What changed in this filing

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Item 1. Financial Statements

2023-02-22 compared with 2022-11-18 · 178 added, 95 removed, 489 unchanged (36% of the section changed)

3 unchanged sentences

(in millions, except per share data)

October 31, 2022 July 31, 2022

January 31, 2023 July 31, 2022

Current assets:

1 unchanged sentence

Short-term investments 2,000.6 1,516.0

Accounts receivable, net of allowance for credit losses of $ 8.4 and $ 8.9 at October 31, 2022 and July 31, 2022, respectively

Accounts receivable, net of allowance for credit losses of $ 8.8 and $ 8.9 at January 31, 2023 and July 31, 2022, respectively

1,278.1 2,142.5

27 unchanged sentences

100.0 shares authorized;

none issued and outstanding at October 31, 2022 and July 31, 2022

none issued and outstanding at January 31, 2023 and July 31, 2022

Common stock and additional paid-in capital;

1 unchanged sentence

1,000.0 shares authorized;

302.3 and 298.8 shares issued and outstanding at October 31, 2022 and July 31, 2022, respectively

302.4 and 298.8 shares issued and outstanding at January 31, 2023 and July 31, 2022, respectively

2,303.0 1,932.7

8 unchanged sentences

(Unaudited, in millions, except per share data)

Three Months Ended

Three Months Ended Six Months Ended

January 31, January 31,

2023 2022 2023 2022

Product $ 352.9 $ 308.0 $ 682.9 $ 603.5

24 unchanged sentences

PALO ALTO NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited, in millions)

Three Months Ended

Three Months Ended Six Months Ended

January 31, January 31,

2023 2022 2023 2022

Net income (loss) $ 84.2 $ ( 93.5 ) $ 104.2 $ ( 197.1 )

3 unchanged sentences

Change in unrealized gains (losses) 63.1 ( 14.7 ) 20.6 ( 16.6 )

Net realized (gains) losses reclassified into earnings 14.8 2.7

Net realized losses reclassified into earnings 3.4 4.6 18.2 7.3

Net change on cash flow hedges 66.5 ( 10.1 ) 38.8 ( 9.3 )

Other comprehensive loss ( 55.5 ) ( 1.4 )

Comprehensive loss $ ( 35.5 ) $ ( 105.0 )

Other comprehensive income (loss) 100.0 ( 18.9 ) 44.5 ( 20.3 )

Comprehensive income (loss) $ 184.2 $ ( 112.4 ) $ 148.7 $ ( 217.4 )

See notes to condensed consolidated financial statements .

3 unchanged sentences

(Unaudited, in millions)

Three Months Ended October 31, 2022

Three Months Ended January 31, 2023

Additional Paid-In Capital Accumulated

3 unchanged sentences

Shares Amount

Balance as of July 31, 2022 298.8 $ 1,932.7 $ ( 55.6 ) $ ( 1,667.1 ) $ 210.0

Balance as of October 31, 2022 302.3 $ 2,266.2 $ ( 111.1 ) $ ( 1,647.1 ) $ 508.0

Net income — — — 84.2 84.2

Other comprehensive loss — — ( 55.5 ) — ( 55.5 )

Other comprehensive income — — 100.0 — 100.0

Issuance of common stock in connection with employee equity incentive plans 1.9 0.8 — — 0.8

1 unchanged sentence

Share-based compensation for equity-based awards — 287.5 — — 287.5

Repurchase and retirement of common stock ( 1.8 ) ( 250.0 ) — — ( 250.0 )

Balance as of January 31, 2023 302.4 $ 2,303.0 $ ( 11.1 ) $ ( 1,562.9 ) $ 729.0

Three Months Ended January 31, 2022

Additional Paid-In Capital Accumulated

Comprehensive Loss Accumulated

Deficit Total

Stockholders’

Shares Amount

Balance as of October 31, 2021 296.0 $ 2,033.9 $ ( 11.3 ) $ ( 1,503.7 ) $ 518.9

Three Months Ended October 31, 2021

Net loss — — — ( 93.5 ) ( 93.5 )

Other comprehensive loss — — ( 18.9 ) — ( 18.9 )

Issuance of common stock in connection with employee equity incentive plans 2.5 0.3 — — 0.3

Taxes paid related to net share settlement of equity awards — ( 8.6 ) — — ( 8.6 )

Share-based compensation for equity-based awards — 269.6 — — 269.6

Repurchase and retirement of common stock ( 3.1 ) ( 550.0 ) — — ( 550.0 )

Balance as of January 31, 2022 295.4 $ 1,745.2 $ ( 30.2 ) $ ( 1,597.2 ) $ 117.8

Table of Content

Six Months Ended January 31, 2023

Additional Paid-In Capital Accumulated

4 unchanged sentences

Balance as of July 31, 2022 298.8 $ 1,932.7 $ ( 55.6 ) $ ( 1,667.1 ) $ 210.0

Net income — — — 104.2 104.2

Other comprehensive income — — 44.5 — 44.5

Issuance of common stock in connection with employee equity incentive plans 5.4 69.0 — — 69.0

Taxes paid related to net share settlement of equity awards — ( 15.4 ) — — ( 15.4 )

Share-based compensation for equity-based awards — 566.7 — — 566.7

Repurchase and retirement of common stock ( 1.8 ) ( 250.0 ) — — ( 250.0 )

Balance as of January 31, 2023 302.4 $ 2,303.0 $ ( 11.1 ) $ ( 1,562.9 ) $ 729.0

Six Months Ended January 31, 2022

Additional Paid-In Capital Accumulated

Comprehensive Loss Accumulated

Deficit Total

Stockholders’

Shares Amount

Balance as of July 31, 2021 291.9 $ 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 )

4 unchanged sentences

Share-based compensation for equity-based awards — 535.3 — — 535.3

Balance as of October 31, 2021 296.0 $ 2,033.9 $ ( 11.3 ) $ ( 1,503.7 ) $ 518.9

Repurchase and retirement of common stock ( 3.1 ) ( 550.0 ) — — ( 550.0 )

Balance as of January 31, 2022 295.4 $ 1,745.2 $ ( 30.2 ) $ ( 1,597.2 ) $ 117.8

See notes to condensed consolidated financial statements.

Table of Content

2 unchanged sentences

(Unaudited, in millions)

Three Months Ended

Six Months Ended

Cash flows from operating activities

30 unchanged sentences

Repurchases of common stock

( 272.7 ) ( 550.0 )

Proceeds from sales of shares through employee equity incentive plans

1 unchanged sentence

( 15.4 ) ( 28.6 )

Net cash provided by financing activities 31.1 38.7

Net cash used in financing activities ( 219.7 ) ( 519.8 )

Net increase (decrease) in cash, cash equivalents, and restricted cash ( 772.7 ) 47.5

4 unchanged sentences

Restricted cash included in prepaid expenses and other current assets 5.8 4.9

Restricted cash included in other assets — 0.5

Total cash, cash equivalents, and restricted cash $ 1,352.1 $ 1,927.6

19 unchanged sentences

Summary of Significant Accounting Policies

There have been no material changes to our significant accounting policies as of and for the three months ended October 31, 2022, as compared to the significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended July 31, 2022.

There have been no material changes to our significant accounting policies as of and for the six months ended January 31, 2023, as compared to the significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended July 31, 2022.

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

4 unchanged sentences

The following table presents revenue by geographic theater (in millions):

Three Months Ended October 31,

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

2023 2022 2023 2022

United States $ 1,042.3 $ 858.6 $ 2,048.6 $ 1,670.3

6 unchanged sentences

The following table presents revenue for groups of similar products and services (in millions):

Three Months Ended October 31,

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

2023 2022 2023 2022

Product $ 352.9 $ 308.0 $ 682.9 $ 603.5

5 unchanged sentences

Deferred Revenue

During the three months ended October 31, 2022 and 2021, we recognized approximately $ 1.1 billion and $ 840.0 million of revenue pertaining to amounts that were deferred as of July 31, 2022 and 2021, respectively.

During the six months ended January 31, 2023 and 2022, we recognized approximately $ 2.1 billion and $ 1.6 billion of revenue pertaining to amounts that were deferred as of July 31, 2022 and 2021, respectively.

Remaining Performance Obligations

Remaining performance obligations were $ 8.3 billion as of October 31, 2022, of which we expect to recognize as revenue approximately $ 4.2 billion over the next 12 months and the remainder thereafter.

Remaining performance obligations were $ 8.8 billion as of January 31, 2023, of which we expect to recognize as revenue approximately $ 4.4 billion over the next 12 months and the remainder thereafter.

Fair Value Measurements

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

October 31, 2022 July 31, 2022

The following table presents our financial assets and liabilities measured at fair value on a recurring basis as of January 31, 2023 and July 31, 2022 (in millions):

January 31, 2023 July 31, 2022

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

21 unchanged sentences

Table of Content

October 31, 2022 July 31, 2022

January 31, 2023 July 31, 2022

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

14 unchanged sentences

Refer to Note 9.

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

Debt for the carrying amount and estimated fair value of our convertible senior notes as of January 31, 2023 and July 31, 2022.

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 October 31, 2022 and July 31, 2022 (in millions):

October 31, 2022

The following tables summarize the amortized cost, unrealized gains and losses, and fair value of our available-for-sale debt securities as of January 31, 2023 and July 31, 2022 (in millions):

January 31, 2023

Amortized Cost Unrealized Gains Unrealized Losses Fair Value

3 unchanged sentences

Corporate debt securities 24.5 — — 24.5

government and agency securities 159.9 — — 159.9

Total available-for-sale cash equivalents $ 206.2 $ — $ — $ 206.2

23 unchanged sentences

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

As of October 31, 2022, the gross unrealized losses that have been in a continuous unrealized loss position for less than 12 months were $ 45.7 million, which were related to $ 3.5 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.

As of January 31, 2023, the gross unrealized losses that have been in a continuous unrealized loss position for less than 12 months were $ 17.2 million, which were related to $ 2.5 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 $ 10.8 million, which were related to $ 571.6 million of available-for-sale debt securities.

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.

1 unchanged sentence

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 three months ended October 31, 2022 and 2021.

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

We did not recognize any credit losses related to our available-for-sale debt securities during the three and six months ended January 31, 2023 and 2022.

The following table summarizes the amortized cost and fair value of our available-for-sale debt securities as of January 31, 2023, by contractual years-to-maturity (in millions):

Amortized Cost Fair Value

6 unchanged sentences

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

As of October 31, 2022 and July 31, 2022, the carrying values of our marketable equity securities were $ 933.2 million and $ 1.2 billion, respectively.

There were no unrealized gains or losses recognized for these securities during the three months ended October 31, 2022 and 2021.

As of January 31, 2023 and July 31, 2022, the carrying values of our marketable equity securities were $ 655.9 million and $ 1.2 billion, respectively.

There were no unrealized gains or losses recognized for these securities during the three and six months ended January 31, 2023 and 2022.

Table of Content

Financing Receivables

The following table summarizes our short-term and long-term financing receivables as of October 31, 2022 and July 31, 2022 (in millions):

October 31, 2022 July 31, 2022

The following table summarizes our short-term and long-term financing receivables as of January 31, 2023 and July 31, 2022 (in millions):

January 31, 2023 July 31, 2022

Short-term financing receivables, gross

8 unchanged sentences

$ 218.1 $ 192.1

There was no significant activity in allowance for credit losses during the three months ended October 31, 2022 and 2021.

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

There was no significant activity in allowance for credit losses during the three and six months ended January 31, 2023 and 2022.

Past due amounts on financing receivables were not material as of January 31, 2023 and July 31, 2022.

Derivative Instruments

3 unchanged sentences

We enter into foreign currency derivative contracts with maturities of 24 months or less, which we designate as cash flow hedges, to manage the foreign currency exchange risk associated with our operating expenditures.

As of October 31, 2022 and July 31, 2022, the total notional amount of our outstanding foreign currency forward contracts was $ 1.3 billion and $ 856.9 million, respectively.

As of January 31, 2023 and July 31, 2022, the total notional amount of our outstanding foreign currency forward contracts was $ 1.1 billion and $ 856.9 million, respectively.

Refer to Note 3.

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

As of October 31, 2022, unrealized losses in accumulated other comprehensive income (“AOCI”) related to our cash flow hedges were $ 52.5 million, of which $ 44.2 million of losses are expected to be recognized into earnings within the next 12 months.

Fair Value Measurements for the fair value of our derivative instruments as reported on our condensed consolidated balance sheets as of January 31, 2023 and July 31, 2022.

As of January 31, 2023, unrealized gains in accumulated other comprehensive income (“AOCI”) related to our cash flow hedges were $ 14.2 million, of which $ 11.9 million of gains are expected to be recognized into earnings within the next 12 months.

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.

Intangible Assets

Cider Security Ltd.

On December 20, 2022, we completed our acquisition of Cider Security Ltd.

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

We expect the acquisition will support Prisma Cloud’s platform approach to securing the entire application security lifecycle from code-to-cloud.

The total purchase consideration for the acquisition of Cider was $ 198.3 million, which consisted of the following (in millions):

Fair value of replacement awards 0.3

Total $ 198.3

As part of the acquisition, we issued replacement equity awards, which included 0.2 million shares of our restricted common stock.

The total fair value of the replacement equity awards was $ 48.6 million, of which 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 preliminary estimated fair values, as presented in the following table (in millions):

Goodwill $ 164.6

Identified intangible assets 27.8

Net liabilities assumed ( 6.5 )

Total $ 198.3

Table of Content

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

The goodwill is expected to be deductible for U.S.

income tax purposes.

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

Fair Value Estimated Useful Life

Developed technology

$ 27.8 5 years

Goodwill and Intangible Assets

The following table presents details of our goodwill during the six months ended January 31, 2023 (in millions):

Balance as of July 31, 2022 $ 2,747.7

Goodwill acquired 164.6

Balance as of January 31, 2023 $ 2,912.3

Purchased Intangible Assets

The following table presents details of our purchased intangible assets as of October 31, 2022 and July 31, 2022 (in millions):

October 31, 2022 July 31, 2022

The following table presents details of our purchased intangible assets as of January 31, 2023 and July 31, 2022 (in millions):

January 31, 2023 July 31, 2022

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

9 unchanged sentences

Total purchased intangible assets $ 830.0 $ ( 468.3 ) $ 361.7 $ 798.9 $ ( 414.4 ) $ 384.5

We recognized amortization expense of $ 29.1 million and $ 31.8 million for the three months ended October 31, 2022 and 2021, respectively.

Table of Content

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

We recognized amortization expense of $ 24.8 million and $ 53.9 million for the three and six months ended January 31, 2023, respectively, and $ 31.7 million and $ 63.5 million for the three and six months ended January 31, 2022, respectively.

The following table summarizes estimated future amortization expense of our intangible assets subject to amortization as of January 31, 2023 (in millions):

Fiscal years ending July 31,

1 unchanged sentence

Future amortization expense $ 357.8 $ 50.7 $ 97.1 $ 83.4 $ 61.6 $ 34.6 $ 30.4

Table of Content

Convertible Senior Notes

22 unchanged sentences

Holders of the Notes of a series who convert their Notes of such series in connection with certain corporate events that constitute a “make-whole fundamental change” under the applicable Indenture are, under certain circumstances, entitled to an increase in the conversion rate for such series of Notes.

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 for the Notes was met during the fiscal quarter ended January 31, 2023, and as a result, holders may convert their Notes at any time during the fiscal quarter ending April 30, 2023.

The net carrying amount of the Notes was classified as a current liability on our condensed consolidated balance sheet as of January 31, 2023.

Table of Content

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 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.

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

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

October 31, 2022 July 31, 2022

January 31, 2023 July 31, 2022

2023 Notes 2025 Notes Total 2023 Notes 2025 Notes Total

3 unchanged sentences

Net carrying amount $ 1,690.7 $ 1,989.6 $ 3,680.3 $ 1,689.3 $ 1,987.5 $ 3,676.8

The total estimated fair value of the 2023 Notes and 2025 Notes were $ 3.3 billion and $ 3.5 billion at October 31, 2022, respectively, and $ 3.2 billion and $ 3.5 billion at July 31, 2022, respectively.

The total estimated fair value of the 2023 Notes and 2025 Notes were $ 3.0 billion and $ 3.3 billion at January 31, 2023, respectively, and $ 3.2 billion and $ 3.5 billion at July 31, 2022, 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 October 31, 2022 and July 31, 2022 to be a Level 2 measurement.

We consider the fair value of the Notes at January 31, 2023 and July 31, 2022 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.

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

Three Months Ended October 31,

2023 Notes 2025 Notes Total 2023 Notes 2025 Notes Total

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

2023 2022 2023 2022

2023 Notes 2025 Notes Total 2023 Notes 2025 Notes Total 2023 Notes 2025 Notes Total 2023 Notes 2025 Notes Total

Contractual interest expense $ 3.2 $ 2.0 $ 5.2 $ 3.1 $ 1.9 $ 5.0 $ 6.4 $ 3.8 $ 10.2 $ 6.3 $ 3.8 $ 10.1

13 unchanged sentences

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

Table of Content

Separately, but concurrently with the issuance of each series of our 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.

Table of Content

The following table presents details of our Warrants (in millions, except per share data):

16 unchanged sentences

We do not anticipate that the discontinuance of the LIBO Rate will materially impact our liquidity or financial position.

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

As of January 31, 2023, there were no amounts outstanding and we were in compliance with all covenants under the Credit Agreement.

Commitments and Contingencies

2 unchanged sentences

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.

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 as of October 31, 2022 (in millions):

Fiscal years ending July 31,

2 unchanged sentences

$ 293.5 $ 120.5 $ 98.0 $ 35.0 $ 40.0 $ — $ —

Table of Content

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.

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

The following table presents details of the aggregate future non-cancelable purchase commitments under these agreements as of January 31, 2023 (in millions):

Fiscal years ending July 31,

3 unchanged sentences

Additionally, we have a $ 159.6 million minimum purchase commitment with a service provider through September 2027 with no specified annual commitments.

Table of Content

We are subject to legal proceedings, claims, and litigation arising in the ordinary course of business, including intellectual property litigation.

2 unchanged sentences

To the extent there is a reasonable possibility that a loss exceeding amounts already recognized may be incurred and the amount of such additional loss would be material, we will either disclose the estimated additional loss or state that such an estimate cannot be made.

As of October 31, 2022, we have not recorded any significant accruals for loss contingencies associated with such legal proceedings, determined that an unfavorable outcome is probable or reasonably possible, or determined that the amount or range of any possible loss is reasonably estimable.

As of January 31, 2023, we have not recorded any significant accruals for loss contingencies associated with such legal proceedings, determined that an unfavorable outcome is probable or reasonably possible, or determined that the amount or range of any possible loss is reasonably estimable.

Stockholders’ Equity

4 unchanged sentences

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.

We did not repurchase shares of our common stock during the three months ended October 31, 2022 and 2021.

During the three months ended October 31, 2022, we paid $ 22.7 million related to share repurchases of our common stock that were not settled as of July 31, 2022.

As of October 31, 2022, $ 1.0 billion remained available 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):

Three and Six Months Ended January 31,

Number of shares repurchased 1.8 3.1

Weighted average price per share (1)

$ 138.65 $ 177.93

Aggregate purchase price (1)

$ 250.0 $ 550.0

______________

(1) Includes transaction costs

In addition to the share repurchase activity summarized in the table above, during the six months ended January 31, 2023, we paid $ 22.7 million related to share repurchases of our common stock that were not settled as of July 31, 2022.

As of January 31, 2023, $ 750.0 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 condensed consolidated balance sheets.

1 unchanged sentence

Restricted Stock Unit (“RSU”) and Performance-Based Stock Unit (“PSU”) Activities

The following table summarizes the RSU and PSU activity under our stock plans during the three months ended October 31, 2022 (in millions, except per share amounts):

The following table summarizes the RSU and PSU activity under our stock plans during the six months ended January 31, 2023 (in millions, except per share amounts):

RSUs Outstanding PSUs Outstanding

4 unchanged sentences

Forfeited ( 0.8 ) $ 119.48 ( 0.2 ) $ 135.26

Balance—October 31, 2022 13.5 $ 122.57 $ 2,311.7 4.5 $ 123.10 $ 772.7

Balance—January 31, 2023 15.4 $ 133.47 $ 2,442.8 4.5 $ 124.21 $ 711.5

______________

5 unchanged sentences

The actual number of PSUs earned and eligible to vest is determined based on the level of achievement against certain performance conditions such as revenue growth, billings and operating margin, or individual performance for the fiscal year, or market conditions, or a combination of performance and market conditions for certain awards.

During the three months ended October 31, 2022, we granted 0.8 million shares of PSUs with both service and market conditions to certain employees.

During the six months ended January 31, 2023, we granted 0.8 million shares of PSUs with both service and market conditions to certain employees.

The market conditions are satisfied when the price of our common stock is equal to or exceeds stock price targets of $ 233.33 , $ 266.67 , $ 300.00 , and $ 333.33 based on the average closing price for 30 consecutive trading days during the three - or four-year period following the date of grant.

To the extent that the market conditions have been met, one-fourth of the awards will vest on each anniversary date of the grant date, subject to continued service.

As of October 31, 2022, the stock price targets for these PSU awards have not been met.

During the three months ended October 31, 2022 and 2021, we granted 1.6 million and 0.6 million shares of PSUs, respectively, which contain service, performance and market conditions, to certain employees.

As of January 31, 2023, the stock price targets for these PSU awards have not been met.

During the six months ended January 31, 2023 and 2022, we granted 1.6 million and 0.6 million shares of PSUs, respectively, which contain service, performance and market conditions, to certain employees.

The service conditions are satisfied over a period of one to three years .

1 unchanged sentence

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

As of October 31, 2022, we have approved 2.3 million shares of PSUs, which will be granted upon the performance condition being established during the next two years.

As of January 31, 2023, we have approved 2.3 million shares of PSUs, which will be granted upon the performance condition being established during the next two years.

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

The following table summarizes the assumptions used and the grant-date fair value of these PSUs granted:

Three Months Ended

Six Months Ended

Volatility 39.6 % - 44.8 %

11 unchanged sentences

The market conditions were achieved when certain stock price targets were met.

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

As of January 31, 2023, all stock price targets for our outstanding PSOs have been satisfied.

One-fourth of the PSOs will vest on each anniversary date of the grant date, subject to continued service.

The contractual term for the PSOs outstanding ranges from seven to seven and a half years following the date of grant in fiscal year 2018 and 2019.

The following table summarizes the PSO activity under our stock plans during the three months ended October 31, 2022 (in millions, except per share amounts):

The following table summarizes the PSO activity under our stock plans during the six months ended January 31, 2023 (in millions, except per share amounts):

PSOs Outstanding

2 unchanged sentences

Balance—July 31, 2022 8.0 $ 64.85 3.2 $ 809.3

Balance—October 31, 2022 8.0 $ 64.85 2.9 $ 851.0

Exercisable—October 31, 2022 8.0 $ 64.85 2.9 $ 851.0

Balance—January 31, 2023 8.0 $ 64.85 2.7 $ 747.7

Exercisable—January 31, 2023 8.0 $ 64.85 2.7 $ 747.7

Table of Content

1 unchanged sentence

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

Three Months Ended

Three Months Ended Six Months Ended

January 31, January 31,

2023 2022 2023 2022

Cost of product revenue

$ 2.6 $ 2.3 $ 5.0 $ 4.6

Cost of subscription and support revenue

30.7 27.7 59.5 54.4

Research and development

129.7 123.6 247.7 249.2

Sales and marketing

88.4 79.8 175.8 153.1

General and administrative

38.5 31.7 67.9 64.1

Total share-based compensation $ 289.9 $ 265.1 $ 555.9 $ 525.4

As of October 31, 2022, total compensation cost related to unvested share-based awards not yet recognized was $ 2.0 billion.

As of January 31, 2023, total compensation cost related to unvested share-based awards not yet recognized was $ 2.3 billion.

This cost is expected to be amortized over a weighted-average period of approximately 2.7 years .

For the three months ended October 31, 2022 and 2021, our provision for income taxes reflected an effective tax rate of 41.9 % and negative 13.6 %, respectively.

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

taxes, withholding taxes, and foreign income taxes.

Our effective tax rate increased compared to the same period last year primarily due to an increase in current U.S.

taxes as a result of mandatory capitalization and amortization of research and development expenditures incurred in fiscal year 2023, as required by the 2017 Tax Cuts and Jobs Act (“TCJA”).

There is no offsetting deferred benefit due to our valuation allowance.

Our income taxes for the three months ended October 31, 2021 were primarily due to foreign income taxes and withholding taxes.

For the three and six months ended January 31, 2023, our provision for income taxes reflected an effective tax rate of 0.2 % and 12.3 %, respectively.

For the three and six months ended January 31, 2022, our provision for income taxes reflected an effective tax rate of negative 15.7 % and negative 14.6 %, respectively.

Our income taxes for the three and six months ended January 31, 2023 were primarily due to U.S.

federal and state income taxes, withholding taxes, and foreign income taxes.

Our effective tax rate varied for the three and six months ended January 31, 2023 compared to the same periods in 2022 primarily due to an increase in current taxes driven by capitalization of research and development expenditures with no offsetting deferred benefit as a result of our valuation allowance.

This increase was offset by a tax benefit from a release of tax reserves related to uncertain tax positions resulting from an agreement with a non-U.S.

tax authority to pay $ 28.9 million to settle a tax audit during the three months ended January 31, 2023.

Our income taxes for the three and six months ended January 31, 2022 were primarily due to foreign income taxes and withholding taxes.

Our effective tax rates differed from the U.S.

statutory tax rate primarily due to changes in our valuation allowance.

As of January 31, 2023, our gross uncertain tax positions were $ 396.0 million and our interest and penalties were $ 6.7 million.

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

Net Income (Loss) Per Share

3 unchanged sentences

Potentially dilutive securities also include warrants related to the issuance of convertible senior notes and equity awards under our employee equity incentive plans using the treasury stock method.

Table of Content

The following table presents the computation of basic and diluted net income (loss) per share of common stock (in millions, except per share data):

Three Months Ended

Three Months Ended Six Months Ended

January 31, January 31,

2023 2022 2023 2022

Net income (loss) $ 84.2 $ ( 93.5 ) $ 104.2 $ ( 197.1 )

7 unchanged sentences

Net income (loss) per share, diluted $ 0.25 $ ( 0.32 ) $ 0.31 $ ( 0.67 )

Table of Content

The following securities were excluded from the computation of diluted net income (loss) per share of common stock as their effect would have been antidilutive or issuance of such shares is contingent upon the satisfaction of certain conditions which were not satisfied by the end of the applicable period (in millions):

Three Months Ended

Three Months Ended Six Months Ended

January 31, January 31,

2023 2022 2023 2022

Convertible senior notes — 39.2 — 39.2

4 unchanged sentences

The following table sets forth the components of other income (expense), net (in millions):

Three Months Ended

Three Months Ended Six Months Ended

January 31, January 31,

2023 2022 2023 2022

Interest income $ 56.6 $ 1.9 $ 86.0 $ 3.3

2 unchanged sentences

Total other income (expense), net $ 51.4 $ ( 0.1 ) $ 77.4 $ ( 1.7 )

Subsequent Event

Business Combination

On November 17, 2022, we entered into a definitive agreement to acquire Cider Security Ltd., a privately-held cyber security company, for total consideration of approximately $ 250.0 million, including approximately $ 194.6 million in cash and approximately $ 55.4 million in replacement equity awards, subject to adjustment.

We expect the acquisition will support Prisma Cloud’s platform approach to securing the entire application security lifecycle from code-to-cloud.

The proposed acquisition is expected to close during our second quarter of fiscal 2023, subject to the satisfaction of customary closing conditions.

Table of Content

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 1. Financial Statements