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Item 2. Management’s Discussion and Analysis

2024-11-21 compared with 2024-05-21 · 175 added, 174 removed, 266 unchanged (57% of the section changed)

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This Quarterly Report on Form 10-Q, including, without limitation, the following discussion and analysis, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.

These statements include, but are not limited to, statements concerning:

the cybersecurity landscape, our expectations regarding our platformization strategy and related progress and opportunities, long-term expectations regarding annual recurring revenue, product development strategy and expectations regarding artificial intelligence, expectations regarding our strategic partnerships, our expectations regarding drivers of and factors affecting growth in our business;

statements regarding expected profitability, trends in billing, our mix of product and subscription and support revenue, cost of revenue, gross margin, cash flows, operating expenses, including future share-based compensation expense, income taxes, investment plans, and liquidity;

Forward-looking statements generally can be identified by words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potentially,” “projects,” “will,” “will be,” “will continue,” “will likely result,” “would” and similar expressions that convey uncertainty of future events or outcomes.

These forward-looking statements include, but are not limited to, statements concerning the following:

expectations regarding the cybersecurity landscape;

expectations regarding our platformization strategy and related progress and opportunities;

expectations regarding annual recurring revenue, remaining performance obligations, and product development strategy;

expectations regarding artificial intelligence;

expectations regarding our strategic partnerships;

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

statements regarding expected profitability, trends in annual recurring revenue, trends in remaining performance obligations, our mix of product and subscription and support revenue, cost of revenue, gross margin, cash flows, operating expenses, including future share-based compensation expense, income taxes, investment plans, and liquidity;

expected recurring revenues resulting from growth in our end-customers and increased adoption of our products and cloud-delivered security solutions;

the performance advantages of our products and subscription and support offerings and the potential benefits to our customers;

our expectations regarding future investments in research and development and product development, customer support, in our employees and in our sales force, including expectations regarding growth in our sales headcount;

our expectation that we will continue to expand our global presence;

expectations regarding future investments in research and development and product development, customer support, in our employees and in our sales force, including expectations regarding growth in our sales headcount;

expectations that we will continue to expand our global presence;

expectations regarding our revenues, including the seasonality and cyclicality from quarter to quarter;

our expectation that we will increase our customer financing activities;

expectations relating to our customer financing activities;

the sufficiency of our cash flow from operations with existing cash, cash equivalents, and investments to meet our cash needs for the foreseeable future;

our ability to successfully acquire and integrate companies and assets and our expectations and intentions with respect to the products and technologies that we acquire and introduce;

our ability to successfully acquire and integrate companies and assets and expectations and intentions with respect to the assets, products and technologies that we acquire;

expectations regarding contingent consideration obligations;

the timing and amount of capital expenditures and share repurchases;

the effects of worldwide economic and geopolitical conditions, including but not limited to hostilities in Israel, inflation, interest rate levels, growth rates and other conditions, on our operating and financial results and performance;

the effects of worldwide economic and geopolitical conditions, including but not limited to hostilities in Israel and the surrounding regions, inflation, interest rate levels, trade regulations, growth rates and other conditions, on our operating and financial results and performance;

the manufacture, delivery and cost of certain of our products;

the effects of current or potential litigation or regulatory developments involving us or affecting our industry;

the effects of litigation or regulatory developments involving us or affecting our industry;

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

These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which could cause our actual results to differ materially from those anticipated or implied by any forward-looking statements.

Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Quarterly Report on Form 10-Q and, in particular, the risks discussed under the caption “Risk Factors” in Part II, Item 1A of this report and those discussed in other documents we file with the Securities and Exchange Commission (“SEC”).

We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law.

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• 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 nine months ended April 30, 2024 to the three and nine months ended April 30, 2023.

A discussion of the nature and trends in our financial results and an analysis of our financial results comparing the three months ended October 31, 2024 to the three months ended October 31, 2023.

• Liquidity and Capital Resources.

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We empower enterprises, organizations, service providers, and government entities to protect themselves against today’s most sophisticated cyber threats.

Our cybersecurity platforms and services help secure enterprise users, networks, clouds, and endpoints by delivering comprehensive cybersecurity backed by industry-leading artificial intelligence and automation.

We are a leading provider of zero trust solutions, starting with next-generation zero trust network access to secure today’s remote hybrid workforces and extending to securing all users, applications, and infrastructure with zero trust principles.

Our security solutions are designed to reduce customers’ total cost of ownership by improving operational efficiency and eliminating the need for siloed point products.

Our company focuses on delivering value in four fundamental areas:

Our cybersecurity platforms and services help secure enterprise users, networks, clouds, and endpoints by delivering comprehensive cybersecurity backed by artificial intelligence (“AI”) and automation.

A key element of our strategy is to help our customers simplify their security architectures through consolidating disparate point products.

We execute on this strategy by developing our capabilities and packaging our offerings into platforms which are able to cover many of our customers’ needs in the markets in which we operate.

Our platformization strategy combines various products and services into a tightly integrated architecture and makes security faster, less complex, and more cost-effective.

We focus on delivering value in four sectors of the cybersecurity industry:

Network Security:

• Our network security platform, designed to deliver complete zero trust solutions to our customers, includes our hardware and software ML-Powered Next-Generation Firewalls, as well as a cloud-delivered Secure Access Service Edge (“SASE”).

• Our network security platform, designed to deliver complete zero trust solutions to our customers, includes our hardware and software ML-Powered Next-Generation Firewalls, AI Runtime Security, as well as a cloud-delivered Secure Access Service Edge (“SASE”).

Prisma ® Access, our Security Services Edge (“SSE”) solution, when combined with Prisma SD-WAN, provides a comprehensive single-vendor SASE offering that is used to secure remote workforces and securely enable the cloud-delivered branch.

We have been recognized as a leader in network firewalls, SASE, SSE, and SD-WAN.

Our network security platform also includes our cloud-delivered security services, such as Advanced Threat Prevention, Advanced WildFire ® , Advanced URL Filtering, Advanced DNS Security, IoT/OT Security, GlobalProtect ® , Enterprise Data Loss Prevention (“Enterprise DLP”), Artificial Intelligence for IT Operations (“AIOps”), SaaS Security API, SaaS Security Inline, and Artificial Intelligence (“AI”) Access Security.

Prisma Access Browser extends SASE security and data protection to the endpoint, giving workers complete device freedom to access business applications securely using their browser.

Our network security platform also includes our cloud-delivered security services, such as Advanced Threat Prevention, Advanced WildFire ® , Advanced URL Filtering, Advanced DNS Security, IoT/OT Security, GlobalProtect ® , Enterprise Data Loss Prevention (“Enterprise DLP”), AI for IT Operations (“AIOps”), software as a service (“SaaS”) Security, and AI Access Security.

Through these add-on security services, our customers are able to secure their content, applications, users, and devices across their entire organization.

Strata Cloud Manager, our network security management solution, can centrally manage our network security platform irrespective of form factor, location, or scale.

Strata Cloud Manager includes the Strata Copilot which provides a natural language interface to simplify and accelerate platform management.

Strata Cloud Manager includes the Strata Copilot which provides a natural language interface to simplify and strengthen network security.

Cloud Security:

• We enable cloud-native security through our Prisma Cloud Code to Cloud TM platform.

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

• We deliver scalable and comprehensive security across the cloud application development lifecycle through our Code to Cloud TM platform, Prisma Cloud.

As a comprehensive Cloud Native Application Protection Platform (“CNAPP”), Prisma Cloud secures multi- and hybrid-cloud environments for applications, data, generative AI (“GenAI”) ecosystem, and the entire cloud native technology stack across the full development lifecycle, from code to cloud.

We also offer our VM-Series and CN-Series virtual firewalls for inline network security on multi- and hybrid-cloud environments.

Security Operations:

• We deliver the next generation of security automation, security analytics, endpoint security, and attack surface management solutions through our Cortex portfolio.

These include Cortex XSIAM, our AI-driven security operations platform, Cortex XDR ® for the prevention, detection, and response to complex cybersecurity attacks, Cortex XSOAR ® for security orchestration, automation, and response (“SOAR”), and Cortex Xpanse TM for attack surface management (“ASM”).

• We deliver the next generation of security operations capabilities that unifies standalone Security Information and Event Management (“SIEM”) tools, endpoint security, security automation, and attack surface management (“ASM”) capabilities on our Cortex platform.

These include Cortex XSIAM ® , for AI-driven security operations that replaces traditional SIEM tools, Cortex XDR ® for the prevention, detection, and response to complex cybersecurity attacks, Cortex XSOAR ® for security orchestration, automation, and response (“SOAR”), and Cortex Xpanse ® for ASM.

These products are delivered as SaaS or software subscriptions.

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Our consultants serve as trusted advisors to our customers by assessing and testing their security controls against the right threats, transforming their security strategy with a threat-informed approach, and responding to security incidents on behalf of our clients.

Additionally, Unit 42 offers managed detection and response services and managed threat hunting services.

For the third quarter of fiscal 2024 and 2023, total revenue was $2.0 billion and $1.7 billion, respectively, representing year-over-year growth of 15.3%.

Additionally, Unit 42 offers managed detection and response (“MDR”) and managed threat hunting services.

For the first quarter of fiscal 2025 and 2024, total revenue was $2.1 billion and $1.9 billion, respectively, representing year-over-year growth of 13.9%.

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 April 30, 2024, we had end-customers in over 180 countries.

As of October 31, 2024, 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.

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

Our product revenue grew to $391.0 million, or 19.7% of total revenue, for the third quarter of fiscal 2024.

Our product revenue grew to $353.8 million, or 16.5% of total revenue, for the first quarter of fiscal 2025, representing year-over-year growth of 3.7%.

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

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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 $1.6 billion, or 80.3% of total revenue, for the third quarter of fiscal 2024, representing year-over-year growth of 19.6%.

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.

When end-customers purchase our physical, virtual, or container firewall appliances, or certain cloud offerings, they typically purchase support in order to receive ongoing security updates, upgrades, bug fixes, and repairs.

In addition to the subscriptions purchased with these appliances, end-customers may also purchase other subscriptions on a per-user, per-endpoint, or capacity-based basis.

Our subscription and support revenue grew to $1.8 billion, or 83.5% of total revenue, for the first quarter of fiscal 2025, representing year-over-year growth of 16.1%.

Our subscriptions provide our end-customers with near real-time access to the latest antivirus, intrusion prevention, web filtering, modern malware prevention, data loss prevention, and cloud access security broker and AI security capabilities across the network, endpoints, and the cloud.

Our subscriptions also include security operations, which enable customers to leverage the AI-driven Cortex platform for advanced capabilities such as security information and event management, next-generation antivirus, endpoint detection and response, extended detection and response, identity threat detection and response, cloud detection and response, SOAR, as well as ASM.

Additionally, we offer MDR for Cortex subscriptions, powered by Unit 42’s elite expertise.

When customers purchase our physical, virtual, or container firewall appliances, or certain cloud offerings, they typically purchase support in order to receive ongoing security updates, upgrades, bug fixes, and repairs.

In addition to the subscriptions purchased with these appliances, customers may also purchase other subscriptions on a per-user, per-endpoint, or capacity-based basis.

We also offer professional services, including incident response, risk management, and digital forensic services.

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 April 2024, we introduced new Cortex XSIAM features that enable security operations teams to identify and remediate cloud threats in real-time.

For example, in August 2024, we launched Prisma Access Browser, our SASE-native enterprise browser that enables security teams to manage security policies across web applications and devices;

and in October 2024, we introduced new capabilities in our operational technology (“OT”) Security solution to protect OT remote operations, mitigate risk for critical OT assets and extend security into industrial environments.

Additionally, we continue to make strategic investments that fit well within our long-term strategy.

For example, in August 2024, we completed the acquisition of certain QRadar assets from International Business Machines Corporation (“IBM”), which we expect will help accelerate the growth of our Cortex business.

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, focus on end-customer satisfaction, and address any product vulnerabilities.

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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, supply chain disruptions, and other conditions, may adversely affect our results of operations and financial performance.

Worsening economic conditions, including inflation, high interest rates, slow growth, fluctuations in foreign exchange rates, supply chain disruptions, impacts of trade regulations, and other conditions, may adversely affect our results of operations and financial performance.

The hostilities in Israel and the surrounding region have increased the levels of economic and political uncertainty.

While we have business operations in Israel, and intend to continue growing our presence in Israel, we currently do not expect significant business disruption.

We are actively monitoring, evaluating, and responding to the developing situation.

We are actively monitoring, evaluating, and responding to the situation.

We are also monitoring the impact of inflationary pressures and the tensions between China and Taiwan, and between the U.S.

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

April 30, 2024 July 31, 2023

(in millions)

Total deferred revenue $ 10,167.6 $ 9,296.4

Cash, cash equivalents, and investments $ 6,394.8 $ 5,437.9

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

October 31, 2024 July 31, 2024

(in billions)

Next-Generation Security Annualized Recurring Revenue

Remaining performance obligations

$ 12.6 $ 12.7

Three Months Ended October 31,

(dollars in millions)

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Operating margin 13.4 % 11.5 %

Billings $ 2,334.0 $ 2,256.2 $ 6,705.7 $ 6,034.3

Billings year-over-year percentage increase 3.4 % 25.6 % 11.1 % 26.1 %

Cash flow provided by operating activities $ 1,509.6 $ 1,526.0

Free cash flow (non-GAAP) $ 1,465.5 $ 1,489.2

• Deferred Revenue.

Our deferred revenue primarily consists of amounts that have been invoiced but have not been recognized as revenue as of the period end.

The majority of our deferred revenue balance consists of subscription and support revenue that is recognized ratably over the contractual service period.

We monitor our deferred revenue balance because it represents a significant portion of revenue to be recognized in future periods.

We define billings as total revenue plus the change in total deferred revenue, net of acquired deferred revenue, during the period.

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

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

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

While we believe that billings provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management, it is important to note that other companies, including companies in our industry, may not use billings, may calculate billings differently, may have different billing frequencies, or may use other financial measures to evaluate their performance, all of which could reduce the usefulness of billings as a comparative measure.

We calculate billings in the following manner:

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

2024 2023 2024 2023

(in millions)

Total revenue $ 1,984.8 $ 1,720.9 $ 5,838.0 $ 4,939.4

change in total deferred revenue, net of acquired deferred revenue 349.2 535.3 867.7 1,094.9

Billings $ 2,334.0 $ 2,256.2 $ 6,705.7 $ 6,034.3

• Next-Generation Security Annualized Recurring Revenue (“NGS ARR”).

Our NGS ARR represents the annualized allocated revenue of all active contracts as of the final day of the reporting period for Prisma and Cortex offerings inclusive of the VM-Series and related services, and certain cloud-delivered security services.

Beginning the first quarter of fiscal 2025, NGS ARR includes revenue attributable to QRadar SaaS contracts.

NGS ARR is an operating metric that we use to assess the strength and trajectory of our business.

NGS ARR should be viewed independently of revenue, deferred revenue and remaining performance obligations and does not represent our revenue under U.S.

GAAP on an annualized basis, as it is an operating metric that can be impacted by contract start and end dates and renewal rates.

NGS ARR is not intended to be a replacement for forecasts of revenue.

• Cash Flow Provided by Operating Activities.

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GAAP, is provided below:

Nine Months Ended April 30,

Three Months Ended October 31,

(in millions)

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

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

2024 2023 2024 2023

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

Three Months Ended October 31,

Amount % of Revenue Amount % of Revenue

(dollars in millions)

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Income before income taxes 368.6 17.2 % 282.6 15.0 %

Provision for (benefit from) income taxes (27.6) (1.3 %) 23.2 1.3 % (1,550.6) (26.5 %) 37.8 0.8 %

Provision for income taxes 17.9 0.8 % 88.4 4.7 %

Net income $ 350.7 16.4 % $ 194.2 10.3 %

(1) Includes share-based compensation as follows:

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

2024 2023 2024 2023

Three Months Ended October 31,

(in millions)

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

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

2024 2023 Change 2024 2023 Change

Amount Amount Amount % Amount Amount Amount %

Three Months Ended October 31,

2024 2023 Change

Amount Amount Amount %

(dollars in millions)

Product $ 353.8 $ 341.1 $ 12.7 3.7 %

Product revenue was flat for the three months ended April 30, 2024 compared to the same period in 2023 driven by increased software revenue and increased demand for our new generation of hardware products, offset by decreased demand for our prior generation of hardware products.

Product revenue increased for the nine months ended April 30, 2024 compared to the same period in 2023 driven by increased software revenue primarily due to a go-to-market strategy for certain Network Security offerings, and increased demand for our new generation of hardware products, partially offset by decreased demand for our prior generation of hardware products.

The change in product revenue for the three months ended October 31, 2024 compared to the same period in 2023 represented a modest increase in product sales.

SUBSCRIPTION AND SUPPORT REVENUE

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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 April 30, Nine Months Ended April 30,

2024 2023 Change 2024 2023 Change

Amount Amount Amount % Amount Amount Amount %

Three Months Ended October 31,

2024 2023 Change

Amount Amount Amount %

(dollars in millions)

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Total subscription and support $ 1,785.0 $ 1,537.0 $ 248.0 16.1 %

Subscription and support revenue increased for the three and nine months ended April 30, 2024 compared to the same periods in 2023 primarily due to increased demand for our subscription and support offerings from our end-customers.

Subscription and support revenue increased for the three months ended October 31, 2024 compared to the same period in 2023 primarily 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 April 30, Nine Months Ended April 30,

2024 2023 Change 2024 2023 Change

Amount Amount Amount % Amount Amount Amount %

Three Months Ended October 31,

2024 2023 Change

Amount Amount Amount %

(dollars in millions)

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Total revenue $ 2,138.8 $ 1,878.1 $ 260.7 13.9 %

Revenue from the Americas, Europe, the Middle East, and Africa (“EMEA”), and Asia Pacific and Japan (“APAC”), increased for the three and nine months ended April 30, 2024 compared to the same periods in 2023 as we continued to increase investment in our global sales force in order to support our growth and innovation, with the Americas contributing the highest increase in revenue due to its larger scale.

Revenue from the Americas, Europe, the Middle East, and Africa (“EMEA”), and Asia Pacific and Japan (“APAC”), increased for the three months ended October 31, 2024 compared to the same period in 2023 as we continued to increase investment in our global sales force in order to support our growth and innovation, with the Americas contributing the highest increase in revenue due to its larger scale.

COST OF REVENUE

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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,

2024 2023 Change 2024 2023 Change

Amount Amount Amount % Amount Amount Amount %

Three Months Ended October 31,

2024 2023 Change

Amount Amount Amount %

(dollars in millions)

Cost of product revenue $ 75.0 $ 77.4 $ (2.4) (3.1) %

Cost of product revenue decreased for the three months ended April 30, 2024 compared to the same period in 2023 primarily due to decreased demand for our prior generation of hardware products and lower other product costs, partially offset by increased demand for our new generation hardware products.

Cost of product revenue decreased for the nine months ended April 30, 2024 compared to the same period in 2023 primarily due to decreased demand for our prior generation of hardware products and lower costs largely driven by an easing of supply chain challenges, partially offset by increased demand for our new generation hardware products.

Cost of product revenue was relatively flat for the three months ended October 31, 2024 compared to the same period in 2023.

COST OF SUBSCRIPTION AND SUPPORT REVENUE

Cost of subscription and support revenue includes personnel costs for our global customer support and technical operations organizations, customer support and repair costs, third-party professional services costs, data center and cloud hosting service costs, amortization of acquired intangible assets and capitalized software development costs, and shared costs.

Cost of subscription and support revenue includes personnel costs for our global customer support and technical operations organizations, data center and cloud hosting service costs, third-party professional services costs, amortization of acquired intangible assets and capitalized software development costs, customer support and repair costs, and shared costs.

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 April 30, Nine Months Ended April 30,

2024 2023 Change 2024 2023 Change

Amount Amount Amount % Amount Amount Amount %

Three Months Ended October 31,

2024 2023 Change

Amount Amount Amount %

(dollars in millions)

Cost of subscription and support revenue $ 479.1 $ 395.4 $ 83.7 21.2 %

Cost of subscription and support revenue increased for the three and nine months ended April 30, 2024 compared to the same periods in 2023 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 $30.4 million for the three months ended April 30, 2024 compared to the same period in 2023, and increased $78.8 million for the nine months ended April 30, 2024 compared to the same period in 2023.

Personnel costs grew $6.5 million for the three months ended April 30, 2024 compared to the same period in 2023, and grew $39.4 million for the nine months ended April 30, 2024 compared to the same period in 2023, primarily due to headcount growth.

The increase in cost of subscription and support revenue for the three months ended April 30, 2024 was further driven by amortization of intangible assets from our recent acquisitions.

Cost of subscription and support revenue increased for the three months ended October 31, 2024 compared to the same period in 2023 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 $39.8 million for the three months ended October 31, 2024 compared to the same period in 2023.

Personnel costs grew $11.3 million for the three months ended October 31, 2024 compared to the same period in 2023, primarily due to headcount growth.

The increase in cost of subscription and support revenue was further driven by increased professional services expense.

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.

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

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

2024 2023 2024 2023

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

Three Months Ended October 31,

Amount Gross Margin Amount Gross Margin

(dollars in millions)

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Total gross profit $ 1,584.7 74.1 % $ 1,405.3 74.8 %

Product gross margin increased for the three months ended April 30, 2024 compared to the same period in 2023 primarily due to lower other product costs and increased software revenue.

Product gross margin increased for the nine months ended April 30, 2024 compared to the same period in 2023 primarily due to lower costs largely driven by an easing of supply chain challenges and increased software revenue.

Subscription and support gross margin increased for the three and nine months ended April 30, 2024 compared to the same periods in 2023 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 October 31, 2024 compared to the same period in 2023 primarily due to favorable hardware product mix and lower other product costs.

Subscription and support gross margin decreased for the three months ended October 31, 2024 compared to the same period in 2023 primarily due to an increase in costs related to our cloud-based offerings.

OPERATING EXPENSES

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We expect operating expenses generally to increase in absolute dollars and to decrease over the long term as a percentage of revenue as we continue to scale our business.

As of April 30, 2024, we expect to recognize approximately $2.2 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 October 31, 2024, we expect to recognize approximately $2.2 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.

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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 April 30, Nine Months Ended April 30,

2024 2023 Change 2024 2023 Change

Amount Amount Amount % Amount Amount Amount %

Three Months Ended October 31,

2024 2023 Change

Amount Amount Amount %

(dollars in millions)

Research and development $ 480.4 $ 409.5 $ 70.9 17.3 %

Research and development expense increased for the three and nine months ended April 30, 2024 compared to the same periods in 2023 primarily due to increased personnel costs, which grew $29.4 million for the three months ended April 30, 2024 compared to the same period in 2023, and grew $91.1 million for the nine months ended April 30, 2024 compared to the same period in 2023, largely due to headcount growth.

Research and development expense increased for the three months ended October 31, 2024 compared to the same period in 2023 primarily due to increased personnel costs, which grew $49.0 million, largely due to headcount growth.

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

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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 April 30, Nine Months Ended April 30,

2024 2023 Change 2024 2023 Change

Amount Amount Amount % Amount Amount Amount %

Three Months Ended October 31,

2024 2023 Change

Amount Amount Amount %

(dollars in millions)

Sales and marketing $ 720.1 $ 660.5 $ 59.6 9.0 %

Sales and marketing expense increased for the three and nine months ended April 30, 2024 compared to the same periods in 2023 primarily due to increased personnel costs and costs associated with sales and marketing events and go-to-market initiatives.

Personnel costs grew $42.7 million for the three months ended April 30, 2024 compared to the same period in 2023, and grew $76.7 million for the nine months ended April 30, 2024 compared to the same period in 2023, largely due to headcount growth.

Costs associated with sales and marketing events and go-to-market initiatives grew $22.3 million for the three months ended April 30, 2024 compared to the same period in 2023, and grew $83.7 million for the nine months ended April 30, 2024 compared to the same period in 2023.

Sales and marketing expense increased for the three months ended October 31, 2024 compared to the same period in 2023 primarily due to increased personnel costs, which grew $57.6 million, largely due to headcount growth.

GENERAL AND ADMINISTRATIVE

General and administrative expense consists primarily of personnel costs and shared costs for our executive, finance, human resources, information technology, and legal organizations, and professional services costs, which consist primarily of legal, auditing, accounting, and other consulting costs.

General and administrative expense also includes change in fair value of contingent consideration liability.

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 April 30, Nine Months Ended April 30,

2024 2023 Change 2024 2023 Change

Amount Amount Amount % Amount Amount Amount %

Three Months Ended October 31,

2024 2023 Change

Amount Amount Amount %

(dollars in millions)

General and administrative $ 97.7 $ 120.1 $ (22.4) (18.7) %

General and administrative expense was relatively flat for the three months ended April 30, 2024 compared to the same period in 2023.

General and administrative expense increased for the nine months ended April 30, 2024 compared to the same period in 2023 primarily due to a litigation accrual of $180.5 million during the nine months ended April 30, 2024 relating to an ongoing patent infringement lawsuit.

General and administrative expense decreased for the three months ended October 31, 2024 compared to the same period in 2023 primarily due to a release of previously accrued litigation-related charge of $43.0 million and decreased professional services expense during the three months ended October 31, 2024, partially offset by increased personnel costs, which grew $15.1 million, largely due to increased share-based compensation, and increased acquisition-related costs, including change in fair value of contingent consideration liability.

INTEREST EXPENSE

Interest expense primarily consists of interest expense related to our 0.75% Convertible Senior Notes due 2023 (the “2023 Notes”) and our 0.375% Convertible Senior Notes due 2025 (the “2025 Notes,” and together with “2023 Notes,” the “Notes”).

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

2024 2023 Change 2024 2023 Change

Amount Amount Amount % Amount Amount Amount %

Interest expense primarily consists of interest expense related to our 0.375% Convertible Senior Notes due 2025 (the “2025 Notes”).

Three Months Ended October 31,

2024 2023 Change

Amount Amount Amount %

(dollars in millions)

Interest expense $ 1.2 $ 2.9 $ (1.7) (58.6) %

Interest expense decreased for the three and nine months ended April 30, 2024 compared to the same periods in 2023 primarily due to conversions of the 2023 Notes prior to or upon maturity in July 2023.

Interest expense decreased for the three months ended October 31, 2024 compared to the same period in 2023 primarily due to early conversions of our 2025 Notes.

Refer to Note 9.

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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,

2024 2023 Change 2024 2023 Change

Amount Amount Amount % Amount Amount Amount %

Three Months Ended October 31,

2024 2023 Change

Amount Amount Amount %

(dollars in millions)

Other income, net $ 83.3 $ 70.3 $ 13.0 18.5 %

Other income, net increased for the three and nine months ended April 30, 2024 compared to the same periods in 2023 primarily due to higher interest income as a result of higher interest rates and higher average cash, cash equivalent, and investment balances for the three and nine months ended April 30, 2024 compared to the same periods in 2023.

PROVISION FOR (BENEFIT FROM) INCOME TAXES

Provision for (benefit from) income taxes consists primarily of U.S.

Other income, net increased for the three months ended October 31, 2024 compared to the same period in 2023 primarily due to higher interest income as a result of higher average cash, cash equivalent, and investment balances for the three months ended October 31, 2024 compared to the same period in 2023.

The increase was further driven by increased gains from our non-designated derivative instruments and investments, partially offset by increased foreign currency exchange losses for the three months ended October 31, 2024 compared to the same period in 2023.

PROVISION FOR INCOME TAXES

Provision for income taxes consists primarily of U.S.

taxes, foreign income taxes, and withholding taxes.

Our provision for income taxes during fiscal 2024 was offset by tax benefits from the release of our valuation allowance on U.S.

federal, U.S.

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

A portion of our valuation allowance release is included in our estimated annual effective tax rate.

Accordingly, we will continue to realize related tax benefits for the remainder of fiscal 2024, in amounts much less than that recorded during the three months ended January 31, 2024.

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

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

2024 2023 Change 2024 2023 Change

Amount Amount Amount % Amount Amount Amount %

Our provision for income taxes during the fiscal quarter ended October 31, 2024 was offset primarily by excess tax benefits from share-based compensation.

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.

The assessment requires significant judgment and is performed for each of the applicable jurisdictions.

Based on our analysis of all positive and negative evidence during the fiscal quarter ended October 31, 2024, 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.

We expect future research and development tax credit generation in California to exceed our ability to use the existing tax credits.

Three Months Ended October 31,

2024 2023 Change

Amount Amount Amount %

(dollars in millions)

Provision for (benefit from) income taxes $ (27.6) $ 23.2 $ (50.8) (219.0 %) $ (1,550.6) $ 37.8 $ (1,588.4) *

Provision for income taxes $ 17.9 $ 88.4 $ (70.5) (79.8) %

Effective tax rate 4.9 % 31.3 %

* Not meaningful

Our benefit from income taxes for the three months ended April 30, 2024 was primarily driven by excess tax benefits from share-based compensation and the release of our valuation allowance on U.S.

federal, U.S.

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

Our benefit from income taxes for the nine months ended April 30, 2024 was primarily driven by the release of our valuation allowance on U.S.

Our provision for income taxes for the three months ended October 31, 2024 and 2023 was 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, 2024 compared to the same period in 2023 primarily due to deferred tax benefits.

During the three months ended October 31, 2023, our deferred tax benefits were significantly limited due to our valuation allowance on U.S.

federal, U.S.

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

states other than California, and United Kingdom deferred tax assets which was subsequently released in the second quarter of fiscal 2024.

Refer to Note 13.

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Liquidity and Capital Resources

April 30, 2024 July 31, 2023

October 31, 2024 July 31, 2024

(in millions)

Working capital (1)

Working capital (deficit)

$ (1,160.0) $ (833.0)

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Total cash, cash equivalents, and investments $ 7,510.7 $ 6,752.0

(1) Current liabilities included net carrying amounts of convertible senior notes of $1.2 billion and $2.0 billion as of April 30, 2024 and July 31, 2023, respectively.

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 April 30, 2024, our total cash, cash equivalents, and investments of $6.4 billion were held for general corporate purposes.

As of April 30, 2024, we had no unremitted earnings when evaluating our outside basis difference relating to our U.S.

As of October 31, 2024, our total cash, cash equivalents, and investments of $7.5 billion were held for general corporate purposes.

As of October 31, 2024, we had no unremitted earnings when evaluating our outside basis difference relating to our U.S.

investment in foreign subsidiaries.

However, there could be local withholding taxes due to various foreign countries if certain lower tier earnings are distributed.

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

Beginning in fiscal 2023, we were required to capitalize and amortize research and development expenses as required by the Tax Cuts and Jobs Act.

As a result of this change, we have paid significantly more U.S.

cash taxes during the nine months ended April 30, 2024 and we expect our cash tax payments to increase in future periods.

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

Our cash tax payments have increased and we expect this trend to continue as a result of our increased profitability and utilization of our net operating loss carryforwards and credits.

In June 2020, we issued the 2025 Notes with an aggregate principal amount of $2.0 billion.

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Upon conversion of the 2025 Notes, we will pay cash equal to the aggregate principal amount of the 2025 Notes to be converted, and, at our election, we 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 2025 Notes being converted.

During the three and nine months ended April 30, 2024, holders of the 2025 Notes converted $661.8 million and $834.1 million, respectively, in aggregate principal amount of the 2025 Notes, which we repaid in cash.

We also issued 4.6 million and 5.7 million shares of our common stock to the holders of the 2025 Notes during the three and nine months ended April 30, 2024, respectively, for the conversion value in excess of the principal amount of the 2025 Notes converted, which were fully offset by shares we received from the corresponding exercise of the note hedges.

Subsequent to April 30, 2024, through the filing date of this Quarterly Report on Form 10-Q, $123.2 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 July 31, 2024.

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

If all of the holders convert their 2025 Notes during this period, we would be obligated to settle the $1.2 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 2025 Notes during the fiscal quarter ending July 31, 2024 or hold the 2025 Notes until maturity on June 1, 2025.

As of April 30, 2024, $1.2 billion of our 2025 Notes remained outstanding.

During the three months ended October 31, 2024, we repaid in cash $319.0 million in aggregate principal amount of the 2025 Notes and issued 2.3 million shares of common stock to the holders for the conversion value in excess of the principal amount of the 2025 Notes converted, which were fully offset by shares we received from our exercise of the associated note hedges.

Subsequent to October 31, 2024, through the filing date of this Quarterly Report on Form 10-Q, $106.0 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 January 31, 2025.

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

If all of the holders convert their 2025 Notes during this period, we would be obligated to settle the $646.6 million 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 2025 Notes during the fiscal quarter ending January 31, 2025 or hold the 2025 Notes until maturity on June 1, 2025.

As of October 31, 2024, $646.6 million of our 2025 Notes remained outstanding.

Refer to Note 9.

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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 April 30, 2024, there were no amounts outstanding, and we were in compliance with all covenants under the Credit Agreement.

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

Refer to Note 9.

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In February 2019, our board of directors authorized a $1.0 billion share repurchase program.

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.

In December 2020, August 2021, August 2022, November 2023, and August 2024, our board of directors authorized additional $700.0 million, $676.1 million, $915.0 million, $316.7 million and $500.0 million increases to this share repurchase program, respectively, bringing the total authorization under this share repurchase program to $4.1 billion.

Repurchases will be funded from available working capital and may be made at management’s discretion from time to time.

As of April 30, 2024, $500.0 million remained available for future share repurchases under this repurchase program.

As of October 31, 2024, $1.0 billion remained available for future share repurchases under this repurchase program.

The repurchase authorization will expire on December 31, 2025, and may be suspended or discontinued at any time without prior notice.

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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 fiscal year ending July 31, 2036, with the most significant leases relating to our corporate headquarters in Santa Clara, California.

As of April 30, 2024, we have total operating lease obligations of $432.3 million recorded on our condensed consolidated balance sheet.

As of April 30, 2024, our commitments to purchase products, components, cloud and other services totaled $4.7 billion.

We have entered into various non-cancelable operating leases, primarily for our offices and data centers, with lease terms expiring through fiscal 2036.

As of October 31, 2024, we have total operating lease obligations of $452.5 million recorded on our condensed consolidated balance sheet.

As of October 31, 2024, our commitments to purchase products, components, cloud and other services totaled $4.6 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 nine months ended April 30, 2024 and 2023:

Nine Months Ended April 30,

Our acquisition of certain IBM QRadar assets on August 31, 2024 included contingent consideration that requires potential future payments through the fiscal quarter ending October 2028.

As of October 31, 2024, we have total contingent consideration obligations of $655.2 million recorded on our condensed consolidated balance sheet.

Refer to Note 3.

Fair Value Measurements and Note 7.

Acquisition in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information on these contingent consideration obligations.

The following table summarizes our cash flows for the three months ended October 31, 2024 and 2023:

Three Months Ended October 31,

(in millions)

2 unchanged sentences

Net cash used in financing activities (219.7) (41.8)

Net increase (decrease) in cash, cash equivalents, and restricted cash $ 239.7 $ (124.5)

Net increase in cash, cash equivalents, and restricted cash $ 746.1 $ 1,355.2

Cash from operations could be affected by various risks and uncertainties detailed in Part II, Item 1A “Risk Factors” in this Quarterly Report on Form 10-Q.

8 unchanged sentences

Our largest source of cash provided by our operations is receipts from our billings.

Cash provided by operating activities during the nine months ended April 30, 2024 was $2.7 billion, an increase of $381.5 million compared to the same period in 2023.

The increase was primarily due to growth of our business as reflected by increases in collections during the nine months ended April 30, 2024, partially offset by higher cash expenditure to support our business growth.

Cash provided by operating activities during the three months ended October 31, 2024 was $1.5 billion, a slight decrease of $16.4 million compared to the same period in 2023.

The decrease was primarily due to timing of payments and collections during the three months ended October 31, 2024.

INVESTING ACTIVITIES

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We expect to continue such activities as our business grows.

Cash used in investing activities during the nine months ended April 30, 2024 was $1.3 billion, a decrease of $1.1 billion compared to the same period in 2023.

The decrease was primarily due to a decrease in purchases of investments, partially offset by an increase in net cash payments for business acquisitions and a decrease in proceeds from sales and maturities of investments during the nine months ended April 30, 2024.

Cash used in investing activities during the three months ended October 31, 2024 was $543.8 million, an increase of $414.8 million compared to the same period in 2023.

The increase was primarily due to an increase in cash payments for a business acquisition and a decrease in proceeds from sales and maturities of investments, partially offset by a decrease in purchases of investments during the three months ended October 31, 2024.

FINANCING ACTIVITIES

Our financing activities have consisted of repayments of our convertible senior notes, 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 nine months ended April 30, 2024 was $1.2 billion, an increase of $1.1 billion compared to the same period in 2023.

The increase was primarily due to early repayments of our 2025 Notes and an increase in cash used to repurchase our common stock during the nine months ended April 30, 2024.

Cash used in financing activities during the three months ended October 31, 2024 was $219.7 million, an increase of $177.9 million compared to the same period in 2023.

The increase was primarily due to an increase in cash used for early repayments of our 2025 Notes, partially offset by a decrease in cash used to repurchase our common stock which did not recur during the three months ended October 31, 2024.

Critical Accounting Estimates

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We believe the critical accounting estimates discussed under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended July 31, 2024 reflect our more significant estimates, assumptions, and judgments that have the most significant impact on our condensed consolidated financial statements.

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

There have been no significant changes to our critical accounting estimates as filed in such report, except for the update as described below resulting from our recent acquisition of certain IBM QRadar assets.

BUSINESS COMBINATIONS

We make significant estimates, assumptions, and judgments when valuing goodwill and other purchased intangible assets in connection with the initial purchase price allocation of an acquired business.

These estimates are based upon a number of factors, including historical experience, market conditions, and information obtained from the management of the acquired business.

Critical estimates in valuing certain intangible assets include, but are not limited to, cash flows that an asset is expected to generate in the future, discount rates, the time and expense that would be necessary to recreate the assets, and the profit margin a market participant would receive.

The amounts and useful lives assigned to identified intangible assets impact the amount and timing of future amortization expense.

Our business combination may also involve post-closing payments contingent upon the occurrence of future events and/or certain conditions being met.

Critical estimates used in valuing contingent consideration obligations include, but are not limited to, estimated future cash payments related to customers entering into qualified new transactions and risk-adjusted discount rates used to present value the expected cash flows.

These estimates and assumptions are required to be updated in order to revalue our contingent consideration liability at the end of each reporting period.

Accordingly, subsequent changes in underlying facts and circumstances could result in changes in these estimates and assumptions, which could have a material impact on the estimated future fair values of these obligations.

Recent Accounting Pronouncements

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis