What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-05-20 compared with 2022-02-23 · 102 added, 99 removed, 363 unchanged (36% of the section changed)

28 unchanged sentences

• Results of Operations.

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.

A discussion of the nature and trends in our financial results and an analysis of our financial results comparing the three and nine months ended April 30, 2022 to the three and nine months ended April 30, 2021.

• Liquidity and Capital Resources.

9 unchanged sentences

Network Security:

• Enabling network security through our ML-Powered Next-Generation Firewalls, available in a number of form factors, including physical, virtual, and containerized appliances, as well as a cloud-delivered service.

Network security also

Table of Content

includes our add-on Cloud-Delivered Security Services, such as Threat Prevention, WildFire, URL Filtering, Advanced URL Filtering, DNS Security, IoT Security, GlobalProtect, SD-WAN, Enterprise Data Loss Prevention (“Enterprise DLP”), SaaS Security API and SaaS Security Inline that secure content, applications, users, and devices across our ML-Powered Next-Generation Firewalls, Prisma, and Cortex product lines, to enable best-in-class security across a broad range of applications.

delivered service.

Network security also includes our add-on Cloud-Delivered Security Services, such as Advanced Threat Prevention, Threat Prevention, WildFire, Advanced URL Filtering, DNS Security, IoT Security, GlobalProtect, SD-WAN, Enterprise Data Loss Prevention (“Enterprise DLP”), SaaS Security API, SaaS Security Inline, and AIOps for NGFW.

These services secure content, applications, users, and devices across our ML-Powered Next-Generation Firewalls, Prisma, and Cortex product lines, to enable best-in-class security across a broad range of applications.

Panorama, our network security management solution, available as hardware or virtual machine, can centrally manage all of our firewalls irrespective of their form factor, location, or scale.

Secure Access Service Edge:

• Prisma Access, the industry’s most complete cloud-delivered security platform, together with Prisma SD-WAN, SaaS Security API and SaaS Security Inline, provide a comprehensive Secure Access Service Edge (“SASE”) offering that is used to secure remote workforces and enable the cloud-delivered branch.

• Prisma Access, the industry’s most complete cloud-delivered security platform, together with Prisma SD-WAN, provide a comprehensive Secure Access Service Edge (“SASE”) offering that is used to secure remote workforces and enable the cloud-delivered branch.

Prisma Access’ integration with the recently announced Okyo Garde Enterprise Edition extends SASE to protect the home networks of work-from-home employees.

Cloud Security:

• Enabling cloud security through our Prisma security offerings.

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.

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

For customers deploying virtual firewalls in cloud environments, VM-Series and CN-Series enforce in-line network security in multi- and hybrid-cloud environments.

Security Analytics and Automation:

• Delivering the next generation of endpoint security, security analytics and security automation solutions through our Cortex portfolio.

These include our industry-leading extended detection and response platform Cortex XDR to prevent, detect, and respond to complex cybersecurity attacks, Cortex XSOAR for security orchestration, automation, and response (“SOAR”), Cortex Xpanse for attack surface management (“ASM”) and Cortex Data Lake allowing our customers to collect and analyze large amounts of context-rich data across endpoints, networks, and clouds.

• Delivering the next generation of endpoint security, vulnerability management, security analytics and automation solutions through our Cortex portfolio.

These include our industry-leading Cortex XDR to prevent, detect, and respond to complex cybersecurity attacks, Cortex XSOAR for security orchestration, automation, and response (“SOAR”), Cortex Xpanse for attack surface management (“ASM”) and Cortex Data Lake allowing our customers to collect and analyze large amounts of context-rich data across endpoints, networks, and clouds.

We have also recently announced the limited availability of Cortex XSIAM, our broader security intelligence and automation platform to deliver on the vision of autonomous security operations.

These products are delivered as software or SaaS subscriptions.

2 unchanged sentences

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

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%.

For the third quarter of fiscal 2022 and 2021, total revenue was $1.4 billion and $1.1 billion, respectively, representing year-over-year growth of 29.1%.

