What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-18 compared with 2022-05-20 · 166 added, 194 removed, 271 unchanged (57% of the section changed)

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These statements include, among other things:

our expectation of achieving and maintaining profitability under U.S.

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

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• Results of Operations.

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

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

• Liquidity and Capital Resources.

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

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

• Critical Accounting Estimates.

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

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

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

We believe our portfolio offers the ability to achieve a zero trust enterprise through advanced security capabilities, while reducing the total cost of ownership for organizations by improving operational efficiency and eliminating the need for siloed point products.

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

Network Security:

• Enabling network security through our ML-Powered Next-Generation Firewalls, available in a number of form factors, including physical, virtual, and containerized appliances, Cloud NGFW for Amazon Web Services, as well as a cloud-

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

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

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

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

Our company focuses on delivering value in five fundamental areas:

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delivered service.

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

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

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

Network Security:

• Our network security platform, which includes our ML-Powered Next-Generation Firewalls, available in a number of form factors, including physical, virtual, and containerized appliances, as well as a cloud-delivered service, has been a leader in the industry for ten consecutive years.

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

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

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

Secure Access Service Edge:

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

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

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

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

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

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

Cloud Security:

• Enabling cloud security through our Prisma security offerings.

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

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

Security Analytics and Automation:

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

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

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

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

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

from code to runtime.

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

Security Operations:

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

These include our industry-leading extended detection and response solution Cortex XDR ® to prevent, detect, and respond to complex cybersecurity attacks, Cortex XSOAR ® for security orchestration, automation, and response (“SOAR”), and Cortex Xpanse ® for attack surface management (“ASM”).

In October 2022, we released Cortex XSIAM ® , our autonomous Security Operations Services (“SOC”) platform that delivers unified security operations functions including automated threat detection and response, user behavioral analytics, threat intelligence management, orchestration and workflow, endpoint protection, and cloud detection and response.

These products are delivered as software or SaaS subscriptions.

Threat Intelligence and Security Consulting (Unit 42):

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

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

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

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

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

For the first quarter of fiscal 2023 and 2022, total revenue was $1.6 billion and $1.2 billion, respectively, representing year-over-year growth of 25.3%.

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

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

As of April 30, 2022, we had end-customers in over 170 countries.

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

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

As of October 31, 2022, we had end-customers in over 180 countries.

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

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

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

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

Our product revenue grew to $330.0 million, or 21.1% of total revenue, for the first quarter of fiscal 2023, representing year-over-year growth of 11.7%.

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

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

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

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

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Our subscription and support revenue grew to $1.2 billion, or 78.9% of total revenue, for the first quarter of fiscal 2023, representing year-over-year growth of 29.6%.

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

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

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

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

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

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

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

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

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

For example, in October 2022, we announced the general availability of Cortex XSIAM, our autonomous SOC platform that delivers unified security operations functions.

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

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

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

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

While we instituted a global work-from-home policy beginning in March 2020, which has been modified to provide employees with the choice to work in our offices for a set number of days per week or completely remotely, we have not experienced significant disruptions in our work operations.

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

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

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

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

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

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

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

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

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

Impact of Macroeconomic Developments and Other Factors on Our Business

Our overall performance depends in part on worldwide economic and geopolitical conditions and their impact on customer behavior.

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

We continue to monitor and respond to developments relating to COVID-19, which has resulted in significant global, social, and business disruption.

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

The global supply chain and the semiconductor industry continue to experience significant challenges.

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

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

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

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We monitor the key financial metrics set forth in the tables below to help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts, and assess operational efficiencies.

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

April 30, 2022 July 31, 2021

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

October 31, 2022 July 31, 2022

(in millions)

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Cash, cash equivalents, and investments $ 5,898.4 $ 4,686.4

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

2022 2021 2022 2021

Three Months Ended October 31,

(dollars in millions)

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Gross margin 70.5 % 69.5 %

Operating loss $ (47.6) $ (110.4) $ (204.2) $ (243.7)

Operating income (loss) $ 15.2 $ (82.7)

Operating margin 1.0 % (6.6) %

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We calculate billings in the following manner:

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

2022 2021 2022 2021

(in millions) (in millions)

Three Months Ended October 31,

(in millions)

Total revenue $ 1,563.4 $ 1,247.4

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We define free cash flow, a non-GAAP financial measure, as cash provided by operating activities less purchases of property, equipment, and other assets.

We consider free cash flow to be a profitability and liquidity measure that provides useful information to management and stockholders about the amount of cash generated by the business after necessary capital expenditures.

We consider free cash flow to be a profitability and liquidity measure that provides useful information to management and investors about the amount of cash generated by the business after necessary capital expenditures.

A limitation of the utility of free cash flow as a measure of our financial performance and liquidity is that it does not represent the total increase or decrease in our cash balance for the period.

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

Nine Months Ended April 30,

Three Months Ended October 31,

(in millions)

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Net cash used in investing activities $ (1,319.8) $ (229.9)

Net cash used in financing activities $ (453.5) $ (768.4)

Net cash provided by financing activities $ 31.1 $ 38.7

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

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

2022 2021 2022 2021

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

Three Months Ended October 31,

Amount % of Revenue Amount % of Revenue

(dollars in millions)

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1,086.3 69.5 % 949.5 76.1 %

Operating loss

(47.6) (3.4) % (110.4) (10.3) % (204.2) (5.2) % (243.7) (8.0) %

Operating income (loss) 15.2 1.0 % (82.7) (6.6) %

Interest expense (6.8) (0.4) % (6.9) (0.6) %

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

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

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

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

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

Other income (expense), net 26.0 1.6 % (1.6) (0.1) %

Income (loss) before income taxes 34.4 2.2 % (91.2) (7.3) %

Provision for income taxes 14.4 0.9 % 12.4 1.0 %

Net income (loss) $ 20.0 1.3 % $ (103.6) (8.3) %

______________

(1) Includes share-based compensation as follows:

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

2022 2021 2022 2021

Three Months Ended October 31,

(in millions)

Cost of product revenue

$ 2.3 $ 1.6 $ 6.9 $ 4.7

Cost of subscription and support revenue

27.4 23.3 81.8 69.3

Research and development

112.7 118.2 361.9 317.2

Sales and marketing

75.7 69.2 228.8 203.8

General and administrative

29.2 30.6 93.3 101.9

Total share-based compensation $ 266.0 $ 260.3

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

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

2022 2021 Change 2022 2021 Change

Amount Amount Amount % Amount Amount Amount %

Three Months Ended October 31,

2022 2021 Change

Amount Amount Amount %

(dollars in millions)

Product $ 330.0 $ 295.5 $ 34.5 11.7 %

Product revenue for the three and nine months ended April 30, 2022 increased compared to the same periods in 2021 primarily due to increased demand for our new and existing product offerings in both periods.

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

Subscription and Support Revenue

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

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

2022 2021 Change 2022 2021 Change

Amount Amount Amount % Amount Amount Amount %

Three Months Ended October 31,

2022 2021 Change

Amount Amount Amount %

(dollars in millions)

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Total subscription and support $ 1,233.4 $ 951.9 $ 281.5 29.6 %

Subscription and support revenue increased for the three and nine months ended April 30, 2022 compared to the same periods in 2021.

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

Subscription and support revenue increased for the three months ended October 31, 2022 compared to the same period in 2021 due to increased demand for our subscription and support offerings from our end-customers.

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

Revenue by Geographic Theater

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

2022 2021 Change 2022 2021 Change

Amount Amount Amount % Amount Amount Amount %

Three Months Ended October 31,

2022 2021 Change

Amount Amount Amount %

(dollars in millions)

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$ 1,563.4 $ 1,247.4 $ 316.0 25.3 %

With respect to geographic theaters, the increase in revenue for the three and nine months ended April 30, 2022 compared to the same periods in 2021 was driven primarily by the Americas, due to its larger sales force and a larger percentage of our customers located in the Americas.

Revenue from our other geographic theaters, both Europe, the Middle East, and Africa (“EMEA”) and Asia Pacific and Japan (“APAC”), increased for the three and nine months ended April 30, 2022 compared to the same periods in 2021 due to continued investment in our global sales force to support our growth and increase our customer base in the regions.

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

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

Cost of Revenue

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

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

2022 2021 Change 2022 2021 Change

Amount Amount Amount % Amount Amount Amount %

Three Months Ended October 31,

2022 2021 Change

Amount Amount Amount %

(dollars in millions)

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Number of employees at period end 154 130 24 18.5 %

Cost of product revenue increased for the three and nine months ended April 30, 2022 compared to the same periods in 2021, primarily due to an increase in product volume in both periods.

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

Cost of product revenue increased for the three months ended October 31, 2022 compared to the same period in 2021 due to an increase in product volume and higher costs related to our product offerings, primarily driven by supply chain challenges.

Cost of Subscription and Support Revenue

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

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

Cost of subscription and support revenue includes personnel costs for our global customer support and technical operations organizations, customer support and repair costs, third-party professional services costs, data center and cloud hosting service costs, amortization of acquired intangible assets and capitalized software development costs, and shared costs.

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

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

2022 2021 Change 2022 2021 Change

Amount Amount Amount % Amount Amount Amount %

Three Months Ended October 31,

2022 2021 Change

Amount Amount Amount %

(dollars in millions)

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Number of employees at period end 2,616 2,321 295 12.7 %

Cost of subscription and support revenue increased for the three and nine months ended April 30, 2022 compared to the same periods in 2021, primarily due to p ersonnel costs, which grew $34.6 million to $142.5 million for the three months ended April 30, 2022 compared to the same period in 2021, and grew $108.2 million to $403.9 million for the nine months ended April 30, 2022 compared to the same period in 2021 primarily due to headcount growth.

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

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

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

Cost of subscription and support revenue increased for the three months ended October 31, 2022 compared to the same period in 2021, primarily due to increased costs to support the growth of our subscription and support offerings.

Personnel costs grew $19.8 million to $142.6 million, primarily due to headcount growth.

The remaining increase was primarily due to increased cloud hosting service costs to support our cloud-based subscription offerings and increased shared costs.

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

Our virtual and higher-end firewall products generally have higher gross margins than our lower-end firewall products within each product series.

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

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

2022 2021 2022 2021

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

Three Months Ended October 31,

Amount Gross Margin Amount Gross Margin

(dollars in millions)

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Total gross profit $ 1,101.5 70.5 % $ 866.8 69.5 %

Product gross margin decreased for the three months ended October 31, 2022 compared to the same period in 2021, primarily due to higher costs related to our product offerings driven by supply chain challenges.

Subscription and support gross margin increased for the three months ended October 31, 2022 compared to the same period in 2021, primarily due to our growth in subscription and support revenue, which outpaced the subscription and support costs.

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

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

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

Operating Expenses

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

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

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

As of October 31, 2022, we expect to recognize approximately $2.0 billion of share-based compensation expense over a weighted-average period of approximately 2.5 years, excluding additional share-based compensation expense related to any future grants of share-based awards.

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

Research and Development

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

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

2022 2021 Change 2022 2021 Change

Amount Amount Amount % Amount Amount Amount %

Three Months Ended October 31,

2022 2021 Change

Amount Amount Amount %

(dollars in millions)

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Number of employees at period end 3,532 2,745 787 28.7 %

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

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

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

Research and development expense increased for the three months ended October 31, 2022 compared to the same period in 2021, primarily due to an increase in personnel costs, which grew $23.2 million to $290.1 million, largely due to headcount growth.

The remaining increase in research and development expense was further driven by increased shared costs.

Sales and Marketing

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

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

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

2022 2021 Change 2022 2021 Change

Amount Amount Amount % Amount Amount Amount %

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

Three Months Ended October 31,

2022 2021 Change

Amount Amount Amount %

(dollars in millions)

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Number of employees at period end 5,616 4,664 952 20.4 %

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

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

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

Sales and marketing expense increased for the three months ended October 31, 2022 compared to the same period in 2021, primarily due to an increase in personnel costs, which grew $75.1 million to $456.1 million, largely due to headcount growth and increased travel and entertainment expenses.

The increase in sales and marketing expense was further driven by increased costs associated with in-person events and go-to-market initiatives, and increased shared costs.

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General and Administrative

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

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

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

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

2022 2021 Change 2022 2021 Change

Amount Amount Amount % Amount Amount Amount %

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

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

Three Months Ended October 31,

2022 2021 Change

Amount Amount Amount %

(dollars in millions)

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Number of employees at period end 1,595 1,238 357 28.8 %

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

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

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

The increase in personnel costs in the nine months ended April 30, 2022 was primarily due to headcount growth, partially offset by lower share-based compensation related to accelerated vesting of equity awards in connection with acquisitions compared to the same period in 2021.

General and administrative expense decreased for the three months ended October 31, 2022 compared to the same period in 2021 primarily due to a decrease in professional services expense and acquisition-related costs, partially offset by a modest increase in personnel costs.

Interest Expense

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

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

2022 2021 Change 2022 2021 Change

Amount Amount Amount % Amount Amount Amount %

Three Months Ended October 31,

2022 2021 Change

Amount Amount Amount %

(dollars in millions)

Interest expense $ 6.8 $ 6.9 $ (0.1) (1.4) %

Interest expense decreased for the three and nine months ended April 30, 2022 compared to the same periods in 2021 primarily because we no longer recognize interest expense for amortization of the debt discount as a result of the adoption of new debt guidance.

Refer to Note 1.

Description of Business and Summary of Significant Accounting Policies and Note 9.

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

Other Income, Net

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

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

2022 2021 Change 2022 2021 Change

Amount Amount Amount % Amount Amount Amount %

Interest expense was relatively flat for the three months ended October 31, 2022 compared to the same period in 2021.

Other Income (Expense), Net

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

Three Months Ended October 31,

2022 2021 Change

Amount Amount Amount %

(dollars in millions)

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

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

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

Other income (expense), net $ 26.0 $ (1.6) $ 27.6 *

______________

* Not meaningful

The increase in other income (expense), net for the three months ended October 31, 2022 compared to the same period in 2021 was primarily due to higher interest income earned on our cash, cash equivalent, and investment balances as a result of higher interest rates for the three months ended October 31, 2022 compared to 2021, and increased foreign currency exchange gains, partially offset by increased losses from our investments and non-designated derivative instruments.

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Provision for (Benefit from) Income Taxes

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

Provision for Income Taxes

Provision for income taxes consists primarily of U.S.

taxes driven by capitalization of research and development expenditures, foreign income taxes, and withholding taxes.

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

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

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

2022 2021 Amount % 2022 2021 Amount %

Three Months Ended October 31,

2022 2021 Change

Amount Amount Amount %

(dollars in millions)

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

Provision for income taxes $ 14.4 $ 12.4 $ 2.0 16.1 %

Effective tax rate 41.9 % (13.6) %

Our income taxes for the three and nine months ended April 30, 2022 and 2021 were primarily due to foreign income taxes in profitable jurisdictions and withholding taxes.

Our effective tax rate varied for the three and nine months ended April 30, 2022 compared to the same periods in 2021 primarily due to our valuation allowance.

Our provision for income taxes for the three months ended October 31, 2022 was primarily due to U.S.

taxes driven by capitalization of research and development expenditures, withholding taxes, and foreign income taxes .

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

Our effective tax rate varied for the three months ended October 31, 2022 compared to the same period in 2021, primarily due to an increase in current taxes with no offsetting deferred benefit as a result of our valuation allowance.

Refer to Note 12.

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Liquidity and Capital Resources

April 30, 2022 July 31, 2021

October 31, 2022 July 31, 2022

(in millions)

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______________

(1) Current liabilities included net carrying amounts of convertible senior notes of $3.7 billion and $1.6 billion as of April 30, 2022 and July 31, 2021, respectively.

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

Refer to Note 8.

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

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

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

As of October 31, 2022, our total cash, cash equivalents, and investments of $5.9 billion were held for general corporate purposes.

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

investment in foreign subsidiaries.

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

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

The sale price condition for the Notes was met during the fiscal quarter ended October 31, 2022, and as a result, holders may convert their Notes at any time during the fiscal quarter ending January 31, 2023.

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

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

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

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

Refer to Note 8.

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

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

As of October 31, 2022, there were no amounts outstanding and we were in compliance

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with all covenants under the Credit Agreement.

Refer to Note 8.

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

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Capital Return

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

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

In December 2020, August 2021, and August 2022, our board of directors authorized additional $700.0 million, $676.1 million, and $915.0 million increases to this share repurchase program, respectively, bringing the total authorization under this share repurchase program to $3.3 billion.

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

The expiration date of this repurchase authorization was extended to December 31, 2023, and our repurchase program may be suspended or discontinued at any time.

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

As of October 31, 2022, $1.0 billion remained available for future share repurchases under this repurchase program.

Refer to Note 10.

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Leases and Other Material Cash Requirements

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

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

As of April 30, 2022, our purchase obligations including commitments of products and components with our manufacturing partners and component suppliers, as well as minimum or fixed purchase commitments for our use of certain cloud and other services with third-party providers, totaled $2.5 billion.

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

As of October 31, 2022, we have total operating lease obligations of $346.1 million recorded on our condensed consolidated balance sheet.

As of October 31, 2022, our commitments to purchase products, components, cloud and other services totaled $2.3 billion.

Refer to Note 9.

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

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

Nine Months Ended April 30,

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

Three Months Ended October 31,

(in millions)

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Net cash used in investing activities (1,319.8) (229.9)

Net cash used in financing activities (453.5) (768.4)

Net cash provided by financing activities 31.1 38.7

Net increase (decrease) in cash, cash equivalents, and restricted cash $ (52.0) $ 397.7

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

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

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

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

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Operating Activities

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

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

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

Cash provided by operating activities during the nine months ended April 30, 2022 was $1.5 billion, an increase of $283.8 million compared to the same period in 2021.

The increase was primarily due to growth of our business as reflected by an increase in billings, and an increase in collections during the nine months ended April 30, 2022, partially offset by higher cash expenditure to support our business growth.

Cash provided by operating activities during the three months ended October 31, 2022 was $1.2 billion, an increase of $647.8 million compared to the same period in 2021.

The increase was primarily due to growth of our business as reflected by increases in collections during the three months ended October 31, 2022, partially offset by higher cash expenditure to support our business growth.

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Investing Activities

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We expect to continue such activities as our business grows.

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

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

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decrease in purchases of investments, and an increase in proceeds from sales and maturities of investments during the nine months ended April 30, 2022.

Cash used in investing activities during the three months ended October 31, 2022 was $1.3 billion, a increase of $1.1 billion compared to the same period in 2021.

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

Financing Activities

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

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

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

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

Cash provided by financing activities during the three months ended October 31, 2022 was $31.1 million, a decrease of $7.6 million compared to the same period in 2021.

The decrease was primarily due to payments made for share repurchases of our common stock that were not settled as of July 31, 2022, offset by an increase in proceeds from the sale of shares through employee equity incentive plans and a decrease in payments for tax withholding obligations of certain employees related to the net share settlement of equity awards during the three months ended October 31, 2022.

Critical Accounting Estimates

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We evaluate our estimates and assumptions on an ongoing basis.

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

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

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

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

We believe the critical accounting estimates discussed under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended July 31, 2022 reflect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements.

There have been no significant changes to our critical accounting estimates as filed in such report, except for estimates related to convertible senior notes, which we no longer consider to be a critical accounting policy, due to our adoption of the new debt guidance.

Refer to Note 1.

Description of Business and Summary of Significant Accounting Policies in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information on our adoption of the new accounting guidance.

Recent Accounting Pronouncements

For a discussion of the recent accounting pronouncements, refer to Note 1.

Description of Business and Summary of Significant Accounting Policies in Part I, Item 1 of this Quarterly Report on Form 10-Q.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

There have been no significant changes to our critical accounting estimates as filed in such report.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis