What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-24 compared with 2023-02-22 · 100 added, 97 removed, 355 unchanged (36% of the section changed)

4 unchanged sentences

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;

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

expectations regarding drivers of and factors affecting growth in our business;

21 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 and six months ended January 31, 2023 to the three and six months ended January 31, 2022.

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, 2023 to the three and nine months ended April 30, 2022.

• Liquidity and Capital Resources.

9 unchanged sentences

Our company focuses on delivering value in five fundamental areas:

Table of Content

Table of Conten ts

Network Security:

3 unchanged sentences

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.

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 ML-Powered Next-Generation Firewall together with SD-WAN functionality.

Secure Access Service Edge:

2 unchanged sentences

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.

Prisma Access is also combined with Prisma SD-WAN to provide 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:

• 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.

• As a comprehensive Cloud Native Application Protection Platform (“CNAPP”), Prisma Cloud removes friction and guesswork out of securing hybrid and multi-cloud environments with continuous visibility and threat prevention.

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

7 unchanged sentences

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%.

For the third quarter of fiscal 2023 and 2022, total revenue was $1.7 billion and $1.4 billion, respectively, representing year-over-year growth of 24.1%.

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

As of April 30, 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.

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%.

Table of Conten ts

Our product revenue grew to $388.1 million, or 22.6% of total revenue, for the third quarter of fiscal 2023, representing year-over-year growth of 10.4%.

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

4 unchanged sentences

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

Our subscription and support revenue grew to $1.3 billion, or 77.4% of total revenue, for the third quarter of fiscal 2023, representing year-over-year growth of 28.7%.

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 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.

For example, in March 2023, we enhanced our Prisma SASE capabilities for organizations to leverage the power of artificial intelligence to drive better security outcomes and operating efficiencies.

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.

4 unchanged sentences

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.

Worsening economic conditions, including inflation, higher interest rates, slower growth, fluctuations in foreign exchange rates, and other conditions such as the effects of COVID-19, may adversely affect our results of operations and financial performance.

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.

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.

Table of Content

While we have experienced improvements in the availability of chips and components in general during the third quarter of fiscal 2023, we are still incurring increased costs and experiencing increased lead time for certain product deliveries to our end-customers.

We will continue to work to minimize the effects from supply chain challenges.

Table of Conten ts

Key Financial Metrics

1 unchanged sentence

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

January 31, 2023 July 31, 2022

April 30, 2023 July 31, 2022

(in millions)

1 unchanged sentence

Cash, cash equivalents, and investments $ 6,668.0 $ 4,686.4

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

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

2023 2022 2023 2022

19 unchanged sentences

We calculate billings in the following manner:

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

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

2023 2022 2023 2022

3 unchanged sentences

Billings $ 2,256.2 $ 1,796.9 $ 6,034.3 $ 4,786.4

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Table of Conten ts

• Cash Flow Provided by Operating Activities.

8 unchanged sentences

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:

Six Months Ended January 31,

Nine Months Ended April 30,

(in millions)

5 unchanged sentences

Net cash used in financing activities $ (91.5) $ (453.5)

Table of Content

Table of Conten ts

Results of Operations

1 unchanged sentence

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

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

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

2023 2022 2023 2022

20 unchanged sentences

Interest expense (7.8) (0.5) % (6.8) (0.5) % (21.5) (0.4) % (20.5) (0.5) %

Other income (expense), net 51.4 3.1 % (0.1) — % 77.4 2.4 % (1.7) (0.1) %

Other income, net 60.1 3.5 % 1.9 0.1 % 137.5 2.8 % 0.2 — %

Income (loss) before income taxes 131.0 7.6 % (52.5) (3.8) % 249.8 5.1 % (224.5) (5.7) %

3 unchanged sentences

(1) Includes share-based compensation as follows:

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

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

2023 2022 2023 2022

14 unchanged sentences

We expect our revenue to vary from quarter to quarter based on seasonal and cyclical fact ors.

Table of Content

Table of Conten ts

Product Revenue

3 unchanged sentences

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

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

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

2023 2022 Change 2023 2022 Change

2 unchanged sentences

Product $ 388.1 $ 351.5 $ 36.6 10.4 % $ 1,071.0 $ 955.0 $ 116.0 12.1 %

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.

Product revenue for the three and nine months ended April 30, 2023 increased compared to the same periods in 2022 driven by increased demand for our new generation of hardware products and increased software revenue primarily due to a new go-to-market strategy for certain Network Security offerings, partially offset by decreased 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 January 31, Six Months Ended January 31,

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

2023 2022 Change 2023 2022 Change

4 unchanged sentences

Total subscription and support $ 1,332.8 $ 1,035.2 $ 297.6 28.7 % $ 3,868.4 $ 2,996.0 $ 872.4 29.1 %

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.

Subscription and support revenue increased for the three and nine months ended April 30, 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 January 31, Six Months Ended January 31,

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

2023 2022 Change 2023 2022 Change

6 unchanged sentences

$ 1,720.9 $ 1,386.7 $ 334.2 24.1 % $ 4,939.4 $ 3,951.0 $ 988.4 25.0 %

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

With respect to geographic theaters, the increases in revenue for the three and nine months ended April 30, 2023 compared to the same periods in 2022 were 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, Europe, the Middle East, and Africa (“EMEA”) and Asia Pacific and Japan (“APAC”), increased for the three and nine months ended April 30, 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 Conten ts

Cost of Revenue

4 unchanged sentences

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

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

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

We expect our cost of product revenue to fluctuate with our revenue from hardware products.

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

2023 2022 Change 2023 2022 Change

3 unchanged sentences

Number of employees at period end 141 147 (6) (4.1) % 141 147 (6) (4.1) %

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 product revenue decreased for the three months ended April 30, 2023 compared to the same period in 2022 due to decreased demand for our prior generation hardware products, partially offset by increased demand for our new generation hardware products.

The decrease was further driven by lower costs primarily due to an easing of supply chain challenges during the three months ended April 30, 2023.

Cost of product revenue was relatively flat for the nine months ended April 30, 2023 compared to the same period in 2022 due to increased demand for our new generation hardware products as we shifted away from prior generation, and higher costs primarily driven by supply chain challenges during the first two quarters of fiscal 2023, offset by hardware product mix.

Cost of Subscription and Support Revenue

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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 January 31, Six Months Ended January 31,

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

2023 2022 Change 2023 2022 Change

3 unchanged sentences

Number of employees at period end 2,815 2,400 415 17.3 % 2,815 2,400 415 17.3 %

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

Cost of subscription and support revenue increased for the three and nine months ended April 30, 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 $27.9 million for the three months ended April 30, 2023 compared to the same period in 2022, and increased $73.6 million for the nine months ended April 30, 2023 compared to the same period in 2022.

Personnel costs grew $25.8 million to $168.3 million for the three months ended April 30, 2023 compared to the same period in 2022, and grew $68.2 million to $472.1 million for the nine months ended April 30, 2023 compared to the same period in 2022, primarily due to headcount growth.

Table of Conten ts

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 January 31, Six Months Ended January 31,

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

2023 2022 2023 2022

4 unchanged sentences

Total gross profit $ 1,246.1 72.4 % $ 946.2 68.2 % $ 3,536.5 71.6 % $ 2,724.6 69.0 %

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.

Product gross margin increased for the three months ended April 30, 2023 compared to the same period in 2022, primarily due to increased software revenue, lower costs primarily driven by an easing of supply chain challenges, and a favorable hardware product mix.

Product gross margin increased for the nine months ended April 30, 2023 compared to the same period in 2022, primarily due to increased software revenue and a favorable hardware product mix, partially offset by higher costs primarily driven by supply chain challenges during the first two quarters of fiscal 2023.

Subscription and support gross margin increased for the three and nine months ended April 30, 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 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.

As of April 30, 2023, we expect to recognize approximately $2.1 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.

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 January 31, Six Months Ended January 31,

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

2023 2022 Change 2023 2022 Change

3 unchanged sentences

Number of employees at period end 3,693 3,047 646 21.2 % 3,693 3,047 646 21.2 %

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

Research and development expense increased for the three and nine months ended April 30, 2023 compared to the same periods in 2022, primarily due to increased personnel costs, which grew $50.2 million to $328.0 million for the three months ended April 30, 2023 compared to the same period in 2022, and grew $107.9 million to $938.8 million for the nine months ended April 30, 2023 compared to the same period in 2022, largely due to headcount growth.

Table of Conten ts

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 January 31, Six Months Ended January 31,

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

2023 2022 Change 2023 2022 Change

3 unchanged sentences

Number of employees at period end 5,710 4,908 802 16.3 % 5,710 4,908 802 16.3 %

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.

Sales and marketing expense increased for the three and nine months ended April 30, 2023 compared to the same periods in 2022, primarily due to increased personnel costs, which grew $69.9 million to $482.8 million for the three months ended April 30, 2023 compared to the same period in 2022, and grew $223.8 million to $1.4 billion for the nine months ended April 30, 2023 compared to the same period in 2022, largely due to headcount growth.

The increases in both periods were further driven by increased costs associated with marketing activities.

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 January 31, Six Months Ended January 31,

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

2023 2022 Change 2023 2022 Change

3 unchanged sentences

Number of employees at period end 1,620 1,368 252 18.4 % 1,620 1,368 252 18.4 %

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.

General and administrative expense increased for the three and nine months ended April 30, 2023 compared to the same periods in 2022 primarily due to increased personnel costs, which grew $9.4 million to $77.8 million for the three months ended April 30, 2023 compared to the same period in 2022, and grew $18.0 million to $223.1 million for the nine months ended April 30, 2023 compared to the same period in 2022.

The increases in personnel costs for both periods were primarily due to share-based compensation related to our recent acquisitions and headcount growth.

The increases in both periods were further driven by slightly higher reserves due to increased receivables as a result of our business growth.

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 January 31, Six Months Ended January 31,

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

2023 2022 Change 2023 2022 Change

2 unchanged sentences

Interest expense $ 7.8 $ 6.8 $ 1.0 14.7 % $ 21.5 $ 20.5 $ 1.0 4.9 %

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 January 31, Six Months Ended January 31,

Interest expense increased slightly for the three and nine months ended April 30, 2023 compared to the same periods in 2022 primarily due to certain additional costs during the three months ended April 30, 2023.

Table of Conten ts

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,

2023 2022 Change 2023 2022 Change

1 unchanged sentence

(dollars in millions)

Other income (expense), net $ 51.4 $ (0.1) $ 51.5 * $ 77.4 $ (1.7) $ 79.1 *

Other income, net $ 60.1 $ 1.9 $ 58.2 * $ 137.5 $ 0.2 $ 137.3 *

______________

* Not meaningful

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.

The increases in other income, net for the three and nine months ended April 30, 2023 compared to the same periods in 2022 were primarily due to higher interest income earned as a result of higher interest rates and higher cash, cash equivalent, and investments balances for the three and nine months ended April 30, 2023 compared to 2022.

Provision for Income Taxes

3 unchanged sentences

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 January 31, Six Months Ended January 31,

We regularly evaluate the need for a valuation allowance.

Due to recent profitability, a reversal of our valuation allowance in certain jurisdictions in the foreseeable future is reasonably possible.

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

Change 2023 2022 Change

3 unchanged sentences

Effective tax rate 17.7 % (39.4) % 15.1 % (20.4) %

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

Our provision for income taxes for the three and nine months ended April 30, 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.

Our effective tax rate varied for the three and nine months ended April 30, 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 nine months ended April 30, 2023 resulting from a tax settlement.

Refer to Note 13.

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

Table of Conten ts

Liquidity and Capital Resources

January 31, 2023 July 31, 2022

April 30, 2023 July 31, 2022

(in millions)

6 unchanged sentences

______________

(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.

(1) Current liabilities included net carrying amounts of convertible senior notes of $3.7 billion as of both April 30, 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 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.

As of April 30, 2023, our total cash, cash equivalents, and investments of $6.7 billion were held for general corporate purposes.

As of April 30, 2023, we had no unremitted earnings when evaluating our outside basis difference relating to our U.S.

investment in foreign subsidiaries.

1 unchanged sentence

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

Table of Content

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

3 unchanged sentences

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 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 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.

All the 2023 Notes will mature on July 1, 2023 and at that time we will be obligated to pay the $1.7 billion principal amount of the 2023 Notes in cash.

The sale price condition for the 2025 Notes was met during the fiscal quarter ended April 30, 2023, and as a result, holders may convert their 2025 Notes at any time during the fiscal quarter ending July 31, 2023.

If all of the holders converted their 2025 Notes during this period, we would be obligated to settle the $2.0 billion principal amount of the 2025 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, 2023 or hold the 2023 Notes until maturity on July 1, 2023.

As of April 30, 2023, substantially all of our Notes remained outstanding.

Refer to Note 9.

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

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

In April 2023, we entered into a new credit agreement (the “2023 Credit Agreement”) that provides for a $400.0 million unsecured revolving credit facility (the “2023 Credit Facility”), with an option to increase the amount of the Credit Facility by up to an additional $350.0 million, subject to certain conditions.

The interest rates and commitment fees are also subject to upward and downward adjustments based on our progress towards the achievement of certain sustainability goals related to greenhouse gas emissions.

As of April 30, 2023, there were no amounts outstanding and we were in compliance with all covenants under the 2023 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 January 31, 2023, $750.0 million remained available for future share repurchases under this repurchase program.

As of April 30, 2023, $750.0 million remained available for future share repurchases under this repurchase program.

Refer to Note 11.

Stockholders’ Equity in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information on this repurchase program.

Table of Conten ts

Leases and Other Material Cash Requirements

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

As of 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.

As of April 30, 2023, we have total operating lease obligations of $327.9 million recorded on our condensed consolidated balance sheet.

As of April 30, 2023, our commitments to purchase products, components, cloud and other services totaled $2.0 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 six months ended January 31, 2023 and 2022:

Six Months Ended January 31,

The following table summarizes our cash flows for the nine months ended April 30, 2023 and 2022:

Nine Months Ended April 30,

(in millions)

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Net increase (decrease) in cash, cash equivalents, and restricted cash $ (124.5) $ 546.2

Table of Content

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 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.

Cash provided by operating activities during the nine months ended April 30, 2023 was $2.4 billion, an increase of $902.4 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 nine months ended April 30, 2023, partially offset by a decrease in cash due to timing of payments and 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 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.

Cash used in investing activities during the nine months ended April 30, 2023 was $2.4 billion, an increase of $1.9 billion compared to the same period in 2022.

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 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.

Table of Conten ts

Cash used in financing activities during the nine months ended April 30, 2023 was $91.5 million, a decrease of $362.0 million compared to the same period in 2022.

The decrease was primarily due to decrease in repurchases of our common stock during the nine months ended April 30, 2023.

Critical Accounting Estimates

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

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 2. Management’s Discussion and Analysis