What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-02-22 compared with 2022-11-18 · 133 added, 118 removed, 319 unchanged (44% of the section changed)

14 unchanged sentences

our intentions to sell any of our available-for-sale debt instruments;

our expectations regarding the impact of the discontinuance of the LIBO Rate upon our liquidity or financial position;

capital expenditures and share repurchases;

expectations to increase customer financing activities in the future;

expectations regarding the potential impacts of the outbreak of the coronavirus disease discovered in 2019 (“COVID-19”) and related public health measures on our business, the business of our customers, suppliers and channel partners, and the economy;

expectations regarding the potential impacts of the coronavirus disease discovered in 2019 (“COVID-19”) and related public health measures on our business, the business of our customers, suppliers and channel partners, and the economy;

and other statements regarding our future operations, financial condition and prospects, and business strategies.

9 unchanged sentences

• Results of Operations.

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

A discussion of the nature and trends in our financial results and an analysis of our financial results comparing the three and six months ended January 31, 2023 to the three and six months ended January 31, 2022.

• Liquidity and Capital Resources.

7 unchanged sentences

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 security solutions are designed to increase security while reducing our 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:

1 unchanged sentence

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.

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

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.

Our software-defined wide-area network (“SD-WAN”) is integrated with PAN-OS, so that our end-customers can get the security features of our PAN-OS ML-Powered Next-Generation Firewall together with SD-WAN functionality.

Secure Access Service Edge:

• 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.

• Prisma Access is our next-generation cloud-delivered security platform that provides secure network access for employees across all locations with continuous threat inspection and unified policy management for information technology.

We recently introduced Zero Trust Network Access (“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 to all applications and data across the enterprise, while continuously verifying trust and inspecting traffic for security.

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

Cloud Security:

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

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

from code to runtime.

• As a comprehensive Cloud Native Application Protection Platform (“CNAPP”), Prisma Cloud secures hybrid and multi-cloud environments with continuous visibility and threat prevention across the entire application lifecycle.

With code to cloud security coverage that encompasses code, infrastructure, workloads, data, networks, web applications, and APIs, Prisma Cloud is the only platform that addresses security needs at every step in the cloud journey.

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

2 unchanged sentences

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.

In October 2022, we released Cortex XSIAM ® , our autonomous Security Operations Center (“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.

1 unchanged sentence

• 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%.

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

For the second quarter of fiscal 2023 and 2022, total revenue was $1.7 billion and $1.3 billion, respectively, representing year-over-year growth of 25.7%.

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 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.

As of January 31, 2023, we had end-customers in over 180 countries.

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

1 unchanged sentence

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

Our product revenue grew to $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.

Table of Content

Our product revenue grew to $352.9 million, or 21.3% of total revenue, for the second quarter of fiscal 2023, representing year-over-year growth of 14.6%.

Product revenue is primarily generated from sales of our appliances, primarily our ML-Powered Next-Generation Firewall.

Product revenue also includes revenue derived from software licenses of Panaroma, SD-WAN, and the VM-Series.

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.

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

Our products are designed for different performance requirements throughout an organization, ranging from our PA-410, which is designed for small organizations and remote or branch offices, to our top-of-the-line PA-7080, which is designed for large-scale data centers and service provider use.

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.

Table of Content

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 subscription and support revenue grew to $1.3 billion, or 78.7% of total revenue, for the second quarter of fiscal 2023, representing year-over-year growth of 29.1%.

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.

3 unchanged sentences

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.

For example, in November 2022, we launched PAN-OS® 11.0 Nova, which introduced 50 product updates and innovations.

Among them were the new Advanced WildFire® cloud-delivered security service that brings unprecedented protection against evasive malware and the updated Advanced Threat Prevention service which now protects against zero-day injection attacks.

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.

7 unchanged sentences

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.

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

4 unchanged sentences

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

January 31, 2023 July 31, 2022

(in millions)

1 unchanged sentence

Cash, cash equivalents, and investments $ 6,167.5 $ 4,686.4

Three Months Ended October 31,

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

2023 2022 2023 2022

(dollars in millions)

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We consider billings to be a key metric used by management to manage our business.

We believe billings provides investors with an important indicator of the health and visibility of our business because it includes subscription and support revenue, which is recognized ratably over the contractual service period, and product revenue, which is recognized at the time of shipment, provided that all other conditions for revenue recognition have been met.

We believe billings provides investors with an important indicator of the health and visibility of our business because it includes subscription and support revenue, which is recognized ratably over the contractual service period, and product revenue, which is recognized at the time of hardware shipment or delivery of software license, provided that all other conditions for revenue recognition have been met.

