What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-02-23 compared with 2021-11-19 · 129 added, 120 removed, 333 unchanged (43% of the section changed)

3 unchanged sentences

These statements include, among other things:

the effects of supply chain constraints and the global chip and component shortages and other factors affecting the manufacture, delivery and cost of certain of our products;

the effects of supply chain challenges and the global chip and component shortages and other factors affecting the manufacture, delivery and cost of certain of our products;

expectations regarding drivers of and factors affecting growth in our business;

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• Results of Operations.

A discussion of the nature and trends in our financial results and an analysis of our financial results comparing the three months ended October 31, 2021 to the three months ended October 31, 2020.

A discussion of the nature and trends in our financial results and an analysis of our financial results comparing the three and six months ended January 31, 2022 to the three and six months ended January 31, 2021.

• Liquidity and Capital Resources.

An analysis of changes in our balance sheets and cash flows, and a discussion of our financial condition and our ability to meet cash needs.

An analysis of changes on our balance sheets and cash flows, and a discussion of our financial condition and our ability to meet cash needs.

• Critical Accounting Estimates.

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• Enabling cloud security through our Prisma security offerings.

Prisma Cloud, the industry’s most comprehensive Cloud Native Security Platform (“CNSP”), secures multi- and hybrid-cloud environments and cloud native applications, integrating security across the full deployment lifecycle.

Prisma Cloud, the industry’s most comprehensive Cloud Native Application Protection Platform (“CNAPP”), secures multi- and hybrid-cloud environments and cloud native applications, integrating security across the full deployment lifecycle.

VM-Series and CN-Series enforce in-line network security in multi- and hybrid-cloud environments.

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Unit 42 offers incident response, risk management, board advisory and proactive cybersecurity assessment services.

For the first quarter of fiscal 2022 and 2021, total revenue was $1.2 billion and $946.0 million, respectively, representing year-over-year growth of 31.9%.

For the second quarter of fiscal 2022 and 2021, total revenue was $1.3 billion and $1.0 billion, respectively, representing year-over-year growth of 29.5%.

Our growth reflects the increased adoption of our portfolio, which consists of product, subscriptions, and support.

We believe our portfolio will enable us to benefit from recurring revenues as we continue to grow our installed end-customer base.

As of October 31, 2021, we had end-customers in over 170 countries.

As of January 31, 2022, we had end-customers in over 170 countries.

Our end-customers represent a broad range of industries, including education, energy, financial services, government entities, healthcare, Internet and media, manufacturing, public sector, and telecommunications, and include almost all of the Fortune 100 companies and a majority of the Global 2000 companies in the world.

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We primarily use a two-tiered, indirect fulfillment model whereby we sell our products, subscriptions, and support to our distributors, which, in turn, sell to our resellers, which then sell to our end-customers.

Our product revenue was $295.5 million, or 23.7% of total revenue, for the first quarter of fiscal 2022, representing year-over-year growth of 24.5%.

Our product revenue grew to $308.0 million, or 23.4% of total revenue, for the second quarter of fiscal 2022, representing year-over-year growth of 20.9%.

Product revenue is generated from sales of our appliances, primarily our ML-Powered Next-Generation Firewall, which is available in a number of form factors, including as physical, virtual, and containerized appliances.

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The same firewall functionality that is delivered in our physical appliances is also available in our VM-Series virtual firewalls, which secure virtualized and cloud-based computing environments, and in our CN-Series container firewalls, which secure container environments and traffic.

Our subscription and support revenue grew to $951.9 million, or 76.3% of total revenue, for the first quarter of fiscal 2022, representing year-over-year growth of 34.3%.

Our subscription and support revenue grew to $1.0 billion, or 76.6% of total revenue, for the second quarter of fiscal 2022, representing year-over-year growth of 32.4%.

Our subscriptions provide our end-customers with near real-time access to the latest antivirus, intrusion prevention, web filtering, modern malware prevention, data loss prevention, and cloud access security broker capabilities across the network, endpoints, and the cloud.

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customers and improving our competitive position.

For example, in August 2021, we acquired Gamma Networks, Inc.

(“Gamma”), which we expect will enhance and expand our data loss prevention offerings.

For example, in November 2021, we launched Prisma Cloud 3.0, a single unified platform that secures infrastructure, applications, data and entitlements across cloud environments and Prisma Access 3.0 that delivers next generation cloud access security broker (“CASB”) protecting against threats that originate from SaaS applications.

We believe that the growth of our business and our short-term and long-term success are dependent upon many factors, including our ability to extend our technology leadership, grow our base of end-customers, expand deployment of our portfolio and support offerings within existing end-customers, and focus on end-customer satisfaction.

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We are actively monitoring, evaluating, and responding to developments relating to COVID-19, which has resulted in, and is expected to continue to result in significant global, social, and business disruption.

While we instituted a global work-from-home policy beginning in Marc h 2020, which has been modified to provide employees with the choice to work in certain of our offices when and as they feel comfortable, we have not experienced significant disruptions in our work operations.

While we instituted a global work-from-home policy beginning in March 2020, which has been modified to provide employees with the choice to work in certain of our offices when and as they feel comfortable, we have not experienced significant disruptions in our work operations.

We are conducting business as usual with modifications to employee travel and continue to hold most of the marketing events virtually.

We expect these changes will substantially remain in effect in the second quarter of fiscal 2022 and could extend to future quarters.

We expect these changes will substantially remain in effect in the third quarter of fiscal 2022 and could extend to future quarters.

We will continue to actively monitor the situation, including progress made through vaccinations, and we will make further changes to our business operations as may be required by federal, state, or local authorities or that we determine are in the best interests of our employees, end-customers, partners, suppliers, and stockholders.

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Although some end-customers adopted Prisma Access as their secure work-from-home solution for the longer term, COVID-19 has affected our end-customers’ spending and could lead them to delay or defer purchasing decisions, and lengthen sales cycles and payment terms, which could materially adversely impact our business, results of operations, and overall financial performance.

Also, certain of our end-customers or partners may be or may become credit or cash constrained, making it difficult for them to fulfill their payment obligations to us.

The extent of the impact of COVID-19 on our operational and financial performance will depend on developments, including the duration and spread of the virus and its variants, impact on our end-customers’ spending, volume of sales and length of our sales cycles, impact on our partners, suppliers, and employees, actions that may be taken by governmental authorities, and other factors identified in Part II, Item 1A “Risk Factors” in this Form 10-Q.

The global supply chain and the semiconductor industry are experiencing challenges.

We have seen supply chain challenges increase, including chip and component shortages, which have, in certain cases, caused delays in acquiring chips, components and inventory and have resulted in increased costs as compared to historic levels.

We continue to work to minimize the effects from supply chain constraints, however, we have experienced increases in lead time for product deliveries to our end-customers.

Also, certain of our end-customers or partners have been and others may become credit or cash constrained, making it difficult for them to fulfill their payment obligations to us.

The global supply chain and the semiconductor industry are experiencing significant challenges.

We have seen supply chain challenges increase, including chip and component shortages, which have, in certain cases, caused delays for us in acquiring chips, components and inventory and have resulted in increased costs as compared to historic levels.

While we incurred increased costs and experienced increased lead time for certain product deliveries to our end-customers, we continue to work to minimize the effects from supply chain challenges.

Given the dynamic nature of these circumstances, the full impact of COVID-19 and other macroeconomic factors on our ongoing business, results of operations and overall financial performance cannot be reasonably estimated at this time.

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We discuss revenue, gross margin, and the components of operating loss and margin below under “Results of Operations.”

October 31, 2021 July 31, 2021

January 31, 2022 July 31, 2021

(in millions)

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Cash, cash equivalents, and investments $ 4,191.3 $ 3,789.4

Three Months Ended October 31,

Three Months Ended January 31, Six Months Ended January 31,

2022 2021 2022 2021

(dollars in millions)

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We calculate billings in the following manner:

Three Months Ended October 31,

(in millions)

Three Months Ended January 31, Six Months Ended January 31,

2022 2021 2022 2021

(in millions) (in millions)

Total revenue $ 1,316.9 $ 1,016.9 $ 2,564.3 $ 1,962.9

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A reconciliation of free cash flow to cash flow provided by operating activities, the most directly comparable financial measure calculated and presented in accordance with GAAP, is provided below:

Three Months Ended October 31,

Six Months Ended January 31,

(in millions)

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Net cash used in investing activities $ (504.2) $ (1,270.6)

Net cash provided by (used in) financing activities $ 38.7 $ (464.5)

Net cash used in financing activities $ (519.8) $ (469.9)

Table of Content

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The period-to-period comparison of results is not necessarily indicative of results for future periods.

