Loss before provision for income taxes	(59,444		)	(60,880		)	(122,812		)	(122,290		)	(57,590		)	(59,238		)	(113,785		)	(122,111		)
Provision for income taxes	106			821			526			1,785			821			885			1,785			2,316
Net loss	$	(59,550	)	$	(61,701	)	$	(123,338	)	$	(124,075	)	$	(58,411	)	$	(60,123	)	$	(115,570	)	$	(124,427	)
Net loss per share attributable to common stockholders, basic and diluted	$	(0.31	)	$	(0.29	)	$	(0.65	)	$	(0.60	)	$	(0.28	)	$	(0.26	)	$	(0.56	)	$	(0.55	)
Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted	192,730			209,193			191,026			207,515			209,193			229,359			207,515			226,609

* Prior period information has been adjusted to reflect the adoption impact of ASC 606, which we adopted on February 1, 2018.

See the accompanying notes to condensed consolidated financial statements.

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PURE STORAGE, INC.

Condensed Consolidated Statements of Comprehensive Loss

(in thousands, unaudited)


													Three Months Ended July 31,						Six Months Ended July 31,
	Three Months Ended July 31,						Six Months Ended July 31,						2017			2018			2017			2018
	2016			2017			2016			2017			(As Adjusted*)						(As Adjusted*)
Net loss	$	(59,550	)	$	(61,701	)	$	(123,338	)	$	(124,075	)	$	(58,411	)	$	(60,123	)	$	(115,570	)	$	(124,427	)
Other comprehensive income:
Change in unrealized net gain on available-for-sale securities	45			165			852			282
Other comprehensive income (loss):
Change in unrealized net gain (loss) on available-for-sale securities													165			(193		)	282			(909		)
Comprehensive loss	$	(59,505	)	$	(61,536	)	$	(122,486	)	$	(123,793	)	$	(58,246	)	$	(60,316	)	$	(115,288	)	$	(125,336	)

* Prior period information has been adjusted to reflect the adoption impact of ASC 606, which we adopted on February 1, 2018.

See the accompanying notes to condensed consolidated financial statements.

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PURE STORAGE, INC.

Condensed Consolidated Statements of Cash Flows

(in thousands, unaudited)


							Six Months Ended July 31,
	Six Months Ended July 31,						2017			2018
	2016			2017			(As Adjusted*)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(123,338	)	$	(124,075	)	$	(115,570	)	$	(124,427	)
Adjustments to reconcile net loss to net cash used in operating activities:
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	22,336			30,000			30,000			33,590
Amortization of debt discount and debt issuance costs							—			7,889
Stock-based compensation expense	50,894			69,057			69,057			97,609
Other	494			797			797			82
Changes in operating assets and liabilities:
Accounts receivable, net	6,589			25			25			707
Inventory	(2,392		)	(10,487		)	(10,487		)	(8,900		)
Deferred commissions	1,887			(4,607		)	(9,587		)	(4,155		)
Prepaid expenses and other current assets	(809		)	(186		)
Prepaid expenses and other assets							(186		)	11,134
Accounts payable	(10,007		)	201			201			(18,135		)
Accrued compensation and other liabilities	8,687			310			(2,993		)	(7,458		)
Deferred revenue	41,102			24,473			24,251			39,144
Net cash used in operating activities	(4,557		)	(14,492		)
Net cash provided by (used in) operating activities							(14,492		)	27,080
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment	(46,118		)	(30,100		)	(30,100		)	(42,733		)
Purchase of intangible assets	(1,000		)	—
Purchases of marketable securities	(427,968		)	(95,358		)	(95,358		)	(494,507		)
Sales of marketable securities	59,071			33,529			33,529			13,585
Maturities of marketable securities	5,800			73,681			73,681			97,793
Net increase in restricted cash	(5,600		)	—
Net cash used in investing activities	(415,815		)	(18,248		)	(18,248		)	(425,862		)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from exercise of stock options	6,369			6,793			6,793			29,067
Proceeds from issuance of common stock under employee stock purchase plan	15,079			14,166			14,166			19,698
Proceeds from issuance of convertible senior notes, net of issuance costs							—			562,062
Payment for purchase of capped calls							—			(64,630		)
Repurchase of common stock							—			(20,000		)
Net cash provided by financing activities	21,448			20,959			20,959			526,197
Net decrease in cash and cash equivalents	(398,924		)	(11,781		)
Cash and cash equivalents, beginning of period	604,742			183,675
Cash and cash equivalents, end of period	$	205,818		$	171,894
Net increase (decrease) in cash, cash equivalents and restricted cash							(11,781		)	127,415
Cash, cash equivalents and restricted cash, beginning of period							196,409			258,820
Cash, cash equivalents and restricted cash, end of period							$	184,628		$	386,235

CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD:
Cash and cash equivalents							$	171,894		$	370,457
Restricted cash							12,734			15,778
Cash, cash equivalents and restricted cash, end of period							$	184,628		$	386,235

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for income taxes	$	1,827		$	1,661		$	1,661		$	3,023
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING INFORMATION
Property and equipment purchased but not yet paid	$	7,691		$	6,578		$	6,578		$	11,949
Vesting of early exercised stock options	$	486		$	546		$	546		$	320

* Prior period information has been adjusted to reflect the adoption impact of ASC 606 and ASU 2016-18, which we adopted on February 1, 2018.

See the accompanying notes to condensed consolidated financial statements.

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PURE STORAGE, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 1. Business Overview

Organization and Description of Business

Pure Storage, Inc. (the Company, we, us, or other similar pronouns) was originally incorporated in the state of Delaware in October 2009 under the name OS76, Inc. In January 2010, we changed our name to Pure Storage, Inc. We are ~~building a data platform that transforms business through a dramatic increase in performance and reduction in complexity and costs. We are~~ headquartered in Mountain View, California and have wholly owned subsidiaries throughout the world.

We empower innovators to build a better world with data. Our data platform replaces storage systems designed for mechanical disk with all-flash systems optimized end-to-end for solid-state memory. Our Pure1 cloud-based support and management platform simplifies storage administration, while real-time scanning enables us to find and fix issues before they have an impact. Our business model replaces the traditional forklift upgrade cycle with Evergreen Storage subscriptions to hardware and software innovation, support and maintenance.

Note 2. Basis of Presentation and Summary of Significant Accounting Policies

Principles of Consolidation

The condensed consolidated financial statements include the accounts of the ~~company~~Company and our wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Unaudited Interim Consolidated Financial Information

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (U.S. GAAP) and applicable rules and regulations of the Securities and Exchange Commission (the SEC) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended January 31, ~~2017.~~2018.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, comprehensive loss and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full fiscal year ~~2018~~2019 or any future period. Certain prior period amounts have been adjusted as a result of adoption of new accounting pronouncements. Refer to "Recently Adopted Accounting Pronouncements" below for further information.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and accompanying notes. Actual results could differ from these estimates. Such estimates include, but are not limited to, the determination of ~~best estimate of~~standalone selling price ~~included in multiple-element~~for revenue arrangements ~~sales commissions,~~with multiple performance obligations, useful lives of intangible assets, ~~and~~ property and equipment ~~fair values of~~and deferred sales commissions, stock-based ~~awards,~~compensation, provision for income taxes including related reserves, and contingent ~~liabilities, among others.~~liabilities. Management bases its estimates on historical experience and on various other assumptions which management believes to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

Restricted Cash

Restricted cash is comprised of cash collateral related to our leases and for a vendor corporate credit card ~~program and letters of credit related to our facility leases.~~program. As of ~~both~~ January 31, ~~2017~~2018 and July 31, ~~2017,~~2018, we had restricted cash of ~~$12.7~~$14.8 million ~~which was included in other assets, non-current, in~~and $15.8 million on the condensed consolidated balance sheets.

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PURE STORAGE, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

Marketable Securities

We classify our marketable securities as available-for-sale at the time of purchase and reevaluate such classification at each balance sheet date. We may sell these securities at any time for use in current operations even if they have not yet reached maturity. As a result, we classify our securities, including those with maturities beyond twelve months, as current assets in the accompanying condensed consolidated balance sheets. We carry these securities at fair value and record unrealized gains and losses, in accumulated other comprehensive ~~income (loss),~~loss, which is reflected as a component of stockholders’ equity. We evaluate our securities to assess whether those with unrealized loss positions are other than temporarily impaired. We consider impairments to be other than temporary if they are related

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~~PURE STORAGE, INC.~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

to deterioration in credit risk or if it is likely we will sell the securities before the recovery of their cost basis. Realized gains and losses from the sale of marketable securities and declines in value deemed to be other than temporary are determined on the specific identification method. To date, there have been no declines in value deemed to be other than temporary in any of our securities. Realized gains and losses are reported in other income (expense), net in the condensed consolidated statements of operations.

Deferred Commissions

Deferred commissions consist of ~~direct and~~ incremental costs paid to our sales force to obtain customer contracts. Deferred commissions related to ~~customer contracts. The~~product revenues are recognized upon transfer of control to customers and deferred ~~commission amounts~~commissions related to support subscription revenue are ~~recoverable through the revenue streams that will be recognized under the related customer contracts. Direct sales commissions are deferred when earned and~~ amortized over an expected useful life of six years. We determine the ~~same~~expected useful life based on an estimated benefit period ~~that revenue is recognized from~~by evaluating our technology development life cycle, expected customer relationship period, and other factors. We classify deferred commissions as current and non-current on our condensed consolidated balance sheets based on the ~~related customer contract.~~timing of when we expect to recognize the expense. Amortization of deferred commissions is included in sales and marketing expense in the condensed consolidated statements of operations.

Changes in total deferred commissions during the periods presented are as follows (in thousands):



	Three Months Ended July 31, 2018			Six Months Ended July 31, 2018

Beginning balance⁽¹⁾	$	86,044		$	87,313
Additions	24,582			40,003
Recognition of deferred commissions	(19,157		)	(35,847		)
Ending balance as of July 31, 2018	$	91,469		$	91,469

As^{____________________}

⁽¹⁾Balance as of January 31, 2018 was adjusted to reflect the adoption of ASC 606.

Of the $91.5 million total deferred commissions balance as of July 31, 2018, we expect to recognize approximately 26% as commission expense over the next 12 months and the remainder thereafter.

There was no impairment loss in relation to capitalized commissions for the three and six months ended July 31, 2017 and 2018.

Deferred Revenue

Deferred revenue primarily consists of amounts that have been invoiced but that have not yet been recognized as revenue and performance obligations pertaining to support subscription services. The current portion of deferred revenue represents the amounts that are expected to be recognized as revenue within one year of the condensed consolidated balance sheet dates.

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PURE STORAGE, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

Changes in total deferred revenue during the periods presented are as follows (in thousands):



	Three Months Ended July 31, 2018			Six Months Ended July 31, 2018
Beginning balance ⁽¹⁾	$	388,614		$	374,102
Additions	92,511			167,782
Recognition of deferred revenue	(67,878		)	(128,637		)
Ending balance as of July 31, 2018	$	413,247		$	413,247

^{____________________}

⁽¹⁾ Balance as of January 31, 2018 was adjusted to reflect the adoption of ASC 606.

During the three and six months ended July 31, 2017, we ~~recorded deferred commissions, current, of $15.8~~recognized $44.1 million and ~~$19.7 million, and deferred commissions, non-current, of $14.9 million and $15.6~~$75.1 million in ~~other assets, non-current, in~~revenue pertaining to deferred revenue as of the ~~condensed consolidated balance sheets. We recognized sales commission expenses~~beginning of ~~$19.6 millionand $25.5 million during~~each period. During the three and six months ended July 31, ~~2016 and 2017, and $37.2~~2018, we recognized $60.9 million and ~~$46.0~~$106.2 million ~~during~~ in revenue pertaining to deferred revenue as of the ~~six months~~beginning of each period.

Of the $413.2 million remaining performance obligations as of July 31, ~~2016~~2018, we expect to recognize approximately 52% as revenue over the next 12 months and ~~2017, respectively.~~the remainder thereafter.

Substantially all of our contracted but not invoiced performance obligations are subject to cancellation and, therefore, are not considered in our remaining performance obligations.

Revenue Recognition

We derive revenue from two sources: (1) product revenue which includes hardware and embedded software and (2) support subscription revenue which includes customer support, hardware maintenance, and software upgrades on a when-and-if-available basis.

Our product revenue is derived from the sale of storage hardware and operating system software that is integrated into the hardware. We typically recognize product revenue upon transfer of control to our customers. Products are typically shipped directly by us to customers, and our channel partners do not stock our inventory.

Our support subscription revenue is derived from the sale of support subscription, which includes the right to receive unspecified software upgrades and enhancements on a when-and-if-available basis, bug fixes, parts replacement services related to the hardware, as well as access to our cloud-based management and support platform. Revenue related to support subscription is recognized ratably over the contractual term, which generally ranges from one to six years and represents our performance obligations period. The vast majority of our products are sold with support subscription agreements, which typically commence upon transfer of control of the corresponding products to our customers. Costs to service the support subscription are expensed as incurred. In addition, our Evergreen Storage program provides our customers who continually maintain active support subscription agreements for three years with an included controller refresh with each additional three year support subscription renewal. In accordance with revenue recognition guidance, the controller refresh represents an additional performance obligation and the allocated revenue is recognized in the period in which these controllers are shipped.

~~Recent~~We recognize revenue upon the transfer of promised goods or services to customers in an amount that reflects the consideration we expect to be entitled in exchange for those goods or services. This is achieved through applying the following five-step approach:

Identification of the contract, or contracts, with a customer

Identification of the performance obligations in the contract

Determination of the transaction price

Allocation of the transaction price to the performance obligations in the contract

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PURE STORAGE, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

Recognition of revenue when, or as, we satisfy a performance obligation

When applying this five-step approach, we apply judgment in determining the customer's ability and intention to pay, which is based on a variety of factors including the customer's historical payment experience and/or published credit and financial information pertaining to the customer. To the extent a customer contract includes multiple promised goods or services, we determine whether promised goods or services are capable of being distinct in the context of the contract to be accounted for as a combined performance obligation. We allocate transaction price to each performance obligation for contracts that contain multiple performance obligations based on a relative standalone selling price, taking into account available information such as market conditions and internally approved pricing guidelines related to performance obligations.

Recently Adopted Accounting Pronouncements ~~Not Yet Adopted~~

In May 2014, the Financial Accounting Standards Board (FASB), issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (ASU ~~2014-09)~~2014-09 or ASC 606), requiring an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ~~ASU 2014-09 will supersede~~ASC 606 supersedes nearly all existing revenue recognition guidance under U.S. GAAP ~~when~~upon its effective date. The standard permits two methods of adoptions: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of applying the standard recognized at the date of application (cumulative catch-up transition method).

We adopted the standard using the full retrospective method beginning February 1, 2018, for the year ending January 31, 2019, and our historical financial information for the years ended January 31, 2017 and 2018 has been adjusted to conform to the new standard.

The most significant impact of the standard related to the removal of limitation on contingent revenue, resulting in an increase in product revenue and a decrease in support subscription revenue. In addition, the adoption of ASC 606 also resulted in differences in the timing of recognition of sales commissions. While the adoption of the standard changes certain line items within the net cash flow from operating activities, it ~~becomes effective.~~ had no impact to the net cash provided by or used in operating, investing, or financing activities on our condensed consolidated statements of cash flows.

The following line items on our condensed consolidated balance sheet as of January 31, 2018 have been adjusted to reflect the adoption of ASC 606 (in thousands):



	As of January 31, 2018
	As Previously Reported			Adjustment			As Adjusted
Assets
Deferred commissions, current	$	22,437		$	(1,349	)	$	21,088
Deferred commissions, non-current	20,288			45,937			66,225
Total deferred commissions	$	42,725		$	44,588		$	87,313
Liabilities
Deferred revenue, current	$	209,377		$	(18,148	)	$	191,229
Deferred revenue, non-current	196,632			(13,759		)	182,873
Total deferred revenue	$	406,009		$	(31,907	)	$	374,102
Stockholders' equity
Accumulated deficit	$	(980,082	)	$	76,495		$	(903,587	)

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PURE STORAGE, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

The following line items on our unaudited condensed consolidated statement of operations for the three and six months ended July 31, 2017 have been adjusted to reflect the adoption of ASC 606 (in thousands, except per share data):



	Three Months Ended July 31, 2017									Six Months Ended July 31, 2017
	As Previously Reported			Adjustment			As Adjusted			As Previously Reported			Adjustment			As Adjusted
Revenue:
Product	$	175,013		$	4,656		$	179,669		$	313,438		$	9,081		$	322,519
Support subscription	49,448			(4,447		)	45,001			93,654			(8,858		)	84,796
Total revenue	$	224,461		$	209		$	224,670		$	407,092		$	223		$	407,315

Gross profit	$	148,010		$	209		$	148,219		$	267,093		$	223		$	267,316
Sales and marketing	$	120,633		$	(3,081	)	$	117,552		$	217,597		$	(8,282	)	$	209,315
Total operating expenses	$	212,156		$	(3,081	)	$	209,075		$	394,644		$	(8,282	)	$	386,362
Loss from operations	$	(64,146	)	$	3,290		$	(60,856	)	$	(127,551	)	$	8,505		$	(119,046	)
Loss before provision for income taxes	$	(60,880	)	$	3,290		$	(57,590	)	$	(122,290	)	$	8,505		$	(113,785	)
Net loss	$	(61,701	)	$	3,290		$	(58,411	)	$	(124,075	)	$	8,505		$	(115,570	)
Net loss per share attributable to common stockholders, basic and diluted	$	(0.29	)	$	0.01		$	(0.28	)	$	(0.60	)	$	0.04		$	(0.56	)

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



	Three Months Ended July 31, 2017						Six Months Ended July 31, 2017
	As Previously Reported		Adjustment		As Adjusted		As Previously Reported		Adjustment		As Adjusted
Revenue:
United States	$	165,466	$	154	$	165,620	$	311,960	$	165	$	312,125
Rest of the world	58,995		55		59,050		95,132		58		95,190
Total revenue	$	224,461	$	209	$	224,670	$	407,092	$	223	$	407,315

In ~~August 2015,~~November 2016, the FASB issued ASU No. ~~2015-14,~~2016-18, ~~Revenue~~Statement of Cash Flows (Topic 230): Restricted Cash (ASU 2016-18), which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and restricted cash. We adopted ASU 2016-18 effective February 1, 2018 on a retrospective basis. Upon adoption, restricted cash is 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 adoption of this standard increased our previously reported net cash flow from ~~Contracts with Customers~~investing activities for the periods in which there were changes in restricted cash but did not impact our net cash flow from operating activities or financing activities presented on our consolidated statements of cash flows.

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PURE STORAGE, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

The following line items in our unaudited condensed consolidated statement of cash flows for the six months ended July 31, 2017 have been adjusted to reflect the adoption of ASU 2016-18 and ASC 606 (in thousands):



	Six Months Ended July 31, 2017
	As Previously Reported			Adjustment			As Adjusted
Net loss⁽¹⁾	$	(124,075	)	$	8,505		$	(115,570	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Deferred commissions⁽¹⁾	$	(4,607	)	$	(4,980	)	$	(9,587	)
Accrued compensation and other liabilities ⁽¹⁾	$	310		$	(3,303	)	$	(2,993	)
Deferred revenue⁽¹⁾	$	24,473		$	(222	)	$	24,251
Cash used in operating activities	$	(14,492	)	$	—		$	(14,492	)
Cash, cash equivalents and restricted cash, beginning of period ⁽²⁾	$	183,675		$	12,734		$	196,409
Cash, cash equivalents and restricted cash, end of period ⁽²⁾	$	171,894		$	12,734		$	184,628

(1) Adjustment pertaining to the adoption of ASC 606.

(2) Adjustment pertaining to the adoption of ASU 2016-18.

In June 2018, the FASB issued ASU No. 2018-07, ~~, deferring~~Compensation - Stock Compensation (Topic 718) (ASU 2018-07). ASU 2018-07 aligns the ~~effective date~~accounting for ~~ASU 2014-09 by one year.~~share-based awards to employees and non-employees to follow the same model. The new standard ~~will be~~is effective for usfiscal years beginning ~~on February 1,~~after December 15, 2018 ~~which is the mandatory adoption date and we do not plan to early adopt. This standard may be adopted~~ using ~~either the full or~~a modified retrospective ~~methods.~~transition approach. Early adoption is permitted. We ~~currently anticipate adopting~~adopted this standard for the ~~standard retrospectively to all prior periods presented. We are evaluating~~three and six months ended July 31, 2018 and the impact of the new standard on our accounting policies, processes, and system requirements, and have assigned internal and external resources to assist in our evaluation and system implementation. We have made and will continue to make investments in systems to enable timely and accurate reporting under the new standard. We are also evaluating the potential impact that the implementationadoption of this standard ~~will have on~~did not materially impact our consolidated financial statements.

Recent Accounting Pronouncements Not Yet Adopted

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (ASU 2016-02). ASU 2016-02 requires lessees to recognize all leases with terms in excess of one year on their balance sheet as a right-of-use asset and a lease liability at the commencement date. The new standard also simplifies the accounting for sale and leaseback transactions. ~~The amendments in this update will be effective for us beginning on February 1, 2019 and must be adopted using a~~ASU 2016-02 requires the use of the modified retrospective method for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. ~~Early~~In July 2018, the FASB issued ASU No. 2018-10, Leases (Topic 842), Codification Improvements to Topic 842, Leases (ASU 2018-10) and ASU No. 2018-11, Leases (Topic 842), Targeted Improvements (ASU 2018-11). ASU 2018-11 provides a new transition method in which an entity can initially apply the new lease standards at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. These standards will be effective for us beginning on February 1, 2019 and early adoption is permitted. We expect to apply the new transition method prescribed by ASU 2018-11 at the adoption date. We are currently evaluating ~~adoption methods and~~ the impact of ~~this standard~~these standards on our consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13). ASU 2016-13 amends guidance on reporting credit losses for assets held at amortized cost basis and available-for-sale debt securities to require that credit losses on available-for-sale debt securities be presented as an allowance rather than as a write-down. The measurement of credit losses for newly recognized financial assets and subsequent changes in the allowance for credit losses are recorded in the statements of operations. The amendments in this update will be effective for us beginning on February 1, 2020 with early adoption permitted on or after February 1, 2019. We are currently evaluating the impact of this standard on our consolidated financial statements.

In ~~November 2016,~~February 2018, the FASB issued ASU No. ~~2016-18,~~2018-02, Income Statement - Reporting Comprehensive Income (Topic 220) - Reclassification of ~~Cash Flows (Topic 230): Restricted Cash~~Certain Tax Effects from Accumulated Other Comprehensive Income. (ASU 2016-18), which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore,This standard

711

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PURE STORAGE, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

~~amounts generally described as restricted cash~~allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and ~~restricted cash equivalents should be included with cash~~Jobs Act of 2017 (the Tax Act) and ~~cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18~~requires certain disclosures about stranded tax effects. This standard will be effective for us beginning on February 1, ~~2018~~2019 and ~~will~~should be applied ~~on a retrospective basis.~~either in the period of adoption or retrospectively. Early adoption is permitted. We do not expect ~~the adoption of~~ this standard to have any ~~material~~ impact on our consolidated financial statements.

~~In May 2017, the FASB issued ASU No 2017-09,~~ ~~Compensation—Stock Compensation (Topic 718) — Scope of Modification Accounting,~~ to clarify when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new standard, modification is required only if the fair value, the vesting conditions, or the classification of an award as equity or liability changes as a result of the change in terms or conditions. ASU 2017-09 will be effective for us beginning February 1, 2018 and will be applied prospectively. Early adoption is permitted. We are currently evaluating the impact of this standard on our consolidated financial statements.

Note 3. Financial Instruments

Fair Value Measurements

We measure our cash equivalents, marketable securities, and restricted cash at fair value on a recurring basis. We define fair value as the exchange price that would be received from sale of an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. We measure our financial assets and liabilities at fair value at each reporting period using a fair value hierarchy which requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Three levels of inputs may be used to measure fair value:

▪

~~Level I~~—

Level 1 - Observable inputs are unadjusted quoted prices in active markets for identical assets or liabilities;

Level 2 - Observable inputs are quoted prices for similar assets and liabilities in active markets or inputs other than quoted prices that are observable for the assets or liabilities, either directly or indirectly through market corroboration, for substantially the full term of the financial instruments; and

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. These inputs are based on our own assumptions used to measure assets and liabilities at fair value and require significant management judgment or estimation.


▪	~~Level II~~—Observable inputs are quoted prices for similar assets and liabilities in active markets or inputs other than quoted prices that are observable for the assets or liabilities, either directly or indirectly through market corroboration, for substantially the full term of the financial instruments; and


▪	~~Level III~~—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. These inputs are based on our own assumptions used to measure assets and liabilities at fair value and require significant management judgment or estimation.

We classify our cash equivalents, marketable securities and restricted cash within Level 1 or Level 2 because they are valued using either quoted market prices or inputs other than quoted prices which are directly or indirectly observable in the market, including readily-available pricing sources for the identical underlying security which may not be actively traded. Our fixed income available-for-sale securities consist of high quality, investment grade securities from diverse issuers. The valuation techniques used to measure the fair value of our marketable securities were derived from non-binding market consensus prices that are corroborated by observable market data or quoted market prices for similar instruments.

In addition to our cash equivalents, marketable securities, and restricted cash, we measure the fair value of our convertible senior notes (the Notes) on a quarterly basis for disclosure purposes. We consider the fair value of the Notes at July 31, 2018 to be a Level 2 measurement due to limited trading activity of the Notes. Refer to Note 5 for further information.

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PURE STORAGE, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

Cash Equivalents, Marketable Securities and Restricted Cash

The following tables summarize our cash equivalents, marketable securities and restricted cash by significant investment categories as of January 31, ~~2017~~2018 and July 31, ~~2017~~2018 (in thousands):



	As of January 31, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Cash Equivalents		Marketable Securities		Restricted Cash
Level 1
Money market accounts	$	—	$	—	$	—		$	32,057	$	17,294	$	—	$	14,763
Level 2
U.S. government treasury notes	131,643		—		(651		)	130,992		10,172		120,820		—
U.S. government agencies	47,229		—		(333		)	46,896		—		46,896		—
Corporate debt securities	186,506		116		(1,049		)	185,573		—		185,573		—
Total	$	365,378	$	116	$	(2,033	)	$	395,518	$	27,466	$	353,289	$	14,763



	As of July 31, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Cash Equivalents		Marketable Securities		Restricted Cash
Level 1
Money market accounts	$	—	$	—	$	—		$	29,047	$	13,269	$	—	$	15,778
Level 2
U.S. government treasury notes	326,328		—		(839		)	325,489		58,320		267,169		—
U.S. government agencies	76,443		—		(374		)	76,069		1,194		74,875		—
Corporate debt securities	383,340		104		(1,713		)	381,731		—		381,731		—
Foreign government bonds	5,151		1		(3		)	5,149		—		5,149		—
Asset-backed securities	7,283		—		(2		)	7,281		—		7,281		—
Total	$	798,545	$	105	$	(2,931	)	$	824,766	$	72,783	$	736,205	$	15,778

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PURE STORAGE, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

As of January 31, 2017

Amortized
Cost

Gross Unrealized
Gains

Gross Unrealized
Losses

Fair
Value
Cash Equivalents Marketable Securities Restricted Cash
Level 1

Money market accounts $ —
$ —
$ —
$ 12,734
$ —
$ —
$ 12,734
Level 2
U.S. government treasury notes 148,298
22
(289 ) 148,031
13,226
134,805
—
U.S. government agencies 40,398
2
(159 ) 40,241
—
40,241
—
Corporate debt securities 185,701
242
(379 ) 185,564
—
185,564
—
Foreign government bonds 2,377
2
(3 ) 2,376
—
2,376
—
Total $ 376,774
$ 268
$ (830 ) $ 388,946
$ 13,226
$ 362,986
$ 12,734

As of July 31, 2017

Amortized
Cost

Gross Unrealized
Gains

Gross Unrealized
Losses

Fair
Value
Cash Equivalents
Marketable
Securities
Restricted Cash
Level 1
Money market accounts $ —
$ —
$ —
$ 12,734
$ —
$ —
$ 12,734
Level 2
U.S. government treasury notes 140,495
15
(317 ) 140,193
18,390
121,803
—
U.S. government agencies 44,861
3
(139 ) 44,725
—
44,725
—
Corporate debt securities 182,057
365
(205 ) 182,217
—
182,217
—
Foreign government bonds 2,380
—
(2 ) 2,378
—
2,378
—
Total $ 369,793
$ 383
$ (663 ) $ 382,247
$ 18,390
$ 351,123
$ 12,734

The amortized cost and estimated fair value of our marketable securities are shown below by contractual maturity (in thousands):


	As of July 31, 2017				As of July 31, 2018
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due within one year	$	150,456	$	150,372	$	373,160	$	372,316
Due in one to five years	200,946		200,751		365,867		363,889
Total	$	351,402	$	351,123	$	739,027	$	736,205

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~~PURE STORAGE, INC.~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

~~Based on our evaluation of available evidence, we concluded that the~~The gross unrealized losses on our marketable securities as of July 31, ~~2017~~2018 were temporary in nature. The following table presents gross unrealized losses and fair values for those investments that were in a continuous unrealized loss as of July 31, ~~2017,~~2018, aggregated by investment category (in thousands).:


	Less than 12 months					Greater than 12 months					Total					Less than 12 months					Greater than 12 months					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
U.S. government treasury notes	$	121,518	$	(299	)	$	1,986	$	(18	)	$	123,504	$	(317	)	$	271,578	$	(483	)	$	48,941	$	(356	)	$	320,519	$	(839	)
U.S. government agencies	35,916		(112		)	4,471		(27		)	40,387		(139		)	55,695		(227		)	20,374		(147		)	76,069		(374		)
Corporate debt securities	62,323		(192		)	4,271		(13		)	66,594		(205		)	271,946		(1,454		)	30,654		(259		)	302,600		(1,713		)
Foreign government bonds	878		(2		)	—		—			878		(2		)	2,944		(3		)	—		—			2,944		(3		)
Asset-backed securities																5,016		(2		)	—		—			5,016		(2		)
Total	$	220,635	$	(605	)	$	10,728	$	(58	)	$	231,363	$	(663	)	$	607,179	$	(2,169	)	$	99,969	$	(762	)	$	707,148	$	(2,931	)

~~Gross realized~~Realized gains or losses on sale of marketable securities ~~for the three and six months ended July 31, 2016 were $104,000 and $110,000; and~~ were not significant for ~~three and six months ended July 31, 2017.~~all periods presented.

Note 4. Balance Sheet Components

Inventory

Inventory consists of the following (in thousands):


	As of January 31, 2017		As of July 31, 2017		As of January 31, 2018		As of July 31, 2018
Raw materials	$	3,003	$	2,966	$	1,181	$	2,828
Finished goods	20,495		30,694		33,316		38,845
Inventory	$	23,498	$	33,660	$	34,497	$	41,673

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PURE STORAGE, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

Property and Equipment, Net

Property and equipment, net, consists of the following (in thousands):


	As of January 31, 2017			As of July 31, 2017			As of January 31, 2018			As of July 31, 2018
Test equipment	$	105,955		$	125,348		$	142,311		$	156,040
Computer equipment and software	54,521			60,838			72,329			92,863
Furniture and fixtures	4,494			5,045			5,363			5,482
Leasehold improvements	10,332			13,092			15,032			23,763
Total property and equipment	175,302			204,323			235,035			278,148
Less: accumulated depreciation and amortization	(93,607		)	(122,473		)	(145,893		)	(176,430		)
Property and equipment, net	$	81,695		$	81,850		$	89,142		$	101,718

Depreciation and amortization expense was ~~$11.6~~$14.8 million and ~~$14.8~~$16.8 million for the three months ended July 31, ~~2016 and~~ 2017 and ~~$21.7~~2018, and $29.2 million and ~~$29.2~~$32.8 million for the six months ended July 31, ~~2016~~2017 and ~~2017, respectively.~~2018.

Intangible Assets, Net

Intangible assets, net, consist of the following (in thousands):

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~~PURE STORAGE, INC.~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~


	As of January 31, 2017			As of July 31, 2017			As of January 31, 2018			As of July 31, 2018
Technology patents	$	10,125		$	10,125		$	10,125		$	10,125
Accumulated amortization	(3,565		)	(4,317		)	(5,068		)	(5,820		)
Intangible assets, net	$	6,560		$	5,808		$	5,057		$	4,305

Intangible assets amortization expense was ~~$342,000 and $376,000~~$0.4 million for the three months ended July 31, ~~2016 and~~ 2017 and ~~$668,000~~2018, and ~~$752,000~~$0.8 million for the six months ended July 31, ~~2016~~2017 and ~~2017.~~2018. The weighted-average remaining useful life of technology patents is ~~3.9~~2.9 years. Due to the defensive nature of these patents, the amortization expense is included in general and administrative expenses in the condensed consolidated statements of operations.

As of July 31, ~~2017,~~2018, future expected amortization expense for intangible assets ~~for each of the next five years~~ is as follows (in thousands):


Years Ending January 31,	Estimated Future Amortization Expense
Remainder of 2018	$	752
2019	1,504
Fiscal Years Ending January 31,			Estimated Future Amortization Expense
Remainder of 2019			$	752
2020	1,504		1,504
2021	1,504		1,504
2022	544		545
Total	$	5,808	$	4,305

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PURE STORAGE, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities consist of the following (in thousands):


	As of January 31, 2017		As of July 31, 2017		As of January 31, 2018		As of July 31, 2018
Sales and use tax payable	$	540	$	298
Accrued professional fees	1,765		1,325
Taxes payable					$	4,052	$	3,801
Accrued marketing	6,718		6,164		5,928		5,017
Accrued travel and entertainment expenses	2,235		4,014		4,386		2,556
Income tax payable	1,135		1,317
Other accrued liabilities	9,304		5,191		12,463		15,675
Total accrued expenses and other liabilities	$	21,697	$	18,309	$	26,829	$	27,049

Note 5. Convertible Senior Notes

In April 2018, we issued $575.0 million in principal amount of 0.125% convertible senior notes due 2023, in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act and received proceeds of $562.1 million, after deducting the underwriters’ discounts and commissions. The Notes are governed by an indenture (the Indenture) between us, as the issuer, and U.S. Bank National Association, as trustee. The Notes are our senior unsecured obligations. The Indenture does not contain any financial covenants or restrictions on the payments of dividends, the incurrence of indebtedness, or the issuance or repurchase of securities by us or any of our subsidiaries. The Notes mature on April 15, 2023 unless repurchased or redeemed by us or converted in accordance with their terms prior to the maturity date. Interest is payable semi-annually in arrears on April 15 and October 15 of each year, beginning on October 15, 2018.

The Notes are convertible for up to 21,884,155 shares of our common stock at an initial conversion rate of approximately 38.0594 shares of Class A common stock per $1,000 principal amount, which is equal to an initial conversion price of approximately $26.27 per share of Class A common stock, subject to adjustment. 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 October 15, 2022, only under the following circumstances:

during any fiscal quarter commencing after the fiscal quarter ending on July 31, 2018 (and only during such fiscal quarter), if the last reported sale price of our Class A common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price for the Notes on each applicable trading day;

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

if we call any or all of the Notes for redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; or

upon the occurrence of specified corporate events.

On or after October 15, 2022 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their Notes at any time regardless of the foregoing circumstances. Upon conversion, holders will receive cash, shares of our Class A common stock, or a combination of cash and shares of our Class A common stock, at our election. We intend to settle the principal of the Notes in cash.

The conversion price will be subject to adjustment in some events. Following certain corporate events that occur prior to the maturity date or following our issuance of a notice of redemption, we will increase the conversion

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PURE STORAGE, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

rate for a holder who elects to convert its Notes in connection with such corporate event or during the related redemption period in certain circumstances. Additionally, upon the occurrence of a corporate event that constitutes a “fundamental change” per the Indenture, holders of the Notes may require us to repurchase for cash all or a portion of the Notes at a purchase price equal to 100% of the principal amount of the Notes plus accrued and unpaid contingent interest.

We may not redeem the Notes prior to April 20, 2021. We may redeem for cash all or any portion of the Notes, at our option, on or after April 20, 2021 if the last reported sale price of our Class A common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending not more than two trading days immediately preceding the date on which we provide notice of redemption at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the Notes.

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

In accounting for the transaction costs related to the issuance of the Notes, we allocated the total amount incurred to the liability and equity components using the same proportions as the initial carrying value of the Notes. Transaction costs attributable to the liability component were netted with the principal amount of the Notes in the condensed consolidated balance sheets and are being amortized to interest expense in the condensed consolidated statements of operations using the effective interest method over the term of the Notes. Transaction costs attributable to the equity component were netted with the equity component of the Notes in additional paid-in capital in the condensed consolidated balance sheets. Upon the issuance of the Notes, we recorded total debt issuance costs of $12.9 million, of which approximately $9.8 million was allocated to the Notes and approximately $3.1 million was allocated to additional paid-in capital.

The Notes consisted of the following (in thousands):



	As of July 31, 2018
Liability:
Principal	$	575,000
Less: debt discount, net of amortization	(128,976		)
Less: debt issuance costs, net of amortization	(9,337		)
Net carrying amount of the Notes	$	436,687

Stockholders' equity:
Allocated value of the conversion feature	$	136,333
Less: debt issuance costs	(3,068		)
Additional paid-in capital	$	133,265

The total estimated fair value of the Notes as of July 31, 2018 was approximately $607.2 million. The fair value was determined based on the closing trading price per $100 of the Notes as of the last day of trading for the period. The fair value of the Notes is primarily affected by the trading price of our common stock and market interest rates.

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PURE STORAGE, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

Based on the closing price of our Class A common stock of $21.66 on July 31, 2018, the if-converted value of the Notes of $474.0 million was less than its principal amount.

The following table sets forth total interest expense recognized related to the Notes for the three and six months ended July 31, 2018 (in thousands):



	Three Months Ended July 31, 2018			Six Months Ended July 31, 2018
Amortization of debt discount	$	6,000		$	7,357
Amortization of debt issuance costs	434			532
Total amortization of debt discount and debt issuance costs	6,434			7,889
Contractual interest expense	181			224
Total interest expense related to the Notes	$	6,615		$	8,113

Effective interest rate of the liability component	5.6		%	5.6		%

In connection with the offering of the Notes, we paid $64.6 million to enter into capped call transactions with certain of the underwriters and their affiliates (the Capped Calls), whereby we have the option to purchase a total of 21,884,155 shares of our Class A 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 the Notes, as the case may be, with such reduction or offset subject to a cap initially equal to $39.66 per share (which represents a premium of 100% over the last reported sales price of our Class A common stock on April 4, 2018), subject to certain adjustments (the Cap Price). The cost of the Capped Calls was accounted for as a reduction to additional paid-in capital on the condensed consolidated balance sheet. The Capped Calls are intended to reduce or offset potential dilution of our common stock upon any conversion of the Notes, subject to a cap based on the Cap Price.

Impact on Earnings Per Share

The Notes will not impact our diluted earnings per share until the average market price of our Class A common stock exceeds the conversion price of $26.27 per share, as we intend to settle the principal amount of the Notes in cash upon conversion. We are required under the treasury stock method to compute the potentially dilutive shares of common stock related to the Notes for periods we report net income. However, upon conversion, there will be no economic dilution from the Notes until the average market price of our Class A common stock exceeds the Cap Price of $39.66 per share, as exercise of the Capped Calls offsets any dilution from the Notes from the conversion price up to the Cap Price. Capped Calls are excluded from the calculation of diluted earnings per share, as they would be anti-dilutive under the treasury stock method.

Note 5.6. Commitments and Contingencies

Operating Leases

~~During the six months ended~~As of January 31, 2018 and July 31, ~~2017, we extended~~2018, the ~~lease term of an existing office facility with total additional lease obligations of~~aggregate future minimum payments under non-cancelable operating leases were approximately ~~$2.0~~$113.0 million ~~with the lease expiring through March 2019.~~and $153.7 million.

Letters of Credit

In connection with the lease amendment executed in March 2018, we issued a letter of credit of $1.5 million. As of January 31, ~~2017~~2018 and July 31, ~~2017,~~2018, we had outstanding letters of credit in the aggregate amount of ~~$7.7~~$9.6 million and $10.8 million, in connection with our facility leases. The letters of credit are collateralized by restricted cash ~~in the same amount~~ and mature aton various dates through ~~June 2024.~~August 2029.

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Notes to Condensed Consolidated Financial Statements (Unaudited)

Legal Matters

~~On September 1, 2016, a purported securities class action entitled~~ ~~Ramsay v. Pure Storage, Inc., et al.~~ was filed in the Superior Court of the State of California (San Mateo County) against us and certain of our officers, directors, investors and underwriters for our initial public offering (IPO), asserting claims under sections 11, 12 and 15 of the Securities Act on behalf of a purported class consisting of purchasers of our common stock pursuant or traceable to our initial public offering, and seeking unspecified compensatory damages and other relief. Substantially identical lawsuits were subsequently filed in the same court, bringing the same claims against the same defendants, captioned ~~Peter Galanis v. Pure Storage, Inc., et al.~~ ~~(filed September 14, 2016),~~ ~~Curtis Wilson v. Pure Storage, Inc., et al.~~ ~~(filed September 15, 2016),~~ ~~Loren Moe v. Pure Storage, Inc., et al.~~ ~~(filed September 23, 2016), and~~ ~~Mason Delahooke and Mahsa Shirazikia v. Pure Storage, Inc., et al.~~ ~~(filed October 5, 2016). On October 27, 2016, the aforementioned actions were consolidated under the caption~~ ~~In re Pure Storage, Inc. Shareholder Litigation~~. On December 13, 2016, the plaintiffs filed a consolidated complaint. On January 26, 2017, the defendants filed a demurrer (motion to dismiss) to the consolidated complaint on the grounds that the plaintiffs failed to state a claim under the Securities Act. On April 4, 2017, the court sustained the demurrer as to all claims with leave to amend. On May 15, 2017, the plaintiffs filed an amended complaint, again asserting claims under sections 11, 12 and 15 of the Securities Act against us and certain of our officers, directors and underwriters for our IPO. On May 26, 2017 the defendants filed a demurrer (motion to dismiss) to the amended complaint on the grounds that the plaintiffs failed to state a claim under the Securities Act. The Court heard arguments on the second demurrer on July 18, 2017 and on August 31, 2017 the Court sustained defendant's demurrer again as to all claims with leave to amend. We believe there is no merit to the allegations and intend to defend ourselves vigorously.

From time to time, we have become involved in claims and other legal matters arising in the normal course of business. We investigate these claims as they arise. Although claims are inherently unpredictable, we currently are not aware of any matters that ~~may~~we expect to have a material adverse effect on our business, financial position, results of operations or cash flows. Accordingly, we have not recorded any loss contingency on our condensed consolidated balance sheet as of July 31, ~~2017.~~2018.

Indemnification

Our arrangements generally include certain provisions for indemnifying customers against liabilities if our products or services infringe a third party’s intellectual property rights. Other guarantees or indemnification arrangements include guarantees of product and service performance and standby letters of credit for lease facilities. It is not possible to determine the maximum potential amount under these indemnification obligations due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. To date, we have not incurred any material costs as a result of such obligations and have not accrued any liabilities related to such obligations in the condensed consolidated financial statements. In addition, we indemnify our officers, directors and certain key employees while they are serving in good faith in their respective capacities. To date, there have been no claims under any indemnification provisions.

Note 6.7. Stockholders’ Equity

Preferred Stock

We have 20,000,000 authorized shares of undesignated preferred stock, the rights, preferences and privileges of which may be designated from time to time by our board of directors. As of July 31, ~~2017,~~2018, there were no shares of preferred stock issued or outstanding.

Class A and Class B Common Stock

We have two classes of authorized common stock, Class A common stock and Class B common stock. As of July 31, ~~2017,~~2018, we had 2,000,000,000 shares of Class A common stock authorized with a par value of $0.0001 per share and 250,000,000 shares of Class B common stock authorized with a par value of $0.0001 per share. As of July 31, ~~2017, 96,478,332~~2018, 204,051,868 shares of Class A common stock were issued and outstanding and ~~114,497,355~~31,359,938 shares of Class B common stock were issued and outstanding.

Repurchase of Common Stock

Concurrent with the issuance of the Notes (see Note 5), we repurchased and retired 1,008,573 shares, or $20.0 million, of our Class A common stock at $19.83 per share, which was equal to the closing price per share of our Class A common stock on April 4, 2018, the date of the pricing of the offering of the Notes. The repurchased shares were recorded as a reduction of additional paid-in capital on the condensed consolidated balance sheet.

Note 7.8. Equity Incentive Plans

Equity Incentive Plans

We maintain two equity incentive plans: the 2009 Equity Incentive Plan ~~(our~~(the 2009 Plan) and the 2015 Equity Incentive Plan ~~(our~~(the 2015 Plan). In August 2015, our board of directors adopted, and in September 2015 our stockholders approved, the 2015 Plan, which became effective in connection with our ~~IPO~~initial public offering (IPO) and serves as the successor to ~~our~~the 2009 Plan. ~~Our~~The 2015 Plan provides for grants of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance stock awards, performance cash awards, and other forms of stock awards to our employees, directors and consultants. ~~We ceased grants~~

Table of ~~new awards under our 2009 Plan after the effective date of our 2015 Plan, and no new grants will be made from our 2009 Plan. Outstanding awards granted under our 2009 Plan will remain subject~~Contents

PURE STORAGE, INC.

Notes to ~~the terms of our 2009 Plan and applicable award agreements, until such outstanding awards that are stock options are exercised, terminated or expired by their terms.~~Condensed Consolidated Financial Statements (Unaudited)

We initially reserved 27,000,000 shares of our Class A common stock for issuance under our 2015 Plan. The number of shares reserved for issuance under our 2015 Plan increases automatically on the first day of February of each year through 2025, in an amount equal to 5% of the total number of shares of our capital stock outstanding as of the immediately preceding January 31.

The exercise price of stock options will generally not be less than 100% of the fair market value of our common stock on the date of grant, as determined by our board of directors. Our equity awards generally vest over a two to four year period and expire no later than ten years from the date of grant.

2015 Employee Stock Purchase Plan

In August 2015, our board of directors adopted, and our stockholders approved, the 2015 Employee Stock Purchase Plan (2015 ESPP), which became effective in connection with our IPO. A total of 3,500,000 shares of Class A common stock was initially reserved for issuance under the 2015 ESPP. The number of shares reserved for issuance under our 2015 ESPP increases automatically on the first day of February of each year through 2025, in an amount equal to the lesser of (i) 1% of the total number of shares of our capital stock outstanding as of the immediately preceding January 31, and (ii) 3,500,000 shares of Class A common stock.

The 2015 ESPP allows eligible employees to purchase shares of our Class A common stock at a discount through payroll deductions ~~(or other payroll contributions)~~ of up to 30% of their eligible compensation, subject to a cap of 3,000 shares on any purchase date or $25,000 in any calendar year (as determined under applicable tax rules). The 2015 ESPP provides for 24 month offering periods beginning March 16th and September 16th of each year, and each offering period consists of four six-month purchase periods, subject to a reset provision. If the closing stock price on the offering date of a new offering falls below the closing stock price on the offering date of an ongoing offering, the ongoing offering would terminate immediately following the purchase of ESPP shares on the purchase date immediately preceding the new offering and participants in the terminated ongoing offering would automatically be enrolled in the new offering (ESPP reset)., resulting in a modification. On each purchase date, eligible employees will purchase our Class A common stock at a price per share equal to 85% of the lesser of the fair market value of our Class A common stock on (1) on the first trading day of the applicable offering period or (2) the purchase date. ~~Our closing stock price on the new offering date of March 16, 2017~~There was ~~lower than the closing stock prices for both the offerings that started on March 16, 2016 and September 16, 2016, which triggered~~ an ESPP reset ~~for those offerings.~~ ~~The ESPP reset~~in the three months ended April 30, 2017 that resulted in a total modification charge of ~~approximately~~ $9.0 million, which is ~~being~~ recognized over the new ~~24-month~~ offering period ending on March 15, 2019. ~~In addition, the original remaining unamortized stock-based compensation expense for each of the offerings is being recognized over the same 24-month offering period ending on March 15, 2019.~~

We recognized stock-based compensation expense related to our 2015 ESPP of ~~$4.3~~$3.8 million and ~~$3.8~~$7.9 million during the three months ended July 31, ~~2016 and~~ 2017 and ~~$8.6~~2018 and $7.9 million and ~~$7.9~~$14.6 million during the six months ended July 31, ~~2016~~2017 and ~~2017.~~2018. As of July 31, ~~2017,~~2018, there was ~~$24.1~~$23.9 million of unrecognized stock-based compensation expense related to our 2015 ESPP, which is expected to be recognized over a weighted-average period of approximately ~~1.6~~0.9 years.

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~~PURE STORAGE, INC.~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

Stock Options

A summary of stock option activity under our equity incentive plans and related information is as follows:

Options Outstanding

Number of
Shares

Weighted-
Average
Exercise Price

Weighted-
Average
Remaining
Contractual Life (In Years)

Aggregate
Intrinsic
Value (in thousands)
Balance as of January 31, 2017 56,840,189
$ 7.15
7.0 $ 315,502
Options granted —
—

Options exercised (2,769,381 ) 2.53

Options forfeited/cancelled (1,266,826 ) 14.04

Balance as of July 31, 2017 52,803,982
$ 7.23
6.5 $ 315,252
Vested and exercisable as of July 31, 2017 31,539,259
$ 4.67
5.8 $ 248,932



	Options Outstanding
	Number of Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life (In Years)	Aggregate Intrinsic Value (in thousands)
Balance as of January 31, 2018	46,359,949		$	7.75	6.3	$	574,224
Options exercised	(5,884,173	)	4.94
Options forfeited/canceled	(1,191,720	)	9.36
Balance as of July 31, 2018	39,284,056		$	8.12	5.9	$	531,664
Vested and exercisable as of July 31, 2018	26,675,832		$	6.00	5.4	$	417,651

The aggregate intrinsic value of options vested and exercisable as of July 31, ~~2017~~2018 is calculated based on the difference between the exercise price and the closing price of ~~$12.07~~$21.66 of our Class A common stock on July 31, ~~2017.~~2018.

As of July 31, ~~2017,~~2018, total unrecognized employee compensation cost related to outstanding options was ~~$98.4~~$49.6 million, which is expected to be recognized over a weighted-average period of approximately ~~2.5~~2.1 years.

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PURE STORAGE, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

Restricted Stock Units

A summary of the restricted stock unit activity under our 2015 Plan and related information is as follows:


	Number of Restricted Stock Units Outstanding		Weighted- Average Grant Date Fair Value		Aggregate Intrinsic Value (in thousands)		Number of Restricted Stock Units Outstanding		Weighted- Average Grant Date Fair Value		Aggregate Intrinsic Value (in thousands)
Unvested Balance as of January 31, 2017	8,783,024		$	13.06	$	99,863
Unvested balance as of January 31, 2018							17,682,646		$	12.60	$	356,117
Granted	9,807,355		10.59		—		7,751,921		20.79
Vested	(2,221,800	)	12.46		—		(4,117,282	)	12.50
Forfeited	(908,755	)	11.50		—		(858,561	)	14.18
Unvested Balance as of July 31, 2017	15,459,824		$	11.67	$	186,600
Converted							(1,142,838	)	11.86
Unvested balance as of July 31, 2018							19,315,886		$	15.87	$	418,359

As of July 31, ~~2017,~~2018, total unrecognized employee compensation cost related to unvested restricted stock units was ~~$161.5~~$273.3 million, which is expected to be recognized over a weighted-average period of approximately ~~2.6~~3.0 years.

~~During the six months ended July 31,~~In March 2017, we granted 750,000 performance stock units (net of 77,000 canceled ~~units during the three months ended July 31, 2017)~~units), at a target percentage of 100%, with both performance and service vesting conditions payable in common shares, from 0% to 150% of the target number granted, contingent upon the degree to which the performance condition is met. ~~Management determined it is probable that~~In March 2018, a total of 780,000 shares was earned based on the performance condition ~~will be satisfied~~achieved and ~~accordingly, we began recognizing stock-based compensation expense during~~these shares are subject to service conditions through the ~~three months ended April 30, 2017.~~vesting periods. Stock-based compensation expense for these performance stock units, recognized on an accelerated attribution method, was $1.2 million and $0.5 million for the three months ended July 31, 2017 and 2018, and $1.6 million and $1.5 million for the six months ended July 31, 2017 and 2018.

In August 2017, we granted 464,744 performance stock units, at a target percentage of 100%, with both performance and service vesting conditions payable in common shares, from 0% to 150% of the target number granted, contingent upon the degree to which the performance condition is met. The performance condition for these performance stock units was set in March 2018 and accordingly, established the grant date for these awards from an accounting perspective and for determining the grant date fair value.

Restricted Stock

In March 2018, we converted certain restricted stock units and performance stock units that were previously granted into 1,375,210 shares of restricted stock for corporate tax benefit purposes. Of the 1,375,210 shares of restricted stock, 697,116 shares are performance restricted stock and 678,094 shares are subject to service vesting conditions only. The conversion did not change the fair value or vesting conditions and therefore no modification accounting was required.

During the three and six months ended July 31, ~~2017~~2018, we issued 21,047 shares and 1,954,908 shares of performance restricted stock, at the maximum performance percentage of 180%, with performance vesting conditions payable in common shares, contingent upon the degree to which the performance condition is met. The shares may be earned from 0% to 180%. Actual shares earned may be lower than the aggregate maximum number dependent on the degree to which the performance condition is met, and cannot be higher than the aggregate maximum number. Any portion of shares that are not earned will be canceled.

All unvested restricted shares are subject to repurchase. Stock-based compensation expense for performance restricted stock is recognized on an accelerated attribution method. In the three and six months ended July 31, 2018, we recognized $6.7 million and $10.2 million in stock-based compensation expense relating to restricted stock. As of July 31, 2018, total unrecognized employee compensation cost related to unvested restricted stock was $31.7 million, which is expected to be recognized over a weighted-average period of approximately 2.6 years.

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PURE STORAGE, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

Stock-Based Compensation Expense

The following table summarizes the components of stock-based compensation expense recognized in the condensed consolidated statements of operations (in thousands):


	Three Months Ended July 31,				Six Months Ended July 31,				Three Months Ended July 31,				Six Months Ended July 31,
	2016		2017		2016		2017		2017		2018		2017		2018
Cost of revenue—product	$	181	$	358	$	287	$	755	$	358	$	720	$	755	$	1,328
Cost of revenue—support	1,712		2,245		2,804		4,019
Cost of revenue—support subscription									2,245		2,929		4,019		5,613
Research and development	13,976		17,971		25,634		33,559		17,971		22,232		33,559		43,322
Sales and marketing	8,732		11,439		16,251		22,065		11,439		17,269		22,065		31,209
General and administrative	3,295		4,825		5,918		8,659		4,825		10,504		8,659		16,137
Total stock-based compensation expense	$	27,896	$	36,838	$	50,894	$	69,057	$	36,838	$	53,654	$	69,057	$	97,609

The tax benefit related to stock-based compensation expense for all periods presented was not material.

Note 8.9. Net Loss per Share Attributable to Common Stockholders

Basic and diluted net loss per share attributable to common stockholders is presented in conformity with the two-class method required for participating securities.

Basic net loss per share attributable to common stockholders is computed by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase. Diluted net loss per share attributable to common stockholders is computed by giving effect to all potentially dilutive common stock equivalents including our outstanding ~~for the period. For purposes of this calculation,~~ stock options, ~~unvested restricted~~common stock ~~awards, repurchasable shares from~~related to unvested early exercised stock options, common stock related to unvested restricted stock units and ~~shares subject~~restricted stock awards, convertible senior notes to ~~ESPP withholding are considered~~the extent dilutive, and common stock issuable pursuant to bethe ESPP. For purposes of calculating basic and diluted net loss per share attributable to common shareholders, these potentially dilutive common stock equivalents ~~but~~ have been excluded from the calculation of diluted net loss per share attributable to common stockholders as their effect is anti-dilutive.

The rights, including the liquidation and dividend rights, of the holders of our Class A and Class B common stock are identical, except with respect to voting. As the liquidation and dividend rights are identical, the undistributed earnings are allocated on a proportionate basis and the resulting net loss per share attributed to common stockholders will, therefore, be the same for both Class A and Class B common stock on an individual or combined basis. ~~We did not present dilutive net loss per share on an if-converted basis because the impact was not dilutive.~~

The following table sets forth the computation of basic and diluted net loss per share attributable to common stockholders (in thousands, except per share data):


													Three Months Ended July 31,						Six Months Ended July 31,
	Three Months Ended July 31,						Six Months Ended July 31,						2017			2018			2017			2018
	2016			2017			2016			2017			(As Adjusted*)						(As Adjusted*)
Net loss	$	(59,550	)	$	(61,701	)	$	(123,338	)	$	(124,075	)	$	(58,411	)	$	(60,123	)	$	(115,570	)	$	(124,427	)
Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted	192,730			209,193			191,026			207,515			209,193			229,359			207,515			226,609
Net loss per share attributable to common stockholders, basic and diluted	$	(0.31	)	$	(0.29	)	$	(0.65	)	$	(0.60	)	$	(0.28	)	$	(0.26	)	$	(0.56	)	$	(0.55	)

* Prior period information has been adjusted to reflect the adoption impact of ASC 606, which we adopted on February 1, 2018.

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PURE STORAGE, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

The following weighted-average outstanding shares of common stock equivalents were excluded from the computation of diluted net loss per share attributable to common stockholders for the periods presented because including them would have been anti-dilutive (in thousands):


	Three Months Ended July 31,		Six Months Ended July 31,		Three Months Ended July 31,		Six Months Ended July 31,
	2016	2017	2016	2017	2017	2018	2017	2018
Stock options to purchase common stock	65,567	53,878	66,974	54,864	53,878	40,920	54,864	42,923
Restricted stock units	4,682	15,710	3,046	13,759	15,710	19,957	13,759	19,486
Early exercised stock options	2,446	279	2,555	333
Restricted stock and early exercised stock options					279	3,327	333	2,585
Employee stock purchase plan	953	898	953	898	898	1,154	898	1,127
Total	73,648	70,765	73,528	69,854	70,765	65,358	69,854	66,121

Note 9.10. Income Taxes

Our provision for income taxes was primarily due to taxes on international operations and state income taxes. The difference between the provision for income taxes that would be derived by applying the statutory rate to our loss before income taxes and the provision for income taxes recorded was primarily attributable to changes in our valuation allowance, non-deductible stock-based compensation expense and the tax rate differential between the U.S. and foreign countries.

As of July 31, ~~2017,~~2018, there were no material changes to either the nature or the amounts of the uncertain tax positions previously determined for the year ended January 31, 2018.

The Tax Act was signed into law on December 22, 2017. The new legislation decreases the U.S. corporate federal income tax rate from 35% to 21% effective January 1, 2018.

The Tax Act also includes a number of other provisions including the elimination of loss carrybacks and limitations on the use of future losses, limitations on the deductibility of executive compensation, limitation or modification on the deductibility of certain business expenses, the transition of U.S. international taxation from a worldwide tax system to a territorial system, and the introduction of a base erosion and anti-abuse tax. Under the Tax Act, the Global Intangible Low-Taxed Income (GILTI) provision taxes foreign income in excess of a deemed return on tangible assets of foreign corporations. Under U.S. GAAP, companies are allowed to make an accounting policy election to either (i) account for GILTI as a component of tax expense in the period in which a company is subject to the rules -- the period cost method, or (ii) account for GILTI in a company’s measurement of deferred taxes -- the deferred method. Because of the complexity of the new tax rules, we have not yet made an accounting policy election and are continuing to assess the impact of the Tax Act during the one-year measurement period from the Tax Act enactment date as allowed by Staff Accounting Bulletin No. 118 (SAB 118) issued in connection with the Tax Act. We expect to complete the accounting for the tax effects of the Tax Act in calendar year 2018.

Note ~~10.~~11. Segment Information

Our chief operating decision maker is a group ~~which is~~ comprised of our Chief Executive Officer, our Chief Financial Officer, and our President. This group reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. We have one business activity and there are no segment managers who are held accountable for operations or operating results. Accordingly, we have a single reportable segment.

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PURE STORAGE, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

Disaggregation of Revenue

The following table ~~sets forth~~depicts the disaggregation of revenue by geographic area based on the billing address of our customers and is consistent with how we evaluate our financial performance (in thousands):


									Three Months Ended July 31,				Six Months Ended July 31,
	Three Months Ended July 31,				Six Months Ended July 31,				2017		2018		2017		2018
	2016		2017		2016		2017		(As Adjusted*)				(As Adjusted*)
United States	$	122,103	$	165,466	$	233,330	$	311,960	$	165,620	$	229,760	$	312,125	$	414,678
Rest of the world	41,111		58,995		69,831		95,132		59,050		79,124		95,190		150,151
Total revenue	$	163,214	$	224,461	$	303,161	$	407,092	$	224,670	$	308,884	$	407,315	$	564,829

* Prior period information has been adjusted to reflect the adoption impact of ASC 606, which we adopted on February 1, 2018.

Long-Lived Assets by Geographic Area

Long-lived assets by geographic area are summarized as follows (in thousands):


	As of January 31, 2017		As of July 31, 2017		As of January 31, 2018		As of July 31, 2018
United States	$	78,692	$	78,207	$	85,430	$	97,250
Rest of the world	3,003		3,643		3,712		4,468
Total long-lived assets	$	81,695	$	81,850	$	89,142	$	101,718

Note ~~11.~~12. Subsequent ~~Events~~Event

In August 2018, we acquired StorReduce, Inc., a cloud-first software-defined storage solution, for $25 million in cash, subject to adjustments. We are currently in the process of completing the purchase price allocation for this acquisition, which will be included in our condensed consolidated financial statements for the quarter ending October 31, 2018.

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~~PURE STORAGE, INC.~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

In August 2017, we entered into a seven-year term operating lease for approximately 45,831 square feet of office space in Mountain View, California with total rent obligation of $31.6 million. In connection with the lease, we have issued a letter of credit of $2.6 million.

On August 22, 2017, Scott Dietzen resigned from his position as chief executive officer and was appointed as the chairman of our board of directors. On August 22, 2017, our board of directors appointed Charles H. Giancarlo, as the new chief executive officer and a member on our board of directors, effective immediately.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition, results of operations and cash flows should be read in conjunction with the (1) unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q, and (2) ~~the~~ audited consolidated financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended January 31, ~~2017.~~2018. This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue,” and similar expressions or variations. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified herein, and those discussed in the section titled “Risk Factors”, set forth in Part II, Item 1A of this Form 10-Q and in our other SEC filings. We disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. Our fiscal year end is January 31.

Overview

We ~~are building the data platform for the cloud era.~~empower innovators to build a better world with data. As the demand for data and the need for real-time analytics increase, we are focused on delivering software-defined all-flash solutions that are uniquely fast and cloud-capable, ~~for customers,~~ enabling customers to ~~put~~implement a data-centric architecture, maximize the value of data, ~~to work for their businesses.~~gain competitive advantage and keep pace with cutting edge developments. Our innovative data platform replaces storage systems designed for mechanical disk with all-flash systems optimized end-to-end for solid-state memory. Our cloud-based support and management platform simplifies storage administration, while real-time scanning enables us to find and fix issues before they have an impact. At the same time, our innovative business model replaces the traditional forklift upgrade cycle with an Evergreen Storage ~~model of~~subscription to hardware and software innovation, support and maintenance.

We were incorporated in October 2009 and are headquartered in Mountain View, California, with ~~a vision to define~~operations throughout the next generation of enterprise storage by pioneering the all-flash array category and innovating a customer-centric business model. We deliver our platform as our flash-optimized software and modular and scalable all-flash hardware inworld. Our primary offerings include: our FlashArray and FlashBlade products, inclusive of our Purity Operating Environment ~~(Purity OE)~~ (Purity OE) software, our Pure1 cloud-based management and support software ~~and~~powered by our META AI Engine, FlashStack, our joint converged infrastructure solution with ~~Cisco. This entire platform is powered by innovative software which can be managed from anywhere~~Cisco, and ~~supported by~~Artificial Intelligence Ready Infrastructure (AIRI), our ~~Evergreen Storage~~ ~~business model.~~joint converged AI Infrastructure offering with NVIDIA.

Since launching in May 2012, our customer base has grown to over ~~3,700~~5,150 customers, including over ~~25%~~35% of the Fortune 500. ~~Our customers include~~We target a variety of large and mid-size ~~organizations across a diverse set of industry verticals, including cloud-based software and~~cloud service providers, ~~consumer web, education, energy, financial services,~~commercial enterprises, federal, state, and local governments, schools and healthcare ~~manufacturing, media, retail, automobile,~~organizations globally, and ~~telecommunications.~~have deployed our platform at customers across multiple industry verticals. Our platform has been deployed in some of the largest and most sophisticated enterprises in the world as well as smaller organizations with limited IT expertise or budget, including hospitals, municipalities and school districts. Hundreds of our customers have invested north of a million dollars in leveraging our platform across their business-critical applications. We define a customer as an end user that purchases our products and services either from one of our channel partners or from us directly. No end user customer represented ~~over~~ 10% or more of revenue ~~for~~in the three and six months ended July 31, ~~2016~~2017 and ~~2017.~~2018.

We have ~~grown rapidly in recent periods,~~continued to experience substantial growth, with revenue for the three months ended July 31, ~~2016~~2017 and ~~2017~~2018 of ~~$163.2~~$224.7 million and ~~$224.5~~$308.9 million, representing year-over-year growth of ~~38%~~37%. For the six months ended July 31, ~~2016~~2017 and ~~2017,~~2018 our revenue was ~~$303.2~~$407.3 million and ~~$407.1~~$564.8 million, representing year-over-year ~~revenue~~ growth ~~rate~~ of ~~34%~~39%. ~~We expect that our~~Our revenue growth rate may continue to decline as our business scales, even if our revenue continues to grow in absolute terms. We have continued to make significant expenditures and investments, including in personnel-related costs, sales and marketing, infrastructure and operations, and we have incurred net losses in each period since our inception, including net losses of ~~$59.6~~$58.4 million and ~~$61.7~~$60.1 million for the three months ended July 31, ~~2016 and~~ 2017 and ~~$123.3~~2018, and $115.6 million and ~~$124.1~~$124.4 million for the six months ended July 31, ~~2016~~2017 and ~~2017.~~

2018.

Since our founding, we have invested heavily in growing our business. Our headcount increased from over ~~1,700~~2,100 employees as of January 31, ~~2017, and~~2018, to over ~~1,900~~2,450 employees as of July 31, ~~2017.~~2018. We intend to continue to invest in our research and development organization to extend our technology leadership, enhance the functionality of our

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existing products and introduce new products. By investing in research and development, we believe we will be well positioned to continue our rapid growth and take advantage of our large market opportunity.

We also intend to continue to invest in and expand our sales and marketing functions and channel programs, including expanding our global network of channel partners and carrying out associated marketing activities in key geographies. By investing in sales and technical training, demand generation and partner programs, we believe we can enable many of our partners to independently identify, qualify, sell and upgrade customers, with limited involvement from us.

In addition, we intend to expand and continue to invest in our international operations, which we believe will be an important factor in our continued growth. ~~However, our international operations are relatively new and we have limited experience operating in foreign jurisdictions.~~ Our revenue generated from customers outside of the United States was 23% ~~of our total revenue~~and 27% for ~~both the year ended January 31, 2017 and~~ the six months ended July 31, ~~2017.~~2017 and 2018.

As a result of our strategy to increase our investments in research and development, sales, marketing, support and international expansion, we expect to continue to incur operating losses and negative cash flows from operations in the near future and may require additional capital resources to execute strategic initiatives to grow our business.

Recent ~~Development~~Developments

~~On August 22, 2017, Scott Dietzen resigned from his position as chief executive officer~~

In March 2018, we announced Artificial Intelligence Ready Infrastructure (AIRI), the industry’s first AI-ready converged infrastructure solution, in partnership with NVIDIA.

In April 2018, we issued $575.0 million of 0.125% convertible senior notes due 2023 (the Notes), in a private placement and ~~was appointed as~~received proceeds of $562.1 million, after deducting the ~~chairman~~underwriters' discounts and commissions. The Notes are unsecured obligations that do not contain any financial covenants or restrictions on the payments of dividends, the incurrence of indebtedness, or the issuance or repurchase of securities by us or any of our ~~board~~subsidiaries. See further discussion in Note 5 in Part I, Item 1 of ~~directors. On August 22, 2017,~~this Quarterly Report on Form 10-Q.

In May 2018, we held Pure//Accelerate, our ~~board~~annual user conference, and introduced a number of ~~directors appointed Charles H. Giancarlo, as the~~ new ~~chief executive officer~~product and ~~a member on our board of directors, effective immediately.~~service offerings including:

~~In April 2017, we launched~~ New FlashArray//X, delivering 100% NVMe-capable storage across our ~~first all-NVMe, enterprise-class all-flash array, on directed basis.~~ ~~FlashArray//X~~FlashArray product line, with the ability to unite SAN and DAS into a single, consolidated, shared, and more efficient data-center architecture.

AIRI Mini, enabling customers to gain competitive advantage through AI at a price point accessible for many organizations.

Evergreen Storage Service (ES2), a cloud-like, storage consumption offering that enables customers to purchase on-premises or offsite-hosted private storage on a pay-per-month-per-terabyte basis, after a baseline commitment.

In August 2018, we acquired StorReduce, Inc., a cloud-first software-defined storage solution. The acquisition is ~~targeted~~expected to ~~be generally available~~help us offer a broader portfolio of data solutions to customers on premise and in the ~~second half~~public cloud.

Table of ~~the fiscal year ending on January 31, 2018.~~Contents

Our Business Model

We sell our data platform predominantly through a high touch, channel-fulfilled model. Our sales force works collaboratively with our global network of distribution and channel partners, which provides us broad sales reach while maintaining direct customer engagement and is responsible for large account penetration, global account coordination, and overall market development. Our channel partners help market and sell our products, typically with assistance from our sales force. This joint sales approach provides us with the benefit of direct relationships with substantially all of our customers and expands our reach through the relationships of our channel partners.

~~Our channel partners typically place orders with us upon receiving an order from~~ In certain geographies we sell through a ~~customer~~two-tier distribution model. We also sell to service providers that deploy our products and ~~do not stock inventory. Our sales organization is supported by systems engineers with deep technical expertise and responsibility for pre-sales technical support and engineering for our~~offer cloud-based storage services to their customers. ~~We support our channel partners through product education and sales and support training.~~ We intend to continue to invest in the channel to add more partners and to expand our reach to customers through our channel partners’ relationships. NoOne channel partner represented ~~over~~ 10% or more of revenue for the ~~six~~ three months ended July 31, ~~July 31, 2016. O~~ne2018. No channel partner or customer represented ~~over~~ 10% or more of revenue for the six months ended July 31, ~~2017.~~2018.

Our business model enables customers to broadly adopt flash for a wide variety of workloads in their data ~~center,~~centers, with some of our most innovative customers adopting all-flash data centers. We do not charge separately for software, meaning that when a customer buys a FlashArray, or FlashBlade, FlashStack, or AIRI,all Pure Storage array software functionality is included in the base purchase price, and the customer is entitled to updates and new features as long as the customer maintains an active ~~maintenance and~~ support subscription agreement. Product revenue is recognized at the time title and risk of loss have transferred. Support revenue is recognized ratably over the term of the related maintenance and support agreement, generally ranging from 1 to 6 years. By keeping our business model simple and efficient, we allow customers to buy more products and expand their footprint more easily while allowing us to reduce our sales and marketing costs.

To deliver on the next level of operational simplicity and support excellence, we designed Pure1, our integrated cloud-based management and ~~support.~~support platform. Pure1 enables our customers, support staff and partners to collaborate to achieve the best customer experience and is included with an active ~~maintenance and~~ support subscription agreement. In addition,

our Evergreen Storage Service program provides our customers who continually maintain active and eligible maintenance and support for three years with an included controller refresh with each additional three year ~~maintenance and~~ support subscription renewal. In this way, our customers improve and extend the service life of their arrays, we reduce our cost of support by keeping the array modern and we encourage capacity expansion. In accordance with ~~multiple-element arrangement~~revenue recognition accounting guidance, we recognize the allocated revenue of the controllers and expense the related cost in the period in which we ship these controllers.

The combination of our high-performance, all-flash products, our exceptional support and our innovative business model has had a substantial impact on customer success and loyalty and ~~are~~is a strong ~~drivers~~driver of both initial purchase and additional purchases of our products. Of all the customers that have been with us for at least 12 months as of July 31, ~~2017,~~2018, our top 25 customers on average spent approximately $12 on new product purchases for every $1 of initial product purchase, in the first 18 months following their initial purchase.

Trends in Our Business and Industry

Demand for Data in the ~~Cloud Era~~Multi-Cloud Environment

In today’s digital economy, we believe that data is key. Data is the strategic core that enables competitiveness and differentiation for businesses in the ~~cloud era~~multi-cloud environment -- collecting vast amounts of data, analyzing it rapidly, discovering new insights, and ultimately delivering new innovations and experiences otherwise impossible without data. We continue to make significant investments in our business to ~~develop and deliver a data platform~~enable data-centric architecture to support today and tomorrow’s volume and velocity of data and to ensure the performance and reliability required for new data-driven applications, while substantially reducing costs and complexity for our customers. ~~Our ability to deliver new and enhanced products will be~~Data-centric architecture supports a ~~key factor in capturing mindshare with~~wide range of classic business applications as well as modern webscale-architecture applications so that our ~~target~~ customers ~~to become~~can both manage their ~~data platform of choice.~~existing applications more efficiently while they modernize their applications.

Adoption of All-Flash Storage Systems

Organizations are increasingly replacing traditional disk-based systems with all-flash storage systems, including those based on NVMe technologies, due to their higher performance, reliability and efficiency. Flash ~~is expected~~continues to penetrate the data center at a rapid rate, and our success depends on the adoption of all-flash storage systems. To

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the extent more organizations recognize the benefits of all-flash storage and the adoption of all-flash storage increases, our target customer base will expand, and demand for all-flash storage will rise.

Adding New Customers and Expanding Sales to Our Existing Customer Base

~~We believe that all-flash storage market is still in the early stages of adoption.~~ In order to capture long-term strategic opportunities, we intend to continue to target new customers, including large enterprises, service providers and government organizations, by continuing to invest in our field sales force and extending our relationships with key channel partners. We also expect that a substantial portion of our future sales will continue to be sales to existing customers, including expansion of existing arrays.

Seasonality in our Business Operations

Consistent with the seasonality of enterprise IT as a whole, we generally experience the lowest demand for our products and services in the first quarter of our fiscal year and the greatest demand for our products and services in the last quarter of our fiscal year. Furthermore, we typically focus investments into our sales organization, along with significant product launches, in the first half of our fiscal year. As a result, we expect that our business and results of operations will fluctuate from quarter to quarter, reflecting seasonally softer revenue and operating margin in the first half of our fiscal year, followed by a stronger second half, the relative impact of which will grow as we operate at a larger scale.

Components of Results of Operations

Revenue

We derive revenue from the sale of our ~~storage~~FlashArray and FlashBlade products and support subscription services. Provided that all other revenue recognition criteria have been met, we typically recognize product revenue upon ~~shipment, as title and risk~~transfer of ~~loss are transferred~~control to our ~~channel partners at that time.~~customers. Products are typically shipped directly by us to customers, and our

channel partners do not stock our inventory. We expect our product revenue may vary from period to period based on, among other things, the timing and size of orders and delivery of products and the impact of significant transactions.

We provide our support subscription services pursuant to ~~maintenance and~~ support subscription agreements, which involve customer support, hardware maintenance and software upgrades for a period of generally 1one to 6six years. We recognize revenue from ~~maintenance and~~ support subscription agreements ratably over the contractual service period. We expect our support subscription revenue to increase as we add new customers and our existing customers renew ~~maintenance and~~ support subscription agreements.

Cost of Revenue

Cost of product revenue primarily consists of costs paid to our third-party contract manufacturers, which includes the costs of our components, and personnel costs associated with our manufacturing operations. Personnel costs consist of salaries, bonuses and stock-based compensation expense. Our cost of product revenue also includes ~~freight,~~ allocated overhead costs, inventory write-offs, and ~~inventory write-offs.~~freight. Allocated overhead costs consist of certain employee benefits and ~~facilities related~~facilities-related costs. We expect our cost of product revenue to increase in absolute dollars, as our product revenue increases.

Cost of support subscription revenue primarily includes personnel costs associated with our customer support organization and parts replacement costs, as well as allocated overhead ~~costs. Cost of support revenue also includes parts replacement~~ costs. We expect our cost of support subscription revenue to increase in absolute dollars, as our support subscription revenue increases.

Operating Expenses

Our operating expenses consist of research and development, sales and marketing and general and administrative expenses. Salaries and personnel-related costs, including stock-based compensation expense, are the most significant component of each category of operating expenses. Operating expenses also include allocated overhead costs for ~~certain~~ employee benefits and ~~facilities related~~facilities-related costs.

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Research and ~~Development~~Development.. Research and development expense consists primarily of employee compensation and related expenses, prototype expenses, depreciation associated with assets acquired for research and development, third-party engineering and contractor support costs, as well as allocated overhead. We expect our research and development expense to increase in absolute dollars and toit may decrease as a percentage of revenue, as we continue to invest in new and existing products and build upon our technology leadership.

Sales and ~~Marketing~~Marketing.. Sales and marketing expense consists primarily of employee compensation and related expenses, sales commissions, marketing programs, travel and entertainment expenses as well as allocated overhead. Marketing programs consist of advertising, events, corporate communications and brand-building activities. We expect our sales and marketing expense to increase in absolute dollars and toit may decrease as a percentage of revenue, as we expand our sales force and increase our marketing resources, expand into new markets and further develop our channel program.

General and ~~Administrative~~Administrative.. General and administrative expense consists primarily of compensation and related expenses for administrative functions including finance, legal, human resources, IT and fees for third-party professional services, as well as allocated overhead. We expect our general and administrative expense to increase in absolute dollars and toit may decrease as a percentage of revenue, as we continue to invest in the growth of our business.

Other Income (Expense), Net

Other income (expense), net consists primarily of interest income earned on cash, cash equivalents and marketable securities, interest expense from the Notes and gains and losses from foreign currency transactions.

Provision for Income Taxes

Provision for income taxes consists primarily of income taxes in certain foreign jurisdictions in which we conduct business and state income taxes in the United States. We have recorded no U.S. federal income tax and provided a full valuation allowance for U.S. deferred tax assets, which includes net operating loss, carryforwards and tax credits related primarily to research and development. We expect to maintain this full valuation allowance for the foreseeable future as it is more likely than not that the deferred tax assets will not be realized based on our history of losses.

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Results of Operations

The following tables set forth our results of operations for the periods presented in dollars and as a percentage of total revenue ~~(in thousands)~~(dollars in thousands, unaudited):


	Three Months Ended July 31,						Six Months Ended July 31,						Three Months Ended July 31,						Six Months Ended July 31,
	2016			2017			2016			2017			2017			2018			2017			2018
	(unaudited)												(As Adjusted*)						(As Adjusted*)
Consolidated Statements of Operations Data:
Revenue:
Product	$	130,920		$	175,013		$	242,658		$	313,438		$	179,669		$	241,137		$	322,519		$	436,586
Support	32,294			49,448			60,503			93,654
Support subscription													45,001			67,747			84,796			128,243
Total revenue	163,214			224,461			303,161			407,092			224,670			308,884			407,315			564,829
Cost of revenue:
Product⁽¹⁾	42,847			57,252			76,893			103,897			57,252			78,262			103,897			144,682
Support⁽¹⁾	14,000			19,199			26,934			36,102
Support subscription⁽¹⁾													19,199			24,457			36,102			47,667
Total cost of revenue	56,847			76,451			103,827			139,999			76,451			102,719			139,999			192,349
Gross profit	106,367			148,010			199,334			267,093			148,219			206,165			267,316			372,480
Operating expenses:
Research and development⁽¹⁾	58,635			69,361			111,573			134,789			69,361			84,031			134,789			162,523
Sales and marketing ⁽¹⁾	87,583			120,633			170,681			217,597			117,552			143,749			209,315			266,116
General and administrative ⁽¹⁾	19,630			22,162			41,211			42,258			22,162			33,591			42,258			60,921
Total operating expenses	165,848			212,156			323,465			394,644			209,075			261,371			386,362			489,560
Loss from operations	(59,481		)	(64,146		)	(124,131		)	(127,551		)	(60,856		)	(55,206		)	(119,046		)	(117,080		)
Other income, net	37			3,266			1,319			5,261
Other income (expense), net													3,266			(4,032		)	5,261			(5,031		)
Loss before provision for income taxes	(59,444		)	(60,880		)	(122,812		)	(122,290		)	(57,590		)	(59,238		)	(113,785		)	(122,111		)
Provision for income taxes	106			821			526			1,785			821			885			1,785			2,316
Net loss	$	(59,550	)	$	(61,701	)	$	(123,338	)	$	(124,075	)	$	(58,411	)	$	(60,123	)	$	(115,570	)	$	(124,427	)


⁽¹⁾	Includes stock-based compensation expense as follows:


	Three Months Ended July 31,				Six Months Ended July 31,				Three Months Ended July 31,				Six Months Ended July 31,
	2016		2017		2016		2017		2017		2018		2017		2018
	(unaudited)
Cost of revenue—product	$	181	$	358	$	287	$	755	$	358	$	720	$	755	$	1,328
Cost of revenue—support	1,712		2,245		2,804		4,019
Cost of revenue—support subscription									2,245		2,929		4,019		5,613
Research and development	13,976		17,971		25,634		33,559		17,971		22,232		33,559		43,322
Sales and marketing	8,732		11,439		16,251		22,065		11,439		17,269		22,065		31,209
General and administrative	3,295		4,825		5,918		8,659		4,825		10,504		8,659		16,137
Total stock-based compensation expense	$	27,896	$	36,838	$	50,894	$	69,057	$	36,838	$	53,654	$	69,057	$	97,609

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Three Months Ended
July 31, Six Months Ended
July 31,
2016 2017 2016 2017
(unaudited)
Condensed Consolidated Statements of Operations Data:

Revenue:

Product 80 % 78 % 80 % 77 %
Support 20
22
20
23
Total revenue 100
100
100
100
Cost of revenue:

Product 26
25
25
25
Support 9
9
9
9
Total cost of revenue 35
34
34
34
Gross profit 65
66
66
66
Operating expenses:

Research and development 36
31
37
33
Sales and marketing 54
54
56
54
General and administrative 12
10
14
10
Total operating expenses 102
95
107
97
Loss from operations (37 ) (29 ) (41 ) (31 )
Other income (expense), net —
2
—
1
Loss before provision for income taxes (37 ) (27 ) (41 ) (30 )
Provision for income taxes —
—
—
—
Net loss (37 )% (27 )% (41 )% (30 )%



	Three Months Ended July 31,				Six Months Ended July 31,
	2017		2018		2017		2018
	(As Adjusted*)				(As Adjusted*)
Condensed Consolidated Statements of Operations Data:
Revenue:
Product	80.0	%	78.1	%	79.2	%	77.3	%
Support subscription	20.0		21.9		20.8		22.7
Total revenue	100.0		100.0		100.0		100.0
Cost of revenue:
Product	25.5		25.4		25.5		25.6
Support subscription	8.5		7.9		8.9		8.5
Total cost of revenue	34.0		33.3		34.4		34.1
Gross profit	66.0		66.7		65.6		65.9
Operating expenses:
Research and development	30.9		27.2		33.1		28.8
Sales and marketing	52.3		46.5		51.4		47.1
General and administrative	9.9		10.9		10.3		10.7
Total operating expenses	93.1		84.6		94.8		86.6
Loss from operations	(27.1	)	(17.9	)	(29.2	)	(20.7	)
Other income (expense), net	1.5		(1.3	)	1.3		(0.9	)
Loss before provision for income taxes	(25.6	)	(19.2	)	(27.9	)	(21.6	)
Provision for income taxes	0.4		0.3		0.5		0.4
Net loss	(26.0	)%	(19.5	)%	(28.4	)%	(22.0	)%

Revenue


	Three Months Ended July 31,				Change				Six Months Ended July 31,				Change				Three Months Ended July 31,				Change				Six Months Ended July 31,				Change
	2016		2017		$		%		2016		2017		$		%		2017		2018		$		%		2017		2018		$		%
	(dollars in thousands, unaudited)
(dollars in thousands, unaudited)																	(As Adjusted*)								(As Adjusted*)
Product revenue	$	130,920	$	175,013	$	44,093	34	%	$	242,658	$	313,438	$	70,780	29	%	$	179,669	$	241,137	$	61,468	34	%	$	322,519	$	436,586	$	114,067	35	%
Support revenue	32,294		49,448		17,154		53	%	60,503		93,654		33,151		55	%
Support subscription revenue																	45,001		67,747		22,746		51	%	84,796		128,243		43,447		51	%
Total revenue	$	163,214	$	224,461	$	61,247	38	%	$	303,161	$	407,092	$	103,931	34	%	$	224,670	$	308,884	$	84,214	37	%	$	407,315	$	564,829	$	157,514	39	%

* Prior period information has been adjusted to reflect the adoption impact of ASC 606, which we adopted on February 1, 2018.

Total revenue increased by ~~$61.2~~$84.2 million, or ~~38%~~37%, during the three months ended July 31, ~~2017~~2018 compared to the three months ended July 31, ~~2016~~2017 and increased by ~~$103.9~~$157.5 million or ~~34%~~39%, during the six months ended July 31, ~~2017~~2018 compared to the six months ended July 31, ~~2016.~~2017. The increase in product revenue was primarily driven by repeat purchases from existing customers and a growing number of new customers. The number of customers grew from over ~~2,300 as of July 31, 2016 to over~~ 3,700 as of July 31, ~~2017.~~2017 to over 5,150 as of July 31, 2018. The increase in support subscription revenue was primarily driven ~~primarily~~ by an increase in ~~maintenance and~~ support subscription agreements sold with increased product sales, as well as increased recognition of deferred support ~~revenue.~~subscription revenue contracts.

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Cost of Revenue and Gross Margin


	Three Months Ended July 31,						Change				Six Months Ended July 31,						Change				Three Months Ended July 31,						Change				Six Months Ended July 31,						Change
	2016			2017			$		%		2016			2017			$		%		2017			2018			$		%		2017			2018			$		%
	(dollars in thousands, unaudited)
(dollars in thousands, unaudited)																					(As Adjusted*)										(As Adjusted*)
Product cost of revenue	$	42,847		$	57,252		$	14,405	34	%	$	76,893		$	103,897		$	27,004	35	%	$	57,252		$	78,262		$	21,010	37	%	$	103,897		$	144,682		$	40,785	39	%
Support cost of revenue	14,000			19,199			5,199		37	%	26,934			36,102			9,168		34	%
Support subscription cost of revenue																					19,199			24,457			5,258		27	%	36,102			47,667			11,565		32	%
Total cost of revenue	$	56,847		$	76,451		$	19,604	34	%	$	103,827		$	139,999		$	36,172	35	%	$	76,451		$	102,719		$	26,268	34	%	$	139,999		$	192,349		$	52,350	37	%
Product gross margin	67		%	67		%					68		%	67		%					68.1		%	67.5		%					67.8		%	66.9		%
Support gross margin	57		%	61		%					55		%	61		%
Support subscription gross margin																					57.3		%	63.9		%					57.4		%	62.8		%
Total gross margin	65		%	66		%					66		%	66		%					66.0		%	66.7		%					65.6		%	65.9		%

____________________________

* Prior period information has been adjusted to reflect the adoption impact of ASC 606, which we adopted on February 1, 2018.

Cost of revenue increased by ~~$19.6~~$26.3 million, or 34%, during the three months ended July 31, ~~2017~~2018 compared to the three months ended July 31, ~~2016~~2017 and increased by ~~$36.2~~$52.4 million, or ~~35%~~37%, during the six months ended July 31, ~~2017~~2018 compared to the six months ended July 31, ~~2016.~~2017. The ~~increase~~increases in product cost of revenue ~~was~~for these periods were primarily driven by increased product sales and, to a lesser extent, by the increased costs in our manufacturing operations, including increased personnel costs associated with increased headcount. The ~~increase~~increases in support subscription cost of revenue ~~was~~during these periods were primarily attributable to costs in our customer support organization as we continue to ~~expand.~~expand globally. These costs are primarily driven by increased personnel costs associated with increased headcount and an increase in parts replacement associated with a higher number of ~~maintenance and~~ support subscription agreements. Total headcount in these functions increased ~~50%~~41% from July 31, ~~2016~~2017 to July 31, ~~2017.~~2018.

Total gross margin increased from ~~65% during the three months ended July 31, 2016 to 66% during~~66.0% in the three months ended July 31, 2017 ~~and remained constant at 66% during~~to 66.7% in the ~~six~~three months ended July 31, ~~2016~~2018 and ~~2017. Product gross margin decreased 1 point~~increased from ~~the six months ended July 31, 2016 to~~65.6% in the six months ended July 31, 2017 ~~primarily driven by both pricing and product mix dynamics including~~to 65.9% in the ~~introduction of our~~ ~~FlashBlade~~ ~~products. Support gross margin increased 4 and 6 points from the three and~~ six months ended July 31, ~~2016 to~~2018. Product gross margin decreased from 68.1% in the three months ended July 31, 2017 to 67.5% in the three months ended July 31, 2018 and decreased from 67.8% in the six months ended July 31, 2017 to 66.9% in the six months ended July 31, 2018, primarily ~~attributed~~driven by pricing and product mix dynamics across our product portfolio, including increased sales from our FlashBlade products which generally have a modestly lower gross margin compared to our FlashArray products. Support subscription gross margin increased ~~recognition of deferred support revenue resulting~~ from 57.3% in the three months ended July 31, 2017 to 63.9% in the three months ended July 31, 2018 and increased from 57.4% in the six months ended July 31, 2017 to 62.8% in the six months ended July 31, 2018, primarily attributable to a continued increase in amortization of ongoing support subscription contracts as a result of our ~~customer~~growing installed base, ~~as well as~~our continued efforts at driving operational efficiencies in our support ~~organization.~~organization and timing of renewal bookings during the period.

Operating Expenses

Research and Development

Three Months Ended July 31, Change Six Months Ended
July 31, Change
2016 2017 $ % 2016 2017 $ %
(dollars in thousands, unaudited)
Research and development $ 58,635
$ 69,361
$ 10,726
18 % $ 111,573
$ 134,789
$ 23,216
21 %



	Three Months Ended July 31,				Change				Six Months Ended July 31,				Change
	2017		2018		$		%		2017		2018		$		%
(dollars in thousands, unaudited)
Research and development	$	69,361	$	84,031	$	14,670	21	%	$	134,789	$	162,523	$	27,734	21	%

Table of Contents

Research and development expense increased by ~~$10.7~~$14.7 million, or ~~18%~~21%, during the three months ended July 31, ~~2017~~2018 compared to the three months ended July 31, ~~2016,~~2017, as we continued to develop new and enhanced product ~~offerings including our~~ ~~FlashBlade~~ ~~and~~ ~~FlashArray//X~~ ~~products.~~offerings. The increase was primarily driven by ana $12.7 million increase ~~of $8.3 million~~ in ~~salary~~employee compensation and related costs, including ana $4.3 million increase ~~of $4.0 million~~ in stock-based compensation expense, as headcount increased ~~by 7%~~22% from July 31, ~~2016~~2017 to July 31, ~~2017.~~ 2018. The remainder of the increase was primarily attributable to ~~$1.7~~a $0.9 million increase in office and facilities related expenses, a $0.6 million increase in depreciation ~~expense~~ on our test ~~equipment.~~equipment and a $0.5 million increase in outside services expense.

Research and development expense increased by ~~$23.2~~$27.7 million, or 21%, during the six months ended July 31, ~~2017~~2018 compared to the six months ended July 31, ~~2016,~~2017, as we continued to develop new and enhanced product ~~offerings including our~~ ~~FlashBlade~~ ~~and~~ ~~FlashArray//X~~ ~~products.~~offerings. The increase was primarily driven by ana $25.0 million increase ~~of $19.2 million~~ in ~~salary~~employee compensation and related costs, including ana $9.8 million increase ~~of $7.9 million~~ in stock-based compensation expense, as headcount increased ~~by 7%~~22% from July 31, ~~2016~~2017 to July 31, ~~2017.~~2018. The remainder of the increase was primarily attributable to ~~$4.2~~a $1.5 million increase in office and facilities related expenses and a $1.1 million increase in depreciation ~~expense~~ on our test equipment.

Sales and Marketing

Three Months Ended July 31, Change Six Months Ended
July 31, Change
2016 2017 $ % 2016 2017 $ %
(dollars in thousands, unaudited)
Sales and marketing $ 87,583
$ 120,633
$ 33,050
38 % $ 170,681
$ 217,597
$ 46,916
27 %



	Three Months Ended July 31,				Change				Six Months Ended July 31,				Change
	2017		2018		$		%		2017		2018		$		%
(dollars in thousands, unaudited)	(As Adjusted*)								(As Adjusted*)
Sales and marketing	$	117,552	$	143,749	$	26,197	22	%	$	209,315	$	266,116	$	56,801	27	%

* Prior period information has been adjusted to reflect the adoption impact of ASC 606, which we adopted on February 1, 2018.

Sales and marketing expense increased by ~~$33.1~~$26.2 million, or ~~38%~~22%, during the three months ended July 31, ~~2017~~2018 compared to the three months ended July 31, ~~2016,~~2017, as we grew our sales force and expanded our geographic footprint. The increase was primarily driven by ana $22.1 million increase ~~of $19.2 million~~ in ~~salary~~employee compensation and related costs, including ana $3.0 million increase ~~of $5.9~~in commissions and a $5.8 million ~~in sales commission expense and an~~ increase ~~of $2.7 million~~ in stock-based compensation expense, as headcount increased ~~by 20%~~27% from July 31, ~~2016~~2017 to July 31, ~~2017.~~2018. The remainder of the increase was primarily attributable to ~~$8.1 million in sales conferences, marketing and brand awareness program costs, including expenses related to our annual Pure //Accelerate conference in June 2017,~~a $2.0 million increase in ~~allocated overhead costs, $1.8~~outside services to support our growth and international expansion, a $1.4 million increase in office and facilities-related expenses and a $0.7 million increase in travel and related ~~costs and $1.4 million in outside services~~ costs.

Sales and marketing expense increased by ~~$46.9~~$56.8 million, or 27%, during the six months ended July 31, ~~2017~~2018 compared to the six months ended July 31, ~~2016,~~2017, as we grew our sales force and expanded our geographic footprint. The increase was primarily driven by ana $46.5 million increase ~~of $33.3 million~~ in ~~salary~~employee compensation and related costs, including ana $7.9 million increase ~~of $8.7~~in commissions and a $9.1 million ~~in sales commission expense and an~~ increase ~~of $5.8 million~~ in stock-based compensation expense, as headcount increased ~~by 20%~~27% from July 31, ~~2016~~2017 to July 31, ~~2017.~~ 2018. The remainder of the increase was primarily attributable to ~~$4.5~~a $3.8 million increase in ~~sales conference,~~outside services to support our growth and international expansion, a $2.6 million increase in office and facilities-related expenses, a $2.5 million increase in travel and related costs, and a $1.4 million increase in marketing events and brand awareness program costs, including expenses related to our annual Pure //Accelerate conference in June 2017, $3.6 million in allocated overhead costs, $3.0 million in outside services costs, and $1.8 million in travel and related costs.

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General and Administrative

Three Months Ended July 31, Change Six Months Ended
July 31, Change
2016 2017 $ % 2016 2017 $ %
(dollars in thousands, unaudited)
General and administrative $ 19,630
$ 22,162
$ 2,532
13 % $ 41,211
$ 42,258
$ 1,047
3 %



	Three Months Ended July 31,				Change				Six Months Ended July 31,				Change
	2017		2018		$		%		2017		2018		$		%
(dollars in thousands, unaudited)
General and administrative	$	22,162	$	33,591	$	11,429	52	%	$	42,258	$	60,921	$	18,663	44	%

General and administrative expense increased by ~~$2.5~~$11.4 million, or ~~13%~~52%, during the three months ended July 31, ~~2017~~2018 compared to the three months ended July 31, ~~2016.~~2017. The increase was primarily due to a ~~$3.4~~$9.0 million increase in ~~salary~~employee compensation and related costs, including ana $5.7 million increase ~~of $1.5 million~~ in stock-based compensation expense, as we increased our general and administrative headcount by ~~30%~~31% from July 31, ~~2016~~2017 to July 31, ~~2017, which was partially offset by~~2018, a ~~$1.1~~$1.7 million ~~decrease~~increase in ~~legal~~outside services costs and ~~other fees.~~a $0.9 million increase in office and facilities-related expenses.

General and administrative expense increased by ~~$1.0~~$18.7 million, or 3%44%, during the six months ended July 31, ~~2017~~2018 compared to the six months ended July 31, ~~2016.~~2017. The increase was primarily due to a ~~$6.5~~$13.8 million increase in ~~salary~~employee compensation and related costs, including ana $7.5 million increase ~~of $2.7 million~~ in stock-based compensation expense, as we increased our general and administrative headcount by ~~30%~~31% from July 31, ~~2016~~2017 to July 31, ~~2017,~~2018, a ~~$2.6~~$3.2 million increase in ~~consulting, accounting and audit fees,~~outside services costs and a ~~$1.0~~$1.8 million increase in office and ~~related costs, partially offset by a $8.4 million decrease in legal and other fees.~~

facilities-related expenses.

Other Income (Expense), Net

Three Months Ended July 31, Change Six Months Ended
July 31, Change
2016 2017 2016 2017
(dollars in thousands, unaudited)
Other income, net $ 37
$ 3,266
$ 3,229
$ 1,319
$ 5,261
$ 3,942



	Three Months Ended July 31,					Change					Six Months Ended July 31,					Change
	2017		2018			$			%		2017		2018			$			%
(dollars in thousands, unaudited)
Other income (expense), net	$	3,266	$	(4,032	)	$	(7,298	)	223	%	$	5,261	$	(5,031	)	$	(10,292	)	196	%

~~The increases in other~~Other income (expense), net decreased during the three and six months ended July 31, ~~2017~~2018 compared to the three and six months ended July 31, ~~2016 were driven~~2017 primarily due to interest expense associated with the amortization of debt discount and debt issuance costs in connection with the Notes issued in April 2018, which was $6.6 million and $8.1 million in the three and six months ended July 31, 2018, and higher net foreign exchange losses in the three and six months ended July 31, 2018 compared to the three and six months ended July 31, 2017 as U.S. dollars strengthened relative to certain foreign currencies, partially offset by ~~increases in net gains from foreign currency transactions and increases~~an increase in interest income ~~earned on~~of $3.5 million and $4.1 million in the three and six months ended July 31, 2018 compared to the three and six months ended July 31, 2017 as our cash, cash equivalents and marketable ~~securities.~~securities increased.

Provision for Income Taxes

Three Months Ended July 31, Change Six Months Ended
July 31, Change
2016 2017 2016 2017
(dollars in thousands, unaudited)
Provision for income taxes $ 106
$ 821
$ 715
$ 526
$ 1,785
$ 1,259



	Three Months Ended July 31,				Change				Six Months Ended July 31,				Change
	2017		2018		$		%		2017		2018		$		%
(dollars in thousands, unaudited)
Provision for income taxes	$	821	$	885	$	64	8	%	$	1,785	$	2,316	$	531	30	%

The increase in provision for income taxes during the three months ended July 31, 2018 compared to the three months ended July 31, 2017 was primarily attributable to higher state income taxes. The increase in provision for income taxes during the six months ended July 31, ~~2017~~2018 compared to the six months ended July 31, ~~2016~~2017 was driven by ~~less excess tax benefit related~~foreign income taxes due to ~~our employee stock-based activities.~~higher foreign profits.

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Liquidity and Capital Resources

As of July 31, ~~2017,~~2018, we had cash, cash equivalents and marketable securities of ~~$523.0~~$1,106.7 million. Our cash and cash equivalents primarily consist of bank deposits and money market accounts. Our marketable securities consist of highly rated debt instruments of the U.S. government and its agencies, debt instruments of highly rated corporations, ~~and~~ debt instruments issued by foreign ~~governments.~~governments, and asset-backed securities. We have generated significant operating losses ~~and negative cash flows from operations~~ as reflected in our accumulated deficit of ~~$926.6~~$1,028.0 million. We ~~expect to~~may continue to incur operating losses and negative cash flows from operations in the near future and require additional capital resources to execute strategic initiatives to grow our business.

We believe our existing cash, cash equivalents and marketable securities will be sufficient to fund our operating and capital needs for at least the next 12 months. Our future capital requirements will depend on many factors including our growth rate, the timing and extent of spending to support development efforts, the expansion of sales and marketing and international operation activities, the timing of new product introductions, ~~and~~ the continuing market acceptance of our products and ~~services.~~services, and the timing and settlement election of the Notes. We may ~~in the future~~continue to enter into arrangements to acquire or invest in complementary businesses, services and technologies, including intellectual property rights. For example, we acquired StorReduce, Inc., a cloud-first software-defined solution, in August 2018. We may be required 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 would be adversely affected.

In April 2018, we issued $575.0 million of 0.125% convertible senior notes (the Notes) due 2023, in a private placement and received proceeds of $562.1 million, after deducting the underwriters' discounts and commissions. The Notes are unsecured obligations that do not contain any financial covenants or restrictions on the payments of dividends, the incurrence of indebtedness, or the issuance or repurchase of securities by us or any of our subsidiaries. The Notes mature on April 15, 2023 unless repurchased or redeemed by us or converted in accordance with their terms prior to the maturity date. The Notes are convertible for up to 21,884,155 shares of our common stock at an initial conversion rate of approximately 38.0594 shares of common stock per $1,000 principal amount, which is equal to an initial conversion price of approximately $26.27 per share of common stock, subject to adjustment.

Holders may surrender their Notes for conversion at their option at any time prior to the close of business on the business day immediately preceding October 15, 2022, only under specific circumstances. On or after October 15, 2022 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their Notes at any time regardless of the foregoing conditions. Upon conversion, holders will receive cash, shares of our Class A common stock, or a combination of cash and shares of our Class A common stock, at our election. We intend to settle the principal of the Notes in cash. See further discussion in Note 5 in Part I, Item 1 of this report.

As of January 31, ~~2017~~2018 and July 31, ~~2017,~~2018, we had letters of credit in the aggregate amount of ~~$7.7~~$9.6 million and $10.8 million, in connection with our ~~facility~~ leases. The letters of credit are collateralized by restricted cash ~~in the same amount~~ and mature aton various dates through ~~June 2024.~~August 2029.

The following table summarizes our cash flows for the periods presented (in thousands, unaudited):


	Six Months Ended July 31,						Six Months Ended July 31,
	2016			2017			2017			2018
Net cash used in operating activities	$	(4,557	)	$	(14,492	)
Net cash provided by (used in) operating activities							$	(14,492	)	$	27,080
Net cash used in investing activities	$	(415,815	)	$	(18,248	)	$	(18,248	)	$	(425,862	)
Net cash provided by financing activities	$	21,448		$	20,959		$	20,959		$	526,197

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Operating Activities

Net cash provided by operating activities during the six months ended July 31, 2018 was $27.1 million, which mainly consisted of a net loss of $124.4 million, adjusted for non-cash charges including stock-based compensation expense of $97.6 million, depreciation and amortization of $33.6 million, amortization of debt discount and debt issuance costs of $7.9 million and net cash inflows of $12.3 million from changes in operating assets and liabilities. The net cash inflows from changes in operating assets and liabilities were primarily the result of a $39.1 million increase in deferred revenue, an $11.1 million decrease in prepaid expenses and other assets and a $0.7 million decrease in net accounts receivable, partially offset by an $18.1 million decrease in accounts payable, an $8.9 million increase in inventory, a $7.5 million decrease in accrued compensation and other liabilities, and a $4.2 million increase in deferred commissions. The increase in deferred revenue was primarily due to new sales order growth during the six months ended July 31, 2018. The increase in inventory was primarily due to expanding product portfolio and to support revenue growth. The decreases in prepaid expenses and other assets, accounts receivable, accounts payable and accrued compensation and other liabilities were primarily attributable to timing of collections and payments.

Net cash used in operating activities during the six months ended July 31, 2017 was $14.5 million, which resulted primarily from a net loss of ~~$124.1~~$115.6 million, partially offset by non-cash charges for stock-based compensation expense of $69.1 million, depreciation and amortization of $30.0 million, and net cash ~~inflows~~flow of ~~$9.7~~$1.2 million from changes in operating assets and ~~liabilities. The net cash inflows from changes in operating assets and~~ liabilities ~~were~~ primarily ~~the result of~~driven by a ~~$24.5~~$24.3 million increase in deferred revenue, partially offset by a $10.5 million increase in inventory and a ~~$4.6~~$9.6 million increase in deferred commission. The increases in deferred revenue and deferred commission were primarily due to new sales order growth during the six months ended July 31, 2017. The increase in inventory was primarily as a result of increased purchases to manage component costs and availability to meet higher demand for our products.

Investing Activities

Net cash ~~provided by operating~~used in investing activities during the six months ended July 31, ~~2016 was $4.6~~2018 of $425.9 million ~~which~~ resulted from ~~a net loss~~capital expenditures of ~~$123.3~~$42.7 million ~~partially offset by non-cash charges for stock-based compensation expense of $50.9 million, $22.3 million for depreciation and amortization~~ and net ~~cash inflows~~purchases of ~~$45.1 million from changes in operating assets and liabilities. The net cash inflows from changes in operating assets and liabilities were primarily the result~~marketable securities of a $41.1 million increase in deferred revenue, a $8.7 million increase in accrued compensation and other liabilities, a $6.6 million decrease in accounts receivable and a decrease in deferred commissions of $1.9 million, partially offset by a $10.0 million decrease in accounts payable and a $2.4 million increase in inventory. The increase in deferred revenue was primarily due to new sales order growth during the six months ended July 31, 2016. The decreases in accounts receivable and accounts payable and the increase in accrued compensation and other liabilities were primarily attributable to the timing of collections and payments.

~~Investing Activities~~$383.1 million.

Net cash used in investing activities during the six months ended July 31, 2017 of $18.2 million resulted from capital expenditures of $30.1 million, partially offset by net sales and maturities of marketable securities of $11.9 million.

Net cash used in investing activities during the six months ended July 31, 2016 of $415.8 million resulted from net purchases of marketable securities of $363.1 million, capital expenditures of $46.1 million, an increase in restricted cash of $5.6 million related to a vendor credit card program and security deposit for office space, as well as the purchase of a portfolio of technology patents for $1.0 million.

Financing Activities

Net cash provided by financing activities during the six months ended July 31, 2018 of $526.2 million was primarily attributable to $562.1 million in net proceeds from issuance of the Notes, $29.1 million in proceeds from the exercise of employee stock options and $19.7 million in proceeds from issuance of common stock under the employee stock purchase plan (ESPP), partially offset by a $64.6 million payment to purchase Capped Calls and a $20.0 million common stock repurchase in conjunction with the issuance of the Notes.

Net cash provided by financing activities during the six months July 31, 2017 of $21.0 million was primarily attributed to $14.2 million in proceeds from issuance of common stock under ~~employee stock purchase plan (ESPP)~~our ESPP and $6.8 ~~million in proceeds from the exercise of stock options.~~

Net cash provided by financing activities during the six months ended July 31, 2016 of $21.4 million during the six months ended July 31, 2016 was primarily due to $15.1 million in proceeds from issuance of common stock under ESPP and $6.4 million in proceeds from the exercise of stock options.

Contractual Obligations and Commitments

~~During the six months ended~~As of January 31, 2018 and July 31, ~~2017, we extended~~2018, the ~~lease term of an existing office facility with total additional lease obligations of~~aggregate future minimum payments under non-cancelable operating leases was approximately ~~$2.0~~$113.0 million ~~with the lease expiring through March 2019.~~

~~In August 2017, we entered into a seven-year term operating lease for approximately 45,831 square feet of office space in Mountain View, California with a total base rent obligation of $31.6~~and $153.7 million. In connection with the lease amendment executed in March 2018, we ~~have~~ issued aan additional letter of credit of ~~$2.6~~$1.5 million.

In April 2018, we issued $575.0 million of 0.125% convertible senior notes due 2023, in a private placement and received proceeds of $562.1 million, after deducting the underwriters' discounts and commissions. The Notes are unsecured obligations that do not contain any financial covenants or restrictions on the payments of dividends, the incurrence of indebtedness, or the issuance or repurchase of securities by us or any of our subsidiaries. See further discussion in Note 5 in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Table of Contents

Critical Accounting Policies and Estimates

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

Please see Note 2 of Part I, Item 1 of this Quarterly Report on Form 10-Q for the summary of significant accounting policies. In addition, please see “Critical Accounting Policies and Estimates” in our latest 10-K. There have been no material changes to our critical accounting policies and estimates since our 10-K filed on March ~~29, 2017.~~26, 2018, except for the changes as a result of the adoption of new accounting pronouncements.

Available Information

Our website is located at www.purestorage.com, and our investor relations website is located at ~~http://~~investor.purestorage.com. The following filings will be available through our investor relations website after we file them with the SEC: Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and our Proxy Statements for our annual meetings of stockholders, and are also available for download free of charge. We will 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 related filings. Further, a copy of this Quarterly Report on Form 10-Q is located at the SEC's Public Reference Room at 100 F Street, NE, Room 1580, 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 webcast our earnings calls and certain events we participate in or host with members of the investment community on our investor relations website. Additionally, we provide notifications of news or announcements regarding our financial performance, including SEC filings, investor events, press and earnings releases, social media accounts (Twitter, Facebook and LinkedIn), and blogs as part of 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 certificate of incorporation, bylaws, governance guidelines, board committee charters, and code of conduct, is also available on our investor relations website under the heading “Corporate Governance.” The content of our websites are not incorporated by reference into this Quarterly Report on Form 10-Q 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.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

We have operations both within the United States and internationally, and we are exposed to market risk in the ordinary course of our business.

Interest Rate Risk

Our cash, cash equivalents and marketable securities primarily consist of bank deposits and money market accounts, U.S. government notes and U.S. agency notes, asset-backed securities, and highly rated corporate debt. As of July 31, ~~2017,~~2018, we had cash, cash equivalents and marketable securities of ~~$523.0~~$1,106.7 million. The carrying amount of our cash equivalents reasonably approximates fair value, due to the short maturities of these instruments. The primary objectives of our investment activities are the preservation of capital, the fulfillment of liquidity needs and the fiduciary control of cash and investments. We do not enter into investments for trading or speculative purposes. Our investments are exposed to market risk due to a fluctuation in interest rates, which may affect our interest income and the fair value of our investments.

We considered the historical volatility of short-term interest rates and determined that it was reasonably possible that an adverse change of 100 basis points could be experienced in the near term. A hypothetical 1.00% (100 basis

points) increase in interest rates would have resulted in a decrease in the fair value of our marketable securities of approximately ~~$3.6~~$7.9 million as of July 31, ~~2017~~2018.

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Foreign Currency Exchange Risk

Our sales contracts are primarily denominated in U.S. dollars with a small number of contracts denominated in foreign currencies. A portion of our operating expenses are incurred outside the United States and denominated in foreign currencies and are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the British pound and Euro. Additionally, fluctuations in foreign currency exchange rates may cause us to recognize transaction gains and losses in our statement of operations. Given the impact of foreign currency exchange rates has not been material to our historical operating results, we have not entered into any derivative or hedging transactions, but we may do so in the future if our exposure to foreign currency exchange should become more significant.

We considered the historical trends in currency exchange rates and determined that it was reasonably possible that adverse changes in exchange rates of 10% for all currencies could be experienced in the near term. These reasonably possible adverse changes in exchange rates of 10% were applied to total monetary assets and liabilities denominated in currencies other than U.S. dollar at July 31, ~~2017~~2018 to compute the adverse impact these changes would have had on our loss before income taxes in the near term. These changes would have resulted in an adverse impact on loss before income taxes of approximately ~~$6.7~~$3.5 million as of July 31, ~~2017~~2018.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this report. Based on such evaluation, our CEO and CFO concluded that, as of July 31, ~~2017,~~2018, our disclosure controls and procedures were designed at a reasonable assurance level and were effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

We implemented certain internal controls to ensure we adequately evaluated our contracts and properly assessed the impact of ASC 606 on our financial statements to facilitate such adoption effective February 1, 2018. In addition, we made some changes in the first quarter of our fiscal 2018 to certain internal controls to reflect new processes that were implemented as a result of the adoption of ASC 606. There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) or 15d-15(d) of the Exchange Act that occurred during the quarter ended July 31, ~~2017~~2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Effectiveness of Controls

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

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

The information set forth under the "Legal Matters" subheading in Note 5. Commitments and Contingencies of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q is incorporated herein by reference.

~~In addition, we may from~~From time to time, we may be involved in various legal proceedings arising from the normal course of business, and an unfavorable resolution of any of these matters could ~~materially~~negatively affect our future results of operations, cash flows or financial position. We are not presently party to any legal proceedings that, in the opinion of management, would have a material adverse effect on our business.

Item 1A. Risk Factors.

Investing in our Class A common stock involves a high degree of risk. Investors should carefully consider the risks and uncertainties described below, together with all of the other information contained in this report, including our consolidated financial statements and the related notes appearing in this quarterly report, before deciding to invest in our Class A common stock. If any of the following risks actually occur, it could harm our business, prospects, operating results and financial condition. In such event, the trading price of our Class A common stock could decline and investors might lose all or part of their investment.

Risks Related to Our Business and Industry

We have experienced rapid growth in ~~recent~~prior periods, and we may not be able to sustain or manage future growth effectively.

We have significantly expanded our overall business, customer base, headcount, channel partner relationships and operations in ~~recent~~prior periods, and we anticipate that we will continue to expand and ~~may~~ experience ~~significant~~ growth in future periods. For example, ~~from January~~we delivered year-over-year revenue growth of 37% for the three months ended July 31, ~~2016 to January 31, 2017,~~2018, and our headcount increased from over ~~1,300~~1,900 to over ~~1,700~~2,450 employees ~~and to over 1,900 employees as of~~from July 31, ~~2017.~~2017 to July 31, 2018. Our future operating results will depend to a large extent on our ability to successfully sustain our growth and manage our anticipated expansion. To sustain and manage our growth successfully, we believe that we must, among other things, effectively:

maintain and extend our product leadership;

recruit, hire, train and manage ~~additional~~qualified personnel;

maintain and further develop our ~~channel~~ partner relationships;

enhance and expand our distribution and supply chain infrastructure;

expand our support capabilities;

forecast and control expenses;

enhance and expand our international operations; and

implement, improve and maintain our internal systems, procedures and controls.

We expect that our future growth will continue to place a significant strain on our managerial, administrative, operational, financial and other resources. We will incur costs associated with this future growth prior to realizing the anticipated benefits, and the return on these investments may be lower, may develop more slowly than we expect or may never materialize. Investors should not consider our revenue growth in prior quarterly or annual periods as indicative of our future performance. In future periods, we do not expect to achieve similar percentage revenue growth rates as we have achieved in some past periods. If we are unable to ~~sustain or~~ manage our growth ~~effectively,~~successfully, we may not be able to take advantage of market opportunities or ~~develop~~release new products or enhancements ~~to existing products~~ in a timely manner, and we may fail to satisfy customers’ expectations, maintain product quality, execute on our business plan or adequately respond to competitive pressures, each of which could adversely impact our growth and affect our business and operating results.

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We intend to continue focusing on revenue growth and increasing our market penetration and international presence by investing heavily in our business, and this may put pressure on near-term profitability.

Our strategy is to continue ~~with our investments~~investing in marketing, sales, support and research and development. We believe our decision to continue investing heavily in our business will be critical to our future success and to meet our growth objectives. We anticipate that our operating costs and expenses will continue to increase in absolute terms.

In addition, we expect to continue incurring significant legal, accounting and other expenses in order to operate effectively as a public ~~company at our scale.~~company. Even if we achieve or maintain significant revenue growth, we ~~expect to~~may continue to experience losses, forgoing near-term ~~profitability.~~profitability on a U.S. GAAP basis.

We have not achieved profitability for any year since our inception. We incurred a net loss of ~~$245.1~~$159.9 million for the year ended January 31, ~~2017~~2018, and ~~$124.1~~$124.4 million for the six months ended July 31, ~~2017,~~2018, and we had an accumulated deficit of ~~$802.5~~$903.6 million as of January 31, ~~2017~~2018 and ~~$926.6~~$1,028.0 million as of July 31, ~~2017.~~2018. Our operating expenses largely are based on anticipated revenue, and a high percentage of our expenses are, and will continue to be, fixed in the short term. If we fail to adequately increase revenue and manage costs, we may not achieve or maintain profitability in the future. As a result, our business could be harmed and our operating results could suffer.

~~We have a limited operating history, which makes~~Our revenue growth rate in recent periods may not be indicative of our future ~~operating results difficult to predict.~~performance.

We were founded in October 2009, but have generated substantially all of our revenue in our last three fiscal years. We have a limited operating history in an industry characterized by rapid technological change, changing customer needs, evolving industry standards and frequent introductions of new products and services. Our limited operating history makes it difficult to evaluate our current business and our future prospects, including our ability to plan for and model future growth. All of these factors make our future operating results difficult to predict, which may impair our ability to manage our business and reduce investors’ ability to assess our prospects.

Investors should not consider our revenue growth in prior quarterly or annual periods as indicative of our future performance. In future periods, we do not expect to achieve similar percentage revenue growth rates as we have achieved in some past periods. If we are unable to maintain adequate revenue or revenue growth, our stock price could be volatile, and it may be difficult to achieve and maintain profitability.

The market for all-flash storage products is rapidly evolving, which makes it difficult to forecast customer adoption rates and demand for our products.

The market for all-flash storage products is rapidly evolving. ~~As a result, our~~Our future financial performance will depend on the continued growth of this market and on our ability to adapt to competitive dynamics and emerging customer demands and trends. Sales of our products have largely focused on use cases that require performance storage products such as virtualization and transaction processing. Some potential customers have not purchased all-flash storage products and may not have the desire or available budget to invest in a new technology such as ours. Incumbent vendors ~~are actively promoting~~promote storage products retrofitted with flash, which may reduce the perceived value of purpose-built, all-flash ~~products like ours.~~products. It is difficult to predict with any precision customer adoption rates of flash, customer demand for our products or the future growth rate and size of our market.

Our products may never reach mass adoption, and changes or advances in alternative technologies or adoption of cloud storage offerings not utilizing our storage platform could adversely affect the demand for our products. For instance, offerings from ~~large-scale~~large public cloud providers are expanding quickly and may serve as alternatives to our products for a variety of customer workloads. Since these providers are known for developing storage systems internally, this trend could reduce the demand for storage systems developed by original equipment manufacturers, such as us. Further, although flash storage has a number of advantages as compared to other data storage alternatives, ~~such as hard disk drives,~~ flash storage has certain limitations as well, including ~~in some use cases, a higher price per gigabyte of raw storage,~~ more limited methods for data recovery and reduced performance gains for certain uses, such as sequential input/output ~~or I/O,~~ transactions. A slowing in or reduced demand for all-flash storage products caused by ~~lack of customer acceptance,~~ technological challenges, alternative technologies and products or ~~otherwise~~any other reason would result in a lower revenue growth rate or decreased revenue, either of which would negatively impact our business and operating results.

We face intense competition from ~~a number of~~ established companies and new entrants.

We face intense competition from a number of established companies that sell competitive storage products. These competitors include Dell EMC, HP Enterprise, Hitachi ~~Data Systems,~~Vantara, IBM, Lenovo, NetApp and ~~NetApp. These competitors, as well as other potential~~others. Our competitors may have:

greater name and brand recognition and longer operating histories;

larger sales and marketing and customer support budgets and resources;

broader distribution and established relationships with distribution partners and customers;

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the ability to bundle storage products with other products and services to address customers’ requirements;

greater resources to make acquisitions;

larger and more mature product and intellectual property portfolios; and

substantially greater financial, technical and other resources.

We also ~~face competition from a number of other companies, one or more of which may become significant competitors in the future. For example, we~~ compete against ~~certain~~some large public cloud providers and vendors that offer hyperconverged products, ~~that~~which combine compute, networking and ~~storage, or hyperconverged products. Some cloud~~storage. These providers are growing and expanding ~~quickly, and~~ their product offerings, ~~could, if we are unable to effectively sell to these providers, displace~~potentially displacing some demand for our products. ~~Vendors offering hyperconverged products are attempting to displace dedicated storage products like ours. New~~Acquisitions by competitors ~~could emerge and acquire significant market share. The acquisitions of EMC by Dell, Nimble Storage by HP Enterprise and SolidFire by NetApp~~ have introduced new competitive dynamics. ~~All of our competitors may utilize a broad range of competitive strategies.~~ For example, some of our competitors ~~have offered~~offer bundled products and services in order to reduce the initial cost of their storage products. ~~Our competitors may also choose to adopt more aggressive pricing policies than we choose to adopt.~~ Some of our competitors ~~have offered~~offer their storage products either at significant discounts or even for free in competing against us and in response to our efforts to market the overall benefits and technological merits of our ~~products.~~products and programs.

Many competitors have developed competing all-flash ~~or hybrid~~ storage technologies. For example, several of our competitors have introduced all-flash storage products with performance-focused designs and/or with data reduction technologies that directly compete with our products, or have introduced business programs that attempt to compete with ~~or mitigate against, the value of~~ our innovative programs, such as our Evergreen Storage ~~model of hardware and software upgrades and maintenance.~~model. We expect our competitors to continue to improve the performance of their products, reduce their prices and introduce new features, services and technologies that may, or that they may claim to, offer greater ~~performance and improved total cost of ownership as~~value compared to our products. In addition, our competitors may develop enhancements to, or future generations of, competitive products that may render our products or technologies obsolete or less competitive. These and other competitive pressures may prevent us from competing successfully against current or future competitors.

Our business may be harmed by trends in the overall external storage market.

Despite ongoing data growth, the external storage market in which we compete has not experienced overall

growth in the past few years due to a combination of technology transitions, increased storage efficiency, and changing economic and business environments. Customers are rethinking how they consume IT, increasing spending toward public cloud, software as a service, hyperconverged and converged infrastructure and software-defined storage. The future impact of these ~~industry, technological or market changes~~trends on both short-term and long-term growth ~~trends~~of the overall external storage market is uncertain. IfReductions in the overall external storage market, ~~declines,~~ or ~~if the growth rates of~~ the specific markets in which we compete ~~decline, and/or if the consumption model of storage changes and our new and existing products do not receive customer acceptance,~~would harm our business and operating ~~results could be harmed.~~results.

Many of our ~~established~~ competitors have long-standing relationships with key decision makers at ~~many of our~~ current and prospective customers, which may inhibit our ability to ~~compete effectively and maintain or increase our market share.~~compete.

Many of our competitors benefit from established brand awareness and long-standing relationships with key decision makers at ~~many of~~ our current and prospective customers. Our competitors often leverage these existing relationships to discourage customers from evaluating or purchasing our products. In particular, when competing against us, our competitors promote the adequacy of their all-flash or hybrid storage products and emphasize the perceived risks of relying on products from a company that has a shorter operating history. Sales and marketing tactics by established competitors may include incomplete or misleading statements about their products, or about us and our products that could harm or impede our business. Additionally, most of our prospective customers have existing storage ~~systems manufactured~~products supplied by our ~~competitors. This gives an incumbent competitor~~competitors, who have an advantage in retaining the customer because, ~~the incumbent competitor~~among other things, they already ~~understands~~understand the customer’s IT infrastructure, user demands and needs. In the event that we are unable to successfully sell our products to new customers or persuade our customers to continue purchasing our products, we will not be able to maintain or increase our market share and revenue, which could adversely affect our business and operating results.

Our ability to increase our revenue ~~will substantially depend~~depends on our ability to attract, motivate and retain sales, engineering and other key personnel, including our management team, and any failure to attract, motivate and retain these employees could harm our business, operating results and financial condition.

Our ability to increase our revenue ~~will substantially depend~~depends on our ability to attract, motivate and retain qualified sales, engineering and other key employees, including our management. These positions may require candidates with specific backgrounds in software and the storage industry, and competition for employees with such expertise is intense. Our ability to attract, motivate or retain employees may be reduced, as the value of our stock fluctuates and as our employees have the opportunity to sell their equity awards. We may not be successful in attracting, motivating and retaining qualified personnel. We have from time to time experienced, and we expect to continue to experience, difficulty in hiring and retaining highly skilled employees with appropriate qualifications. To the extent that we are successful in hiring to fill these positions,

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we need a significant amount of time to train ~~the~~ new employees before they ~~can~~ become effective and efficient in performing their jobs. From time to time, there may be changes in our management team, ~~resulting from the hiring or departure of those individuals.~~which could create short term uncertainty. Members of our management team, including our executive officers, are generally employed on an at-will basis, which means that they could terminate their employment with us at any time. If we are unable to attract, motivate and retain qualified sales, engineering and other key employees, including our management, our business and operating results could suffer.

If we fail to adequately expand and optimize our sales force, our growth will be impeded.

We ~~will~~ need to continue to expand and optimize our sales ~~infrastructure~~organization in order to grow our customer base and our business. We plan to continue to expand and train our sales force, both domestically and internationally. ~~Identifying, recruiting and training qualified sales personnel require significant time, expense and attention.~~ We must design and implement effective sales incentive programs, and it can take time before our sales representatives are fully trained and productive. ~~Our business may be adversely affected if our efforts to expand and train our sales force do not generate a corresponding increase in revenue. In particular, if~~If we are unable to hire, develop and retain qualified sales personnel or if new sales personnel are unable to achieve desired productivity levels in a reasonable period of time, we may not be able to realize the expected benefits of ~~this investment~~these investments or increase our revenue.

If we fail to develop and introduce new or enhanced products ~~on a timely basis,~~successfully, our ability to attract and retain customers could be ~~impaired and our competitive position could be~~ harmed.

We operate in a dynamic environment characterized by rapidly changing technologies and industry standards and technological obsolescence. To compete successfully, we must design, develop, market and sell new or enhanced products that provide increasingly higher levels of performance, capacity and reliability and that meet the ~~cost~~ expectations of our customers, which is a complex and uncertain process. We believe that we must continue to dedicate significant resources to our research and development efforts to maintain or expand our competitive position. Our investments may take longer to generate revenue or may generate less revenue than we anticipate. The introduction of new products by our competitors, ~~the market acceptance of products based on new or alternative technologies~~ or the emergence of ~~new~~alternative technologies or industry standards could render our existing or future products obsolete or less competitive.

As we introduce new or enhanced products, we must successfully manage product launches and transitions to the next generations of our ~~products.~~products, and encourage our customers to adopt new products and features. For example, we started ~~initial~~ shipments of our ~~new~~ FlashBlade ~~products for direct availability in July 2016~~ and ~~for general availability in January 2017 and started initial shipments of new~~ FlashArray//X products, ~~for direct availability in April 2017.~~and introduced new software features last year. If we are not able to successfully manage the development and release of new or enhanced products, our business, operating results and financial condition could be harmed. Similarly, if we fail to introduce new or enhanced products, such as new or improved software features, that meet ~~the~~our customers' needs ~~of our customers~~ in a timely or cost-effective fashion, we may lose market share and our operating results could be adversely affected.

~~Our research and development efforts may not produce successful products that result in significant revenue in the near future, if at all.~~

Developing new products and related enhancements, including new or improved features, is expensive and time intensive. Our investments in research and development may result in products that may not achieve market adoption, are more expensive to develop than anticipated, may take longer to generate revenue or may generate less revenue than we anticipate. Our future plans include significant investments in research and development for new products and related opportunities. We believe that we must continue to dedicate significant resources to our research and development efforts to maintain or expand our competitive position. However, these efforts may not result in significant revenue in the near future, if at all, which could adversely affect our business and operating results.

If we fail to successfully maintain or grow our relationships with channel partners, our business, operating results and financial condition could be harmed.

Our future success is highly dependent upon our ability to establish and maintain successful relationships with ~~a variety of~~our channel partners. In addition to selling our products, our partners may offer installation, post-sale service and support ~~on our behalf~~ in their local markets. In markets where we rely on partners more heavily, we have less contact with our customers and less control over the sales process and the quality and responsiveness of our partners. As a result, it may be more difficult for us to ensure the proper delivery and installation of our products or the quality or responsiveness of the support and services being offered. Any failure on our part to effectively identify, train and manage our channel partners and to monitor their sales activity, as well as the customer support and services ~~being~~ provided to our customers, ~~in their local markets,~~ could harm our business, operating results and financial condition.

Our channel partners may choose to discontinue offering our products and services or may not devote sufficient attention and resources toward selling our products and services. We typically enter into non-exclusive, written agreements with our channel partners. These agreements generally have a one-year, self-renewing term, have no minimum sales commitment and do not prohibit our channel partners from offering products and services that compete with ours. ~~Accordingly, our channel partners may choose to discontinue offering our products and services or may not devote sufficient attention and resources toward selling our products and services.~~ Additionally, our competitors provide incentives to our existing and potential channel partners to use, purchase or offer their products and services or to prevent or reduce sales of our products and services. The occurrence of any of these events could harm our business, operating results and financial condition.

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Our gross margins are impacted by a variety of factors ~~are subject to variation~~and vary from period to period, ~~and are~~making them difficult to ~~predict.~~predict with certainty.

Our gross margins fluctuate from period to period due primarily to product costs, customer mix and product mix. ~~Over the last six quarters,~~A variety of factors may cause our ~~quarterly~~ gross margins ~~ranged from 65%~~ to ~~66%. Our gross margins may~~ fluctuate and ~~may be affected by a variety of factors,~~make them difficult to predict, including:

demand for our products;

sales and marketing initiatives, discount levels, rebates and competitive pricing;

changes in customer, geographic or product mix, including mix of product configurations;

the cost of ~~freight and~~ components, including NAND and DRAM ~~flash;~~flash, and freight;

new product introductions and enhancements, potentially with initial sales at relatively small volumes and higher product costs;

the timing and amount of revenue recognized and ~~deferred;~~deferred, including impact from the adoption of ASC 606;

excess inventory levels or purchase commitments as a result of changes in demand forecasts or product transitions;

an increase in product returns, order rescheduling and cancellations;

the timing of technical support service contracts and contract renewals;

inventory stocking requirements to mitigate supply constraints, accommodate unforeseen demand or support new product introductions; and

product quality and serviceability issues.

~~Due to such factors, gross margins are subject to variation from period to period and are difficult to predict.~~ If we are unable to manage these factors effectively, our gross margins may decline, and fluctuations in gross margins may make it difficult to manage our business and achieve or maintain profitability, which could materially harm our business, operating results and financial condition.

Our operating results may fluctuate significantly, which could make our future results difficult to predict and could cause our operating results to fall below expectations.

Our operating results may fluctuate due to a variety of factors, many of which are outside of our control. As a result, comparing our results on a period-to-period basis may not be meaningful. ~~Investors should not rely on our past~~

results as an indication of our future performance. If our revenue or operating results fall below the expectations of investors or any securities analysts that follow our company, the price of our Class A common stock would likely decline.

Factors that are difficult to predict and that could cause our operating results to fluctuate include:

the timing and magnitude of orders, shipments and acceptance of our products in any quarter, including product returns, order rescheduling and cancellations by our customers;

fluctuations in demand and prices for our products;

~~potential~~ seasonality in our business or the markets we serve;

our ability to control the costs of the components we use in our hardware products;

our ability to timely adopt subsequent generations of components into our hardware products;

disruption in our supply chains, component availability and related procurement costs;

reductions in customers’ budgets for IT purchases;

changes in industry standards in the data storage industry;

our ability to develop, introduce and ship in a timely manner new products and product enhancements that meet customer requirements;

our ability to effectively manage product transitions as we introduce new products;

any change in the competitive dynamics of our markets, including new entrants or discounting of product prices;

our ability to control costs, including our operating expenses; and

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future accounting pronouncements and changes in accounting ~~policies.~~policies, including our ability to implement the new processes necessary to accurately recognize our revenue under ASC 606 going forward.

The occurrence of any one of these risks could negatively affect our operating results in any particular ~~quarter, which could cause the price of our Class A common stock to decline.~~quarter.

Our sales cycles can be long and unpredictable ~~particularly with respect to large orders,~~ and our sales efforts require considerable time and ~~expense. As a result,~~expense, making it ~~can be~~ difficult for us to predict ~~when, if ever, a particular customer will choose to purchase our products, which may cause our operating results to fluctuate.~~future sales.

Our sales efforts involve educating our customers about the use and benefits of our ~~products, including their technical capabilities and cost saving potential.~~products. Larger customers often undertake an evaluation ~~and testing~~ process that can result in a lengthy sales cycle. We spend substantial time and resources on our sales efforts without any assurance that our efforts will produce any sales. In addition, product purchases are frequently subject to budget constraints, multiple approvals and unplanned administrative ~~processing~~ and other delays. A substantial portion of our quarterly sales typically occurs during the last several weeks of the quarter, which we believe largely reflects customer buying patterns of products similar to ours and other products in the technology industry generally. Since we do not recognize revenue from a sale until ~~title~~control is transferred, ~~for the product, if we have~~ a substantial portion of our sales ~~at the end of~~late in a quarter we may ~~be unable to transfer title and recognize~~negatively impact the recognition of the associated ~~revenue in that quarter.~~revenue. Furthermore, our products come with a 30-day money back guarantee, allowing a customer to return a product within 30 days of receipt if the customer is not satisfied with its purchase for any reason. ~~In addition, a portion of our sales in any quarter is generated by sales activity initiated during the quarter.~~ These factors, among others, make it difficult for us to predict when customers ~~may~~will purchase our ~~products. We may expend significant resources on an opportunity without ever achieving a sale,~~products, which may adversely affect our operating results and cause our operating results to fluctuate. In addition, if sales expected from a specific customer for a particular quarter are not realized in that quarter or at all, our operating results may suffer.

Our company culture has contributed to our success, and if we cannot maintain this culture as we grow, we could lose the innovation, creativity and teamwork fostered by our culture, and our business may be harmed.

We believe that a critical contributor to our success has been our company culture, which we believe fosters innovation, creativity, teamwork, passion for customers and focus on execution, as well as facilitating critical knowledge transfer and knowledge sharing. In particular, we believe that the difference between our sales, support and engineering cultures, relative to those of incumbent vendors, is a key competitive advantage and differentiator for our ~~customers.~~

customers and partners. As we grow and change, we may find it difficult to maintain these important aspects of our company culture, which could limit our ability to innovate and operate effectively. Any failure to preserve our culture could also negatively affect our ability to retain and recruit personnel, continue to perform at current levels or execute on our business strategy.

~~Because our~~Our long-term success depends, in part, on ~~our ability to expand the~~ sales ~~of our products to customers located~~ outside of the United States, ~~our business~~which is susceptible to risks associated with international operations.

We maintain operations outside of the United ~~States. We~~States, which we have been expanding and intend to continue to expand ~~these operations~~ in the future. We have limited experience operating in foreign jurisdictions. Our inexperience in operating our business outside of the United States increases the risk that our international expansion efforts may not be successful. In addition, conductingConducting and expanding international operations subjects us to new risks that we ~~have~~do not generally ~~faced~~face in the United States. These include:

exposure to foreign currency exchange rate risk;

difficulties in collecting payments internationally, and managing and staffing international operations;

establishing relationships with channel partners in international locations;

~~the~~ increased travel, infrastructure and legal compliance costs associated with international locations;

~~the~~ burdens of complying with a wide variety of laws associated with international operations, including taxes and customs;

significant fines, penalties and collateral consequences if we or our partners fail to comply with anti-bribery laws;

heightened risk of improper, unfair or corrupt business practices in certain geographies;

potentially adverse tax consequences, including repatriation of earnings;

increased financial accounting and reporting burdens and complexities;

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political, social and economic instability abroad, terrorist attacks and security concerns in general; and

reduced or varied protection for intellectual property rights in some countries.

The occurrence of any one of these risks could negatively affect our international operations and, consequently, our business, operating results and financial condition generally.

The sales prices of our products and services may ~~decrease,~~fluctuate or decline, which may reduce our gross profits, revenue growth, and adversely impact our financial results.

The sales prices ~~for~~of our products and services may fluctuate or decline for a variety of reasons, including competitive pricing pressures, discounts, cost of components, a change in our mix of products and services, and the introduction of competing products or services or promotional programs. Competition continues to increase in the markets 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 services that compete with ours or may bundle them with other products and services. Additionally, although we price our products and services predominantly in U.S. dollars, currency fluctuations in certain countries and regions may negatively impact actual prices that partners and customers are willing to pay in those countries and regions. Furthermore, we anticipate that the ~~sales~~ prices for our products will decrease over product life cycles. ~~We cannot assure investors that~~If we ~~will~~are required to decrease our prices to be ~~successful~~competitive and are not able to offset this decrease by increases in ~~developing and introducing~~the volume of sales or the sales of new ~~offerings~~products with ~~enhanced functionality on a timely basis, or that our new product and services offerings, if introduced, will enable us to maintain or improve~~higher margins, our gross margins and ~~achieve profitability.~~operating results could be adversely affected.