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

As of April 30, 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.

1 unchanged sentence

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 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%.

Our product revenue grew to $351.5 million, or 25.3% of total revenue, for the third quarter of fiscal 2022, representing year-over-year growth of 21.7%.

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.

2 unchanged sentences

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 $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 subscription and support revenue grew to $1.0 billion, or 74.7% of total revenue, for the third quarter of fiscal 2022, representing year-over-year growth of 31.9%.

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.

When end-customers purchase our physical, virtual, or container firewall appliances, or certain cloud offerings they typically purchase support in order to receive ongoing security updates, upgrades, bug fixes, and repairs.

In addition to the subscriptions purchased with these appliances, end-customers may also purchase other subscriptions on a per-user, per-endpoint, or capacity-based basis.

We also offer professional services, including incident response, risk management, and digital forensic services.

We continue to invest in innovation and acquire businesses as we evolve and further extend the capabilities of our portfolio, as we believe that innovation and timely development of new features and products are essential to meeting the needs of our end-

In addition to the subscriptions purchased with these appliances, end-customers may also purchase other subscriptions on

Table of Content

customers and improving our competitive position.

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.

a per-user, per-endpoint, or capacity-based basis.

We also offer professional services, including incident response, risk management, and digital forensic services.

For example, in February 2022, we introduced PAN-OS 10.2 Nebula, the latest upgrade of our industry leading PAN-OS software that collects, analyzes, and interprets potential zero-day threats using deep learning in real time, resulting in faster detection and prevention of more evasive threats.

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.

4 unchanged sentences

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 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 third quarter of fiscal 2022 and could extend to future quarters.

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 our offices for a set number of days per week or completely remotely, we have not experienced significant disruptions in our work operations.

We are conducting business as usual with modifications to employee travel and hold some marketing events virtually.

We expect these changes will substantially remain in effect in the fourth 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.

11 unchanged sentences

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

January 31, 2022 July 31, 2021

April 30, 2022 July 31, 2021

(in millions)

1 unchanged sentence

Cash, cash equivalents, and investments $ 4,589.3 $ 3,789.4

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

Three Months Ended April 30, Nine Months Ended April 30,

2022 2021 2022 2021

19 unchanged sentences

We calculate billings in the following manner:

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

Three Months Ended April 30, Nine Months Ended April 30,

2022 2021 2022 2021

14 unchanged sentences

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:

Six Months Ended January 31,

Nine Months Ended April 30,

(in millions)

9 unchanged sentences

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

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

Three Months Ended April 30, Nine Months Ended April 30,

2022 2021 2022 2021

22 unchanged sentences

(6.8) (0.5) % (41.0) (3.8) % (20.5) (0.5) % (121.9) (4.0) %

Other income (expense), net (0.1) — % (0.5) (0.1) % (1.7) (0.1) % 1.9 0.1 %

Other income, net 1.9 0.1 % 1.0 0.1 % 0.2 — % 2.9 0.1 %

Loss before income taxes (52.5) (3.8) % (150.4) (14.0) % (224.5) (5.7) % (362.7) (11.9) %

Provision for income taxes 12.7 1.0 % 12.3 1.2 % 25.1 1.0 % 22.2 1.1 %

Provision for (benefit from) income taxes 20.7 1.5 % (5.3) (0.5) % 45.8 1.1 % 16.9 0.6 %

Net loss $ (73.2) (5.3) % $ (145.1) (13.5) % $ (270.3) (6.8) % $ (379.6) (12.5) %

1 unchanged sentence

(1) Includes share-based compensation as follows:

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

Three Months Ended April 30, Nine Months Ended April 30,

2022 2021 2022 2021

20 unchanged sentences

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

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

Three Months Ended April 30, Nine Months Ended April 30,

2022 2021 Change 2022 2021 Change

2 unchanged sentences

Product $ 351.5 $ 288.9 $ 62.6 21.7 % $ 955.0 $ 780.9 $ 174.1 22.3 %

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.

Product revenue for the three and nine months ended April 30, 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

3 unchanged sentences

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 January 31, Six Months Ended January 31,

Three Months Ended April 30, Nine Months Ended April 30,

2022 2021 Change 2022 2021 Change

4 unchanged sentences

Total subscription and support $ 1,035.2 $ 785.0 $ 250.2 31.9 % $ 2,996.0 $ 2,255.9 $ 740.1 32.8 %

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

Subscription and support revenue increased for the three and nine months ended April 30, 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.

1 unchanged sentence

Revenue by Geographic Theater

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

Three Months Ended April 30, Nine Months Ended April 30,

2022 2021 Change 2022 2021 Change

6 unchanged sentences

$ 1,386.7 $ 1,073.9 $ 312.8 29.1 % $ 3,951.0 $ 3,036.8 $ 914.2 30.1 %

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.

With respect to geographic theaters, the increase in revenue for the three and nine months ended April 30, 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 nine months ended April 30, 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

3 unchanged sentences

Cost of product revenue primarily includes costs paid to our manufacturing partners for procuring components and manufacturing our products.

Our cost of product revenue also includes personnel costs, which consist of salaries, benefits, bonuses, share-based compensation, and travel and entertainment associated with our operations organization, amortization of intellectual property licenses, product testing costs, shipping and tariff costs, and allocated shared costs.

Shared costs consist of certain facilities, depreciation, benefits, recruiting, and information technology costs that we allocate based on headcount.

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

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

Three Months Ended April 30, Nine Months Ended April 30,

2022 2021 Change 2022 2021 Change

3 unchanged sentences

Number of employees at period end 147 129 18 14.0 % 147 129 18 14.0 %

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.

Cost of product revenue increased for the three and nine months ended April 30, 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

Cost of subscription and support revenue includes personnel costs, which consist of salaries, benefits, bonuses, share-based compensation, and travel and entertainment for our global customer support and technical operations organizations, customer support and repair costs, third-party professional services costs, data center and cloud hosting service costs, amortization of acquired intangible assets and capitalized software development costs, and allocated shared costs.

Shared costs consist of certain facilities, depreciation, benefits, recruiting, and information technology costs that we allocate based on headcount.

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 January 31, Six Months Ended January 31,

Three Months Ended April 30, Nine Months Ended April 30,

2022 2021 Change 2022 2021 Change

3 unchanged sentences

Number of employees at period end 2,400 1,871 529 28.3 % 2,400 1,871 529 28.3 %

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.

Cost of subscription and support revenue increased for the three and nine months ended April 30, 2022 compared to the same periods in 2021, primarily due to p ersonnel costs, which grew $34.6 million to $142.5 million for the three months ended April 30, 2022 compared to the same period in 2021, and grew $108.2 million to $403.9 million for the nine months ended April 30, 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, cloud hosting service costs to support our cloud-based subscription offerings, and shared costs.

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.

1 unchanged sentence

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

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

Three Months Ended April 30, Nine Months Ended April 30,

2022 2021 2022 2021

5 unchanged sentences

Table of Content

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.

Product gross margin decreased for the three and nine months ended April 30, 2022 compared to the same periods in 2021, primarily due to higher costs related to our product offerings in both periods, primarily driven by supply chain challenges.

Subscription and support gross margin increased for the three months ended April 30, 2022 compared to the same period in 2021, primarily due to our growth in subscription and support revenue, which outpaced the subscription and support costs.

Subscription and support gross margin was relatively flat for the nine months ended April 30, 2022 compared to the same period in 2021.

Operating Expenses

6 unchanged sentences

Research and development expense consists primarily of personnel costs.

Research and development expense also includes prototype-related expenses and allocated shared costs.

Research and development expense also includes prototype-related expenses and shared costs.

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 January 31, Six Months Ended January 31,

Three Months Ended April 30, Nine Months Ended April 30,

2022 2021 Change 2022 2021 Change

3 unchanged sentences

Number of employees at period end 3,047 2,425 622 25.6 % 3,047 2,425 622 25.6 %

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 .

Research and development expense increased for the three and nine months ended April 30, 2022 compared to the same periods in 2021 primarily due to personnel costs, which grew $25.9 million to $277.8 million for the three months ended April 30, 2022 compared to the same period in 2021, and grew $175.0 million to $830.9 million for the nine months ended April 30, 2022 compared to the same period in 2021 .

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

The increase in research and development expense for both periods was further driven by increased shared costs and third-party product development costs.

Sales and Marketing

Sales and marketing expense consists primarily of personnel costs, including commission expense.

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

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

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 January 31, Six Months Ended January 31,

Three Months Ended April 30, Nine Months Ended April 30,

2022 2021 Change 2022 2021 Change

3 unchanged sentences

Number of employees at period end 4,908 4,237 671 15.8 % 4,908 4,237 671 15.8 %

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

Sales and marketing expense increased for the three and nine months ended April 30, 2022 compared to the same periods in 2021, primarily due to personnel costs, which grew $70.8 million to $412.9 million for the three months ended April 30, 2022 compared to the same period in 2021, and grew $238.3 million to $1,197.1 million for the nine months ended April 30, 2022 compared to the same period in 2021.

The increase in personnel costs in both periods was primarily due to headcount growth and increased travel and entertainment expenses.

The increase in both periods was also driven by an increase in costs associated with go-to-market initiatives, including advertising.

Table of Content

other consulting costs.

General and Administrative

General and administrative expense consists primarily of personnel costs and 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.

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 January 31, Six Months Ended January 31,

Three Months Ended April 30, Nine Months Ended April 30,

2022 2021 Change 2022 2021 Change

3 unchanged sentences

Number of employees at period end 1,368 1053 315 29.9 % 1,368 1,053 315 29.9 %

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.

General and administrative expense was relatively flat for the three months ended April 30, 2022 compared to the same period in 2021, primarily due to an increase in personnel costs, offset by a decrease in professional services expense.

Personnel costs increased $10.1 million to $68.4 million for the three months ended April 30, 2022, primarily due to headcount growth, partially offset by share-based compensation related to accelerated vesting of equity awards incurred in connection with acquisitions during the three months ended April 30, 2021, which did not recur in the three months ended April 30, 2022.

General and administrative expense increased for the nine months ended April 30, 2022 compared to the same period in 2021, primarily due to personnel costs, which increased $21.1 million to $205.1 million for the nine months ended April 30, 2022, partially offset by a decrease in acquisition-related costs.

The increase in personnel costs in the nine months ended April 30, 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 January 31, Six Months Ended January 31,

Three Months Ended April 30, Nine Months Ended April 30,

2022 2021 Change 2022 2021 Change

2 unchanged sentences

Interest expense $ 6.8 $ 41.0 $ (34.2) (83.4) % $ 20.5 $ 121.9 $ (101.4) (83.2) %

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.

Interest expense decreased for the three and nine months ended April 30, 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.

1 unchanged sentence

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

Other Income (Expense), Net

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,

Other Income, Net

Other income, 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 April 30, Nine Months Ended April 30,

2022 2021 Change 2022 2021 Change

1 unchanged sentence

(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 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.

Other income, net $ 1.9 $ 1.0 $ 0.9 90.0 % $ 0.2 $ 2.9 $ (2.7) (93.1) %

The increase in other income, net for the three months ended April 30, 2022 compared to the same period in 2021 was primarily due to increased foreign currency exchange gains.

The decrease in other income, net for the nine months ended April 30, 2022 compared to the same period in 2021 was primarily due to increased losses related to non-designated derivative instruments.

Table of Content

Provision for Income Taxes

Provision for income taxes consists primarily of income taxes in foreign jurisdictions in which we conduct business and withholding taxes.

Provision for (Benefit from) Income Taxes

Provision for (benefit from) income taxes consists primarily of income taxes in foreign jurisdictions in which we conduct business and withholding taxes.

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

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

Three Months Ended April 30, Change Nine Months Ended April 30, Change

2022 2021 Amount % 2022 2021 Amount %

(dollars in millions)

Provision for income taxes $ 12.7 $ 12.3 $ 0.4 3.3 % $ 25.1 $ 22.2 $ 2.9 13.1 %

Provision for (benefit from) income taxes $ 20.7 $ (5.3) $ 26.0 (490.6) % $ 45.8 $ 16.9 $ 28.9 171.0 %

Effective tax rate (39.4) % 3.5 % (20.4) % (4.7) %

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.

Our income taxes for the three and nine months ended April 30, 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 nine months ended April 30, 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

January 31, 2022 July 31, 2021

April 30, 2022 July 31, 2021

(in millions)

6 unchanged sentences

______________

(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.

(1) Current liabilities included net carrying amounts of convertible senior notes of $3.7 billion and $1.6 billion as of April 30, 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 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.

As of April 30, 2022, our total cash, cash equivalents, and investments of $4.6 billion were held for general corporate purposes, of which approximately $993.8 million was held outside of the United States.

As of April 30, 2022, we had no unremitted earnings when evaluating our outside basis difference relating to our U.S.

investment in foreign subsidiaries.

6 unchanged sentences

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 January 31, 2022, and as a result, holders may convert their Notes at any time during the fiscal quarter ending April 30, 2022.

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

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

As of April 30, 2022, substantially all of our Notes remained outstanding.

Refer to Note 9.

1 unchanged sentence

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

As of April 30, 2022, there were no amounts outstanding and we were in compliance with all covenants under the Credit Agreement.

Refer to Note 9.

3 unchanged sentences

In February 2019, our board of directors authorized a $1.0 billion share repurchase program.

In December 2020 and August 2021, our board of directors authorized an additional $700.0 million and $676.1 million increase, respectively, bringing the total authorization under this share repurchase program to $2.4 billion.

In December 2020 and August 2021, our board of directors authorized additional $700.0 million and $676.1 million increases, respectively, bringing the total authorization under this share repurchase program to $2.4 billion.

Repurchases will be funded from available working capital and may be made at management’s discretion from time to time.

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

As of April 30, 2022, $450.0 million remained available for future share repurchases under this repurchase program.

Refer to Note 11.

2 unchanged sentences

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 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.

As of April 30, 2022, we have total of $337.4 million operating lease obligations recorded on our condensed consolidated balance sheet.

As of April 30, 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 $2.5 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 six months ended January 31, 2022 and 2021:

Six Months Ended January 31,

The following table summarizes our cash flows for the nine months ended April 30, 2022 and 2021:

Nine Months Ended April 30,

(in millions)

13 unchanged sentences

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 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.

Cash provided by operating activities during the nine months ended April 30, 2022 was $1.5 billion, an increase of $283.8 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 nine months ended April 30, 2022, partially offset by higher cash expenditure to support our business growth.

Investing Activities

1 unchanged sentence

We expect to continue such activities as our business grows.

Cash used in investing activities during the nine months ended April 30, 2022 was $461.3 million, a decrease of $1.0 billion compared to the same period in 2021.

The decrease was primarily due to a decrease in net cash payments for business acquisitions, a

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.

decrease in purchases of investments, and an increase in proceeds from sales and maturities of investments during the nine months ended April 30, 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 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.

Cash used in financing activities during the nine months ended April 30, 2022 was $453.5 million, an decrease of $314.9 million compared to the same period in 2021.

The decrease was primarily due to a decrease in repurchases of our common stock during the nine months ended April 30, 2022.

Critical Accounting Estimates

3 unchanged sentences

We evaluate our estimates and assumptions on an ongoing basis.

Actual results could differ materially from those estimates due to risks and uncertainties, including uncertainty in the economic environment due to the global impact of COVID-19.

Actual results could differ materially from those estimates due to risks and uncertainties, including uncertainty in the economic environment due to the global impact of events such as COVID-19.

To the extent that there are material differences between these estimates and our actual results, our future financial statements will be affected.

9 unchanged sentences

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