The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our condensed consolidated
financial statements and related notes included elsewhere in this Quarterly
Report on Form 10-Q and with our Management's Discussion and Analysis of
Financial Condition and Results of Operations included in our Annual Report on
Form 10-K for the year ended July 31, 2019, filed with the SEC. As discussed in
the section titled "Special Note Regarding Forward-Looking Statements," the
following discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those discussed
below. Factors that could cause or contribute to such difference include, but
are not limited to, those identified below and those discussed in the section
titled "Risk Factors" and elsewhere in this Quarterly Report on Form 10-Q. Our
fiscal year end is July 31, and our fiscal quarters end on October 31, January
31, April 30 and July 31. Our fiscal year ended July 31, 2019 is referred to as
fiscal 2019 and our fiscal year ending July 31, 2020 is referred to as fiscal
2020.
Overview
Zscaler was incorporated in 2007, during the early stages of cloud adoption and
mobility, based on a vision that the internet would become the new corporate
network as the cloud becomes the new data center. We predicted that with rapid
cloud adoption and increasing workforce mobility, traditional perimeter security
approaches would provide inadequate protection for users and data and an
increasingly poor user experience. We pioneered a security cloud that represents
a fundamental shift in the architectural design and approach to network
security.
We generate revenue primarily from sales of subscriptions to access our cloud
platform, together with related support services. We also generate an immaterial
amount of revenue from professional and other services, which consist primarily
of fees associated with mapping, implementation, network design and training.
Our subscription pricing is calculated on a per-user basis. We recognize
subscription and support revenue ratably over the life of the contract, which is
generally one to three years. As of July 31, 2019, we had expanded our
operations to over 3,900 customers across major industries, with users in 185
countries. Government agencies and some of the largest enterprises in the world
rely on us to help them transform to the cloud, including more than 400 of the
Forbes Global 2000 as of July 31, 2019.
We operate our business as one reportable segment. Our revenue has experienced
significant growth in recent periods. For nine months ended April 30, 2020 and
2019, our revenue was $305.4 million and $216.7 million, respectively. However,
we have incurred net losses in all periods since our inception. For nine months
ended April 30, 2020 and 2019, our net loss was $65.6 million and $23.4 million,
respectively. We expect we will continue to incur net losses for the foreseeable
future, as we continue investing in our sales and marketing organization to take
advantage of our market opportunity, to invest in research and development
efforts to enhance the functionality of our cloud platform, to incur additional
compliance and other related costs as we operate as a public company, and
address any legal matters and related accruals, as further described in Note 9,
Commitments and Contingencies, of our condensed consolidated financial
statements included elsewhere in this Quarterly Report on Form 10-Q.
Impacts of COVID-19
In March 2020, the World Health Organization declared the COVID-19 outbreak to
be a pandemic. As a result of COVID-19, we have modified certain aspects of our
business, including restricting employee travel, requiring employees to work
from home, transitioning our employee onboarding and training processes to
remote or online programs, and canceling certain events and meetings, among
other modifications. We will continue to actively monitor and evaluate the
situation and may take further actions that alter our business operations as may
be required by federal, state or local authorities or that we determine are in
the best interests of our employees, customers, partners, suppliers and
stockholders. The effects of these operational modifications are unknown and may
not be known until future reporting periods. While we have not experienced
significant disruptions from the COVID-19 outbreak to date, we are unable to
accurately predict the full impact that
                                       29
--------------------------------------------------------------------------------
  Table of Contents
COVID-19 will have due to numerous uncertainties, including the duration of the
outbreak, actions that may be taken by governmental authorities, the impact on
our business including our sales cycle, sales execution, and marketing efforts,
and the impact to the business of our customers, vendors, and partners. For
further discussion of the challenges and risks we confront related to the
COVID-19 pandemic, please refer to Part II, Item 1A Risk Factors of this
Quarterly Report on Form 10-Q.
Certain Factors Affecting Our Performance
Increased Internet Traffic and Adoption of Cloud-Based Software and Security
The adoption of cloud applications and infrastructure, explosion of internet
traffic volumes and shift to mobile-first computing generally, and the pace at
which enterprises adopt the internet as their corporate network in particular,
impact our ability to drive market adoption of our cloud platform. We believe
that most enterprises are in the early stages of a broad transformation to the
cloud. Organizations are increasingly relying on the internet to operate their
businesses, deploying new SaaS applications and migrating internally managed
line-of-business applications to the cloud. However, the growing dependence on
the internet has increased exposure to malicious or compromised websites, and
sophisticated hackers are exploiting the gaps left by legacy network security
appliances. To securely access the internet and transform their networks,
organizations must also make fundamental changes in their network and security
architectures. We believe that most organizations have yet to fully make these
investments. Since we enable organizations to securely transform to the cloud,
we believe that the imperative for organizations to securely move to the cloud
will increase demand for our cloud platform and broaden our customer base.
New Customer Acquisition
We believe that our ability to increase the number of customers on our cloud
platform is an indicator of our market penetration and our future business
opportunities. As of July 31, 2019 and 2018, we had over 3,900 and over 3,250
customers, respectively, across all major geographies. As of July 31, 2019, we
had over 400 of the Forbes Global 2000 as customers. Our ability to continue to
grow this number will increase our future opportunities for renewals and
follow-on sales. We believe that we have significant room to capture additional
market share and intend to continue to invest significantly in sales and
marketing to engage our prospective customers, increase brand awareness, further
leverage our channel partnerships and drive adoption of our solution.
Follow-On Sales
We typically expand our relationship with our customers over time. While most of
our new customers route all of their internet-bound web traffic through our
cloud platform, some of our customers initially use our services for specific
users or specific security functionality. We leverage our land-and-expand model
with the goal of generating incremental revenue, often within the term of the
initial subscription, by increasing sales to our existing customers in one of
three ways:
•expanding deployment of our cloud platform to cover additional users;
•upgrading to a more advanced Business, Transformation or Secure Transformation
suite; and
•selling a ZPA subscription to a ZIA customer, a ZIA subscription to a ZPA
customer, or other features on an a la carte basis.
Investing in Business Growth
Since our founding, we have invested significantly in growing our business. We
intend to continue (i) investing in our research and development organization
and our development efforts to offer new solutions on our platform and (ii)
dedicating resources to update and upgrade our existing solutions. In addition,
we expect our general and administrative expenses to increase in absolute
dollars in the foreseeable future, as we continue to operate as a public
company, and address any legal
                                       30
--------------------------------------------------------------------------------
  Table of Contents
matters and related accruals, as further described in Note 9, Commitments and
Contingencies, of our condensed consolidated financial statements included
elsewhere in this Quarterly Report on Form 10-Q.
We also intend to continue to invest significantly in sales and marketing to
grow and train our sales force, broaden our brand awareness and expand and
deepen our channel partner relationships. While these planned investments will
increase our operating expenses in the short term, we believe that over the long
term these investments will help us to expand our customer base and grow our
business. We also are investing in programs to increase recognition of our brand
and solutions, including joint marketing activities with our channel partners
and strategic partners.
While we expect our operating expenses to increase in absolute dollars in the
foreseeable future, as a result of these activities, we intend to balance these
investments in future growth with a continued focus on managing our results of
operations and investing judiciously. In the long term we anticipate that these
investments will positively impact our business and results of operations.
Key Business Metrics and Other Financial Measures
We review a number of operating and financial metrics, including the following
key metrics, to measure our performance, identify trends, formulate business
plans and make strategic decisions.
Dollar-Based Net Retention Rate
We believe that dollar-based net retention rate is a key metric to measure the
long-term value of our customer relationships because it is driven by our
ability to retain and expand the recurring revenue generated from our existing
customers. Our dollar-based net retention rate compares the recurring revenue
from a set of customers against the same metric for the prior 12-month period on
a trailing basis. Because our customers have repeat buying patterns and the
average term of our contracts is more than 12 months, we measure this metric
over a set of customers who were with us as of the last day of the same
reporting period in the prior fiscal year. Our dollar-based net retention rate
includes customer attrition. We have not experienced a material increase in
customer attrition rates in recent periods.
We calculate our dollar-based net retention rate as follows:
Denominator: To calculate our dollar-based net retention rate as of the end of a
reporting period, we first establish the ARR from all active subscriptions as of
the last day of the same reporting period in the prior fiscal year. This
effectively represents recurring dollars that we expect in the next 12-month
period from the cohort of customers that existed on the last day of the same
reporting period in the prior fiscal year.
Numerator: We measure the ARR for that same cohort of customers representing all
subscriptions based on confirmed customer orders booked by us as of the end of
the reporting period.
Dollar-based net retention rate is obtained by dividing the numerator by the
denominator. Our dollar-based net retention rate may fluctuate due to a number
of factors, including the performance of our cloud platform; our success in
selling bigger deals for all employees with our Transformation bundle and faster
upsells within a year can reduce our dollar-based net retention rate in future
periods; the timing and the rate of ARR expansion of our existing customers;
potential changes in our rate of renewals and other risk factors described in
this Quarterly Report on Form 10-Q.
                                                         Trailing 12 Months 

Trailing 12 Months


                                                        Ended April 30, 2020         Ended April 30, 2019
Dollar-based net retention rate                                 119%                         118%


                                       31
--------------------------------------------------------------------------------
  Table of Contents
Non-GAAP Financial Measures
In addition to our results determined in accordance with U.S. GAAP, we believe
the following non-GAAP measures are useful in evaluating our operating
performance. We use the following non-GAAP financial information to evaluate our
ongoing operations and for internal planning and forecasting purposes. We
believe that non-GAAP financial information, when taken collectively, may be
helpful to investors because it provides consistency and comparability with past
financial performance. However, non-GAAP financial information is presented for
supplemental informational purposes only, has limitations as an analytical tool
and should not be considered in isolation or as a substitute for financial
information presented in accordance with U.S. GAAP. In particular, free cash
flow is not a substitute for cash used in operating activities. Additionally,
the utility of free cash flow as a measure of our liquidity is further limited
as it does not represent the total increase or decrease in our cash balance for
a given period. In addition, other companies, including companies in our
industry, may calculate similarly-titled non-GAAP measures differently or may
use other measures to evaluate their performance, all of which could reduce the
usefulness of our non-GAAP financial measures as tools for comparison. A
reconciliation is provided below for each non-GAAP financial measure to the most
directly comparable financial measure stated in accordance with U.S. GAAP.
Investors are encouraged to review the related GAAP financial measures and the
reconciliation of these non-GAAP financial measures to their most directly
comparable GAAP financial measures, and not to rely on any single financial
measure to evaluate our business.
Non-GAAP Gross Profit and Non-GAAP Gross Margin
We define non-GAAP gross profit as GAAP gross profit excluding stock-based
compensation expense and amortization of acquired intangible assets. We define
non-GAAP gross margin as non-GAAP gross profit as a percentage of revenue.
                                                                                                          Nine Months Ended
                                              Three Months Ended April 30,                                    April 30,
                                                2020                  2019               2020                 2019
                                                                          (in thousands)
Gross profit                              $      85,945           $  64,168          $ 241,007          $   174,398
Add:
Stock-based compensation expense                  1,614                 686              4,575                1,808
Amortization expense of acquired                    348                 163                758                  307
intangible assets
Non-GAAP gross profit                     $      87,907           $  65,017          $ 246,340          $   176,513
Gross margin                                         78   %              81  %              79  %                80    %
Non-GAAP gross margin                                80   %              82  %              81  %                81    %


                                       32

--------------------------------------------------------------------------------
  Table of Contents
Non-GAAP Income from Operations and Non-GAAP Operating Margin
We define non-GAAP income from operations as GAAP loss from operations excluding
stock-based compensation expense, certain litigation-related expenses, asset
impairment related to facility exit and amortization expense of acquired
intangible assets. We define non-GAAP operating margin as non-GAAP income from
operations as a percentage of revenue. The excluded litigation-related expenses
are professional fees and related costs incurred by us in defending against
significant claims that we deem not to be in the ordinary course of our business
and, if applicable, accruals related to estimated losses in connection with
these claims. There are many uncertainties and potential outcomes associated
with any litigation, including the expense of litigation, timing of such
expenses, court rulings, unforeseen developments, complications and delays, each
of which may affect our results of operations from period to period, as well as
the unknown magnitude of the potential loss relating to any lawsuit, all of
which are inherently subject to change, difficult to estimate and could
adversely affect our results of operations.
                                                                                                                 Nine Months Ended
                                                    Three Months Ended April 30,                                     April 30,
                                                       2020                  2019               2020                 2019
                                                                                (in thousands)
Loss from operations                            $      (20,514)          $ (13,537)         $ (69,069)         $   (27,382)
Add:
Stock-based compensation expense                        27,770              13,275             70,012               34,088
Litigation-related expenses                                 12               6,164             18,353               10,106
Amortization expense of acquired intangible                641                 166              2,062                  405

assets


Asset impairment related to facility exit (1)              430                   -                746                    -
Non-GAAP income from operations                 $        8,339           $   6,068          $  22,104          $    17,217
Operating margin                                           (19)  %             (17) %             (23) %               (13)   %
Non-GAAP operating margin                                    8   %               8  %               7  %                 8    %


___________
(1) Consists of asset impairment charges related to the relocation of our
corporate headquarters.
Free Cash Flow and Free Cash Flow Margin
Free cash flow is a non-GAAP financial measure that we calculate as net cash
provided by (used in) operating activities less purchases of property, equipment
and other and capitalized internal-use software. Free cash flow margin is
calculated as free cash flow divided by revenue. We believe that free cash flow
and free cash flow margin are useful indicators of liquidity that provide
information to management and investors about the amount of cash generated from
our operations that, after the investments in property, equipment and other and
capitalized internal-use software, can be used for strategic initiatives,
including investing in our business and strengthening our financial position.
Free cash flow includes the cyclical impact of inflows and outflows resulting
from contributions to our employee stock purchase plan for which the purchase
period of approximately six months ends in each of our second and fourth fiscal
quarter. As of April 30, 2020, employee contributions to our employee stock
purchase plan was $7.8 million, which will be reclassified to stockholders'
equity upon issuance of the shares during our fourth quarter of fiscal 2020.
In the nine months ended April 30, 2020, we made a $15.0 million payment to
Broadcom in connection with the settlement of the Symantec Cases. For further
information on this settlement refer to Note 9, Commitments and Contingencies of
our condensed consolidated financial statements included elsewhere in this
Quarterly Report Form 10-Q.
                                       33

--------------------------------------------------------------------------------


  Table of Contents
                                                                                                         Nine Months Ended
                                              Three Months Ended April 30,                                   April 30,
                                                 2020                 2019              2020                2019
                                                                         (in thousands)
Net cash provided by operating activities  $      20,822           $ 13,483          $ 47,682          $   40,204
Less:
Purchases of property, equipment and other        (9,694)            (8,091)          (24,793)            (16,698)

assets


Capitalized internal-use software                 (2,023)              (810)           (6,296)             (1,713)
Free cash flow                             $       9,105           $  4,582          $ 16,593          $   21,793
As a percentage of revenue:
Net cash provided by operating activities             19   %             17  %             15  %               19    %

Less:


Purchases of property, equipment and other            (9)  %            (10) %             (8) %               (8)   %

assets


Capitalized internal-use software                     (2)  %             (1) %             (2) %               (1)   %
Free cash flow margin                                  8   %              6  %              5  %               10    %


Calculated Billings
Calculated billings is a non-GAAP financial measure that we believe is a key
metric to measure our periodic performance. Calculated billings represents our
total revenue plus the change in deferred revenue in a period. Calculated
billings in any particular period aims to reflect amounts invoiced for
subscriptions to access our cloud platform, together with related support
services related to our new and existing customers. We typically invoice our
customers annually in advance, and to a lesser extent quarterly in advance,
monthly in advance or multi-year in advance. Calculated billings increased $46.6
million, or 55%, for the three months ended April 30, 2020 over the three months
ended April 30, 2019, and $90.7 million, or 34%, for the nine months ended April
30, 2020 over the nine months ended April 30, 2019. As calculated billings
continues to grow in absolute terms, we expect our calculated billings growth
rate to trend down over time. We also expect that calculated billings will be
affected by seasonality in terms of when we enter into agreements with
customers; and the mix of billings in each reporting period as we typically
invoice customers annually in advance, and to a lesser extent quarterly in
advance, monthly in advance or multi-year in advance.
                                                                                                          Nine Months Ended
                                             Three Months Ended April 30,                                     April 30,
                                               2020                  2019                2020                 2019
                                                                         (in thousands)
Revenue                                 $      110,524           $   79,128          $ 305,382          $   216,728
Add: Total deferred revenue, end of            300,791              211,542            300,791              211,542

period


Less: Total deferred revenue, beginning       (280,022)            (206,020)          (251,202)            (164,023)
of period
Calculated billings                     $      131,293           $   84,650          $ 354,971          $   264,247



Components of Results of Operations
Revenue
We generate revenue primarily from sales of subscriptions to access our cloud
platform, together with related support services. These subscription and related
support services accounted for approximately 98% and 99% of our revenue for the
three months ended April 30, 2020 and 2019, respectively, and approximately 98%
and 99% for the nine months ended April 30, 2020 and 2019, respectively. Our
contracts with our customers do not at any time provide the customer with the
right to take possession of the software that runs our cloud platform. Our
customers may also purchase professional services, such as mapping,
implementation, network design and training. Professional services account for
an immaterial portion of our revenue.
                                       34
--------------------------------------------------------------------------------
  Table of Contents
We generate revenue from contracts with typical durations ranging from one to
three years. We typically invoice our customers annually in advance, and to a
lesser extent quarterly in advance, monthly in advance or multi-year in advance.
We recognize revenue ratably over the life of the contract. Amounts that have
been invoiced are recorded in deferred revenue, or they are recorded in revenue
if the revenue recognition criteria have been met. Subscriptions that are
invoiced annually in advance or multi-year in advance represent a significant
portion of our short-term and long-term deferred revenue in comparison to
invoices issued quarterly in advance or monthly in advance. Accordingly, we
cannot predict the mix of invoicing schedules in any given period.
We generally experience seasonality in terms of when we enter into agreements
with our customers. We typically enter into a higher percentage of agreements
with new customers, as well as renewal agreements with existing customers, in
our second and fourth fiscal quarters. However, because we recognize revenue
ratably over the terms of our subscription contracts, a substantial portion of
the revenue that we report in each period is attributable to the recognition of
deferred revenue relating to agreements that we entered into during previous
periods. Consequently, increases or decreases in new sales or renewals in any
one period may not be immediately reflected as revenue for that period.
Accordingly, the effect of downturns in sales and market acceptance of our
platform, and potential changes in our rate of renewals, may not be fully
reflected in our results of operations until future periods.
Cost of Revenue
Cost of revenue includes expenses related to operating our cloud platform in
data centers, depreciation of our data center equipment, related overhead costs
and the amortization of our capitalized internal-use software. Cost of revenue
also includes employee-related costs, including salaries, bonuses, stock-based
compensation expense and employee benefit costs associated with our customer
support and cloud operations organizations. Cost of revenue also includes
overhead costs for facilities, IT, amortization and depreciation expense.
As our customers expand and increase the use of our cloud platform driven by
additional applications and connected devices, our cost of revenue will increase
due to higher bandwidth and data center expenses. However, we expect to continue
to benefit from economies of scale as our customers increase the use of our
cloud platform. We intend to continue to invest additional resources in our
cloud platform and our customer support organizations as we grow our business.
The level and timing of investment in these areas could affect our cost of
revenue in the future.
Gross Profit and Gross Margin
Gross profit, or revenue less cost of revenue, and gross margin, or gross profit
as a percentage of revenue, have been and will continue to be affected by
various factors, including the timing of our acquisition of new customers and
our renewals of and follow-on sales to existing customers, the average sales
price of our services, mix of services offered in our solutions, the data center
and bandwidth costs associated with operating our cloud platform, the extent to
which we expand our customer support and cloud operations organizations and the
extent to which we can increase the efficiency of our technology, infrastructure
and data centers through technological improvements. We expect our gross profit
to increase in absolute dollars and gross margin to remain relatively unchanged
over the long-term, although our gross profit and gross margin could fluctuate
from period to period depending on the interplay of all of the above factors.
Operating Expenses
Our operating expenses consist of sales and marketing, research and development
and general and administrative expenses. Personnel costs are the most
significant component of operating expenses and consist of salaries, benefits,
bonuses, stock-based compensation expense and, with respect to sales and
marketing expenses, sales commissions that are recognized as expenses. Operating
expenses also include overhead costs for facilities, IT, depreciation expense
and amortization expense.
                                       35
--------------------------------------------------------------------------------
  Table of Contents
Sales and Marketing
Sales and marketing expenses consist primarily of employee compensation and
related expenses, including salaries, bonuses and benefits for our sales and
marketing employees, sales commissions that are recognized as expenses over the
period of benefit, stock-based compensation expense, marketing programs, travel
and entertainment expenses, expenses for conferences and events and allocated
overhead costs. We capitalize our sales commissions and associated payroll taxes
and recognize them as expenses over the estimated period of benefit. The amount
recognized in our sales and marketing expenses reflects the amortization of cost
previously deferred as attributable to each period presented in this Quarterly
Report on Form 10-Q, as described below under "Critical Accounting Policies and
Estimates."
We intend to continue to make significant investments in our sales and marketing
organization to drive additional revenue, further penetrate the market and
expand our global customer base. As a result, we expect our sales and marketing
expenses to continue to increase in absolute dollars and to be our largest
operating expense category for the foreseeable future. In particular, we will
continue to invest in growing and training our sales force, broadening our brand
awareness and expanding and deepening our channel partner relationships.
However, we expect our sales and marketing expenses to decrease as a percentage
of our revenue over the long term, although our sales and marketing expenses may
fluctuate as a percentage of our revenue from period to period due to the timing
and extent of these expenses.
Research and Development
Our research and development expenses support our efforts to add new features to
our existing offerings and to ensure the reliability, availability and
scalability of our solutions. Our cloud platform is software-driven, and our
research and development teams employ software engineers in the design, and the
related development, testing, certification and support, of these solutions.
Accordingly, a majority of our research and development expenses result from
employee-related costs, including salaries, bonuses and benefits, stock-based
compensation expense and costs associated with technology tools used by our
engineers. We expect our research and development expenses to continue to
increase in absolute dollars for the foreseeable future, as we continue to
invest in research and development efforts to enhance the functionality of our
cloud platform, improve the reliability, availability and scalability of our
platform and access new customer markets. However, we expect our research and
development expenses to decrease as a percentage of our revenue over the long
term, although our research and development expenses may fluctuate as a
percentage of our revenue from period to period due to the timing and extent of
these expenses.
General and Administrative
General and administrative expenses consist primarily of employee-related costs,
including salaries and bonuses, stock-based compensation expense and employee
benefit costs for our finance, legal, human resources and administrative
personnel, as well as professional fees for external legal services (including
certain litigation-related expenses), accounting and other related consulting
services. The litigation-related expenses include professional fees and related
costs incurred by us in defending significant claims that we deem not to be in
the ordinary course of our business and, if applicable, accruals related to
estimated losses in connection with these claims. We expect our general and
administrative expenses to increase in absolute dollars for the foreseeable
future, as we continue to incur compliance costs, and other related costs
necessary to operate as a public company, and due to any legal matters and
related accruals, as further described in Note 9, Commitments and Contingencies
to our condensed consolidated financial statements included elsewhere in this
Quarterly Report on Form 10-Q. However, we expect our general and administrative
expenses to decrease as a percentage of our revenue over the long term, although
our general and administrative expenses may fluctuate as a percentage of our
revenue from period to period due to the timing and extent of these expenses. In
particular, litigation-related expenses related to significant litigation claims
may result in significant fluctuations from period to period as they are
inherently subject to change and difficult to estimate.
                                       36
--------------------------------------------------------------------------------
  Table of Contents
Interest Income
Interest income consist primarily of income earned on our cash equivalents and
short-term investments and interest earned on outstanding notes receivable
extended to certain current and former employees who early exercised their stock
options. During the nine months ended April 30, 2019, the principal amount and
accrued interest of the outstanding notes receivable were fully repaid. For more
information on these notes receivable, refer to Note 10, Stock-Based
Compensation, of our consolidated financial statements included elsewhere in
this Quarterly Report on Form 10-Q.
Other Income (Expense), Net
Other income (expense), net consists primarily of foreign currency transaction
gains and losses.
Provision for Income Taxes
Our provision for income taxes consists primarily of income and withholding
taxes in the foreign jurisdictions in which we conduct business, offset by the
non U.S. tax benefit for excess stock-based compensation deduction and partial
release of our U.S. valuation allowance related to the Cloudneeti, Inc.
acquisition. We have not recorded any U.S. federal income tax expense. In the
U.S. we have recorded deferred tax assets for which we provide a full valuation
allowance, which includes net operating loss carryforwards and tax credits. We
expect to maintain this full valuation allowance for the foreseeable future as
it is more likely than not that some or all of those deferred tax assets may not
be realized based on our history of losses. Additionally, in the U.K., we have
recorded deferred tax assets for which we provide a full valuation allowance,
which includes net operating loss carryforwards. We expect to maintain this full
valuation allowance for the foreseeable future as it is more likely than not
that some or all of those deferred tax assets may not be realized based on our
history of losses.
Results of Operations
The following tables set forth our results of operations for the periods
presented in dollars and as a percentage of our revenue:
                                                                                                                  Nine Months Ended
                                                     Three Months Ended April 30,                                     April 30,
                                                       2020                  2019                2020                 2019
                                                                                 (in thousands)
Revenue                                         $      110,524           $   79,128          $ 305,382          $   216,728
Cost of revenue(1) (2)                                  24,579               14,960             64,375               42,330
Gross profit                                            85,945               64,168            241,007              174,398
Operating expenses:
Sales and marketing(1) (2)                              67,727               45,295            188,759              120,596
Research and development(1) (2)                         24,117               16,499             65,094               44,756
General and administrative(1) (3) (4)                   14,615               15,911             56,223               36,428
Total operating expenses                               106,459               77,705            310,076              201,780
Loss from operations                                   (20,514)             (13,537)           (69,069)             (27,382)
Interest income                                          1,528                2,081              5,405                5,595
Other income (expense), net                                 70                 (144)                28                  (82)
Loss before income taxes                               (18,916)             (11,600)           (63,636)             (21,869)
Provision for income taxes                                 421                  636              1,931                1,510
Net loss                                        $      (19,337)          $  (12,236)         $ (65,567)         $   (23,379)


                                       37

--------------------------------------------------------------------------------


  Table of Contents
(1) Includes stock-based compensation expense as follows:
Cost of revenue              $  1,614       $    686       $  4,575       $  1,808
Sales and marketing            15,119          6,459         37,101         14,777
Research and development        6,738          4,194         17,689         11,387
General and administrative      4,299          1,936         10,647          6,116
Total                        $ 27,770       $ 13,275       $ 70,012       $ 34,088


(2) Includes amortization expense of acquired intangible assets as follows:
Cost of revenue             $ 348       $ 163       $   758       $ 307
Sales and marketing             8           3            24           3
Research and development      285           -         1,280          95
Total                       $ 641       $ 166       $ 2,062       $ 405


(3) Includes asset impairment related
to facility exit as follows:           $     430          $        -        

$ 746 $ -

(4) Includes litigation-related expenses $ 12 $ 6,164

       $  18,353          $  10,106
as follows:



                                                              Three Months Ended April 30,                                             Nine Months Ended April 30,
                                                         2020                              2019                  2020                  2019
Revenue                                                  100%                              100%                  100%                  100%
Cost of revenue                                           22                                19                    21                    20
Gross margin                                              78                                81                    79                    80
Operating expenses
Sales and marketing                                       62                                57                    62                    55
Research and development                                  22                                21                    21                    21
General and administrative                                13                                20                    19                    17
Total operating expenses                                  97                                98                    102                   93
Operating margin                                         (19)                              (17)                  (23)                  (13)
Interest income                                            1                                 2                     2                    3
Other income (expense), net                                1                                 -                     -                    -
Loss before income taxes                                 (17)                              (15)                  (21)                  (10)
Provision for income taxes                                 -                                 -                     -                    1
Net loss                                                 (17)%                             (15)%                 (21)%                (11)%



                                       38

--------------------------------------------------------------------------------


  Table of Contents
Comparison of the Three Months Ended April 30, 2020 and 2019
Revenue
                   Three Months Ended April 30,                              Change
                   2020                       2019             $            %
                                 (in thousands)
Revenue     $      110,524                 $ 79,128       $ 31,396          40  %


Revenue increased by $31.4 million, or 40% for the three months ended April 30,
2020, compared to the three months ended April 30, 2019. The increase in revenue
was driven by an increase in users and sales of additional subscriptions to
existing customers, which contributed $17.7 million in revenue, as reflected by
our dollar-based net retention rate of 119% for the trailing 12 months ended
April 30, 2020. The remainder of the increase was attributable to the addition
of new customers, as we increased our customer base by 16% from April 30, 2019
to April 30, 2020.
Cost of Revenue and Gross Margin
                           Three Months Ended April 30,                             Change
                          2020                        2019            $            %
                                         (in thousands)
Cost of revenue     $      24,579                  $ 14,960       $ 9,619          64  %
Gross margin                   78   %                    81  %


Cost of revenue increased by $9.6 million, or 64%, for the three months ended
April 30, 2020, compared to the three months ended April 30, 2019. The overall
increase in cost of revenue was driven primarily by the expanded use of our
cloud platform by existing and new customers, which led to an increase of $7.2
million for data center and equipment related costs for hosting and operating
our cloud platform. Additionally, our employee-related expenses increased by
$2.2 million, inclusive of an increase of $0.9 million in stock-based
compensation expense, driven primarily by a 15% increase in headcount in our
customer support and cloud operations organizations from April 30, 2019 to April
30, 2020.
Gross margin decreased from 81% during the three months ended April 30, 2019 to
78% during the three months ended April 30, 2020. The decline in gross margin is
primarily due to the cost incurred for our increased use of public cloud
infrastructure to manage the increased ZPA traffic which resulted from our
customers' employees working from home during the three months ended April 30,
2020. Using public cloud infrastructure to manage traffic is significantly more
expensive compared to using our data centers.
Operating Expenses
Sales and Marketing Expenses
                               Three Months Ended April 30,                              Change
                              2020                        2019             $            %
                                             (in thousands)
Sales and marketing     $      67,727                  $ 45,295       $ 22,432          50  %


Sales and marketing expenses increased by $22.4 million, or 50%, for the three
months ended April 30, 2020, compared to the three months ended April 30, 2019.
The increase was primarily due to a 41% increase in headcount from April 30,
2019 to April 30, 2020, resulting in an increase of $19.6 million in
employee-related expenses, inclusive of an increase of $8.7 million in
stock-based compensation expense and an increase of $2.3 million in sales
commissions expense.
                                       39
--------------------------------------------------------------------------------
  Table of Contents
Research and Development Expenses
                                  Three Months Ended April 30,                             Change
                                 2020                        2019            $            %
                                                (in thousands)
Research and development   $      24,117                  $ 16,499       $ 7,618          46  %


Research and development expenses increased by $7.6 million, or 46%, for the
three months ended April 30, 2020, compared to the three months ended April 30,
2019 as we continued to develop and enhance the functionality of our cloud
platform. The increase was primarily driven by an increase of $7.6 million in
employee-related expenses, inclusive of an increase of $2.5 million in
stock-based compensation expense, driven by a 43% increase in headcount from
April 30, 2019 to April 30, 2020. The remainder of the increase was primarily
attributable to increased expenses of $1.1 million for facility, software and
equipment related expenses to support our growth. Expense increases were
partially offset by higher capitalized internal-use software development costs
of $1.1 million to support the enhancement and growth of our cloud platform.
General and Administrative Expenses
                                     Three Months Ended April 30,                              Change
                                    2020                        2019             $            %
                                                   (in thousands)
General and administrative    $      14,615                  $ 15,911       $ (1,296)         (8) %


General and administrative expenses decreased by $1.3 million, or 8%, for the
three months ended April 30, 2020, compared to the three months ended April 30,
2019. The overall decrease was primarily due to a $4.1 million expense
recognized in the three months ended April 30, 2019 as a result of a legal
settlement reached with Finjan in April 2019. For further information on this
settlement refer to Note 9, Commitments and Contingencies of our condensed
consolidated financial statements included elsewhere in this Quarterly Report
Form 10-Q. Expense decreases were partially offset by an increase of $2.9
million in employee-related costs, inclusive of an increase of $2.4 million in
stock-based compensation expense, driven by a 29% increase in headcount from
April 30, 2019 to April 30, 2020.
Interest Income
                         Three Months Ended April 30,                             Change
                        2020                          2019           $           %
                                       (in thousands)
Interest income   $       1,528                    $ 2,081       $ (553)        (27) %


Interest income decreased by $0.6 million for the three months ended April 30,
2020, compared to the three months ended April 30, 2019. The decrease was
primarily driven by lower market interest rates.
Other Income (Expense), Net
                                      Three Months Ended April 30,                            Change
                                   2020                            2019          $           %
                                                   (in thousands)
Other income (expense), net   $       70                         $ (144)      $ 214         149  %


                                       40

--------------------------------------------------------------------------------
  Table of Contents
Other income (expense), net increased by $0.2 million for the three months ended
April 30, 2020, compared to the three months ended April 30, 2019. The increase
was primarily driven by fluctuations in foreign currency transaction gains and
losses for the three months ended April 30, 2020 as compared to the three months
ended April 30, 2019.
Provision for Income Taxes
                                       Three Months Ended April 30,                              Change
                                     2020                             2019          $           %
                                                    (in thousands)
Provision for income taxes    $         421                         $ 636       $ (215)        (34) %


Our provision for income taxes decreased by $0.2 million for the three months
ended April 30, 2020, compared to the three months ended April 30, 2019. The
decrease in the provision for income taxes was primarily due to a tax benefit
associated with the acquisition of intangible assets from Cloudneeti Corporation
("Cloudneeti"), which reduced our deferred tax asset and the related valuation
allowance.
Our tax provision for interim periods is determined using an estimate of our
annual effective tax rate, adjusted for discrete items, if any, that arise
during the period. Each quarter, we update our estimate of the annual effective
tax rate, and if the estimated annual effective tax rate changes, we make a
cumulative adjustment in such period.
Our quarterly tax provision, and estimate of our annual effective tax rate, is
subject to variation due to several factors, including variability in pre-tax
income or loss, the mix of jurisdictions to which such income relates, changes
in how we do business, and tax law developments. Our estimated annual effective
tax rate for the year differs from the U.S. statutory rate of 21% primarily due
to the benefit of a portion of our earnings being taxed at rates lower than the
U.S. statutory rate.
The realization of deferred tax assets is dependent upon the generation of
sufficient taxable income of the appropriate character in future periods. We
assess our ability to realize our deferred tax assets on a quarterly basis and
we establish a valuation allowance if it is more-likely-than-not that some
portion of the deferred tax assets will not be realized. We weigh all available
positive and negative evidence, including our earnings history and results of
recent operations, scheduled reversals of deferred tax liabilities, projected
future taxable income and tax planning strategies. Due to the weight of
objectively verifiable negative evidence, including our history of losses in
certain jurisdictions, we believe that it is more likely than not that our U.S.
federal, state, and U.K. deferred tax assets will not be realized. Accordingly,
we have maintained a valuation allowance on our U.S. federal, state, and U.K.
deferred tax assets.
The provisions of the CARES Act did not have a significant impact on our
effective tax rate or the income tax payable and deferred income tax positions.
                                       41

--------------------------------------------------------------------------------


  Table of Contents
Comparison of the Nine Months Ended April 30, 2020 and 2019
Revenue
                  Nine Months Ended April 30,                              Change
                  2020                      2019             $            %
                                (in thousands)
Revenue     $     305,382               $ 216,728       $ 88,654          41  %


Revenue increased by $88.7 million, or 41% for the nine months ended April 30,
2020, compared to the nine months ended April 30, 2019. The increase in revenue
was driven by an increase in users and sales of additional subscriptions to
existing customers, which contributed $61.4 million in revenue, as reflected by
our dollar-based net retention rate of 119% for the trailing 12 months ended
April 30, 2020. The remainder of the increase was attributable to the addition
of new customers, as we increased our customer base by 16% from April 30, 2019
to April 30, 2020.
Cost of Revenue and Gross Margin
                           Nine Months Ended April 30,                              Change
                          2020                       2019             $            %
                                         (in thousands)
Cost of revenue     $      64,375                 $ 42,330       $ 22,045          52  %
Gross margin                   79   %                   80  %


Cost of revenue increased by $22.0 million, or 52%, for the nine months ended
April 30, 2020, compared to the nine months ended April 30, 2019. The overall
increase in cost of revenue was driven primarily by the expanded use of our
cloud platform by existing and new customers, which led to an increase of $14.4
million for data center and equipment related costs for hosting and operating of
our cloud platform for our expanded customer base. Additionally, our
employee-related expenses increased by $6.9 million, inclusive of an increase of
$2.7 million in stock-based compensation expense, driven primarily by a 15%
increase in headcount in our customer support and cloud operations organizations
from April 30, 2019 to April 30, 2020 and by the shift from granting stock
options to restricted stock units subsequent to our IPO.
Gross margin decreased from 80% for the nine months ended April 30, 2019 to 79%
during the nine months ended April 30, 2020. The decline in gross margin is
primarily due to the cost incurred for our increased use of public cloud
infrastructure to manage the increased ZPA traffic which resulted from our
customers' employees working from home during the three months ended April 30,
2020. Using public cloud infrastructure to manage traffic is significantly more
expensive compared to using our data centers.
Operating Expenses
Sales and Marketing Expenses
                              Nine Months Ended April 30,                              Change
                              2020                      2019             $            %
                                            (in thousands)
Sales and marketing     $     188,759               $ 120,596       $ 68,163          57  %


Sales and marketing expenses increased by $68.2 million, or 57%, for the nine
months ended April 30, 2020, compared to the nine months ended April 30, 2019.
The increase was primarily due to a 41% increase in headcount from April 30,
2019 to April 30, 2020, resulting in an increase of $52.7 million in
employee-related expenses, inclusive of an increase of $22.3
                                       42
--------------------------------------------------------------------------------
  Table of Contents
million in stock-based compensation expense and an increase of $6.4 million in
sales commission expense, and partially by the shift from granting stock options
to restricted stock units subsequent to our IPO. Additionally, our sales and
marketing expenses increased by $7.6 million primarily due to growth of certain
major sales and marketing events held during the nine months ended April 30,
2020, including our Zenith Live events. The remainder of the increase was
primarily attributable to increased expenses of $3.9 million in travel expenses
and $2.5 million for facility and IT services.
Research and Development Expenses
                                  Nine Months Ended April 30,                              Change
                                 2020                       2019             $            %
                                                (in thousands)
Research and development   $      65,094                 $ 44,756       $ 20,338          45  %


Research and development expenses increased by $20.3 million, or 45%, for the
nine months ended April 30, 2020, compared to the nine months ended April 30,
2019 as we continued to develop and enhance the functionality of our cloud
platform. The increase was primarily driven by an increase of $19.9 million in
employee-related expenses, inclusive of an increase of $6.3 million in
stock-based compensation expense, driven by a 43% increase in headcount from
April 30, 2019 to April 30, 2020 and by the shift from granting stock options to
restricted stock units subsequent to our IPO. The remainder of the increase was
primarily attributable to increased expenses of $4.1 million for facility,
software and equipment related expenses to support our growth. Expense increases
were partially offset by decreased expenses of $4.5 million, as a result of
higher capitalization of development costs for internal-use software to support
the enhancement and growth of our cloud platform.
General and Administrative Expenses
                                     Nine Months Ended April 30,                              Change
                                    2020                       2019             $            %
                                                   (in thousands)
General and administrative    $      56,223                 $ 36,428       $ 19,795          54  %


General and administrative expenses increased by $19.8 million, or 54%, for the
nine months ended April 30, 2020, compared to the nine months ended April 30,
2019. The increase was primarily due to a $15.0 million payment to Broadcom in
January 2020 in connection with the settlement of the Symantec Cases. For
further information on this settlement refer to Note 9, Commitments and
Contingencies of our condensed consolidated financial statements included
elsewhere in this Quarterly Report Form 10-Q, increase of $7.1 million in
employee-related costs, inclusive of an increase of $4.5 million in stock-based
compensation expense, driven by a 29% increase in headcount from April 30, 2019
to April 30, 2020 and by the shift from granting stock options to restricted
stock units subsequent to our IPO. Expense increases were partially offset by a
$4.1 million expense recognized in the nine months ended April 30, 2019 as a
result of a legal settlement reached with Finjan in April 2019. For further
information on this settlement refer to Note 9, Commitments and Contingencies of
our condensed consolidated financial statements included elsewhere in this
Quarterly Report Form 10-Q.
                                       43
--------------------------------------------------------------------------------

  Table of Contents
Interest Income
                         Nine Months Ended April 30,                             Change
                        2020                         2019           $           %
                                      (in thousands)
Interest income   $       5,405                   $ 5,595       $ (190)         (3) %


Interest income decreased by $0.2 million for the nine months ended April 30,
2020, compared to the nine months ended April 30, 2019. The decrease was
primarily driven by lower market interest rates.
Other Income (Expense), Net
                                      Nine Months Ended April 30,                             Change
                                    2020                            2019         $           %
                                                   (in thousands)
Other income (expense), net   $        28                         $ (82)      $ 110        (134) %


Other income (expense), net increased by $0.1 million for the nine months ended
April 30, 2020, compared to the nine months ended April 30, 2019. The increase
was primarily driven by fluctuations in foreign currency transaction gains and
losses for the nine months ended April 30, 2020 as compared to the nine months
ended April 30, 2019.
Provision for Income Taxes
                                     Nine Months Ended April 30,                            Change
                                    2020                         2019          $           %
                                                  (in thousands)
Provision for income taxes    $       1,931                   $ 1,510       $ 421          28  %


Our provision for income taxes increased by $0.4 million for the nine months
ended April 30, 2020, compared to the nine months ended April 30, 2019. The
overall income tax expense recorded for the current fiscal year is driven by
income taxes for the foreign countries in which we operate, offset by the tax
benefit from the release of a portion of our valuation allowance on deferred tax
assets as a result of deferred taxes recorded in purchase accounting as part of
the acquisition of Cloudneeti.
Our tax provision for interim periods is determined using an estimate of our
annual effective tax rate, adjusted for discrete items, if any, that arise
during the period. Each quarter, we update our estimate of the annual effective
tax rate, and if the estimated annual effective tax rate changes, we make a
cumulative adjustment in such period.
Our quarterly tax provision, and estimate of our annual effective tax rate, is
subject to variation due to several factors, including variability in pre-tax
income or loss, the mix of jurisdictions to which such income relates, changes
in how we do business, and tax law developments. Our estimated annual effective
tax rate for the year differs from the U.S. statutory rate of 21% primarily due
to the benefit of a portion of our earnings being taxed at rates lower than the
U.S. statutory rate.
The realization of deferred tax assets is dependent upon the generation of
sufficient taxable income of the appropriate character in future periods. We
assess our ability to realize our deferred tax assets on a quarterly basis and
we establish a valuation allowance if it is more-likely-than-not that some
portion of the deferred tax assets will not be realized. We weigh all available
positive and negative evidence, including our earnings history and results of
recent operations, scheduled reversals of deferred tax liabilities, projected
future taxable income and tax planning strategies. Due to the weight of
objectively verifiable negative evidence, including our history of losses in
certain jurisdictions, we believe that it is more likely than not
                                       44
--------------------------------------------------------------------------------
  Table of Contents
that our U.S. federal, state, and U.K. deferred tax assets will not be realized.
Accordingly, we have maintained a valuation allowance on our U.S. federal,
state, and U.K. deferred tax assets.
The provisions of the CARES Act did not have a significant impact on our
effective tax rate or the income tax payable and deferred income tax positions.
Liquidity and Capital Resources
As of April 30, 2020, our principal sources of liquidity were cash, cash
equivalents and short-term investments totaling $391.3 million which were held
for working capital and general corporate purposes. Our cash equivalents and
investments consist of highly liquid investments in money market funds, U.S.
treasury securities, U.S. government agency securities and corporate debt
securities.
We have generated significant operating losses from operations, as reflected in
our accumulated deficit of $290.0 million as of April 30, 2020. We expect to
continue to incur operating losses and have in the past and may in the future
generate negative cash flows due to expected investments to grow our business,
including potential business acquisitions and other strategic transactions.
We believe that our existing cash, cash equivalents and short-term investments
will be sufficient to fund our operating and capital needs for at least the next
12 months from the issuance of our financial statements. Our foreseeable cash
needs, in addition to our recurring operating costs, include our expected
capital expenditures in support of expanding our infrastructure and workforce,
lease obligations, purchase commitments, potential business acquisitions and
other strategic transactions. Our assessment of the period of time through which
our financial resources will be adequate to support our operations is a
forward-looking statement and involves risks and uncertainties. Our actual
results could vary as a result of, and our future capital requirements, both
near-term and long-term, will depend on, many factors, including our growth
rate, the timing and extent of spending to support our research and development
efforts, the expansion of sales and marketing and international operating
activities, the timing of new introductions of solutions or features, and the
continuing market acceptance of our services, and the impact of COVID-19
pandemic to our and our customers', vendors' and partners' businesses. We have
and may in the future enter into arrangements to acquire or invest in
complementary businesses, services and technologies, including intellectual
property rights. We have based this estimate on assumptions that may prove to be
wrong, and we could use our available capital resources sooner than we currently
expect. Additionally, some of the factors that may influence our operations are
not within our control, such as general economic conditions and length and
severity of the COVID-19 pandemic. We may be required to seek additional equity
or debt financing. In the event that additional financing is required from
outside sources, we may not be able to raise it on terms acceptable to us or at
all. If we are unable to raise additional capital when desired, or if we cannot
expand our operations or otherwise capitalize on our business opportunities
because we lack sufficient capital, our business, operating results and
financial condition would be adversely affected.
We typically invoice our customers annually in advance, and to a lesser extent
quarterly in advance, monthly in advance or multi-year in advance. Therefore, a
substantial source of our cash is from such prepayments, which are included on
our consolidated balance sheets as a contract liability. Deferred revenue
consists of the unearned portion of billed fees for our subscriptions, which is
subsequently recognized as revenue in accordance with our revenue recognition
policy. As of April 30, 2020, we had deferred revenue of $300.8 million, of
which $274.7 million was recorded as a current liability and is expected to be
recorded as revenue in the next 12 months, provided all other revenue
recognition criteria have been met. Subscriptions that are invoiced annually in
advance or multi-year in advance contribute significantly to our short-term and
long-term deferred revenue in comparison to our invoices issued quarterly in
advance or monthly in advance. Accordingly, we cannot predict the mix of
invoicing schedules in any given period.
                                       45
--------------------------------------------------------------------------------
  Table of Contents
The following table summarizes our cash flows for the periods presented:
                                                   Nine Months Ended April 30,
                                                   2020                     2019
                                                          (in thousands)
Net cash provided by operating activities    $      47,682              $   

40,204


Net cash used in investing activities        $     (19,462)             $ 

(153,677)


Net cash provided by financing activities    $      17,888              $   

32,300




Operating Activities
Net cash provided by operating activities during the nine months ended April 30,
2020 was $47.7 million, which resulted from a net loss of $65.6 million, which
included a $15.0 million payment to Broadcom in January 2020 in connection with
the settlement of the Symantec Cases (refer to Note 9, Commitments and
Contingencies, Legal Matters, included in Part I, Item 1 of this Quarterly
Report on Form 10-Q), adjusted for non-cash charges of $111.7 million and net
cash inflows of $1.5 million from changes in operating assets and liabilities.
Non-cash charges primarily consisted of $70.0 million for stock-based
compensation expense, $17.7 million for amortization of deferred contract
acquisition costs, $12.3 million for depreciation and amortization expense, $9.6
million for noncash operating lease costs, $2.1 million for amortization expense
of acquired intangible assets and $0.7 million for impairment of assets,
partially offset by $0.6 million for deferred income taxes and $0.5 million for
accretion of purchased discounts, net of amortization of investment premiums.
Net cash inflows from changes in operating assets and liabilities were primarily
the result of an increase of $49.6 million in deferred revenue from advanced
invoicing in accordance with our subscription contracts, an increase of $12.7
million in accrued compensation, an increase of $1.9 million in accounts payable
and increase of $0.7 million in accrued expenses, other current and noncurrent
liabilities. Net cash inflows were partially offset by cash outflows resulting
from an increase of $32.2 million in deferred contract acquisition costs, as our
sales commission payments increased due to addition of new customers and
expansion of our existing customer subscriptions, an increase of $13.4 million
in prepaid expenses, other current and noncurrent assets to balance our working
capital requirements, an increase of $12.2 million in accounts receivable
primarily due to timing of billings and collections, and a decrease of $5.5
million in operating lease liabilities primarily due to lease payments, net of
tenant incentives.
Net cash provided by operating activities during the nine months ended April 30,
2019 was $40.2 million, which resulted from a net loss of $23.4 million,
adjusted for non-cash charges of $53.9 million and net cash inflows of $9.7
million from changes in operating assets and liabilities. Non-cash charges
primarily consisted of $34.1 million for stock-based compensation expense, $13.5
million of amortization of deferred contract acquisition costs and $7.3 million
of depreciation and amortization expense, partially offset by accretion of
purchase discounts, net of amortization of investment premiums of $1.7 million.
Net cash inflows from changes in operating assets and liabilities were primarily
the result of an increase of $47.5 million in deferred revenue from advanced
invoicing in accordance with our subscription contracts. Net cash inflows were
partially offset by cash outflows resulting from an increase of $21.7 million in
deferred contract acquisition costs as our sales commission payments increased
due to addition of new customers and expansion of our existing customer
subscriptions, an increase of $9.5 million in accounts receivable primarily due
to seasonality in terms of when we enter into agreements with customers, an
increase of $3.4 million in prepaid expenses, other current and noncurrent
assets, a decrease of $1.5 million in accrued compensation, a decrease of $1.0
million in accrued expenses and other current and noncurrent liabilities and a
decrease of $0.6 million in accounts payable.
Investing Activities
Net cash used in investing activities during the nine months ended April 30,
2020 of $19.5 million was primarily attributable to the purchases of short-term
investments of $202.8 million, capital expenditures of $31.1 million to support
the growth of our cloud platform and investments in leasehold improvements
associated with our new corporate headquarters to
                                       46
--------------------------------------------------------------------------------
  Table of Contents
support our headcount growth and $8.9 million, net of cash acquired, in
connection with our acquisition of Cloudneeti Corporation. These activities were
partially offset by proceeds from the maturities of short-term investments of
$209.2 million and sales of short-term investments of $14.1 million.
Net cash used in investing activities during the nine months ended April 30,
2019 of $153.7 million was primarily attributable to the purchase of short-term
investments of $272.3 million, investments in capital expenditures of $18.4
million to support our cloud platform and headcount, payments for acquired
intangible assets of $1.5 million and payments for business acquisitions, net of
cash acquired of $0.8 million. These activities were partially offset by
proceeds from the maturities of short-term investments of $139.4 million.
Financing Activities
Net cash provided by financing activities of $17.9 million during the nine
months ended April 30, 2020 was primarily attributable to $12.6 million in
proceeds from the exercise of stock options and $5.3 million in proceeds from
issuance of common stock under the employee stock purchase plan.
Net cash provided by financing activities of $32.3 million during the nine
months ended April 30, 2019 was primarily due to $23.5 million in proceeds from
the exercise of stock options, primarily as a result of the termination of our
initial public offering lock-up period ending in September 2018, $8.7 million in
proceeds from issuance of common stock under the employee stock purchase plan
and $1.9 million in proceeds from the repayment of the outstanding principal
amount of the notes receivable for early exercised stock options. Proceeds were
partially offset by $1.8 million in payments of offering costs related to our
IPO.
Contractual Obligations and Commitments
The following table summarizes our contractual obligations as of April 30, 2020:
                                                                    

Payments Due by Period


                                                      Less Than 1              1 to 3            3 to 5           More Than
                                      Total              Year                  Years              Years           5 Years
                                                                         (in thousands)
Real estate arrangements(1)        $  44,655          $   7,166              $ 12,866          $ 13,506          $ 11,117
Co-location arrangements(1)           31,904             16,278                15,626                 -                 -
Non-cancelable purchase
arrangements                          21,537             17,831                 3,406               300                 -
Other current liabilities(2)           2,525              2,525                     -                 -                 -
Total                              $ 100,621          $  43,800              $ 31,898          $ 13,806          $ 11,117


_____
(1) Amounts are reflected on an undiscounted basis. For additional information
refer to Note 8, Operating Leases of our condensed consolidated financial
statements included elsewhere in this Quarterly Report Form 10-Q.
(2) Includes holdback amounts associated with business combinations, which are
payable upon the lapse of the contractual indemnification period.
The contractual commitment amounts in the table above are associated with
agreements that are enforceable and legally binding. Obligations under
contracts, including purchase orders, that we can cancel without a significant
penalty are not included in the table above.
                                       47
--------------------------------------------------------------------------------
  Table of Contents
Off-Balance Sheet Arrangements
As of April 30, 2020, we did not have any relationships with unconsolidated
organizations or financial partnerships, such as structured finance or special
purpose entities, which would have been established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes.
As of April 30, 2020, we had outstanding irrevocable standby unsecured letters
of credits for an aggregate value of $3.1 million with a bank, which serve as
security under certain real estate leases included in Note 8, Operating Leases
to our condensed consolidated financial statements included elsewhere in this
Quarterly Report on Form 10-Q.
Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with U.S. GAAP. The
preparation of these financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue and
expenses, as well as related disclosures. We evaluate our estimates and
assumptions on an ongoing basis. Our estimates are based on historical
experience and various other assumptions that we believe to be reasonable under
the circumstances. Our actual results could differ from these estimates. We
refer to accounting estimates of this type as critical accounting policies and
estimates, which we discuss below.
Our significant accounting policies are discussed in Note 1, Business and
Summary of Significant Accounting Policies to our consolidated financial
statements included in our Form 10-K filed with the SEC on September 18, 2019.
There have been no significant changes to these policies for the nine months
ended April 30, 2020, except as described in Note 1, Business and Summary of
Significant Accounting Policies to our condensed consolidated financial
statements included elsewhere in this Quarterly Report on Form 10-Q.
Recently Issued Accounting Pronouncements
Refer to Note 1, Business and Summary of Significant Accounting Policies to our
condensed consolidated financial statements included elsewhere in this Quarterly
Report on Form 10-Q for more information regarding recently issued accounting
pronouncements.
                                       48

--------------------------------------------------------------------------------

Table of Contents

© Edgar Online, source Glimpses