We derive ~~substantially all~~the majority of our revenue from a single family of products, and a decline in demand for these products would cause our revenue to grow more slowly or to decline.

Our FlashArray family of products has historically accounted for ~~substantially all~~the majority of our revenue and will continue to comprise a significant portion of our revenue for the foreseeable future. As a result, our revenue could be reduced ~~by:~~

~~the failure of our current products to achieve broad market acceptance;~~

by any decline or fluctuation in demand for our products, ~~whether as a result~~regardless of ~~product obsolescence, technological change, customer budgetary constraints or other factors;~~

the ~~introduction of competing products and technologies that replace or substitute, or represent an improvement over, our products; and~~

~~our inability to release enhanced versions of our products, including any related software, on a timely basis.~~

reason. If the market for all-flash storage products grows more slowly than anticipated or if demand for our products slows or declines, we may not be able to increase our revenue or achieve and maintain profitability.

Our products are highly technical and may contain ~~undetected~~ defects, which could cause data unavailability, loss or corruption that might, in turn, result in liability ~~to our customers~~ and harm to our reputation and business.

Our products are highly technical and complex and are often used to store information critical to our customers’ business operations. Our products may contain ~~undetected~~ errors, defects or security vulnerabilities that could result in data unavailability, loss, corruption or other harm to our customers. Some errors in our products may only be discovered after they have been installed and used by customers. Any errors, defects or security vulnerabilities ~~discovered~~ in our products ~~after commercial release~~ could result in a loss of revenue, ~~or delay in revenue recognition,~~ injury to our reputation, a loss of customers or increased service and warranty costs, any of which could adversely affect our business and operating results. In addition, errors or failures in the products of third-party technology vendors may be attributed to us and may harm our reputation.

We could face claims for product liability, tort or breach of warranty. Many of our contracts with customers contain provisions relating to warranty disclaimers and liability limitations, which may be difficult to enforce. Defending a lawsuit, regardless of its merit, would be costly and might divert management’s attention and adversely affect the market’s perception of us and our products. Our business liability insurance coverage could prove inadequate with respect to a claim and future coverage may be unavailable on acceptable terms or at all. These product-related issues could result in claims against us, and our business, operating results and financial condition could be harmed.

Our brand name and our business may be harmed by the marketing strategies of our competitors.

Because of the early stage of our business, we believe that building and maintaining brand recognition and customer goodwill is critical to our success. Our efforts in this area have, on occasion, been hampered by the marketing efforts of our competitors, which have included negative or misleading statements about us and our products. If we are unable to effectively respond to the marketing efforts of our competitors and protect our brand and customer goodwill now or in the future, our business will be adversely affected.

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Our products must interoperate with third party operating systems, software applications and hardware, and if we are unable to ~~devote the necessary resources to~~ ensure that our products interoperate with ~~such~~third party software and hardware, we may lose or fail to increase our market share and may experience reduced demand for our products.

Our products must interoperate with our customers’ existing infrastructure, specifically their networks, servers, software and operating systems, which ~~may be~~are manufactured by a wide variety of vendors. When new or updated versions of these ~~software~~ operating systems or applications are introduced, we must sometimes develop updated versions of our software so that our products ~~will~~ interoperate properly. For example, our Pure1 cloud-based management and support includes connectors to virtualization platforms, allowing our customers to manage our products within native management tools, such as VMware and OpenStack. We may not deliver or maintain interoperability quickly, cost-effectively or at all. These efforts require capital investment and engineering resources. If we fail to maintain compatibility of our products with these infrastructure components, our customers may not be able to fully utilize our products, and we may, among other consequences, lose or fail to increase our market share and experience reduced demand for our products, which may harm our business, operating results and financial condition.

Our products must conform to industry standards in order to be accepted by customers in our markets.

Generally, our products comprise only a part of a data center. The servers, network, software and other components and systems of a data center must comply with established industry standards in order to interoperate

and function efficiently together. We depend on companies that provide other systems in a data center to conform to prevailing industry standards. ~~Often, these~~These companies are often significantly larger and more influential in driving industry standards than we are. Some industry standards may not be widely adopted or implemented uniformly, and competing standards may emerge that may be preferred by our customers. If larger companies do not conform to the same industry standards that we do, or if competing standards emerge, ~~market acceptance~~sales of our products could be adversely affected, which may harm our business.

Our ability to successfully market and sell our products is dependent in part on ease of use and the quality of our support offerings, and any failure to offer high-quality installation and technical support could harm our business.

Once our products are deployed within our customers’ data centers, customers depend on our support organization to resolve technical issues relating to our products. Our ability to provide effective support is largely dependent on our ability to attract, train and retain qualified personnel, as well as to engage with qualified support partners that provide a similar level of customer support. In addition, our sales process is highly dependent on our product and business reputation and on recommendations from our existing customers. Although our products are designed to be interoperable with existing servers and systems, we may need to provide customized installation and configuration support to our customers before our products become fully operational in their environments. Any failure to maintain, or a market perception that we do not maintain, high-quality installation and technical support could harm our reputation, our ability to sell our products to existing and prospective customers and our business.

We rely on contract manufacturers to manufacture our products, and if we fail to manage our ~~relationship~~relationships with our contract manufacturers successfully, our business could be negatively impacted.

We rely on a limited number of contract manufacturers to manufacture our products. Our reliance on contract manufacturers reduces our control over the assembly process, and exposes us to risks, such as reduced control over quality assurance, costs and product supply. If we fail to manage our relationships with these contract manufacturers effectively, or if these contract manufacturers experience delays, disruptions, capacity constraints or quality control problems, our ability to timely ship products to our customers could be impaired and our competitive position and reputation could be harmed. If we are required, for whatever reason, to change contract manufacturers or assume internal manufacturing operations, we may lose revenue, incur increased costs and damage our customer relationships. Qualifying a new contract manufacturer and commencing production is expensive and time-consuming. We may need to increase our component purchases, contract manufacturing capacity and internal test and quality functions if we experience increased demand. The inability of our contract manufacturers to provide us with adequate supplies of high-quality products could cause a delay in our order fulfillment, and our business, operating results and financial condition may be harmed.

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We rely on a limited number of suppliers, and in some cases single-source suppliers, and any disruption or termination of ~~these~~our supply arrangements could delay shipments of our products and could harm our relationships with current and prospective customers.

We rely on a limited number of suppliers, and in some cases, on single-source suppliers, for several key components of our products, and we have not generally entered into agreements for the long-term purchase of these components. For example, the CPUs utilized in our products are supplied by Intel Corporation (Intel), and neither we nor our contract manufacturers have an agreement with Intel for the procurement of these CPUs. Instead, we purchase the CPUs either directly from Intel or through a reseller on a purchase order basis. Intel or its resellers could stop selling to us at any time or could raise their prices without notice.

This reliance on a limited number of suppliers and the lack of any guaranteed sources of supply exposes us to several risks, including:

the inability to obtain an adequate supply of key components, including solid-state drives;

price volatility for the components of our products;

failure of a supplier to meet our quality or production requirements;

failure of a supplier of key components to remain in business or adjust to market conditions; and

consolidation among suppliers, resulting in some suppliers exiting the industry or discontinuing the manufacture of components.

Further, some of the components in our products are sourced from component suppliers outside the United States. The portion of our products that are sourced outside the United States may subject us to additional logistical risks or risks associated with complying with local rules and regulations in foreign countries. Significant changes to existing international trade agreements could lead to sourcing or logistics disruption resulting from import delays or the imposition of increased tariffs on our sourcing partners. For example, the United States and Chinese governments have recently had discussions regarding potential import tariffs by both countries.

As a result of these risks, we cannot assure investors that we will be able to obtain enough of these key components in the future or that the cost of these components will not increase. If our supply of components is disrupted or delayed, or if we need to replace our existing suppliers, there can be no assurance that additional components will be available when required or that components will be available on terms that are favorable to us, which could extend our lead times, increase the costs of our components and harm our business, operating results and financial condition. ~~Even if we are successful in growing our business, we~~We may not be able to continue to procure components at reasonable prices, which may require us to enter into longer-term contracts with component suppliers to obtain ~~these~~ components at competitive prices. ~~This~~Any of the foregoing disruptions could increase our costs and decrease our gross margins, harming our business, operating results and financial condition.

Managing the supply of our products and their components is complex. Insufficient supply and inventory may result in lost sales opportunities or delayed revenue, while excess inventory may harm our gross margins.

Our third-party contract manufacturers 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 marketing organizations, adjusted for overall market conditions. In order to reduce manufacturing lead times and plan for adequate component supply, from time to time we may issue ~~forecasts~~orders 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 make accurate forecasts and effectively manage the supply of our products and components. We have, in the past, had to write off inventory in connection with transitions to new product models. If we ultimately determine that we have excess supply, we may have to reduce our prices and write down or write off excess or obsolete inventory, which in turn could result in lower gross margins. Alternatively, insufficient supply levels may lead to shortages that result in delayed revenue, reduced product margins or loss of sales opportunities altogether. If we are unable to effectively manage our supply and inventory, our results of operations could be adversely affected.

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If we are unable to sell renewals of our ~~maintenance and~~ support subscription services to our customers, our future revenue and operating results will be harmed.

Existing customers may not renew their ~~maintenance and~~ support subscription agreements after the initial period, and given our limited operating history, we may not be able to accurately predict our renewal rates. Our customers’ renewal rates may decline or fluctuate as a result of a number of factors, including their available budget and the level of their satisfaction with our ~~storage platform,~~products, customer support and pricing as compared to that offered by our competitors. If our customers renew their contracts, they may renew on terms that are less economically beneficial to us. ~~We cannot assure investors that our customers will renew their maintenance and support agreements, and if~~If our customers do not renew their agreements or renew on less favorable terms, our revenue may grow more slowly than expected, if at all.

We expect that revenue from ~~maintenance and~~ support subscription agreements will increase as a percentage of total revenue over time, and because we recognize this revenue over the term of the relevant contract period, downturns or upturns in sales of support subscriptions are not immediately reflected in full in our results of operations.

We expect that revenue from ~~maintenance and~~ support subscription agreements will increase as a percentage of total revenue over time. We recognize ~~maintenance and~~ support subscription revenue ratably over the term of the relevant service period. As a result, much of the ~~maintenance and~~ support subscription revenue we report each quarter is derived from ~~maintenance and~~ support subscription agreements that we sold in prior quarters. Consequently, a decline in new or renewed ~~maintenance and~~ support subscription agreements in any one quarter will not be fully reflected in revenue in that quarter but will negatively affect our revenue in future quarters. Accordingly, the effect of significant downturns in sales of ~~maintenance and~~ support subscriptions is not reflected in full in our results of operations until future periods. ~~Also, it~~It is also difficult for us to rapidly increase our ~~maintenance and~~ support subscription revenue through additional sales in any period, as revenue from renewals must be recognized ratably over the applicable service period.

Adverse economic conditions or reduced data center spending may ~~adversely impact~~harm our revenues and profitability.

Our operations and performance depend in part on worldwide economic conditions and the impact these conditions have on levels of spending on data center technology. Global economic uncertainty and political and fiscal challenges in the United States and abroad could adversely impact data center spending. Our business depends on the overall demand for data center infrastructure and on the economic health of our current and prospective customers.

Weak economic conditions ~~or a reduction in data center spending,~~ would likely adversely impact our business, operating results and financial condition in a number of ways, including by reducing sales, lengthening sales cycles and lowering prices ~~for~~of our products and services.

Third-party claims that we ~~are infringing the~~infringe their intellectual property rights ~~of others, whether successful or not,~~ could ~~subject us to~~be costly and ~~time-consuming litigation or require us to obtain expensive licenses, and~~harm our ~~business could be harmed.~~business.

There is a substantial amount of intellectual property litigation in the flash-based storage industry, and we may become party to, or threatened with, litigation or other adversarial proceedings regarding intellectual property rights with respect to our ~~technology, including interference or derivation proceedings before the U.S. Patent and Trademark Office.~~technology. Third parties may assert infringement claims against us based on existing or future intellectual property rights. The outcome of intellectual property litigation is subject to uncertainties that cannot be adequately quantified in advance. We have ~~in the past received~~been, and may in the future ~~receive inquiries from other intellectual property holders and may become~~be, subject to claims that we infringe ~~their~~upon the intellectual property rights of other intellectual property holders, particularly as we ~~expand our presence in the market~~grow and face increasing competition. ~~For example, in 2013, EMC Corporation (EMC) brought lawsuits against~~

~~us, alleging misappropriation of confidential information and trade secrets and patent infringement. In October 2016,~~

~~we resolved pending disputes between EMC and us, resulting in the dismissal of the lawsuits.~~

Any intellectual property rights claim ~~such as the lawsuits brought by EMC,~~ against us or our customers, suppliers, and channel partners, with or without merit, could be time-consuming and expensive to litigate or settle, could divert management’s resources and attention from operating our business and could force us to acquire intellectual property rights and licenses, which may involve substantial royalty payments. Further, a party making such a claim, if successful, could secure a judgment that requires us to pay substantial damages, including treble damages and attorneys’ fees if we are found to have willfully infringed a patent. An adverse determination also could invalidate our intellectual property rights and prevent us from manufacturing and ~~offering~~selling our products ~~to our customers~~ and may require that we procure or develop substitute products that do not infringe, which could require significant effort and expense. We may not be able to re-engineer our products successfully to avoid infringement, and we may have to seek a license for the infringed technology, which may not be available on reasonable terms or at all, may significantly increase our operating expenses or may require us to restrict our business activities in one or more respects. Even if we were able to obtain a license, it could be non-exclusive, thereby giving our competitors access to the same technologies licensed to us. Claims that we have misappropriated the confidential information or trade secrets of third parties could have a similar negative impact on our business. Any of these events could harm our business and financial condition.

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We currently have a number of agreements in effect pursuant to which we have agreed to defend, indemnify and hold harmless our customers, suppliers and channel partners from damages and costs which may arise from the infringement by our products of third-party patents, trademarks or other proprietary rights. The scope of these indemnity obligations varies but may, in some instances, include indemnification for damages and expenses, including attorneys’ fees. Our insurance may not cover intellectual property infringement claims. A claim that our products infringe a third party’s intellectual property rights could harm our relationships with our customers, deter future customers from purchasing our products and expose us to costly litigation and settlement expenses. Even if we are not a party to any litigation between a customer and a third party relating to infringement by our products, an adverse outcome in any such litigation could make it more difficult for us to defend our products against intellectual property infringement claims in any subsequent litigation in which we are a named party. Any of these results could harm our brand and financial condition.

The success of our business depends in part on our ability to protect and enforce our intellectual property rights.

We rely on a combination of patent, copyright, service mark, trademark and trade secret laws, as well as confidentiality procedures and contractual restrictions, to establish and protect our proprietary rights, all of which provide only limited protection. We have over 700 issued patents and patent applications in the United States and foreign countries. We cannot assure investors that future patents issued to us, if any, ~~patents~~ will ~~issue with respect to our currently pending patent applications in a manner that gives~~give us the protection that we seek, if at all, or that any patents issued to us will not be challenged, invalidated, circumvented or held to be ~~unenforceable in actions against alleged infringers.~~unenforceable. Our issued patents and any patents that may issue in the future ~~with respect to pending or future patent applications~~ may not provide sufficiently broad protection or ~~they~~ may not ~~prove to~~ be ~~enforceable in actions against alleged infringers.~~enforceable. Changes to the patent laws in the United States and other jurisdictions could also diminish the value of our patents and patent applications or narrow the scope of our patent protection. We cannot be certain that the steps we have

taken will prevent unauthorized use of our technology or the reverse engineering of our technology. Moreover, others may independently develop technologies ~~that are~~ competitive to ours or infringe our intellectual property. Furthermore, any of our trademarks may be challenged by others or invalidated through administrative process or litigation.

Protecting against the unauthorized use of our intellectual property, products and other proprietary rights is expensive and difficult. Litigation may be necessary in the future to enforce or defend our intellectual property rights or to determine the validity and scope of the proprietary rights of others. Any such litigation could result in substantial costs and diversion of management’s resources and attention, either of which could harm our business, operating results and financial condition. Further, many of our current and potential competitors have the ability to dedicate substantially greater resources than us to ~~defending~~defend intellectual property infringement claims and ~~to enforcing~~enforce their intellectual property ~~rights than we have.~~rights. Accordingly, we may not be able to prevent third parties from infringing upon or misappropriating our intellectual property. Effective patent, trademark, service mark, copyright and trade secret protection may not be available in every country in which our products are available. An inability to adequately protect and enforce our intellectual property and other proprietary rights could harm our business and financial condition.

~~If we are unable to protect the confidentiality of our trade secrets, the value of our technology could be materially adversely affected and our business could be harmed.~~

In addition to the protection afforded by patents, we rely on confidential proprietary information, including trade secrets and know-how to develop and maintain our competitive position. Any disclosure to or misappropriation by third parties of our confidential proprietary information could enable competitors to quickly duplicate or surpass our technological achievements, thus eroding our competitive position in our market. We seek to protect our confidential proprietary information, in part, by confidentiality agreements and invention assignment agreements with our employees, consultants, scientific advisors, contractors and collaborators. These agreements are designed to protect our proprietary information; however, we cannot be certain that such agreements have been entered into with all relevant parties, and we cannot be certain that our trade secrets and other confidential proprietary information will not be disclosed or that competitors will not otherwise gain access to our trade secrets or independently develop substantially equivalent information and techniques. For example, any of these parties may breach the agreements and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches.

We also seek to preserve the integrity and confidentiality of our proprietary information by maintaining physical security of our premises and physical and electronic security of our IT systems, but it is possible that these security measures could be breached. If any of our confidential proprietary information were to be lawfully obtained or independently developed by a competitor, we may have no right to prevent such competitor from using that technology or information to compete with us, which could harm our competitive position. Further, the laws of some foreign countries do not protect proprietary rights to the same extent or in the same manner as the laws of the United States. As a result, we may encounter significant problems in protecting and defending our intellectual property both in the United States and abroad. If we are unable to prevent material disclosure of the intellectual property related to our technologies to third parties, we will not be able to establish or maintain a competitive advantage in our market, which could harm our business.

Our use of open source software could impose limitations on our ability to commercialize our products.

We use open source software in our products and expect to continue to use open source software in the future. Although we monitor our use of open source software, the terms of many open source licenses have not been interpreted by U.S. or foreign courts, and there is a risk that such licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to market our products. From time to time, we may face claims from third parties claiming ownership of, or demanding release of, the open source software or derivative works that we have developed using such software, which could include our proprietary source code, or otherwise seeking to enforce the terms of the applicable open source license. These claims could result in litigation and could require us to make our software source code freely available, seek licenses from third parties in order to continue offering our products for certain uses or cease offering the implicated solutions unless and until we can re-engineer them to avoid infringement. This re-engineering process could require significant additional research and development resources, and we may be required to discontinue providing some of our software in the event re-engineering cannot be accomplished on a timely basis, any of which could harm our business, operating results and financial condition.

If we suffer a cybersecurity or other security breach, we may lose customers and incur significant liabilities.

~~System security risks, data protection breaches and cyber-attacks on our systems or products could compromise our proprietary information (or information~~

Table of our customers), disrupt our internal operations and harm public perception of our products, which could cause our business and reputation to suffer, create additional liabilities and adversely affect our financial results and stock price.Contents

In the ordinary course of business, we store sensitive data on our internal systems, networks and servers, which may include intellectual property, our proprietary business information and that of our customers, suppliers and business partners and sales data, which may include personally identifiable information. Additionally, we design and sell products that allow our customers to store our customers’ data. The security of our own networks and the intrusion protection features of our ~~product~~products are both critical to our operations and business strategy.

We devote significant resources to network security, data encryption and other security measures to protect our systems and data, but these security measures cannot provide absolute security. For example, we use encryption and authentication technologies to secure the transmission and storage of data and prevent third party access to data or accounts, but these security measures are subject to third-party security breaches, employee error, malfeasance, faulty password management or other irregularities. Any destructive or intrusive breach of our internal systems could result in the information stored on our networks being accessed, publicly disclosed, lost or stolen. Additionally, an effective attack on our products could disrupt the proper functioning of our products, allow unauthorized access to sensitive, proprietary or confidential information of ours or our customers, disrupt or temporarily interrupt customers’ operations or cause other destructive outcomes, including the theft of information sufficient to engage in fraudulent transactions. The risk that these types of events could seriously harm our business is likely to increase as we expand our network of channel partners, resellers and authorized service providers and operate in more countries. The economic costs to us to eliminate or alleviate cyber or other security problems, viruses, worms, malicious software systems and security vulnerabilities could be significant and may be difficult to anticipate or measure because the damage may differ based on the identity and motive of the programmer or hacker, which are often difficult to identify. If any of these types of security breaches, actual or perceived, were to occur and we were to be unable to protect sensitive data, our relationships with our business partners and customers could be materially damaged, our reputation and brand could be materially harmed, use of our products could decrease and we could be exposed to a risk of loss or litigation and possible liability.

We may ~~further expand through acquisitions of, or investments in,~~acquire other ~~companies, each of~~businesses which ~~may divert~~could require significant management attention, disrupt our ~~management’s attention, resulting in additional dilution to~~business, dilute stockholder value, and adversely affect our ~~stockholders and consumption of resources that are necessary to sustain and grow our business.~~operating results.

~~Our business strategy~~We may, from time to time, ~~include acquiring~~acquire complementary products, technologies or businesses. For example, in August 2018 we acquired StorReduce, Inc. We also may enter into relationships with other businesses in order to expand our product offerings, which could involve preferred or exclusive licenses, additional channels of distribution or discount pricing or investments in other companies. Negotiating these transactions can be time-consuming, difficult and expensive, and our ability to close these transactions may be subject to third-party or government approvals, which are beyond our control. Consequently, we can make no assurance that these transactions, once undertaken and announced, will close.

These kinds of acquisitions or investments may result in unforeseen operating difficulties and expenditures. In particular, we may encounter difficulties assimilating or integrating the businesses, technologies, products, personnel or operations of ~~the~~ acquired companies, particularly if the key personnel of the acquired business choose not to work for us, and we may have difficulty retaining the customers of any acquired business. Acquisitions may also disrupt our ongoing business, divert our resources and require significant management attention that would otherwise be available for development of our business. Any acquisition or investment could expose us to unknown liabilities. Moreover, we cannot assure investors that the anticipated benefits of any acquisition or investment would be ~~realized or that we would not be exposed to unknown liabilities.~~realized. In connection with these types of transactions, we may issue additional equity securities that would dilute our stockholders, use cash that we may need in the future to operate our business, incur debt on terms unfavorable to us or that we are unable to repay, incur large charges or substantial liabilities, encounter difficulties integrating diverse business cultures and become subject to adverse tax consequences, substantial depreciation or deferred compensation charges. These challenges related to acquisitions or investments could harm our business and financial condition.

~~We may require additional capital to support business growth, and this capital might not be available on acceptable terms, or at all.~~

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 products or enhance our existing products, enhance our operating infrastructure and acquire complementary businesses and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional funds through further issuances of equity or convertible debt securities, our stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing in the future could involve additional restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. 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 support our business growth and to respond to business challenges could be significantly limited and our prospects and financial condition could be harmed.

