Business and Summary of Significant Accounting Policies | Business and Summary of Significant Accounting Policies Description of the Business Zscaler, Inc. ("Zscaler," the "Company," "we," "us," or "our") is a cloud security company that developed a platform incorporating core security functionalities needed to enable users to safely utilize authorized applications and services based on an organization’s policies. Our solution is a purpose-built, multi-tenant, distributed cloud security platform that secures access for users and devices to applications and services, regardless of location. We deliver our solutions using a software-as-a-service ("SaaS") business model and sell subscriptions to customers to access our cloud platform, together with related support services. We were incorporated in Delaware in September 2007 and conduct business worldwide, with presence in North America, Europe and Asia. Our headquarters are in San Jose, California. Reverse Stock Split In March 2018, our board of directors approved an amendment to the Company's amended and restated certificate of incorporation effecting a 2-for-3 reverse stock split of the Company's issued and outstanding shares of common stock and convertible preferred stock. The reverse stock split was effected on March 1, 2018. All issued and outstanding share and per share amounts included in the accompanying condensed consolidated financial statements have been adjusted to reflect this reverse stock split for all periods presented. Initial Public Offering In March 2018, we completed our initial public offering ("IPO") of common stock, in which we sold 13,800,000 shares. The shares were sold at an IPO price of $16.00 per share for net proceeds of $205.3 million, after deducting underwriters' discounts and commissions of $15.5 million. In connection with the IPO, we incurred offering costs of $6.2 million which were recorded in stockholders’ equity as a reduction of the net proceeds received from the IPO. Immediately prior to the closing of the IPO, all our outstanding shares of convertible preferred stock were automatically converted into 72,500,750 shares of common stock on a one-to-one basis. Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States ("U.S. GAAP") and applicable regulations of the Securities and Exchange Commission ("SEC") regarding interim financial reporting, and include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. 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 the applicable required disclosures and regulations of the SEC. Therefore, these unaudited condensed consolidated financial statements and accompanying footnotes should be read in conjunction with the Company's audited consolidated financial statements and related notes in its Annual Report on Form 10-K for the fiscal year ended July 31, 2018 (the "Fiscal 2018 Form 10-K"), as filed with the SEC on September 13, 2018. Interim Unaudited Condensed Consolidated Financial Statements The accompanying condensed balance sheet as of July 31, 2018 was derived from the audited financial statements as of that date. The accompanying interim condensed consolidated financial statements, including the consolidated balance sheets as of January 31, 2019, the consolidated statements of operations for the three and six months ended January 31, 2019 and 2018, the consolidated statements of comprehensive loss for the three and six months ended January 31, 2019 and 2018, the consolidated statements of cash flows for the six months ended January 31, 2019 and 2018, the consolidated statement of redeemable convertible preferred stock and stockholders’ equity (deficit) for the three and six months ended January 31, 2019 and 2018 are unaudited. The related financial data and the other financial information disclosed in the accompanying notes to these condensed consolidated financial statements are also unaudited. These interim unaudited condensed consolidated financial statements have been prepared on a basis consistent with our annual consolidated financial statements and, in our opinion, include all normal recurring adjustments necessary to state fairly our quarterly results. The results of operations for the three and six months ended January 31, 2019 are not necessarily indicative of the results to be expected for the fiscal year ending July 31, 2019 or for any other future fiscal year or interim period. JOBS Act Extended Transition Period We are an emerging growth company ("EGC") as defined in the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"). As an EGC, the JOBS Act allows us to take advantage of specified reduced reporting requirements that are otherwise generally applicable to public companies, including, but not limited to, delayed adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We have irrevocably elected not to avail ourselves of the extended transition periods available under the JOBS Act for complying with new and revised accounting standards and, therefore, we are subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. As a result of our transition to large accelerated filer status as of July 31, 2019, we will cease to qualify as an emerging growth company and will no longer have the option to take advantage of the extended transition period. Use of Estimates The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported and disclosed in the financial statements and accompanying notes. Such estimates include, but are not limited to, the determination of revenue recognition, deferred revenue, deferred contract acquisition costs, valuation of acquired intangible assets, the period of benefit generated from our deferred contract acquisition costs, allowance for doubtful accounts, valuation of common stock options and stock-based awards, useful lives of property and equipment, useful lives of acquired intangible assets, loss contingencies related to litigation and valuation of deferred tax assets. Management determines these estimates and assumptions based on historical experience and on various other assumptions that are believed to be reasonable. Actual results could differ significantly from these estimates, and such differences may be material to the condensed consolidated financial statements. Fiscal Year Our fiscal year ends on July 31. References to fiscal 2019, for example, refer to our fiscal year ending July 31, 2019. Significant Accounting Policies Our significant accounting policies are discussed in the "Index to Consolidated Financial Statements, Note 1. Business and Summary of Significant Accounting Policies" in the Fiscal 2018 Form 10-K. There have been no significant changes to these policies that have had a material impact on our condensed consolidated financial statements and related notes for the three and six months ended January 31, 2019. The following describes the impact of certain policies. Revenue Recognition We adopted Accounting Standards Codification ("ASC") Topic 606, Revenue From Contracts With Customers ("ASC 606") on August 1, 2017, using the full retrospective transition method. Disaggregation of Revenue Subscription and support revenue is recognized over time and accounted for approximately 97% and 99% of our revenue for the three months ended January 31, 2019 and 2018, respectively, and approximately 98% of our revenue for the six months ended January 31, 2019 and 2018. The following table summarizes the revenue by region based on the shipping address of customers who have contracted to use our cloud platform: Three Months Ended January 31, Six Months Ended January 31, 2019 2018 2019 2018 Amount % Revenue Amount % Revenue Amount % Revenue Amount % Revenue (in thousands, except per percentage data) United States $ 37,626 51 % $ 20,224 45 % $ 67,433 49 % $ 39,985 47 % Europe, Middle East and Africa (*) 29,552 40 % 20,168 45 % 56,946 41 % 37,154 44 % Asia Pacific 5,674 7 % 3,465 8 % 10,463 8 % 6,554 8 % Other 1,450 2 % 1,119 2 % 2,758 2 % 1,144 1 % Total $ 74,302 100 % $ 44,976 100 % $ 137,600 100 % $ 84,837 100 % (*) Revenue from the United Kingdom ("U.K.") represented 10% and 12% of our revenue for the three months ended January 31, 2019 and 2018, respectively, and 10% and 11% for the six months ended January 31, 2019 and 2018, respectively. The following table summarizes the revenue from contracts by type of customer: Three Months Ended January 31, Six Months Ended January 31, 2019 2018 2019 2018 Amount % Revenue Amount % Revenue Amount % Revenue Amount % Revenue (in thousands, except per percentage data) Channel partners $ 71,074 96 % $ 41,258 92 % $ 131,093 95 % $ 77,429 91 % Direct customers 3,228 4 % 3,718 8 % 6,507 5 % 7,408 9 % Total $ 74,302 100 % $ 44,976 100 % $ 137,600 100 % $ 84,837 100 % Contract Balances Contract liabilities consist of deferred revenue and include payments received in advance of performance under the contract. Such amounts are recognized as revenue over the contractual period. For the six months ended January 31, 2019 and 2018, we recognized revenue of $68.2 million and $58.6 million, respectively, that was included in the corresponding contract liability balance at the beginning of these periods. Remaining Performance Obligations The typical subscription and support term is one to three years. Most of our subscription and support contracts are non-cancelable over the contractual term. However, customers typically have the right to terminate their contracts for cause, if we fail to perform. As of January 31, 2019, the aggregate amount of the transaction price allocated to remaining performance obligations was $461.0 million. We expect to recognize 55% of the transaction price over the next 12 months and 98% of the transaction price over the next three years, with the remainder recognized thereafter. Costs to Obtain and Fulfill a Contract We capitalize sales commissions and associated payroll taxes paid to internal sales personnel that are incremental to the acquisition of channel partner and direct customer contracts. These costs are recorded as deferred contract acquisition costs in the condensed consolidated balance sheets. The following table summarizes the activity of the deferred contract acquisition costs: Three Months Ended January 31, Six Months Ended January 31, 2019 2018 2019 2018 (in thousands) Beginning balance $ 55,978 $ 36,002 $ 55,910 $ 34,662 Capitalization of contract acquisition costs 9,080 7,005 13,472 11,213 Amortization of deferred contract acquisition costs (4,457) (3,064) (8,781) (5,932) Ending balance $ 60,601 $ 39,943 $ 60,601 $ 39,943 As of the end of the period: Deferred contract acquisition costs, current $ 18,058 $ 12,271 $ 18,058 $ 12,271 Deferred contract acquisition costs, noncurrent 42,543 27,672 42,543 27,672 Total deferred contract acquisition costs $ 60,601 $ 39,943 $ 60,601 $ 39,943 Sales commissions accrued but not paid as of January 31, 2019 and July 31, 2018, totaled $4.6 million and $10.0 million, respectively, which are included within accrued compensation in the condensed consolidated balance sheets. Deferred Offering Costs Deferred offering costs consisted of fees and expenses incurred in connection with our IPO, including legal, accounting, printing and other IPO-related costs. Total deferred offering costs of $6.2 million were reclassified to stockholders' equity (deficit) as a reduction of the net proceeds received from the IPO. Recently Adopted Accounting Pronouncements In January 2017, the Financial Accounting Standard Board ("FASB") issued Accounting Standard Update ("ASU") No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business . The amendment was issued to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions of assets or businesses. This standard provides a screen test to determine when a set (inputs and processes that produce an output) is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. We adopted this standard as of August 1, 2018, and it did not have a material impact to our consolidated financial statements. In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting , which provides clarity in applying the guidance in Topic 718 around modifications of share-based payment awards. We adopted this standard as of August 1, 2018, and it did not have a material impact to our consolidated financial statements. In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments . The new standard eliminates the diversity in practice related to the classification of certain cash receipts and payments for debt prepayment or extinguishment costs, the maturing of a zero-coupon bond, the settlement of contingent liabilities arising from a business combination, proceeds from insurance settlements, distributions from certain equity method investees and beneficial interests obtained in a financial asset securitization. We adopted this standard as of August 1, 2018 using the retrospective transition method, and it did not have a material impact to our consolidated financial statements. In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash , which requires that amounts generally described as restricted cash or restricted cash equivalents 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. We adopted this standard as of August 1, 2018 using the retrospective transition method and we have adjusted our prior period condensed consolidated statement of cash flows to conform to the current presentation. In June 2018, the FASB issued ASU No. 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting , which simplifies the accounting for equity awards granted to nonemployees. For public business entities, it is effective for fiscal years beginning after December 15, 2018, and interim periods therein. Early adoption is permitted. We early adopted this standard as of August 1, 2018 using the prospective transition method, which resulted in a cumulative-effect adjustment of $0.3 million recognized within stockholders' equity, as a reduction of additional paid-in capital against accumulated deficit, on the adoption date. In August 2018, the FASB issued ASU No. 2018-15, “Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract ,” which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The new standard requires capitalized costs to be amortized on a straight-line basis generally over the term of the arrangement, and the financial statement presentation for these capitalized costs would be the same as that of the fees related to the hosting arrangements. For public business entities, this standard is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. We early adopted this standard as of August 1, 2018 using the prospective transition method, and it did not have a material impact to our consolidated financial statements. In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, " Disclosure Update and Simplification ," amending certain disclosure requirements that have become redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders' equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders' equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. The final rule is effective November 5, 2018. We early adopted this requirement as of August 1, 2018, presenting the activity of the stockholder's equity accounts in the accompanying condensed statements of redeemable convertible preferred stock and stockholders' equity (deficit) for the periods presented. Recently Issued Accounting Pronouncements Not Yet Adopted In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02"), which requires lessees to recognize most leases on their balance sheets that do not meet the definition of a short-term lease but recognize the expenses on their statements of operations in a manner similar to current accounting rules. In July 2018, the FASB issued ASU 2018-10, Leases (Topic 842), Codification Improvements ("ASU 2018-10"), which clarifies certain adoption provisions of the new leases standard such as the application of implicit rate, lessee reassessment of lease classification and certain transition adjustments. In addition, in July 2018, the FASB issued ASU 2018-11, Leases (Topic 842), Targeted Improvements ("ASU 2018-11"), which allows for the adoption of ASU 2016-02 to be applied at the beginning of the year of adoption, as opposed to at the beginning of the earliest year presented in the financial statements. These standards are effective for fiscal years beginning after December 15, 2018, with early adoption permitted. We are currently evaluating the effect of these standards; however, we anticipate the most significant effects will relate to the recognition of right-of-use assets and lease liabilities arising from our real estate and data center operating leases that do not meet the definition of a short-term lease on the adoption date and providing qualitative and quantitative disclosures in the notes to the condensed 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 . This ASU amends guidance on reporting credit losses for assets held at amortized cost basis and available-for-sale debt securities to require that credit losses on available-for-sale debt securities be presented as an allowance rather than as a write-down. The measurement of credit losses for newly recognized financial assets and subsequent changes in the allowance for credit losses are recorded in the statements of operations. For public business entities, it is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the potential impact of this standard on our consolidated financial statements. |