UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DCWashington, D.C. 20549

FORM
10-Q


(Mark One)
x ☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2017August 2, 2020
OR
o ☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from   to   
Commission File Number: 001-37570
Pure Storage, Inc.
(Exact Name of Registrant as Specified in its Charter)
Delaware27-1069557
(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)

(800) 379-7873
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
650 Castro Street, Suite 400
Mountain View, California  
94041
(AddressTitle of principal executive offices, including zip code)
(Zip Code)

(800) 379-7873
(Registrant’s telephone number, including area code)
each class		Trading symbol(s)Name of each exchange on which registered
Class A Common Stock, $0.0001 par value per sharePSTGNew York Stock Exchange LLC

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, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” andfiler,” “smaller reporting company”company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filerxAccelerated filero☐
Non-accelerated filero☐(Do not check if a small reporting company)Smaller reporting companyo☐
Emerging growth companyo☐
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to section 13(a) of the Exchange Act. o


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

As of November 30, 2017September 7, 2020, the registrant had 112,788,614268,213,465 shares of its Class A common stock outstanding and 103,994,591 shares of its Class B common stock outstanding.



Table of Contents

PURE STORAGE, INC.
Table of Contents
FORM 10-Q for the Quarter Ended August 2, 2020
Page
ii
 
PART I.
 
Item 1.
21
21
32
43
4
56
67
Item 2.
1828
Item 3.
2937
Item 4.
2938
PART II.
Item 1.
3139
Item 1A.
3139
Item 2.
5060
Item 3.
5060
Item 4.
5060
Item 5.
5060
Item 6.
5061
51
Exhibit Index
52



Table of Contents

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 expansionprofitability and growth, our expectations regarding demand for our products and services and trends in the external storage market, our expectations that average sales prices may decrease or fluctuate over time, our plans to expand and continue to invest internationally, our plans to expand thecontinue investing in marketing, sales, support and research and development, organization as well as the sales and marketing function and channel programs, our shift to subscription services, 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, including development efforts and acquisitions, 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 productsalternative offerings from incumbent, vendors, hyperconverged products, defined as server computeemerging and storage combined within a single chassis, or public cloud vendors, our expectations concerning relationships with third parties, including our partners, customers and customers,contract manufacturers, the adequacy of our intellectual property rights, and expectations concerning pendingpotential legal proceedings and related costs.costs, the impact of adverse economic conditions and the duration and scope of the COVID-19 pandemic and related "shelter-in-place" orders and other measures and its impact on our business, operating results, cash flows and/or financial condition.
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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Table of Contents

PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
PURE STORAGE, INC.
Condensed Consolidated Balance Sheets
(in thousands, except per share data, unaudited)
At the End of
Fiscal 2020Second Quarter of Fiscal 2021
As of
January 31, 2017		 As of
October 31, 2017
ASSETS 
  
ASSETS  
Current assets: 
  
Current assets:  
Cash and cash equivalents$183,675
 $182,039
Cash and cash equivalents$362,635 $355,601 
Marketable securities362,986
 369,337
Marketable securities936,518 937,514 
Accounts receivable, net of allowance of $2,000 and $2,073 as of January 31, 2017 and October 31, 2017168,978
 202,006
Accounts receivable, net of allowance of $542 and $587Accounts receivable, net of allowance of $542 and $587458,643 366,698 
Inventory23,498
 37,208
Inventory38,518 36,363 
Deferred commissions, current15,787
 20,187
Deferred commissions, current37,148 39,507 
Prepaid expenses and other current assets25,157
 24,522
Prepaid expenses and other current assets56,930 76,701 
Total current assets780,081
 835,299
Total current assets1,890,392 1,812,384 
Property and equipment, net81,695
 84,264
Property and equipment, net122,740 145,126 
Operating lease right-of-use assetsOperating lease right-of-use assets112,854 121,576 
Deferred commissions, non-currentDeferred commissions, non-current102,056 105,180 
Intangible assets, net6,560
 5,432
Intangible assets, net58,257 52,855 
Deferred income taxes, non-current844
 965
GoodwillGoodwill37,584 37,584 
Restricted cashRestricted cash15,287 15,287 
Other assets, non-current30,565
 36,596
Other assets, non-current25,034 31,620 
Total assets$899,745
 $962,556
Total assets$2,364,204 $2,321,612 
LIABILITIES AND STOCKHOLDERS’ EQUITY 
  
LIABILITIES AND STOCKHOLDERS’ EQUITY  
Current liabilities: 
  
Current liabilities:  
Accounts payable$52,719
 $66,664
Accounts payable$77,651 $56,366 
Accrued compensation and benefits39,252
 50,077
Accrued compensation and benefits106,592 96,438 
Accrued expenses and other liabilities21,697
 24,945
Accrued expenses and other liabilities47,223 46,818 
Operating lease liabilities, currentOperating lease liabilities, current27,264 29,517 
Deferred revenue, current158,095
 183,889
Deferred revenue, current356,011 378,072 
Liability related to early exercised stock options1,362
 568
Total current liabilities273,125
 326,143
Total current liabilities614,741 607,211 
Convertible senior notes, netConvertible senior notes, net477,007 491,132 
Operating lease liabilities, non-currentOperating lease liabilities, non-current92,977 109,606 
Deferred revenue, non-current145,031
 173,641
Deferred revenue, non-current341,277 346,679 
Other liabilities, non-current3,159
 3,651
Other liabilities, non-current8,084 20,878 
Total liabilities421,315
 503,435
Total liabilities1,534,086 1,575,506 
Commitments and contingencies (Note 5)

 

Commitments and contingencies (Note 7)Commitments and contingencies (Note 7)
Stockholders’ equity: 
  
Stockholders’ equity:  
Preferred stock, par value of $0.0001 per share— 20,000 shares authorized as of January 31, 2017 and October 31, 2017; no shares issued and outstanding as of January 31, 2017 and October 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 October 31, 2017; 204,364 (Class A 87,027, Class B 117,337) and 216,016 (Class A 109,178, Class B 106,838) shares issued and outstanding as of January 31, 2017 and October 31, 201720
 20
Preferred stock, par value of $0.0001 per share— 20,000 shares authorized; 0 shares issued and outstandingPreferred stock, par value of $0.0001 per share— 20,000 shares authorized; 0 shares issued and outstanding0 0 
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; 264,008 and 267,776 Class A shares issued and outstandingClass 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; 264,008 and 267,776 Class A shares issued and outstanding26 27 
Additional paid-in capital1,281,452
 1,428,024
Additional paid-in capital2,107,579 2,172,391 
Accumulated other comprehensive loss(562) (719)
Accumulated other comprehensive incomeAccumulated other comprehensive income5,449 12,185 
Accumulated deficit(802,480) (968,204)Accumulated deficit(1,282,936)(1,438,497)
Total stockholders’ equity478,430
 459,121
Total stockholders’ equity830,118 746,106 
Total liabilities and stockholders’ equity$899,745
 $962,556
Total liabilities and stockholders’ equity$2,364,204 $2,321,612 
 
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)


 Second Quarter of FiscalFirst Two Quarters of Fiscal
 2020202120202021
Revenue:  
Product$300,128 $272,309 $538,869 $519,248 
Subscription services96,199 131,414 184,158 251,594 
Total revenue396,327 403,723 723,027 770,842 
Cost of revenue:  
Product92,870 84,731 169,462 154,016 
Subscription services35,138 44,266 68,859 85,275 
Total cost of revenue128,008 128,997 238,321 239,291 
Gross profit268,319 274,726 484,706 531,551 
Operating expenses:  
Research and development107,020 114,652 212,095 227,098 
Sales and marketing186,188 171,434 352,814 344,867 
General and administrative40,016 44,471 82,126 85,596 
Restructuring and other0 8,288 0 22,990 
Total operating expenses333,224 338,845 647,035 680,551 
Loss from operations(64,905)(64,119)(162,329)(149,000)
Other income (expense), net(652)1,603 (2,468)(1,813)
Loss before provision for income taxes(65,557)(62,516)(164,797)(150,813)
Provision for income taxes461 2,451 1,557 4,748 
Net loss$(66,018)$(64,967)$(166,354)$(155,561)
Net loss per share attributable to common stockholders, basic and diluted$(0.26)$(0.25)$(0.67)$(0.59)
Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted251,298 264,799 248,336 263,867 
 Three Months Ended 
 October 31,		 Nine Months Ended October 31,
 2016 2017 2016 2017
Revenue: 
  
    
Product$160,523
 $223,196
 $403,181
 $536,634
Support36,433
 54,478
 96,936
 148,132
Total revenue196,956
 277,674
 500,117
 684,766
Cost of revenue: 
  
    
Product54,725
 75,392
 131,618
 179,289
Support14,597
 20,467
 41,531
 56,569
Total cost of revenue69,322
 95,859
 173,149
 235,858
Gross profit127,634
 181,815
 326,968
 448,908
Operating expenses: 
  
    
Research and development61,612
 68,927
 173,185
 203,716
Sales and marketing91,392
 129,299
 262,073
 346,896
General and administrative22,810
 25,406
 64,021
 67,664
Legal settlement30,000
 —
 30,000
 —
Total operating expenses205,814
 223,632
 529,279
 618,276
Loss from operations(78,180) (41,817) (202,311) (169,368)
Other income (expense), net(192) 1,138
 1,127
 6,399
Loss before provision for income taxes(78,372) (40,679) (201,184) (162,969)
Provision for income taxes441
 970
 967
 2,755
Net loss$(78,813) $(41,649) $(202,151) $(165,724)
Net loss per share attributable to common stockholders, basic and diluted$(0.40) $(0.20) $(1.05) $(0.79)
Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted195,807
 213,274
 192,637
 209,456

 
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)




 Second Quarter of FiscalFirst Two Quarters of Fiscal
 2020202120202021
Net loss$(66,018)$(64,967)$(166,354)$(155,561)
Other comprehensive income net of tax:  
Unrealized net gains on available-for-sale securities2,173 2,715 3,798 7,605 
Less: reclassification adjustment for net gains on available-for-sale securities included in net loss(53)(703)(51)(869)
Change in unrealized net gains on available-for-sale securities2,120 2,012 3,747 6,736 
Comprehensive loss$(63,898)$(62,955)$(162,607)$(148,825)


See the accompanying notes to condensed consolidated financial statements.
3
 Three Months Ended 
 October 31,		 Nine Months Ended October 31,
 2016 2017 2016 2017
Net loss$(78,813) $(41,649) $(202,151) $(165,724)
Other comprehensive income (loss): 
  
    
Change in unrealized net gain (loss) on available-for-sale securities(554) (439) 298
 (157)
Comprehensive loss$(79,367) $(42,088) $(201,853) $(165,881)
     

 

Table of Contents

PURE STORAGE, INC.
Condensed Consolidated Statements of Stockholders' Equity
(in thousands, unaudited)

Second Quarter of Fiscal 2020
Common StockAdditional Paid-in CapitalAccumulated Other Comprehensive IncomeAccumulated DeficitTotal Stockholders' Equity
SharesAmount
Balance at the end of the first quarter of fiscal 2020252,853 $25 $1,924,947 $1,289 $(1,182,285)$743,976 
Issuance of common stock upon exercise of stock options655 0 2,502 — — 2,502 
Stock-based compensation expense— — 56,460 — — 56,460 
Vesting of restricted stock units2,277 1 (1)— — — 
Net issuance of restricted stock(33)— — — — — 
Tax withholding on vesting of restricted stock— — (1,501)— — (1,501)
Other comprehensive income— — — 2,120 — 2,120 
Net loss— — — — (66,018)(66,018)
Balance at the end of the second quarter of fiscal 2020255,752 $26 $1,982,407 $3,409 $(1,248,303)$737,539 


Second Quarter of Fiscal 2021
Common StockAdditional Paid-in CapitalAccumulated Other Comprehensive IncomeAccumulated DeficitTotal Stockholders' Equity
SharesAmount
Balance at the end of the first quarter of fiscal 2021263,970 $26 $2,120,189 $10,173 $(1,373,530)$756,858 
Issuance of common stock upon exercise of stock options2,138 1 12,237 — — 12,238 
Stock-based compensation expense— — 61,456 — — 61,456 
Vesting of restricted stock units2,930 1 (1)— — — 
Tax withholding on vesting of restricted stock(85)— (1,467)— — (1,467)
Repurchases of common stock(1,177)(1)(20,023)— — (20,024)
Other comprehensive income— — — 2,012 — 2,012 
Net loss— — — — (64,967)(64,967)
Balance at the end of the second quarter of fiscal 2021267,776 $27 $2,172,391 $12,185 $(1,438,497)$746,106 

See the accompanying notes to condensed consolidated financial statements.




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PURE STORAGE, INC.
Condensed Consolidated Statements of Stockholders' Equity
(in thousands, unaudited)
First Two Quarters of Fiscal 2020
Common StockAdditional Paid-in CapitalAccumulated Other Comprehensive Income (Loss)Accumulated DeficitTotal Stockholders' Equity
SharesAmount
Balance at the end of fiscal 2019243,524 $24 $1,820,043 $(338)$(1,081,949)$737,780 
Issuance of common stock upon exercise of stock options3,863 1 19,290 — — 19,291 
Stock-based compensation expense— — 118,206 — — 118,206 
Vesting of restricted stock units4,327 1 (1)— — 0 
Net issuance of restricted stock1,065 — — — — — 
Tax withholding on vesting of restricted stock— — (7,173)— — (7,173)
Common stock issued under employee stock purchase plan2,973 — 32,042 — — 32,042 
Other comprehensive income— — — 3,747 — 3,747 
Net loss— — — — (166,354)(166,354)
Balance at the end of the second quarter of fiscal 2020255,752 $26 $1,982,407 $3,409 $(1,248,303)$737,539 



First Two Quarters of Fiscal 2021
Common StockAdditional Paid-in CapitalAccumulated Other Comprehensive IncomeAccumulated DeficitTotal Stockholders' Equity
SharesAmount
Balance at the end of fiscal 2020264,008 $26 $2,107,579 $5,449 $(1,282,936)$830,118 
Issuance of common stock upon exercise of stock options4,313 1 21,625 — — 21,626 
Stock-based compensation expense— — 120,150 — — 120,150 
Vesting of restricted stock units5,455 1 (1)— — — 
Cancellation of restricted stock(230)— — — — — 
Tax withholding on vesting of restricted stock(219)— (2,841)— — (2,841)
Common stock issued under employee stock purchase plan1,585 — 16,021 — — 16,021 
Repurchases of common stock(7,136)(1)(90,142)— — (90,143)
Other comprehensive income— — — 6,736 — 6,736 
Net loss— — — — (155,561)(155,561)
Balance at the end of the second quarter of fiscal 2021267,776 $27 $2,172,391 $12,185 $(1,438,497)$746,106 

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)




 First Two Quarters of Fiscal
 20202021
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss$(166,354)$(155,561)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization43,591 31,597 
Amortization of debt discount and debt issuance costs13,290 14,125 
Stock-based compensation expense120,561 120,146 
Impairment of long-lived assets0 7,505 
Other327 1,972 
Changes in operating assets and liabilities, net of effects of acquisition:
Accounts receivable, net26,553 91,896 
Inventory6,852 1,735 
Deferred commissions(3,595)(5,483)
Prepaid expenses and other assets(635)(26,389)
Operating lease right-of-use assets13,438 14,181 
Accounts payable(30,827)(21,090)
Accrued compensation and other liabilities(25,704)(3,217)
Operating lease liabilities(13,083)(13,071)
Deferred revenue71,045 27,463 
Net cash provided by operating activities55,459 85,809 
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment(53,229)(48,776)
Acquisition, net of cash acquired(47,881)0 
Purchase of intangible assets(9,000)0 
Purchases of marketable securities(488,497)(291,237)
Sales of marketable securities60,368 91,351 
Maturities of marketable securities270,756 206,174 
Net cash used in investing activities(267,483)(42,488)
CASH FLOWS FROM FINANCING ACTIVITIES
  Net proceeds from exercise of stock options19,260 21,658 
  Proceeds from issuance of common stock under employee stock purchase plan32,042 16,021 
  Proceeds from borrowing0 4,950 
  Repayment of debt assumed from acquisition(11,555)0 
  Tax withholding on vesting of restricted stock(7,173)(2,841)
  Repurchases of common stock0 (90,143)
Net cash provided by (used in) financing activities32,574 (50,355)
Net decrease in cash, cash equivalents and restricted cash(179,450)(7,034)
Cash, cash equivalents and restricted cash, beginning of period463,813 377,922 
Cash, cash equivalents and restricted cash, end of period$284,363 $370,888 
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD
Cash and cash equivalents$268,938 $355,601 
Restricted cash15,425 15,287 
Cash, cash equivalents and restricted cash, end of period$284,363 $370,888 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest$359 $359 
Cash paid for income taxes$2,716 $5,070 
Cash paid for amounts included in the measurement of lease liabilities$16,167 $17,849 
Property and equipment purchased but not yet paid$5,717 $6,619 
Operating lease right-of-use assets obtained in exchange for operating lease liabilities$3,449 $29,754 
 Nine Months Ended October 31,
 2016 2017
CASH FLOWS FROM OPERATING ACTIVITIES

  
Net loss$(202,151) $(165,724)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

Depreciation and amortization35,978
 45,525
Stock-based compensation expense79,129
 107,920
Other1,051
 879
Changes in operating assets and liabilities:

 

Accounts receivable, net(38,186) (33,630)
Inventory(189) (14,314)
Deferred commissions1,844
 (7,629)
Prepaid expenses and other current assets39
 (112)
Accounts payable3,639
 11,808
Accrued compensation and other liabilities6,786
 14,629
Deferred revenue60,180
 54,404
Net cash provided by (used in) operating activities(51,880) 13,756
CASH FLOWS FROM INVESTING ACTIVITIES

 

Purchases of property and equipment(64,602) (44,351)
Purchase of intangible assets(1,000) —
Purchases of marketable securities(483,558) (151,998)
Sales of marketable securities79,815
 46,067
Maturities of marketable securities38,213
 99,021
Net increase in restricted cash(5,600) (2,029)
Net cash used in investing activities(436,732) (53,290)
CASH FLOWS FROM FINANCING ACTIVITIES

 

Net proceeds from exercise of stock options10,725
 15,761
Proceeds from issuance of common stock under employee stock purchase plan25,606
 22,137
Net cash provided by financing activities36,331
 37,898
Net decrease in cash and cash equivalents(452,281) (1,636)
Cash and cash equivalents, beginning of period604,742
 183,675
Cash and cash equivalents, end of period$152,461
 $182,039
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

Cash paid for income taxes$2,510
 $2,410
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING INFORMATION 
 

Property and equipment purchased but not yet paid$5,956
 $9,831
Vesting of early exercised stock options$794
 $794

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.
Data is foundational to our customers' digital transformation and we are focused on delivering innovative and disruptive technology and data storage solutions that enable customers to maximize the value of their data. We started with the vision of making flash storage available to enterprise organizations everywhere and established an entirely new customer experience including our innovative Evergreen Storage subscription that radically simplified storage ownership and reduced total cost of ownership for our customers.
Our solutions serve data workloads on-premise, in the cloud, or hybrid environments and include mission-critical production, test/development, analytics, disaster recovery, and backup/recovery.
Note 2. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
In September 2019, we adopted a 52/53 week fiscal year consisting of four 13-week quarters ending on the first Sunday after January 30, which for fiscal 2020 was February 2, 2020 and for fiscal 2021 is January 31, 2021. The second quarter of fiscal 2020 and 2021 ended on July 31, 2019 and August 2, 2020. Unless otherwise stated, all dates refer to the Company’s fiscal year and fiscal periods.
The condensed consolidated financial statements include the accounts of the companyCompany 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.fiscal 2020.
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 20182021 or any future period.
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Notes to Condensed Consolidated Financial Statements (Unaudited)
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.estimates and assumptions due to risks and uncertainties, including uncertainty in the current economic environment from the ongoing COVID-19 pandemic. Such estimates include, but are not limited to, the determination of best estimate ofstandalone selling price included in multiple-elementfor revenue arrangements sales commissions,with multiple performance obligations, useful lives of intangible assets and property and equipment, fair valuesthe period of benefit for deferred contract costs for commissions, stock-based awards,compensation, provision for income taxes including related reserves, and contingent liabilities, among others.valuation of intangible assets and goodwill. 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.
In accordance with our on-going accounting practices, we review the estimated useful lives of our property and equipment on an ongoing basis. In the first quarter of fiscal 2021, management determined that the estimated useful lives of its test equipment and certain computer equipment and software required revision. The estimated useful lives of test equipment and certain computer equipment and software were revised to 4 years. Previously, the estimated useful lives of these assets ranged from 2 to 3 years. The change in estimated useful lives was accounted for as a change in estimate and recognized on a prospective basis effective February 3, 2020. The effect of this change in estimate resulted in a reduction to depreciation expense of $6.3 million and $14.1 million in the second quarter and first two quarters of fiscal 2021.
Restricted Cash
Restricted cash is comprised of cash collateral for a corporate credit card program and letters of credit related to our facility leases. Asleases and for a vendor credit card program. At the end of January 31, 2017fiscal 2020 and October 31, 2017,the second quarter of fiscal 2021, we had restricted cash of $12.7 million and $14.8 million, which was included in other assets, non-current, in the condensed consolidated balance sheets.$15.3 million.
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), which is reflected

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Notes to Condensed Consolidated Financial Statements (Unaudited)

as a component of stockholders’ equity. We evaluate our securities to assess whether those with unrealized loss positions are otheras to whether the declines in fair value were due to credit losses, and record the portion of impairment relating to the credit losses through allowance for credit losses limited to the amount that fair value was less than temporarily impaired. We consider impairments to be other than temporary if they are related to deterioration in credit risk or if it is likely we will sell the securities before the recovery of theiramortized 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 CommissionsBusiness Combinations
Deferred commissions consistWe allocate the purchase price to the assets acquired and liabilities assumed based on their estimated fair values. The excess of direct and incremental costs paid to our sales force related to customer contracts. The deferred commission amounts are recoverable through the revenue streams that will be recognized under the related customer contracts. Direct sales commissions are deferred when earned and amortizedpurchase price over the samefair values of the assets acquired and liabilities assumed is recorded as goodwill. During the measurement period, that revenue is recognizedwhich may be up to one year from the related customer contract. Amortizationacquisition date, we may record adjustments to the estimated fair value of deferred commissionsthe assets acquired and liabilities assumed, with the corresponding offset to goodwill. The results of operations of an acquired business is included in salesour condensed consolidated financial statements from the date of acquisition. Acquisition-related expenses are expensed as incurred.
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Notes to Condensed Consolidated Financial Statements (Unaudited)
Operating Leases
We determine if an arrangement contains a lease at inception. Lease liabilities are recognized at the present value of the future lease payments at commencement date. The interest rate implicit in our operating leases is not readily determinable, and marketingtherefore an incremental borrowing rate is estimated to determine the present value of future payments. The estimated incremental borrowing rate factors in a hypothetical interest rate on a collateralized basis with similar terms, payments, and economic environments. The operating lease right-of-use (ROU) asset is determined based on the lease liability initially established and reduced for any prepaid lease payments and any lease incentives. We have elected to not allocate the contract consideration for operating lease contracts with lease and non-lease components, and account for the lease and non-lease components as a single lease component.
Certain of the operating lease agreements contain rent concession, rent escalation, and option to renew provisions. Rent concession and rent escalation provisions are considered in determining the lease cost. Lease cost is recognized on a straight-line basis over the lease term commencing on the date we have the right to use the leased property. We generally use the base, non-cancelable, lease term when recognizing the lease assets and liabilities, unless it is reasonably certain that an extension or termination option will be exercised.
In addition, certain of our operating lease agreements contain tenant improvement allowances from our landlords. These allowances are accounted for as lease incentives and reduce our ROU asset and lease cost over the lease term.
For short-term leases with lease term no longer than twelve months, and do not include an option to purchase the underlying asset that we are reasonably certain to exercise, we recognize rent expense in theour condensed consolidated statements of operations.operations on a straight-line basis over the lease term and record variable lease payments as incurred.
AsRevenue Recognition
We generate revenue primarily from 2 sources: (1) product revenue which includes hardware and embedded software and (2) subscription services revenue which includes Evergreen Storage subscriptions, and our unified subscription that includes Pure as-a-Service and Cloud Block Store.
Our product revenue is derived from the sale of January 31, 2017integrated storage hardware and October 31, 2017,operating system software. We typically recognize product revenue upon transfer of control to our customers. Products are typically shipped directly by us to customers.
Our subscription services revenue is derived from the services we recorded deferred commissions, current,perform in connection with the sale of $15.8 millionsubscription services and $20.2 million,is recognized ratably over the contractual term, which generally ranges from one to six years. The majority of our product solutions are sold with an Evergreen Storage subscription service agreement, which typically commences upon transfer of control of the corresponding products to our customers. Costs for subscription services are expensed when incurred. In addition, our Evergreen Storage subscription provides our customers with a new controller based upon certain terms. The controller refresh represents a separate performance obligation that is included within the Evergreen Storage subscription service agreement and deferred commissions, non-current,the allocated revenue is recognized upon shipment of $14.9 millionthe controller.
Our subscription services also include the right to receive unspecified software updates and $18.2 million, inupgrades on a when-and-if-available basis, software bug fixes, replacement parts and other assets, non-current, inservices related to the condensed consolidated balance sheets.underlying infrastructure, as well as access to our cloud-based management and support platform. We also sell professional services such as installation and implementation consulting services, and the related revenue is recognized sales commission expensesas services are performed.

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Table of $21.6 millionand $38.3 million during the three months ended October 31, 2016 and 2017, and $58.8 million and $84.3 million during the nine months October 31, 2016 and 2017.Contents
Recent Accounting Pronouncements Not Yet Adopted
In May 2014, thePURE STORAGE, INC.
Notes to Condensed Consolidated Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), requiring an entity toStatements (Unaudited)
We recognize revenue when it transfersupon the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expectswe expect to be entitled to in exchange for those goods or services. ASU 2014-09This 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
•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 should be accounted for as a separate performance obligation. The transaction price is determined based on the consideration which we will supersede nearly all existing revenue recognition guidance under U.S. GAAP when it becomes effective. be entitled to in exchange for transferring goods or services to the customer. We allocate the transaction price to each performance obligation for contracts that contain multiple performance obligations based on a relative standalone selling price which is determined based on the price at which the performance obligation is sold separately, or if not observable through past transactions, is estimated taking into account available information such as market conditions and internally approved pricing guidelines related to performance obligations.
Recent Accounting Pronouncements Not Yet Adopted
In August 2015,2020, the FASBFinancial Accounting Standards Board (FASB) issued ASUAccounting Standards Update (ASU) No. 2015-14, Revenue from2020-06, Accounting for Convertible Instruments and Contracts with Customers, deferringin an Entity's Own Equity, which simplifies the effective dateaccounting for ASU 2014-09 by one year.certain convertible instruments, amends guidance on derivative scope exceptions for contracts in an entity's own equity, and modifies the guidance on diluted earnings per share (EPS) calculations as a result of these changes. The new standard will be effective for us beginning February 7, 2022 and can be applied on February 1, 2018. This standard may be adopted using either the fulla fully retrospective or modified retrospective methods. We anticipate adopting the standard retrospectively to all prior periods presented. While we are in the final stage of evaluating 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 believe the impact on our consolidated financial statements upon the adoption of this standard will be primarily an increase in revenue, a decrease in deferred revenue balance, a decrease in sales and marketing expenses and an increase in deferred commissions balance. The impact to revenue and deferred revenue balance is primarily attributable to the removal of current limitation on contingent revenue accelerating revenue recognition for certain contracts. The impact to sales and marketing expenses and deferred commissions balance is primarily attributable to a change in current amortization period from contract term to expected customer life as required by the new standard.  Additionally, we have made and will continue to make investments in systems to enable timely and accurate reporting under the new standard.
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 modified retrospective method for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements.basis. Early adoption is permitted. We are currently evaluating adoption methods and the impact of this standard 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 lossespermitted for assets held at amortized cost basis and available-for-sale debt securities to require that credit losses on available-

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Notes to Condensed Consolidated Financial Statements (Unaudited)

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 usfiscal years beginning on February 1, 2020 with early adoption permitted on or after February 1, 2019.December 15, 2020. We are currently evaluating the impact of this standard on our condensed consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, 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 amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 will be effective for us beginning on February 1, 2018 and will be applied on a retrospective basis. 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 1 - Observable inputs are unadjusted quoted prices in active markets for identical assets or liabilities;
▪
Level I—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.
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PURE STORAGE, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
▪
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.

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PURE STORAGE, INC.
our convertible senior notes (the Notes) on a quarterly basis for disclosure purposes. We consider the fair value of the Notes at the end of the second quarter of fiscal 2021 to Condensed Consolidated Financial Statements (Unaudited)

be a Level 2 measurement due to its limited trading activity. Refer to Note 6 for the carrying amount and estimated fair value of our Notes at the end of the second quarter of fiscal 2021.
Cash Equivalents, Marketable Securities and Restricted Cash
The following tables summarize our cash equivalents, marketable securities and restricted cash by significant investment categories asat the end of January 31, 2017fiscal 2020 and October 31, 2017the second quarter of fiscal 2021 (in thousands):
 
 At the End of Fiscal 2020
 Amortized
Cost		Gross Unrealized
Gains		Gross Unrealized
Losses		Fair
Value		Cash EquivalentsMarketable SecuritiesRestricted Cash
Level 1      
Money market accounts$— $— $— $26,355 $11,068 $0 $15,287 
Level 2      
U.S. government treasury notes323,751 2,146 0 325,897 0 325,897 0 
U.S. government agencies53,930 317 (3)54,244 0 54,244 0 
Corporate debt securities452,318 3,954 (1)456,271 3,001 453,270 0 
Foreign government bonds14,994 147 0 15,141 0 15,141 0 
Asset-backed securities87,267 699 0 87,966 0 87,966 0 
Total$932,260 $7,263 $(4)$965,874 $14,069 $936,518 $15,287 
 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 notes148,298
 22
 (289) 148,031
 13,226
 134,805
 —
U.S. government agencies40,398
 2
 (159) 40,241
 —
 40,241
 —
Corporate debt securities185,701
 242
 (379) 185,564
 —
 185,564
 —
Foreign government bonds2,377
 2
 (3) 2,376
 —
 2,376
 —
Total$376,774
 $268
 $(830) $388,946
 $13,226
 $362,986
 $12,734


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 As of October 31, 2017
 
Amortized
Cost
 
Gross Unrealized
Gains
 
Gross Unrealized
Losses
 
Fair
Value
 Cash Equivalents 
Marketable
Securities
 Restricted Cash
Level 1             
Money market accounts$—
 $—
 $—
 $14,763
 $—
 $—
 $14,763
Level 2             
U.S. government treasury notes144,297
 6
 (419) 143,884
 6,374
 137,510
 —
U.S. government agencies44,517
 —
 (205) 44,312
 —
 44,312
 —
Corporate debt securities187,616
 209
 (310) 187,515
 —
 187,515
 —
Total$376,430
 $215
 $(934) $390,474
 $6,374
 $369,337
 $14,763

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Notes to Condensed Consolidated Financial Statements (Unaudited)

 At the End of the Second Quarter of Fiscal 2021
 Amortized
Cost		Gross Unrealized
Gains		Gross Unrealized
Losses		Fair
Value		Cash EquivalentsMarketable
Securities		Restricted Cash
Level 1
Money market accounts$— $— $— $46,281 $30,994 $0 $15,287 
Level 2       
U.S. government treasury notes365,487 4,926 0 370,413 0 370,413 0 
U.S. government agencies46,120 598 (4)46,714 0 46,714 0 
Corporate debt securities405,307 6,550 (2)411,855 0 411,855 0 
Foreign government bonds18,770 430 0 19,200 0 19,200 0 
Asset-backed securities87,835 1,497 0 89,332 0 89,332 0 
Total$923,519 $14,001 $(6)$983,795 $30,994 $937,514 $15,287 
The amortized cost and estimated fair value of our marketable securities are shown below by contractual maturity (in thousands):
As of October 31, 2017 At the End of the Second Quarter of Fiscal 2021
Amortized Cost Fair Value Amortized CostFair Value
Due within one year$173,537
 $173,413
Due within one year$354,472 $357,266 
Due in one to five years196,519
 195,924
Due in one to five years569,047 580,248 
Total$370,056
 $369,337
Total$923,519 $937,514 
 
We review the individual securities that have unrealized losses on a regular basis to evaluate whether or not any security has experienced and expect to experience credit losses which resulted in the decline in fair value. Based on our evaluation of available evidence, we concluded that the gross unrealized losses on our marketable securities asinvestments at the end of October 31, 2017fiscal 2020 and the second quarter of fiscal 2021 were temporary in nature. We do not intend to sell these investments and it is not more likely than not that we will be required to sell these investments before recovery of their amortized cost basis, which may be at maturity.

The following table presents gross unrealized losses and fair values for those investments that were in a continuous unrealized loss asposition at the end of October 31, 2017,fiscal 2020 and the second quarter of fiscal 2021, aggregated by investment category (in thousands):

At the End of Fiscal 2020
Less than 12 monthsGreater than 12 monthsTotal
Fair
Value		Unrealized
Loss		Fair
Value		Unrealized
Loss		Fair
Value		Unrealized
Loss
U.S. government treasury notes$0 $0 $1,000 $0 $1,000 $0 
U.S. government agencies4,998 (3)0 0 4,998 (3)
Corporate debt securities9,691 (1)0 0 9,691 (1)
Total$14,689 $(4)$1,000 $0 $15,689 $(4)

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Notes to Condensed Consolidated Financial Statements (Unaudited)
At the End of the Second Quarter of Fiscal 2021
Less than 12 months Greater than 12 months Total Less than 12 monthsGreater than 12 monthsTotal
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$122,530
 $(381) $3,965
 $(38) $126,495
 $(419)
U.S. government agencies31,914
 (106) 12,398
 (99) 44,312
 (205)U.S. government agencies$4,996 $(4)$0 $0 $4,996 $(4)
Corporate debt securities81,288
 (168) 24,941
 (142) 106,229
 (310)Corporate debt securities1,309 (2)0 0 1,309 (2)
Total$235,732
 $(655) $41,304
 $(279) $277,036
 $(934)Total$6,305 $(6)$0 $0 $6,305 $(6)
 
Realized gains or losses on sale of marketable securities were not significant for all periods presented.