We are exposed to the credit risk of some of our customers, which could harm our business, operating results and financial condition.

Most of our sales are made on an open credit basis. ~~As a general matter, we~~We monitor individual customer payment capability when we grant open credit arrangements and may limit these open credit arrangements based on perceived creditworthiness. We also maintain allowances we believe are adequate to cover exposure for doubtful accounts. Although we have programs in place that are designed to monitor and mitigate these risks, we cannot assure investors these programs

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will be effective in managing our 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.

Sales to U.S. federal, state and local governments are subject to a number of challenges and risks that may adversely impact our business.

Sales to U.S. federal, state and local governmental agencies may in the future account for a significant portion of our revenue. ~~Sales to such government entities are subject to the following risks:~~

~~selling~~Selling to governmental agencies can be highly competitive, expensive and time consuming, often requiring significant upfront time and expense without any assurance that such efforts will generate a ~~sale;~~

~~government~~sale. Government certification requirements applicable to our products may change and in doing so restrict our ability to sell into the U.S. federal government sector until we have attained the revised ~~certification;~~

~~government~~certification. Government demand and payment for our products and services may be impacted by public sector budgetary cycles and funding authorizations, with funding reductions or delays adversely affecting public sector demand for our products and ~~services;~~

weservices. We sell our products to governmental agencies through our channel partners, and these agencies 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 results of ~~operations;~~

~~governments~~operations. Governments routinely investigate and audit government contractors’ administrative processes, and any unfavorable audit could result in the government refusing to continue buying our products, which would adversely impact our revenue and results of operations, or institute fines or civil or criminal liability if the audit uncovers improper or illegal ~~activities; and~~

activities. Finally, governments may require certain products 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 these requirements, affecting our ability to sell these products to governmental agencies.

We need to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act, and the failure to do so could have a material adverse effect on our business and stock price.

The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. We are required to perform system and process evaluation and testing of our internal control over financial reporting to allow management to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act ~~or Section 404.~~(Section 404). Our independent registered public accounting firm also needs to attest to the effectiveness of our internal control over financial reporting. ~~Over the last year, we have taken and~~We continue to take ~~additional~~ steps to ~~upgrade~~develop our finance and accounting function, ~~including the hiring of~~such as continue to hire additional ~~finance and accounting~~ personnel and to implement additional tools and improvements to policies and ~~procedures associated with the financial statement close process.~~procedures. Our compliance with Section 404 may require us to continue to incur substantial expense and expend significant management efforts. If we are unable to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm notes or identifies deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the ~~market~~ price of our Class A common stock could decline and we could be subject to sanctions or investigations by the SEC, or other regulatory authorities, which would require additional financial and management resources.

Our international operations, ~~subject~~as well as U.S. tax reform, could expose us to potentially adverse tax consequences.

The Tax Cuts and Jobs Act (the Tax Act) was signed into law on December 22, 2017. The new legislation decreased the U.S. corporate federal income tax rate from 35% to 21% effective January 1, 2018. The Tax Act also includes a number of other provisions including the elimination of loss carrybacks and limitations on the use of future losses, limitations on the deductibility of executive compensation, limitation or modification on the deductibility of certain business expenses, the transition of U.S. international taxation from a worldwide tax system to a territorial system, and the introduction of a base erosion and anti-abuse tax. In the absence of guidance on various uncertainties and ambiguities in the application of these provisions, we will use what we believe are reasonable interpretations and assumptions in applying the Tax Act, but it is possible that the Internal Revenue Service could issue subsequent guidance or take positions on audit that differ from our prior interpretations and assumptions, which could have a material adverse effect on our cash tax liabilities, results of operations, and financial condition.

We generally conduct our international operations through wholly-owned subsidiaries and report our taxable income in various jurisdictions worldwide based upon our business operations in those jurisdictions. InGiven the ~~future,~~passage

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of the Tax Act and other global tax developments, we ~~may decide~~continue to ~~reorganize~~evaluate our corporate ~~tax~~ structure and intercompany ~~relationships~~relationships. Future changes to ~~more closely align~~U.S. and global tax laws may adversely impact our ~~corporate organization with the expansion of our international business activities. Although we anticipate that such steps could achieve a reduction in our overall~~ effective tax ~~rate in the future as a result of implementing the new corporate structure, our restructuring efforts will require us to incur expenses in the near term for which we may not realize any benefits.~~rate.

Our intercompany relationships are, and after the implementation of any changes to our ~~new~~ corporate ~~tax~~ structure will continue to be, subject to complex transfer pricing regulations administered by taxing authorities in various jurisdictions. The relevant taxing authorities may disagree with our determinations as to the income and expenses attributable to specific jurisdictions. If such a disagreement were to occur, and our position were not sustained, we could be required to pay additional taxes, interest and penalties, which could result in tax charges, higher effective tax rates, reduced cash flows and lower overall profitability of our operations. In addition, following the implementation of our new corporate tax structure, if the intended tax treatment of the structure is not accepted by the applicable taxing authorities, there are changes in tax law that negatively impact the structure or we do not operate our business consistent with the structure and applicable tax laws and regulations, we may fail to achieve any tax advantages as a result of the new corporate structure, and our future operating results and financial condition may be negatively impacted.

Current U.S. tax laws, including limitations on the ability of taxpayers to claim and utilize foreign tax credits and the deferral of certain tax deductions until earnings outside of the United States are repatriated to the United States, as well as changes to U.S. tax laws that may be enacted in the future, could impact the tax treatment of our foreign earnings. Due to expansion of our international business activities, any changes in the U.S. taxation of such activities may increase our worldwide effective tax rate and adversely affect our financial condition and operating results.

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, anti-bribery laws, import/export controls, federal securities laws and tax laws and regulations. In certain jurisdictions, these regulatory requirements may be more stringent than in the United States. For example, the European Union has adopted certain directives to facilitate the recycling of electrical and electronic equipment sold in the European Union, including the Restriction on the Use of Certain Hazardous Substances in Electrical and Electronic Equipment directive and the Waste Electrical and Electronic Equipment directive.

Changes in applicable laws, regulations and standards could harm our business, operating results and financial condition. For example, we have a presence in the European Union, including in United Kingdom, and our business could be impacted, to some extent, by the United Kingdom's exit from the European Union and related changes in law and regulation. In addition, the European Union has adopted the General Data Protection Regulation, which went into effect in May 2018 and contains numerous requirements and changes, including more robust obligations on data processors and heavier documentation requirements for data protection compliance programs by companies. Customers may choose to implement technological solutions to comply with such regulations that impact the performance and competitiveness of our products and solutions.

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, our business, operating results and financial condition could be harmed. Even the perception of privacy concerns, whether or not valid, may harm our reputation and inhibit competitiveness and adoption of our products by current and future customers. 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 and sanctions could harm our business, operating results and financial condition.

Governmental regulations affecting the import or export of products could negatively affect our revenue.

The U.S. and various foreign governments have imposed controls, export license requirements and restrictions on the import or export of some technologies, especially encryption technology. From time to time, governmental agencies have proposed additional regulation of encryption technology, such as requiring the escrow of imports or exports. If we fail to obtain required import or export approval for our products, our international and domestic sales could be harmed and our revenue may be adversely affected. In many cases, we rely on vendors and channel partners to handle logistics associated with the import and export of our products, so our visibility and control over these matters may be limited. In addition, failure to comply with such regulations could result in penalties, costs and restrictions on export privileges, which could harm our business, operating results and financial condition.

Our business is subject to the risks of earthquakes, floods and other natural catastrophic events, and to interruption by man-made factors such as computer viruses or terrorism.

We and our suppliers have operations in locations, including our headquarters in California, that are subject to earthquakes, floods and other natural catastrophic events, such as severe weather and geological events, which could disrupt our operations or the operations of our customers and suppliers. Our customers affected by a natural disaster could postpone or cancel orders of our products, which could negatively impact our business. Moreover, should any

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of our key suppliers fail to deliver components to us as a result of a natural disaster, we may be unable to purchase these components in necessary quantities or may be forced to purchase components in the open market at significantly higher costs. We may also be forced to purchase components in advance of our normal supply chain demand to avoid potential market shortages. ~~We may not have adequate~~Our business interruption insurance may be insufficient to compensate us for losses due to a significant natural disaster or due to man-made factors. Any natural catastrophic events may also prevent our employees from being able to reach our offices in any jurisdiction around the world, and therefore impede our ability to conduct business as usual.

In addition, acts of terrorism or malicious computer viruses could cause disruptions in our or our customers’ businesses or the economy as a whole. To the extent that these disruptions result in delays or cancellations of customer orders or the deployment of our products, our business, operating results and financial condition could be harmed.

Risks Related to Our Notes

We may not have the ability to raise the funds necessary to settle conversions of the Notes or to repurchase the Notes upon a fundamental change, and our future debt may contain limitations on our ability to pay cash upon conversion or repurchase of the Notes.

Holders of the Notes will have the right to require us to repurchase all or a portion of their Notes upon the occurrence of a fundamental change at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid special interest, if any, to, but excluding, the fundamental change repurchase date. In addition, if a make-whole fundamental change (as defined in the indenture for the Notes) occurs prior to the maturity date of the Notes, we will in some cases be required to increase the conversion rate for a holder that elects to convert its Notes in connection with such make-whole fundamental change. Upon a conversion of the Notes, unless we elect to deliver solely shares of our Class A common stock to settle such conversion (other than paying cash in lieu of delivering any fractional share), we will be required to make cash payments in respect of the Notes being converted. However, we may not have enough available cash or be able 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.

In addition, our ability to repurchase or to pay cash upon conversion of the Notes may be limited by law, regulatory authority or agreements governing our future indebtedness. Our failure to repurchase the Notes at a time when the repurchase is required by the indenture governing the Notes or to pay cash upon conversion of the Notes as required by the indenture would constitute a default under the indenture. A default under the 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 the Notes or to pay cash upon conversion of the Notes.

Servicing our debt will require a significant amount of cash, and we may not have sufficient cash flow from our business to pay our substantial debt.

Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, including the amounts payable under the Notes, depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not continue to generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.

We may still incur substantially more debt or take other actions that would diminish our ability to make payments on the Notes when due.

We and our subsidiaries may incur substantial additional debt in the future, subject to the restrictions contained in our future debt instruments, some of which may be secured debt. We are not restricted under the terms of the indenture governing the Notes from incurring additional debt, securing existing or future debt, recapitalizing our debt

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or taking a number of other actions that could have the effect of diminishing our ability to make payments on the Notes when due. Furthermore, the indenture prohibits us from engaging in certain mergers or acquisitions unless, among other things, the surviving entity assumes our obligations under the Notes and the indenture. These and other provisions in the indenture could deter or prevent a third party from acquiring us even when the acquisition may be favorable to holders of the Notes.

The conditional conversion feature of the Notes, if triggered, may adversely affect our financial condition and operating results.

In the event the conditional conversion feature of the Notes is triggered, holders of the Notes will be entitled to convert the Notes at any time during specified periods at their option. If one or more holders elect to convert their Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than by paying cash in lieu of delivering any fractional share), we may settle all or a portion of our conversion obligation in cash, which could adversely affect our liquidity. In addition, even if holders do not elect to convert their Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.

If we are unable to use the treasury stock method in accounting for the shares issuable upon conversion of the Notes, then our diluted earnings per share would be adversely affected.

Under certain circumstances, convertible debt instruments (such as the Notes) that may be settled entirely or partly in cash are currently accounted for utilizing the treasury stock method, the effect of which is that the shares issuable upon conversion of the Notes are not included in the calculation of diluted earnings per share except to the extent that the conversion value of the Notes exceeds their principal amount. Under the treasury stock method, for diluted earnings per share purposes, the transaction is accounted for as if the number of shares of common stock that would be necessary to settle such excess, if we elected to settle such excess in shares, are issued. We cannot be sure that the accounting standards in the future will continue to permit the use of the treasury stock method. If we are unable to use the treasury stock method in accounting for the shares issuable upon conversion of the Notes, then our diluted earnings per share would be adversely affected.

The capped call transactions may affect the value of the Notes and our common stock.

In connection with the Notes, we entered into capped call transactions with certain financial institutions (the option counterparties). The capped call transactions are expected generally to reduce the potential dilution upon any conversion of the Notes and/or offset any cash payments we are required to make in excess of the principal amount upon conversion of the Notes, with such reduction and/or offset subject to a cap.

In connection with establishing their initial hedges of the capped call transactions, the option counterparties and/or their respective affiliates purchased shares of our Class A common stock and/or entered into various derivative transactions with respect to our Class A common stock. This activity could have increased (or reduced the size of any decrease in) the market price of our Class A common stock or the Notes at that time.

In addition, the option counterparties and/or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our Class A common stock and/or purchasing or selling our Class A common stock in secondary market transactions (and are likely to do so during any observation period related to a conversion of notes or following any repurchase of notes by us on any fundamental change repurchase date or otherwise). This activity could also cause or avoid an increase or a decrease in the price of our Class A common stock or the Notes.

The potential effect, if any, of these transactions and activities on the price of our Class A common stock or the Notes will depend in part on market conditions and cannot be ascertained at this time. Any of these activities could adversely affect the value of our common stock.

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Risks Related to Our Common Stock

The dual class structure of our common stock has the effect of concentrating voting control with those stockholders who hold our Class B common stock, including our executive officers, employees and directors and their affiliates, which limits investors’ ability to influence the outcome of important transactions, including a change in control.

Our Class B common stock has ten votes per share, and our Class A common stock has one vote per share. Stockholders who hold shares of our Class B common stock, including our executive officers, employees and directors and their affiliates, collectively hold the ~~vast~~ majority of the voting power of our outstanding capital stock. Because of the ten-to-one voting ratio between our Class B common stock and Class A common stock, the holders of our Class B common stock will therefore be able to control all matters submitted to our stockholders for approval so long as the shares of our Class B common stock represent at least 10% of all outstanding shares of our Class A common stock and Class B common stock. These holders of our Class B common stock may also have interests that differ from investors and may vote in a way with which investors disagree and which may be adverse to investors’ interests. This concentrated control may have the effect of delaying, preventing or deterring a change in control of our company, could deprive our stockholders of an opportunity to receive a premium for their capital stock as part of a sale of our company and might ultimately affect the market price of our Class A common stock.

Future transfers by holders of our Class B common stock will generally result in those shares converting into shares of our Class A common stock, subject to limited exceptions, such as certain transfers effected for estate planning purposes. The conversion of shares of our Class B common stock into shares of our Class A common stock will have the effect, over time, of increasing the relative voting power of those holders of Class B common stock who retain their shares in the long term. If, for example, Dr. Dietzen and Messrs. Colgrove and Hatfield retain a significant portion of their holdings of our Class B common stock for an extended period of time, they could control a significant portion of the voting power of our capital stock for the foreseeable future. As board members, Dr. Dietzen and Mr. Colgrove each owe a fiduciary duty to our stockholders and must act in good faith and in a manner they reasonably believe to be in the best interests of our stockholders. However, as stockholders, Dr. Dietzen and Messrs. Colgrove and Hatfield are entitled to vote their shares in their own interests, which may not always be in the interests of our stockholders generally.

~~Substantial sales of shares of our common stock in the future could cause the market price of our common stock to decline.~~

The price of our common stock could decline if there are substantial sales of our common stock, particularly sales by any of our large stockholders. For example, we have two large stockholders that each hold well over 10% of our outstanding common stock. While volume limitations under Rule 144 under the Securities Act could partially limit sales by directors, executive officers and other affiliates, the market price of the shares of our common stock could decline as a result of sales of a substantial number of our shares in the public market or the perception in the market that the holders of a large number of shares intend to sell their shares.

The trading price of our Class A common stock has been and may continue to be highly volatile, and an active, liquid, and orderly market for our Class A common stock may not be sustained.

The trading price of our Class A common stock has been, and will likely continue to be, highly volatile. Since shares of our Class A common stock were sold in our initial public offering in October 2015 at a price of $17.00 per share, our closing stock price has ranged from $9.40 to ~~$19.74,~~$26.82, through August ~~25, 2017.~~30, 2018. Some of the factors, many of which are beyond our control, affecting our volatility may include:

price and volume fluctuations in the overall stock market from time to time;

significant volatility in the market price and trading volume of technology companies in general and of companies in our industry;

actual or anticipated changes in our results of operations or fluctuations in our operating results;

whether our operating results meet the expectations of securities analysts or investors;

~~actual~~issuance or ~~anticipated changes~~new or updated research or reports by securities analysts, including the publication of unfavorable reports or change in ~~the expectations~~recommendation or downgrading of ~~investors or securities analysts;~~our Class A common stock;

actual or anticipated developments in our competitors’ businesses or the competitive landscape generally;

litigation involving us, our industry or both;

general economic conditions and trends;

major catastrophic events;

sales of large blocks of our stock; or

departures of key personnel.

~~The stock markets in general, and market prices for the securities~~

Table of technology-based companies like ours in particular, have from time to time experienced volatility that often has been unrelated to the operating performance of the underlying companies. A certain degree of stock price volatility can be attributed to being a newly public company. These broad market and industry fluctuations may adversely affect the market price of our Class A common stock, regardless of our operating performance. Contents

In several recent situations where the ~~market~~ price of a stock has been volatile, holders of that stock have instituted securities class action litigation against the company that issued the ~~stock, such as the consolidated class action we currently are defending against.~~stock. If any of our stockholders were to bring a lawsuit against us, the defense and disposition of the lawsuit could be costly and divert the time and attention of our management and harm our business, operating results and financial condition.

~~If securities analysts do not publish research or reports about our business, or if they downgrade our stock, the price of our stock could decline.~~

The trading market for our Class A common stock will likely be influenced by research and reports that securities or industry analysts publish about us or our business. In the event securities or industry analysts cover our company and one or more of these analysts downgrades our stock, lowers their price target, or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline.

We have never paid dividends on our common stock and we do not anticipate paying any cash dividends in 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, investors may only receive a return on their investment in our Class A common stock if the market price of our common stock increases.

~~We will continue to incur increased costs as a result of being a public company.~~

As a public company, we have incurred and expect to continue to incur significant legal, accounting and other expenses. In addition, new rules implemented by the SEC and New York Stock Exchange require changes in corporate governance practices of public companies. We expect these rules and regulations to continue to increase our legal and financial compliance costs and to make some activities more time-consuming and costly. We will continue to incur additional costs associated with our public company reporting requirements. We expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified people to serve on our board of directors or as executive officers.

Provisions in our amended and restated certificate of incorporation and amended and restated bylaws and under Delaware law might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the ~~trading~~ price of our Class A common stock.

Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that could depress the trading price of our Class A common stock by acting to discourage, delay or prevent a change of control of our company or changes in our management that the stockholders of our company may deem advantageous. These provisions:

provide for a dual class common stock structure, so that certain stockholders will have significant influence over all matters requiring stockholder approval, including the election of directors and significant corporate transactions, such as a merger or other sale of our company or its assets and which could discourage others from initiating any potential merger, takeover or other change of control transaction that other stockholders may view as beneficial;

establish a classified board of directors so that not all members of our board of directors are elected at one time;

authorize the issuance of “blank check” preferred stock that our board of directors could issue to increase the number of outstanding shares to discourage a takeover attempt;

prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;

prohibit stockholders from calling a special meeting of our stockholders;

provide that the board of directors is expressly authorized to make, alter or repeal our bylaws; and

establish advance notice requirements for nominations for elections to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.

Additionally, we are subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested”

stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder and which may discourage, delay, or prevent a change of control of our company.

Any provision of our amended and restated certificate of incorporation, bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our Class A common stock.

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Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for any derivative action or proceeding brought on our behalf; any action asserting a breach of fiduciary duty; any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, our amended and restated certificate of incorporation or our bylaws; or any action asserting a claim against us that is governed by the internal affairs doctrine. The choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and other employees. If a court were to find the choice of forum provision contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business and financial condition.

Item 2. Unregistered Sales of Equity Securities and Use of ~~Proceeds.~~Proceeds

Not applicable.

~~Unregistered Sales of Equity Securities~~

~~Not applicable.~~

~~Use of Proceeds from our Initial Public Offering of Class A Common Stock~~

~~Not applicable.~~

Item 3. Defaults upon Senior Securities.

Not applicable.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

On June 20, 2017, we held our annual meeting of stockholders (the Annual Meeting). At the Annual Meeting, our stockholders voted on five proposals, as described in the definitive proxy statement filed with the U.S. Securities and Exchange Commission on May 8, 2017. As disclosed in a Form 8-K filed on June 23, 2017, our stockholders approved, on an advisory basis, the frequency of future stockholder advisory votes on our executive compensation of “One Year.” In August 2017, based on the voting results and in consideration of the appropriate voting frequency at this time, our board of directors resolved that the company will hold an advisory vote on the compensation of our named executive officers every year.Not applicable.

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Item 6. Exhibits.

~~See the Exhibit Index following the signature page to this Quarterly Report on Form 10-Q for a list~~



		Incorporation By Reference
Exhibit Number	Description	Form	SEC File No.	Exhibit	Filing Date
3.1	Amended and Restated Certificate of Incorporation.	10-Q	001-37570	3.1	12/11/2015
3.2	Bylaws.	S-1	333-206312	3.4	9/9/2015
4.1	Form of Class A Common Stock Certificate of the Company.	S-1	333-206312	4.1	9/9/2015
4.2	Indenture dated as of April 9, 2018 by and between Pure Storage, Inc. and U.S. Bank National Association, as Trustee	8-K	001-37570	4.1	4/10/2018
4.3	Form of Global Note, representing Pure Storage, Inc.'s 0.125% Convertible Senior Notes due 2023 (included as Exhibit A to the Indenture incorporated by reference as Exhibit 4.2 hereto)	8-K	001-37570	4.2	4/10/2018
4.4	Reference is made to Exhibits 3.1 and 3.2
31.1*	Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**	Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.1	Form of Confirmation for Capped Call Transactions.	8-K	001-37570	99.1	4/10/2018
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

Table of ~~exhibits filed~~Contents

* Filed herewith.

** Furnished herewith.

+ Indicates management contract or ~~furnished with this report, which Exhibit Index is incorporated herein by reference.~~compensatory plan.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		PURE STORAGE, INC.

Date:	September ~~5, 2017~~4, 2018	By:	/s/ CHARLES GIANCARLO
			Charles Giancarlo
			Chief Executive Officer and Director (Principal Executive Officer)

Date:	September ~~5, 2017~~4, 2018	By:	/s/ TIMOTHY RIITTERS
			Timothy Riitters
			Chief Financial Officer (Principal Financial and Accounting Officer)

~~Exhibit Index~~

Incorporation By Reference
Exhibit
Number
Description Form SEC File No. Exhibit Filing Date
3.1

Amended and Restated Certificate of Incorporation.
10-Q
001-37570
3.1 12/11/2015
3.2

Bylaws.
S-1
333-206312
3.4 9/9/2015
4.1

Form of Class A Common Stock Certificate of the Company.
S-1
333-206312
4.1 9/9/2015
4.2 Reference is made to Exhibits 3.1 and 3.2.
31.1*

Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*

Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1**

Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

* Filed herewith.

** Furnished herewith.