Three Months Ended October 31,

Amount % of Revenue Amount % of Revenue

Three Months Ended January 31, Six Months Ended January 31,

2022 2021 2022 2021

Amount % of Revenue Amount % of Revenue Amount % of Revenue Amount % of Revenue

(dollars in millions)

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(1) Includes share-based compensation as follows:

Three Months Ended October 31,

Three Months Ended January 31, Six Months Ended January 31,

2022 2021 2022 2021

(in millions)

Cost of product revenue

$ 2.3 $ 1.6 $ 4.6 $ 3.1

Cost of subscription and support revenue

27.7 23.8 54.4 46.0

Research and development

123.6 103.6 249.2 199.0

Sales and marketing

79.8 69.7 153.1 134.6

General and administrative

31.7 42.4 64.1 71.3

Total share-based compensation $ 265.1 $ 241.1 $ 525.4 $ 454.0

Our revenue consists of product revenue and subscription and support revenue.

Revenue is recognized upon transfer of control of the corresponding promised products and subscriptions and support to our customers in an amount that reflects the consideration we expect to be entitled in exchange for those products and subscriptions and support.

Revenue is recognized upon transfer of control of the corresponding promised products and subscriptions and support to our customers in an amount that reflects the consideration we expect to be entitled to in exchange for those products and subscriptions and support.

We expect our revenue to vary from quarter to quarter based on seasonal and cyclical fact ors.

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We recognize product revenue at the time of hardware shipment or delivery of software license.

Three Months Ended October 31,

2021 2020 Change

Amount Amount Amount %

Three Months Ended January 31, Six Months Ended January 31,

2022 2021 Change 2022 2021 Change

Amount Amount Amount % Amount Amount Amount %

(dollars in millions)

Product $ 308.0 $ 254.7 $ 53.3 20.9 % $ 603.5 $ 492.0 $ 111.5 22.7 %

Product revenue for the three months ended October 31, 2021 increased compared to the same period in 2020 primarily due to increased demand for our existing and newly introduced product offerings.

Product revenue for the three and six months ended January 31, 2022 increased compared to the same periods in 2021 primarily due to increased demand for our new and existing product offerings in both periods.

Subscription and Support Revenue

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As a percentage of total revenue, we expect our subscription and support revenue to vary from quarter to quarter and increase over the long term as we introduce new subscriptions, renew existing subscription and support contracts, and expand our installed end-customer base.

Three Months Ended October 31,

2021 2020 Change

Amount Amount Amount %

Three Months Ended January 31, Six Months Ended January 31,

2022 2021 Change 2022 2021 Change

Amount Amount Amount % Amount Amount Amount %

(dollars in millions)

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Total subscription and support $ 1,008.9 $ 762.2 $ 246.7 32.4 % $ 1,960.8 $ 1,470.9 $ 489.9 33.3 %

Subscription and support revenue increased for the three months ended October 31, 2021 compared to the same period in 2020.

The increase was due to increased demand for our subscription and support offerings from both new and existing end-customers.

Subscription and support revenue increased for the three and six months ended January 31, 2022 compared to the same periods in 2021.

The increase in both periods was due to increased demand for our subscription and support offerings from our end-customers.

The mix between subscription revenue and support revenue will fluctuate over time, depending on the introduction of new subscription offerings, renewals of support services, and our ability to increase sales to new and existing end-customers.

Revenue by Geographic Theater

Three Months Ended October 31,

2021 2020 Change

Amount Amount Amount %

Three Months Ended January 31, Six Months Ended January 31,

2022 2021 Change 2022 2021 Change

Amount Amount Amount % Amount Amount Amount %

(dollars in millions)

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$ 1,316.9 $ 1,016.9 $ 300.0 29.5 % $ 2,564.3 $ 1,962.9 $ 601.4 30.6 %

With respect to geographic theaters, the increase in revenue for the three months ended October 31, 2021 compared to the same period in 2020 was driven primarily by the Americas, due to its larger sales force and a larger percentage of our customers being located in the Americas.

Revenue from our other geographic theaters, both Europe, the Middle East, and Africa (“EMEA”) and Asia Pacific and Japan (“APAC”), increased for the three months ended October 31, 2021 compared to the same period in 2020 due to continued investment in our global sales force in order to support our growth and increase our customer base in the region.

With respect to geographic theaters, the increase in revenue for the three and six months ended January 31, 2022 compared to the same periods in 2021 was driven primarily by the Americas, due to its larger sales force and a larger percentage of our customers located in the Americas.

Revenue from our other geographic theaters, both Europe, the Middle East, and Africa (“EMEA”) and Asia Pacific and Japan (“APAC”), increased for the three and six months ended January 31, 2022 compared to the same periods in 2021 due to continued investment in our global sales force to support our growth and increase our customer base in the regions.

Cost of Revenue

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We expect our cost of product revenue to fluctuate with our product revenue.

Three Months Ended October 31,

2021 2020 Change

Amount Amount Amount %

Three Months Ended January 31, Six Months Ended January 31,

2022 2021 Change 2022 2021 Change

Amount Amount Amount % Amount Amount Amount %

(dollars in millions)

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Number of employees at period end 134 118 16 13.6 % 134 118 16 13.6 %

Cost of product revenue increased for the three months ended October 31, 2021 compared to the same period in 2020, primarily due to an increase in product volume and higher costs related to our new product offerings.

Cost of product revenue increased for the three and six months ended January 31, 2022 compared to the same periods in 2021, primarily due to an increase in product volume in both periods.

The remaining increase was due to higher costs related to our product offerings in both periods, primarily driven by supply chain challenges.

Cost of Subscription and Support Revenue

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We expect our cost of subscription and support revenue to increase as our installed end-customer base grows and adoption of our cloud-based subscription offerings increases.

Three Months Ended October 31,

2021 2020 Change

Amount Amount Amount %

Three Months Ended January 31, Six Months Ended January 31,

2022 2021 Change 2022 2021 Change

Amount Amount Amount % Amount Amount Amount %

(dollars in millions)

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Number of employees at period end 2,380 1,697 683 40.2 % 2,380 1,697 683 40.2 %

Cost of subscription and support revenue increased for the three months ended October 31, 2021 compared to the same period in 2020, primarily due to p ersonnel costs, which grew $35.2 million to $122.8 million for the three months ended October 31, 2021 compared to the same period in 2020 primarily due to headcount growth.

The remaining increase was primarily due to increased outside service costs for global customer support resulting from the expansions of our customer base and product portfolio, amortization of intangible assets from our acquisitions, and cloud hosting service costs to support our cloud-based subscription offerings.

Gross margin, or gross profit as a percentage of revenue, has been and will continue to be affected by a variety of factors, including the introduction of new products, manufacturing costs, tariff costs, the average sales price of our products, cloud hosting service costs, personnel costs, the mix of products sold, and the mix of revenue between product and subscription and support offerings.

For sales of our products, our higher-end firewall products generally have higher gross margins than our lower-end firewall products within each product series.

Cost of subscription and support revenue increased for the three and six months ended January 31, 2022 compared to the same periods in 2021, primarily due to p ersonnel costs, which grew $38.4 million to $138.6 million for the three months ended January 31, 2022 compared to the same period in 2021, and grew $73.6 million to $261.4 million for the six months ended January 31, 2022 compared to the same period in 2021 primarily due to headcount growth.

The remaining increase for both periods was primarily due to increased outside service costs for global customer support resulting from the expansions of our customer base and product portfolio, and cloud hosting service costs to support our cloud-based subscription offerings.

Gross margin, or gross profit as a percentage of revenue, has been and will continue to be affected by a variety of factors, including the introduction of new products, manufacturing costs, the average sales price of our products, cloud hosting service costs, personnel costs, the mix of products sold, and the mix of revenue between product and subscription and support offerings.

For sales of our products, our virtual and higher-end firewall products generally have higher gross margins than our lower-end firewall products within each product series.

We expect our gross margins to vary over time depending on the factors described above.

Three Months Ended October 31,

Amount Gross Margin Amount Gross Margin

Three Months Ended January 31, Six Months Ended January 31,

2022 2021 2022 2021

Amount Gross Margin Amount Gross Margin Amount Gross Margin Amount Gross Margin

(dollars in millions)

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Table of Content

Product gross margin decreased for the three months ended October 31, 2021 compared to the same period in 2020, primarily due to product mix and higher costs of materials as a result of supply chain constraints.

Subscription and support gross margin decreased for the three months ended October 31, 2021 compared to the same period in 2020 primarily due to higher costs to fulfill professional services arrangements, partially offset by increased efficiency in our cloud hosting usage, which supports our cloud-based subscription offerings.

Product gross margin decreased for the three and six months ended January 31, 2022 compared to the same periods in 2021, primarily due to product mix and higher costs related to our product offerings in both periods, primarily driven by supply chain challenges.

Subscription and support gross margin was relatively flat for the three and six months ended January 31, 2022 compared to the same periods in 2021.

Operating Expenses

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Our operating expenses also include shared costs, which consist of certain facilities, depreciation, benefits, recruiting, and information technology costs that we allocate based on headcount to each department.

In response to COVID-19, we instituted a global work-from-home policy, which has been modified to provide employees with the choice to work in certain of our offices when and as they feel comfortable.

We also made modifications to employee travel beginning in March 2020, and we continue to hold most of the marketing events virtually.

In response to COVID-19, we made modifications to employee travel beginning in March 2020, and we continue to hold most of the marketing events virtually.

We expect operating expenses generally to increase in absolute dollars and decrease over the long term as a percentage of revenue as we continue to scale our business.

As of October 31, 2021, we expect to recognize approximately $2.3 billion of share-based compensation expense over a weighted-average period of approximately 2.8 years, excluding additional share-based compensation expense related to any future grants of share-based awards.

Share-based compensation expense is generally recognized on a straight-line basis over the requisite service periods of the awards.

Research and Development

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We expect research and development expense to increase in absolute dollars as we continue to invest in our future products and services, although our research and development expense may fluctuate as a percentage of total revenue.

Three Months Ended October 31,

2021 2020 Change

Amount Amount Amount %

Three Months Ended January 31, Six Months Ended January 31,

2022 2021 Change 2022 2021 Change

Amount Amount Amount % Amount Amount Amount %

(dollars in millions)

1 unchanged sentence

Number of employees at period end 2,880 2,195 685 31.2 % 2,880 2,195 685 31.2 %

Research and development expense increased for the three months ended October 31, 2021 compared to the same period in 2020 primarily due to personnel costs, which grew $78.9 million to $266.9 million.

The increase in personnel costs was primarily due to headcount growth.

The remaining increase was primarily driven by an increase in allocated shared costs.

Research and development expense increased for the three and six months ended January 31, 2022 compared to the same periods in 2021 primarily due to personnel costs, which grew $70.2 million to $286.2 million for the three months ended January 31, 2022 compared to the same period in 2021, and grew $149.1 million to $553.1 million for the six months ended January 31, 2022 compared to the same period in 2021 .

The increase in personnel costs in both periods was primarily due to headcount growth.

Sales and Marketing

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Sales and marketing expense also includes costs for market development programs, promotional and other marketing costs, professional services, and allocated shared costs.

We continue to strategically invest in headcount and have substantially grown our international sales presence.

We continue to strategically invest in headcount and have grown our sales presence.

We expect sales and marketing expense to continue to increase in absolute dollars as we increase the size of our sales and marketing organizations to grow customer base, increase touch points with end-customers and expand our global presence, although our sales and marketing expense may fluctuate as a percentage of total revenue.

Three Months Ended October 31,

2021 2020 Change

Amount Amount Amount %

Three Months Ended January 31, Six Months Ended January 31,

2022 2021 Change 2022 2021 Change

Amount Amount Amount % Amount Amount Amount %

(dollars in millions)

1 unchanged sentence

Number of employees at period end 4,826 4,065 761 18.7 % 4,826 4,065 761 18.7 %

Sales and marketing expense increased for the three months ended October 31, 2021 compared to the same period in 2020, primarily due to personnel costs, which grew $87.7 million to $381.0 million for the three months ended October 31, 2021 compared to the same period in 2020.

The increase in personnel costs was largely due to headcount growth.

The remaining increase was primarily driven by an increase in costs associated with go-to-market initiatives, including advertising.

Table of Content

Sales and marketing expense increased for the three and six months ended January 31, 2022 compared to the same periods in 2021, primarily due to personnel costs, which grew $79.8 million to $403.2 million for the three months ended January 31, 2022 compared to the same period in 2021, and grew $167.5 million to $784.2 million for the six months ended January 31, 2022 compared to the same period in 2021.

The increase in personnel costs in both periods was largely due to headcount growth.

The increase in the six months ended January 31, 2022 was also driven by an increase in costs associated with go-to-market initiatives, including advertising.

General and Administrative

General and administrative expense consists primarily of personnel costs and allocated shared costs for our executive, finance, human resources, and legal organizations, and professional services costs, which consist primarily of legal, auditing, accounting, and other consulting costs.

Table of Content

other consulting costs.

General and administrative expense also includes certain non-recurring general expenses.

We expect general and administrative expense to increase in absolute dollars due to additional costs associated with accounting, compliance, and insurance, although our general and administrative expense may fluctuate as a percentage of total revenue.

Three Months Ended October 31,

2021 2020 Change

Amount Amount Amount %

Three Months Ended January 31, Six Months Ended January 31,

2022 2021 Change 2022 2021 Change

Amount Amount Amount % Amount Amount Amount %

(dollars in millions)

1 unchanged sentence

Number of employees at period end 1,307 963 344 35.7 % 1,307 963 344 35.7 %

General and administrative expense increased for the three months ended October 31, 2021 compared to the same period in 2020 primarily due to personnel costs, which increased $13.9 million to $67.4 million .

The increase in personnel costs was primarily due to headcount growth, partially offset by lower share-based compensation related to accelerated vesting of equity awards in connection with acquisitions during the three months ended October 31, 2021.

General and administrative expense decreased for the three months ended January 31, 2022 compared to the same period in 2021.

The decrease was primarily due to share-based compensation related to accelerated vesting of equity awards and transaction costs incurred in connection with acquisitions during the three months ended January 31, 2021, which did not recur in the three months ended January 31, 2022.

The decrease was partially offset by an increase in personnel costs due to headcount growth in the three months ended January 31, 2022.

Total personnel costs, including share-based compensation related to accelerated vesting of equity awards in connection with acquisitions, decreased by $2.9 million to $69.3 million for the three months ended January 31, 2022 compared to the same period in 2021.

General and administrative expense increased for the six months ended January 31, 2022 compared to the same period in 2021 primarily due to personnel costs, which increased $11.0 million to $136.7 million for the six months ended January 31, 2022.

The increase in personnel costs in the six months ended January 31, 2022 was primarily due to headcount growth, partially offset by lower share-based compensation related to accelerated vesting of equity awards in connection with acquisitions compared to the same period in 2021.

Interest Expense

Interest expense primarily consists of interest expense related to our 0.75% Convertible Senior Notes due 2023 (the “2023 Notes”) and the 0.375% Convertible Senior Notes due 2025 (the “2025 Notes,” and together with “2023 Notes,” the “Notes”).

Three Months Ended October 31,

2021 2020 Change

Amount Amount Amount %

Three Months Ended January 31, Six Months Ended January 31,

2022 2021 Change 2022 2021 Change

Amount Amount Amount % Amount Amount Amount %

(dollars in millions)

Interest expense $ 6.8 $ 40.7 $ (33.9) (83.3) % $ 13.7 $ 80.9 $ (67.2) (83.1) %

Interest expense decreased for the three months ended October 31, 2021 compared to the same period in 2020 primarily because we no longer recognize interest expense for amortization of the debt discount as a result of the adoption of new debt guidance.

Interest expense decreased for the three and six months ended January 31, 2022 compared to the same periods in 2021 primarily because we no longer recognize interest expense for amortization of the debt discount as a result of the adoption of new debt guidance.

Refer to Note 1.

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Other Income (Expense), Net

Other income (expense), net includes interest income earned on our cash, cash equivalents, and investments, foreign currency remeasurement gains and losses, and foreign currency transaction gains and losses.

Three Months Ended October 31,

2021 2020 Change

Amount Amount Amount %

Other income (expense), net includes interest income earned on our cash, cash equivalents, and investments, and gains and losses from foreign currency remeasurement and foreign currency transactions.

Three Months Ended January 31, Six Months Ended January 31,

2022 2021 Change 2022 2021 Change

Amount Amount Amount % Amount Amount Amount %

(dollars in millions)

Other income (expense), net $ (0.1) $ (0.5) $ 0.4 (80.0) % $ (1.7) $ 1.9 $ (3.6) (189.5) %

The change in other income (expense), net for the three months ended October 31, 2021 compared to the same period in 2020 was primarily due to foreign currency remeasurement and transaction losses for the three months ended October 31, 2021 compared to foreign currency remeasurement and transaction gains for the same period in 2020.

The change in other income (expense), net for the three months ended January 31, 2022 compared to the same period in 2021 was primarily due to a decrease in foreign currency transaction losses.

The change in other income (expense), net for the six months ended January 31, 2022 compared to the same period in 2021 was primarily due to an increase in foreign currency remeasurement losses.

Table of Content

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We maintain a full valuation allowance for domestic and certain foreign deferred tax assets, including net operating loss carryforwards and certain domestic tax credits.

In prior years, we reorganized our corporate structure and intercompany relationships to more closely align with the international nature of our business activities.

Our corporate structure has caused, and may continue to cause, disproportionate relationships between our overall effective tax rate and other jurisdictional measures.

Three Months Ended October 31, Change

2021 2020 Amount %

Our valuation allowance has caused, and may continue to cause, disproportionate relationships between our overall effective tax rate and other jurisdictional measures.

Three Months Ended January 31, Change Six Months Ended January 31, Change

2022 2021 Amount % 2022 2021 Amount %

(dollars in millions)

1 unchanged sentence

Effective tax rate (15.7) % (9.5) % (14.6) % (10.5) %

Our income taxes for the three months ended October 31, 2021 and 2020 are primarily due to foreign income taxes in profitable jurisdictions and withholding taxes.

Our effective tax rate varied for the three months ended October 31, 2021 compared to the same period in 2020 primarily due to our valuation allowance.

Our income taxes for the three and six months ended January 31, 2022 and 2021 were primarily due to foreign income taxes in profitable jurisdictions and withholding taxes.

Our effective tax rate varied for the three and six months ended January 31, 2022 compared to the same periods in 2021 primarily due to our valuation allowance.

Refer to Note 13.

1 unchanged sentence

Liquidity and Capital Resources

October 31, 2021 July 31, 2021

January 31, 2022 July 31, 2021

(in millions)

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______________

(1) Current liabilities included net carrying amounts of convertible senior notes of $3.7 billion and $1.6 billion as of October 31, 2021 and July 31, 2021, respectively.

(1) Current liabilities included net carrying amounts of convertible senior notes of $3.7 billion and $1.6 billion as of January 31, 2022 and July 31, 2021, respectively.

Refer to Note 9.

Debt in Part I, Item 1 of this Quarterly Report on Form 10-Q for information on the Notes.

As of October 31, 2021, our total cash, cash equivalents, and investments of $4.4 billion were held for general corporate purposes, of which approximately $938.4 million was held outside of the United States.

As of October 31, 2021, we had no unremitted earnings when evaluating our outside basis difference relating to our U.S.

As of January 31, 2022, our total cash, cash equivalents, and investments of $4.2 billion were held for general corporate purposes, of which approximately $854.2 million was held outside of the United States.

As of January 31, 2022, we had no unremitted earnings when evaluating our outside basis difference relating to our U.S.

investment in foreign subsidiaries.

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Upon conversion of the Notes of a series, we will pay cash equal to the aggregate principal amount of the Notes of such series to be converted, and, at our election, will pay or deliver cash and/or shares of our common stock for the amount of our conversion obligation in excess of the aggregate principal amount of the Notes of such series being converted.

The sale price condition for the Notes was met during the fiscal quarter ended October 31, 2021, and as a result, holders may convert their Notes at any time during the fiscal quarter ending January 31, 2022.

The sale price condition for the Notes was met during the fiscal quarter ended January 31, 2022, and as a result, holders may convert their Notes at any time during the fiscal quarter ending April 30, 2022.

If all of the holders of the Notes converted their Notes during this period, we would be obligated to settle the $3.7 billion principal amount of the Notes in cash.

We believe that our cash provided by operating activities, our existing cash, cash equivalents and investments, and existing sources of and access to financing will be sufficient to meet our anticipated cash needs should the holders choose to convert their Notes during the fiscal quarter ending January 31, 2022.

As of October 31, 2021, substantially all of our Notes remained outstanding.

As of January 31, 2022, substantially all of our Notes remained outstanding.

Refer to Note 9.

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In September 2018, we entered into a credit agreement (the “Credit Agreement”) that provides for a $400.0 million unsecured revolving credit facility (the “Credit Facility”), with an option to increase the amount of the credit facility up to an additional $350.0 million, subject to certain conditions.

As of October 31, 2021, there were no amounts outstanding and we were in compliance with all covenants under the Credit Agreement.

As of January 31, 2022, there were no amounts outstanding and we were in compliance with all covenants under the Credit Agreement.

Refer to Note 9.

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The expiration date of this repurchase authorization was extended to December 31, 2022, and our repurchase program may be suspended or discontinued at any time.

As of October 31, 2021, $1.0 billion remained available for future share repurchases under this repurchase program.

As of January 31, 2022, $450.0 million remained available for future share repurchases under this repurchase program.

Refer to Note 11.

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We have entered into various non-cancelable operating leases primarily for our facilities with original lease periods expiring through the year ending July 31, 2028, with the most significant leases relating to corporate headquarters in Santa Clara, California.

As of October 31, 2021, we have total of $363.9 million operating lease obligations recorded on our condensed consolidated balance sheet.

During the three months ended October 31, 2021, we entered into an agreement to purchase 4.6 acres of land adjacent to our headquarters for $38.9 million in cash.

If consummated, the transaction would be expected to close during our fiscal quarter ending January 31, 2022.

As of October 31, 2021, our purchase obligations including commitments of products and components with our manufacturing partners and component suppliers, as well as minimum or fixed purchase commitments for our use of certain cloud and other services with third-party providers, totaled $1.9 billion.

As of January 31, 2022, we have total of $344.5 million operating lease obligations recorded on our condensed consolidated balance sheet.

As of January 31, 2022, our purchase obligations including commitments of products and components with our manufacturing partners and component suppliers, as well as minimum or fixed purchase commitments for our use of certain cloud and other services with third-party providers, totaled $2.6 billion.

Refer to Note 10.

Commitments and Contingencies in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information on these commitments,

The following table summarizes our cash flows for the three months ended October 31, 2021 and 2020:

Three Months Ended October 31,

The following table summarizes our cash flows for the six months ended January 31, 2022 and 2021:

Six Months Ended January 31,

(in millions)

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Net cash used in investing activities (504.2) (1,270.6)

Net cash provided by (used in) financing activities 38.7 (464.5)

Net cash used in financing activities (519.8) (469.9)

Net increase (decrease) in cash, cash equivalents, and restricted cash $ 47.5 $ (841.1)

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We believe that our cash flow from operations with existing cash and cash equivalents will be sufficient to meet our anticipated cash needs for at least the next 12 months and thereafter for the foreseeable future.

Our future capital requirements will depend on many factors including our growth rate, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced products and subscription and support offerings, the costs to acquire or invest in complementary businesses and technologies, the costs to ensure access to adequate manufacturing capacity, the investments in our infrastructure to support the adoption of our cloud-based subscription offerings, the repayment obligations associated with our Notes, the investments in our new corporate headquarters, the continuing market acceptance of our products and subscription and support offerings, and macroeconomic events such as COVID-19.

Our future capital requirements will depend on many factors, including our growth rate, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced products and subscription and support offerings, the costs to acquire or invest in complementary businesses and technologies, the costs to ensure access to adequate manufacturing capacity, the investments in our infrastructure to support the adoption of our cloud-based subscription offerings, the repayment obligations associated with our Notes, the investments in our corporate headquarters, the continuing market acceptance of our products and subscription and support offerings, and macroeconomic events such as COVID-19.

In addition, from time to time we may incur additional tax liability in connection with certain corporate structuring decisions.

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Our largest source of cash provided by our operations is receipts from our product revenue and subscription and support revenue.

Cash provided by operating activities during the three months ended October 31, 2021 was $588.9 million, an increase of $54.0 million compared to the same period in 2020.

The increase was primarily due to growth of our business as reflected by an increase in billings, and an increase in collections during the three months ended October 31, 2021, partially offset by higher cash expenditure to support our business growth.

Table of Content

Cash provided by operating activities during the six months ended January 31, 2022 was $1,071.5 million, an increase of $172.1 million compared to the same period in 2021.

The increase was primarily due to growth of our business as reflected by an increase in billings, and an increase in collections during the six months ended January 31, 2022, partially offset by higher cash expenditure to support our business growth.

Investing Activities

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We expect to continue such activities as our business grows.

Cash used in investing activities during the three months ended October 31, 2021 was $229.9 million, a decrease of $656.3 million compared to the same period in 2020.

The decrease was primarily due to lower purchases of investments and a decrease in net cash payments for business acquisitions during the three months ended October 31, 2021.

Table of Content

Cash used in investing activities during the six months ended January 31, 2022 was $504.2 million, a decrease of $766.4 million compared to the same period in 2021.

The decrease was primarily due to a decrease in net cash payments for business acquisitions and an increase in proceeds from sales and maturities of investments during the six months ended January 31, 2022.

Financing Activities

Our financing activities have consisted of cash used to repurchase shares of our common stock, payments for tax withholding obligations of certain employees related to the net share settlement of equity awards, and proceeds from sales of shares through employee equity incentive plans.

Cash provided by financing activities during the three months ended October 31, 2021 was $38.7 million, a change of $503.2 million compared to cash used in financing activities of $464.5 million during the same period in 2020.

The change was primarily due to us not repurchasing our common stock during the three months ended October 31, 2021.

Cash used in financing activities during the six months ended January 31, 2022 was $519.8 million, an increase of $49.9 million compared to the same period in 2021.

The increase was primarily due to higher repurchases of our common stock during the six months ended January 31, 2022.

Critical Accounting Estimates

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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our assessment of our exposures to market risk has not changed materially since the presentation set forth in Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended July 31, 2021.

Our assessment of our exposures to market risk has not changed materially from the disclosure set forth in Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended July 31, 2021.

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 2. Management’s Discussion and Analysis