What changed in this filing

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Item 1A. Risk Factors

2022-02-23 compared with 2021-11-19 · 33 added, 45 removed, 784 unchanged (9% of the section changed)

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Our business is subject to numerous risks and uncertainties, including those highlighted in Part II, Item 1A titled “Risk Factors.” These risks include, but are not limited to, the following:

• The ongoing global COVID-19 outbreak could harm our business and results of operations.

• The ongoing global COVID-19 pandemic could harm our business and results of operations.

• Our business and operations have experienced growth in recent periods, and if we do not effectively manage any future growth or are unable to improve our systems, processes, and controls, our operating results could be adversely affected.

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Risks Related to Our Business and Our Industry

The ongoing global COVID-19 outbreak could harm our business and results of operations.

The ongoing global COVID-19 pandemic could harm our business and results of operations.

The novel strain of COVID-19 identified in late 2019 has spread globally, including within the United States, and has resulted in government authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place orders, and shutdowns.

This outbreak has negatively impacted and will likely continue to have a negative impact on, worldwide economic activity and financial markets and has impacted, and will further impact, our workforce and operations, the operations of our end-customers, and those of our respective channel partners, vendors and suppliers.

This pandemic has negatively impacted and will likely continue to have a negative impact on, worldwide economic activity and financial markets and has impacted, and will further impact, our workforce and operations, the operations of our end-customers, and those of our respective channel partners, vendors and suppliers.

In light of the uncertain and rapidly evolving situation relating to the spread of this virus and various government restrictions and guidelines, we have taken measures intended to mitigate the spread of the virus and minimize the risk to our employees, channel partners, end-customers, and the communities in which we operate.

These measures include transitioning our employee population to work remotely from home beginning in March 2020, which continued through the first quarter of fiscal 2022 and may continue into future quarters.

These measures include transitioning our employee population to work remotely from home beginning in March 2020, which continued through the second quarter of fiscal 2022 and may continue into future quarters.

Although we continue to monitor the situation and may adjust our current policies as more information and public health guidance become available, including progress made through vaccinations, these precautionary measures that we have adopted could negatively affect our customer success efforts, sales and marketing efforts, delay and lengthen our sales cycles, and create operational or other challenges, any of which could harm our business and results of operations.

In addition, COVID-19 may continue to disrupt the operations of our end-customers and channel partners for an indefinite period of time, including as a result of travel restrictions and/or business shutdowns, all of which could negatively impact our business and results of operations, including cash flows.

In addition, COVID-19 will likely continue to disrupt the operations of our end-customers and channel partners for an indefinite period of time, including as a result of travel restrictions and/or business shutdowns, all of which could negatively impact our business and results of operations, including cash flows.

The ongoing impact of COVID-19 is fluid and uncertain, but it has caused and may continue to cause various negative effects, including an inability to meet with our existing or potential end-customers;

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and changes in the demand for our products, which has caused us to reprioritize our engineering and research and development efforts and make changes to our original offering roadmap.

We have also seen supply chain challenges increase, including chip and component shortages, and we do not have sufficient inventory of certain of our products to promptly meet customer demand.

We have also seen supply chain challenges increase significantly, including chip and component shortages (in some cases, attributable to labor shortages), and we do not have sufficient inventory of certain of our products to promptly meet customer demand.

As a result, we have experienced extended sales cycles and increased costs for chips and components compared to historic levels;

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As a result, our employee headcount has increased significantly, and we expect it to continue to grow over the next year.

For example, from the end of fiscal 2021 to the end of the first quarter of fiscal 2022, our headcount increased from 10,473 to 11,098 employees.

For example, from the end of fiscal 2021 to the end of the second quarter of fiscal 2022, our headcount increased from 10,473 to 11,527 employees.

In addition, as we have grown, our number of end-customers has also increased significantly, and we have increasingly managed more complex deployments of our products and subscriptions with larger end-customers.

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The multinational efforts to contain the spread of COVID-19 have had a significant adverse effect on the global macroeconomic environment that continues to cause economic uncertainty.

In addition, the instability in the global credit markets, falling demand for oil and other commodities, uncertainties related to the timing of the lifting of governmental restrictions to mitigate the spread of COVID-19, changes in public policies such as domestic and international regulations, taxes, or international trade agreements, international trade disputes, government shutdowns, geopolitical turmoil and other disruptions to global and regional economies and markets continue to add uncertainty to global economic conditions.

In addition, the instability in the global credit markets, shortages and delays related to the global supply chain challenges, uncertainties related to the timing of the lifting of governmental restrictions to mitigate the spread of COVID-19, changes in public policies, such as domestic and international regulations, taxes, or international trade agreements, international trade disputes, government shutdowns, geopolitical turmoil and other disruptions to global and regional economies and markets continue to add uncertainty to global economic conditions.

These adverse conditions could result in reductions in sales of our products and subscriptions, longer sales cycles, reductions in subscription or contract duration and value, slower adoption of new technologies, increased costs for the chips and components to manufacture our products, and increased price competition.

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Our revenue growth rate in recent periods may not be indicative of our future performance.

We experienced revenue growth rates of 31.9% and 22.6% in the first quarter of fiscal 2022 and the first quarter of fiscal 2021, respectively.

We experienced revenue growth rates of 30.6% and 23.6% in the six months ended January 31, 2022 and the six months ended January 31, 2021, respectively.

Our revenue for any prior quarterly or annual period should not be relied upon as an indication of our future revenue or revenue growth for any future period.

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Other than fiscal 2012, we have incurred losses in all fiscal years since our inception.

As a result, we had an accumulated deficit of $1.5 billion as of October 31, 2021.

As a result, we had an accumulated deficit of $1.6 billion as of January 31, 2022.

We anticipate that our operating expenses will continue to increase in the foreseeable future as we continue to grow our business.

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We rely on revenue from subscription and support offerings, and because we recognize revenue from subscription and support over the term of the relevant service period, downturns or upturns in sales of these subscription and support offerings are not immediately reflected in full in our operating results.

Subscription and support revenue accounts for a significant portion of our revenue, comprising 76.3% of total revenue in the first quarter of fiscal 2022 and 74.9% of total revenue in the first quarter of fiscal 2021.

Subscription and support revenue accounts for a significant portion of our revenue, comprising 76.5% of total revenue in the six months ended January 31, 2022 and 74.9% of total revenue in the six months ended January 31, 2021.

Sales of new or renewal subscription and support contracts may decline and fluctuate as a result of a number of factors, including end-customers’ level of satisfaction with our products and subscriptions (including newly integrated products and services), the prices of our products and subscriptions, the prices of products and services offered by our competitors, and reductions in our end-customers’ spending levels.

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However, we may not receive significant revenue from these investments in the near future, if at all, or these investments may not yield the expected benefits, either of which could adversely affect our business and operating results.

We may acquire other businesses, which could subject us to adverse claims or liabilities, require significant management attention, disrupt our business, adversely affect our operating results, may not result in the expected benefits of such acquisitions and may dilute stockholder value.

As part of our business strategy, we may acquire or make investments in complementary companies, products, or technologies.

We acquire other businesses, which could subject us to adverse claims or liabilities, require significant management attention, disrupt our business, adversely affect our operating results, may not result in the expected benefits of such acquisitions and may dilute stockholder value.

As part of our business strategy, we acquire and make investments in complementary companies, products, or technologies.

The identification of suitable acquisition candidates is difficult, and we may not be able to complete such acquisitions on favorable terms, if at all.

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For example, we have experienced, and could continue to experience, increased difficulties in obtaining a sufficient amount of materials in the semiconductor market, which could reduce our flexibility to react to product mix changes and unforecasted orders.

In addition, we have experienced increased costs because of these shortages.

Further, we do not have volume purchase contracts with any of our component suppliers, and they could cease selling to us at any time.

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left the E.U.

The rules governing the new relationship between the E.U.

were set out in the E.U.-U.K.

Trade and Cooperation Agreement (i.e., the Brexit deal) and came into force on January 1, 2021.

and the EU/UK Trade and Cooperation Agreement came into force on January 1, 2021.

At this time, we cannot predict the impact that the Brexit deal and any future agreements will have on our business.

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We have entered into forward contracts in an effort to reduce our foreign currency exchange exposure related to our foreign currency denominated expenditures.

As of October 31, 2021, the total notional amount of our outstanding foreign currency forward contracts was $564.0 million.

As of January 31, 2022, the total notional amount of our outstanding foreign currency forward contracts was $584.4 million.

For more information on our hedging transactions, refer to Note 6.

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A material portion of our sales is derived through our distributors.

For the first quarter of fiscal 2022, three distribut ors individually represented 10% or more of our total revenue, and in the aggregate represented 54.1% of our total revenue.

A s of October 31, 2021, two distrib utors individually represented 10% or more of our gross accounts receivable, and in the aggregate represented 35.2% of our gross accounts receivable.

For the six months ended January 31, 2022, three distributors individually represented 10% or more of our total revenue, and in the aggregate represented 54.4% of our total revenue.

As of January 31, 2022, four distrib utors individually represented 10% or more of our gross accounts receivable, and in the aggregate represented 53.9% of our gross accounts receivable.

Additionally, to the degree that turmoil in the credit markets makes it more difficult for some customers to obtain financing, those customers’ ability to pay could be adversely impacted, which in turn could have a material adverse impact on our business, operating results, and financial condition.

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If we or our channel partners do not effectively assist our end-customers in deploying our products and subscriptions, succeed in helping our end-customers quickly resolve post-deployment issues, or provide effective ongoing support, our ability to sell additional products and subscriptions to existing end-customers would be adversely affected and our reputation with potential end-customers could be damaged.

While we have been able to meet increased demand for support services in the first quarter of fiscal 2022, failure to do so in the future could have a material adverse effect on our business.

While we have been able to meet increased demand for support services in the six months ended January 31, 2022, failure to do so in the future could have a material adverse effect on our business.

Many larger enterprise, service provider, and government entity end-customers have more complex networks and require higher levels of support than smaller end-customers.

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The enforcement of the CCPA by the California Attorney General commenced on July 1, 2020.

The CCPA has been amended on multiple occasions and the California Attorney General has issued initial and revised regulations that also govern the CCPA, which could be subject to additional modifications.

It remains unclear what, if any, additional modifications will be made to this legislation or how it will be interpreted and enforced.

The CCPA has been amended on multiple occasions and the California Attorney General has issued initial and revised regulations that also govern the CCPA.

It remains unclear how this legislation will be interpreted and enforced.

The effects of the CCPA potentially are significant, however, and may require us to modify our data processing practices and policies and to incur substantial costs and expenses for compliance.

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Each of these privacy, security, and data protection laws and regulations, and any other such changes or new laws or regulations, could impose significant limitations, or require changes to our business model or practices or growth strategy, which may increase our compliance expenses and make our business more costly or less efficient to conduct.

Our actual or perceived failure to comply with applicable laws and regulations or other obligations to which we are now or which we may be subject relating to personal data, or to protect personal data from unauthorized acquisition, use or other processing, could result in consequences such as enforcement actions and regulatory investigations against us, fines, public censure, claims for

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damages by end-customers and other affected individuals, damage to our reputation and loss of goodwill (both in relation to existing end-customers and prospective end-customers), any of which could have a material adverse effect on our operations, financial performance, and business.

end-customers and prospective end-customers), any of which could have a material adverse effect on our operations, financial performance, and business.

Evolving and changing definitions of personal data and personal information, within the E.U., the United States, and elsewhere, especially relating to classification of Internet Protocol (“IP”) addresses, machine identification, location data, and other information, may limit or inhibit our ability to operate or expand our business, including limiting strategic partnerships that may involve the sharing or uses of data, and may require significant expenditures and efforts in order to comply.

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Further, the determination of our worldwide provision for or benefit from income taxes and other tax liabilities requires significant judgment by management, and there are transactions where the ultimate tax determination is uncertain.

Although we believe that our estimates are reasonable, the ultimate tax outcome may differ from the amounts recorded in our condensed consolidated financial statements and may materially affect our financial results in the period or periods for which such determination is made.

Although we believe that our estimates are reasonable, the ultimate tax outcome may differ from the amounts recorded on our condensed consolidated financial statements and may materially affect our financial results in the period or periods for which such determination is made.

In addition, our future income tax obligations could be adversely affected by changes in, or interpretations of, tax laws in the United States or in other jurisdictions in which we operate.

If our estimates or judgments relating to our critical accounting policies are based on assumptions that change or prove to be incorrect, our operating results could fall below our publicly announced guidance or the expectations of securities analysts and investors, resulting in a decline in the market price of our common stock.

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

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported on our 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, the results of which form the basis for making judgments about the carrying values of assets, liabilities, equity, revenue, and expenses that are not readily apparent from other sources.

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a change of control of Palo Alto Networks, Inc.) before the maturity date, (2) upon conversion of our Notes, or (3) to repay our Notes in cash at their maturity, unless earlier converted or repurchased.

Effective November 1, 2021 through January 31, 2022, all of the 2023 Notes and 2025 Notes are convertible.

Effective February 1, 2022 through April 30, 2022, all of the 2023 Notes and 2025 Notes are convertible.

If all of the Noteholders decided to convert their notes, we would be obligated to pay $3.7 billion to the Noteholders.

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The market price of our common stock has been volatile since our initial public offering (“IPO”) in July 2012.

The reported high and low sales prices of our common stock during the last 12 months have ranged from $253.00 to $523.72, as measured through November 12, 2021.

The reported high and low sales prices of our common stock during the last 12 months have ranged from $311.56 to $572.67, as measured through February 14, 2022.

The market price of our common stock may fluctuate widely in response to various factors, some of which are beyond our control.

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We cannot guarantee that our share repurchase program will be fully consummated, or that it will enhance shareholder value, and share repurchases could affect the price of our common stock.

As of October 31, 2021, we had $1.0 billion available under our share repurchase program, which will expire on December 31, 2022.

As of January 31, 2022, we had $450.0 million available under our share repurchase program, which will expire on December 31, 2022.

Such share repurchase program may be suspended or discontinued by the Company at any time without prior notice.

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In addition, the program may be suspended or terminated at any time, which may result in a decrease in the price of our common stock.

We are subject to risks associated with our strategic investments.

Impairments in the value of our investments could negatively impact our financial results.

In July 2017, we formed the $20.0 million Palo Alto Networks Venture Fund.

The fund is aimed at seed-, early-, and growth-stage security companies with a cloud-based application approach.

We may not realize a return on our capital investments.

Many such private companies generate net losses and the market for their products, services or technologies may be slow to develop, and, therefore, are dependent on the availability of later rounds of financing from banks or investors on favorable terms to continue their operations.

The financial success of our investment in any company is typically dependent on a liquidity event, such as a public offering, acquisition or other favorable market event reflecting appreciation in the cost of our initial investment.

The capital markets for public offerings and acquisitions are dynamic and the likelihood of liquidity events for the companies we have invested in, and intend to invest in, could significantly change.

Further, valuations of privately-held companies are inherently complex due to the lack of readily available market data and as such, the basis for these valuations is subject to the timing and accuracy of the data received from these companies.

If we determine that any of our investments in such companies have experienced a decline in value, we may be required to record an impairment, which could be material and negatively impact our financial results.

All of our investments are subject to a risk of a partial or total loss of investment capital.

We do not intend to pay dividends for the foreseeable future.

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As a result, you may only receive a return on your investment in our common stock if the market price of our common stock increases.

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Our charter documents and Delaware law, as well as certain provisions contained in the indentures governing our Notes, could discourage takeover attempts and lead to management entrenchment, which could also reduce the market price of our common stock.

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• specify that special meetings of our stockholders may be called only by the chairman of our board of directors, our president, our secretary, or a majority vote of our board of directors;

• require the affirmative vote of holders of at least 66 2/3% of the voting power of all of the then outstanding shares of the voting stock, voting together as a single class, to amend the provisions of our amended and restated certificate of incorporation relating to the issuance of preferred stock and management of our business or our amended and restated bylaws;

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incorporation relating to the issuance of preferred stock and management of our business or our amended and restated bylaws;

• authorize our board of directors to amend our bylaws by majority vote;

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See the risk factor entitled “ The issuance of additional stock in connection with financings, acquisitions, investments, our stock incentive plans, the conversion of our Notes or exercise of the related Warrants, or otherwise will dilute all other stockholders .” The holders of our Notes have priority over holders of our common stock, and if we engage in future debt financings, the holders of such additional debt would also have priority over the holders of our common stock.

Current and future indebtedness may also contain terms that,

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among other things, restrict our ability to incur additional indebtedness.

Current and future indebtedness may also contain terms that, among other things, restrict our ability to incur additional indebtedness.

We may also be required to take other actions that would otherwise be in the interests of the debt holders and would require us to maintain specified liquidity or other ratios, any of which could harm our business, operating results, and financial condition.

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In the event that our chief executive officer, chief financial officer, or independent registered public accounting firm determines in the future that our internal control over financial reporting is not effective as defined under Section 404, we could be subject to one or more investigations or enforcement actions by state or federal regulatory agencies, stockholder lawsuits or other adverse actions requiring us to incur defense costs, pay fines, settlements or judgments and causing investor perceptions to be adversely affected and potentially resulting in a decline in the market price of our stock.

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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