Note 4. Balance Sheet Components
Inventory
Inventory consists of the following (in thousands):
 As of
January 31, 2017		 As of
October 31, 2017
Raw materials$3,003
 $5,926
Finished goods20,495
 31,282
Inventory$23,498
 $37,208

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Notes to Condensed Consolidated Financial Statements (Unaudited)

At the End of
Fiscal 2020Second Quarter of Fiscal 2021
Raw materials$2,974 $3,647 
Finished goods35,544 32,716 
Inventory$38,518 $36,363 
Property and Equipment, Net
Property and equipment, net consists of the following (in thousands):
 
At the End of
As of
January 31, 2017		 As of
October 31, 2017		 Fiscal 2020Second Quarter of Fiscal 2021
Test equipment$105,955
 $135,497
Test equipment$205,555 $222,682 
Computer equipment and software54,521
 66,270
Computer equipment and software141,387 160,159 
Furniture and fixtures4,494
 5,337
Furniture and fixtures8,324 8,831 
Leasehold improvements10,332
 13,815
Leasehold improvements40,356 42,568 
Total property and equipment175,302
 220,919
Total property and equipment395,622 434,240 
Less: accumulated depreciation and amortization(93,607) (136,655)Less: accumulated depreciation and amortization(272,882)(289,114)
Property and equipment, net$81,695
 $84,264
Property and equipment, net$122,740 $145,126 
 
Depreciation and amortization expense related to property and equipment was $13.2$19.9 million and $15.2$13.8 million for the three months ended October 31, 2016second quarter of fiscal 2020 and 2017,2021, and $34.9$39.7 million and $44.4$26.2 million for the nine months ended October 31, 2016first two quarters of fiscal 2020 and 2017.2021.
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Notes to Condensed Consolidated Financial Statements (Unaudited)
Intangible Assets, Net
Intangible assets, net consist of the following (in thousands):
 
At the End of
Fiscal 2020Second Quarter of Fiscal 2021
As of
January 31, 2017		 As of
October 31, 2017		Gross Carrying ValueAccumulated AmortizationNet Carrying AmountGross Carrying ValueAccumulated AmortizationNet Carrying Amount
Technology patents$10,125
 $10,125
Technology patents$19,125 $(8,933)$10,192 $19,125 $(10,327)$8,798 
Accumulated amortization(3,565) (4,693)
Developed technologyDeveloped technology56,100 (8,035)48,065 56,100 (12,043)44,057 
Intangible assets, net$6,560
 $5,432
Intangible assets, net$75,225 $(16,968)$58,257 $75,225 $(22,370)$52,855 
 
Intangible assets amortization expense was $376,000 for three months ended October 31, 2016 and 2017, and $1.0$2.6 million and $1.1$2.7 million for the nine months ended October 31, 2016second quarter of fiscal 2020 and 2017. The2021, and $3.9 million and $5.4 million for the first two quarters of fiscal 2020 and 2021. At the end of the second quarter of fiscal 2021, the weighted-average remaining useful life ofamortization period was 3.2 years for technology patents is 3.6 years. Due toand 5.5 years for developed technology. Amortization of the defensive nature of thesetechnology patents the amortization expense is included in general and administrative expenses due to their defensive nature and amortization of developed technology is included in cost of product revenue in the condensed consolidated statements of operations.
AsAt the end of October 31, 2017,the second quarter of fiscal 2021, future expected amortization expense for intangible assets for each of the next five years is as follows (in thousands):
Fiscal Years EndingEstimated Future
Amortization Expense
Remainder of 2021$5,402 
20229,846 
20239,300 
20249,300 
20259,300 
Thereafter9,707 
Total$52,855 
Goodwill
At the end of fiscal 2020 and the second quarter of fiscal 2021, goodwill was $37.6 million. There were 0 impairments to goodwill during the second quarter and first two quarters of fiscal 2020 and 2021.
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Years Ending January 31,
Estimated 
Future
Amortization
Expense
Remainder of 2018$376
20191,504
20201,504
20211,504
2022544
Total$5,432

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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):
At the End of
 Fiscal 2020Second Quarter of Fiscal 2021
Taxes payable$9,012 $6,437 
Accrued marketing7,679 12,865 
Accrued travel and entertainment expenses3,829 909 
Acquisition consideration6,149 2,628 
Other accrued liabilities20,554 23,979 
Total accrued expenses and other liabilities$47,223 $46,818 

Note 5. Deferred Revenue and Commissions
Deferred Commissions
Deferred commissions consist of incremental costs paid to our sales force to obtain customer contracts. Deferred commissions related to product revenue are recognized upon transfer of control to customers and deferred commissions related to subscription services revenue are amortized over an expected useful life of six years. We determine the expected useful life based on an estimated benefit period 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 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): 
Second Quarter of FiscalFirst Two Quarters of Fiscal
2020202120202021
Beginning balance$113,257 $142,363 $114,973 $139,204 
Additions30,074 30,534 48,310 60,296 
Recognition of deferred commissions(24,763)(28,210)(44,715)(54,813)
Ending balance$118,568 $144,687 $118,568 $144,687 
Of the $144.7 million total deferred commissions balance at the end of the second quarter of fiscal 2021, we expect to recognize approximately 27% as commission expense over the next 12 months and the remainder thereafter.
There was 0 impairment related to capitalized commissions for the second quarter and first two quarters of fiscal 2020 and 2021.
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PURE STORAGE, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
 As of
January 31, 2017		 As of
October 31, 2017
Sales and use tax payable$540
 $1,256
Accrued professional fees1,765
 1,430
Accrued marketing6,718
 8,899
Accrued travel and entertainment expenses2,235
 4,112
Income tax payable1,135
 1,620
Other accrued liabilities9,304
 7,628
Total accrued expenses and other liabilities$21,697
 $24,945
Deferred Revenue
Deferred revenue primarily consists of amounts that have been invoiced but have not yet been recognized as revenue including performance obligations pertaining to 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.
Changes in total deferred revenue during the periods presented are as follows (in thousands):

Second Quarter of FiscalFirst Two Quarters of Fiscal
2020202120202021
Beginning balance$564,230 $706,060 $535,920 $697,288 
Additions140,548 155,435 258,441 287,169 
Recognition of deferred revenue(97,515)(136,744)(187,098)(259,706)
Ending balance$607,263 $724,751 $607,263 $724,751 
Revenue recognized during the second quarter of fiscal 2020 and 2021 from deferred revenue at the beginning of each respective period was $88.2 million and $119.4 million. Revenue recognized during the first two quarters of fiscal 2020 and 2021 from deferred revenue at the beginning of each respective period was $150.2 million and $204.6 million.
Remaining Performance Obligations
Total contracted but not recognized revenue was $956.4 million at the end of the second quarter of fiscal 2021. Contracted but not recognized revenue consists of both deferred revenue and non-cancelable amounts that are expected to be invoiced and recognized as revenue in future periods. The value of orders that are contracted but have not been fulfilled and that can be canceled by customers, are excluded from remaining performance obligations. Of the $956.4 million contracted but not recognized revenue at the end of the second quarter of fiscal 2021, we expect to recognize approximately 42% over the next 12 months, and the remainder thereafter.
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PURE STORAGE, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 6. 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 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 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 ended on July 31, 2018 (and only during such fiscal quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, 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 5 business day period after any 5 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 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 common stock, or a combination of cash and shares of our 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 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.

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PURE STORAGE, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 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 2 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.

Upon the issuance of the Notes, we recorded total debt issuance costs of $12.9 million, of which $9.8 million was allocated to the Notes and $3.1 million was allocated to additional paid-in capital.

The Notes consisted of the following (in thousands):
At the End of
Fiscal 2020Second Quarter of Fiscal 2021
Liability:
Principal$575,000 $575,000 
Less: debt discount, net of amortization(91,378)(78,206)
Less: debt issuance costs, net of amortization(6,615)(5,662)
Net carrying amount of the Notes$477,007 $491,132 
Stockholders' equity recorded at issuance:
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 at the end of the second quarter of fiscal 2021 was $579.4 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. Based on the closing price of our common stock of $17.86 on the last day of the second quarter of fiscal 2021, the if-converted value of the Notes of $390.9 million was less than its principal amount. At the end of the second quarter of fiscal 2021, the remaining term of the Notes is 32 months.

The following table sets forth total interest expense recognized related to the Notes for the second quarter and first two quarters of fiscal 2020 and 2021 (in thousands):
Second Quarter of FiscalFirst Two Quarters of Fiscal
2020202120202021
Amortization of debt discount$6,341 $6,703 $12,393 $13,171 
Amortization of debt issuance costs459 486 897 954 
Total amortization of debt discount and debt issuance costs6,800 7,189 13,290 14,125 
Contractual interest expense181 181 358 358 
Total interest expense related to the Notes$6,981 $7,370 $13,648 $14,483 
Effective interest rate of the liability component5.6 %5.6 %5.6 %5.6 %

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PURE STORAGE, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 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 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 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 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 5.7. Commitments and Contingencies

Operating Leases
During the nine months ended October 31, 2017, we extended the lease term of an existing office facility with total additional lease obligations of approximately $2.0 million with the lease expiring through March 2019. Additionally, 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 rent obligation and management fees of $32.2 million.
Letters of Credit
In connection withAt the lease executed in August 2017, we issued a letterend of creditfiscal 2020 and the second quarter of $2.6 million. As of January 31, 2017 and October 31, 2017,fiscal 2021, we had outstanding letters of credit in the aggregate amount of $7.7 million and $9.6$11.5 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 August 2026.2029.
Legal Matters
In September 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. Substantially identical lawsuits were subsequently filed in the same Court, bringing the same claims against the same defendants. In October 2016, these actions were consolidated under the caption In re Pure Storage, Inc. Shareholder Litigation. In January 2017 and May 2017, the defendants filed demurrers (motions to dismiss) to plaintiffs' complaints on the grounds that the plaintiffs failed to state a claim under the Securities Act, and both times, in April 2017 and August 2017, the Court sustained the demurrers in defendants' favor as to all claims with leave to amend. The plaintiffs subsequently agreed to dismiss the lawsuit entirely, with no amendment or appeal, and in October 2017, the Court dismissed the consolidated action without prejudice.
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 maywe 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 asat the end of October 31, 2017.the second quarter of fiscal 2021.
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

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PURE STORAGE, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)

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.
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PURE STORAGE, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 8. Leases
We lease office facilities under non-cancelable operating lease agreements expiring through July 2032. Our lease agreements do not contain any material residual value guarantees or restrictive covenants. During the second quarter of fiscal 2021, we commenced a data center lease executed in fiscal 2020 with total undiscounted cash flows of $22.4 million. The components of lease costs during the periods presented were as follows (in thousands):
Second Quarter of FiscalFirst Two Quarters of Fiscal
2020202120202021
Fixed operating lease cost$8,228 $9,532 $16,711 $18,281 
Variable lease cost (1)
2,242 2,291 4,342 4,942 
Short-term lease cost (12 months or less)1,484 1,559 2,345 3,066 
Total lease cost$11,954 $13,382 $23,398 $26,289 

(1) Variable lease cost for the second quarter and first two quartersof fiscal 2020 and 2021 predominantly included common area maintenance charges.
At the end of the second quarter of fiscal 2021, the weighted-average remaining lease term is 5.5 years and the weighted-average discount rate is 6.08%. Future lease payments under our non-cancelable operating leases at the end of the second quarter of fiscal 2021 were as follows (in thousands):
Fiscal Years EndingOperating Leases
The remainder of 2021$18,983 
202234,869 
202330,180 
202424,776 
202521,582 
Thereafter36,094 
Total future lease payments166,484 
Less: imputed interest(27,361)
Present value of lease liabilities$139,123 

Note 9. Restructuring and Other
During the second quarter and first two quarters of fiscal 2021, we ceased use of certain leased facilities. The unamortized costs of $7.5 million relating to operating lease right-of-use assets and leasehold improvements for these leases were expensed.
During the second quarter and first two quarters of fiscal 2021, we effected workforce realignment plans to streamline our operations and recognized $0.8 million and $6.6 million of restructuring costs related to one-time involuntary termination benefit costs. The restructuring charges are included in restructuring and other expenses in our condensed consolidated statement of operations. The liability for unpaid amounts at the end of the second quarter was not material.
During the first two quarters of fiscal 2021, we incurred incremental costs of $9.8 million directly related to the COVID-19 pandemic. These costs primarily included the write-off of marketing commitments no longer deemed to have value for the remainder of fiscal 2021, estimated non-recoverable costs for internal events that could not be held, and hazard related premiums to support manufacturing operations. Of these costs, $8.9 million is included in restructuring and other expenses and $0.9 million is included in cost of revenue in our consolidated statement of operations for the first two quarters of fiscal 2021.
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PURE STORAGE, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 6.10. 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. AsAt the end of October 31, 2017,the second quarter of fiscal 2021, there were no0 shares of preferred stock issued or outstanding.
Class A and Class B Common Stock
We have two2 classes of authorized common stock, Class A common stock, which we refer to as our "common stock", and Class B common stock. AsAt the end of October 31, 2017,the second quarter of fiscal 2021, we had 2,000,000,000 authorized shares of Class A common stock authorized with a par value of $0.0001 per share and 250,000,000 authorized shares of Class B common stock, authorized with each class having a par value of $0.0001 per share. AsAt the end of October 31, 2017, 109,177,866the second quarter of fiscal 2021, 267,776,462 shares of Class A common stock were issued and outstandingoutstanding.
Share Repurchase Program
In August 2019, our board of directors approved the repurchase of up to $150.0 million of our common stock. During the second quarter of fiscal 2021, we repurchased and 106,837,859retired 1,176,761 shares of Class B common stock were issuedat an average purchase price of $17.00 per share for an aggregate repurchase price of $20.0 million. During the first two quarters of fiscal 2021, we repurchased and outstanding.retired 7,136,191 shares of common stock at an average purchase price of $12.61 per share for an aggregate repurchase price of approximately $90.0 million. At the end of the second quarter of fiscal 2021, $45.0 million remained available for future share repurchases under our current repurchase authorization.
Note 7.11. Equity Incentive Plans
Equity Incentive Plans
We maintain two2 equity incentive plans: the 2009 Equity Incentive Plan (the 2009 Plan) and the 2015 Equity Incentive Plan (the 2015 Plan). In AugustThe 2015 our board of directors adopted, and in September 2015 our stockholders approved, the 2015 Plan which became effective in connection with our initial public offering (IPO) and serves as the successor to theour 2009 Plan. The 2015 Plan and provides for grants of incentive stock options to our employees and non-statutory stock options, stock appreciation rights, restricted stock, awards, restricted stock unit awards (RSUs), performance stock awards, performance cash awards, and other forms of stock awards to our employees, directors and consultants. We ceased grants of new awards under the 2009 Plan after the effective date of the 2015 Plan, and no new grants will be made from the 2009 Plan. Outstanding awards granted under the 2009 Plan will remain subject to the terms of the 2009 Plan and applicable award agreements, until such outstanding awards that are stock options are exercised, terminated or expired by their terms.
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 3,500,000We net-share settle equity awards held by certain employees by withholding shares of Class A common stock was initially reserved for issuance under the 2015 ESPP.upon vesting to satisfy tax withholding obligations. The number of shares reserved for issuance underwithheld to satisfy employee tax withholding obligations are returned to our 2015 ESPP increases automatically on the first day of February of each year through 2025, in an amount equalPlan and will be available for future issuance. Payments for employees’ tax obligations to the lessertax authorities are recognized as a reduction to additional paid-in capital and reflected as a financing activity in our condensed consolidated statements 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.

cash flows.
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PURE STORAGE, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)

2015 Amended and Restated Employee Stock Purchase Plan
Under our Amended and Restated 2015 Employee Stock Purchase Plan (2015 ESPP), our board of directors (or a committee thereof) has the authority to establish the length and terms of the offering periods and purchase periods and the purchase price of the shares of common stock which may be purchased under the plan. The 2015 ESPP allowscurrent offering terms allow 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, a dollar cap of $7,500 per purchase period, or $25,000 in any calendar year (as determined under applicable tax rules). The 2015 ESPP providescurrent terms also allow for 24 montha 24-month offering periodsperiod beginning March 16th and September 16th of each year, andwith each offering period consistsconsisting of four six-month4 6 month purchase periods, subject to a reset provision. IfFurther, currently, on each purchase date, eligible employees may purchase our common stock at a price per share equal to 85% of the lesser of the fair market value of our common stock (1) on the first trading day of the applicable offering period or (2) the purchase date.
Under the reset provision currently authorized, 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). On each purchase date, eligible employees will purchase our Class A common stock at, resulting in a price per share equalmodification charge to 85% of the lesser of the fair market value of our Class A common stock (1) on the first trading day of the applicable offering period or (2) the purchase date. Our closing stock price onbe recognized over the new offering dateperiod. During the first quarter of March 16, 2017fiscal 2021, 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 resetthat resulted in a modification charge of approximately $9.0$23.8 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, 2019.2022.
We recognized stock-basedStock-based compensation expense related to our 2015 ESPP of $4.8was $4.2 million and $4.7$6.4 million during the three months ended October 31, 2016second quarter of fiscal 2020 and 2017,2021, and $13.4$15.7 million and $12.6$12.0 million during the nine months ended October 31, 2016first two quarters of fiscal 2020 and 2017. As2021. At the end of October 31, 2017, there was $32.2 millionthe second quarter of fiscal 2021, total unrecognized stock-based compensation expensecost related to our 2015 ESPP was $41.2 million, which is expected to be recognized over a weighted-average period of approximately 1.41.6 years.
Stock Options
A summary of the 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, 201756,840,189
 $7.15
 7.0 $315,502
Options granted1,000,000
 14.92
    
Options exercised(5,502,179) 2.86
    
Options forfeited/cancelled(2,362,891) 14.41
    
Balance as of October 31, 201749,975,119
 $7.43
 6.4 $457,252
Vested and exercisable as of October 31, 201730,500,061
 $4.84
 5.9 $355,871
 Options Outstanding
 Number of
Shares		Weighted-
Average
Exercise Price		Weighted-
Average
Remaining
Contractual Life (In Years)		Aggregate
Intrinsic
Value (in thousands)
Balance at the end of fiscal 202026,822,243 $8.97 3.9$237,803 
Options exercised(4,312,894)5.01   
Options forfeited(125,685)16.54   
Balance at the end of the second quarter of fiscal 202122,383,664 $9.70 4.2$183,708 
Vested and exercisable at the end of the second quarter of fiscal 202120,369,881 $9.06 4.1$179,477 
 
The aggregate intrinsic value of options vested and exercisable asat the end of October 31, 2017the second quarter of fiscal 2021 is calculated based on the difference between the exercise price and the closing price of $16.43$17.86 of our Class A common stock on October 31, 2017.

The weighted average fair valuethe last day of the second quarter of fiscal 2021.
Stock-based compensation expense recognized related to stock options grantedwas $4.5 million and $2.1 million during the nine months ended October 31, 2017 was $5.58.second quarter of fiscal 2020 and 2021, and $10.0 million and $4.1 million during the first two quarters of fiscal 2020 and 2021.
As
22
Table of October 31, 2017,Contents
PURE STORAGE, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
At the end of the second quarter of fiscal 2021, total unrecognized employee compensation cost related to outstanding options was $89.3$6.4 million, which is expected to be recognized over a weighted-average period of approximately 2.7 years.1.0 year.


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PURE STORAGE, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)

Restricted Stock UnitsRSUs and PRSUs
A summary of the restricted stock unitRSU and PRSU activity under our 2015 Plan and related information is as follows:
 Number of
RSUs and PRSUs Outstanding		Weighted-
Average
Grant Date
Fair Value		Aggregate
Intrinsic
Value (in thousands)
Unvested balance at the end of fiscal 202025,434,597 $18.72 $452,736 
Granted14,461,995 11.27 
Vested(5,454,940)16.93 
Forfeited(1,643,740)17.34 
Unvested balance at the end of the second quarter of fiscal 202132,797,912 $15.80 $585,770 
 Number of Restricted Stock Units Outstanding 
Weighted-
Average
Grant Date
Fair Value
 Aggregate
Intrinsic
Value (in thousands)
Unvested Balance as of January 31, 20178,783,024
 $13.06
 $99,863
Granted14,315,164
 11.65
 

Vested(3,627,367) 12.33
 

Forfeited(1,292,330) 11.75
 

Unvested Balance as of October 31, 201718,178,491
 $12.21
 $298,674


AsDuring the second quarter of October 31, 2017, total unrecognized employee compensation cost related to unvested restricted stock units was $191.6 million, which is expected to be recognized overfiscal 2021, we issued 1,451,896 shares of performance RSUs (PRSUs), at a weighted-average periodtarget percentage of approximately 2.6 years.

In March 2017, we granted 750,000 performance stock units (net of 77,000 canceled units during the nine months ended October 31, 2017)100%, with both performance and service vesting conditions payable in common sharesstock, from 0% to 150%125% of the target number granted, contingent upon the degree to which the performance condition is met. In August 2017, we granted 464,744 performance stock units with both performance and service vesting conditions payable in commonAny portion of shares from 0% to 120% of the target number granted, contingent upon the degree to which the performance condition is met.

For the performance stock units granted in March 2017, management determined it is probable that the performance conditionare not earned will be satisfied and accordingly, we began recognizing stock-based compensation expense during the three months ended April 30, 2017. canceled.
Stock-based compensation expense for these performance stock unitsrecognized related to RSUs and PRSUs was $1.3$40.4 million and $2.9$50.1 million forduring the threesecond quarter of fiscal 2020 and nine months ended October 31, 2017,2021, and $77.7 million and $96.9 million during the first two quarters of fiscal 2020 and 2021. At the end of the second quarter of fiscal 2021, total unrecognized employee compensation cost related to unvested RSUs was $472.5 million, which is expected to be recognized on an accelerated attribution method.over a weighted-average period of 2.9 years.

Restricted Stock
The performance condition forA summary of the performancerestricted stock units granted in August 2017 will be determined at a future dateactivity under our 2015 Plan and accordingly, thererelated information is no grant date for these awards from an accounting perspective and grant date fair value isas follows:
 Number of
Restricted Stock Outstanding		Weighted-
Average
Grant Date
Fair Value		Aggregate
Intrinsic
Value (in thousands)
Unvested balance at the end of fiscal 20202,127,206 $19.58 $37,684 
Vested(787,698)19.54 
Forfeited/canceled(229,605)20.15 
Unvested balance at the end of the second quarter of fiscal 20211,109,903 $19.49 $19,823 

All unvested shares of restricted stock are subject to cancellation to the extent vesting conditions are not considered in the calculation of weighted-average grant date fair value in the table above. No stock-basedmet. Stock-based compensation expense recognized related to restricted stock was $7.4 million and $2.8 million during the second quarter of fiscal 2020 and 2021, and $14.8 million and $7.1 million during the first two quarters of fiscal 2020 and 2021. At the end of the second quarter of fiscal 2021, total unrecognized employee compensation cost related to unvested restricted stock was $7.1 million, which is expected to be recognized for these performance awards in the three and nine months ended October 31, 2017.over a weighted-average period of 1.4 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 
 October 31,		 Nine Months Ended 
 October 31,
 2016 2017 2016 2017
Cost of revenue—product$138
 $143
 $425
 $898
Cost of revenue—support1,178
 2,422
 3,982
 6,441
Research and development15,241
 18,073
 40,875
 51,632
Sales and marketing8,468
 12,104
 24,719
 34,169
General and administrative3,210
 6,121
 9,128
 14,780
Total stock-based compensation expense$28,235
 $38,863
 $79,129
 $107,920


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PURE STORAGE, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)

 Second Quarter of FiscalFirst Two Quarters of Fiscal
 2020202120202021
Cost of revenue—product$954 $990 $1,931 $1,986 
Cost of revenue—subscription services3,633 3,686 7,584 7,078 
Research and development29,108 29,839 57,353 58,550 
Sales and marketing16,055 16,848 34,369 33,120 
General and administrative8,654 10,089 19,324 19,412 
Total stock-based compensation expense$58,404 $61,452 $120,561 $120,146 
The tax benefit related to stock-based compensation expense for all periods presented was not material.
Note 8.12. 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 attributable to common stockholders 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, common stock related to unvested restricted stock awards,RSUs and PRSUs, repurchasable shares from early exercisedrestricted stock, options,our Notes to the extent dilutive, and shares subject to ESPP withholding are considered to be common stock issuable pursuant to the ESPP. 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):
 Second Quarter of FiscalFirst Two Quarters of Fiscal
 2020202120202021
Net loss$(66,018)$(64,967)$(166,354)$(155,561)
Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted251,298 264,799 248,336 263,867 
Net loss per share attributable to common stockholders, basic and diluted$(0.26)$(0.25)$(0.67)$(0.59)
24
 Three Months Ended 
 October 31,		 Nine Months Ended 
 October 31,
 2016 2017 2016 2017
Net loss$(78,813) $(41,649) $(202,151) $(165,724)
Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted195,807
 213,274
 192,637
 209,456
Net loss per share attributable to common stockholders, basic and diluted$(0.40) $(0.20) $(1.05) $(0.79)
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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):
 
 Second Quarter of FiscalFirst Two Quarters of Fiscal
 2020202120202021
Stock options to purchase common stock31,739 23,329 32,852 24,482 
Unvested RSUs and PRSUs25,513 33,286 24,743 31,216 
Restricted stock subject to repurchase2,917 1,236 2,777 1,473 
Shares related to convertible senior notes21,884 21,884 21,884 21,884 
Shares issuable pursuant to the ESPP720 2,040 720 2,040 
Total82,773 81,775 82,976 81,095 
 Three Months Ended 
 October 31,		 Nine Months Ended 
 October 31,
 2016 2017 2016 2017
Stock options to purchase common stock62,874
 51,685
 65,594
 53,786
Restricted stock units6,342
 17,201
 4,155
 14,913
Early exercised stock options2,246
 196
 2,451
 287
Employee stock purchase plan434
 585
 434
 585
Total71,896
 69,667
 72,634
 69,571

Note 9.13. Other Income (Expense), Net
Other income (expense), net consists of the following (in thousands):
Second Quarter of FiscalFirst Two Quarters of Fiscal
2020202120202021
Interest income(1)
$6,772 $4,424 $13,606 $10,655 
Interest expense(2)
(6,981)(7,433)(13,648)(14,584)
Foreign currency transactions gains (losses)(443)2,808 (2,426)422 
Other income0 1,804 0 1,694 
Total other income (expense), net$(652)$1,603 $(2,468)$(1,813)

(1) Interest income includes interest income related to our cash, cash equivalents and marketable securities and non-cash interest income (expense) related to accretion (amortization) of the discount (premium) on marketable securities.
(2)Interest expense includes non-cash interest expense related to amortization of the debt discount and debt issuance costs of the Notes and the contractual interest expense related to the Notes and debt.
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PURE STORAGE, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 14. Income Taxes
Our provision for income taxes wastax primarily due toreflects taxes on international operations and state income taxes. The difference between the provision for income taxestax provision that would be derived by applying the statutory rate to our loss before income taxes and the provision for income taxestax provision recorded was primarily attributable to changes in our valuation

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allowance, non-deductible stock-based compensation expense and research and development credits.
On June 7, 2019, a three-judge panel from the U.S. Court of Appeals for the Ninth Circuit overturned the U.S. Tax Court's decision in Altera Corp. v. Commissioner and upheld the portion of the Treasury regulations under Section 482 of the Internal Revenue Code that requires related parties in a cost-sharing arrangement to share expenses related to share-based compensation. On July 22, 2019, the taxpayer filed a petition for a rehearing before the full Ninth Circuit and the request was denied on November 12, 2019. On February 10, 2020, the taxpayer filed a petition to appeal the decision to the Supreme Court and on June 22, 2020 the Supreme Court denied the petition. The Supreme Court action did not have a material impact on our financial statements. There is no impact on our effective tax rate differential betweenfor the second quarter and first two quarters of fiscal 2021, due to our U.S. and foreign countries.full valuation allowance against our deferred tax assets.
AsAt the end of October 31, 2017,the second quarter of fiscal 2021, 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, 2017.fiscal 2020.
Note 10.15. 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. Our chief operating decision maker reviews financial information presented on a consolidated basis forfor purposes of allocating resources and evaluating financial performance. We have one1 business activity and there are no0 segment managers who are held accountable for operations or operating results. Accordingly, we have a single reportable segment.
Disaggregation of Revenue
The following table sets forthdepicts 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):
 Second Quarter of FiscalFirst Two Quarters of Fiscal
 2020202120202021
United States$294,596 $281,679 $523,535 $545,825 
Rest of the world101,731 122,044 199,492 225,017 
Total revenue$396,327 $403,723 $723,027 $770,842 

 Three Months Ended 
 October 31,		 Nine Months Ended 
 October 31,
 2016 2017 2016 2017
United States$152,134
 $192,977
 $385,464
 $504,937
Rest of the world44,822
 84,697
 114,653
 179,829
Total revenue$196,956
 $277,674
 $500,117
 $684,766
Long-Lived Assets by Geographic Area
Long-lived assets, which are comprised of property and equipment, net, by geographic area are summarized as follows (in thousands):
 
 As of
January 31, 2017		 As of
October 31, 2017
United States$78,692
 $80,387
Rest of the world3,003
 3,877
Total long-lived assets$81,695
 $84,264


At the End of
 Fiscal 2020Second Quarter of Fiscal 2021
United States$113,942 $135,311 
Rest of the world8,798 9,815 
Total long-lived assets$122,740 $145,126 
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PURE STORAGE, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 16. Subsequent Event
On August 24, 2020, we entered into a Credit Agreement with a consortium of financial institutions and lenders that provides for a five-year, senior secured revolving credit facility of $300 million (Credit Facility). Proceeds from the Credit Facility may be used for general corporate purposes and working capital.
The annual interest rates applicable to loans under the Credit Facility are, at our option, equal to either a base rate plus a margin ranging from 0.50% to 1.25% or LIBOR, subject to a floor of 0%, plus a margin ranging from 1.50% to 2.25%. In addition, we will incur a commitment fee on the unused portion of the commitments ranging from 0.25% to 0.40% per annum. The respective margins are based on the then-applicable Consolidated Leverage Ratio.
Loans under the Credit Facility are subject to certain restrictions and two financial ratios measured as of the last day of each fiscal quarter, commencing with the fiscal quarter ending January 31, 2021: a Consolidated Leverage Ratio not to exceed 4.5:1 and an Interest Coverage Ratio not to be less than 3:1.
We have not borrowed any funds under the Credit Facility.
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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 fiscal year ended January 31, 2017.February 2, 2020. 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, impacts on our business and general economic conditions due to the COVID-19 pandemic, 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 the first Sunday after January 31.30.
Overview
We are building the data platform for the cloud era. As the demand for dataData is foundational to our customers' digital transformation and the need for real-time analytics increase, we are focused on delivering software-defined all-flashinnovative and disruptive technology and data storage solutions that are uniquely fast and cloud-capable for customers, enablingenable customers to putmaximize the value of their data. We started with the vision of making flash storage available to enterprise organizations everywhere and established an entirely new customer experience including our innovative Evergreen Storage subscription that radically simplified storage ownership and reduced total cost of ownership for our customers.
Our solutions serve data workloads on-premise, in the cloud, or hybrid environments and include mission-critical production, test/development, analytics, disaster recovery, and backup/recovery.
Our Modern Data Experience vision begins with our portfolio of products and subscription services that is transforming and modernizing storage operations for our customers. Our Modern Data Experience vision extends to work for their businesses. Ouran innovative and highly-integrated data platform replaces storage systems designed for mechanical disk with all-flash systems optimized end-to-end for solid-state memory. At the same time, our innovative business model replaces the traditional forklift upgrade cycle with an Evergreen Storage model of products and subscription services, consisting of Cloud Data Infrastructure (integrated hardware and software innovation, supportappliances which run in on-premise data centers), Cloud Data Services (software services which run natively in major public cloud infrastructures), and maintenance.Cloud Data Management (software hosted data management services to manage our entire platform).The Modern Data Experience is based on four key pillars: Fast Matters, Cloud Everywhere, Simple is Smart, and Subscription to Innovation.
Fast Matters- Speed is critical to customer experience and engagement, and therefore, we design our high-performance solutions to allow applications, analytics, and development to move and execute quickly in order for our customers to make impactful decisions. We were incorporated in 2009redefine fast by delivering low-latency, high bandwidth, and maximum density technologies. For example, accelerating core applications enables rapid response and deployment which reduces costs while increasing enterprise resilience.
Cloud Everywhere- Providing our customers the opportunity to transform their data management to a full or hybrid cloud model. This model reduces costs and adds agility through an API-defined platform, a consistent on-premise and public cloud experience, seamless data mobility and comprehensive data protection. This multi-cloud environment delivers increased flexibility, fast global recovery, and minimized application downtime through automated response.
Simple is Smart- From day one, our storage solutions are designed to be simple, allowing our customers to reduce time spent managing the storage platform including issue resolution. Our storage dashboards present real-time and intuitive platform analytics; meanwhile, AI-based optimization proactively analyzes future workloads and global network issues to limit unforeseen infrastructure problems.
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Subscription to Innovation- Delivering a subscription with a vision to definelow total cost of ownership, eliminating the next generation of enterprise storage by pioneering the all-flash array categoryneed for forklift hardware replacements, and innovating a customer-centric business model. We deliver our platform as our flash-optimized softwareproviding customizable capacity and modular and scalable all-flash hardware in our FlashArray and FlashBlade products, inclusive of our Purity Operating Environment (Purity OE) software, our Pure1 cloud-based software, and FlashStack, our joint converged infrastructure solution with Cisco. This entire platform is powered by innovative software which can be managed from anywhere and supported by our Evergreen Storage business model.
Since launching in May 2012, our customer base has grown to over 4,000 customers, including over 25% of the Fortune 500. Our customers include large and mid-size organizations across a diverse set of industry verticals, including cloud-based software and service providers, consumer web, education, energy, financial services, governments, healthcare, manufacturing, media, retail, automobile, and telecommunications. We define a customer as an end user that purchases our products and services either from one of our channel partners or from us directly. No end user customer represented 10% or more of revenuemobility, whether on-premise, in the three and nine months ended October 31, 2016 and 2017. One channel partner represented 10%cloud or more of revenue in the three and nine months ended October 31, 2017.
We have grown rapidly in recent periods, with revenue for the three months ended October 31, 2016 and 2017 of $197.0 million and $277.7 million, representing year-over-year growth of 41%. For the nine months ended October 31, 2016 and 2017, our revenue was $500.1 million and $684.8 million, representing year-over-year revenue growth rate of 37%.hybrid cloud. We expect that 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,subscription services sales and marketing, infrastructure and operations, and have incurred net losses in each period since our inception, including net losses of $78.8 million and $41.6 million for the three months ended October 31, 2016 and 2017, and $202.2 million and $165.7 million for the nine months ended October 31, 2016 and 2017.
Since our founding, we have invested heavily in growing our business. Our headcount increased from over 1,700 employees as of January 31, 2017, and to over 2,000 employees as of October 31, 2017. We intend to continue to invest in our research and development organization to extend our technology leadership, enhance the functionalitygrow faster than sales of our existing products and introduce new products. By investing in research and development, we believe we will be well positioned to continue our rapid growth and take advantage of our large market opportunity.

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We also intend to continue to invest 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 for the year ended January 31, 2017 and 26% for the nine months ended October 31, 2017.
Asintegrated appliances as a result of our strategycustomers choosing to increaseconsume 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
On August 22, 2017, our board of directors appointed Charles H. Giancarlo,technologies as the new chief executive officer and a member on our board of directors, effective immediately. 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. 
In April 2017, we launched FlashArray//X, our first all-NVMe, enterprise-class all-flash array, on directed basis. FlashArray//X became generally available in September 2017.
Our Business Model
We sell our data platform predominantly through a high touch, channel-fulfilled model. Our sales force works collaboratively with our channel partners 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 a customer 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 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. One channel partner represented 10% or more of revenue for the nine months ended October 31, 2016 and 2017.
Our business model enables customers to broadly adopt flash for a wide variety of workloads in their data 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, all 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 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. 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 agreement. In addition, our service including Evergreen Storage 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 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

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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 successunified subscription including Pure as-a-Service and loyalty and are strong drivers 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 October 31, 2017, our top 25 customers on average spent approximately $11 on new product purchases for every $1 of initial product purchase, in the first 18 months following their initial purchase.Cloud Data Services.
Coronavirus (COVID-19)
Trends in Our Business and Industry

Demand for Data in the Cloud Era

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 -- 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 makeactively monitor, evaluate and respond to developments relating to the Coronavirus (COVID-19) pandemic. The global pandemic has resulted in significant investments in ourglobal social and business to developdisruption and deliver a data platform to support today and tomorrow’s volume and velocity of data and to ensure the performance 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 a key factor in capturing mindshare with our target customers to become their data platform of choice.economic contraction.

Adoption of All-Flash Storage Systems

Organizations are increasingly replacing traditional disk-based systems with all-flash storage systems,The global economic contraction due to their higher performance, reliabilityCOVID-19 continues to create significant uncertainty and efficiency. Flash is expected to penetrate the data center at a rapid rate, and our success dependshaving an adverse impact on the adoption of all-flash storage systems. To the extent more organizations recognize the benefits of all-flash storage and the adoption of all-flash storage increases, our target customer base will expand, and demand for all-flash storage will rise.

Adding New Customers and Expanding Sales to Our Existing Customer Base

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, ingrowth during fiscal 2021; however, we are not able to currently estimate 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.ultimate impact.
Components of Results of Operations
Revenue
We derive revenue primarily from the sale of our storageFlashArray and FlashBlade products and supportsubscription services, Evergreen Storage, and our unified subscription that includes Pure as-a-Service and Cloud Data Services. Subscription services also include our professional services offerings such as installation and implementation consulting services.
Provided that all other revenue recognition criteria have been met, we typically recognize product revenue upon shipment, as title and risktransfer of loss are transferredcontrol to our channel partners at that time.customers and the satisfaction of our performance obligations. 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.

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We provide our support services pursuant to maintenance and support agreements, which involve customer support, hardware maintenance and software upgrades for a period of generally 1 to 6 years. We recognize revenue from maintenance and support agreements ratablysubscription services over the contractual service period.period and professional services as delivered. We expect our supportsubscription services revenue to increase as we add new customers and our existing customers renew maintenance and support agreements.expand their consumption and service levels.
Cost of Revenue
Cost of product revenue primarily consists of costs paid to our third-party contract manufacturers, which includes the costs of our raw material 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, amortization of intangible assets pertaining to developed technology, and inventory write-offs.freight. Allocated overhead costs consist of certain employee benefits and facilities relatedfacilities-related costs. We expect our cost of product revenue to increase in absolute dollars as our product revenue increases.
Cost of supportsubscription services revenue includesprimarily consists of personnel costs associated with delivering our customer support organizationsubscription and professional services, part replacements, allocated overhead costs. Costcosts and depreciation of support revenue also includes parts replacement costs.infrastructure used to deliver our subscription services. We expect our cost of supportsubscription services revenue to increase in absolute dollars, as our supportsubscription services 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 relatedfacilities-related costs.
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Research and Development.Development. Research and development expense consistsexpenses consist 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 it may decreaseincrease slightly as a percentage of revenue, as we continue to invest in new and existing products and build upon our technology leadership.technologies.
Sales and Marketing.Marketing. Sales and marketing expense consistsexpenses consist 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 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.dollars.
General and Administrative.Administrative. General and administrative expense consistsexpenses consist 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 amortization of intangible assets pertaining to defensive technology patents and allocated overhead. We expect our general and administrative expense to increase in absolute dollars and it may decreaseincrease slightly as a percentage of revenue, as we continue to invest in the growth of our business.revenue.
Other Income (Expense), Net
Other income (expense), net consists primarily of interest income earned onrelated to cash, cash equivalents and marketable securities, interest expense related to convertible senior notes and gains and losses(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 current 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 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 
 October 31,		 Nine Months Ended 
 October 31,
 2016 2017 2016 2017
 (unaudited)
Consolidated Statements of Operations Data:     
Revenue: 
  
    
Product$160,523
 $223,196
 $403,181
 $536,634
Support36,433
 54,478
 96,936
 148,132
Total revenue196,956
 277,674
 500,117
 684,766
Cost of revenue: 
  
    
Product (1)
54,725
 75,392
 131,618
 179,289
Support (1)
14,597
 20,467
 41,531
 56,569
Total cost of revenue69,322
 95,859
 173,149
 235,858
Gross profit127,634
 181,815
 326,968
 448,908
Operating expenses: 
  
    
Research and development (1)
61,612
 68,927
 173,185
 203,716
Sales and marketing (1)
91,392
 129,299
 262,073
 346,896
General and administrative (1)
22,810
 25,406
 64,021
 67,664
Legal settlement30,000
 —
 30,000
 —
Total operating expenses205,814
 223,632
 529,279
 618,276
Loss from operations(78,180) (41,817) (202,311) (169,368)
Other income (expense), net(192) 1,138
 1,127
 6,399
Loss before provision for income taxes(78,372) (40,679) (201,184) (162,969)
Provision for income taxes441
 970
 967
 2,755
Net loss$(78,813) $(41,649) $(202,151) $(165,724)
(1)
Includes stock-based compensation expense as follows:
 Three Months Ended 
 October 31,
Nine Months Ended 
 October 31,
 2016 2017 2016 2017
 (unaudited)
Cost of revenue—product$138
 $143
 $425
 $898
Cost of revenue—support1,178
 2,422
 3,982
 6,441
Research and development15,241
 18,073
 40,875
 51,632
Sales and marketing8,468
 12,104
 24,719
 34,169
General and administrative3,210
 6,121
 9,128
 14,780
Total stock-based compensation expense$28,235
 $38,863
 $79,129
 $107,920



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 Three Months Ended 
 October 31,		 Nine Months Ended 
 October 31,
 2016 2017 2016 2017
 (unaudited)
Condensed Consolidated Statements of Operations Data: 
  
    
Revenue: 
  
    
Product81.5 % 80.4 % 80.6 % 78.4 %
Support18.5
 19.6
 19.4
 21.6
Total revenue100.0
 100.0
 100.0
 100.0
Cost of revenue: 
  
  
  
Product27.8
 27.1
 26.3
 26.1
Support7.4
 7.4
 8.3
 8.3
Total cost of revenue35.2
 34.5
 34.6
 34.4
Gross profit64.8
 65.5
 65.4
 65.6
Operating expenses: 
  
  
  
Research and development31.3
 24.8
 34.7
 29.7
Sales and marketing46.4
 46.6
 52.4
 50.7
General and administrative11.6
 9.2
 12.8
 9.9
Legal settlement15.2
 —
 6.0
 —
Total operating expenses104.5
 80.6
 105.9
 90.3
Loss from operations(39.7) (15.1) (40.5) (24.7)
Other income (expense), net(0.1) 0.5
 0.3
 0.9
Loss before provision for income taxes(39.8) (14.6) (40.2) (23.8)
Provision for income taxes0.2
 0.4
 0.2
 0.4
Net loss(40.0)% (15.0)% (40.4)% (24.2)%
 
Revenue
Second Quarter of FiscalChangeFirst Two Quarters of FiscalChange
Three Months Ended October 31, Change Nine Months Ended 
 October 31,		 Change 20202021$%20202021$%
2016 2017 $ % 2016 2017 $ %
(dollars in thousands, unaudited)
(dollars in thousands, unaudited)(dollars in thousands, unaudited)
Product revenue$160,523
 $223,196
 $62,673
 39% $403,181
 $536,634
 $133,453
 33%Product revenue$300,128 $272,309 $(27,819)(9)%$538,869 $519,248 $(19,621)(4)%
Support revenue36,433
 54,478
 18,045
 50% 96,936
 148,132
 51,196
 53%
Subscription services revenueSubscription services revenue96,199 131,414 35,215 37 %184,158 251,594 67,436 37 %
Total revenue$196,956
 $277,674
 $80,718
 41% $500,117
 $684,766
 $184,649
 37%Total revenue$396,327 $403,723 $7,396 2 %$723,027 $770,842 $47,815 7 %
Total revenue increased by $80.7$7.4 million, or 41%2%, during the three months ended October 31, 2017second quarter of fiscal 2021 compared to the three months ended October 31, 2016second quarter of fiscal 2020 and increased by $184.6$47.8 million, or 37%7%, during the nine months ended October 31, 2017first two quarters of fiscal 2021 compared to the nine months ended October 31, 2016. The increase in product revenue was primarily driven by repeat purchases from existing customers and a growing numberfirst two quarters of new customers. The number of customers grew from over 2,600 as of October 31, 2016 to over 4,000 as of October 31, 2017. The increase in support revenue was primarily driven by an increase in maintenance and support agreements sold with increased product sales, as well as increased recognition of deferred support revenue contracts.


fiscal 2020.
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The increase in total revenue during these periods was largely driven by increases in sales of both our Evergreen Storage subscription services, and our unified subscription that includes Pure as-a-Service and Cloud Block Store. The increases in revenue of our subscription services was offset by declines in product revenues impacted by the global recession caused by COVID-19.
During the second quarter of fiscal year 2021 compared to the second quarter of fiscal 2020, total revenue in the United States declined by 4% from $294.6 million to $281.7 million and total rest of the world revenue grew 20% from $101.7 million to $122.0 million. During the first two quarters of fiscal 2021 compared to the first two quarters of fiscal 2020, total revenue in the United States grew by 4% from $523.5 million to $545.8 million and total rest of the world revenue grew 13% from $199.5 million to $225.0 million. For further details on revenues by geography, see Note 15 of Part I, Item 1 of this Quarterly Report on Form 10-Q.
Deferred Revenue
Deferred revenue primarily consists of amounts that have been invoiced but have not yet been recognized as revenue including performance obligations pertaining to 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.
Changes in total deferred revenue during the periods presented are as follows (in thousands, unaudited):

Second Quarter of FiscalFirst Two Quarters of Fiscal
2020202120202021
Beginning balance$564,230 $706,060 $535,920 $697,288 
Additions140,548 155,435 258,441 287,169 
Recognition of deferred revenue(97,515)(136,744)(187,098)(259,706)
Ending balance$607,263 $724,751 $607,263 $724,751 
Revenue recognized during the second quarter of fiscal 2020 and 2021, from deferred revenue at the beginning of each respective period was $88.2 million and $119.4 million. Revenue recognized during the first two quarters of fiscal 2020 and 2021, from deferred revenue at the beginning of each respective period was $150.2 million and $204.6 million.
Remaining Performance Obligations
Total contracted but not recognized revenue was $956.4 million at the end of the second quarter of fiscal 2021. Contracted but not recognized revenue consists of both deferred revenue and non-cancelable amounts that are expected to be invoiced and recognized as revenue in future periods. The value of orders that are contracted but have not been fulfilled and that can be canceled by customers, are excluded from remaining performance obligations. Of the $956.4 million contracted but not recognized revenue at the end of the second quarter of fiscal 2021, we expect to recognize approximately 42% over the next 12 months, and the remainder thereafter.
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Cost of Revenue and Gross Margin
 
Second Quarter of FiscalChangeFirst Two Quarters of FiscalChange
20202021$%20202021$%
(dollars in thousands, unaudited)
Product cost of revenue$91,916 $83,741 $(8,175)(9)%$167,531 $152,030 $(15,501)(9)%
Stock-based compensation954 990 36 4 %1,931 1,986 55 3 %
Total product cost of revenue$92,870 $84,731 $(8,139)(9)%$169,462 $154,016 $(15,446)(9)%
% Product revenue31 %31 %31 %30 %
Subscription services cost of revenue$31,505 $40,580 $9,075 29 %$61,275 $78,197 $16,922 28 %
Stock-based compensation3,633 3,686 53 1 %7,584 7,078 (506)(7)%
Total subscription services cost of revenue$35,138 $44,266 $9,128 26 %$68,859 $85,275 $16,416 24 %
% of Subscription services revenue37 %34 %37 %34 %
Total cost of revenue$128,008 $128,997 $989 1 %$238,321 $239,291 $970 — %
% of Total revenue32 %32 %33 %31 %
Product gross margin69 %69 %  69 %70 %
Subscription services gross margin63 %66 %  63 %66 %
Total gross margin68 %68 %  67 %69 %
 Three Months Ended October 31, Change Nine Months Ended 
 October 31,		 Change
 2016 2017 $ % 2016 2017 $ %
 (dollars in thousands, unaudited)
Product cost of revenue$54,725
 $75,392
 $20,667
 38% $131,618
 $179,289
 $47,671
 36%
Support cost of revenue14,597
 20,467
 5,870
 40% 41,531
 56,569
 15,038
 36%
Total cost of revenue$69,322
 $95,859
 $26,537
 38% $173,149
 $235,858
 $62,709
 36%
Product gross margin65.9% 66.2%  
  
 67.4% 66.6%    
Support gross margin59.9% 62.4%  
  
 57.2% 61.8%    
Total gross margin64.8% 65.5%  
  
 65.4% 65.6%    


Cost of revenue increased by $26.5 million, or 38%, during the three months ended October 31, 2017 compared to the three months ended October 31, 2016 and increased by $62.7 million, or 36%, during the nine months ended October 31, 2017 compared to the nine months ended October 31, 2016. The increase in product cost of revenue was 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 in supportsubscription services cost of revenue was primarily attributable to higher costs in our customer support organization as we continue to expand globally. These costs are primarilyorganization. The increase in subscription services gross margin for both periods was driven by increased personnel costs associated with increased headcount and an increaserenewals in parts replacement associated with a higher number of maintenance and support agreements. Total headcount in these functions increased 42% from October 31, 2016 to October 31, 2017.
Total gross margin increased from 64.8% in the three months ended October 31, 2016 to 65.5% in the three months ended October 31, 2017 and increased from 65.4% in the nine months ended October 31, 2016 to 65.6% in the nine months ended October 31, 2017. Product gross margin was relatively consistent at 65.9% in the three months ended October 31, 2016 and at 66.2% in the three months ended October 31, 2017. Product gross margin decreased from 67.4% in the nine months ended October 31, 2016 to 66.6% in the nine months ended October 31, 2017, primarily driven by both pricing and product mix dynamics including our FlashBlade products. Support gross margin increased from 59.9% to 62.4% during the three months ended October 31, 2017 and from 57.2% to 61.8% during the nine months ended October 31, 2017, primarily attributed to increased recognition of deferred support revenue resulting from our expanding customer base and our continued efforts at driving operational efficiencies in our support organization.Evergreen subscriptions.
Operating Expenses
Research and Development

Second Quarter of FiscalChangeFirst Two Quarters of FiscalChange
20202021$%20202021$%
(dollars in thousands, unaudited)
Research and development$77,912 $84,813 $6,901 9 %$154,742 $168,548 $13,806 9 %
Stock-based compensation29,108 29,839 731 3 %57,353 58,550 1,197 2 %
Total expenses$107,020 $114,652 $7,632 7 %$212,095 $227,098 $15,003 7 %
% of Total revenue27 %28 %29 %29 %

 Three Months Ended October 31, Change Nine Months Ended 
 October 31,		 Change
 2016 2017 $ % 2016 2017 $ %
 (dollars in thousands, unaudited)
Research and development$61,612
 $68,927
 $7,315
 12% $173,185
 $203,716
 $30,531
 18%

Research and development expense increased by $7.3$7.6 million, or 12%7%, during the three months ended October 31, 2017second quarter of fiscal 2021 compared to the three months ended October 31, 2016,second quarter of fiscal 2020, as we continuedcontinue to innovate and develop newtechnologies to both enhance and enhanced product offerings includingexpand our FlashBlade and FlashArray//X products.solution portfolio. The increase was primarily driven

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by a $7.9$10.7 million increase in employee compensation and related costs, includingpartially offset by a $2.8$6.0 million increasedecrease in stock-based compensationdepreciation expense as headcount increased 15% from October 31, 2016due to October 31, 2017.revising our estimated useful lives of test equipment, and certain computer equipment and software during the first quarter of fiscal 2021.

