What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2022-09-06 compared with 2021-09-03 · 305 added, 388 removed, 1037 unchanged (40% of the section changed)

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Reports of Independent Registered Public Accounting Firm

Management’s Report on Internal Control Over Financial Reporting

Reports of Independent Registered Public Accounting Firm (PCAOB ID:

Consolidated Balance Sheets

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Notes to Consolidated Financial Statements

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Report of Independent Registered Public Accounting Firm

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We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

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Revenue Recognition

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We evaluated the accuracy of the Company’s contract summary documentation, specifically related to the identification and determination of distinct performance obligations and the timing of revenue recognition.

Business Combinations

Description of the Matter

As described in Note 7 to the consolidated financial statements, the Company completed an acquisition of Expanse Inc.

for net consideration of $797.2 million in the year ended July 31, 2021.

The Company accounted for this acquisition as a business combination.

Auditing the accounting for the acquisition was complex due to the significant estimation uncertainty in determining the fair values of identified intangible assets, which consisted of developed technology of $123.4 million and customer relationships of $36.9 million.

The significant estimation uncertainty was primarily due to the sensitivity of the respective fair values to underlying assumptions about future performance of the acquired business and due to the limited historical data on which to base these assumptions.

The significant assumptions used to form the basis of the forecasted results included revenue growth rates and technology migration curves.

These significant assumptions were forward-looking and could be affected by future economic and market conditions.

How We Addressed the Matter in Our Audit

We obtained an understanding, evaluated the design and tested the operating effectiveness of the Company’s controls over its accounting for the acquisition.

This included testing controls over the estimation process supporting the recognition and measurement of identified intangible assets, and management’s judgment and evaluation of underlying assumptions and estimates with regards to the fair values of the identified intangible assets.

To test the estimated fair values of the identified intangible assets, our audit procedures included, among others, reading the underlying agreements, testing management’s application of the relevant accounting guidance, and involving a specialist to assist us in the evaluation of the Company’s valuation methodology and testing of the significant assumptions.

For example, we compared the revenue growth rates and technology migration curves to current industry, market and economic trends.

Additionally, we tested the completeness and accuracy of the underlying data supporting the significant assumptions and estimates.

/s/ Ernst & Young LLP

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September 6, 2022

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Report of Independent Registered Public Accounting Firm

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September 6, 2022

Management’s Report on Internal Control Over Financial Reporting

The management of Palo Alto Networks, Inc.

(the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934 for the Company.

The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s principal executive and principal financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with U.S.

generally accepted accounting principles.

The Company’s internal control over financial reporting includes those policies and procedures that:

(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S.

generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company;

and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the Consolidated Financial Statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of July 31, 2021, based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control - Integrated Framework (2013 framework).

Based on that assessment, management concluded that, as of July 31, 2021, the Company’s internal control over financial reporting was effective.

The effectiveness of the Company’s internal control over financial reporting as of July 31, 2021, has been audited by Ernst & Young LLP, the independent registered public accounting firm that audits the Company’s Consolidated Financial Statements, as stated in their report preceding this report, which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of July 31, 2021.

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PALO ALTO NETWORKS, INC.

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Other long-term liabilities 108.4 97.7

Total liabilities 12,043.6 9,478.0

Commitments and contingencies (Note 12)

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1,932.7 2,311.2

Accumulated other comprehensive income (loss) ( 9.9 ) 10.5

Accumulated other comprehensive loss ( 55.6 ) ( 9.9 )

Accumulated deficit ( 1,667.1 ) ( 1,666.8 )

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See notes to consolidated financial statements.

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PALO ALTO NETWORKS, INC.

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See notes to consolidated financial statements .

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PALO ALTO NETWORKS, INC.

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Change in unrealized gains (losses) on investments ( 25.0 ) ( 3.0 ) 1.0

( 3.0 ) 1.0 10.4

Change in unrealized gains (losses) on cash flow hedges

( 17.4 ) 13.2 2.3

Cash flow hedges:

Change in unrealized gains (losses) ( 54.0 ) 1.1 8.3

Net realized (gains) losses reclassified into earnings 33.3 ( 18.5 ) 4.9

Net change on cash flow hedges ( 20.7 ) ( 17.4 ) 13.2

Other comprehensive income (loss)

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See notes to consolidated financial statements.

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PALO ALTO NETWORKS, INC.

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Balance as of July 31, 2019 96.8 $ 2,490.9 $ ( 3.7 ) $ ( 900.9 ) $ 1,586.3

Cumulative-effect adjustment from adoption of new accounting pronouncement — — — ( 28.3 ) ( 28.3 )

Net loss — — — ( 267.0 ) ( 267.0 )

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Repurchase and retirement of common stock ( 6.1 ) ( 1,198.1 ) — — ( 1,198.1 )

Temporary equity reclassification — 21.9 — — 21.9

Settlement of convertible notes 2.5 ( 12.2 ) — — ( 12.2 )

Common stock received from exercise of note hedges ( 2.5 ) — — — —

Issuance of common and restricted common stock in connection with acquisitions 1.3 229.5 — — 229.5

Balance as of July 31, 2019 96.8 2,490.9 ( 3.7 ) ( 900.9 ) 1,586.3

Net loss — — — ( 267.0 ) ( 267.0 )

Other comprehensive income — — 14.2 — 14.2

Issuance of common stock in connection with employee equity incentive plans 3.6 84.0 — — 84.0

Taxes paid related to net share settlement of equity awards — ( 22.7 ) — — ( 22.7 )

Share-based compensation for equity-based awards — 674.4 — — 674.4

Repurchase and retirement of common stock ( 6.1 ) ( 1,198.1 ) — — ( 1,198.1 )

Settlement of warrants 2.0 — — — —

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Balance as of July 31, 2021 97.3 2,311.2 ( 9.9 ) ( 1,666.8 ) 634.5

Cumulative-effect adjustment from adoption of new accounting pronouncement — ( 581.9 ) — 266.7 ( 315.2 )

Net loss — — — ( 267.0 ) ( 267.0 )

Other comprehensive loss — — ( 45.7 ) — ( 45.7 )

Issuance of common stock in connection with employee equity incentive plans 4.1 137.3 — — 137.3

Taxes paid related to net share settlement of equity awards — ( 50.3 ) — — ( 50.3 )

Share-based compensation for equity-based awards — 1,031.4 — — 1,031.4

Repurchase and retirement of common stock ( 1.8 ) ( 915.0 ) — — ( 915.0 )

Balance as of July 31, 2022 99.6 $ 1,932.7 $ ( 55.6 ) $ ( 1,667.1 ) $ 210.0

See notes to consolidated financial statements.

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PALO ALTO NETWORKS, INC.

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Depreciation and amortization 282.6 260.4 206.1

(Gain) loss related to facility exit — ( 3.1 ) 7.0

Gain related to facility exit — — ( 3.1 )

Amortization of deferred contract costs 362.1 298.0 254.4

Amortization of debt discount and debt issuance costs 7.2 142.9 73.9

Amortization of operating lease right-of-use assets 44.5 47.4 —

Reduction of operating lease right-of-use assets 54.4 44.5 47.4

Amortization of investment premiums, net of accretion of purchase discounts 13.5 13.1 ( 6.2 )

Loss on conversions of convertible senior notes — — 2.6

Repayments of convertible senior notes attributable to debt discount — ( 0.1 ) —

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Cash flows from financing activities

Repayments of convertible senior notes attributable to principal and equity component ( 0.9 ) — ( 477.4 )

Repayments of convertible senior notes ( 0.6 ) ( 0.9 ) —

Payments for debt issuance costs — ( 0.2 ) —

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See notes to consolidated financial statements .

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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(the “Company,” “we,” “us,” or “our”), headquartered in Santa Clara, California, was incorporated in March 2005 under the laws of the State of Delaware and commenced operations in April 2005.

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 empower enterprises, organizations, service providers, and government entities to secure their users, networks, clouds and endpoints by delivering comprehensive cybersecurity backed by artificial intelligence and automation.

Basis of Presentation

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Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.

Such management estimates include, but are not limited to, the standalone selling price for our products and services, share-based compensation, fair value of assets acquired and liabilities assumed in business combinations, identified intangibles and goodwill, valuation allowance against deferred tax assets, manufacturing partner and supplier liabilities, fair value of debt component of convertible notes, interest rate for operating lease liabilities, deferred contract cost benefit period, and loss contingencies.

We base our estimates on historical experience and also on assumptions that we believe are reasonable.

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.

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

We evaluate our estimates on an ongoing basis.

Management estimates include, but are not limited to, the standalone selling price for our products and services, share-based compensation, fair value of assets acquired and liabilities assumed in business combinations, the assessment of recoverability of our intangibles and goodwill, valuation allowance against deferred tax assets, manufacturing partner and supplier liabilities, deferred contract cost benefit period, and loss contingencies.

We base our estimates on assumptions, both historical and forward looking, that we believe are reasonable.

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

Concentrations

Financial instruments that subject us to concentrations of credit risk consist primarily of cash and cash equivalents, investments, derivative contracts, accounts receivable and financing receivables.

We invest only in high-quality credit instruments and maintain our cash and cash equivalents and available-for-sale investments in fixed income securities.

We invest only in high-quality credit instruments and our cash and cash equivalents and available-for-sale investments consist primarily of fixed income securities.

Management believes that the financial institutions that hold our investments are financially sound and, accordingly, are subject to minimal credit risk.

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Our accounts receivable are primarily derived from our distributors in various geographical locations.

Our financing receivables are with certain qualified end-customers.

Our financing receivables are with qualified end-customers.

We perform ongoing credit evaluations and generally do not require collateral on accounts receivable or financing receivables.

As of July 31, 2021, four distributors individually represented 10% or more of our gross accounts receivable, and in the aggregate represented 56.6 % of our gross accounts receivable.

As of July 31, 2021, four end-customers represented 10% or more of our gross financing receivables, and in aggregate represented 67.0 % of our gross financing receivables.

As of July 31, 2022, three distributors individually represented 10% or more of our gross accounts receivable, and in the aggregate represented 47.7 % of our gross accounts receivable.

As of July 31, 2022, two end-customers represented 10% or more of our gross financing receivables, and in aggregate represented 33.7 % of our gross financing receivables.

For fiscal 2022, three distributors represented 10% or more of our total revenue, representing 29.7 %, 12.4 %, and 11.5 %, respectively.

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Our other comprehensive income (loss) includes unrealized gains and losses on available-for-sale investments and unrealized gains and losses on cash flow hedges.

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Foreign Currency Transactions

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dollars using the exchange rates in effect at the balance sheet dates.

Foreign currency remeasurement gains and losses and foreign currency transaction gains and losses are not significant to the financial statements.

Foreign currency remeasurement gains and losses and foreign currency transaction gains and losses are not significant to the consolidated financial statements.

We define fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

When determining the fair value measurements for assets and liabilities which are required to be recorded at fair value, we consider the principal or most advantageous market in which to transact and the market-based risk.

We apply fair value accounting for all financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis.

We categorize assets and liabilities recorded or disclosed at fair value on our consolidated balance sheets based upon the level of judgment associated with inputs used to measure their fair value.

The categories are as follows:

• Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities.

• Level 2—Inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the assets or liabilities, either directly or indirectly through market corroboration, for substantially the full term of the financial instruments.

• Level 3—Inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value.

The inputs require significant management judgment or estimation.

Our financial assets and liabilities that are measured at fair value on a recurring basis include marketable securities and derivative financial instruments.

Goodwill, intangible assets, and other long-lived assets are measured at fair value on a nonrecurring basis, only if impairment is indicated.

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Investments with maturities greater than one year from the consolidated balance sheet date are classified as long-term investments.

We classify our investments in marketable debt securities as available-for-sale at the time of purchase.

When the fair value of a security is below its amortized cost, the amortized cost will be reduced to its fair value if it is more likely than not that we are required to sell the impaired security before recovery of its amortized cost basis, or we have the intention to sell the security.

If neither of these conditions are met, we determine whether the impairment is due to credit losses by comparing the present value of the expected cash flows of the security with its amortized cost basis.

The amount of impairment recognized is limited to the excess of the amortized cost over the fair value of the security.

An allowance for credit losses for the excess of amortized cost over the expected cash flows is recorded in other income, net in our consolidated statements of operations.

Impairment losses that are not credit-related are included in accumulated other comprehensive income (loss) (“AOCI”) in stockholders’ equity.

We determine the classification of our investments in marketable debt securities at the time of purchase and reevaluate such determination at each balance sheet date.

Our marketable debt securities are classified as available-for-sale.

Debt securities in an unrealized loss position are written down to its fair value with the corresponding charge recorded in other income, net in our consolidated statements of operations, if it is more likely than not that we will be required to sell the impaired security before recovery of its amortized cost basis, or we have the intention to sell the security.

If neither of these conditions are met, we determine whether a credit loss exists by comparing the present value of the expected cash flows of the security with its amortized cost basis.

An allowance for credit losses is recorded in other income, net in our consolidated statements of operations for an amount not to exceed the unrealized loss.

Unrealized losses that are not credit-related are included in accumulated other comprehensive income (loss) (“AOCI”) in stockholders’ equity.

Accounts Receivable

Trade accounts receivable are recorded at the invoiced amount, net of allowances for credit losses for any potential uncollectible amounts.

The allowance for credit losses is based on our assessment of the collectability of accounts.

Management regularly reviews the adequacy of the allowance for credit losses on a collective basis by considering the age of each outstanding invoice, each customer’s expected ability to pay and collection history, current market conditions, and reasonable and supportable forecasts of future economic conditions to determine whether the allowance is appropriate.

Accounts receivable deemed uncollectible are charged against the allowance for credit losses when identified.

Trade accounts receivable are recorded at the invoiced amount, net of allowances for credit losses.

The allowance for credit losses is based on our assessment of collectability.

Accounts receivable deemed uncollectible are charged against the allowance for credit losses.

For the years ended July 31, 2022 and 2021, the allowance for credit losses activity was not significant.

Financing Receivables

We provide financing arrangements, primarily loans, for certain qualified end-user customers to purchase our products and services.

We provide financing arrangements for certain qualified end-user customers to purchase our products and services.

Payment terms on these financing arrangements are up to five years .

We evaluate our allowance for credit losses by assessing the risks and losses inherent in our financing receivables on either an individual or a collective basis.

Financing receivables are recorded at amortized cost, which approximates fair value.

We may sell, in certain instances, these financing arrangements on a non-recourse basis to third party financial institutions.

The financing receivables are derecognized upon transfer as these sales qualify as true sales.

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We evaluate the allowance for credit losses by assessing the risks and losses inherent in our financing receivables on either an individual or a collective basis.

Our assessment considers various factors, including lifetime expected losses determined using customer risk profile, current economic conditions that may affect a customer’s ability to pay, and forward-looking economic considerations.

Financing receivables are written off when they are considered uncollectible, and related outstanding balances are reversed and charged against the allowance for credit losses.

Financing receivables deemed uncollectible are charged against the allowance for credit losses.

Short-term financing receivables are included in prepaid expenses and other current assets, and long-term financing receivables are included in other assets on our consolidated balance sheets.

For the years ended July 31, 2021 and 2020, the allowance for credit losses activity was not significant.

Refer to Note 5.

Financing Receivables for additional information.

As a global business, we are exposed to currency exchange rate risk.

We are exposed to foreign currency exchange risk.

Substantially all of our revenue is transacted in U.S.

dollars, however, a portion of our operating expenditures are incurred outside of the United States and are denominated in foreign currencies, making them subject to fluctuations in foreign currency exchange rates.

We enter into foreign currency derivative contracts with maturities of 16 months or less, which we designate as cash flow hedges, to manage the foreign currency exchange rate risk associated with these expenditures.

Our derivative financial instruments are recorded at fair value, on a gross basis, as either assets or liabilities in our consolidated balance sheets.

Gains or losses related to our cash flow hedges are recorded as a component of AOCI in our consolidated balance sheets and are reclassified into the financial statement line item associated with the underlying hedged transaction in our consolidated

statements of operations when the underlying hedged transaction is recognized in earnings.

If it becomes probable that the hedged transaction will not occur, the cumulative unrealized gain or loss is reclassified immediately from AOCI into the financial statement line item associated with the underlying hedged transaction in our consolidated statements of operations.

We enter into foreign currency derivative contracts with maturities of 16 months or less, which we designate as cash flow hedges, to manage the foreign currency exchange risk associated with our operating expenditures.

Our derivative financial instruments are recorded at fair value, on a gross basis, as either assets or liabilities on our consolidated balance sheets.

Gains or losses related to our cash flow hedges are recorded as a component of AOCI on our consolidated balance sheets and are reclassified into the financial statement line item associated with the underlying hedged transaction in our consolidated statements of operations when the underlying hedged transaction is recognized in earnings.

Gains or losses related to non-designated derivative instruments are recognized in other income, net in our consolidated statements of operations for each period until the instrument matures, is terminated, is re-designated as a qualified cash flow hedge, or is sold.

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We include the results of operations of the businesses that we acquire as of the respective dates of acquisition.

We allocate the fair value of the purchase price of our acquisitions to the tangible assets acquired, liabilities assumed, and intangible assets acquired, based on their estimated fair values.

We allocate the fair value of the purchase price of our acquisitions to the assets acquired and liabilities assumed, generally based on their estimated fair values.

The excess of the purchase price over the fair values of these identifiable assets and liabilities is recorded as goodwill.

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Amortization is computed over the estimated useful lives of the respective assets.

Acquisition-related in-process research and development represents the fair value of incomplete research and development projects that have not reached technological feasibility as of the date of acquisition.

Initially, these assets are not subject to amortization.

Assets related to projects that have been completed are transferred to developed technology, which are subject to amortization.

Impairment of Goodwill, Intangible Assets, and Other Long-Lived Assets

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We have elected to first assess qualitative factors to determine whether it is more likely than not that the fair value of our single reporting unit is less than its carrying amount, including goodwill.

If we determine that it is more likely than not that the fair value of our single reporting unit is less than its carrying amount, then the quantitative impairment test will be performed.

Under the quantitative impairment test, if the carrying amount of our single reporting unit exceeds its fair value, we will recognize an impairment loss in an amount equal to that excess but limited to the total amount of goodwill.

If we determine that it is more likely than not that the fair value is less than its carrying amount, then the quantitative impairment test will be performed.

Under the quantitative impairment test, if the carrying amount exceeds its fair value, we will recognize an impairment loss in an amount equal to that excess but limited to the total amount of goodwill.

We evaluate events and changes in circumstances that could indicate carrying amounts of purchased intangible assets and other long-lived assets may not be recoverable.

When such events or changes in circumstances occur, we assess the recoverability of these assets by determining whether or not the carrying amount will be recovered through undiscounted expected future cash flows.

If the total of the future undiscounted cash flows is less than the carrying amount of an asset, we record an impairment loss for the amount by which the carrying amount of the asset exceeds the fair value of the asset.

When such events or changes in circumstances occur, we assess the recoverability of these assets or asset groups by determining whether or not the carrying amount will be recovered through undiscounted expected future cash flows.

If the total of the future undiscounted cash flows is less than the carrying amount of an asset or asset group, we record an impairment loss for the amount by which the carrying amount exceeds the fair value of the asset or asset group.

We did no t recognize any impairment losses on our goodwill, intangible assets, or other long-lived assets during the years ended July 31, 2022, 2021, and 2020.

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Manufacturing Partner and Supplier Liabilities

We outsource most of our manufacturing, repair, and supply chain management operations to our EMS provider and payments to it are a significant portion of our cost of product revenue.

Although we could be contractually obligated to purchase manufactured products and components, we generally do not own the manufactured products and components.

Although we are contractually obligated to purchase manufactured products and components, we generally do not own the components and manufactured products.

Product title transfers from our EMS provider to us and immediately to our customers upon shipment.

Our EMS provider assembles our products using design specifications, quality assurance programs, and standards that we establish, and it procures components and assembles our products based on our demand forecasts.

Our EMS provider assembles our products using design specifications, quality assurance programs, and standards that we establish, and it procures components and assembles products based on our demand forecasts.

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

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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.

When the notes are convertible, the net carrying amount of the notes is classified as a current liability and a portion of the equity component representing the conversion option is reclassified to temporary equity in our consolidated balance sheets.

The portion of the equity component classified as temporary equity is measured as the difference between the principal and net carrying amount of the notes, excluding debt issuance costs.

Prior to August 1, 2021, our convertible senior notes were separated into a liability and an equity component.

The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that did 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 was determined by deducting the fair value of the liability component from the par value of the notes as a whole.

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

The equity component was not remeasured as it continued to meet the conditions for equity classification.

Transaction costs related to the issuance of the notes were allocated to the liability and equity components using the same proportions as the proceeds from the notes.

Transaction costs attributable to the liability component were 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 were netted with the equity component of the notes in additional paid-in capital.

Upon the notes becoming convertible, the net carrying amount of the liability component was classified as a current liability and a portion of the equity component representing the conversion option was reclassified to temporary equity.

The portion of the equity component classified as temporary equity was measured as the difference between the principal and net carrying amount of the notes, excluding debt issuance costs.

Upon adoption of the new debt guidance on August 1, 2021, our convertible senior notes are accounted for entirely as a liability and measured at their amortized cost.

Transaction costs related to the issuance of the notes are netted with the liability and are amortized on a straight-line basis, which approximates the effective interest rate method, to interest expense over the term of the notes.

Revenue Recognition

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Revenues are reported net of sales taxes.

Shipping charges billed to channel partners are included in revenues and related costs are included in cost of revenue.

Shipping charges billed to our customers are included in revenues and related costs are included in cost of revenue.

Product Revenue

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Our contractual subscription and support contracts are typically one to five years.

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Contracts with Multiple Performance Obligations

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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 paid for initial contracts are generally not commensurate with the

commissions paid for renewal contracts, given the substantive difference in commission rates in proportion to their respective contract values.

Sales commissions paid for initial contracts are generally not commensurate with the commissions paid for renewal contracts, given the substantive difference in commission rates in proportion to their respective contract values.

Sales commissions for initial contracts that are not commensurate 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.

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Share-Based Compensation

Compensation expense related to share-based transactions, including employee and non-employee director awards, is measured and recognized in the financial statements based on fair value on the grant date.

Compensation expense related to share-based transactions is measured and recognized in the consolidated financial statements based on fair value on the grant date.

We recognize share-based compensation expense for awards with only service conditions on a straight-line basis over the requisite service period of the related award.

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We account for forfeitures of all share-based payment awards when they occur.

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We determine if an arrangement is a lease at inception.

We evaluate the classification of leases at commencement and, as necessary, at modification.

Operating leases are included in operating lease right-of-use assets, accrued and other liabilities, and long-term operating lease liabilities on our consolidated balance sheets.

Operating leases related balances are included in operating lease right-of-use assets, accrued and other liabilities, and long-term operating lease liabilities on our consolidated balance sheets.

We did not have any material finance leases in any of the periods presented.

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Payments under our lease arrangements are primarily fixed, however, certain lease agreements contain variable payments, which are expensed as incurred and not included in the operating lease right-of-use assets and liabilities.

Variable lease payments are primarily comprised of real estate taxes, common area maintenance, and insurance.

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.

Variable lease payments are primarily comprised of real estate taxes, common area maintenance charges, and insurance costs.

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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Recently Adopted Accounting Pronouncements

Credit Losses

In June 2016, the Financial Accounting Standards Board (“FASB”) issued new authoritative guidance on the accounting for credit losses on most financial assets and certain financial instruments.

The standard replaces the incurred loss model with an expected credit loss model for off-balance sheet credit exposures and financial assets measured at amortized cost, including trade accounts receivables and financing receivables.

Credit losses on available-for-sale debt securities are required to be recorded through an allowance rather than as a write-down.

We adopted this standard in our first quarter of fiscal 2021 using the modified-retrospective approach.

Acquired Contract Assets and Contract Liabilities

In October 2021, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance that requires companies to apply revenue guidance to recognize and measure contract assets and contract liabilities from contracts with customers acquired in a business combination on the acquisition date, instead of measuring them at fair value.

We early adopted this guidance in our first quarter of fiscal 2022 on a prospective basis.

The adoption of this standard did not have a material impact on our consolidated financial statements.

Recently Issued Accounting Pronouncements

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Debt with Conversion Options

In August 2020, the FASB issued new authoritative guidance to simplify the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity.

The standard reduces the number of models used to account for convertible instruments and simplifies both the classification of debt on the balance sheet and the earnings per share calculation.

We intend to early adopt this standard in our first quarter of fiscal 2022 using the modified-retrospective approach, under which, financial results reported in periods prior to fiscal 2022 will not be adjusted.

We expect the adoption of this standard to result in a decrease to accumulated deficit of $ 266.6 million, a decrease to additional paid-in capital of $ 711.0 million, and an increase to convertible senior notes, net of $ 444.4 million.

Interest expense recognized in future periods will be reduced as a result of accounting for our convertible debt instrument as a single liability measured at its amortized cost.

In August 2020, the FASB issued authoritative guidance that simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments.

The standard reduces the number of models used to account for convertible instruments and simplifies the classification of debt on the balance sheet.

We adopted this standard in our first quarter of fiscal 2022 using the modified-retrospective approach, under which financial results reported in periods prior to fiscal 2022 were not adjusted.

The adoption of this standard resulted in an increase to convertible senior notes, net of $ 444.3 million, a decrease to accumulated deficit of $ 266.7 million, and a decrease to additional paid-in capital and temporary equity of $ 711.0 million upon adoption.

Disaggregation of Revenue

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Deferred Revenue

During the years ended July 31, 2021 and July 31, 2020, we recognized approximately $ 2.0 billion and $ 1.5 billion of revenue pertaining to amounts that were deferred as of July 31, 2020 and July 31, 2019, respectively.

During the years ended July 31, 2022 and 2021, we recognized approximately $ 2.7 billion and $ 2.0 billion of revenue pertaining to amounts that were deferred as of July 31, 2021 and 2020, respectively.

Remaining Performance Obligations

Revenue expected to be recognized from remaining performance obligations was $ 8.2 billion as of July 31, 2022, of which we expect to recognize approximately $ 4.1 billion over the next 12 months and the remainder thereafter.

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Fair Value Measurements

We categorize assets and liabilities recorded or disclosed at fair value on our consolidated balance sheets based upon the level of judgment associated with inputs used to measure their fair value.

The categories are as follows:

• Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities.

• Level 3—Inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value.

The inputs require significant management judgment or estimation.

The following table presents the fair value of our financial assets and liabilities measured at fair value on a recurring basis using the above input categories as of July 31, 2021 and July 31, 2020 (in millions):

The following table presents our financial assets and liabilities measured at fair value on a recurring basis as of July 31, 2022 and 2021 (in millions):

July 31, 2022 July 31, 2021

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Certificates of deposit — 155.3 — 155.3 — 150.4 — 150.4

Commercial paper — 69.1 — 69.1 — — — —

Corporate debt securities — 19.5 — 19.5 — 1.0 — 1.0

government and agency securities — 10.0 — 10.0 — 116.3 — 116.3

government and agency securities — 5.1 — 5.1 — — — —

Total cash equivalents 1,205.2 259.0 — 1,464.2 124.2 267.7 — 391.9

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Certificates of deposit — 116.4 — 116.4 — 12.4 — 12.4

Commercial paper — 79.0 — 79.0 — — — —

Corporate debt securities — 505.0 — 505.0 — 208.9 — 208.9

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government and agency securities — — — — — 28.5 — 28.5

Asset-backed securities — 172.5 — 172.5 — — — —

Total long-term investments — 1,051.9 — 1,051.9 — 888.3 — 888.3

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Total assets measured at fair value $ 1,205.2 $ 2,830.0 $ — $ 4,035.2 $ 124.2 $ 2,187.1 $ — $ 2,311.3

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July 31, 2022 July 31, 2021

Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total

Accrued and other liabilities:

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Refer to Note 10.

Debt, for the carrying amount and estimated fair value of our convertible senior notes as of July 31, 2021 and July 31, 2020.

Debt, for the carrying amount and estimated fair value of our convertible senior notes as of July 31, 2022 and 2021.

Cash Equivalents and Investments

Available-for-sale Debt Securities

The following tables summarize the amortized cost, unrealized gains and losses, and fair value of our available-for-sale debt securities as of July 31, 2021 and July 31, 2020 (in millions):

The following tables summarize the amortized cost, unrealized gains and losses, and fair value of our available-for-sale debt securities (in millions):

July 31, 2022

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Certificates of deposit $ 155.3 $ — $ — $ 155.3

Commercial paper 69.1 — — 69.1

Corporate debt securities 19.5 — — 19.5

government and agency securities 10.0 — — 10.0

government and agency securities 5.0 0.1 — 5.1

Total available-for-sale cash equivalents $ 258.9 $ 0.1 $ — $ 259.0

Certificates of deposit $ 116.5 $ — $ ( 0.1 ) $ 116.4

Commercial paper 79.1 — ( 0.1 ) 79.0

Corporate debt securities 1,276.8 1.3 ( 11.9 ) 1,266.2

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government and agency securities 17.6 — ( 0.2 ) 17.4

Asset-backed securities 173.4 0.2 ( 1.1 ) 172.5

Total available-for-sale investments $ 2,591.5 $ 1.6 $ ( 25.2 ) $ 2,567.9

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July 31, 2021

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Cash equivalents:

Certificates of deposit $ 150.4 $ — $ — $ 150.4

Corporate debt securities 1.0 — — 1.0

government and agency securities 116.3 — — 116.3

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government and agency securities 1,435.1 1.1 — 1,436.2

government and agent securities 27.4 — — 27.4

government and agency securities 72.0 — — 72.0

Total available-for-sale investments $ 1,913.7 $ 1.6 $ ( 0.1 ) $ 1,915.2

As of July 31, 2022, the gross unrealized losses that have been in a continuous unrealized loss position for less than 12 months were $ 24.8 million, which were related to $ 2.0 billion of available-for-sale debt securities, and the gross unrealized losses that have been in a continuous unrealized loss position for more than 12 months were not material.

The gross unrealized losses on our available-for-sale debt securities as of July 31, 2021 were not material.

Unrealized losses related to our available-for-sale debt securities are due to interest rate fluctuations as opposed to credit quality.

We do not intend to sell any of the securities in an unrealized loss position and it is not likely that we would be required to sell these securities before recovery of their amortized cost basis, which may be at maturity.

We did not recognize any credit losses related to our available-for-sale debt securities during the year ended July 31, 2021, and there were no other-than-temporary impairments for these securities during the year ended July 31, 2020.

We did not recognize any credit losses related to our available-for-sale debt securities during the years ended July 31, 2022 and 2021.

The following table summarizes the amortized cost and fair value of our available-for-sale debt securities as of July 31, 2022, by contractual years-to-maturity (in millions):

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Due between one and three years 965.2 956.4

Due between three to five years 91.5 91.2

Due between five to ten years 4.3 4.3

Total $ 2,850.4 $ 2,826.9

Marketable Equity Securities

Marketable equity securities consist of money market funds and are included in cash and cash equivalents in our consolidated balance sheets.

As of July 31, 2021 and 2020, the carrying value of our marketable equity securities were $ 124.2 million and $ 1.6 billion, respectively.

Marketable equity securities consist of money market funds and are included in cash and cash equivalents on our consolidated balance sheets.

As of July 31, 2022 and 2021, the carrying value of our marketable equity securities were $ 1.2 billion and $ 124.2 million, respectively.

There were no unrealized gains or losses recognized for these securities during the years ended July 31, 2022, 2021, and 2020.

Financing Receivables

The following table summarizes our short-term and long-term financing receivables as of July 31, 2021 (in millions):

The following table summarizes our short-term and long-term financing receivables (in millions):

Short-term financing receivables, gross

$ 112.6 $ 80.0

Allowance for credit losses ( 1.3 ) ( 1.0 )

Short-term financing receivables, net

$ 111.3 $ 79.0

Long-term financing receivables, gross

$ 194.6 $ 198.6

Allowance for credit losses ( 2.5 ) ( 4.3 )

Long-term financing receivables, net

There was no significant activity in allowance for credit losses during the year ended July 31, 2021.

Past due amounts on financing receivables were immaterial as of July 31, 2021.

Through July 31, 2020, financing receivables were not significant to our consolidated balance sheet.

$ 192.1 $ 194.3

There was no significant activity in allowance for credit losses during the years ended July 31, 2022 and 2021.

Past due amounts on financing receivables were not material as of July 31, 2022 and 2021.

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Derivative Instruments

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Fair Value Measurements for the fair value of our derivative instruments as reported on our consolidated balance sheets as of July 31, 2022.

During the years ended July 31, 2021, 2020, and 2019, both unrealized gains and losses recognized in AOCI related to our cash flow hedges and amounts reclassified into earnings were not material.

Unrealized gains and losses in AOCI related to our cash flow hedges as of July 31, 2021 and July 31, 2020 were not material.

As of July 31, 2022, unrealized losses in AOCI related to our cash flow hedges were $ 24.8 million, of which $ 22.0 million of losses are expected to be recognized into earnings within the next 12 months.

As of July 31, 2021, unrealized gains and losses in AOCI related to our cash flow hedges were not material.

During the year ended July 31, 2022, we completed acquisitions for a combined total purchase consideration of $ 40.1 million, which was primarily cash.

We have accounted for these transactions as business combinations, and recorded goodwill of $ 37.6 million.

The goodwill is not deductible for income tax purposes.

Bridgecrew Inc.

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$ 21.6 6 years

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On December 15, 2020, we completed our acquisition of Expanse Inc.

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The remaining fair value was allocated to future services and will be expensed over the remaining service periods as share-based compensation.

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We have accounted for this transaction as a business combination and allocated the purchase consideration to assets acquired and liabilities assumed based on preliminary estimated fair values, as presented in the following table (in millions):

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Customer relationships 47.5 7 years

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CloudGenix Inc.

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Total $ 402.7

As part of the acquisition, we issued $ 30.3 million of replacement awards, of which the portion attributable to services performed prior to the acquisition date was allocated to purchase consideration.

As part of the acquisition, we issued $ 30.3 million of replacement awards, of w hich the portion attributable to services performed prior to the acquisition date was allocated to purchase consideration.

The remaining fair value was allocated to future services and will be expensed over the remaining service periods as share-based compensation.

We have accounted for this transaction as a business combination and allocated the purchase consideration to assets acquired and liabilities assumed based on estimated fair values, as presented in the following table (in millions):

We have accounted for this transaction as a business combination and allocated the purchase consid eration to assets acquired and liabilities assumed based on estimated fair values, as presented in the following table (in millions):

Goodwill $ 301.2

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The remaining fair value was allocated to future services and will be expensed over the remaining service periods as share-based compensation.

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Customer relationships 1.8 8 years

Twistlock Ltd.

On July 9, 2019, we completed our acquisition of Twistlock Ltd.

(“Twistlock”), a privately-held company specializing in container security.

The acquisition extends our cloud security strategy with the addition of Twistlock to our Prisma cloud security offerings.

The total purchase consideration for the acquisition of Twistlock was $ 378.1 million, which consisted of the following (in

Fair value of replacement equity awards 2.7

Total purchase consideration $ 378.1

As part of the acquisition, we issued replacement equity awards, which included 0.1 million shares of our restricted common stock.

The total fair value of the replacement equity awards was $ 51.8 million, of which the portion attributable to services performed prior to the acquisition date was allocated to the purchase consideration.

The remaining fair value was allocated to future services and will be expensed over the remaining service periods as share-based compensation.

Goodwill $ 300.6

Identified intangible assets 54.1

Cash and cash equivalents 14.0

Net assets acquired 9.4

Total $ 378.1

Goodwill generated from this business combination is primarily attributable to the assembled workforce and expected post-acquisition synergies from integrating Twistlock’s product into our platform.

The goodwill is deductible for U.S.

income tax purposes.

The following table presents details of the identified intangible assets acquired (in millions, except years):

Fair Value Estimated Useful Life

Developed technology

$ 51.5 7 years

Customer relationships 2.6 8 years

On June 12, 2019, we completed our acquisition of PureSec Ltd.

(“PureSec”), a privately-held company specializing in cybersecurity solutions for serverless architectures.

The acquisition extends our cloud security strategy with the addition of PureSec to our Prisma cloud security offerings.

The total purchase consideration for the acquisition of PureSec was $ 36.8 million, which consisted of the following (in millions):

Fair value of replacement equity awards 0.9

Total purchase consideration $ 36.8

As part of the acquisition, we issued replacement equity awards.

The total fair value of the replacement equity awards was $ 9.1 million, of which the portion attributable to services performed prior to the acquisition date was allocated to the purchase consideration.

The remaining fair value was allocated to future services and will be expensed over the remaining service periods as share-based compensation.

Goodwill $ 24.4

Identified intangible assets 7.4

Net assets acquired 1.0

Goodwill generated from this business combination is primarily attributable to the assembled workforce and expected post-

acquisition synergies from integrating PureSec’s product into our platform.

The goodwill is deductible for U.S.

income tax purposes.

The following table presents details of the identified intangible assets acquired (in millions, except years):

Fair Value Estimated Useful Life

Developed technology

$ 7.4 5 years

Demisto, Inc.

On March 28, 2019, we completed our acquisition of Demisto, Inc.

(“Demisto”), a privately-held security company specializing in security orchestration, automation and response (“SOAR”).

The acquisition expands the functionality of our portfolio with the addition of Demisto’s SOAR product.

The total purchase consideration for the acquisition of Demisto was $ 474.2 million, which consisted of the following (in millions):

Common stock ( 0.9 million shares)

Fair value of replacement equity awards 9.5

Total purchase consideration $ 474.2

As part of the acquisition, we issued replacement equity awards, which included 0.3 million shares of our restricted common stock.

The total fair value of the replacement equity awards was $ 105.2 million, of which the portion attributable to services performed prior to the acquisition date was allocated to the purchase consideration.

The remaining fair value was allocated to future services and will be expensed over the remaining service periods as share-based compensation.

Goodwill $ 387.8

Identified intangible assets 76.3

Net liabilities assumed ( 15.8 )

Total $ 474.2

Goodwill generated from this business combination is primarily attributable to the assembled workforce and expected post-acquisition synergies from integrating Demisto’s product into our portfolio.

The goodwill is not deductible for income tax purposes.

The following table presents details of the identified intangible assets acquired (in millions, except years):

Fair Value Estimated Useful Life

Developed technology

$ 56.6 6 years

Customer relationships 19.7 6 years

On October 12, 2018, we completed our acquisition of RedLock Inc.

(“RedLock”), a privately-held cloud security company.

The acquisition expands our security capabilities for the public cloud with the addition of RedLock’s cloud security analytics technology.

The total purchase consideration for the acquisition of RedLock was $ 158.2 million, which consisted of $ 155.0 million in cash paid upon closing and $ 3.2 million in fair value of unvested equity awards attributable to services performed prior to the acquisition date.

As part of the acquisition, we assumed RedLock equity awards with a total fair value of $ 57.4 million.

Of the total fair value, a portion was allocated to the purchase consideration and the remainder was allocated to future services and will be expensed over the remaining service periods as share-based compensation.

Goodwill $ 113.6

Identified intangible assets 54.8

Net liabilities assumed ( 10.2 )

Total $ 158.2

Goodwill generated from this business combination is primarily attributable to the assembled workforce and expected post-acquisition synergies from integrating RedLock’s technology into our platform.

The goodwill is not deductible for income tax purposes.

The following table presents details of the identified intangible assets acquired (in millions, except years):

Fair Value Estimated Useful Life

Developed technology

$ 48.6 4 years

Customer relationships 5.3 8 years

Trade name and trademarks 0.9 6 months

Additional Acquisition-Related Information

The operating results of the acquired companies are included in our consolidated statements of operations from the respective dates of acquisition.

Pro forma results of operations have not been presented because the effects of the acquisitions were not material to our consolidated statements of operations.

Additional information related to our acquisitions completed in fiscal 2022, such as that related to income tax and other contingencies, existing as of the acquisition date but unknown to us may become known during the remainder of the measurement period, not to exceed 12 months from the respective acquisition date, which may result in changes to the amounts and allocations recorded.

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Goodwill and Intangible Assets

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Goodwill acquired 37.6

Measurement period adjustment ( 1.9 )

Balance as of July 31, 2022 $ 2,747.7

Purchased Intangible Assets

The following table presents details of our purchased intangible assets as of July 31, 2021 and July 31, 2020 (in millions):

The following table presents details of our purchased intangible assets (in millions):

Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount

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Other 0.9 ( 0.1 ) 0.8 1.8 ( 1.8 ) —

Total intangible assets subject to amortization 795.0 ( 414.4 ) 380.6 788.0 ( 289.4 ) 498.6

Intangible assets not subject to amortization:

In-process research and development 3.9 — 3.9 — — —

Total purchased intangible assets $ 798.9 $ ( 414.4 ) $ 384.5 $ 788.0 $ ( 289.4 ) $ 498.6

We recognized amortization expense of $ 126.9 million, $ 117.8 million, and $ 77.3 million for the years ended July 31, 2022, 2021, and 2020, respectively.

The following table summarizes estimated future amortization expense of our intangible assets as of July 31, 2021 (in millions):

The following table summarizes estimated future amortization expense of our intangible assets subject to amortization as of July 31, 2022 (in millions):

Fiscal years ending July 31,

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Property and Equipment

The following table presents details of our property and equipment, net as of July 31, 2021 and July 31, 2020 (in millions):

The following table presents details of our property and equipment, net (in millions):

Computers, equipment, and software $ 404.3 $ 352.1

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Total property and equipment, net $ 357.8 $ 318.4

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During the year ended July 31, 2022, we purchased 4.6 acres of land adjacent to our headquarters in Santa Clara, California, along with the associated buildings, for $ 39.5 million to accommodate future expansion of our headquarters.

This amount was recorded in property and equipment, net on our consolidated balance sheet as of July 31, 2022.

We recognized depreciation expense of $ 92.8 million, $ 94.2 million, and $ 96.0 million related to property and equipment during the years ended July 31, 2022, 2021, and 2020, respectively.

Convertible Senior Notes

In June 2014, we issued $ 575.0 million aggregate principal amount of 0.0 % Convertible Senior Notes due 2019 (the “2019 Notes”), in July 2018, we issued $ 1.7 billion aggregate principal amount of 0.75 % Convertible Senior Notes due 2023 (the “2023 Notes”) and, in June 2020, we issued $ 2.0 billion aggregate principal amount of 0.375 % Convertible Senior Notes due 2025 (the “2025 Notes,” and together with the 2023 Notes, the “Notes”).

The 2019 Notes were converted prior to or settled on the maturity date of July 1, 2019, in accordance with their terms.

In July 2018, we issued $ 1.7 billion aggregate principal amount of 0.75 % Convertible Senior Notes due 2023 (the “2023 Notes”) and, in June 2020, we issued $ 2.0 billion aggregate principal amount of 0.375 % Convertible Senior Notes due 2025 (the “2025 Notes,” and together with the 2023 Notes, the “Notes”).

The 2023 Notes bear interest at a fixed rate of 0.75 % per year, payable semi-annually in arrears on January 1 and July 1 of each year, beginning on January 1, 2019.

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Additionally, upon the occurrence of a corporate event that constitutes a “fundamental change” under the applicable Indenture, holders of the Notes of such series may require us to repurchase for cash all or a portion of the Notes of such series at a repurchase price equal to 100 % of the principal amount of the Notes of such series plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

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.

Accordingly, the net carrying amount of the 2023 Notes was reclassified into current liabilities and the portion of the equity component representing the conversion option was reclassified into temporary equity in our consolidated balance sheet as of July 31, 2021.

The sale price condition was not met for the 2025 Notes during the fiscal quarters ended July 31, 2021 or July 31, 2020, and was not met for the 2023 Notes during the fiscal quarter ended July 31, 2020.

Since the 2025 Notes for both periods and the 2023 Notes as of July 31, 2020 were not convertible, the associated net carrying amount was classified as a long-term liability and the equity component was included in additional paid-in capital in our consolidated balance sheets.

During the year ended July 31, 2019, we repaid $ 575.0 million in aggregate principal amount of the 2019 Notes and issued 2.5 million shares of common stock to the holders of the 2019 Notes for the conversion value in excess of the principal amount.

These shares were fully offset by shares received from the corresponding exercise of the associated note hedges.

The following table sets forth the components of the Notes as of July 31, 2021 and July 31, 2020 (in millions):

July 31, 2021 July 31, 2020

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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.

The net carrying amount of the Notes was classified as a current liability on our consolidated balance sheet as of July 31, 2022.

The sale price condition for the 2023 Notes was met 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 ended October 31, 2021.

Accordingly, the net carrying amount of the 2023 Notes was classified as a current liability and the portion of the equity component representing the conversion option was classified as temporary equity on our consolidated balance sheet as of July 31, 2021.

The sale price condition for the 2025 Notes was not met during the fiscal quarter ended July 31, 2021.

Since the 2025 Notes were not convertible during the fiscal quarter ended October 31, 2021, the associated net carrying amount was classified as a long-term liability and the equity component was included in additional paid-in capital on our consolidated balance sheet as of July 31, 2021.

The following table sets forth the components of the Notes (in millions):

July 31, 2022 (1)

July 31, 2021

2023 Notes 2025 Notes Total 2023 Notes 2025 Notes Total

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Equity component (including amounts classified as temporary equity) $ — $ — $ — $ 315.0 $ 403.0 $ 718.0

The total estimated fair value of the Notes was $ 5.5 billion and $ 4.1 billion at July 31, 2021 and July 31, 2020, respectively.

The fair value was determined based on the closing trading price per $100 of the Notes as of the last day of trading for the period.

We consider the fair value of the Notes at July 31, 2021 and July 31, 2020 to be a Level 2 measurement.

______________

(1) As described in Note 1.

Description of Business and Summary of Significant Accounting Policies, we adopted new debt guidance effective August 1, 2021, using a modified retrospective method, under which financial results reported in prior periods were not adjusted.

Upon adoption, our convertible senior notes are accounted for entirely as a liability and measured at their amortized cost.

The total estimated fair value of the 2023 Notes and 2025 Notes were $ 3.2 billion and $ 3.5 billion at July 31, 2022, respectively and $ 2.6 billion and $ 2.9 billion at July 31, 2021, respectively.

The fair value was determined based on the closing trading price per $100 of the applicable series of the Notes as of the last day of trading for the period.

We consider the fair value of the Notes at July 31, 2022 and 2021 to be a Level 2 measurement.

The fair value of the Notes is primarily affected by the trading price of our common stock and market interest rates.

Based on the closing price of our common stock on July 31, 2021, the if-converted values of the 2023 Notes and 2025 Notes exceeded their principal amounts by $ 754.4 million and $ 587.8 million, respectively.

The following table sets forth interest expense recognized related to our convertible senior notes (dollars in millions):

The following table sets forth interest expense recognized related to the Notes (dollars in millions):

Year Ended July 31, 2022 Year Ended July 31, 2021 Year Ended July 31, 2020

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Amortization of debt discount (1)

— — — 63.5 74.3 137.8 60.9 10.5 71.4

Amortization of debt issuance costs 2.8 4.4 7.2 2.3 2.8 5.1 2.1 0.4 2.5

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Effective interest rate of the liability component 0.9 % 0.6 % 5.2 % 5.4 % 5.2 % 5.4 %

To minimize the impact of potential economic dilution upon conversion of our convertible senior notes, we entered into separate convertible note hedge transactions (the “2019 Note Hedges,” with respect to the 2019 Notes, the “2023 Note Hedges,” with respect to the 2023 Notes, the “2025 Note Hedges,” with respect to the 2025 Notes and the 2023 Notes Hedgers together with 2025 Note Hedges, the “Note Hedges”) with respect to our common stock concurrent with the issuance of each series of our convertible senior notes.

Upon the settlement of the 2019 Notes, we exercised the corresponding portion of our 2019 Note Hedges during the year ended July 31, 2019 and received shares of our common stock that fully offset the shares issued in excess of the principal amount of the converted 2019 Notes.

The 2019 Note Hedges expired upon maturity of the 2019 Notes.

______________

(1) Upon adoption of the new debt guidance on August 1, 2021, the conversion option is no longer separately accounted for as debt discount.

Our convertible senior notes are accounted for entirely as a liability.

To minimize the impact of potential economic dilution upon conversion of our convertible senior notes, we entered into separate convertible note hedge transactions (the “2023 Note Hedges,” with respect to the 2023 Notes, the “2025 Note Hedges,” with respect to the 2025 Notes, and the 2023 Notes Hedges together with 2025 Note Hedges, the “Note Hedges”) with respect to our common stock concurrent with the issuance of each series of the Notes.

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The following table presents details of our Note Hedges (in millions):

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2025 Note Hedges 6.7 $ 370.8

The Note Hedges cover shares of our common stock at a strike price per share that corresponds to the initial applicable conversion price of the applicable series of Notes, which are also subject to adjustment, and are exercisable upon conversion of the applicable series of the Notes.

The Note Hedges will expire upon maturity of the applicable series of Notes.

The Note Hedges cover shares of our common stock at a strike price per share that corresponds to the initial applicable conversion price of the applicable series of the Notes, which are also subject to adjustment, and are exercisable upon conversion of the applicable series of the Notes.

The Note Hedges will expire upon maturity of the applicable series of the Notes.

The Note Hedges are separate transactions and are not part of the terms of the applicable series of the Notes.

Holders of the Notes of either series will not have any rights with respect to the Note Hedges.

Any shares of our common stock receivable by us under the Note Hedges are

excluded from the calculation of diluted earnings per share as they are antidilutive.

The aggregate amounts paid for the Note Hedges are included in additional paid-in capital in our consolidated balance sheets.

Separately, but concurrently with the issuance of each series of our convertible senior notes, we entered into transactions whereby we sold warrants (the “2019 Warrants,” with respect to the 2019 Notes, the “2023 Warrants,” with respect to the 2023 Notes, the “2025 Warrants,” with respect to the 2025 Notes, and the 2023 Warrants together with the 2025 Warrants, the “Warrants”) to acquire shares of our common stock, subject to anti-dilution adjustments.

During the year ended July 31, 2020, we net settled all 2019 Warrants with 2.0 million shares or $ 462.0 million in fair value of our common stock.

Any shares of our common stock receivable by us under the Note Hedges are excluded from the calculation of diluted earnings per share as they are antidilutive.

The aggregate amounts paid for the Note Hedges are included in additional paid-in capital on our consolidated balance sheets.

Separately, but concurrently with the issuance of each series of our convertible senior notes, we entered into transactions whereby we sold warrants (the “2023 Warrants,” with respect to the 2023 Notes, the “2025 Warrants,” with respect to the 2025 Notes, and the 2023 Warrants together with the 2025 Warrants, the “Warrants”) to acquire shares of our common stock, subject to anti-dilution adjustments.

The 2023 Warrants and 2025 Warrants are exercisable beginning October 2023 and September 2025, respectively.

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Holders of the Notes of either series will not have any rights with respect to the Warrants.

The aggregate proceeds received from the sale of the Warrants are included in additional paid-in capital in our consolidated balance sheets.

The aggregate proceeds received from the sale of the Warrants are included in additional paid-in capital on our consolidated balance sheets.

Revolving Credit Facility

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We are obligated to pay an ongoing commitment fee on undrawn amounts at a rate of 0.125 % to 0.250 %, depending on our leverage ratio.

Regulatory authorities that oversee financial markets have announced that after the end of 2021, they would no longer compel banks currently reporting information used to set the LIBO Rate to continue to make rate submissions.

As a result, it is possible that beginning in 2022, the LIBO Rate will no longer be available as a reference rate.

In March 2021, the ICE Benchmark Administration, the administrator of LIBO Rate, announced that it will cease publication of LIBO Rate by June 2023.

Under the terms of our Credit Facility, in the event of the discontinuance of the LIBO Rate, a mutually agreed-upon alternative benchmark rate will be established to replace the LIBO Rate, which may include the Secured Overnight Financing Rate (“SOFR”).

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

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

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In September 2012, we entered into two lease agreements for a total of approximately 300,000 square feet of space in Santa Clara, California, which served as our previous corporate headquarters through August 2017, when we relocated to our current corporate campus.

The leases contain rent holiday periods and two separate five -year options to extend the lease term beyond their expiration dates of July 2023.

Rental payments under these lease agreements are approximately $ 94.3 million over the lease term.

In August 2017, we exited our previous corporate headquarter facilities and relocated to our new corporate campus, which resulted in the recognition of a cease-use loss of $ 39.2 million during the year ended July 31, 2018.

Due to changes in market conditions, and the resulting changes to the amount and timing of estimated cash flows from sublease rentals that could be reasonably obtained, we recognized an additional cease-use loss of $ 7.0 million as general and administrative expense in our consolidated statements of operations during the year ended July 31, 2019.

In December 2019, we terminated these leases prior to their expiration date.

termination fee is $ 25.0 million, payable in equal quarterly installments from April 2020 through July 2023.

The early termination fee is $ 25.0 million, payable in equal quarterly installments from April 2020 through July 2023.

Upon termination, we recorded a decrease of $ 13.6 million in operating lease liabilities based on the payment schedule of the early termination fee discounted by the incremental borrowing rate for the remaining payment term.

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As a result, during the year ended July 31, 2020, we recorded a gain of $ 3.1 million net of other related fees of $ 1.8 million in general and administrative expense in our consolidated statements of operations.

During the years ended July 31, 2021 and July 31, 2020, our net cost for operating leases was $ 75.2 million and $ 80.4 million, respectively, primarily consisting of operating lease costs of $ 59.3 million and $ 63.5 million, respectively.

Our net cost for operating leases also included variable lease costs, short-term lease costs and sublease income in both periods.

We recognized rent expense of $ 43.0 million for the year ended July 31, 2019, prior to our adoption of the new lease guidance.

During the years ended July 31, 2022, 2021 and 2020, our net cost for operating leases was $ 89.7 million, $ 75.2 million, and $ 80.4 million, respectively, primarily consisting of operating lease costs of $ 67.6 million, $ 59.3 million, and $ 63.5 million, respectively.

Our net cost for operating leases also included variable lease costs, short-term lease costs and sublease income in the periods presented.

The following tables present additional information for our operating leases (in millions, except for years and percentages):

Year Ended July 31,

2022 2021 2020

Operating cash flows used in payments of operating lease liabilities $ 81.5 $ 81.7 $ 78.3

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(1) Current portion of operating lease liabilities is included in accrued and other liabilities on our consolidated balance sheet.

As of July 31, 2022, we have additional non-cancelable operating leases for office space that had been signed but had not yet commenced with total future minimum lease payments of $ 26.0 million.

These leases will commence in fiscal 2023, with lease terms ranging from three to ten years .

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Commitments and Contingencies

Purchase Commitments

Manufacturing Purchase Commitments

In order to reduce manufacturing lead times and plan for adequate supply, we enter into agreements with manufacturing partners and component suppliers to procure inventory based on our demand forecasts.

We are committed to minimum or fixed purchases through the year ending July 31, 2026.

The following table presents details of the aggregate future purchase commitments under these arrangements excluding obligations under contracts that we can cancel without a significant penalty as of July 31, 2021 (in millions):

The following table presents details of the aggregate future minimum or fixed purchase commitments under these arrangements excluding obligations under contracts that we can cancel without a significant penalty as of July 31, 2022 (in millions):

Fiscal years ending July 31,

Total 2022 2023 2024 2025 2026

Total 2023 2024 2025 2026 2027 2028 and Thereafter

Manufacturing purchase commitments

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Other Purchase Commitments

We have entered into various non-cancelable agreements with certain service providers, under which we are committed to minimum or fixed purchases through the year ending July 31, 2026.

We have entered into various non-cancelable agreements with certain service providers, under which we are committed to minimum or fixed purchases.

The following table presents details of the aggregate future non-cancelable purchase commitments under these agreements as of July 31, 2022 (in millions):

Fiscal years ending July 31,

Total 2022 2023 2024 2025 2026

Total 2023 2024 2025 2026 2027 2028 and Thereafter

Other purchase commitments

$ 1,881.4 $ 82.7 $ 368.5 $ 413.9 $ 531.6 $ 483.9 $ 0.8

Additionally, we have a $ 162.2 million minimum purchase commitment with a service provider through September 2027 with no specified annual commitments.

Mutual Covenant Not to Sue and Release Agreement

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To date, we have not recorded any accruals for loss contingencies associated with indemnification claims or determined that an unfavorable outcome is probable or reasonably possible.

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Stockholders’ Equity

Share Repurchase Program

In August 2016, our board of directors authorized a $ 500.0 million share repurchase program and in February 2017 authorized a $ 500.0 million increase to the repurchase program, bringing the total authorization to $ 1.0 billion (our “original authorization”).

This repurchase program expired on December 31, 2018.

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

In February 2019, our board of directors authorized a $ 1.0 billion share repurchase program, which is funded from available working capital.

In December 2020 and August 2021, our board of directors authorized additional $ 700.0 million and $ 676.1 million in cre ases to this share repurchase program, respectively, bringing the total authorization under this share repurchase program to $ 2.4 billion (our “current authorization”).

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

Repurchases may be made at management’s discretion from time to time on the open market, through privately negotiated transactions, transactions structured through investment banking institutions, block purchase techniques, 10b5-1 trading plans, or a combination of the foregoing.

During the year ended July 31, 2019, we repurchased and retired 1.9 million shares of our common stock under our original authorization for an aggregate purchase price of $ 330.0 million and an average price per share of $ 177.64 , including transaction costs.

During the years ended July 31, 2021 and 2020, we repurchased and retired 4.0 million shares and 0.9 million shares of our common stock under our current authorization for an aggregate purchase price of $ 1.2 billion and $ 198.1 million, and an average price per share of $ 294.87 and $ 209.12 , respectively, including transaction costs.

As of July 31, 2021, we have $ 323.9 million remaining for future share repurchases under our current repurchase authorization.

The following table summarizes the share repurchase activity under our share repurchase program (in millions, except per share amounts):

Year Ended July 31,

2022 2021 2020

Number of shares repurchased 1.8 4.0 0.9

Weighted average price per share (1)

$ 512.49 $ 294.87 $ 209.12

Aggregate purchase price (1)

$ 915.0 $ 1,178.1 $ 198.1

______________

(1) Includes transaction costs

As of July 31, 2022, $ 85.0 million remained available for future share repurchases under our current repurchase authorization.

The total price of the shares repurchased and related transaction costs are reflected as a reduction to common stock and additional paid-in capital on our consolidated balance sheets.

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Share-Based Compensation Plans

2012 Equity Incentive Plan

Our 2012 Equity Incentive Plan (our “2012 Plan”) was adopted by our board of directors and approved by the stockholders on June 5, 2012 and was effective one business day prior to the effectiveness of our registration statement for our initial public offering (“IPO”).

Our 2012 Plan replaced our 2005 Equity Incentive Plan (our “2005 Plan”), which terminated upon the completion of our IPO, however, awards that were outstanding upon termination remained outstanding pursuant to their original terms.

Our 2012 Plan provides for the granting of stock options, restricted stock award (“RSA”), restricted stock unit (“RSU”), stock appreciation rights, performance shares (“PSAs”), performance-based stock units (“PSUs”) and performance stock options (“PSOs”) to our employees, directors, and consultants.

Awards granted under our 2012 Plan vest over the periods determined by the board of directors, generally three to four years from the date of grant, and our options expire no more than ten years after the date of grant.

Since our IPO in 2012, awards granted under our 2012 Plan consist primarily of RSUs.

Equity Incentive Plans

Our 2021 Equity Incentive Plan (our “2021 Plan”) became effective in December 2021 and replaced our 2012 Equity Incentive Plan (our “2012 Plan”).

Our 2021 Plan provides for the granting of stock options, stock appreciation rights, restricted stock awards (“RSAs”), restricted stock units (“RSUs”), performance shares (“PSAs”), performance-based stock units (“PSUs”) and performance stock options (“PSOs”) to our employees, directors, and consultants.

Upon effectiveness of the 2021 Plan, the 2012 Plan was terminated and no further awards will be granted under the 2012 Plan.

Awards that were outstanding upon such termination remained outstanding pursuant to their original terms, and any subsequent expiration, cancellation or forfeiture of awards under our 2012 Plan are returned to our 2021 Plan.

The majority of our equity awards are RSUs, which generally vest over a period of three to four years from the date of grant.

Until vested, RSUs do not have the voting and dividend participation rights of common stock and the shares underlying the awards are not considered issued and outstanding.

We grant awards with performance conditions (PSAs and PSUs) to certain employees, which vest over a period of one to four years from the date of grant.

The actual number of PSAs and PSUs earned and eligible to vest is determined based on the level of achievement against revenue growth, pre-established billings and operating margin goals, or pre-defined individual performance targets for the fiscal year.

Our options expire no more than ten years after the date of grant.

We grant PSUs to certain employees, which vest over a period of one to four years from the date of grant.

The actual number of PSUs earned and eligible to vest is determined based on the level of achievement against revenue growth, pre-established billings and operating margin goals, or pre-defined individual performance targets for the fiscal year, and market conditions, if applicable.

During the year ended July 31, 2022, we granted 0.1 million shares of PSUs, which contain service, performance and market conditions.

The performance condition is based on revenue growth, whereas the market condition measures our total shareholder return (“TSR”) relative to the TSR of the companies listed in the Standard & Poor’s 500 index.

In addition to this grant, we have also approved the future grant of 0.1 million shares of PSUs with similar terms, which will be considered granted at the time their related vesting conditions are established in the next two years .

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We have also granted PSOs with both a market condition and a service condition to certain executives.

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The market condition for PSOs granted in the fiscal year 2021 requires the price of our common stock to equal or exceed $ 397.00 , $ 496.25 , $ 595.50 and $ 700.00 based on the average closing price for 30 consecutive trading days during the three -, four -, five -, and six-and-a-half-year periods following the date of grant.

To the extent that the market condition has been met, one-fourth of the PSOs will vest on the anniversary date of the grant date for such PSOs, subject to continued service.

Certain outstanding PSOs may be exercised prior to vesting (“early exercise”).

All of the PSOs granted in the fiscal year 2021 were forfeited in the same fiscal year and are no longer outstanding.

To the extent that the market condition has been met, one-fourth of the PSOs will vest on each anniversary date of the grant date for such PSOs, subject to continued service.

All outstanding PSOs may be exercised prior to vesting (“early exercise”).

Shares of common stock issued upon early exercise of the PSOs will be restricted and, at our option, subject to repurchase if the option holder ceases to be a service provider.

The maximum contractual term of our PSOs ranged from six and a half years to seven and a half years from the date of grant, depending on vesting period.

During the fiscal year ended July 31, 2021, 0.4 million shares of our PSOs vested as the first stock price target for our PSOs granted in fiscal years 2018 and 2019 was satisfied and the service condition was met.

The maximum contractual term of our outstanding PSOs is seven and a half years from the date of grant, depending on vesting period.

As of July 31, 2022, all stock price targets for our outstanding PSOs have been satisfied.

We net-share settle equity awards held by certain employees by withholding shares upon vesting to satisfy tax withholding obligations.

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Payments for employees’ tax obligations to the tax authorities are recognized as a reduction to additional paid-in capital and reflected as financing activities in our consolidated statements of cash flows.

A total of 21.9 million shares of our common stock are reserved for issuance pursuant to our 2012 Plan as of July 31, 2021.

This includes shares that are (i) reserved but unissued under our 2005 Plan on the effective date of our 2012 Plan or (ii) returned to our 2005 Plan as a result of expiration or termination of options.

On the first day of each fiscal year, the number of shares in the reserve may be increased by the lesser of (i) 8,000,000 shares, (ii) 4.5 % of the outstanding shares of common stock on the last day of our immediately preceding fiscal year, or (iii) such other amount as determined by our board of directors.

A total of 13.1 million shares of our common stock are reserved for issuance pursuant to our equity incentive plans as of July 31, 2022.

2012 Employee Stock Purchase Plan

Our 2012 Employee Stock Purchase Plan was adopted by our board of directors and approved by the stockholders on June 5, 2012, and was effective upon completion of our IPO.

Our 2012 Employee Stock Purchase Plan was adopted by our board of directors and approved by the stockholders on June 5, 2012, and was effective upon completion of our initial public offering (“IPO”).

On August 29, 2017, we amended and restated our 2012 Employee Stock Purchase Plan (our “2012 ESPP”) to extend the length of our offering periods from 6 to 24 months.

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Participants may purchase shares of common stock through payroll deductions of up to 15 % of their eligible compensation, subject to purchase limits of 625 shares per six-month purchase period and $ 25,000 worth of stock for each calendar year.

purchased under our 2012 ESPP during the fiscal years ended July 31, 2021, 2020 and 2019 were 0.6 million, 0.6 million and 0.5 million, at an average exercise price of $ 161.07 per share , $ 146.90 per share and $ 128.81 per share respectively.

A total o f 4.6 million share s of our common stock are available for sale under our 2012 ESPP as of July 31, 2021.

Shares purchased under our 2012 ESPP during the fiscal years ended July 31, 2022, 2021 and 2020 were 0.7 million, 0.6 million and 0.6 million, at an average exercise price of $ 192.81 per share, $ 161.07 per share and $ 146.90 per share respectively.

A total of 4.9 million shares of our common stock are available for sale under our 2012 ESPP as of July 31, 2022.

On the first day of each fiscal year, the number of shares in the reserve may be increased by the lesser of (i) 2,000,000 shares, (ii) 1 % of the outstanding shares of our common stock on the first day of the fiscal year, or (iii) such other amount as determined by our board of directors.

Acquisition-related Activities

Assumed Share-Based Compensation Plans

In connection with our acquisitions of Bridgecrew, Expanse, Sinefa and Crypsis during the year ended July 31, 2021, we assumed the Bridgecrew, Inc.

2019 Stock Incentive Plan, the Expanse Holding Company, Inc.

Amended and Restated 2012 Stock Incentive Plan, the Sinefa Group, Inc.

2020 Stock Plan, and the Crypsis Group Holdings, LLC 2017 Equity Incentive Plan (together, the “2021 assumed Plans”).

In connection with our acquisitions of CloudGenix, Aporeto, and Zingbox during the year ended July 31, 2020, we assumed CloudGenix’s 2013 Equity Incentive Plan, Aporeto’s Amended and Restated 2015 Stock Option and Grant Plan and Zingbox’s Stock Incentive Plan, as amended and restated (together, the “2020 assumed Plans”).

In connection with our acquisitions of RedLock, Demisto, and Twistlock during the year ended July 31, 2019, we assumed RedLock’s 2015 Stock Plan, as amended, Demisto’s 2015 Stock Option Plan, as amended, and Twistlock’s 2015 Share Option Plan, as amended and restated (together, the “2019 assumed Plans”).

In aggregate, the 2021 assumed Plans, the 2020 assumed Plans and the 2019 assumed plans are referenced as “the Assumed Plans.”

In connection with our acquisitions, we have assumed equity incentive plans of certain acquired companies (collectively “the Assumed Plans”).

The equity awards assumed in connection with each acquisition were granted from their respective assumed plans.

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Acquisitions for more information on our acquisitions and the related equity awards assumed.

Restricted Stock Issuances

In connection with our acquisitions of Expanse and Sinefa during the year ended July 31, 2021, we issued a total of 0.3 million shares of restricted common stock as replacement equity awards which are subject to additional time-based vesting requirements and continued service by the award holder.

In connection with our acquisition of Zingbox during the year ended July 31, 2020, we issued a total of 0.1 million shares of restricted common stock as replacement equity awards which are subject to additional time-based vesting requirements and continued service by the award holder.

In connection with our acquisitions of RedLock, Demisto, PureSec, and Twistlock during the year ended July 31, 2019, we issued a total of 0.5 million shares of restricted common stock as replacement equity awards which are subject to additional time-based vesting requirements and continued service by the award holder.

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Stock Option Activities

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Balance—July 31, 2019 0.3 $ 14.53 2.2 $ 81.4 3.7 $ 193.99 6.2 $ 120.1

Granted — $ — 2.6 $ 191.97

Exercised ( 0.2 ) $ 11.46 — $ —

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Balance—July 31, 2020 0.1 $ 19.59 1.5 $ 34.2 2.8 $ 194.14 5.2 $ 170.9

Granted — $ — 0.2 $ 304.29

Exercised 0.0 $ 12.82 — $ —

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Balance—July 31, 2021 0.1 $ 26.20 0.8 $ 27.4 2.8 $ 194.14 4.2 $ 566.8

Granted — $ — 0.2 $ 304.29

Exercised ( 0.1 ) $ 18.72 — $ —

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Exercisable—July 31, 2022 0.0 $ 55.36 0.5 $ 6.7 2.7 $ 194.55 3.2 $ 809.3

The weighted-average grant-date fair value of PSOs granted during the years ended July 31, 2021 and 2019 was $ 82.12 and $ 59.11 , per share, respectively.

The weighted-average grant-date fair value of PSOs granted during the year ended July 31, 2021 was $ 82.12 per share.

The intrinsic value of options exercised during the years ended July 31, 2022, 2021, and 2020 was $ 29.2 million, $ 22.2 million and $ 50.2 million, respectively.

RSA and PSA Activities

The following table summarizes the RSA and PSA activity under our stock plans during the years ended July 31, 2021, 2020, and 2019 (in millions, except per share amounts):

RSAs Outstanding PSAs Outstanding

Shares Weighted-

Grant-Date Fair Value Per Share Number

Shares Weighted-

Grant-Date Fair Value Per Share

Balance—July 31, 2018 0.2 $ 163.14 0.1 $ 148.54

( 0.2 ) $ 166.83 0.0 $ 148.54

0.0 $ 152.09 0.0 $ 148.54

Balance—July 31, 2019 0.0 $ 148.54 0.1 $ 148.54

0.0 $ 148.54 0.0 $ 148.54

Balance—July 31, 2020 0.0 $ 148.54 0.1 $ 148.54

0.0 $ 148.54 ( 0.1 ) $ 148.54

0.0 $ 148.54 0.0 $ 148.54

Balance—July 31, 2021 — $ — — $ —

The aggregate fair value, as of respective vesting dates, of RSAs vested during the years ended July 31, 2021, 2020 and 2019, was $ 1.6 million, $ 7.0 million and $ 41.1 million, respectively.

The aggregate fair value, as of the respective vesting dates, of PSAs vested during the years ended July 31, 2021, 2020, and 2019 was $ 0.8 million, $ 3.8 million and $ 4.5 million, respectively.

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RSU and PSU Activities

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Balance—July 31, 2021 6.9 $ 257.56 $ 2,760.2 1.3 $ 292.93 $ 498.4

Granted (1)(2)

1.9 $ 494.54 0.3 $ 351.14

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(1) For PSUs, shares granted represent the aggregate maximum number of shares that may be earned and issued with respect to these awards over their full terms.

(2) Includes 0.4 million RSUs assumed in connection with the acquisitions of Crypsis, Sinefa, Expanse and Bridgecrew, with weighted-average grant-date fair value of $ 241.43 , $ 297.17 , $ 317.45 , $ 354.66 , respectively, for the year ended July 31, 2021 and 0.1 million RSUs assumed in connection with the acquisitions of Zingbox, Aporeto and CloudGenix, with weighted-average grant-date fair value of $ 208.25 , $ 231.30 and $ 181.48 , respectively, for the year ended July 31, 2020.

includes 0.4 million RSUs assumed and 0.1 million replacement RSUs granted in connection with the acquisitions of RedLock, Demisto, PureSec, and Twistlock, with weighted-average grant-date fair values of $ 218.69 and $ 224.31 per share, respectively, for the year ended July 31, 2019.

(2) Includes 0.4 million RSUs assumed in connection with the acquisitions of Crypsis, Sinefa, Expanse and Bridgecrew, with weighted-average grant-date fair value of $ 241.43 , $ 297.17 , $ 317.45 and $ 354.66 , respectively, for the year ended July 31, 2021, and 0.1 million RSUs assumed in connection with the acquisitions of Zingbox, Aporeto and CloudGenix, with weighted-average grant-date fair value of $ 208.25 , $ 231.30 and $ 181.48 , respectively, for the year ended July 31, 2020.

(3) Includes time-based vesting for PSUs.

The aggregate fair value, as of the respective vesting dates, of RSUs vested during the years ended July 31, 2021, 2020, and 2019 was $ 986.4 million, $ 615.7 million, and $ 566.4 million, respectively.

The aggregate fair value, as of the respective vesting dates, of RSUs vested during the years ended July 31, 2022, 2021, and 2020 was $ 1.6 billion, $ 986.4 million, and $ 615.7 million, respectively.

The aggregate fair value, as of the respective vesting dates, of PSUs vested during the year ended July 31, 2022, 2021, and 2020 was $ 184.0 million, $ 20.8 million and $ 11.9 million, respectively.

Shares Available for Grant

The following table presents the stock activity and the total number of shares available for grant under our stock plans as of July 31, 2021 (in millions):

The following table presents the stock activity and the total number of shares available for grant under our equity incentive plans as of July 31, 2022 (in millions):

Number of shares

Balance—July 31, 2021 11.3

Authorized 4.7

PSOs, RSUs, and PSUs granted ( 5.1 )

Options, PSOs, RSAs, PSAs, RSUs, and PSUs forfeited 1.1

Cancelled upon effectiveness of the 2021 Plan

RSUs and PSUs granted ( 2.2 )

PSOs, RSUs, and PSUs forfeited 1.2

Shares withheld for taxes 0.1

Balance—July 31, 2022 4.6

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Share-Based Compensation

We record share-based compensation awards based on estimated fair value as of the grant date.

The fair value of RSUs, PSUs, RSAs, and PSAs is based on the closing market price of our common stock on the date of grant.

The fair value of PSOs is estimated on the grant date using a Monte Carlo simulation model, which predicts settlement of the options midway between the vesting term and the contractual term.

No PSOs were granted during the year ended July 31, 2020.

The following table summarizes the assumptions used and the resulting grant-date fair values of our PSOs granted during the years ended July 31, 2021 and 2019:

The fair value of RSUs and PSUs not subject to market conditions is based on the closing market price of our common stock on the date of grant.

The fair value of the PSUs subject to the market condition is estimated on the grant date using a Monte Carlo simulation model.

No such PSUs were granted during the years ended July 31, 2021 or 2020.

The following table summarizes the assumptions used and the resulting grant-date fair value of our PSUs subject to the market condition granted during the year ended July 31, 2022:

Year Ended July 31, 2022

35.9 % 35.6 % - 36.5 %

Volatility 36.0 % - 41.1 %

Expected term (in years) 1.4 - 3.0

Dividend yield — %

Risk-free interest rate 0.2 % - 2.0 %

Grant-date fair value per share

$ 411.49 - $ 782.13

The expected volatility is based on the historical volatility of our common stock.

The expected term is based on the length of each tranche’s performance period from the grant date.

The dividend yield assumption is based on our current expectations about our anticipated dividend policy.

The risk-free interest rate is based on the implied yield available on U.S.

Treasury zero-coupon issues with maturities that approximate the expected term.

The fair value of PSOs is estimated on the grant date using a Monte Carlo simulation model, which predicts settlement of the options midway between the vesting term and the contractual term.

No PSOs were granted during the years ended July 31, 2022 or 2020.

The following table summarizes the assumptions used and the resulting grant-date fair values of our PSOs granted during the year ended July 31, 2021:

Year Ended July 31, 2021

Dividend yield

Risk-free interest rate

Weighted-average grant-date fair value per share $ 82.12

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The expected term represents the term from the first day of the offering period to the purchase dates within each offering period.

The dividend yield assumption is based on our expectations about our anticipated dividend

The dividend yield assumption is based on our current expectations about our anticipated dividend policy.

The risk-free interest rate is based on the implied yield available on U.S.

Treasury zero-coupon issues with maturities that approximate the expected term.

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The following table summarizes share-based compensation included in costs and expenses (in millions):

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Total share-based compensation $ 1,013.4 $ 926.9 $ 664.5

During the year ended July 31, 2021, we accelerated the vesting of certain equity awards in connection with our acquisitions of Bridgecrew, Expanse, Sinefa and Crypsis and recorded $ 9.8 million, $ 5.7 million, $ 9.8 million and $ 7.1 million, respectively.

During the year ended July 31, 2020, we accelerated the vesting of certain equity awards in connection with our acquisitions of Zingbox, Ap oreto and CloudGenix and recorded $ 1.3 million, $ 4.4 million and $ 0.3 million, respectively, and during the year ended July 31, 2019, we accelerated the vesting of certain equity awards in connection with our acquisitions of RedLock and Twistlock and recorded $ 14.2 million and $ 5.8 million, respectively, of share-based compensation within general and administrative expense.

As of July 31, 2022, total compensation cost related to unvested share-based awards not yet recognized was $ 1.8 billion.

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Total $ 59.8 $ 33.9 $ 35.2

For the year ended July 31, 2022, our provision for income taxes increased compared to the year ended July 31, 2021, primarily due to foreign income and withholding taxes.

For the year ended July 31, 2021, our provision for income taxes decreased slightly compared to the year ended July 31, 2020, primarily due to tax benefits from changes in our valuation allowances.

For the year ended July 31, 2020, our provision for income taxes increased compared to the year ended July 31, 2019, primarily due to an increase in foreign income as a result of increased business operations and withholding taxes from an increase in billings in the relevant jurisdictions.

We also had a change in our valuation allowance related to acquisitions completed during fiscal 2019.

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The following table presents the items accounting for the difference between income taxes computed at the federal statutory income tax rate and our provision for income taxes:

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Change in valuation allowance ( 158.7 ) ( 40.7 ) ( 714.1 )

Effect of U.S.

tax law change — — 0.6

Share-based compensation 83.6 5.0 ( 5.1 )

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operations and was fully offset by a full valuation.

The following table presents the components of our deferred tax assets and liabilities as of July 31, 2021 and July 31, 2020 (in millions):

The following table presents the components of our deferred tax assets and liabilities as of July 31, 2022 and 2021 (in millions):

Deferred tax assets:

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Fixed assets and intangible assets 1,742.6 1,789.6

Interest carryforward 55.8 19.2

Gross deferred tax assets 3,636.7 3,140.1

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Deferred tax liabilities:

Deferred commissions ( 165.4 ) ( 130.8 )

Deferred contract costs ( 183.6 ) ( 165.4 )

Other deferred tax liabilities ( 27.8 ) ( 32.3 )

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Net deferred tax assets $ 11.2 $ 9.1

Our increase in deferred tax assets relating to net operating losses and fixed assets and intangible assets is largely due to an impact from the United Kingdom tax rate increase from 19% to 25% effective April 1, 2023.

As of July 31, 2021, it is not more likely than not that our deferred tax assets will be realizable, and therefore, are offset by a full valuation allowance.

A valuation allowance is provided when it is more likely than not that the deferred tax asset will not be realized.

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As of July 31, 2022, we have provided a valuation allowance for our federal, state, United Kingdom and certain other foreign deferred tax assets that we believe will, more likely than not, be unrealizable.

The net valuation allowance increased by $ 0.7 billion from the year

ended July 31, 2020 to the year ended July 31, 2021, primarily due to a change in the United Kingdom tax rate as discussed above and an increase in our operations.

The net valuation allowance increased by $ 0.5 billion from the year ended July 31, 2021 to the year ended July 31, 2022, primarily due to an increase in our NOL carryforwards and deferred revenue as a result of current year operations.

As of July 31, 2022, we had federal, state, and foreign NOL carryforwards of approximately $ 2.0 billion, $ 1.0 billion, and $ 1.8 billion, respectively, as reported on our tax returns, available to reduce future taxable income, if any.

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Our foreign NOL will carry forward indefinitely.

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As of July 31, 2022, we had federal and state research and development tax credit carryforwards of approximately $ 243.8 million and $ 197.4 million, respectively, as reported on our tax returns.

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As of July 31, 2021, we had $ 372.9 million of unrecognized tax benefits, $ 68.7 million of which would affect income tax expense if recognized, after consideration of our valuation allowance in the United States and other assets.

As of July 31, 2021, our federal, state, and foreign returns for the tax years 2009 through the current period remain subject to adjustment due to current and future examinations.

Fiscal years outside the normal statute of limitation remain open to audit by tax authorities due to tax attributes generated in earlier years, which have been carried forward and may be audited in subsequent years when utilized.

We do not expect the amount of unrecognized tax benefits as of July 31, 2021 to change significantly over the next 12 months.

We do not expect the amount of unrecognized tax benefits as of July 31, 2022 to materially change over the next 12 months.

We file federal, state, and foreign income tax returns in jurisdictions with varying statutes of limitations.

Generally, all years remain subject to adjustment due to our NOL and credit carryforwards.

We currently have ongoing tax audits in various jurisdictions and at various times.

The primary focus of these audits is, generally, profit allocation.

The ultimate amount and timing of any future settlements cannot be predicted with reasonable certainty.

We recognize both interest and penalties associated with uncertain tax positions as a component of income tax expense.

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We had accrued interest and penalties on our consolidated balance sheets related to unrecognized tax benefits of $ 20.9 million and $ 15.7 million as of July 31, 2022 and 2021, respectively.

The ultimate amount and timing of any future cash settlements cannot be predicted with reasonable certainty.

The following table presents a reconciliation of the beginning and ending amount of our gross unrecognized tax benefits (in millions):

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Unrecognized tax benefits at the end of the period $ 414.0 $ 372.9 $ 326.4

During the year ended July 31, 2021, our additions for tax positions taken in the given year were primarily attributable to uncertain tax positions related to tax credits.

During the year ended July 31, 2020 and July 31, 2019, our additions for tax positions taken in the given year were primarily attributable to intercompany transactions.

During the year ended July 31, 2022 and 2021, our additions for tax positions taken in the given year were primarily attributable to uncertain tax positions related to tax credits.

During the year ended July 31, 2020, our additions for tax positions taken in the given year were primarily attributable to intercompany transactions.

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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Net loss per share, basic and diluted $ ( 2.71 ) $ ( 5.18 ) $ ( 2.76 )

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The following securities were excluded from the computation of diluted net loss per share of common stock for the periods presented as their effect would have been antidilutive (in millions):

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Total other income, net $ 9.0 $ 2.4 $ 35.9

Employee Benefit Plan

We have established a 401(k) tax-deferred savings plan which permits participants to make contributions by salary deduction pursuant to Section 401(k) of the Internal Revenue Code.

We make matching contributions based upon the amount of employees’ contributions, subject to certain limitations.

Our matching contributions to the plan were immaterial for the years ended July 31, 2021, 2020, and 2019.

Segment Information

We conduct business globally and are primarily managed on a geographic theater basis.

We conduct business globally and sales are primarily managed on a geographic theater basis.

Our chief operating decision maker reviews financial information presented on a consolidated basis accompanied by information about revenue by geographic region for purposes of allocating resources and evaluating financial performance.

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Revenue for revenue by geographic theater and revenue for groups of similar products and services for the years ended July 31, 2022, 2021, and 2020.

Related Party Transactions

Certain members of our board of directors are affiliated with Greylock Partners (“Greylock”), a venture capital firm.

Entities affiliated with Greylock owned a portion of the outstanding shares of Demisto immediately prior to completion of our acquisition of Demisto on March 28, 2019 and, as a result, received purchase consideration valued at $ 85.6 million during the year ended July 31, 2019.

Refer to Note 7.

Acquisitions for more information on our acquisition of Demisto.

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Subsequent Events

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The repurchase authorization will expire on December 31, 2022, and may be suspended or discontinued at any time.

Business Combination

On August 11, 2021, we completed our acquisition of Gamma Networks, Inc.

(“Gamma”), a privately-held AI powered company, for total consideration of approximately $ 36 million, subject to adjustment.

We expect the acquisition will expand our data loss prevention offerings.

We will complete the initial accounting for the acquisition of Gamma, including the allocation of purchase consideration, during our first quarter of fiscal 2022.

The repurchase authorization will expire on December 31, 2023, and may be suspended or discontinued at any time without prior notice.

Stock Split Effected in the Form of a Stock Dividend (“Stock Split”)

On August 22, 2022, we announced that our board of directors had approved a three -for-one stock split of our outstanding shares of common stock to be effected in the form of a stock dividend.

Each stockholder of record at the close of business on September 6, 2022 (the “record date”), will receive, after the close of business on September 13, 2022, two additional shares for every share held on the record date, and trading will begin on a split-adjusted basis on September 14, 2022.

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CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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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 8. Financial Statements and Supplementary Data