What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-09-06 compared with 2021-09-03 · 120 added, 147 removed, 369 unchanged (42% of the section changed)

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• 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.

• Contractual Obligations and Commitments.

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A discussion of expected impacts of impending accounting changes on financial information to be reported in the future.

We empower enterprises, service providers, and government entities to secure all users, applications, data, networks, clouds and devices with comprehensive visibility and context continuously across all locations.

We deliver cybersecurity products covering a broad range of use cases, enabling our end-customers to secure their networks, remote and hybrid workforces, branch locations, and public and private clouds, and to advance their Security Operations Centers (“SOC”).

We believe our portfolio offers advanced prevention and security, while reducing the total cost of ownership for organizations by improving operational efficiency and eliminating the need for siloed point products.

We do this with solutions focused on delivering value in five fundamental areas:

Zero Trust Network Security:

• Enabling zero trust 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.

This also 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.

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.

Cloud Security:

• 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.

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

We empower enterprises, organizations, service providers, and government entities to protect themselves against today’s most sophisticated cyber threats.

Our cybersecurity platforms and services help secure enterprise users, networks, clouds, and endpoints by delivering comprehensive cybersecurity backed by industry leading artificial intelligence and automation.

We are a leading provider of zero trust solutions that start with the next-generation of zero trust network access to secure remote workforces and extend into securing all users, applications and infrastructure with zero trust principles.

Our security solutions are designed to reduce customers’ total cost of ownership by improving operational efficiency and eliminating the need for siloed point products.

Our company focuses on delivering value in five fundamental areas:

Network Security:

• Our network security platform, which includes 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, has been a leader in the industry for ten consecutive years.

Our network security platform also includes our Cloud-Delivered Security Services, such as Threat Prevention, Advanced Threat Prevention, WildFire ® , Advanced URL Filtering, DNS Security, IoT Security, GlobalProtect™, SD-WAN, Enterprise Data Loss Prevention (“Enterprise DLP”), SaaS Security API and SaaS Security Inline.

Through these add-on security services, our customers are able to secure their content, applications, users, and devices across our network security platform as well as the Prisma ® and Cortex ® product lines.

Panorama™, our network security management solution, available as hardware or virtual machine, can centrally manage our network security platform irrespective of 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.

Security Analytics and Automation:

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

• Prisma Access is our next-generation Zero Trust Network Access (“ZTNA”) platform that provides secure network access for all employees with unified policy management and continuous threat inspection.

We have recently introduced ZTNA 2.0, which addresses major shortcomings in the first-generation ZTNA products in the industry (which we refer to as ZTNA 1.0).

Prisma Access delivers granular least-privileged access along with continuous trust verification and security inspection and protects security for all applications and data across the enterprise infrastructure.

Prisma Access, when combined with Prisma SD-WAN, provides a comprehensive single-vendor Secure Access Service Edge (“SASE”) offering that is used to secure remote workforces and enable the cloud-delivered branch.

Cloud Security:

• We enable cloud native security through our Prisma Cloud platform.

As a comprehensive Cloud Native Application Protection Platform (“CNAPP”), Prisma Cloud secures hybrid and multi-cloud environments for applications, data, and the entire cloud native technology stack across the full development lifecycle;

from code to runtime.

For inline network security on multi and hybrid-cloud environments, we also offer our VM-Series and CN-Series Firewall offerings.

Security Operations:

• We deliver 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.

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Threat Intelligence and Security Consulting (Unit 42):

• Enabling security teams with up-to-date threat intelligence and deep cybersecurity expertise before, during and after attacks through our Unit 42 threat research and security consulting team.

• We enable security teams with up-to-date threat intelligence and deep cybersecurity expertise before, during and after attacks through our Unit 42 threat research and security consulting team.

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

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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.

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

As of July 31, 2022, we had end-customers in over 180 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 some of the largest Fortune 100 and Global 2000 companies in the world.

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.

We maintain a field sales force that works closely with our channel partners in developing sales opportunities.

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 $1.1 billion or 26.3% of total revenue for fiscal 2021, representing year-over-year growth of 5.3%.

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.

Our product revenue grew to $1.4 billion or 24.8% of total revenue for fiscal 2022, representing year-over-year growth of 21.7%.

Product revenue is primarily 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.

Our ML-Powered Next-Generation Firewall incorporates our PAN-OS operating system, which provides a consistent set of capabilities across our entire network security product line.

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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 is essential to meeting the needs of our end-customers and improving our competitive position.

We continue to invest in innovation 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-customers and improving our competitive position.

During fiscal 2022, we introduced several new offerings, including:

Cortex XDR 2.5, Next Generation SD-WAN, Prisma Cloud 2.0, Enterprise DLP, 5G Security, IoT Healthcare Security, Prisma Access 2.0 and Complete Zero Trust Network Security.

Additionally, we acquired productive investments that we believe fit well within our long-term strategy.

For example, in September 2020, we acquired Crypsis, which we expect will expand our incident response capabilities and strengthen our Cortex strategy;

in November 2020, we acquired Sinefa, which we expect will extend our Prisma Access offering;

in December 2020, we acquired Expanse, which we expect will enrich our Cortex offerings and provide organizations an integrated view of the enterprise to combine external, internal, and threat data;

and in March 2021, we acquired Bridgecrew, which we expect will expand our Prisma Cloud offering to deliver security across the full application lifecycle.

Prisma Cloud 3.0, Prisma Access 3.0, AIOps for NGFW, PAN-OS 10.2, and Cloud NGFW for AWS.

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.

To manage any future growth effectively, we must continue to improve and expand our information technology and financial infrastructure, our operating and administrative

systems and controls, and our ability to manage headcount, capital, and processes in an efficient manner.

To manage any future growth effectively, we must continue to improve and expand our information technology and financial infrastructure, our operating and administrative systems and controls, and our ability to manage headcount, capital, and processes in an efficient manner.

While these areas present significant opportunities for us, they also pose challenges and risks that we must successfully address in order to sustain the growth of our business and improve our operating results.

For additional information regarding the challenges and risks we face, see the “Risk Factors” section in Part I, Item 1A of this Annual Report on Form 10-K.

Impact of COVID-19 on Our Business

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 continued significant global, social, and business disruption.

As described in “Impacts of COVID-19 on our Business” included in Part I, Item 1 Business in this Annual Report, we have made some changes to our business including instituting a global work-from-home policy beginning in March 2020 and adopting our FLEXWORK initiative in fiscal 2021, which did not incur significant disruptions in our work operations during fiscal 2020 and fiscal 2021.

Impact of COVID-19 and Other Macroeconomic Factors on Our Business

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 our offices for a set number of days per week or completely remotely, we did not experience significant disruption in our work operations during fiscal 2022.

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.

Our focus remains on the safety of our employees, and we strive to protect the health and well-being of the communities in which we operate, in part, by providing technology to our employees, end-customers, and partners to help them do their best work while remote.

Although some end-customers adopted Prisma Access as their secure work-from-home solution for the longer term, there continues to be uncertainty regarding the business outlook due to COVID-19, which may curtail 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 (including 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 I, Item 1A “Risk Factors” in this Form 10-K.

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

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.

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 I, Item 1A “Risk Factors” in this Form 10-K.

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.

In addition, our overall performance depends in part on worldwide economic and geopolitical conditions.

Worsening economic conditions, including inflation, higher interest rates, fluctuations in foreign exchange rates and other changes in economic conditions, may adversely affect our financial performance.

Key Financial Metrics

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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 factors.

Product Revenue

Product revenue is derived primarily from sales of our appliances.

Product revenue also includes revenue derived from software licenses of Panorama and the VM-Series.

Product revenue is derived 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.

Product revenue also includes revenue derived from software licenses of Panorama.

Our appliances and software licenses include a broad set of built-in networking and security features and functionalities.

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Product $ 1,363.1 $ 1,120.3 $ 242.8 21.7 % $ 1,120.3 $ 1,064.2 $ 56.1 5.3 %

Product revenue increased for fiscal 2021 compared to fiscal 2020, largely driven by increases in software sales, reflecting increased demand for our products.

Product revenue increased for fiscal 2022 compared to fiscal 2021 primarily due to increased demand for our new generation of products, which includes customer transition from our legacy products.

Subscription and Support Revenue

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Total subscription and support $ 4,138.4 $ 3,135.8 $ 1,002.6 32.0 % $ 3,135.8 $ 2,344.2 $ 791.6 33.8 %

Subscription and support revenue increased year-over-year for fiscal 2021 due to increased demand for our subscription and support offerings from both new and existing end-customers.

The mix between subscription revenue and support revenue will vary 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.

Subscription and support revenue increased for fiscal 2022 compared to fiscal 2021 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

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With respect to geographic theaters, the Americas contributed the largest portion of the year-over-year increases in revenue for fiscal 2022 due to its larger and more established sales force compared to our other theaters.

Revenue from both Europe, the Middle East, and Africa (“EMEA”) and Asia Pacific and Japan (“APAC”) increased year-over-year for fiscal 2021 due to our increasing investment in global sales force in order to support our growth and innovation.

Revenue from Europe, the Middle East, and Africa (“EMEA”) and Asia Pacific and Japan (“APAC”) increased year-over-year for fiscal 2022 due to increasing investment in global sales force in order to support our growth and innovation.

Cost of Revenue

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Cost of Product Revenue

Cost of product revenue primarily includes costs paid to our manufacturing partners.

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 costs.

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

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 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.

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Number of employees at period end 149 127 22 17.3 % 127 117 10 8.5 %

Cost of product revenue increased for fiscal 2021 compared to fiscal 2020 primarily due to an increase in the volume of product sold, partially offset by product mix.

The remaining increase was largely due to increased overhead costs to support the growth of our product revenue.

Cost of product revenue increased for fiscal 2022 compared to fiscal 2021 primarily due to an increase in the volume of product sold.

The remaining increase in costs was primarily driven by supply chain challenges.

Cost of Subscription and Support Revenue

Cost of subscription and support revenue includes personnel costs 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 costs.

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.

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P ersonnel costs grew $135.4 million to $547.8 million for fiscal 2022 compared to fiscal 2021 primarily due to headcount growth.

Cl oud hosting service costs, which support the adoption of our cloud-based subscription offerings incr eased $45.6 million for fiscal 2021 compared to fiscal 2020.

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, as well as the amortization of intangible assets from our recent acquisitions.

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.

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

Gross margin 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.

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.

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$ 3,782.8 68.8 % $ 2,981.2 70.0 % $ 2,408.9 70.7 %

Product gross margin was relatively flat for fiscal 2021 compared to fiscal 2020.

Subscription and support gross margin decreased for fiscal 2021 compared to fiscal 2020, primarily due to increased costs to fulfill professional services arrangements.

Product gross margin decreased for fiscal 2022 compared to fiscal 2021 primarily due to higher costs related to our product offerings driven by supply chain challenges.

Subscription and support gross margin was relatively flat for fiscal 2022 compared to fiscal 2021.

Operating Expenses

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Personnel costs are the most significant component of operating expenses and consist of salaries, benefits, bonuses, share-based compensation, travel and entertainment, and with regard to sales and marketing expense, sales commissions.

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

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.

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.

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, and limited employee travel beginning in March 2020.

Further, we have canceled in-person events and either replaced them with virtual events or postponed them to future periods.

As of July 31, 2022, we expect to recognize approximately $1.8 billion of share-based compensation expense over a weighted-average period of approximately 2.6 years, excluding additional share-based compensation expense related to any future grants of share-based awards.

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Research and development expense consists primarily of personnel costs.

Research and development expense also includes prototype related expenses and allocated 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.

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Number of employees at period end 3,268 2,595 673 25.9 % 2,595 1,821 774 42.5 %

Research and development expense increased for fiscal 2021 compared to fiscal 2020 due to an increase in personnel costs, which grew $321.2 million to $911.0 million for fiscal 2021 compared to fiscal 2020.

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

Research and development expense increased for fiscal 2022 compared to fiscal 2021 primarily due to an increase in personnel costs, which grew $193.5 million to $1.1 billion, primarily due to headcount growth.

The increase in research and development expense 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 costs.

We continue to thoughtfully invest in headcount and have substantially grown our international 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 increase touch points with end-customers and to expand our global presence, although our sales and marketing expense may fluctuate as a percentage of total revenue.

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 our 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.

Year Ended July 31, Year Ended July 31,

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Number of employees at period end 5,167 4,493 674 15.0 % 4,493 3,800 693 18.2 %

Sales and marketing expense increased for fiscal 2021 compared to fiscal 2020 primarily due to an increase in personnel costs, which grew $186.9 million to $1.3 billion for fiscal 2021 compared to fiscal 2020.

The increase in personnel costs was largely due to headcount growth, partially offset by decreased travel expenses due to COVID-19.

In addition, expenses increased as a result of go-to-market initiatives, including advertising, which were partially offset by a decrease in trade shows and convention expenses as in-person events were replaced with virtual events due to COVID-19.

Sales and marketing expense increased for fiscal 2022 compared to fiscal 2021 primarily due to an increase in personnel costs, which grew $291.8 million to $1.6 billion, primarily due to headcount growth and increased travel and entertainment expenses.

The increase in sales and marketing expense was further driven by an increase in costs associated with marketing activities.

General and Administrative

General and administrative expense consists primarily of personnel costs for our executive, finance, human resources, legal, and information technology 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 and impairment losses.

Certain facilities, depreciation, benefits, recruiting, and information technology costs are allocated to other organizations based on headcount.

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.

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

We expect general and administrative expense to increase in absolute dollars as we increase the size of our general and administrative organizations and incur additional costs to support our business growth, although our general and administrative expense may fluctuate as a percentage of total revenue.

Year Ended July 31, Year Ended July 31,

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Number of employees at period end 1,462 1,150 312 27.1 % 1,150 874 276 31.6 %

General and administrative expenses increased for fiscal 2021 compared to fiscal 2020 primarily due to personnel costs, which grew $48.9 million to $244.0 million for fiscal 2021 compared to fiscal 2020, due primarily to an increase in share-based compensation expense related to accelerated vesting of certain equity awards in connection with our acquisitions and headcount growth.

Other increases included increased professional services expense to support our business growth.

General and administrative expenses increased for fiscal 2022 compared to fiscal 2021 primarily due to personnel costs, which grew $24.6 million to $268.6 million, partially offset by a decrease in acquisition-related costs.

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.

Interest Expense

Interest expense primarily consists of non-cash interest expense from the amortization of the debt discount and debt issuance costs related to our 0.0% Convertible Senior Notes due 2019 (the “2019 Notes”), the 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”), and also includes the contractual interest expense related to our Notes.

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”).

Year Ended July 31, Year Ended July 31,

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Interest expense $ 27.4 $ 163.3 $ (135.9) (83.2) % $ 163.3 $ 88.7 $ 74.6 84.1 %

Interest expense increased for fiscal 2021 compared to fiscal 2020 due to the issuance of our 2025 Notes in the fourth quarter of fiscal 2020.

Interest expense decreased for fiscal 2022 compared to fiscal 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.

Debt in Part II, Item 8 of this Annual Report on Form 10-K for more information on our series of convertible senior notes.

Description of Business and Summary of Significant Accounting Policies and Note 10.

Debt in Part II, Item 8 of this Annual Report on Form 10-K for more information.

Other Income, Net

Other income, 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.

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.

Year Ended July 31, Year Ended July 31,

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Other income, net $ 9.0 $ 2.4 $ 6.6 275.0 % $ 2.4 $ 35.9 $ (33.5) (93.3) %

Other income, net decreased for fiscal 2021 compared to fiscal 2020 primarily due to lower interest income earned on our cash, cash equivalent, and investment balances as a result of lower interest rates for fiscal 2021 compared to fiscal 2020.

Other income, net increased for fiscal 2022 compared to fiscal 2021 primarily due to increased foreign currency exchange gains and higher interest income earned on our cash, cash equivalent, and investment balances as a result of higher interest rates for fiscal 2022 compared to fiscal 2021, partially offset by increased losses related to non-designated derivative instruments.

Provision for Income Taxes

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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 recent 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.

To the extent

we revisit our corporate structure, it may have an impact on our tax provision.

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

Year Ended July 31, Year Ended July 31,

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The provision for income taxes for fiscal 2022 was primarily due to income taxes in profitable foreign jurisdictions and withholding taxes.

Our provision for income taxes slightly decreased for fiscal 2021 compared to fiscal 2020, primarily due to changes in our valuation allowances.

Our provision for income taxes increased for fiscal 2022 compared to fiscal 2021, primarily due to foreign income and withholding taxes.

Refer to Note 15.

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Working capital (1)

$ (1,891.4) $ (469.4)

Cash, cash equivalents, and investments:

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Total cash, cash equivalents, and investments $ 4,686.4 $ 3,789.4

As of July 31, 2021, our total cash, cash equivalents, and investments of $3.8 billion were held for general corporate purposes, of which approximately $942.3 million was held outside of the United States.

______________

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

Refer to Note 10.

Debt in Part II, Item 8 of this Annual Report on Form 10-K for information on the Notes.

As of July 31, 2022, our total cash, cash equivalents, and investments of $4.7 billion were held for general corporate purposes.

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

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Withholding taxes that would be payable upon remittance of these lower tier earnings are not expected to be material.

In June 2014, we issued the 2019 Notes with an aggregate principal amount of $575.0 million.

The 2019 Notes were converted prior to or settled on the maturity date of July 1, 2019.

During fiscal 2019, we repaid in cash $575.0 million in aggregate principal amount of the 2019 Notes and issued 2.5 million shares of common stock to the holders for the conversion value in excess of the principal amount of the 2019 Notes converted, which were fully offset by shares received from our exercise of the associated note hedges.

In July 2018, we issued the 2023 Notes with an aggregate principal amount of $1.7 billion.

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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 was met for the 2023 Notes during the fiscal quarter ended July 31, 2021, and as a result, holders may convert their 2023 Notes at any time during the fiscal quarter ending October 31, 2021.

We believe that our cash provided by operating activities, together with our existing cash, cash equivalents and investments will be sufficient to meet our anticipated cash needs should the holders choose to convert their 2023 Notes during the fiscal quarter ending October 31, 2021.

As of July 31, 2021, substantially all of our 2023 Notes and 2025 Notes remained outstanding.

The sale price condition for the Notes was met during the fiscal quarter ended July 31, 2022, and as a result, holders may convert their Notes at any time during the fiscal quarter ending October 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 October 31, 2022 or hold the 2023 Notes until maturity on July 1, 2023.

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

Refer to Note 10.

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Debt in Part II, Item 8 of this Annual Report on Form 10-K for more information on the Credit Agreement.

In February 2019, our board of directors authorized a $1.0 billion share repurchase program, and, in December 2020, our board of directors authorized a $700.0 million increase to our share repurchase program, bringing the total authorization to $1.7 billion (our “current authorization”).

As of July 31, 2021, $323.9 million remained available for future share repurchases under this current authorization.

On August 17, 2021, our board of directors authorized another $676.1 million increase to our current authorization, bringing the total remaining authorization for future share repurchases to $1.0 billion.

Capital Return

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 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 our current authorization was extended to December 31, 2022, and this program may be suspended or discontinued at any 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 July 31, 2022, 85.0 million remained available for future share repurchases under this repurchase program.

In February 2020, our board of directors approved the repurchase of $1.0 billion of our common stock through an accelerated share repurchase (“ASR”) transaction, which was in addition to our current authorization.

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Stockholders’ Equity in Part II, Item 8 of this Annual Report on Form 10-K for information on these repurchase programs.

Leases and Other Material Cash Requirements

We have entered into various non-cancelable operating leases primarily for our facilities with original lease periods expiring through the year ending July 31, 2032, with the most significant leases relating to our corporate headquarters in Santa Clara, California.

As of July 31, 2022, we have total operating lease obligations of $338.4 million recorded on our consolidated balance sheet.

As of July 31, 2022, our commitments to purchase products, components, cloud and other services totaled $2.4 billion.

Refer to Note 12.

Commitments and Contingencies in Part II, Item 8 of this Annual Report on Form 10-K for more information on these commitments.

The following table summarizes our cash flows for the years ended July 31, 2022, 2021, and 2020:

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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 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 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 operating activities have consisted of net losses adjusted for certain non-cash items and changes in assets and liabilities.

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 fiscal 2022 was $2.0 billion , an increase of $481.7 million compared to fiscal 2021 .

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

The increase was primarily due to growth of our business as reflected by increases in billings and collections during fiscal 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 fiscal 2021 was $1.5 billion, a net change of $1.8 billion compared to cash provided by investing activities of $288.0 million in fiscal 2020.

The change was primarily due to a decrease in proceeds from maturities and sales of investments and higher purchases of investments during fiscal 2021.

Cash used in investing activities during fiscal 2022 was $933.4 million, a decrease of $547.2 million compared to fiscal 2021.

The decrease was primarily due to a decrease in net cash payments for business acquisitions, partially offset by an increase in net investment purchases, sales and maturities during fiscal 2022.

Financing Activities

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

Cash used in financing activities during fiscal 2021 was $1.1 billion, a net change of $1.8 billion compared to cash provided by financing activities of 673.0 million in fiscal 2020.

The change was primarily due to net proceeds of $1.8 billion from the issuance of our 2025 Notes, issuance of warrants, and purchase of note hedges during fiscal 2020 .

Contractual Obligations and Commitments

The following summarizes our contractual obligations and commitments as of July 31, 2021:

Payments Due by Period

Total Less Than 1 Year 1-3 Years 3-5 Years More Than 5 Years

(in millions)

0.75% Convertible Senior Notes due 2023

$ 1,692.0 $ — $ 1,692.0 $ — $ —

0.375% Convertible Senior Notes due 2025

2,000.0 — — 2,000.0 —

Operating lease obligations

426.6 78.8 134.2 116.1 97.5

Purchase obligations (1)

1,831.7 251.3 609.0 971.4 —

$ 5,950.3 $ 330.1 $ 2,435.2 $ 3,087.5 $ 97.5

______________

(1) Consists of minimum purchase 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.

Obligations under contracts that we can cancel without a significant penalty are not included in the table above.

(2) No amounts related to income taxes are included.

As of July 31, 2021, we had approximately $80.6 million of tax liabilities recorded related to uncertainty in income tax positions.

Off-Balance Sheet Arrangements

As of July 31, 2021, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

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

Cash used in financing activities during fiscal 2022 was $806.6 million, a decrease of $297.4 million compared to fiscal 2021.

The decrease was primarily due to a decrease in repurchases of our common stock during fiscal 2022 .

Critical Accounting Estimates

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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 current economic environment due to the global impact of COVID-19.

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

Actual results could differ materially from those estimates due to risks and uncertainties, including uncertainty in the current economic environment.

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

We believe that of our significant accounting policies described in Note 1.

Description of Business and Summary of Significant Accounting Policies in Part II, Item 8 of this Annual Report on Form 10-K, the critical accounting policies requiring estimates, assumptions, and judgments that have the most significant impact on our consolidated financial statements are described below.

Description of Business and Summary of Significant Accounting Policies in Part II, Item 8 of this Annual Report on Form 10-K, the critical accounting estimates, assumptions, and judgments that have the most significant impact on our consolidated financial statements are described below.

Revenue Recognition

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We establish standalone selling price using the prices charged for a deliverable when sold separately.

If not observable through past transactions, we estimate the standalone selling price based on our pricing model and our go-to-market strategy, which include factors such as type of sales channel (reseller, distributor, or end-customer), the geographies in which our offerings were sold (domestic or international) and offering type (products, subscriptions, or support).

If not observable through past transactions, we estimate the standalone selling price based on our pricing model and our go-to-market strategy, which include factors such as type of sales channel (channel partner or end-customer), the geographies in which our offerings were sold (domestic or international) and offering type (products, subscriptions, or support).

As our business offerings evolve over time, we may be required to modify our estimated standalone selling prices, and as a result the timing and classification of our revenue could be affected.

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Contract costs, which primarily consist of sales commissions, are amortized on a systematic basis that is consistent with the transfer to the customer of the goods or services to which the asset relates.

Sales commissions for initial contracts that are not commensurate with renewal

commissions are amortized over a benefit period of five years, consistent with the revenue recognition pattern of the performance obligations in the related contracts including expected renewals.

Sales commissions for initial contracts that are not commensurate with renewal commissions are amortized over a benefit period of five years, consistent with the revenue recognition pattern of the performance obligations in the related contracts including expected renewals.

The benefit period is determined by taking into consideration contract length, technology life, and other quantitative and qualitative factors.

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Sales commissions for initial contracts that are commensurate and sales commissions for renewal contracts are amortized over the related contractual period in proportion to the revenue recognized.

We account for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns.

In addition, deferred tax assets are recorded for the future benefit of utilizing net operating losses and research and development credit carryforwards.

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In the event that we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made.

We apply the authoritative accounting guidance prescribing a threshold and measurement attribute for the financial recognition and measurement of a tax position taken or expected to be taken in a tax return.

We recognize liabilities for uncertain tax positions based on a two-step process.

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The second step requires us to estimate and measure the tax benefit as the largest amount that is more likely than not to be realized upon ultimate settlement.

Significant judgment is also required in evaluating our uncertain tax positions and determining our provision for income taxes.

Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes.

Although we believe our reserves are reasonable, no assurance can be given that the final tax outcome of these matters will not be different from that which is reflected in our historical income tax provisions and accruals.

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These forecasts of future demand are based upon historical trends and analysis from our sales and product management functions as adjusted for overall market conditions.

We accrue for costs for manufacturing purchase commitments in excess of our forecasted demand, including costs for excess components or for carrying costs incurred by our manufacturing partners and component suppliers.

We accrue costs for manufacturing purchase commitments in excess of our forecasted demand, including costs for excess components or for carrying costs incurred by our manufacturing partners and component suppliers.

Actual component usage and product demand may be materially different from our forecast and could be caused by factors outside of our control, which could have an adverse impact on our results of operations.

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Critical estimates in valuing certain intangible assets include, but are not limited to, cash flows that an asset is expected to generate in the future, discount rates, the time and expense that would be necessary to recreate the assets, and the profit margin a market participant would receive.

The amounts and useful lives assigned to identified intangible assets impacts the amount and timing of future amortization expense.

The amounts and useful lives assigned to identified intangible assets impact the amount and timing of future amortization expense.

We evaluate goodwill for impairment on an annual basis in our fourth fiscal quarter or more frequently if we believe impairment indicators exist.

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If qualitative factors indicate that it is more likely than not that our reporting unit’s fair value is less than its carrying amount, then we will perform the quantitative impairment test by comparing our reporting unit’s carrying amount, including goodwill, to its fair value.

If the carrying amount of our reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to that excess.

If the carrying amount of our reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to that excess but limited to the total amount of goodwill.

To date, the results of our qualitative assessment have indicated that the quantitative goodwill impairment test is not necessary.

We evaluate long-lived assets, such as property, equipment, and purchased intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable.

We evaluate purchased intangible assets and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable.

Such events or changes in circumstances include, but are not limited to, a significant decrease in the fair value of the underlying asset or asset group, a significant decrease in the benefits realized from the acquired assets, difficulty and delays in integrating the business, or a significant change in the operations of the acquired assets or use of an asset or asset group.

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Actual future results may differ from those estimates.

Convertible Senior Notes

In accounting for the issuance of our convertible senior notes, we separate the notes into liability and equity components.

The carrying amount of the liability component is calculated by measuring the fair value of a similar liability that does not have an associated convertible feature, using a discounted cash flow model with a risk adjusted yield.

The carrying amount of the equity component representing the conversion option is determined by deducting the fair value of the liability component from the par value of the notes as a whole.

This difference represents a debt discount that is amortized to interest expense using the effective interest method over the term of the notes.

The equity component is not remeasured as long as it continues to meet the conditions for equity classification.

In accounting for the transaction costs related to the issuance of the notes, we allocate the total amount incurred to the liability and equity components using the same proportions as the proceeds from the notes.

Transaction costs attributable to the liability component are netted with the liability component and amortized to interest expense using the effective interest method over the term of the notes.

Transaction costs attributable to the equity component are netted with the equity component of the notes in additional paid-in capital in the consolidated balance sheets.

Recent Accounting Pronouncements

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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-K

Item 7. Management’s Discussion and Analysis