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Research and development expense increased by $30.5$15.0 million, or 18%7%, during the nine months ended October 31, 2017first two quarters of fiscal 2021 compared to the nine months ended October 31, 2016, as we continued to develop new and enhanced product offerings including our FlashBlade and FlashArray//X products.first two quarters of fiscal 2020. The increase was primarily driven by a $27.7$23.2 million increase in employee compensation and related costs, includingpartially offset by a $10.8$12.0 million increase in stock-based compensation expense, as headcount increased 15% from October 31, 2016 to October 31, 2017. The remainder of the increase was primarily attributable to a $4.9 million increasedecrease in depreciation expense ondue to revising our estimated useful lives of test equipment.equipment, and certain computer equipment and software during the first quarter of fiscal 2021.
Sales and Marketing

Second Quarter of FiscalChangeFirst Two Quarters of FiscalChange
20202021$%20202021$%
(dollars in thousands, unaudited)
Sales and marketing$170,133 $154,586 $(15,547)(9)%$318,445 $311,747 $(6,698)(2)%
Stock-based compensation16,055 16,848 793 5 %34,369 33,120 (1,249)(4)%
Total expenses$186,188 $171,434 $(14,754)(8)%$352,814 $344,867 $(7,947)(2)%
% of Total revenue47 %42 %49 %45 %

 Three Months Ended October 31, Change Nine Months Ended 
 October 31,		 Change
 2016 2017 $ % 2016 2017 $ %
 (dollars in thousands, unaudited)
Sales and marketing$91,392
 $129,299
 $37,907
 41% $262,073
 $346,896
 $84,823
 32%

Sales and marketing expense increaseddecreased by $37.9$14.8 million, or 41%8%, during the three months ended October 31, 2017second quarter of fiscal 2021 compared to the three months ended October 31, 2016, as we grew our sales forcesecond quarter of fiscal 2020, primarily due to a decrease of $19.4 million in marketing and expanded our geographic footprint.travel spend due to the COVID-19 pandemic. The increasedecrease was primarily drivenpartially offset by a $31.2$4.8 million increase in employee compensation and related costs including a $17.3 millionas we continue to invest in certain areas within sales commission expense and a $3.6 million increase in stock-based compensation expense, as headcount increased 20% from October 31, 2016 to October 31, 2017. The remainder of the increase was primarily attributable to a $2.4 million increase in sales conferences, marketing and brand awareness program costs, a $2.1 million increase in office expenses and a $1.3 million increase in travel and related costs.marketing.

Sales and marketing expense increaseddecreased by $84.8$7.9 million, or 32%2%, during the nine months ended October 31, 2017first two quarters of fiscal 2021 compared to the nine months ended October 31, 2016, as we grew our sales force and expanded our geographic footprint.first two quarters of fiscal 2020. The increasedecrease was primarily drivendue to a decrease of $29.8 million in marketing and travel spend due to the COVID-19 pandemic, partially offset by a $64.6$14.9 million increase in employee compensation and related costs, including a $26.0$3.6 million in sales commission expense and a $9.5 million increase in stock-based compensation expense, as headcount increased by 20% from October 31, 2016 to October 31, 2017. The remainder of the increase was primarily attributable to a $6.8 million increase in sales conference, marketing and brand awareness program costs, including expenses related to our annual Pure//Accelerate conference in June 2017, a $5.8 million increase in office and relatedfacilities-related expenses and a $3.6$2.0 million increase in outside services costsas we continue to grow our sales force and a $3.2 million increase in travel and related costs.expand our international presence.
General and Administrative
 Three Months Ended October 31, Change Nine Months Ended 
 October 31,		 Change
 2016 2017 $ % 2016 2017 $ %
 (dollars in thousands, unaudited)
General and administrative$22,810
 $25,406
 $2,596
 11% $64,021
 $67,664
 $3,643
 6%

Second Quarter of FiscalChangeFirst Two Quarters of FiscalChange
20202021$%20202021$%
(dollars in thousands, unaudited)
General and administrative$31,362 $34,382 $3,020 10 %$62,802 $66,184 $3,382 5 %
Stock-based compensation8,654 10,089 1,435 17 %19,324 19,412 88 — %
Total expenses$40,016 $44,471 $4,455 11 %$82,126 $85,596 $3,470 4 %
% of Total revenue10 %11 %11 %11 %
General and administrative expense increased by $2.6$4.5 million, or 11%, during the three months ended October 31, 2017second quarter of fiscal 2021 compared to the three months ended October 31, 2016. The increase wassecond quarter of fiscal 2020 and increased by $3.5 million, or 4%, during the first two quarters of fiscal 2021 compared to the first two quarters of fiscal 2020, primarily due to a $5.5 million increase in employee compensation and related costs, including a $2.9 million increase in stock-based compensation expense, as we increased our general and administrative headcount by 33% from October 31, 2016 to October 31, 2017, which was partially offset by a $3.1 million decrease in legal and other fees.costs.



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Restructuring and Other
General and administrative expense increased by $3.6
Second Quarter of FiscalChangeFirst Two Quarters of FiscalChange
20202021$20202021$
(dollars in thousands, unaudited)
Restructuring and other$— $8,288 $8,288 $— $22,990 $22,990 
% of Total revenue— %2 %— %3 %

During the second quarter of fiscal 2021,we ceased use of certain leased facilities. The unamortized costs of $7.5 million or 6%, during the nine months ended October 31, 2017 comparedrelating to the nine months ended October 31, 2016. The increase was primarily due to a $12.1operating lease right-of-use assets and leasehold improvements for these leases were expensed. We also recognized $0.8 million increase in employee compensation and relatedinvoluntary termination benefit costs including a $5.7 million increase in stock-based compensation expense as we increased our general and administrative headcount by 33% from October 31, 2016 to October 31, 2017, and a $1.3 million increase in office and related expenses, partially offset by a $8.9 million decrease in outside services costs including legal and other fees.
Legal Settlement
In October 2016, we incurred a one-time charge of $30.0 million related to a legal settlement agreement with Dell Inc. There wasworkforce realignment plan.
During the first two quarters of fiscal 2021, we incurred incremental costs of $8.9 million directly related to the COVID-19 pandemic. These costs primarily included the write-off of marketing commitments no legal settlement chargelonger deemed to have value for the remainder of fiscal 2021 and estimated non-recoverable costs for internal events that could not be held. In addition, we expensed unamortized costs of $7.5 million relating to the cease use of certain lease facilities (as discussed above) and recognized $6.6 million in the three and nine months ended October 31, 2017.one-time involuntary termination benefit costs related to workforce realignment plans.


Other Income (Expense), Net
Second Quarter of FiscalChangeFirst Two Quarters of FiscalChange
20202021$20202021$
(dollars in thousands, unaudited)
Other income (expense), net$(652)$1,603 $2,255��$(2,468)$(1,813)$655 
% of Total revenue— %— %— %— %
 Three Months Ended October 31, Change Nine Months Ended 
 October 31,		 Change
 2016 2017   2016 2017  
 (dollars in thousands, unaudited)
Other income (expense), net$(192) $1,138
 $1,330
 $1,127
 $6,399
 $5,272

The increases in other income (expense), net during the three and nine months ended October 31, 2017 compared to the three and nine months ended October 31, 2016 were driven by increases in net gains from foreign currency transactions and increases in interest income earned on our cash, cash equivalents and marketable securities.
Provision for Income Taxes
 Second Quarter of FiscalChangeFirst Two Quarters of FiscalChange
 20202021$%20202021$%
(dollars in thousands, unaudited)
Provision for income taxes$461 $2,451 $1,990 432 %$1,557 $4,748 $3,191 205%
% of Total revenue— %1 %— %1 %
 Three Months Ended October 31, Change Nine Months Ended 
 October 31,		 Change
 2016 2017   2016 2017  
 (dollars in thousands, unaudited)
Provision for income taxes$441
 $970
 $529
 $967
 $2,755
 $1,788


The increases in provision for income taxes increased during the threesecond quarter and nine months ended October 31, 2017first two quarters of fiscal 2021 compared to the threesecond quarter and nine months ended October 31, 2016 was driven byfirst two quarters of fiscal 2020 primarily attributable to an increase in foreign income taxes and less excess tax benefitthe release of valuation allowance related to our employee stock-based activities.unrealized gains on available for sale securities in the second quarter of fiscal 2020.
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Liquidity and Capital Resources
AsAt the end of October 31, 2017,the second quarter of fiscal 2021, we had cash, cash equivalents and marketable securities of $551.4$1,293.1 million. Our cash and cash equivalents primarily consist of bank deposits and money market accounts. Our marketable securities generally 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. We have generated significant operating lossesgovernments, and negative cash flows from operations as reflected in our accumulated deficit of $968.2 million. We 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.asset-backed securities.
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 futureliquidity and working capital requirements will depend on many factors including our growth rate,needs could be negatively impacted by the timingCOVID-19 pandemic and extent of spending to support development efforts, the expansion ofglobal economic recession which has resulted in reduced sales, and marketing and international operation activities, the timing of new product introductions, and the continuing market acceptance of our products and services.customers or partners being unable to fulfill their payment obligations to us. We may in the futurecontinue to enter into arrangements to acquire or invest in complementary businesses, services and technologies, including intellectual property rights. Werights and may be required to seek additional

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equity or debt financing. financing in the future.
Revolving Credit Facility
In August 2020, we entered into a Credit Agreement with a consortium of financial institutions and lenders that provides for a five-year, senior secured revolving credit facility of $300 million (Credit Facility). Proceeds from the event that additional financing is requiredCredit Facility may be used for general corporate purposes and working capital. The annual interest rates applicable to loans under the Credit Facility are, at our option, equal to either a base rate plus a margin ranging from outside sources,0.50% to 1.25% or LIBOR, subject to a floor of 0%, plus a margin ranging from 1.50% to 2.25%. In addition, we may not be ablewill incur a commitment fee on the unused portion of the commitments ranging from 0.25% to raise it0.40% per annum. The respective margins are based on terms acceptablethe then-applicable Consolidated Leverage Ratio. Loans under the Credit Facility are subject to us or at all. If we are unable to raise additional capital when desired, our business, operating resultscertain restrictions and two financial condition would be adversely affected.
Asratios measured as of the last day of each fiscal quarter, commencing with the fiscal quarter ending January 31, 20172021: a Consolidated Leverage Ratio not to exceed 4.5:1 and October 31, 2017,an Interest Coverage Ratio not to be less than 3:1. We have not borrowed any funds under the Credit Facility.
Letters of Credit
At the end of fiscal 2020 and the end of the second quarter of fiscal 2021, we had letters of credit in the aggregate amount of $9.6$11.5 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 August 2026.2029.
Convertible Senior Notes
In April 2018, we issued $575.0 million of 0.125% convertible senior notes due 2023 (the Notes), 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 common stock, or a combination of cash and shares of our common stock, at our election. We intend to settle the principal of the Notes in cash. See further discussion in Note 6 in Part I, Item 1 of this report.
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Share Repurchase Program
In August 2019, our board of directors approved the repurchase of up to $150.0 million of our common stock. During the second quarter of fiscal 2021, we repurchased and retired 1,176,761 shares of common stock at an average purchase price of $17.00 per share for an aggregate repurchase price of $20.0 million. During the first two quarters of fiscal 2021, we repurchased and retired 7,136,191 shares of common stock at an average purchase price of $12.61 per share for an aggregate repurchase price of approximately $90.0 million. Approximately $45.0 million remained under our share repurchase authorization as of the end of the second quarter of fiscal 2021.
The following table summarizes our cash flows for the periods presented (in thousands, unaudited):
 
 Nine Months Ended October 31,
 2016 2017
Net cash provided by (used in) operating activities$(51,880) $13,756
Net cash used in investing activities$(436,732) $(53,290)
Net cash provided by financing activities$36,331
 $37,898
 First Two Quarters of Fiscal
 20202021
Net cash provided by operating activities$55,459 $85,809 
Net cash used in investing activities$(267,483)$(42,488)
Net cash provided by (used in) financing activities$32,574 $(50,355)
Operating Activities
Net cash provided by operating activities during the nine months ended October 31, 2017first two quarters of fiscal 2020 and 2021 was $13.8 million, which resulted primarily driven by cash collections from a net losssales of $165.7 million,our product and subscription services including certain invoices with extended payment terms and deferral of the employer portion of social security payroll tax under the CARES Act, partially offset by non-cash charges for stock-based compensation expense of $107.9 million, depreciation and amortization of $45.5 million, and net cash inflows of $25.2 million from changes in operating assets and liabilities. The net cash inflows from changes in operating assets and liabilities were primarily the result of a $54.4 million increase in deferred revenue, a $14.6 million increase in accruedpayments to our contract manufacturers, employee compensation, and other liabilities and a $11.8 million increase in accounts payable, partially offset by a $33.6 million increase in net accounts receivable, a $14.3 million increase in inventory and a $7.6 million increase in deferred commissions. The increases in deferred revenue and deferred commissions were primarily due to new sales order growth during the nine months ended October 31, 2017. The increase in inventory was primarily as a result of increased purchases to manage component costs and availability to meet demand for our products. The increases in accounts receivable, accounts payable and accrued compensation and other liabilities were primarily attributable to revenue growth and increased activities to support overall business growth.

Net cash used ingeneral corporate operating activities during the nine months ended October 31, 2016 was $51.9 million, which resulted from a net loss of $202.2 million, including a $30.0 million one-time legal settlement payment, partially offset by non-cash charges for stock-based compensation expense of $79.1 million, $36.0 million for depreciation and amortization and net cash inflows of $34.1 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 $60.2 million increase in deferred revenue, a $6.8 million increase in accrued compensation and other liabilities, a $3.6 million increase in accounts payable and a $1.8 million decrease in deferred commissions, partially offset by a $38.2 million increase in accounts receivable. The increases in deferred revenue was primarily due to new sales order growth during the nine months ended October 31, 2016. The increases in accounts receivable, accounts payable and in accrued compensation and other liabilities were primarily attributable to revenue growth and increased activities to support overall business growth.expenditures.
Investing Activities
Net cash used in investing activities during the nine months ended October 31, 2017first two quarters of $53.3 million resulted from capital expenditures of $44.4 million,fiscal 2021 was primarily driven by net purchases of marketable securities of $6.9 million, and a net increase in restricted cash of $2.0 million related to security deposit for office space.capital expenditures.
Net cash used in investing activities during the nine months ended October 31, 2016first two quarters of $436.7 million resulted fromfiscal 2020 was primarily driven by net purchases of marketable securities, of $365.5 million, capital expenditures, net cash paid for our acquisition of $64.6 million, an increase in restricted cash of $5.6 million related to a corporate credit card programCompuverde, and security deposit for office space, as well as the purchase of a portfolio of technology patents for $1.0 million.

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intangible assets acquired.
Financing Activities
Net cash used in financing activities during the first two quarters of fiscal 2021 was primarily driven by share repurchases, partially offset by proceeds from exercise of stock options and issuance of common stock from employee stock purchase plan (ESPP).
Net cash provided by financing activities during the nine months ended October 31, 2017first two quarters of fiscal 2020 was $37.9 million primarily attributable to $22.1 million indriven by proceeds from issuance of common stock under employee stock purchase plan (ESPP)from ESPP and $15.8 million in proceeds from the exercise of employee stock options.options, partially offset by repayment of debt assumed in connection with acquisition of Compuverde, and tax withholdings on vesting of restricted stock.
Net cash provided by financing activities during the nine months ended October 31, 2016 was $36.3 million primarily due to $25.6 million in proceeds from issuance of common stock under ESPP and $10.7 million in proceeds from exercises of employee stock options.
Contractual Obligations and Commitments

Except as set forth in Notes 7 to 9 of Part I, Item 1 of this Quarterly Report on Form 10-Q, there have been no material changes to our non-cancelable contractual obligations and commitments disclosed in our Annual Report on 10-K for fiscal 2020. As events continue to evolve and additional information becomes available in regards to the COVID-19 pandemic, our contractual obligations and commitments may be impacted in future periods.
During the nine months ended October 31, 2017, we extended the lease term
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Table of an existing office facility with total additional lease obligations of approximately $2.0 million with the lease expiring through March 2019. Additionally, 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 and management fees of $32.2 million. In connection with the lease, we issued a letter of credit of $2.6 million.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 seeRefer to 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, 2017.27, 2020, except for the change in estimate of the useful life for certain property and equipment.
Available Information
Our website is located atwww.purestorage.com, and our investor relations website is located athttp://investor.purestorage.com. The following filings will be available through our investor relations website free of charge 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.stockholders. We will also provide a link to the section of the SEC's website atwww.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.

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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. AsAt the end of October 31, 2017,the second quarter of fiscal 2021 we had cash, cash equivalents and marketable securities of $551.4$1,293.1 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$11.2 million asat the end of October 31, 2017.the second quarter of fiscal 2021.
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Foreign Currency Exchange Risk
Our sales contracts are primarily denominated in U.S. dollars with a proportionally 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 October 31, 2017the end of the second quarter of fiscal 2021 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 provision for income taxes of approximately $8.7$4.6 million asat the end of October 31, 2017.the second quarter of fiscal 2021.
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, asat the end of October 31, 2017,the second quarter of fiscal 2021, 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.

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Changes in Internal Control over Financial Reporting
ThereAs a result of COVID-19, most of our workforce has been working from home since March 2020. During the second quarter of fiscal 2021 therewere 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 secondquarter ended October 31, 2017of fiscal 2021 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 fromFrom time to time, bewe are involved in various legal proceedings arising from the normal course of business, and an unfavorable resolution of any of these matters could 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, which we refer to as our "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 periods, and we may not be able to sustain or manage future growth effectively.
We have significantly expanded our overallOur business, customer base, headcount, channel partner relationships and operations in recent periods, and we anticipate that we will continue to expand and may experience significant growth in future periods. For example, from January 31, 2016 to January 31, 2017, our headcount increased from over 1,300 to over 1,700 employees, and to over 2,000 employees as of October 31, 2017. Our future operating results, cash flows and financial condition may be materially adversely affected by the COVID-19 pandemic, including the resulting global economic uncertainty and measures taken in response to the pandemic, the impacts of which will depend on ongoing and future developments, which are highly uncertain and difficult to predict.
The COVID-19 pandemic has resulted in significant global social and business disruption and economic contraction. The pandemic has impacted our business and has also put unprecedented strains on governments, health care systems, educational institutions, businesses and individuals around the world. The ongoing impact on the global population and the magnitude and duration of the COVID-19 pandemic is difficult to assess or predict. It is even more difficult to predict the ongoing impact on the global economic market, which will be highly dependent, among other things, upon the actions of governments, businesses and other organizations in response to the pandemic and the effectiveness of those actions.
The extent and continued impact of the COVID-19 pandemic on our business and operational and financial performance depends on many factors, including the duration and spread of the outbreak; the availability and effectiveness of a large extentvaccine; government responses to and restrictions related to the pandemic; impact on our customers and our sales efforts and cycles; impact on our customer, industry or employee events; and effect on our partners, vendors and supply chains, all of which are uncertain and outside of our control. Potential negative impacts of these external factors include, but are not limited to, material adverse effects on demand for our products and services, including due to budget constraints and other uncertainties; our ability to successfully sustaingain new customers; our growth and manageemployee productivity; 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 personnel;
maintain and further develop our channel partner relationships;
enhance and expand our distribution and supply chain infrastructure;and sales and distribution channels; collectability of customer accounts; our ability to execute strategic plans; impairments; and our profitability and cost structure.
expand our support capabilities;
forecastFurther, the COVID-19 pandemic has enhanced, 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 andmay further exacerbate, other resources. We will incur costsrisks discussed in this “Risk Factors” section, particularly risks associated with this future growth priordemand, market trends, relationship building and sales efforts, as well as risks affected by the shift to realizingour workforce largely working from home. We are continuing to monitor the anticipated benefits,pandemic and intend to continue taking appropriate steps in accordance with the return on these investments may be lower, may develop more slowly than we expect or may never materialize. If we are unable to sustain or manage our growth effectively, we may not be able to take advantagerecommendations and requirements of market opportunities or develop 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 ourThe rapidly evolving 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 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. Even if we achieve or maintain significant revenue growth, we may continue to experience losses, forgoing near-term profitability on a sustained basis.
We have not achieved profitability for any year since our inception. We incurred a net loss of $245.1 million for the year ended January 31, 2017 and $165.7 million for the nine months ended October 31, 2017, and we had an accumulated deficit of $802.5 million as of January 31, 2017 and $968.2 million as of October 31, 2017. 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 future operating results difficult to predict.
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 newdata storage 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-flashdata storage products is rapidly evolving. As aChanges in the application requirements, data center infrastructure trends and the broader technology landscape result ourin evolving customer requirements for capacity, performance scalability and enterprise features of storage systems. Our future financial performance will depend on the continued growth of this market anddepends on our ability to adapt to competitive dynamics and emerging customer demands and trends. SalesThe introduction 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. Incumbentby incumbent vendors are actively promoting storage products retrofitted with flash, which may reduce the perceived value of purpose-built, all-flash products like ours. 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 that do not utilizingutilize our storage platform could adversely affect the demand for our products. For instance, offerings
Offerings from large-scalelarge 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 numberIt is difficult to predict with any precision customer adoption rates 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 gigabytenew offerings, customer demand for our products or the future growth rate and size 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.our addressable market. A slowing in or reducedreduction in demand for all-flashour data storage products caused by lack of customer acceptance, technological challenges, alternative technologies and products or otherwiseany other reason would result in a lower revenue growth rate or decreased revenue, either of which would negatively impact our business and operating results.

Our business may be harmed by trends in the overall external storage market.
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TableDespite ongoing data growth, the external storage market in which we compete has not experienced substantial growth in the past few years due to a combination of Contents

technology transitions, increased storage efficiency, competitive pricing dynamics and changing economic and business environments. Customers are rethinking how they consume IT, increasing spending toward the public cloud, software as a service, hyperconverged and converged infrastructure and software-defined storage. Any failure on our part to accurately predict trends, successfully update our product offerings or to adapt our sales programs to meet changing customer demands could harm our business, operating results and financial condition. The future impact of these trends on both the short-term and long-term growth of the overall external storage market is uncertain. Reductions in the overall external storage market or the specific markets in which we compete would harm 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 includeproducts, including Dell EMC, HP Enterprise, Hitachi Vantara, IBM, LenovoNetApp and NetApp. These competitors, as well as other potentialothers. 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;
•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 cloud providers and vendors that offerof hyperconverged products, thatwhich combine compute, networking and storage, or hyperconverged products. Some cloudstorage. These providers are growing and expanding quickly, and their product offerings, could, if we are unable to effectively sell to these providers, displacepotentially displacing some demand for our products. Vendors offering hyperconverged products are attempting to displace dedicated storage products like ours. New 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,In addition, some of our competitors have offeredoffer 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. SomeFurther, some of our competitors have offeredoffer 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 meritsus.
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Many competitors have developed or acquired competing all-flashstorage technologies with features 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 attemptdesigned, among other things, 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 asvalue compared to our products. In addition, our competitors may develop enhancements to, or future generations of, competitive products thatthese developments may render our products or technologies obsolete or less competitive. These and other competitive pressures may prevent us from competing successfully against our 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 on both short-term and long-term growth trends is uncertain. If the overall 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, our business and operating results could be harmed.
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.

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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 manufacturedproducts supplied by our competitors. This gives an incumbent competitorcompetitors who have an advantage in retaining the customer because, among other things, the incumbent competitorvendor already understands the customer’s IT infrastructure, user demands and needs. Inneeds, or the event thatcustomer is concerned about actual or perceived costs of switching to a new vendor and technology.If 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 couldwould adversely affect our business and operating results.
Our ability to increase our revenue will substantially depend on our ability to attract, motivatebrand name 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 on our ability to attract 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, asharmed by the valuemarketing strategies of our stock fluctuatescompetitors.
We believe that building and asmaintaining brand recognition and customer goodwill is critical to our employeessuccess. Our efforts in this area have, on occasion, been hampered by 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, 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. Membersmarketing efforts of our management team, includingcompetitors, which have included negative or misleading statements about us and our executive officers, are generally employed on an at-will basis, which means that they could terminate their employment with us at any time.products. If we are unable to attract, motivateeffectively respond to the marketing efforts of our competitors and retain qualified sales, engineeringprotect our brand and other key employees, including our management,customer goodwill now or in the future, 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 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 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 or increase our revenue.
If we fail to develop and introduce new or enhanced products 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. The introduction of new products by our competitors, the market acceptance of products based on new or alternative technologies or the emergence of new 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. For example, we started initial shipments of our new FlashBlade products for general availability in January 2017 and initial shipments of new FlashArray//X products for direct availability in April 2017. 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

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software features, that meet the 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 channel partners.our partners, including value-added resellers, service providers and systems integrators. 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.
Our gross margins are impacted by a variety of factors, are subject to variation from period to period and are difficult to predict.
Our gross margins fluctuate from period to period due primarily to product costs, customer mix and product mix. Over the last six quarters, our quarterly gross margins ranged from 65% to 66%. Our gross margins may fluctuate and may be affected by a variety of factors, 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;
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;
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;

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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;
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
future accounting pronouncements and changes in accounting policies.
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.
Our sales cycles can be long, unpredictable and unpredictable, particularly with respect to large orders, and our sales efforts require considerable time and expense. As a result,expensive, 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. Larger customers often undertake aninvolves evaluation and testing process that can result in a lengthy sales cycle.cycle, particularly for larger customers. 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

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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 product sale is not recognized until title is transferred for the product, if we haveperformance obligations are satisfied, a substantial portion of our sales at the end oflate in a quarter we may be unable to transfer title and recognizenegatively 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 maywill 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 contributedSales to U.S. federal, state, local and foreign governments are subject to a number of challenges and risks that may adversely impact our business.
Sales to U.S. federal, state, local and foreign governmental agencies may in the future account for a significant portion of our revenue and sales to governmental agencies impose additional challenges and risks to our success,sales efforts.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 demand and payment for our products and services may be impacted by public sector budgetary cycles and funding authorizations, including in connection with an extended federal government shutdown, with funding reductions or delays adversely affecting public sector demand for our products and services.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 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.Finally, governments may require certain products to be manufactured in the United States and other relatively high-cost manufacturing locations, and we cannot maintain this culture asmay not manufacture all products in locations that meet these requirements, affecting our ability to sell these products to governmental agencies.
Risks Related to Our Products and Subscription Services Offerings
If we grow, wefail to develop and introduce new or enhanced products successfully, our ability to attract and retain customers could lose the innovation, creativity and teamwork fostered by our culture, and our business may 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 expectations of our customers, which is a complex and uncertain process. We believe that a critical contributorwe must continue to dedicate significant resources to our success has beenresearch and development efforts to maintain or expand our company culture, whichcompetitive position. Our investments may take longer to generate revenue or may generate less revenue than 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 thatanticipate. The introduction of new products by our competitors, or the difference betweenemergence of alternative technologies or industry standards could render our sales, support and engineering cultures, relative to thoseexisting or future products obsolete or less competitive.
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As we growintroduce new or enhanced products, we must successfully manage product launches and change, we may find it difficulttransitions 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 long-term success depends, in part, on our ability to expand the salesnext generations of our products and encourage our customers to customers located outsideadopt new products and features. If we are not able to successfully manage the development and release of the United States, our business is susceptible to risks associated with international operations.
We maintain operations outside of the United States. We have been expanding and intend to continue to expand these operations in the future. We have limited experience operating in foreign jurisdictions. This increases the risk that our international expansion efforts may not be successful. In addition, conducting and expanding international operations subjects us to new risks that we do not generally 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;
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,enhanced products, our business, operating results and financial condition generally.could be harmed. Similarly, if we fail to introduce new or enhanced products, such as new or improved software features, that meet our customers' needs in a timely or cost-effective fashion, we may lose market share and our operating results could be adversely affected.

If we fail to manage the anticipated transition to subscription offerings successfully, our revenues and results of operation may be harmed.
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The sales pricesWe are now offering all of our products and services may decrease, which may reduce our gross profits and adversely impact our financial results.
The sales prices for our products and services may decline for a variety of reasons, including competitive pricing pressures, discounts, 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 we will be successful in developing and introducing new offerings with enhanced functionality on a timelysubscription basis, or thatincluding our hardware and software products through Pure as-a-Service and Cloud Data Services. These business models are relatively new product and services offerings, if introduced, will enable us to maintain or improve our gross margins and achieve profitability.
We derive 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 the majority of our revenuestorage market 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;
any decline or fluctuation in demand for our products, whether as a result of product obsolescence, technological change, customer budgetary constraints or other factors;
the introduction of competing productsevolve, 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.
If the market for all-flash storage products grows more slowly than anticipated or if demand for our products declines, we may not be able to increasecompete effectively, drive continued revenue growth or maintain the profitability with these business models. Additionally, the subscription models offered by us and our revenuecompetitors may unfavorably impact the pricing of and demand for our on-premise offerings, which could reduce our revenues and profitability. If we do not successfully execute our business strategy, which includes subscription offerings, or achieveanticipate the needs of our customers, our revenues and maintain profitability.profitability could be negatively impacted.
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 ofWe may not be able to enforce provisions in our contracts with customers contain provisions relating to warranty disclaimers and liability limitations, which may be difficult to enforce.limitations. Defending a lawsuit, regardless of its merit, would be costly and mightcould divert management’s attention and adversely affect the market’s perception of us and our products. Our business liability insurance coverage could provemay be inadequate with respect to a claim and future coverage may not be unavailableavailable 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

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efforts of our competitors, which have included statements about us and our products. If we are unable to effectively respond to the marketing efforts ofensure that our competitors and protect our brand and customer goodwill now or in the future, our business will be adversely affected.
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 software and hardware, we may lose or fail to increase our market share and may experience reduced demand for our products.share.
Our products must interoperate with our customers’ existing infrastructure, specifically their networks, servers, software and operating systems, which may be manufacturedare offered by a wide variety of vendors. When new or updated versions of these software operating systems or applications are introduced, we must sometimesmay need to develop updated versions of our software so that our products willcontinue to 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. Theseall as 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.
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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.an IT environment. The servers, network, software and other components and systems of a data centerdeployed by our customers 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 centerthis ecosystem to conform to prevailing industry standards. Often, theseThese 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 acceptancesales 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 withinby our customers’ data centers,customers, 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 relationshiprelationships 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 manufacturersproducts, which 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 couldwill be impaired, potentially on short notice, and our competitive position, reputation and reputationfinancial results 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

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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.
We rely on a limited number of suppliers, and in some cases single-source suppliers, and any disruption or termination of theseour 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. While we actively monitor and manage our supply chain, we cannot anticipate the potential impact that new or current restrictions due to COVID-19 may have on the manufacturing and shipment of our products.
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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;flash;
•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 or increasing the price of components.
Further, some of the components in our products are sourced from component suppliers outside the United States, including from China. 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, there have been discussions regarding potential significant changes to U.S. trade policies, legislation, treaties and tariffs, and the United States and Chinese governments have announced import tariffs by both countries. If any new legislation and/or regulations are implemented, if existing trade agreements are renegotiated or terminated, or if tariffs are imposed on foreign-sourced or U.S. goods, it may be inefficient and expensive for us to alter our business operations in order to adapt to or comply with such changes. Such operational changes could have a material adverse effect on our business, financial condition, results of operations or cash flows.
As a result of these risks, we cannot assure investors that we will be able to obtain enougha sufficient supply 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, weWe 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. ThisAny of the foregoing disruptions could increase our costs and decrease our gross margins, harming our business, operating results and financial condition.
ManagingIf we do not manage the supply of our products and their components efficiently, our results of operation could be adversely affected.
Managing the supply of our products and underlying 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 forecastsorders 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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Risks Related to Our Operating Results or Financial Condition
We have experienced growth in prior periods, and we may not be able to sustain future growth effectively.
We have significantly expanded our overall business, customer base, headcount, channel partner relationships and operations in prior periods, and we anticipate that we will continue to expand and experience growth in future periods. For example, while we delivered year-over-year revenue growth of 2% for the second quarter of fiscal 2021 compared to the second quarter of fiscal 2020, our headcount increased from over 3,300 to over 3,700 employees at the end of the second quarter of fiscal 2020 to the end of the second quarter of fiscal 2021. 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 our growth successfully, we believe that we must, among other things, effectively allocate resources and operate our business across a wide range of priorities.
We expect that our future growth will continue to place 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 may not 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. If we are unable to manage our growth successfully, we may not be able to take advantage of market opportunities or release new products or enhancements 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.
We intend to continue focusing on revenue growth and increasing our market penetration and international presence by investing heavily in our business, which may put pressure on near-term profitability.
We have not achieved profitability for any year since our inception. We incurred a net loss of $201.0 million for fiscal 2020, and $155.6 million for the first two quarters of fiscal 2021, and we had an accumulated deficit of $1,282.9 million at the end of fiscal 2020 and $1,438.5 million at the end of the second quarter of fiscal 2021. 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.
Our strategy is to continue investing in marketing, sales, support and research and development. We believe continuing to invest heavily in our business is critical to our future success and meeting our growth objectives. We anticipate that our operating costs and expenses will continue to increase in absolute terms. Even if we achieve or maintain significant revenue growth, we may continue to experience losses, forgoing near-term profitability on a U.S. GAAP basis.
Our gross margins are impacted by a variety of factors and vary from period to period, making them difficult to predict with certainty.
Our gross margins fluctuate from period to period due primarily to product costs, customer mix and product mix. A variety of factors may cause our gross margins to fluctuate and make them difficult to predict, including, but not limited to:
•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 components, including flash and DRAM, and freight;
•new product introductions and enhancements with higher product costs;
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•excess inventory levels or purchase obligations 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; and
•inventory stocking requirements to mitigate supply constraints, accommodate unforeseen demand or support new product introductions.
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, a portion of which are outside of our control. As a result, comparing our results on a period-to-period basis may not be meaningful.
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 or seasonality in demand and prices for our products;
•our ability to control the costs of the components we use or to timely adopt subsequent generations of components;
•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 new products and product enhancements that meet customer requirements and to effectively manage product transitions;
•changes in the competitive dynamics of our markets, including new entrants or discounting of product prices;
•our ability to control costs, including our operating expenses;
•the impact of adverse economic conditions and the impact of public health epidemics or pandemics, such as the COVID-19 pandemic; and
•future accounting pronouncements and changes in accounting policies.
The occurrence of any one of these factors could negatively affect our operating results in any particular quarter.
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The sales prices of our products and services may fluctuate or decline, which may reduce our gross profits, revenue growth, and adversely impact our financial results.
The sales prices 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 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 prices for our products will decrease over product life cycles. If we are required to decrease our prices to be competitive and are not able to offset this decrease by increases in the volume of sales or the sales of new products with higher margins, our gross margins and operating results could be adversely affected.
We derive the majority of our revenue from our FlashArray products, and a decline in demand for these products would cause our revenue to grow more slowly or to decline.
Our FlashArray products have historically accounted for the majority of our revenue and will continue to comprise a significant portion of our revenue for the foreseeable future, including through our subscription offerings. We have seen slower revenue growth in recent periods, which we believe has largely been driven by the pandemic. As a result, our revenue could be reduced by any decline or fluctuation in demand for these products, regardless of the reason. If demand for our core products slows or declines, we may not be able to increase our revenue or achieve and maintain profitability.
If we are unable to sell renewals of our maintenance and supportsubscription services to our customers, our future revenue and operating results will be harmed.

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Existing customers may not renew their maintenance and supportsubscription services agreements after the initial period and, given our limited operating history,changing customer purchasing preferences, 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 ifIf 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 agreementssubscription services 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 subscription services are not immediately reflected in full in our results of operations.
We expect thatOur revenue from maintenance and support agreements will increasesubscription services has been increasing as a percentage of total revenue over time. We are also increasing the number of our subscription-based offerings, such as Pure as-a-Service, though it is more difficult to predict the rate at which customers will adopt, and the rate at which our revenue will grow from these new offerings. We recognize maintenance and supportsubscription services revenue ratably over the term of the relevant service period. As a result, much of the maintenance and supportsubscription services revenue we report each quarter is derived from maintenance and support agreements that we sold in prior quarters. Consequently, a decline in new or renewed maintenance and supportsubscription services 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 supportsubscription services is not reflected in full in our results of operations until future periods. Also, itIt is also difficult for us to rapidly increase our maintenance and supportsubscription services revenue through additional sales in any period, as revenue from renewals must be recognized ratably over the applicable service period.
Adverse economic conditions
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We may require additional capital to support business growth, and this capital might not be available on acceptable terms, or reduced data center spendingat all.
We intend to continue to make investments to support our business growth and may adversely impactrequire additional funds to support business initiatives, including the need to develop new products or enhance our revenuesexisting products, enhance our operating infrastructure and profitability.
Our operationsacquire complementary businesses and performance dependtechnologies. Accordingly, we may need to engage in part on worldwide economic conditionsequity 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 the impact these conditionsany new equity securities we issue could have on levelsrights, preferences and privileges superior to those of spending on data center technology. Global economic uncertainty and political and fiscal challengesholders of our common stock. Any debt financing we undertake in the United Statesfuture could involve additional restrictive covenants relating to our capital raising activities and abroadother 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 adversely impact data center spending. Our business depends onbe significantly limited and our prospects and financial condition could be harmed.
We are exposed to the overall demand for data center infrastructure and on the economic healthcredit risk of some of our currentcustomers, which could harm our business, operating results and prospective customers. Weak economic conditions, or a reductionfinancial condition.
Most of our sales are made on an open credit basis. 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 data center spending, would likely adversely impactplace that are designed to monitor and mitigate these risks, we cannot assure investors these programs 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.
Risks Related to Our Operations
If we are unable to attract, motivate and retain sales, engineering and other key personnel, including our management team, we may not be able to increase our revenue and our business, operating results and financial condition could be harmed.
Our ability to increase our revenue 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. 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, we may need a significant amount of time to train new employees before they are effective and efficient in performing their jobs. From time to time, there may be changes in our management team, which could create short term uncertainty. All of our employees, including members of our management team and 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 or if they are unable to work effectively or at all due to the COVID-19 pandemic, our business and operating results could suffer.
If we fail to adequately expand and optimize our sales force, our growth will be impeded.
We need to continue to expand and optimize our sales 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. We must design and implement effective sales incentive programs, and it can take time before new sales representatives are fully trained and productive. We must adapt our sales processes for new sales and marketing approaches, including those required by the changes resulting from the pandemic. 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 numberreasonable period of ways, includingtime, we may not be able to realize the expected benefits of these investments or increase our revenue and our business and operating results could suffer.
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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 reducingour culture, and our business may be harmed.
We believe that our company culture has been a critical contributor to our success. Our culture fosters innovation, creativity, teamwork, passion for customers and focus on execution, and facilitates critical knowledge transfer and knowledge sharing. In particular, we believe that the difference between our sales, lengthening sales cyclessupport and lowering pricesengineering cultures and those of incumbent vendors, is a key competitive advantage and differentiator for our productscustomers and services.partners. As we grow and change or are required to adapt to changes in business operations as a result of the COVID-19 pandemic, 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.
Our long-term success depends, in part, on sales outside of the United States, which subjects us to costs and risks associated with international operations.
We maintain operations outside of the United States, which we have been expanding and intend to continue to expand in the future. As a company headquartered in the United States, conducting and expanding international operations subjects us to costs and risks that we may not generally face in the United States, including:
•exposure to foreign currency exchange rate risk;
•difficulties in collecting payments internationally;
•managing and staffing international operations;
•public health pandemics or epidemics, such as the COVID-19 pandemic;
•establishing relationships with channel partners in international locations;
•increased travel, infrastructure and legal compliance costs associated with international locations;
•requirements to comply with a wide variety of laws and regulations 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;
•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.
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Our international operations, as well as changes in tax laws, could expose us to potentially adverse tax consequences.
The U.S. Tax law changes enacted through the Tax Cuts and Jobs Act (the Tax Act) in December 2017 are subject to further interpretations from the U.S. federal and state governments and regulatory organizations. Such interpretations 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. Given the passage of the Tax Act and other global tax developments, we continue to evaluate our corporate structure and intercompany relationships. Future changes to U.S. and global tax laws may adversely impact our effective tax rate.
Our intercompany relationships are, and after the implementation of any changes to our corporate 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.
Third-party claims that we are infringing theinfringe their intellectual property rights of others, whether successful or not, could subject us tobe costly and time-consuming litigation or require us to obtain expensive licenses, andharm our business could be harmed.business.
There is a substantial amount of intellectual property litigation in the flash-baseddata 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. 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 been, and may in the future be, subject to claims that we infringe upon the intellectual property rights of other intellectual property holders, particularly as we grow and face increasing competition.
Any intellectual property rights claim such as the lawsuits brought by EMC Corporation or others, 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 offeringselling 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,

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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 givingwhich may give 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.
We currently have a number of agreements in effect with our customers, suppliers and channel partners pursuant to which we have agreed to defend, indemnify and hold them harmless our customers, suppliers and channel partners from damages and costs which may arise from theclaims of 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 claims 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, business and financial condition.
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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 7002,000 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 givesgive 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 anyfuture 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 enforceableenforceable. Further, the laws of certain foreign countries do not provide the same level of protection of corporate proprietary information and assets such as intellectual property, trademarks, trade secrets, know-how and records, as the laws of the United States. For instance, the legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection. As a result, we may encounter significant problems in actions against alleged infringers. protecting and defending our intellectual property or proprietary rights abroad.
Changes to the patent lawsintellectual property law 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.protection, among other intellectual property rights. We cannot be certain that the steps we have taken will prevent theft, unauthorized use of our technology or the reverse engineering of our technology.proprietary information and other intellectual property, including technical data, manufacturing processes, data sets or other sensitive information. Moreover, others may independently develop technologies that are competitive to ours or that 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 defendingdefend intellectual property infringement claims and to enforcingenforce 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

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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 eventif re-engineering cannot be accomplished on a timely basis, any of which could harm our business, operating results and financial condition.
System security risks, data protection breaches and cyber-attacks on our systems or products could compromise our proprietary information (or information 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.
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 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

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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, other companies, each of which may divert our management’s attention, resulting in additional dilution to our stockholders and consumption of resources that are necessary to sustain and grow our business.
Our business strategy may, from time to time, include acquiring complementary products, technologies or businesses. 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. 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 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 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.

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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 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 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 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;
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 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
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. Our independent registered public accounting firm also needs to attest to the effectiveness of our internal control over financial reporting. We continue to take steps to upgrade our finance and accounting function, including the hiring of additional finance and accounting personnel, and implement additional policies and procedures associated with the financial statement close process. 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 us to potentially adverse tax consequences.
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. In the future, we may decide to reorganize our corporate tax structure and intercompany relationships to more closely align 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.
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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 presencebeen subject to the EU General Data Protection Regulation, or GDPR, since May 2018 and to the California Consumer Privacy Act (CCPA) since January 2020. These and potentially other future privacy regulations may require us to make further changes to our policies and procedures in the European Union, including in United Kingdom, and ourfuture beyond what we have already done. 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. We made changes to our data protection compliance program in relation to data privacy regulations and will continue to monitor the implementation and evolution of global data protection regulations, but if we are not compliant with such privacy regulations, we may be subject to significant fines and our business may be harmed. In addition, the European Union has adoptedCCPA places additional requirements on the General Data Protection Regulation, whichhandling of personal data and is scheduledcurrently subject to go into effect in May 2018a revision and contains numerous requirementsupdate process. The potential effects of this legislation are far-reaching and changes, including more robust obligations onmay require us to modify our data processorsprocessing practices and heavier documentation requirements for data protection compliance programs by companies.policies and to incur substantial costs and expenses. 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 or its various components, 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.
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If we or our products suffer a cybersecurity or other security breach, we may lose customers and incur significant liabilities.
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, on occasion, include personally identifiable information. Additionally, we design and sell products that allow our customers to store their data. The security of our own networks and the intrusion protection features of our 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. While we use encryption and authentication technologies to secure the transmission and storage of data and prevent third-party access to data or accounts, 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 our and our 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 were to occur and we were 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 acquire other businesses which could require significant management attention, disrupt our business, dilute stockholder value, and adversely affect our operating results.
We may, from time to time, acquire complementary products, technologies or businesses, such as our acquisition of Compuverde AB in April 2019. 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 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 will be 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.
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General Risk Factors
Adverse economic conditions may harm our revenues and profitability.
Our operations and performance depend in part on worldwide economic conditions and the economic health of our current and prospective customers. Global economic uncertainty, civil unrest and political and fiscal challenges in the United States and abroad can arise suddenly and affect the rate of information technology spending and could adversely affect our customers' ability or willingness to purchase our products and services. For example, the global macroeconomic environment could be negatively affected by the growth rate in the economy of the European Union, China, or the United States, trade relations between the United States and China, the impact of public health epidemics or pandemics, such as the COVID-19 pandemic, political uncertainty in the Middle East and other geopolitical events. Additionally, the United Kingdom's exit from the European Union is disruptive and remains subject to the successful conclusion of a final withdrawal agreement between the parties. In the absence of such an agreement, there would be no transitional provisions and any exit from the European Union could lead to adverse economic consequences. Weak economic conditions 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 of our products and services.
Our business is subject to the risks of earthquakes, fires, floods and other natural catastrophic events, and to interruption by man-made factors such as computer viruses or terrorism.

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public health epidemics or pandemics, such as the COVID-19 pandemic.
We and our suppliers have operations in locations, including our headquarters in California, that are subject to earthquakes, fires, 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 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 adequateOur 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, man-made factors, such as acts of terrorism or malicious computer viruses, and public health epidemics or pandemics, such as the COVID-19 pandemic, 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 Credit Facility and Notes
Restrictive covenants in the agreement governing our senior secured revolving credit facility may restrict our ability to pursue business strategies.
In August 2020, we entered into a Credit Agreement with a consortium of financial institutions and lenders that provides for a five-year, senior secured revolving credit facility of $300 million (Credit Facility). We have not borrowed any funds under this Credit Facility. We could borrow funds under this Credit Facility at any time, subject to customary borrowing conditions, for general corporate purposes and working capital.
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The agreement governing our senior secured revolving Credit Facility limits our ability, among other things, to: incur additional secured indebtedness; sell, transfer, license or dispose of assets; consolidate or merge; enter into transactions with our affiliates; and incur liens. In addition, our senior secured revolving Credit Facility contains financial and other restrictive covenants that limit our ability to engage in activities that may be in our long term best interest, such as, subject to permitted exceptions, making capital expenditures in excess of certain thresholds, making investments, loans and other advances, and prepaying any additional indebtedness while our indebtedness under our senior secured revolving Credit Facility is outstanding. Our failure to comply with financial and other restrictive covenants could result in an event of default, which if not cured or waived, could result in the lenders requiring immediate payment of all outstanding borrowings or foreclosing on collateral pledged to them to secure the indebtedness.
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. 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 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.
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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 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.
If 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.
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 common stock and/or entered into various derivative transactions with respect to our common stock. This activity could have increased (or reduced the size of any decrease in) the market price of our 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 common stock and/or purchasing or selling our 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 common stock or the Notes.
The potential effect, if any, of these transactions and activities on the price of our 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 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 or distribute 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.

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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$8.76 to $19.74,$28.66, through December 1, 2017.September 7, 2020. 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 changesnew or updated research or reports by securities analysts, including the publication of unfavorable reports or change in the expectationsrecommendation or downgrading of investors or securities analysts;our 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;trends, including the impact of the COVID pandemic;
•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 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. 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.
We cannot guarantee that our share repurchase program will enhance shareholder value, and share repurchases could affect the price of our common stock.
In August 2019, our board of directors authorized a $150 million share repurchase program, which is being funded from available working capital. A large portion of the currently authorized program has been used. The repurchase authorization has no fixed end date. Although our board of directors has authorized a share repurchase program, this program does not obligate us to repurchase any specific dollar amount or to acquire any specific number of shares. The share repurchase program could affect the price of our common stock, increase volatility and diminish our cash reserves.
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 andIf one or more of these analysts downgrades our stock, lowers their price target, or publishes inaccurateunfavorable or unfavorableinaccurate 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.
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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

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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.
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

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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.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Not applicable.Purchases of Equity Securities by the Issuer
The following table summarizes our stock repurchase activity for the second quarter of fiscal 2021 (in thousands except for price per share):
PeriodAverage Price Paid per Share
Total Number of Shares Purchased as Part of Share Repurchase Program (1)
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Program
May 4 - May 31$— — $65,000 
June 1 - June 28$16.83 825 $51,112 
June 29 - August 2$17.38 352 $45,000 
(1) In August 2019, our board of directors authorized us to repurchase up to $150.0 million of our outstanding common stock under our share repurchase program. See "Liquidity and Capital Resources—Share Repurchase Program" included under Part I, Item 2 in this Quarterly Report on Form 10-Q.
The following table summarizes the shares of restricted common stock that were delivered by certain employees upon vesting of equity awards to satisfy tax withholding requirements during the second quarter of fiscal 2021 (in thousands except for price per share):
PeriodAverage Price per Share DeliveredTotal Number of Shares Delivered to Satisfy Tax Withholding RequirementsApproximate Dollar Value of Shares Delivered to Satisfy Tax Withholding Requirements
May 4 - May 31$— — $— 
June 1 - June 28$17.28 85 $1,469 
June 29 - August 2$— — $— 

Item 3. Defaults upon Senior Securities.
Not applicable.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.

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 of exhibits filed
  Incorporation By Reference 
Exhibit
Number		DescriptionFormSEC File No.ExhibitFiling Date
3.110-Q001-375703.112/11/2015
3.2S-1333-2063123.49/9/2015
4.1S-1333-2063124.19/9/2015
4.28-K001-375704.14/10/2018
4.38-K001-375704.24/10/2018
4.4Reference is made to Exhibits 3.1 and 3.2    
10.13*
31.1*    
31.2*    
32.1**    
99.18-K001-3757099.14/10/2018
101.INSXBRL Instance Document    
101.SCHXBRL Taxonomy Extension Schema Document    
101.CALXBRL Taxonomy Extension Calculation Linkbase Document    
101.DEFXBRL Taxonomy Extension Definition Linkbase Document    
101.LABXBRL Taxonomy Extension Label Linkbase Document    
101.PREXBRL Taxonomy Extension Presentation Linkbase Document    
104Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document (included in Exhibit 101)
* 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 10, 2020PURE STORAGE, INC.
By:
Date:December 8, 2017By:/s/ CHARLES GIANCARLO
Charles Giancarlo
Chief Executive Officer and Director
(Principal Executive Officer)
Date:December 8, 2017September 10, 2020By:/s/ TIMOTHY RIITTERSKEVAN KRYSLER
Timothy RiittersKevan Krysler
Chief Financial Officer
(Principal Financial and Accounting Officer)


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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.
        
10.1+*
 
Offer Letter, by and between Pure Storage, Inc. and Charlie Giancarlo, dated August 22, 2017.
        
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.
+     Indicates management contract or compensatory plan.



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