What changed in this filing

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Item 1A. Risk Factors

2024-02-21 compared with 2023-11-17 · 64 added, 26 removed, 581 unchanged (13% of the section changed)

13 unchanged sentences

• If we are unable to sell new and additional product, subscription, and support offerings to our end-customers, especially to large enterprise customers, our future revenue and operating results will be harmed.

• If we are unable to attract new customers, our future results of operations could be harmed.

• We rely on revenue from subscription and support offerings, and because we recognize revenue from subscription and support over the term of the relevant service period, downturns or upturns in sales or renewals of these subscription and support offerings are not immediately reflected in full in our operating results.

6 unchanged sentences

• If we do not accurately predict, prepare for, and respond promptly to rapidly evolving technological and market developments and successfully manage product and subscription introductions and transitions to meet changing end-customer needs in the enterprise security industry, our competitive position and prospects will be harmed.

• Issues in the development and deployment of Artificial Intelligence (“AI”) may result in reputational harm and legal liability and could adversely affect our results of operations.

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• Issues in the development and deployment of AI may result in reputational harm and legal liability and could adversely affect our results of operations.

• A network or data security incident may allow unauthorized access to our network or data, harm our reputation, create additional liability, and adversely impact our financial results.

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• We are subject to governmental export and import controls that could subject us to liability or impair our ability to compete in international markets.

• Our actual or perceived failure to adequately protect personal data could have a material adverse effect on our business.

• We may incur increased costs to comply with privacy and data protection laws and, if we fail to comply, we could be subject to government enforcement actions, private litigation and adverse publicity.

• We may have exposure to greater than anticipated tax liabilities.

8 unchanged sentences

• The convertible note hedge and warrant transactions may affect the value of our common stock.

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Risks Related to Global Economic and Geopolitical Conditions

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As a result, our employee headcount has increased, and we expect it to continue to grow over the next year.

For example, from the end of fiscal 2023 to the end of the first quarter of fiscal 2024, our headcount increased from 13,948 to 14,182 employees.

For example, from the end of fiscal 2023 to the end of the second quarter of fiscal 2024, our headcount increased from 13,948 to 14,789 employees.

In addition, as we have grown, the number of end-customers has also increased, and we have managed more complex deployments of our products and subscriptions with larger end-customers.

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Our revenue growth rate in recent periods may not be indicative of our future performance, and we may not be able to maintain profitability, which could cause our business, financial condition, and operating results to suffer.

We have experienced revenue growth rates of 20.1% and 25.3% in three months ended October 31, 2023 and 2022, respectively.

We have experienced revenue growth rates of 19.7% and 25.5% for the six months ended January 31, 2024 and 2023, respectively.

Our revenue for any quarterly or annual period should not be relied upon as an indication of our future revenue or revenue growth for any future period.

If we are unable to maintain consistent or increasing revenue or revenue growth, the market price of our common stock could be volatile, and it may be difficult for us to maintain profitability or maintain or increase cash flow on a consistent basis.

In addition, we have incurred losses in fiscal years prior to fiscal 2023 and, as a result, we had an accumulated deficit of $1.0 billion as of October 31, 2023.

In addition, we have incurred losses in fiscal years prior to fiscal 2023.

We anticipate that our operating expenses will continue to increase in the foreseeable future as we continue to grow our business.

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If we are unable to navigate these challenges as we encounter them, our business, financial condition, and operating results may suffer.

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Our operating results may vary significantly from period to period, which makes our results difficult to predict and could cause our results to fall short of expectations, and such results may not be indicative of future performance.

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Failure to realize sales from large enterprise end-customers could materially and adversely affect our business, operating results, and financial condition.

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If we are unable to attract new customers, our future results of operations could be harmed.

To increase our revenue and maintain profitability, we must add new customers.

To do so, we must successfully convince prospective customers of the value of adopting our solutions.

We are engaging in costly marketing and sales efforts to accelerate platformization and attract new customers, which may fail or may not be as successful as intended or at all.

Additionally, prospective customers’ decisions to purchase our solutions depend on a variety of factors, many of which are out of our control.

These factors significantly impact our ability to add new customers and increase the time, resources and sophistication required to do so.

For example, prospective customers may face real or perceived switching costs when switching to our solutions from other legacy security vendors and products.

Deployment of our solutions may require a significant commitment of resources from our customers.

Any deterioration in general economic conditions, including as a result of the geopolitical environment or inflation (as well as government policies such as raising interest rates in response to inflation), have in the past caused, and may in the future cause, our current and prospective customers to delay or cut their overall security and IT operations spending.

If our efforts to attract new customers are not successful, our sales may not grow as quickly as anticipated, or at all, and our business, operating results, and financial condition will be harmed.

We rely on revenue from subscription and support offerings, and because we recognize revenue from subscription and support over the term of the relevant service period, downturns or upturns in sales or renewals of these subscription and support offerings are not immediately reflected in full in our operating results.

Subscription and support revenue accounts for a significant portion of our revenue, comprising 81.8% of total revenue in the three months ended October 31, 2023 and 78.9% of total revenue in the three months ended October 31, 2022.

Subscription and support revenue accounts for a significant portion of our revenue, comprising 81.0% of total revenue in the six months ended January 31, 2024 and 78.8% of total revenue in the six months ended January 31, 2023.

Sales and renewals of subscription and support contracts may decline and fluctuate as a result of a number of factors, including end-customers’ level of satisfaction with our products and subscriptions, the frequency and severity of subscription outages, our product uptime or latency, the prices of our products and subscriptions, and reductions in our end-customers’ spending levels.

9 unchanged sentences

Substantially all of our revenue is generated by sales through our channel partners, including distributors and resellers.

For the three months ended October 31, 2023, three distributors individually represented 10% or more of our total revenue and in the aggregate represented 46.0% of our total revenue.

As of October 31, 2023, two distributors individually represented 10% or more of our gross accounts receivable and in the aggregate represented 31.5% of our gross accounts receivable.

For the six months ended January 31, 2024, three distributors individually represented 10% or more of our total revenue and in the aggregate represented 46.4% of our total revenue.

As of January 31, 2024, three distributors individually represented 10% or more of our gross accounts receivable and in the aggregate represented 46.6% of our gross accounts receivable.

We provide our channel partners with specific training and programs to assist them in selling our products, including subscriptions and support offerings, but there can be no assurance that these steps will be utilized or effective.

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If we fail to effectively manage our sales channels or channel partners, our ability to sell our products and subscriptions and operating results will be harmed.

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We are exposed to the credit and liquidity risk of our customers, and to credit exposure in weakened markets, which could result in material losses.

28 unchanged sentences

• public cloud vendors and startups that offer solutions for cloud security (private, public, and hybrid cloud).

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Many of our competitors have greater financial, technical, marketing, sales, and other resources, greater name recognition, longer operating histories, and a larger base of customers than we do.

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The occurrence of any of these risks could harm our business, operating results, and financial condition.

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If we do not accurately predict, prepare for, and respond promptly to rapidly evolving technological and market developments and successfully manage product and subscription introductions and transitions to meet changing end-customer needs in the enterprise security industry, our competitive position and prospects will be harmed.

19 unchanged sentences

We have incorporated, and are continuing to develop and deploy, AI into many of our products and solutions, including services that support our products and solutions.

AI presents challenges and risks that could affect our products and solutions, and therefore our business.

We are also incorporating AI into the operations of our business.

AI presents challenges and risks that could affect our products and solutions, and the operations of our business.

For example, AI algorithms may have flaws, and datasets used to train models may be insufficient or contain biased information.

These potential issues could subject us to regulatory risk, legal liability, including under new proposed legislation regulating AI in jurisdictions such as the EU and regulations being considered in other jurisdictions, and brand or reputational harm.

The AI that is being incorporated into our products, solutions, and business operation tools may not be successful or beneficial, and instead may cause technical, legal or ethical problems or result in increased costs.

The investments that we are making across our business in AI reflect our ongoing efforts to innovate and provide products and services that are useful to our customers, as well as provide efficiencies in our business.

Such investments ultimately may not be commercially viable or may not result in an adequate return of capital and we may incur unanticipated liabilities.

These efforts could subject us to regulatory risk, legal liability, including under new proposed legislation regulating AI in jurisdictions such as the EU and regulations being considered in other jurisdictions, or brand or reputational harm.

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The rapid evolution of AI, including potential government regulation of AI, requires us to invest significant resources to develop, test, and maintain AI in our products and services in a manner that meets evolving requirements and expectations.

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Any of these negative outcomes could adversely impact the market perception of our products and subscriptions and end-customer and investor confidence in our company and could seriously harm our business or operating results.

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Defects, errors, or vulnerabilities in our products, subscriptions, or support offerings, the failure of our products or subscriptions to block a virus or prevent a security breach or incident, misuse of our products, or risks of product liability claims could harm our reputation and adversely impact our operating results.

26 unchanged sentences

These false positives may impair the perceived reliability of our products and subscriptions and may therefore adversely impact market acceptance of our products and subscriptions and could result in damage to our reputation, negative publicity, loss of channel partners, end-customers and sales, increased costs to remedy any problem, and costly litigation.

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Our ability to sell our products and subscriptions is dependent on the quality of our technical support services and those of our channel partners, and the failure to offer high-quality technical support services could have a material adverse effect on our end-customers’ satisfaction with our products and subscriptions, our sales, and our operating results.

10 unchanged sentences

Third parties are asserting, have asserted, and may in the future assert claims of infringement of intellectual property rights against us.

For example, on January 31, 2024, in the Centripetal Networks, Inc.

lawsuit against us, a jury returned a verdict of non-willful infringement with a lump sum amount of $151.5 million, plus statutory interest, for which we have accrued $176.8 million for the verdict amount and estimated interest.

In addition, we have been sued for patent infringement by Finjan, Inc.

and Lionra Technologies, which are both scheduled for trial in 2024.

Third parties may also assert such claims against our end-customers or channel partners, whom our standard license and other agreements obligate us to indemnify against claims that our products and subscriptions infringe the intellectual property rights of third parties.

9 unchanged sentences

Any of these events could seriously harm our business, financial condition, and operating results.

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Our proprietary rights may be difficult to enforce or protect, which could enable others to copy or use aspects of our products or subscriptions without compensating us.

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If we are held to have breached the terms of an open source software license, we could be required to seek licenses from third parties to continue offering our products and subscriptions on terms that are not economically feasible, to reengineer our products and subscriptions, to discontinue the sale of our products and subscriptions if reengineering could not be accomplished on a timely basis, or to make generally available, in source code form, our proprietary code, any of which could adversely affect our business, operating results, and financial condition.

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In addition to risks related to license requirements, usage of open source software can lead to greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or assurance of title or controls on origin of the software.

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Some components that we import for final manufacturing in the United States have been impacted by these tariffs.

As a result, our costs have increased and we have raised, and may be required to further raise, prices on our hardware products, all of which could severely impair our ability to fulfill orders.

As a result, our costs have increased and we have raised, and may be required to further raise, prices on our hardware products.

Our manufacturing partners typically fulfill our supply requirements on the basis of individual purchase orders.

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Any production interruptions for any reason, such as a natural disaster, epidemic or pandemic, capacity shortages, or quality problems at one of our manufacturing partners would negatively affect sales of our product lines manufactured by that manufacturing partner and adversely affect our business and operating results.

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Managing the supply of our hardware products and product components is complex.

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If we are unable to hire, integrate, train, or retain the qualified and highly skilled personnel required to fulfill our current or future needs, our business, financial condition, and operating results could be harmed.

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Further, we believe that a critical contributor to our success and our ability to retain highly skilled personnel has been our corporate culture, which we believe fosters innovation, inclusion, teamwork, passion for end-customers, focus on execution, and the facilitation of critical knowledge transfer and knowledge sharing.

