What changed in this filing

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Item 1. Financial Statements

2024-02-21 compared with 2023-11-17 · 287 added, 125 removed, 487 unchanged (46% of the section changed)

3 unchanged sentences

(in millions, except per share data)

October 31, 2023 July 31, 2023

January 31, 2024 July 31, 2023

Current assets:

1 unchanged sentence

Short-term investments 1,588.5 1,254.7

Accounts receivable, net of allowance for credit losses of $ 8.2 and $ 7.8 as of October 31, 2023 and July 31, 2023, respectively

Accounts receivable, net of allowance for credit losses of $ 6.5 and $ 7.8 as of January 31, 2024 and July 31, 2023, respectively

1,896.3 2,463.2

10 unchanged sentences

Intangible assets, net 440.1 315.4

Deferred tax assets 2,234.3 23.1

Other assets 326.0 321.7

11 unchanged sentences

Long-term deferred revenue 4,900.3 4,621.8

Deferred tax liabilities 588.5 28.1

Long-term operating lease liabilities 362.7 279.2

6 unchanged sentences

100.0 shares authorized;

none issued and outstanding as of October 31, 2023 and July 31, 2023

none issued and outstanding as of January 31, 2024 and July 31, 2023

Common stock and additional paid-in capital;

1 unchanged sentence

1,000.0 shares authorized;

313.7 and 308.3 shares issued and outstanding as of October 31, 2023 and July 31, 2023, respectively

322.7 and 308.3 shares issued and outstanding as of January 31, 2024 and July 31, 2023, respectively

3,650.0 3,019.0

Accumulated other comprehensive loss ( 6.5 ) ( 43.2 )

Accumulated deficit ( 1,033.2 ) ( 1,227.4 )

Retained earnings (accumulated deficit) 713.7 ( 1,227.4 )

Total stockholders’ equity 4,357.2 1,748.4

1 unchanged sentence

See notes to condensed consolidated financial statements.

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PALO ALTO NETWORKS, INC.

1 unchanged sentence

(Unaudited, in millions, except per share data)

Three Months Ended October 31,

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

2024 2023 2024 2023

Product $ 390.7 $ 352.9 $ 731.8 $ 682.9

12 unchanged sentences

Operating income

53.6 39.9 268.8 55.1

Interest expense ( 2.8 ) ( 6.9 ) ( 5.7 ) ( 13.7 )

1 unchanged sentence

Income before income taxes

Provision for income taxes 88.4 14.4

135.5 84.4 418.1 118.8

Provision for (benefit from) income taxes ( 1,611.4 ) 0.2 ( 1,523.0 ) 14.6

$ 1,746.9 $ 84.2 $ 1,941.1 $ 104.2

Net income per share, basic

3 unchanged sentences

Weighted-average shares used to compute net income per share, basic

319.6 302.3 314.9 301.0

Weighted-average shares used to compute net income per share, diluted

357.5 331.6 353.7 335.0

See notes to condensed consolidated financial statements .

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PALO ALTO NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited, in millions)

Three Months Ended October 31,

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

2024 2023 2024 2023

Other comprehensive income (loss), net of tax:

$ 1,746.9 $ 84.2 $ 1,941.1 $ 104.2

Other comprehensive income, net of tax:

Change in unrealized gains (losses) on investments 60.1 33.5 41.9 5.7

2 unchanged sentences

Net realized (gains) losses reclassified into earnings

( 1.2 ) 3.4 8.1 18.2

Net change on cash flow hedges 26.4 66.5 ( 5.2 ) 38.8

Other comprehensive loss

Other comprehensive income

86.5 100.0 36.7 44.5

Comprehensive income (loss) $ 144.4 $ ( 35.5 )

Comprehensive income $ 1,833.4 $ 184.2 $ 1,977.8 $ 148.7

See notes to condensed consolidated financial statements .

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PALO ALTO NETWORKS, INC.

1 unchanged sentence

(Unaudited, in millions)

Three Months Ended October 31, 2023

Three Months Ended January 31, 2024

Common Stock and Additional Paid-In Capital

Accumulated Other Comprehensive Loss

Retained Earnings (Accumulated Deficit)

Total Stockholders’ Equity

Shares Amount

Balance as of October 31, 2023 313.7 $ 3,296.7 $ ( 93.0 ) $ ( 1,033.2 ) $ 2,170.5

Net income — — — 1,746.9 1,746.9

Other comprehensive income

— — 86.5 — 86.5

Issuance of common stock in connection with employee equity incentive plans 3.1 55.3 — — 55.3

Taxes paid related to net share settlement of equity awards — ( 3.8 ) — — ( 3.8 )

