What changed in this filing

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Item 1A. Risk Factors

2021-11-08 compared with 2021-08-02 · 138 added, 127 removed, 792 unchanged (25% of the section changed)

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• Our operating results are likely to vary significantly and be unpredictable.

• Insufficient inventory or components, including chips and other components, and including component or inventory shortages related to the COVID-19 pandemic, contract manufacturer’s capacity, shipping challenges and costs, or other factors affecting the global supply chain, may result in lost sales opportunities or delayed billings and revenue and increased costs, and excess inventory may harm our gross margins.

• Adverse economic conditions or reduced information technology spending may adversely impact our business.

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• We generate a majority of revenue from sales outside of the United States.

• Our inability to successfully acquire and integrate other businesses, products or technologies, or to successfully invest in and form successful strategic alliances with other businesses, could seriously harm our competitive position.

• We may not be successful in executing our strategy to increase our sales to large- and medium-sized end-customers.

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• Our industry is highly competitive and we must accurately predict, prepare for and respond promptly to technological and market developments and changing end-customer needs, including by introducing products and product enhancements and innovations that address a fast-changing technology and threat landscape and that achieve sufficient market acceptance, in order to maintain or improve our competitive position.

• Insufficient inventory or components, including component or inventory shortages based on the COVID-19 pandemic, chip or component shortages, contract manufacturer’s capacity or other factors affecting the global supply chain or costs, may result in lost sales opportunities or delayed revenue, while excess inventory may harm our gross margins.

• We depend on several third-party manufacturers to build our products and are susceptible to manufacturing delays, capacity constraints and cost increases.

• We are susceptible to supply shortages and disruptions, long lead times for components and supply changes because some of the key components in our products come from limited sources of supply.

• We are susceptible to, and are currently experiencing, supply chain constraints, supply shortages and disruptions, long lead times for components and supply changes because some of the key components in our products come from limited sources of supply.

• We are susceptible to defects or vulnerabilities in our products or services, as well as reputational harm from the failure or misuse of our products or services.

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• Global economic uncertainty and weakening product demand caused by political instability, changes in trade agreements and other conflict could adversely affect our business and financial performance.

• The trading price of our common stock may be volatile, which volatility may be exacerbated by share repurchases under our Repurchase Program.

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• our ability to attract and retain new end-customers or sell additional products and services to our existing end-customers;

• component, including chips and other components, and product inventory shortages, including those caused by factors outside of our control such as the COVID-19 pandemic, international trade disputes or tariffs, natural disasters, health emergencies, power outages, civil unrest, labor disruption, international conflicts, terrorism, wars and critical infrastructure attacks;

• inventory management;

• the level of demand for our products and services, which may render forecasts inaccurate and may be impacted by the COVID-19 pandemic and supply chain constraints in ways that we are not able to foresee;

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• the timing of shipments, which may depend on factors such as inventory levels, logistics, manufacturing or shipping delays, our ability to ship new products on schedule and our ability to accurately forecast inventory requirements;

• inventory management;

• increased expenses, unforeseen liabilities or write-downs and any negative impact on results of operations from any acquisition or equity investment consummated, as well as accounting risks, integration risks related to product plans and products, and risks of negative impact by such acquisitions and equity investments on our financial results;

• the mix of products sold and the mix of revenue between products and services, as well as the degree to which products and services are bundled and sold together for a package price;

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• increased demand for cloud-based services and the uncertainty associated with transitioning to providing such services;

• increased expenses, unforeseen liabilities or write-downs and any impact on results of operations from any acquisition consummated;

• our channel partners having insufficient financial resources to withstand changes and challenges in business conditions;

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Accordingly, in the event of revenue shortfalls, we are generally unable to mitigate the negative impact on margins in the short term.

Adverse economic conditions or reduced information technology spending may adversely impact our business.

Our business depends on the overall demand for information technology and on the economic health of our current and prospective customers.

In addition, the purchase of our products is often discretionary and may involve a significant commitment of capital and other resources.

Weak global and regional economic conditions and spending environments, geopolitical instability and uncertainty, weak economic conditions in certain regions or a reduction in information technology spending regardless of macro-economic conditions, including the effects of the COVID-19 pandemic on the foregoing issues, could have adverse impacts on our business, financial condition and results of operations, including longer sales cycles, lower prices for our products and services, higher default rates among our channel partners, reduced unit sales and slower or declining growth.

Our billings, revenue, operating margin and free cash flow growth may slow or may not continue.

We may experience slowing growth, or a decrease, in billings, revenue, operating margin and free cash flow for a number of reasons, including as a result of the COVID-19 pandemic, a slowdown in demand for our products or services, a shift in demand from products to services, increased competition, a decrease in the growth of our overall market or softness in demand in certain geographies or industry verticals, such as the service provider industry, changes in our strategic opportunities, execution risks and our failure for any reason to continue to capitalize on sales and growth opportunities due to other risks identified in the risk factors described in this periodic report.

Our expenses as a percentage of total revenue may be higher than expected if our revenue is lower than expected.

If our investments in sales and marketing and other functional areas do not result in expected billings and revenue growth, we may experience margin declines.

In addition, we may not be able to sustain profitability in future periods if we fail to increase billings, revenue or deferred revenue, and do not appropriately manage our cost structure, free cash flow, or encounter unanticipated liabilities.

As a result, any failure by us to maintain profitability and margins and continue our billings, revenue and free cash flow growth could cause the price of our common stock to materially decline.

The COVID-19 pandemic could adversely affect our business in a material way.

The COVID-19 pandemic, including the Delta variant and other COVID-19 variants, has negatively impacted the global economy, disrupted global supply chains and demand for certain solutions and created significant volatility in, and disruption of, global financial markets.

The extent of the future impact of the COVID-19 pandemic on our operational and financial performance, including on demand for our products and services, our ability to source components, and our ability to execute our business strategies and initiatives in the expected time frame, will depend on future developments, including the duration and spread of the COVID-19 pandemic and related restrictions on, and disruptions of, business and world economies, all of which are uncertain and difficult to predict.

There is a worldwide shortage of various components, impacting many industries, caused in-part by the COVID-19 pandemic.

Similar to others, we are experiencing ongoing component shortages, which have resulted in extended lead times of certain products and significant disruption to our production schedule.

We also have experienced and expect to continue to experience increased component costs, which may have a negative impact on our gross margins.

An extended period of global supply chain disruption, demand reduction and economic slowdown would materially negatively affect our overall business and our operating results, including billings, revenue, gross margins, operating margins, cash flows and other operating results.

If the spread of the COVID-19 pandemic limits the availability of our products, either by limiting components available, by limiting the actual manufacture and assembly or by limiting or restricting shipping of components and products, this likely would result in increased product backlog, lower billings, lower revenue and decreased profitability and would negatively impact, and may materially negatively impact, our

operating results and business.

In addition, we may also face personnel-related risks as restrictions related to the COVID-19 pandemic begin to ease and we transition back to an in-person working model, including that our “return to office” plan may be viewed negatively by employees and lead to attrition or to difficulty in hiring.

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due to product or component shortages, implementation delays or other factors;

and our ability to provide technical and other support to our customers may be affected.

and our ability to provide technical and other support to our

customers may be affected.

We have also offered, and may continue to offer, payment terms in excess of our contractual agreements to some of our distributor customers, which may decrease the likelihood that we will be able to collect from these customers.

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While we continue to monitor developments and the potential effect on our business, it is clear that the COVID-19 pandemic will negatively impact certain sales and may have a material negative impact on our operating results in the near term and longer term.

Adverse economic conditions or reduced information technology spending may adversely impact our business.

Our business depends on the overall demand for information technology and on the economic health of our current and prospective customers.

In addition, the purchase of our products is often discretionary and may involve a significant commitment of capital and other resources.

Our billings, revenue, operating margin and free cash flow growth may slow or may not continue.

Our expenses as a percentage of total revenue may be higher than expected if our revenue is lower than expected.

If our investments in sales and marketing and other functional areas do not result in expected billings and revenue growth, we may experience margin declines.

As a result, any failure by us to maintain profitability and margins and continue our billings, revenue and free cash flow growth could cause the price of our common stock to materially decline.

We rely on third-party channel partners for substantially all of our revenue.

If our partners fail to perform, our ability to sell our products and services will be limited, and if we fail to optimize our channel partner model going forward, our operating results may be harmed.

Additionally, a small number of distributors represents a large percentage of our revenue and gross accounts receivable, and one distributor accounted fo r 32% of our total net accounts receivable as of June 30, 2021.

Additionally, a small number of distributors represents a large percentage of our revenue and gross accounts receivable, and one distributor accounted fo r 30% of our total net accounts receivable as of September 30, 2021.

A significant portion of our sales is generated through a limited number of distributors, and substantially all of our revenue is from sales by our channel partners, including distributors and resellers.

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If we are unable to adequately control these risks, our business, operating results, and financial condition could be harmed.

If channel partners fail to pay us under the terms of our agreements or we are otherwise unable to collect on our accounts receivable from these channel partners, we may be adversely affected both from the inability to collect amounts due and the cost of enforcing the terms of our contracts, including litigation.

If channel partners fail to pay us under the terms of our agreements or we are otherwise unable to collect on our accounts receivable from these channel partners, we may

be adversely affected both from the inability to collect amounts due and the cost of enforcing the terms of our contracts, including litigation.

Our channel partners may seek bankruptcy protection or other similar relief and fail to pay amounts due to us, or pay those amounts more slowly, either of which could adversely affect our operating results, financial position, and cash flow.

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We may also become increasingly dependent on a more limited number of channel partners, as consolidation increases the relative proportion of our business for which each channel partner is responsible, which may magnify the risks described in the preceding paragraphs.

Exclusive Networks Group (“Exclusive”) accounted for 32% and 34% of our total net accounts receivable as of June 30, 2021 and December 31, 2020, respectively, and six distributor customers accounted for 66% and 70% of our total net

accounts receivable in the aggregate, respectively.

During the three and six months ended June 30, 2021, Exclusive accounted for 31% and 32% of our total revenue, respectively, and Ingram Micro accounted for 12% of our total revenue, respectively.

During the three and six months ended June 30, 2020, Exclusive accounted for 31% of our total revenue.

Exclusive Networks Group (“Exclusive”), TD Synnex, and Ingram Micro, Inc.

(“Ingram Micro”) accounted for 30%, 15% and 11% of our total net accounts receivable as of September 30, 2021, respectively, and six distributor customers accounted for 67% of our total net accounts receivable in the aggregate.

During the three and nine months ended September 30, 2021, Exclusive accounted for 31% and 32% of our total revenue, respectively, and Ingram Micro accounted for 12% of our total revenue.

During the three and nine months ended September 30, 2020, Exclusive accounted fo r 29% and 30% of our total revenue, respectively, and Ingram Micro accounted for 10% of our total revenue.

In addition to other risks associated with the concentration of accounts receivable and revenue from these distributors, Exclusive is a private equity-backed company and we may not have sufficient information to assess its financial condition and, accordingly, if Exclusive were to experience financial difficulties, we might not have advance notice.

Additionally, Exclusive may face liquidity risk, which may harm our ability to collect on our accounts receivable.

Additionally, Exclusive may face liquidity risk or other financial challenges, which may harm our ability to collect on our accounts receivable.

We provide sales channel partners with specific programs to assist them with selling our products and incentivize them to sell our products, but there can be no assurance that these programs will be effective.

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We implemented a cloud-based quoting tool to help provide our sales team with the ability to have faster quote generation, reduce quote errors and increase sales productivity.

Our ability to integrate the data from this tool into our order processing may cause order processing delays that could have an effect on our financial results.

Our ability to integrate the data from this tool into our order processing may cause order processing delays that could have an effect on our financial

Our billings and revenue for any quarter could fall below our expectations or those of securities analysts and investors, resulting in a decline in our stock price, if expected orders at the end of any quarter are delayed for any reason or our ability to fulfill orders at the end of any quarter is hindered for any reason, including, among others:

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Our future performance depends on the continued services and continuing contributions of our senior management to execute on our business plan and to identify and pursue new opportunities and product innovations.

The loss of services of members of senior management, particularly Ken Xie, our Co-Founder, Chief Executive Officer and Chairman, or Michael Xie, our Co-Founder, President and Chief Technology Officer, or of any of our senior sales leaders or functional area leaders, could significantly delay or prevent the achievement of our development and strategic objectives.

The loss of services of members of senior management, particularly Ken Xie, our Co-Founder, Chief Executive Officer and Chairman, or Michael Xie,

our Co-Founder, President and Chief Technology Officer, or of any of our senior sales leaders or functional area leaders, could significantly delay or prevent the achievement of our development and strategic objectives.

The loss of the services or the distraction of our senior management for any reason, including the COVID-19 pandemic, could adversely affect our business, financial condition and results of operations.

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None of our key employees has an employment agreement for a specific term, and any of our employees may terminate their employment at any time.

Our ability to continue to attract and

retain highly skilled personnel will be critical to our future success.

Our ability to continue to attract and retain highly skilled personnel will be critical to our future success.

Competition for highly skilled personnel is frequently intense, especially for qualified sales, support and engineering employees in network security and especially in the locations where we have a substantial presence and need for highly skilled personnel, such as the San Francisco Bay Area and the Vancouver, Canada area.

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We have incurred indebtedness and may incur other debt in the future, which may adversely affect our financial condition and future financial results.

As of June 30, 2021, we had an aggregate of $987.5 million of indebtedness outstanding under our senior notes.

As of September 30, 2021, we had an aggregate of $988.0 million of indebtedness outstanding under our senior notes.

Under the agreements governing our indebtedness, we are permitted to incur additional debt.

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In addition, changes by any rating agency to our credit rating may negatively impact the value and liquidity of both our debt and equity securities.

If our credit ratings are downgraded or other negative action is taken, the interest rate payable by us under our unsecured revolving credit facility may increase.

If our credit ratings are downgraded or other negative action is taken, the interest rate payable by us

under our unsecured revolving credit facility may increase.

In addition, any downgrades in our credit ratings may affect our ability to obtain additional financing in the future and may negatively impact the terms of any such financing.

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• costs of compliance with foreign policies, laws and regulations and the risks and costs of non-compliance with such policies, laws and regulations;

• disruption in manufacturing or shipping or decreases in demand by channel partners or end-customers, including any such disruption or decreases caused by factors outside of our control such as natural disasters and health emergencies, including earthquakes, droughts, fires, power outages, typhoons, floods, pandemics or epidemics such as the COVID-19 pandemic and manmade events such as civil unrest, labor disruption, international trade disputes, international conflicts, terrorism, wars and critical infrastructure attacks;

• disruption in the supply chain or in manufacturing or shipping, or decreases in demand by channel partners or end-customers, including any such disruption or decreases caused by factors outside of our control such as natural disasters and health emergencies, including earthquakes, droughts, fires, power outages, typhoons, floods, pandemics or epidemics such as the COVID-19 pandemic and manmade events such as civil unrest, labor disruption, international trade disputes, international conflicts, terrorism, wars and critical infrastructure attacks;

• protectionist policies and penalties, and local laws, requirements, policies and perceptions that may adversely impact a U.S.-headquartered business’s sales in certain countries outside of the U.S.

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Furthermore, hiring sales personnel in new countries requires additional setup and upfront costs that we may not recover if the sales personnel fail to achieve full productivity.

If our sales employees do not become fully productive on the timelines that we have projected, our revenue may not increase at anticipated levels and our ability to achieve long-term projections may be negatively impacted.

negatively impacted.

If we are unable to hire and train sufficient numbers of effective sales personnel, or the sales personnel are not successful in obtaining new end-customers or increasing sales to our existing customer base, our business, operating results and prospects may be adversely affected.

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If our investments in additional sales personnel or our marketing programs are not successful in continuing to create market awareness of our company and products or increasing lead generation, or if we experience turnover and disruption in our sales and marketing teams, we may not be able to achieve sustained growth, and our business, financial condition and results of operations may be adversely affected.

We are also limited

in our marketing efforts as a result of the COVID-19 pandemic, as mitigation and containment measures adopted by government authorities to contain the spread of COVID-19, including travel restrictions and other requirements that limit in-person meetings, could limit our ability to establish and maintain relationships with new and existing customers and negatively affect our sales and marketing efforts.

We are also limited in our marketing efforts as a result of the COVID-19 pandemic, as mitigation and containment measures adopted by government authorities to contain the spread of COVID-19, including travel restrictions and other requirements that limit in-person meetings, could limit our ability to establish and maintain relationships with new and existing customers and negatively affect our sales and marketing efforts.

A portion of our revenue is generated by sales to government organizations, which are subject to a number of challenges and risks.

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For example, if the distributor receives a significant portion of its revenue from sales to such government organization, the financial health of the distributor could be substantially harmed, which could negatively affect our future sales to such distributor.

Governments routinely investigate, review and audit government vendors’ administrative and other processes, and any unfavorable investigation, audit, other review or unfavorable determination related to any government clearance of certification could result in the government’s refusing to continue buying our products and services, a limitation and reduction of government purchases of our products and services, a reduction of revenue or fines, or civil or criminal liability if the investigation, audit or other review uncovers improper, illegal or otherwise concerning activities.

and reduction of government purchases of our products and services, a reduction of revenue or fines, or civil or criminal liability if the investigation, audit or other review uncovers improper, illegal or otherwise concerning activities.

Any such penalties could adversely impact our results of operations in a material way.

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We face many competitors across the different cybersecurity markets.

Our competitors include companies such as

Barracuda Networks, Inc., Check Point Software Technologies Ltd., Cisco Systems, Inc.

(“Cisco”), CrowdStrike Holdings, Inc., F5 Networks, Inc., FireEye, Inc., Forcepoint LLC, Imperva, Inc., Juniper Networks, Inc.

(“Juniper”), McAfee, LLC, Palo Alto Networks, Inc., Proofpoint, Inc., SonicWALL, Inc., Sophos Group Plc, Trend Micro Incorporated and Zscaler, Inc.

Our competitors include companies such as Barracuda Networks, Inc., Check Point Software Technologies Ltd., Cisco Systems, Inc.

(“Cisco”), CrowdStrike Holdings, Inc., F5 Networks, Inc., Forcepoint LLC, Imperva, Inc., Juniper Networks, Inc.

(“Juniper”), Mandiant, Inc., McAfee Corp., Palo Alto Networks, Inc., Proofpoint, Inc., SonicWALL, Inc., Sophos Group Plc, Trend Micro Incorporated and Zscaler, Inc.

Some of our existing and potential competitors enjoy competitive advantages such as:

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As a result of such acquisitions, competition in our market may continue to increase and our current or potential competitors might be able to adapt more quickly to new technologies and customer needs, devote greater resources to the promotion or sale of their products and services, initiate or withstand substantial price competition, take advantage of acquisition or other opportunities more readily, or develop and expand their product and service offerings more quickly than we do.

In addition, our competitors may bundle products and services competitive with ours with other products and services.

In addition, our competitors may bundle

products and services competitive with ours with other products and services.

Customers may accept these bundled products and services rather than separately purchasing our products and services.

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These competitive pressures in our market or our failure to compete effectively may result in price reductions, fewer customer orders, reduced revenue and gross margins and loss of market share.

Managing inventory of our products and product components is complex.

Insufficient inventory or components may result in lost sales opportunities or delayed revenue, while excess inventory may harm our gross margins.

Managing our inventory is complex, especially given current supply chain disruption.

Our channel partners may increase orders during periods of product shortages, cancel orders or not place orders commensurate with our expectations if their inventory is too high, return products or take advantage of price protection (if any is available to the particular partner) or delay orders in anticipation of new products, and accurately forecasting inventory requirements and demand can be challenging.

Our channel partners also may adjust their orders in response to the supply of our products and the products of our competitors that are available to them and in response to seasonal fluctuations in end-customer demand.

Furthermore, the time required to source components including chips and other components, and manufacture or ship certain products has increased, and so we expect inventory shortfalls to continue and costs to manufacture and ship on-time to continue to increase.

If we cannot manufacture and ship our products due to, for example, global chip shortages, excessive demand on contract manufacturers capacity, natural disasters and health emergencies such as earthquakes, fires, power outages, typhoons, floods, cyber events, pandemics and epidemics such as the COVID-19 pandemic or manmade events such as civil unrest, labor disruption, international trade disputes, international conflicts, terrorism, wars and critical infrastructure attacks, our business and financial results could be materially and adversely impacted.

For example, the global chip shortage caused by the COVID-19 pandemic and other factors affecting manufacturing capacity in Asia has continued and is having, and we expect to continue to have, an adverse impact on our ability to manage our inventory and to meet product demand in a timely fashion.

We expect this shortage may persist for an indefinite period of time.

Management of our inventory is further complicated by the significant number of different products and models that we sell which may impact our billings, revenue, margins and free cash flow.

Mismanagement of our inventory, whether due to imprecise forecasting, employee errors or malfeasance, inaccurate information or otherwise, may adversely affect our results of operations.

The COVID-19 pandemic has resulted in challenges to obtaining components and inventory, as well as increases to freight and shipping costs, and may result in a material adverse effect on our results of operations.

In an effort to try to at least partially mitigate supply chain risk from COVID-19, we have increased our on-hand stock of certain products.

If we are unable to sell these products, we would be required to write-off excess inventory, which would have an adverse impact on our results of operations.

Inventory management remains an area of focus as we balance the need to maintain inventory levels that are sufficient to ensure competitive lead times against the risk of inventory obsolescence because of rapidly changing technology, product transitions, customer requirements or excess inventory levels.

If we ultimately determine that we have excess inventory, we may have to reduce our prices and write-down inventory, which in turn could result in lower gross margins.

Alternatively, insufficient inventory levels may lead to shortages that result in delayed billings and revenue or loss of sales opportunities altogether as potential end-customers turn to competitors’ products that are readily available.

For example, we have in the past experienced inventory shortages and excesses due to the variance in demand for certain products from forecasted amounts.

Our inventory management systems and related supply chain visibility tools may be inadequate to enable us to effectively manage inventory.

If we are unable to effectively manage our inventory and that of our channel partners, our results of operations could be adversely affected.

COVID-19 pandemic impacts on global supply chains are impacting our ability to procure parts required for our hardware appliances.

Extended lead times have been introduced in delivering products for customer orders in a timely fashion.

The COVID-19 pandemic has continued to impact global supply chains for many organizations, including us, resulting in shortages of and delays in both raw materials and electronic components such as computer chips.

Events in upstream supplies and component shortages are negatively impacting our ability to plan and deliver upon orders received in a timely fashion, and supply chain disruption, component shortages and shipping challenges are increasing our costs.

These increased costs may require us to raise prices of our products in turn;

such price increases may result in our products being less price-competitive in the market.

If our new products and product enhancements do not achieve sufficient market acceptance, our results of operations and competitive position will suffer.

We spend substantial amounts of time and money to acquire and develop internally new products and enhanced versions of our existing products in order to incorporate additional features, improved functionality or other enhancements in order to meet our customers’ rapidly evolving demands for network security in our highly competitive industry.

When we develop a new product or an enhanced version of an existing product, we typically incur expenses and expend resources upfront

to market, promote and sell the new offering.

When we develop a new product or an enhanced version of an existing product, we typically incur expenses and expend resources upfront to market, promote and sell the new offering.

Therefore, when we develop and introduce new or enhanced products, they must achieve high levels of market acceptance in order to justify the amount of our investment in developing and bringing them to market.

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In addition, the market perception that “all-in-one” solutions may be suitable only for small and medium-sized businesses because such solution lacks the performance capabilities and functionality of other solutions may harm our sales to large businesses, service provider and government organization end-customers.

If the foregoing concerns and perceptions become prevalent, even if there is no factual basis for these concerns and perceptions, or if other issues arise with our market in general, demand for multi-security functionality products could be severely limited, which would limit our growth and harm our business, financial condition and results of operations.

If the foregoing concerns and perceptions

become prevalent, even if there is no factual basis for these concerns and perceptions, or if other issues arise with our market in general, demand for multi-security functionality products could be severely limited, which would limit our growth and harm our business, financial condition and results of operations.

Further, a successful and publicized targeted attack against us, exposing a “single point of failure,” could significantly increase these concerns and perceptions and may harm our business and results of operations.

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If organizations are reluctant to add additional network infrastructure from new vendors or otherwise decide to work with their existing vendors, our business, financial condition and results of operations will be adversely affected.

Managing inventory of our products and product components is complex.

Insufficient inventory or components may result in lost sales opportunities or delayed revenue, while excess inventory may harm our gross margins.

Managing our inventory is complex.

Furthermore, if the time required to source components including chips and other components, or manufacture or ship certain products increases for any reason, inventory shortfalls could result and costs to manufacture and ship on-time could increase.

For example, the global chip shortage caused by the COVID-19 pandemic and other factors affecting manufacturing capacity in Asia has continued into 2021 and may have an adverse impact on our ability to manage our inventory and to meet product demand in a timely fashion.

This shortage may persist for an indefinite period of time.

Management of our inventory is further complicated by the significant number of different products and models that we sell which may impact our billings, revenue, margins and free cash flow.

Mismanagement of our inventory, whether due to imprecise forecasting, employee errors or malfeasance, inaccurate information or otherwise, may adversely affect our results of operations.

In order to mitigate supply chain risk from COVID-19, we have increased our on-hand stock of certain products.

If we are unable to sell these products, we would be required to write-off excess inventory, which would have an adverse impact on our results of operations.

If we ultimately determine that we have excess inventory, we may have to reduce our prices and write-down inventory, which in turn could result in lower gross margins.

For example, we have in the past experienced inventory shortages and excesses due to the variance in demand for certain products from forecasted amounts.

Our inventory management systems and related supply chain visibility tools may be inadequate to enable us to effectively manage inventory.

If we are unable to effectively manage our inventory and that of our channel partners, our results of operations could be adversely affected.

Because we depend on several third-party manufacturers to build our products, we are susceptible to manufacturing delays that could prevent us from shipping customer orders on time, if at all, and may result in the loss of sales and customers, and third-party manufacturing cost increases could result in lower gross margins and free cash flow.

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Our proprietary SPUs, which are key to the performance of our appliances, are built by contract manufacturers including Renesas and Toshiba.

These contract manufacturers use foundries operated by TSMC or Renesas on a purchase-order basis, and these foundries do not guarantee their capacity and could delay orders or increase their pricing.

These contract manufacturers use foundries operated by TSMC or Renesas on a purchase-order

basis, and these foundries do not guarantee their capacity and could delay orders or increase their pricing.

Accordingly, the foundries are not obligated to continue to fulfill our supply requirements, and due to the long lead time that a new foundry would require, we could suffer inventory shortages of our SPU as well as increased costs.

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We may also encounter customers who require that all of the components of our products be certified as conflict-free.

If we are not able to

meet customer requirements, such customers may choose to not purchase our products, which could impact our sales and the value of portions of our inventory.

If we are not able to meet customer requirements, such customers may choose to not purchase our products, which could impact our sales and the value of portions of our inventory.

Because some of the key components in our products come from limited sources of supply, we are susceptible to supply shortages, long lead times for components, and supply changes, each of which could disrupt or delay our scheduled product deliveries to our customers, result in inventory shortage, cause loss of sales and customers or increase component costs resulting in lower gross margins and free cash flow.

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We have in the past experienced, and are currently experiencing, shortages and long lead times for certain components.

Our limited source components for particular appliances and suppliers of those components include specific types of CPUs from Intel, network chips from Broadcom, Marvell and Intel, and memory devices from Intel, ADATA, Toshiba, Samsung and Western Digital.

Our limited source components for particular appliances and suppliers of those components include specific types of CPUs from Intel and Advanced Micro Devices, Inc.

(“AMD”), network chips from Broadcom, Marvell and Intel, and memory devices from Intel, ADATA, Toshiba, Samsung and Western Digital.

We also may face shortages in the supply of the capacitors and resistors that are used in the manufacturing of our products.

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Our products are also susceptible to errors, defects, logic flaws, vulnerabilities and inserted vulnerabilities that may arise in, or be included in our products in, different stages of our supply chain, manufacturing and shipment processes, and a threat actor’s exploitation of these weaknesses may be difficult to anticipate, prevent, and detect.

If we are unable to maintain an effective supply chain security risk management program, then the security and integrity of our products and the updates to those products that our customers receive could be exploited by third parties or insiders.

If we are unable to maintain an effective supply chain security risk management program, then the security and integrity of our products and the updates to those products that our

customers receive could be exploited by third parties or insiders.

Different customers deploy and use our products in different ways, and certain deployments and usages may subject our products to adverse conditions that may negatively impact the effectiveness and useful lifetime of our products.

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Any such technical failure, downtime or failures in general may temporarily or permanently expose our end-customers’ networks, leaving their networks unprotected against the latest security threats.

An actual, possible or perceived security breach or infection of the network of one of our end-customers, regardless of whether the breach is attributable to the failure of our products or services to prevent the security breach, or any actual or perceived security risk in our supply chain, could adversely affect the market’s perception of our security products and services,

cause customers and customer prospects not to buy from us and, in some instances, subject us to potential liability that is not contractually limited.

We may not be able to correct any security flaws or vulnerabilities promptly, or at all.

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Costs for contract development can be substantial and our profitability may be harmed if we are unable to recover these costs.

Although the market expects rapid introduction of new products or product enhancements to respond to new threats, the development of these products is difficult and the timetable for commercial release and availability is uncertain and there can be long time periods between releases and availability of new products.

and availability is uncertain and there can be long time periods between releases and availability of new products.

We have in the past and may in the future experience unanticipated delays in the availability of new products and services and fail to meet previously announced timetables for such availability.

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Additionally, if we are unable to meet the demand to provide our services through a SaaS model, we may lose customers to competitors.

Unforeseen COVID-19 pandemic impacts on global supply chains may impact our ability to procure parts required for building our hardware appliances.

Extended lead time may be introduced in identifying alternative sources and in delivering orders than is typical.

The COVID-19 pandemic has continued to impact global supply chains for many organizations, resulting in shortages of and delays in both raw equipment and electronic components such as computer chips.

Though we have managed our supply availability well thus far during the COVID-19 pandemic, unforeseen events in upstream supplies and component availability may impact our ability to plan and deliver upon orders received.

Additionally, such unforeseen impacts to required component supply chains may introduce increases in prices of components that may require us to raise prices of our products in turn;

such price increases may result in our products being less price-competitive in the market.

Our uniform resource locator (“URL”) database for our web filtering service may fail to keep pace with the rapid growth of URLs and may not categorize websites in accordance with our end-customers ’ expectations.

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In addition, false identification of emails or programs as unwanted spam or potentially unwanted programs may reduce the adoption of our products.

If our system restricts important files or applications based on falsely identifying them as malware or some other item that should be restricted, this could adversely affect end-customers’ systems and cause material system failures.

If our system restricts important files or applications based on falsely identifying them as malware or

some other item that should be restricted, this could adversely affect end-customers’ systems and cause material system failures.

In addition, our threat researchers periodically identify vulnerabilities in various third-party products, and, if these identifications are perceived to be incorrect or are in fact incorrect, this could harm our business.

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Our success depends on the market’s confidence in our ability to provide effective network security protection.

Despite our efforts and processes to prevent breaches of our internal networks, systems and websites, we are still vulnerable to computer viruses, break-ins, phishing attacks, ransomware attacks, attempts to overload our servers with denial-of-service, vulnerabilities in vendor hardware and software that we leverage, and other cyber-attacks and similar disruptions from unauthorized access to our internal networks, systems or websites.

Despite our efforts and processes to prevent breaches of our internal networks, systems and websites, we are still vulnerable to

computer viruses, break-ins, phishing attacks, ransomware attacks, attempts to overload our servers with denial-of-service, vulnerabilities in vendor hardware and software that we leverage, and other cyber-attacks and similar disruptions from unauthorized access to our internal networks, systems or websites.

Our security measures may also be breached due to employee error, malfeasance or otherwise, which breaches may be more difficult to detect than outsider threats, and the existing programs and trainings we have in place to prevent such insider threats may not be effective or sufficient.

Third parties may also attempt to fraudulently induce our employees to transfer funds or disclose information in order to gain access to our

networks and confidential information.

Third parties may also attempt to fraudulently induce our employees to transfer funds or disclose information in order to gain access to our networks and confidential information.

Third parties may also send our customers or others malware or malicious emails that falsely indicate that we are the source, potentially causing lost confidence in us and reputational harm.

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We may not be able to successfully implement requisite improvements to these systems, controls and processes, such as system capacity, access, security and change management controls, in a timely or efficient manner.

Our failure to improve our systems and processes, or their failure to operate in the intended manner, whether as a result of the significant growth of our business or otherwise, may result in our inability to manage the growth of our business and to accurately forecast our revenue, expenses and earnings, or to prevent certain losses.

Our failure to improve our systems and processes, or their failure to operate in the intended manner, whether as a result of the significant growth of our business or otherwise, may

result in our inability to manage the growth of our business and to accurately forecast our revenue, expenses and earnings, or to prevent certain losses.

Moreover, the failure of our systems and processes could undermine our ability to provide accurate, timely and reliable reports on our financial and operating results and could impact the effectiveness of our internal control over financial reporting.

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In addition, the laws of some foreign countries do not protect our proprietary rights to as great an extent as the laws of the United States, and many foreign countries do not enforce these laws as diligently as government agencies and private parties in the United States.

From time to time, legal action by us may be necessary to enforce our patents and other IP rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement or invalidity.

From time to time, legal action by us may be

necessary to enforce our patents and other IP rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement or invalidity.

Such litigation could result in substantial costs and diversion of resources and could negatively affect our business, operating results and financial condition.

If we are unable to protect our proprietary rights (including aspects of our software and products protected other than by patent rights),

we may find ourselves at a competitive disadvantage to others who need not incur the additional expense, time and effort required to create the innovative products that have enabled us to be successful to date.

If we are unable to protect our proprietary rights (including aspects of our software and products protected other than by patent rights), we may find ourselves at a competitive disadvantage to others who need not incur the additional expense, time and effort required to create the innovative products that have enabled us to be successful to date.

Our products contain third-party open source software components, and failure to comply with the terms of the underlying open source software licenses could restrict our ability to sell our products.

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If we are unsuccessful in defending any such claims, our operating results and financial condition and results may be materially and adversely affected.

For example, we may be required to pay substantial damages and could be prevented from selling certain of our products.

For example, we may be required to pay substantial damages and could be prevented from selling certain of

our products.

Litigation, with or without merit, could negatively impact our business, reputation and sales in a material fashion.

We have several ongoing patent lawsuits, certain companies have sent us demand letters proposing that we license certain of their patents, and organizations have sent letters demanding that we provide indemnification for patent claims.

examples of the ongoing patent lawsuits against us, one such patent lawsuit by British Telecommunications plc was filed in federal court in Delaware in July 2018, and a second such lawsuit by Finjan, Inc.

was filed in federal court in California in October 2018, and additional patent lawsuits have been filed against us since.

Given this and the proliferation of lawsuits in our industry and other similar industries by both non-practicing entities and operating entities, and recent non-practicing entity and operating entity patent litigation against other companies in the security space, we expect that we will be sued for patent infringement in the future, regardless of the merits of any such lawsuits.

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Other Risks Related to Our Business and Financial Position

Our inability to successfully acquire and integrate other businesses, products or technologies, or to successfully invest in and form successful strategic alliances with other businesses, could seriously harm our competitive position.

In order to remain competitive, we may seek to acquire additional businesses, products, technologies or IP, such as patents, and to make equity investments in businesses coupled with strategic alliances.

For example, in 2021, we acquired ShieldX and AlaxalA and we made an equity investment in Linksys.

F or any possible future acquisitions or investments, we may not be successful in negotiating the terms of the acquisition or investment or financing the acquisition or investment.

For both our prior and future acquisitions, we may not be successful in effectively integrating the acquired business, product, technology or IP and sales force into our existing business and operations.

We may have difficulty incorporating acquired technologies, IP or products with our existing product lines, integrating reporting systems and procedures, and maintaining uniform standards, controls, procedures and policies.

For example, we may experience difficulties integrating an acquired company’s ERP or CRM systems, sales support and other processes and systems, with our current systems and processes.

We may also experience difficulty in timely obtaining financial information from the companies in which we have invested in order to meet our financial reporting requirements.

Our due diligence for acquisitions and investments may fail to identify all of the problems, liabilities or other shortcomings or challenges of an acquired business, product or technology, including issues with IP, product quality or product architecture, regulatory compliance practices, environmental and sustainability compliance practices, revenue recognition or other accounting practices or employee or customer issues, and we may not accurately forecast the financial impact of an acquisition or an investment and alliance.

In addition, any acquisitions and significant investments we are able to complete may be dilutive to revenue growth and earnings and may not result in any synergies or other benefits we had expected to achieve, which could result in negative impact to our operating results and impairment charges that could be substantial.

We may have to pay cash, incur debt or issue equity securities to pay for any acquisition, each of which could affect our financial condition or the value of our capital stock and could result in dilution to our stockholders.

Acquisitions or investments during a quarter may result in increased operating expenses and adversely affect our cash flows or our results of operations for that period and future periods compared to the results that we have previously forecasted or achieved.

Further, completing a potential acquisition or investment and alliance and integrating acquired businesses, products, technologies or IP are challenging to do successfully and could significantly divert management time and resources.

In addition, because we are accounting for our Linksys investment using the equity method of accounting, we are reliant on the accuracy and timeliness of their financial reporting to us.

If their financial reporting to us is not accurate and timely, it may result in delays in our financial reporting.

Failure to comply with laws and regulations applicable to our business could subject us to fines and penalties and could also cause us to lose end-customers in the public sector or negatively impact our ability to contract with the public sector.

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For example, in June 2018, California passed the California Consumer Privacy Act (the “CCPA”), which provides new data privacy rights for consumers and new operational requirements for companies and became effective on January 1, 2020.

The CCPA was expanded pursuant to the California Privacy Rights Act, which was passed in 2020 and which will become

effective in 2023.

The CCPA was expanded pursuant to the California Privacy Rights Act, which was passed in 2020 and which will become effective in 2023.

The costs of compliance with and the penalties for violations of the GDPR and CCPA, along with other burdens imposed by these regulations, may limit the use and adoption of our products and services and could have an adverse impact on our business.

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If we were to fail to comply with U.S.

export laws, U.S.

Customs regulations and import regulations, U.S.

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As a result, China and other countries imposed retaliatory tariffs on goods exported from the United States and both the United States and foreign countries have threatened to alter or leave current trade agreements.

While we do not currently expect these tariffs to have a significant effect on our raw material and product import costs, if the United States expands increased tariffs, or retaliatory trade measures are taken by China or other countries in response to the tariffs, the cost of our products could increase, our operations could be disrupted or we could be required to raise our prices, which may result in the loss of customers and harm to our reputation and operating performance.

While we do not currently expect these tariffs to have a significant effect on our raw material and product import costs, if the United States expands increased tariffs, or retaliatory trade measures are taken by other countries in response to the tariffs, the cost of our products could increase, our operations could be disrupted or we could be required to raise our prices, which may result in the loss of customers and harm to our reputation and operating performance.

Any modification in these areas, any shift in the enforcement or scope of existing regulations or any change in the countries, governments, persons or technologies targeted by such regulations, could result in decreased use of our products by, or in our decreased ability to export or sell our products to, existing or potential end-customers with international operations and could result in increased costs.

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The laws and regulations to which we are subject include the EU RoHS Directive, EU Regulation 1907/2006 – Registration, Evaluation, Authorization and Restriction of Chemicals (the “REACH” Regulation) and the EU Waste Electrical and Electronic Equipment Directive (the “WEEE Directive”), as well as the implementing legislation of the EU member states.

Similar laws and regulations have been passed or are pending in China, South Korea, Norway and Japan and may be enacted in other regions, including in the United States, and we are, or may in the future be, subject to these laws and regulations.

Similar laws and regulations have been passed or are pending in China,

South Korea, Norway and Japan and may be enacted in other regions, including in the United States, and we are, or may in the future be, subject to these laws and regulations.

The EU RoHS Directive and the similar laws of other jurisdictions ban or restrict the presence of certain hazardous substances such as lead, mercury, cadmium, hexavalent chromium and certain fire-retardant plastic additives in electrical equipment, including our products.

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Our failure to comply with these and future environmental rules and regulations could result in reduced sales of our products, increased costs, substantial product inventory write-offs, reputational damage, penalties and other sanctions.

For example, in 2021, we acquired ShieldX and we made an equity investment in Linksys.

F or any possible future acquisitions or investments, we may not be successful in negotiating the terms of the acquisition or investment or financing the acquisition or investment.

For example, we may experience difficulties integrating an acquired company’s ERP or CRM systems, sales support and other processes and systems, with our current systems and processes.We may also experience difficulty in timely obtaining financial information from the companies in which we have invested in order to meet our financial reporting requirements.

Our due diligence for acquisitions and investments may fail to identify all of the problems, liabilities or other shortcomings or challenges of an acquired business, product or technology, including issues with IP, product quality or product architecture, regulatory compliance practices, revenue recognition or other accounting practices or employee or customer issues, and we may not accurately forecast the financial impact of an acquisition or an investment and alliance.

Investors’ expectations of our performance relating to environmental, social and governance factors may impose additional costs and expose us to new risks.

There is an increasing focus from certain investors, employees and other stakeholders concerning corporate responsibility, specifically related to environmental, social and governance matters.

Some investors may use these factors to guide their investment strategies and, in some cases, may choose not to invest in us if they believe our policies relating to corporate responsibility are inadequate.

Third-party providers of corporate responsibility ratings and reports on companies have increased to meet growing investor demand for measurement of corporate responsibility performance.

The criteria by which our corporate responsibility practices are assessed may change, which could result in greater expectations of us and cause us to undertake costly initiatives to satisfy such new criteria.

If we elect not to or are unable to satisfy such new criteria, investors may conclude that our policies with respect to corporate social responsibility are inadequate.

We may face reputational damage in the event that our corporate social responsibility procedures or standards do not meet the standards set by various constituencies.

There is an increasing focus from certain investors, employees, customers and other stakeholders concerning corporate responsibility, specifically related to environmental, social and governance matters (“ESG”).

Some investors may use these non-financial performance factors to guide their investment strategies and, in some cases, may choose not to invest in us if they believe our policies and actions relating to corporate responsibility are inadequate.

The growing investor demand for measurement of non-financial performance is addressed by third-party providers of sustainability assessment and ratings on companies.

The criteria by which our corporate responsibility practices are assessed may change due to the constant evolution of the sustainability landscape, which could result in greater expectations of us and cause us to undertake costly initiatives to satisfy such new criteria.

If we elect not to or are unable to satisfy such new criteria, investors may conclude that our policies and/or actions with respect to corporate social responsibility are inadequate.

We may face reputational damage in the event that we do not meet the ESG standards set by various constituencies.

Furthermore, if our competitors’ corporate social responsibility performance is perceived to be better than ours, potential or current investors may elect to invest with our competitors instead.

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The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes.

We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as provided in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in this Quarterly Report on Form 10-Q, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

Our operating results may be adversely affected if our assumptions change or if actual

circumstances differ from those in our assumptions, which could cause our operating results to fall below the expectations of securities analysts and investors, resulting in a decline in our stock price.

We base our estimates on historical experience and on various other assumptions that we

believe to be reasonable under the circumstances, as provided in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in this Quarterly Report on Form 10-Q, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

Our operating results may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our operating results to fall below the expectations of securities analysts and investors, resulting in a decline in our stock price.

Significant assumptions and estimates used in preparing our condensed consolidated financial statements include those related to revenue recognition, deferred contract costs and commission expense, valuation of inventory, accounting for business combination, contingent liabilities and accounting for income taxes.

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If ineffectual, such restructurings or transfers could increase our income tax liabilities, and in turn, increase our global effective tax rate.

Moreover, our existing corporate structure and intercompany arrangements have been implemented in a

manner that we believe is in compliance with current prevailing tax laws.

Moreover, our existing corporate structure and intercompany arrangements have been implemented in a manner that we believe is in compliance with current prevailing tax laws.

However, the tax authorities of the jurisdictions in which we operate may challenge our methodologies for valuing developed technology or intercompany arrangements, which could impact our worldwide effective tax rate and harm our financial position and operating results.

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and foreign tax rules.

For example, in April 2021, legislation was proposed that would increase the corporate tax rate in the United States to 28% from its current 21%.

If passed, this legislation would increase our effective tax rate.

For example, the administration has proposed an increase to the corporate tax rate in the United States.

If enacted, this legislation would increase our effective tax rate.

As a multinational corporation, we conduct our business in many countries and are subject to taxation in many jurisdictions.

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If compliance with these various legal and regulatory requirements diverts our management’s attention from other business concerns, it could have a material adverse effect on our business, financial condition and results of operations.

Sarbanes-Oxley requires, among other things, that we assess the effectiveness of our internal control over financial reporting annually, and of our disclosure con trols and procedures quarterly.

Sarbanes-Oxley requires, among other things, that we assess the effectiveness of our internal control over financial reporting annually, and of our disclosure controls and procedures quarterly.

Although our most recent assessment, testing and evaluation resulted in our conclusion that, as of December 31, 2020, our internal controls over financial reporting were effective, we cannot predict the outcome of our testing in 2021 or future periods.

We may incur additional expenses and commitment of management’s time in connection with further ev aluations, both of which could materially increase our operating expenses and accordingly reduce our operating results.

We may incur additional expenses and

commitment of management’s time in connection with further evaluations, both of which could materially increase our operating expenses and accordingly reduce our operating results.

If securities or industry analysts stop publishing research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

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The market price of our common stock may be subject to wide fluctuations in response to, among other things, the risk factors described in this pe riodic report, news about us and our financial results, the impact of the COVID-19 pandemic, news about our competitors and their results, and other factors such as rumors or fluctuations in the valuation of companies perceived by investors to be comparable to us.

For example, during the six months ended June 30, 2021, the closing price of our common stock ranged from $138.11 to $247.04 per share.

For example, during the nine months ended September 30, 2021, the closing price of our common stock ranged from $138.11 to $320.19 per share.

Furthermore, stock markets have experienced price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies.

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The extent to which the COVID-19 pandemic may impact the market price of our common stock is unclear, and the market price of our common stock may fluctuate significantly as a result of the COVID-19 pandemic.

Share repurchases under our Repurchase Program (the “Repurchase Program”) could increase the volatility of the trading price of our common stock, could diminish our cash reserves, could occur at non-optimal prices and may not result in the most effective use of our capital.

In July 2020, our board of directors approved a $500.0 million increase in the authorized stock repurchase amount under the Repurchase Program and extended the term of the Repurchase Program to February 28, 2022, bringing the aggregate amount authorized to be repurchased to $3.0 billion.

As of June 30, 2021, $921.1 million remained available for future share repurchases under the Repurchase Program.

Share repurchases under our Repurchase Program could increase the volatility of the trading price of our common stock, could diminish our cash reserves, could occur at non-optimal prices and may not result in the most effective use of our capital.

As of September 30, 2021, $812.3 million remained available for future share repurchases under the Repurchase Program.

In October 2021, our board of directors approved a $1.25 billion increase in the authorized stock repurchase amount under the Repurchase Program and extended the term of the Repurchase Program to February 28, 2023, bringing the aggregate amount authorized to be repurchased to $4.25 billion.

Share repurchases under the Repurchase Program could affect the price of our common stock, increase stock price volatility and diminish our cash reserves.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1A. Risk Factors