9 unchanged sentences

Additionally, our international sales and operations are subject to a number of risks, including the following:

• political, economic, and social uncertainty around the world, health risks such as epidemics and pandemics like COVID-19, macroeconomic challenges in Europe, terrorist activities, Russia’s invasion of Ukraine, tensions between China and Taiwan, the recent hostilities in Israel and the surrounding region, and continued hostilities in the Middle East;

• political, economic, and social uncertainty around the world, health risks such as epidemics and pandemics like COVID-19, macroeconomic challenges in Europe, terrorist activities, Russia’s invasion of Ukraine, tensions between China and Taiwan, the hostilities in Israel and the surrounding region, and continued hostilities in the Middle East;

• unexpected changes in, or the application of, foreign and domestic laws and regulations (including intellectual property rights protections), regulatory practices, trade restrictions, and foreign legal requirements, including those applicable to the importation, certification, and localization of our products, tariffs, and tax laws and treaties, including regulatory and trade policy changes adopted by the current administration, such as the Sanctions on Russia, or foreign countries in response to regulatory changes adopted by the current administration;

16 unchanged sentences

We have entered into forward contracts in an effort to reduce our foreign currency exchange exposure related to our foreign currency denominated expenditures.

As of October 31, 2023, the total notional amount of our outstanding foreign currency forward contracts was $777.9 million.

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

For more information on our hedging transactions, refer to Note 6.

3 unchanged sentences

We have business operations in Israel, and intend to continue growing our presence in Israel.

Our operations in Israel could be disrupted by political instability, civil unrest, terrorist attacks, acts of violence, acts of war, or other military actions, including the recent hostilities in Israel and the surrounding region.

Our operations in Israel could be disrupted by political instability, civil unrest, terrorist attacks, acts of violence, acts of war, or other military actions, including the hostilities in Israel and the surrounding region.

The future of peace efforts between Israel and its Arab neighbors remains uncertain.

1 unchanged sentence

Current or future tensions and conflicts in the Middle East could adversely affect our business, operating results, financial condition, and cash flows.

In addition, many of our employees in Israel are obligated to perform annual reserve duty in the Israeli military and are subject to being called for active duty under emergency circumstances, which has occurred as a result of recent hostilities in Israel and the surrounding region.

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We cannot predict the full impact of these conditions on us in the future, particularly if emergency circumstances or an escalation in the political situation occurs.

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RISKS RELATED TO PRIVACY AND DATA PROTECTION

Our actual or perceived failure to adequately protect personal data could have a material adverse effect on our business.

We may incur increased costs to comply with privacy and data protection laws and, if we fail to comply, we could be subject to government enforcement actions, private litigation and adverse publicity.

A wide variety of laws and regulations apply to the collection, use, retention, protection, disclosure, transfer, and other processing of personal data in jurisdictions where we and our customers operate.

Compliance with these laws and regulations is difficult and costly.

These laws and regulations are also subject to frequent and unexpected changes, new or additional laws or regulations may be adopted, and rulings that invalidate prior laws or regulations may be issued.

These laws and regulations are also subject to frequent, inconsistent and unexpected changes, new, modified or additional laws or regulations may be adopted, and rulings that invalidate prior laws, regulations, or interpretations of such laws or regulations, may be issued.

For example, we are subject to the E.U.

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The decision imposed a requirement for companies to carry out an assessment of the laws and practices governing access to personal data in the third country to ensure an essentially equivalent level of data protection to that afforded in the E.U.

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Among other effects, we may experience additional costs associated with increased compliance burdens, reduced demand for our offerings from current or prospective customers in the European Economic Area (“EEA”), Switzerland, and the U.K.

3 unchanged sentences

Such legal challenges could result in additional legal and regulatory risk, compliance costs, and in our business, operating results, and financial condition being harmed.

Additionally, we and our customers may face risk of enforcement actions by data protection authorities in Europe relating to personal data transfers to us and by us from Europe.

Any such enforcement actions could result in substantial costs and diversion of resources, and distract management and technical personnel.

These potential liabilities and enforcement actions could also have an overall negative effect on our business, operating results, and financial condition.

We are also subject to the California Consumer Privacy Act, as amended by the California Privacy Rights Act (collectively, the “CCPA”).

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Moreover, additional state privacy laws have been passed and will require potentially substantial efforts to obtain compliance.

These include laws enacted in at least nine states, which all go into effect by January 1, 2026.

These include laws enacted in at least fourteen states, which all go into effect by January 1, 2026.

We may also from time to time be subject to obligations relating to personal data by contract, or face assertions that we are subject to self-regulatory obligations or industry standards.

1 unchanged sentence

Internationally, data localization laws may mandate that personal data collected in a foreign country be processed and stored within that country.

We and our customers may face risk of enforcement actions by regulators or data protection authorities, private litigation and adverse publicity including reputational damage and loss of customer confidence for alleged violations of any of the foregoing obligations.

Any such claims could result in substantial costs, ongoing remedial, audit and reporting obligations, and diversion of resources, and distract management and technical personnel.

These potential liabilities and enforcement actions could also have an overall negative effect on our business, operating results, and financial condition.

The amount and scope of insurance we maintain may not cover all types of claims that may arise.

New legislation affecting the scope of personal data and personal information where we or our customers and partners have operations, especially relating to classification of Internet Protocol (“IP”) addresses, machine identification, AI, location data, and other information, may limit or inhibit our ability to operate or expand our business, including limiting strategic partnerships that may involve the sharing or uses of data, and may require significant expenditures and efforts in order to comply.

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Although we believe that our estimates are reasonable, the ultimate tax outcome may differ from the amounts recorded on our consolidated financial statements and may materially affect our financial results in the period or periods for which such determination is made.

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In addition, our future income tax obligations could be adversely affected by changes in, or interpretations of, tax laws, regulations, policies, or decisions in the United States or in the other jurisdictions in which we operate.

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Enforcement actions, litigation, and sanctions could harm our business, operating results, and financial condition.

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Risks Related to Our Notes and Common Stock

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We will need to make cash payments (a) if holders of our 2025 Notes require us to repurchase all, or a portion of, their 2025 Notes upon the occurrence of a fundamental change (e.g., a change of control of Palo Alto Networks, Inc.) before the maturity date, (b) upon conversion of our 2025 Notes, or (c) to repay our 2025 Notes in cash at their maturity unless earlier converted or repurchased.

Effective November 1, 2023 through January 31, 2024, all of the 2025 Notes are convertible.

Effective February 1, 2024 through April 30, 2024, all of the 2025 Notes are convertible.

If all of the note holders decided to convert their 2025 Notes, we would be obligated to pay the $1.8 billion principal amount of the 2025 Notes in cash.

26 unchanged sentences

• departures of key personnel;

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• geopolitical or economic uncertainty around the world.

4 unchanged sentences

In connection with each such sale of the 2025 Notes, we also entered into warrant transactions with the counterparties pursuant to which we sold warrants (the “2025 Warrants”) for the purchase of our common stock.

In addition, we also entered into warrant transactions in connection with our 2023 Notes (together with the 2025 Warrants, the “Warrants”).

The 2025 Note Hedges for our 2025 Notes are generally expected to reduce the potential dilution to our common stock upon any conversion of our 2025 Notes.

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We cannot guarantee that our share repurchase program will be fully consummated or that it will enhance shareholder value, and share repurchases could affect the price of our common stock.

As of October 31, 2023, we had $683.3 million available under our share repurchase program.

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 repurchase authorization will expire on December 31, 2024, and may be suspended or discontinued at any time without prior notice.

As of January 31, 2024, we had $1.0 billion available under our share repurchase program which will expire on December 31, 2024 and may be suspended or discontinued at any time without prior notice.

Such share repurchase program may be suspended or discontinued by the Company at any time without prior notice.

10 unchanged sentences

• establish that our board of directors is divided into three classes, Class I, Class II, and Class III, with three-year staggered terms;

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• authorize our board of directors to issue shares of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval;

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If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly impaired, and our business may be adversely affected.

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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 1A. Risk Factors