Share-based compensation for equity-based awards — 302.1 — — 302.1

Settlement of convertible notes 0.8 ( 0.3 ) — — ( 0.3 )

Settlement of note hedges

( 0.8 ) — — — —

Settlement of warrants 5.9 — — — —

Balance as of January 31, 2024 322.7 $ 3,650.0 $ ( 6.5 ) $ 713.7 $ 4,357.2

Three Months Ended January 31, 2023

Common Stock and Additional Paid-In Capital

Accumulated Other Comprehensive Loss

Accumulated Deficit

1 unchanged sentence

Shares Amount

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

— — — 84.2 84.2

Other comprehensive income

— — 100.0 — 100.0

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

Taxes paid related to net share settlement of equity awards — ( 1.5 ) — — ( 1.5 )

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

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Six Months Ended January 31, 2024

Common Stock and Additional Paid-In Capital

Accumulated Other Comprehensive Loss

Retained Earnings (Accumulated Deficit)

Total Stockholders’ Equity

Shares Amount

Balance as of July 31, 2023 308.3 $ 3,019.0 $ ( 43.2 ) $ ( 1,227.4 ) $ 1,748.4

Net income — — — 1,941.1 1,941.1

Other comprehensive loss — — ( 49.8 ) — ( 49.8 )

Other comprehensive income — — 36.7 — 36.7

Issuance of common stock in connection with employee equity incentive plans 5.7 142.3 — — 142.3

1 unchanged sentence

Share-based compensation for equity-based awards — 575.2 — — 575.2

— 273.1 — — 273.1

Repurchase and retirement of common stock ( 0.3 ) ( 66.7 ) — — ( 66.7 )

( 0.3 ) ( 66.7 ) — — ( 66.7 )

Settlement of convertible notes 1.1 ( 0.5 ) — — ( 0.5 )

2 unchanged sentences

Settlement of warrants 9.0 — — — —

Balance as of October 31, 2023 313.7 $ 3,296.7 $ ( 93.0 ) $ ( 1,033.2 ) $ 2,170.5

Three Months Ended October 31, 2022

Balance as of January 31, 2024 322.7 $ 3,650.0 $ ( 6.5 ) $ 713.7 $ 4,357.2

Six Months Ended January 31, 2023

Common Stock and Additional Paid-In Capital

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

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

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

1 unchanged sentence

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

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

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

See notes to condensed consolidated financial statements.

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4PALO ALTO NETWORKS, INC.

1 unchanged sentence

(Unaudited, in millions)

Three Months Ended October 31,

Six Months Ended January 31,

Cash flows from operating activities

2 unchanged sentences

Share-based compensation for equity-based awards 543.0 549.3

Deferred income taxes

( 1,691.3 ) 2.5

Depreciation and amortization 132.9 140.6

3 unchanged sentences

Amortization of investment premiums, net of accretion of purchase discounts ( 30.9 ) ( 14.3 )

Changes in operating assets and liabilities:

Changes in operating assets and liabilities, net of effects of acquisitions:

Accounts receivable, net 568.0 864.6

11 unchanged sentences

Proceeds from maturities of investments 808.3 998.9

Business acquisitions, net of cash and restricted cash acquired

( 610.6 ) ( 185.6 )

Purchases of property, equipment, and other assets

8 unchanged sentences

( 19.3 ) ( 15.4 )

Net cash provided by (used in) financing activities

Net cash used in financing activities

( 114.4 ) ( 219.7 )

5 unchanged sentences

Restricted cash included in prepaid expenses and other current assets 6.3 5.8

Restricted cash included in other assets 0.5 —

Total cash, cash equivalents, and restricted cash $ 1,789.3 $ 1,352.1

Non-cash investing and financing activities

Equity consideration for business acquisitions $ ( 27.4 ) $ ( 0.3 )

See notes to condensed consolidated financial statements.

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Notes to Condensed Consolidated Financial Statements (Unaudited)

12 unchanged sentences

Our condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes in our Annual Report on Form 10-K for the fiscal year ended July 31, 2023.

Reclassification

Certain prior period amounts in the condensed consolidated financial statements have been reclassified to conform to the current period presentation.

Use of Estimates

4 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, 2023, as compared to the significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended July 31, 2023.

There have been no material changes to our significant accounting policies as of and for the six months ended January 31, 2024, as compared to the significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended July 31, 2023.

Recently Issued Accounting Pronouncements

Segment Reporting

In November 2023, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance that expands annual and interim disclosure requirements for reportable segments, primarily through enhanced disclosures about significant segment expenses.

The standard is effective for our annual periods beginning in fiscal 2025 and interim periods beginning in the first quarter of fiscal 2026, and requires retrospective application for all prior periods presented in the financial statements.

Early adoption is permitted.

We are currently evaluating the impact of this standard on our disclosures in the consolidated financial statements.

Income Tax Disclosures

In December 2023, the FASB issued authoritative guidance that requires consistent categories and greater disaggregation of information in the effective tax rate reconciliation and additional disclosures of income taxes paid by jurisdiction.

The standard is effective for our annual periods beginning in fiscal 2026 and could be applied either prospectively or retrospectively.

Early adoption is permitted.

We are currently evaluating the impact of this standard on our disclosures in the consolidated financial statements.

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Disaggregation of Revenue

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,

2024 2023 2024 2023

United States $ 1,248.2 $ 1,042.3 $ 2,452.5 $ 2,048.6

5 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,

2024 2023 2024 2023

Product $ 390.7 $ 352.9 $ 731.8 $ 682.9

5 unchanged sentences

Deferred Revenue

During the three months ended October 31, 2023 and 2022, we recognized approximately $ 1.4 billion and $ 1.1 billion of revenue pertaining to amounts that were deferred as of July 31, 2023 and 2022, respectively.

During the six months ended January 31, 2024 and 2023, we recognized approximately $ 2.7 billion and $ 2.1 billion of revenue pertaining to amounts that were deferred as of July 31, 2023 and 2022, respectively.

Remaining Performance Obligations

Remaining performance obligations were $ 10.4 billion as of October 31, 2023, of which we expect to recognize as revenue approximately $ 5.0 billion over the next 12 months and the remainder thereafter.

Remaining performance obligations were $ 10.8 billion as of January 31, 2024, of which we expect to recognize as revenue approximately $ 5.2 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, 2023 and July 31, 2023 (in millions):

October 31, 2023 July 31, 2023

The following table presents our financial assets and liabilities measured at fair value on a recurring basis as of January 31, 2024 and July 31, 2023 (in millions):

January 31, 2024 July 31, 2023

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

1 unchanged sentence

Money market funds $ 859.3 $ — $ — $ 859.3 $ 476.1 $ — $ — $ 476.1

Certificates of deposit — 11.0 — 11.0 — — — —

Commercial paper — 252.1 — 252.1 — 151.4 — 151.4

2 unchanged sentences

Total cash equivalents 859.3 281.2 — 1,140.5 476.1 151.4 — 627.5

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January 31, 2024 July 31, 2023

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

Short-term investments:

6 unchanged sentences

Total short-term investments — 1,588.5 — 1,588.5 — 1,254.7 — 1,254.7

October 31, 2023 July 31, 2023

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

Long-term investments:

19 unchanged sentences

Refer to Note 9.

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

Debt for the carrying amount and estimated fair value of our convertible senior notes as of January 31, 2024 and July 31, 2023.

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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, 2023 and July 31, 2023 (in millions):

October 31, 2023

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, 2024 and July 31, 2023 (in millions):

January 31, 2024

Amortized Cost

2 unchanged sentences

Cash equivalents:

Certificates of deposit $ 11.0 $ — $ — $ 11.0

Commercial paper 252.1 — — 252.1

23 unchanged sentences

Total available-for-sale investments $ 4,339.1 $ 1.5 $ ( 38.0 ) $ 4,302.6

As of October 31, 2023, the gross unrealized losses that have been in a continuous unrealized loss position for less than 12 months were $ 40.4 million, which were related to $ 3.3 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 $ 14.6 million, which were related to $ 922.5 million of available-for-sale debt securities.

As of January 31, 2024, the gross unrealized losses that have been in a continuous unrealized loss position for less than 12 months were $ 5.1 million, which were related to $ 1.5 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 $ 6.2 million, which were related to $ 752.8 million of available-for-sale debt securities.

As of July 31, 2023 the gross unrealized losses that have been in a continuous unrealized loss position for less than 12 months were $ 30.7 million, which were related to $ 3.4 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 $ 7.3 million, which were related to $ 481.8 million of available-for-sale debt securities.

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

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

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

The following table summarizes the amortized cost and fair value of our available-for-sale debt securities as of October 31, 2023, 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, 2024 and 2023.

The following table summarizes the amortized cost and fair value of our available-for-sale debt securities as of January 31, 2024, by contractual years-to-maturity (in millions):

Amortized Cost Fair Value

7 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, 2023 and July 31, 2023, the carrying values of our marketable equity securities were $ 1.6 billion and $ 476.1 million, respectively.

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

As of January 31, 2024 and July 31, 2023, the carrying values of our marketable equity securities were $ 859.3 million and $ 476.1 million, respectively.

There were no unrealized gains or losses recognized for these securities during the three and six months ended January 31, 2024 and 2023.

Financing Receivables

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

October 31, 2023 July 31, 2023

The following table summarizes our short-term and long-term financing receivables as of January 31, 2024 and July 31, 2023 (in millions):

January 31, 2024 July 31, 2023

Short-term financing receivables, gross $ 503.0 $ 435.1

8 unchanged sentences

Long-term financing receivables, net $ 639.9 $ 653.3

Our financing receivables portfolio primarily consisted of high-quality investment-grade receivables as of October 31, 2023 and July 31, 2023.

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

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

Our financing receivables portfolio primarily consisted of high-quality investment-grade receivables as of January 31, 2024 and July 31, 2023.

There was no significant activity in allowance for credit losses during the three and six months ended January 31, 2024 and 2023.

Past due amounts on financing receivables were not material as of January 31, 2024 and July 31, 2023.

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, 2023 and July 31, 2023, the total notional amount of our outstanding foreign currency forward contracts was $ 777.9 million and $ 957.5 million, respectively.

As of January 31, 2024 and July 31, 2023, the total notional amount of our outstanding foreign currency forward contracts was $ 1.2 billion and $ 957.5 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, 2023 and July 31, 2023.

As of October 31, 2023, unrealized gains and losses in accumulated other comprehensive income (“AOCI”) related to our cash flow hedges were a $ 31.0 million net loss, of which $ 29.0 million in 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, 2024 and July 31, 2023.

As of January 31, 2024, unrealized gains and losses in accumulated other comprehensive income (“AOCI”) related to our cash flow hedges were a $ 6.2 million net loss, of which $ 5.4 million in losses are expected to be recognized into earnings within the next 12 months.

As of July 31, 2023, unrealized gains and losses in AOCI related to our cash flow hedges were a $ 0.7 million net gain.

Intangible Assets

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Dig Security Solutions Ltd.

On December 5, 2023, we completed our acquisition of Dig Security Solutions Ltd.

(“Dig”), a privately-held cyber security company.

We expect the acquisition will enhance our Prisma Cloud capabilities with a data security posture management solution that is intended to provide customers with visibility into, and secure data stored across, their multi-cloud environments.

The total purchase consideration for the acquisition of Dig was $ 255.4 million, which consisted of the following (in millions):

Fair value of replacement awards 7.8

Total $ 255.4

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 $ 72.0 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 $ 192.2

Identified intangible assets 45.4

Cash and restricted cash 22.1

Net liabilities assumed ( 4.3 )

Total $ 255.4

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

The goodwill is not expected to be deducible for 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 $ 45.4 5 years

Talon Cyber Security Ltd.

On December 28, 2023, we completed our acquisition of Talon Cyber Security Ltd.

(“Talon”), a privately-held cyber security company.

We expect the acquisition will support Prisma SASE’s approach to provide secure access to business applications for unmanaged and personal devices with an enterprise browser.

The total purchase consideration for the acquisition of Talon was $ 458.6 million, which consisted of the following (in millions):

Fair value of replacement awards 19.6

Total $ 458.6

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

The total fair value of the replacement equity awards was $ 109.6 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.

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Goodwill $ 253.7

Identified intangible assets 131.4

Cash and restricted cash 53.9

Net assets acquired 19.6

Total $ 458.6

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

The goodwill is not expected to be deductible for 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 $ 131.4 5 years

Goodwill and Intangible Assets

The following table presents details of our goodwill during the six months ended January 31, 2024 (in millions):

Balance as of July 31, 2023 $ 2,926.8

Goodwill acquired 445.9

Balance as of January 31, 2024 $ 3,372.7

Purchased Intangible Assets

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

October 31, 2023 July 31, 2023

The following table presents details of our purchased intangible assets as of January 31, 2024 and July 31, 2023 (in millions):

January 31, 2024 July 31, 2023

Gross Carrying Amount

14 unchanged sentences

Total purchased intangible assets $ 1,012.7 $ ( 572.6 ) $ 440.1 $ 834.7 $ ( 519.3 ) $ 315.4

We recognized amortization expense of $ 24.9 million and $ 29.1 million for the three months ended October 31, 2023 and 2022, respectively.

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

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We recognized amortization expense of $ 28.4 million and $ 53.3 million for the three and six months ended January 31, 2024, respectively, and $ 24.8 million and $ 53.9 million for the three and six months ended January 31, 2023, respectively.

The following table summarizes estimated future amortization expense of our intangible assets subject to amortization as of January 31, 2024 (in millions):

Fiscal years ending July 31,

22 unchanged sentences

Additionally, upon the occurrence of a corporate event that constitutes a “fundamental change” under the Indenture, holders of the 2025 Notes may require us to repurchase for cash all or a portion of the 2025 Notes at a repurchase price equal to 100 % of the principal amount of the 2025 Notes plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

Holders of the 2025 Notes were able to early convert their 2025 Notes during the fiscal quarter ended October 31, 2023 as the sales price condition had been met during the fiscal quarter ended July 31, 2023.

During the three months ended October 31, 2023, holders of the 2025 Notes converted $ 46.0 million in aggregate principal amount of the 2025 Notes, which we repaid in cash.

We also issued 0.3 million shares of our common stock to the holders of the 2025 Notes for the conversion value in excess of the principal amount.

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Holders of the 2025 Notes were able to early convert their 2025 Notes during the fiscal quarter ended January 31, 2024 as the sales price condition had been met during the fiscal quarter ended October 31, 2023.

During the three and six months ended January 31, 2024, holders of the 2025 Notes converted $ 126.3 million and $ 172.3 million, respectively, in aggregate principal amount of the 2025 Notes, which we repaid in cash.

We also issued 0.8 million and 1.1 million shares of our common stock to the holders of the 2025 Notes during the three and six months ended January 31, 2024, respectively, for the conversion value in excess of the principal amount.

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

The sale price condition for the 2025 Notes was met during the fiscal quarter ended October 31, 2023 and as a result, holders may convert their 2025 Notes during the fiscal quarter ending January 31, 2024.

The net carrying amount of the 2025 Notes was classified as a current liability on our condensed consolidated balance sheet as of October 31, 2023.

Refer to Note 16.

Subsequent Event for additional information regarding conversion of the 2025 Notes after January 31, 2024 through the filing date of this Quarterly Report on Form 10-Q.

The sale price condition for the 2025 Notes was met during the fiscal quarter ended January 31, 2024 and as a result, holders may convert their 2025 Notes during the fiscal quarter ending April 30, 2024.

The net carrying amount of the 2025 Notes was classified as a current liability on our condensed consolidated balance sheet as of January 31, 2024.

The following table sets forth the net carrying amount of our 2025 Notes (in millions):

October 31, 2023 July 31, 2023

January 31, 2024 July 31, 2023

Principal $ 1,827.0 $ 1,999.3

2 unchanged sentences

Net carrying amount $ 1,821.8 $ 1,991.5

The total estimated fair value of the 2025 Notes was $ 4.8 billion as of October 31, 2023 and $ 5.0 billion as of July 31, 2023, respectively.

The total estimated fair value of the 2025 Notes was $ 6.2 billion as of January 31, 2024 and $ 5.0 billion as of July 31, 2023.

The fair value was determined based on the closing trading price per $100 of the 2025 Notes as of the last day of trading for the period.

We consider the fair value of the 2025 Notes as of October 31, 2023 and July 31, 2023 to be a Level 2 measurement.

We consider the fair value of the 2025 Notes as of January 31, 2024 and July 31, 2023 to be a Level 2 measurement.

The fair value of the 2025 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,

2024 2023 2024 2023

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

Contractual interest expense $ — $ 1.7 $ 1.7 $ 3.2 $ 2.0 $ 5.2 $ — $ 3.6 $ 3.6 $ 6.4 $ 3.8 $ 10.2

11 unchanged sentences

We paid an aggregate amount of $ 370.8 million for the 2025 Note Hedges, which is included in additional paid-in capital on our condensed consolidated balance sheets.

As a result of the conversions of the 2025 Notes settled during the three months ended October 31, 2023, we exercised the corresponding portion of our 2025 Note Hedges and received 0.3 million shares of our common stock during the period.

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As a result of the conversions of the 2025 Notes settled during the three and six months ended January 31, 2024, we exercised the corresponding portion of our 2025 Note Hedges and received 0.8 million and 1.1 million shares of our common stock during the respective period.

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

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

During the three months ended October 31, 2023, we net settled a portion of the 2023 Warrants with 3.1 million shares of our common stock with a fair value of $ 763.5 million.

During the six months ended January 31, 2024, we net settled all of the 2023 Warrants with 9.0 million shares of our common stock with a fair value of $ 2.4 billion, of which 5.9 million shares of our common stock with a fair value of $ 1.7 billion were net settled during the three months ended January 31, 2024.

The number of net shares issued was determined based on the number of 2023 Warrants exercised multiplied by the difference between the strike price of the 2023 Warrants and their daily volume-weighted-average stock price.

As of October 31, 2023, up to 12.1 million shares of our common stock were issuable for gross settlement under the remaining outstanding 2023 Warrants, which will be net settled when exercised through the end of December 2023.

Revolving Credit Facility

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

As of January 31, 2024, there were no amounts outstanding and we were in compliance with all covenants under the Credit Agreement.

Commitments and Contingencies

Purchase Commitments

Manufacturing Purchase Commitments

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

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, 2023 (in millions):

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

In addition, in order to reduce manufacturing lead times and plan for adequate supply, we have entered 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 non-cancelable purchase commitments under these agreements as of January 31, 2024 (in millions):

Fiscal years ending July 31,

Total Remaining 2024 2025 2026 2027 2028 2029 and Thereafter

Manufacturing purchase commitments

$ 4,793.3 $ 0.6 $ 419.8 $ 868.4 $ 518.1 $ 585.6 $ 2,400.8

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, 2023 (in millions):

Fiscal years ending July 31,

Total Remaining 2024 2025 2026 2027 2028 2029 and Thereafter

Other purchase commitments

Manufacturing

218.9 109.3 69.6 40.0 — — —

Additionally, we have a $ 153.3 million minimum purchase commitment with a service provider through September 2027 with no specified annual commitments.

34.7 4.8 9.8 7.2 3.0 3.2 6.7

Total purchase commitments

$ 5,046.9 $ 114.7 $ 499.2 $ 915.6 $ 521.1 $ 588.8 $ 2,407.5

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Additionally, we have a $ 149.9 million minimum purchase commitment with a cloud service provider through September 2027 with no specified annual commitments.

In October 2023, we established a multi-currency notional cash pool for a certain number of our entities with a third-party bank.

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We accrue for contingencies when we believe that a loss is probable and that we can reasonably estimate the amount of any such loss.

As of October 31, 2023, we have not recorded any significant accruals for loss contingencies associated with such matters.

Legal matters could include speculative, substantial, or indeterminate monetary amounts.

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Palo Alto Networks

On March 12, 2021, Centripetal Networks, Inc., filed a lawsuit against us in the United States District Court for the Eastern District of Virginia (“E.D.VA”).

On March 12, 2021, Centripetal Networks, Inc., filed a lawsuit against us in the United States District Court for the Eastern District of Virginia.

The lawsuit alleges that our products infringe multiple Centripetal patents.

We successfully challenged certain of these patents, which were found unpatentable by the U.S.

Patent and Trademark Office.

The complaint requests injunctive relief, monetary damages, and attorneys fees.

The US District Court E.D.VA has set a trial date of January 22, 2024 on the remaining patents.

Patent and Trademark Office (“PTO”).

The case went to jury trial on January 22, 2024, on four patents, with three stayed pending review in the PTO.

On January 31, 2024, the jury returned a verdict of non-willful infringement with a lump sum amount of $ 151.5 million, plus statutory interest.

We are advancing post-trial motions that aim to eliminate patents and patent claims from the scope of the final judgment and corresponding damages.

The trial judge will decide these motions before entering final judgment, after which there will likely be an appeal by one or both parties to the action.

We respectfully disagree with the verdict and believe that it is contrary to both the law and the extensive evidence presented at trial, which is why we are seeking relief from the court.

In addition, Centripetal filed infringement contentions on certain of their patents in the European Patent Office in Germany, to which we filed invalidity challenges.

Those matters are still pending.

We are unable, at this time, to reasonably estimate a possible loss or potential range of loss, if any.

As of January 31, 2024, we accrued $ 176.8 million for the verdict amount and estimated interest.

The accrual was recorded in other long-term liabilities on our condensed consolidated balance sheets with the corresponding charge included in general and administrative expense on our condensed consolidated statements of operations for the three and six months ended January 31, 2024.

Palo Alto Networks

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The complaint requests injunctive relief, monetary damages, and attorneys fees.

The court has moved the trial date from April 8, 2024 to October 21, 2024.

The trial is set for October 21, 2024.

We are unable, at this time, to reasonably estimate a possible loss or potential range of loss, if any.

Palo Alto Networks

On March 22, 2022, we filed a declaratory judgment action in the United States District Court for the Southern District of New York (“S.D.N.Y”) seeking a ruling that we are not infringing various Taasera patents.

Taasera challenged jurisdiction in S.D.N.Y, which issue is currently on appeal with the Federal Circuit.

Pursuant to an order of the Judicial Panel on Multidistrict Litigation, this matter has been consolidated in the United States District Court for the Eastern District of Texas with several other patent infringement matters brought by Taasera.

The court moved the start date to April 15, 2024, as the start of consecutive trials of these consolidated matters.

On March 22, 2022, we filed a declaratory judgment action in the United States District Court for the Southern District of New York seeking a ruling that we are not infringing various Taasera patents.

The parties have now resolved all pending matters between them as of December 2023.

The amounts paid by us to resolve these matters were not material.

Lionra Technologies v.

Palo Alto Networks

On August 29, 2022, Lionra Technologies filed a lawsuit against us in the United States District Court for the Eastern District of Texas.

The lawsuit alleges that our products infringe multiple Lionra patents.

The complaint requests injunctive relief, monetary damages and attorneys fees.

The patents at issue are currently under review before the U.S.

Patent and Trademark Office.

Trial is set for May 20, 2024.

We are unable, at this time, to reasonably estimate a possible loss or potential range of loss, if any.

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Stockholders’ Equity

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

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

In December 2020, August 2021, August 2022, and November 2023, our board of directors authorized additional $ 700.0 million, $ 676.1 million, $ 915.0 million, and $ 316.7 million increases to this share repurchase program, respectively, bringing the total authorization under this share repurchase program to $ 3.6 billion (our “current authorization”).

The expiration date of our current authorization was extended to December 31, 2024, and our repurchase program may be suspended or discontinued at any time.

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

During the three months ended October 31, 2023, we repurchased and retired 0.3 million shares of our common stock under our current repurchase authorization for an aggregate purchase price of $ 66.7 million, including transaction costs, at an average price of $ 226.67 .

During the three months ended October 31, 2022, we did not repurchase shares of our common stock, and 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, 2023, $ 683.3 million 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 Months Ended January 31, Six Months Ended January 31,

2024 2023 2024 2023

Number of shares repurchased — 1.8 0.3 1.8

Weighted average price per share (1)

$ — $ 138.65 $ 226.67 $ 138.65

Aggregate purchase price (1)

$ — $ 250.0 $ 66.7 $ 250.0

(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, 2024, $ 1.0 billion 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.

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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, 2023 (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, 2024 (in millions, except per share amounts):

RSUs Outstanding PSUs Outstanding

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Forfeited ( 0.7 ) $ 153.46 ( 0.4 ) $ 136.05

Balance—October 31, 2023 10.6 $ 150.58 $ 2,574.9 6.2 $ 145.51 $ 1,516.4

Balance—January 31, 2024 11.7 $ 179.68 $ 3,973.8 5.9 $ 146.39 $ 1,982.8

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

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The number of PSUs eligible to vest is determined based on the level of achievement against certain performance conditions, market conditions, and a combination thereof.

During the three months ended October 31, 2023 and 2022, we granted 2.0 million and 1.6 million shares of PSUs, respectively, which contain service, performance and market conditions.

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During the six months ended January 31, 2024, we granted 2.1 million shares of PSUs that contain service, performance, and market conditions, of which 0.1 million shares were granted during the three months ended January 31, 2024.

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

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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, 2023, we have approved 2.7 million shares of PSUs, which will be granted upon the performance condition being established during the next two fiscal years.

As of January 31, 2024, we have approved 2.7 million shares of PSUs, which will be granted upon the performance condition being established during the next two fiscal 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 resulting grant-date fair value of our PSUs subject to market conditions granted during the three months ended October 31, 2023 and 2022:

Three Months Ended October 31,

The following table summarizes the assumptions used and the resulting grant-date fair value of our PSUs subject to market conditions granted during the three and six months ended January 31, 2024:

Three Months Ended January 31, 2024 Six Months Ended January 31, 2024

Volatility 40.9 %

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

As of October 31, 2023, all of our outstanding PSOs have been fully vested.

As of January 31, 2024, all of our outstanding PSOs have been fully vested.

The maximum contractual term of our outstanding PSOs is seven and a half years from 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, 2023 (in millions, except per share amounts):

The following table summarizes the PSO activity under our stock plans during the six months ended January 31, 2024 (in millions, except per share amounts):

Number of Shares

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Exercised ( 1.0 ) $ 64.94

Balance—October 31, 2023 6.3 $ 65.22 1.9 $ 1,116.0

Exercisable—October 31, 2023 6.3 $ 65.22 1.9 $ 1,116.0

Balance—January 31, 2024 5.4 $ 65.25 1.7 $ 1,482.7

Exercisable—January 31, 2024 5.4 $ 65.25 1.7 $ 1,482.7

Share-Based Compensation

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

Three Months Ended October 31,

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

2024 2023 2024 2023

Cost of product revenue $ 2.3 $ 2.6 $ 4.7 $ 5.0

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Total share-based compensation $ 275.3 $ 289.9 $ 546.3 $ 555.9

As of October 31, 2023, total compensation cost related to unvested share-based awards not yet recognized was $ 1.9 billion.

As of January 31, 2024, 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 2.8 years.

For the three months ended October 31, 2023 and 2022, our provision for income taxes reflected effective tax rates of 31.3 % and 41.9 %, respectively.

Our income taxes for the three months ended October 31, 2023 and 2022 were primarily due to U.S.

For the three and six months ended January 31, 2024, our benefit from income taxes reflected an effective tax rate of negative 1,189.2 % and negative 364.3 %, respectively.

Our effective tax rates for the three and six months ended January 31, 2024 differed from the U.S.

statutory tax rate primarily due to the release of our valuation allowance.

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We regularly assess the need for a valuation allowance on our deferred tax assets.

In making this assessment, we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets to determine, based on the weight of available evidence, whether it is more likely than not that some or all the deferred tax assets will not be realized.

As of January 31, 2024, based on our analysis of all positive and negative evidence, we concluded it is more likely than not that our U.S.

federal, U.S.

states other than California, and United Kingdom deferred tax assets will be realizable based on our recent profitability and continued forecasted income.

We continue to maintain a valuation allowance for our California deferred tax assets due to the uncertainty regarding realizability of these deferred tax assets as they have not met the “more likely than not” realization criterion.

As a result of the valuation allowance release, we recognized a deferred tax benefit of $ 3.2 billion for the U.S.

federal, U.S.

states other than California, and United Kingdom deferred tax assets.

In addition, we recognized a deferred tax expense of $ 1.7 billion for the U.S.

federal indirect tax effect of foreign deferred taxes.

Accordingly, during the three and six months ended January 31, 2024, we recognized a net tax benefit of $ 1.5 billion relating to our valuation allowance release.

We will continue to monitor the need for a valuation allowance on our deferred tax assets.

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.

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 decreased for the three months ended October 31, 2023 compared to the same period in 2022 primarily due to higher tax benefits from our share-based compensation.

Our effective tax rates differed from the U.S.

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

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

We regularly evaluate the need for a valuation allowance.

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

statutory tax rate 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.

Net Income Per Share

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

Three Months Ended October 31,

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

2024 2023 2024 2023

$ 1,746.9 $ 84.2 $ 1,941.1 $ 104.2

Weighted-average shares used to compute net income per share, basic

319.6 302.3 314.9 301.0

Weighted-average effect of potentially dilutive securities:

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Weighted-average shares used to compute net income per share, diluted

357.5 331.6 353.7 335.0

Net income per share, basic

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The following securities were excluded from the computation of diluted net income 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 October 31,

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

2024 2023 2024 2023

Employee equity incentive plans 2.4 8.9 2.5 5.8

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Other Income, Net

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

Three Months Ended October 31,

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

2024 2023 2024 2023

Interest income $ 85.3 $ 56.6 $ 156.5 $ 86.0

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Total other income, net $ 84.7 $ 51.4 $ 155.0 $ 77.4

Subsequent Events

On October 29, 2023, we entered into a definitive agreement to acquire Dig Security Solutions Ltd., a privately-held cyber security company (“Dig”), for total consideration of approximately $ 295.0 million, including approximately $ 232.0 million in cash and approximately $ 63.0 million in replacement awards, subject to adjustment.

On November 6, 2023, we entered into a definitive agreement to acquire Talon Cyber Security Ltd., a privately-held cyber security company (“Talon”), for total consideration of approximately $ 550.0 million, including approximately $ 434.9 million in cash and approximately $ 115.1 million in replacement awards, subject to adjustment.

We expect the acquisition will support Prisma SASE’s approach to provide secure access to business applications for unmanaged and personal devices with an enterprise browser.

The proposed acquisitions of Dig and Talon are expected to close during our second quarter of fiscal 2024, subject to the satisfaction of customary closing conditions.

Share Repurchase

On November 16, 2023, our board of directors authorized a $ 316.7 million increase to our share repurchase program, bringing the total remaining authorization for future share repurchases to $ 1.0 billion.

The expiration date of the repurchase authorization was extended to December 31, 2024, and our repurchase program may be suspended or discontinued at any time without prior notice.

Subsequent Event

2025 Notes Conversion

Subsequent to January 31, 2024, $ 581.0 million in aggregate principal amount of the 2025 Notes was converted or had been submitted by the holders for conversion and will settle during the fiscal quarter ending April 30, 2024.

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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 1. Financial Statements