We consider billings to be a useful metric for management and investors, particularly if we continue to experience increased sales of subscriptions and strong renewal rates for subscription and support offerings, and as we monitor our near-term cash flows.

1 unchanged sentence

We calculate billings in the following manner:

Three Months Ended October 31,

(in millions)

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

2023 2022 2023 2022

(in millions) (in millions)

Total revenue $ 1,655.1 $ 1,316.9 $ 3,218.5 $ 2,564.3

1 unchanged sentence

Billings $ 2,029.1 $ 1,607.9 $ 3,778.1 $ 2,989.5

Table of Content

• Cash Flow Provided by Operating Activities.

2 unchanged sentences

Monitoring cash flow provided by operating activities enables us to analyze our financial performance without the non-cash effects of certain items such as depreciation, amortization, and share-based compensation costs, thereby allowing us to better understand and manage the cash needs of our business.

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• Free Cash Flow (non-GAAP).

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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:

Three Months Ended October 31,

Six Months Ended January 31,

(in millions)

4 unchanged sentences

Net cash used in investing activities $ (2,484.3) $ (504.2)

Net cash provided by financing activities $ 31.1 $ 38.7

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

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2 unchanged sentences

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

Three Months Ended October 31,

Amount % of Revenue Amount % of Revenue

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

2023 2022 2023 2022

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

(dollars in millions)

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(1) Includes share-based compensation as follows:

Three Months Ended October 31,

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

2023 2022 2023 2022

(in millions)

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

5 unchanged sentences

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

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

Product revenue also includes revenue derived from software licenses of Panorama and SD-WAN.

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

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

Three Months Ended October 31,

2022 2021 Change

Amount Amount Amount %

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

2023 2022 Change 2023 2022 Change

Amount Amount Amount % Amount Amount Amount %

(dollars in millions)

Product $ 352.9 $ 308.0 $ 44.9 14.6 % $ 682.9 $ 603.5 $ 79.4 13.2 %

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.

Product revenue for the three and six months ended January 31, 2023 increased compared to the same periods in 2022 driven by increased demand for our new generation of hardware products and increase in software revenue primarily due to a new go-to-market strategy for certain Network Security offerings, partially offset by a decrease in revenue from our prior generation of hardware products.

Subscription and Support Revenue

3 unchanged sentences

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

Three Months Ended October 31,

2022 2021 Change

Amount Amount Amount %

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

2023 2022 Change 2023 2022 Change

Amount Amount Amount % Amount Amount Amount %

(dollars in millions)

2 unchanged sentences

Total subscription and support $ 1,302.2 $ 1,008.9 $ 293.3 29.1 % $ 2,535.6 $ 1,960.8 $ 574.8 29.3 %

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.

Subscription and support revenue increased for the three and six months ended January 31, 2023 compared to the same periods in 2022 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 October 31,

2022 2021 Change

Amount Amount Amount %

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

2023 2022 Change 2023 2022 Change

Amount Amount Amount % Amount Amount Amount %

(dollars in millions)

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$ 1,655.1 $ 1,316.9 $ 338.2 25.7 % $ 3,218.5 $ 2,564.3 $ 654.2 25.5 %

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.

With respect to geographic theaters, the increase in revenue for the three and six months ended January 31, 2023 compared to the same periods in 2022 was driven primarily by the Americas, due to its larger sales force and a larger percentage of our customers located in the Americas.

Revenue from our other geographic theaters, both Europe, the Middle East, and Africa (“EMEA”) and Asia Pacific and Japan (“APAC”), increased for the three and six months ended January 31, 2023 compared to the same periods in 2022 due to continued investment in our global sales force to support our growth and increase our customer base in the regions.

Table of Content

Cost of Revenue

Our cost of revenue consists of cost of product revenue and cost of subscription and support revenue.

Table of Content

Cost of Product Revenue

3 unchanged sentences

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

Three Months Ended October 31,

2022 2021 Change

Amount Amount Amount %

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

2023 2022 Change 2023 2022 Change

Amount Amount Amount % Amount Amount Amount %

(dollars in millions)

1 unchanged sentence

Number of employees at period end 142 134 8 6.0 % 142 134 8 6.0 %

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 product revenue increased for the three and six months ended January 31, 2023 compared to the same periods in 2022 due to an increase in product volume and higher costs related to our product offerings, primarily driven by supply chain challenges, partially offset by hardware product mix.

Cost of Subscription and Support Revenue

1 unchanged sentence

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 October 31,

2022 2021 Change

Amount Amount Amount %

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

2023 2022 Change 2023 2022 Change

Amount Amount Amount % Amount Amount Amount %

(dollars in millions)

1 unchanged sentence

Number of employees at period end 2,751 2,380 371 15.6 % 2,751 2,380 371 15.6 %

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.

Cost of subscription and support revenue increased for the three and six months ended January 31, 2023 compared to the same periods in 2022, primarily due to increased costs to support the growth of our subscription and support offerings.

Cloud hosting service costs, which support our cloud-based subscription offerings, increased $26.8 million for the three months ended January 31, 2023 compared to the same period in 2022, and increased $45.8 million for the six months ended January 31, 2023 compared to the same period in 2022.

Personnel costs grew $22.6 million to $161.2 million for the three months ended January 31, 2023 compared to the same period in 2022, and grew $42.4 million to $303.8 million for the six months ended January 31, 2023 compared to the same period in 2022, primarily due to headcount growth.

Table of Content

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.

1 unchanged sentence

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

Three Months Ended October 31,

Amount Gross Margin Amount Gross Margin

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

2023 2022 2023 2022

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

(dollars in millions)

2 unchanged sentences

Total gross profit $ 1,188.9 71.8 % $ 911.6 69.2 % $ 2,290.4 71.2 % $ 1,778.4 69.4 %

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.

Table of Content

Product gross margin increased for the three months ended January 31, 2023 compared to the same period in 2022, primarily due to increased software revenue and favorable hardware product mix, partially offset by higher costs related to our hardware product offerings driven by supply chain challenges.

Product gross margin decreased for the six months ended January 31, 2023 compared to the same period in 2022, primarily due to higher costs related to our hardware product offerings driven by supply chain challenges, partially offset by increased software revenue and favorable hardware product mix.

Subscription and support gross margin increased for the three and six months ended January 31, 2023 compared to the same periods in 2022, primarily due to our growth in subscription and support revenue, which outpaced the subscription and support costs.

Operating Expenses

3 unchanged sentences

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.

As of January 31, 2023, we expect to recognize approximately $2.3 billion of share-based compensation expense over a weighted-average period of approximately 2.7 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.

3 unchanged sentences

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 October 31,

2022 2021 Change

Amount Amount Amount %

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

2023 2022 Change 2023 2022 Change

Amount Amount Amount % Amount Amount Amount %

(dollars in millions)

1 unchanged sentence

Number of employees at period end 3,649 2,880 769 26.7 % 3,649 2,880 769 26.7 %

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.

Research and development expense increased for the three and six months ended January 31, 2023 compared to the same periods in 2022, primarily due to increase in personnel costs, which grew $34.5 million to $320.7 million for the three months ended January 31, 2023 compared to the same period in 2022, and grew $57.7 million to $610.8 million for the six months ended January 31, 2023 compared to the same period in 2022, largely due to headcount growth.

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

Table of Content

Sales and Marketing

3 unchanged sentences

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 %

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

2023 2022 Change 2023 2022 Change

Amount Amount Amount % Amount Amount Amount %

(dollars in millions)

1 unchanged sentence

Number of employees at period end 5,778 4,826 952 19.7 % 5,778 4,826 952 19.7 %

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.

Table of Content

Sales and marketing expense increased for the three and six months ended January 31, 2023 compared to the same periods in 2022, primarily due to increase in personnel costs, which grew $78.8 million to $482.0 million for the three months ended January 31, 2023 compared to the same period in 2022, and grew $153.9 million to $938.1 million for the six months ended January 31, 2023 compared to the same period in 2022, largely due to headcount growth and increased travel and entertainment expenses.

The increase in the six months ended January 31, 2023 was further driven by increased costs associated with in-person events and go-to-market initiatives.

General and Administrative

1 unchanged sentence

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 %

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

2023 2022 Change 2023 2022 Change

Amount Amount Amount % Amount Amount Amount %

(dollars in millions)

1 unchanged sentence

Number of employees at period end 1,612 1307 305 23.3 % 1,612 1,307 305 23.3 %

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.

General and administrative expense increased for the three and six months ended January 31, 2023 compared to the same periods in 2022 primarily due to increase in personnel costs, which grew $9.4 million to $78.7 million for the three months ended January 31, 2023 compared to the same period in 2022, and grew $8.6 million to $145.3 million for the six months ended January 31, 2023 compared to the same period in 2022.

The increase in personnel costs for both periods was primarily due to share-based compensation related to our recent acquisition and headcount growth.

The remaining increase in general and administrative expense in both periods was primarily due to increase in acquisition-related costs and slightly higher reserves as a result of increased financing receivables.

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 October 31,

2022 2021 Change

Amount Amount Amount %

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

2023 2022 Change 2023 2022 Change

Amount Amount Amount % Amount Amount Amount %

(dollars in millions)

Interest expense $ 6.9 $ 6.8 $ 0.1 1.5 % $ 13.7 $ 13.7 $ — — %

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

Interest expense was relatively flat for the three and six months ended January 31, 2023 compared to the same periods in 2022.

Table of Content

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 %

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

2023 2022 Change 2023 2022 Change

Amount Amount Amount % Amount Amount Amount %

(dollars in millions)

2 unchanged sentences

* 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.

Table of Content

The increase in other income (expense), net for the three and six months ended January 31, 2023 compared to the same periods in 2022 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 and six months ended January 31, 2023 compared to 2022.

Provision for Income Taxes

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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 October 31,

2022 2021 Change

Amount Amount Amount %

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

Change 2023 2022 Change

2023 2022 Amount % Amount Amount Amount %

(dollars in millions)

1 unchanged sentence

Effective tax rate 0.2 % (15.7) % 12.3 % (14.6) %

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.

Our provision for income taxes for the three and six months ended January 31, 2023 was 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 release of uncertain tax positions during the three months ended January 31, 2023 resulting from a tax settlement.

Refer to Note 13.

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Liquidity and Capital Resources

October 31, 2022 July 31, 2022

January 31, 2023 July 31, 2022

(in millions)

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______________

(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.

(1) Current liabilities included net carrying amounts of convertible senior notes of $3.7 billion as of both January 31, 2023 and July 31, 2022.

Refer to Note 9.

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

As of 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.

As of January 31, 2023, our total cash, cash equivalents, and investments of $6.2 billion were held for general corporate purposes.

As of January 31, 2023, we had no unremitted earnings when evaluating our outside basis difference relating to our U.S.

investment in foreign subsidiaries.

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

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

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

The sale price condition 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 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.

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 January 31, 2023 or hold the 2023 Notes until maturity on July 1, 2023.

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

We believe that our cash provided by operating activities, our existing cash, cash equivalents and investments, and existing sources of and access to financing will be sufficient to meet our anticipated cash needs should the holders choose to convert their Notes during the fiscal quarter ending April 30, 2023 or hold the 2023 Notes until maturity on July 1, 2023.

As of January 31, 2023, substantially all of our Notes remained outstanding.

Refer to Note 9.

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

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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.

Refer to Note 9.

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

As of January 31, 2023, $750.0 million remained available for future share repurchases under this repurchase program.

Refer to Note 11.

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

As of January 31, 2023, we have total operating lease obligations of $336.8 million recorded on our condensed consolidated balance sheet.

As of January 31, 2023, our commitments to purchase products, components, cloud and other services totaled $2.2 billion.

Refer to Note 10.

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

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

Three Months Ended October 31,

The following table summarizes our cash flows for the six months ended January 31, 2023 and 2022:

Six Months Ended January 31,

(in millions)

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Net cash used in investing activities (2,484.3) (504.2)

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

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Cash from operations could be affected by various risks and uncertainties, including, but not limited to, the effects of COVID-19 and other risks detailed in Part II, Item 1A “Risk Factors” in this Quarterly Report on Form 10-Q.

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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 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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Cash provided by operating activities during the six months ended January 31, 2023 was $1.9 billion, an increase of $859.8 million compared to the same period in 2022.

The increase was primarily due to growth of our business as reflected by increases in collections during the six months ended January 31, 2023, partially offset by higher cash expenditure to support our business growth.

Investing Activities

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We expect to continue such activities as our business grows.

Cash used in investing activities during 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.

Cash used in investing activities during the six months ended January 31, 2023 was $2.5 billion, an increase of $2.0 billion compared to the same period in 2022.

The increase was primarily due to an increase in purchases of investments and increase in net cash payments for business acquisitions, offset by an increase in proceeds from sales and maturities of investments during the six months ended January 31, 2023.

Financing Activities

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.

Cash used in financing activities during the six months ended January 31, 2023 was $219.7 million, a decrease of $300.1 million compared to the same period in 2022.

The decrease was primarily due to decrease in repurchases of our common stock during the six months ended January 31, 2023.

Critical Accounting Estimates

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

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis