PALO ALTO NETWORKS, INC.
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 appearing elsewhere in this Quarterly
Report on Form 10-Q. The following discussion and analysis contains
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements include, among other things:
expectations regarding drivers of and factors affecting growth in our business;
the performance advantages of our products and subscription and support
offerings and the potential benefits to our customers; statements regarding
trends in billings, 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;
expectations regarding our revenues, including the seasonality and cyclicality
from quarter to quarter; expectations and intentions with respect to the
products and technologies that we acquire and introduce; our strategy of
acquiring complementary businesses and our ability to successfully acquire and
integrate businesses and technologies, including closing the proposed Sinefa and
Expanse acquisitions; expected recurring revenues resulting from expected growth
in our installed base and increased adoption of our products and cloud-based
subscription services; the sufficiency of our existing cash and investments to
meet our cash needs for the foreseeable future; our intentions to sell any of
our available-for-sale debt instruments; our expectations regarding the impact
of the discontinuance of the LIBO Rate upon our liquidity or financial position;
the timing and amount of sublease income, capital expenditures and share
repurchases; expectations to increase customer financing activities in the
future; expectations regarding the potential impacts of the outbreak of the
coronavirus disease in 2019 ("COVID-19") and related public health measures on
our business, the business of our customers, suppliers and channel partners, and
the economy; and other statements regarding our future operations, financial
condition and prospects, and business strategies. Forward-looking statements
generally can be identified by words such as "anticipates," "believes," "could,"
"estimates," "expects," "intends," "may," "plans," "predicts," "projects,"
"would," "will be," "will continue," "will likely result," and similar
expressions. 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. Given
these risks and uncertainties, readers are cautioned not to place undue reliance
on such forward-looking statements.
Our Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") is organized as follows:
•Overview. A discussion of our business and overall analysis of financial and
other highlights in order to provide context for the remainder of MD&A.
•Key Financial Metrics. A summary of our generally accepted accounting
principles ("GAAP") and non-GAAP key financial metrics, which management
monitors to evaluate our performance.
•Results of Operations. 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, 2020 to the three months ended October 31, 2019 .
•Liquidity and Capital Resources. An analysis of changes in our balance sheets
and cash flows, and a discussion of our financial condition and our ability to
meet cash needs.
•Critical Accounting Estimates. A discussion of our accounting policies that
require critical estimates, assumptions, and judgments.
•Recent Accounting Pronouncements. A discussion of expected impacts of impending
accounting changes on financial information to be reported in the future.
Overview
We empower enterprises, service providers, and government entities to secure all
users, applications, data, networks and devices with comprehensive visibility
and context continuously across all locations. We deliver cybersecurity products
covering a broad range of use cases, enabling our end-customers to secure their
networks, remote workforce, access to the service edge, branch locations, public
and private clouds, and to advance their Security Operations Centers ("SOC"). We
believe our portfolio offers advanced prevention and security, while reducing
the total cost of ownership for organizations by improving operational
efficiency and eliminating the need for siloed point products. We do this with
solutions focused on delivering value in three fundamental areas:
Secure the Enterprise:
•Secure the network through our ML-powered Next-Generation Firewalls, available
in a number of form factors, including physical, virtual, and containerized
appliances, as well as a cloud-delivered service. This also includes our add-on
Cloud-delivered Security Services ("Security Services"), such as Threat
Prevention, WildFire, URL Filtering, DNS Security, IoT Security, GlobalProtect,
SD-WAN, and Enterprise Data Loss Prevention that secure applications, users,
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and devices across our ML-powered Next-Generation Firewalls, Prisma, and Cortex
product lines. Panorama, our network security management solution, available as
hardware or virtual machine, can centrally manage all of our firewalls
irrespective of their form factor, location, or scale.
Secure the Cloud:
•Secure the cloud through our Prisma security offerings. Prisma Cloud , the
industry's most comprehensive Cloud Native Security Platform ("CNSP"), secures
multi- and hybrid-cloud environments and cloud native applications integrating
security across the full deployment lifecycle. Prisma SaaS protects SaaS
applications. Prisma Access, a comprehensive Secure Access Service Edge ("SASE")
offering, together with CloudGenix SD-WAN, is used to secure remote work forces
and enable the cloud-delivered branch. CloudGenix SD-WAN autonomous networking
and integrated security is available as a combination of physical, virtual, and
cloud-delivered appliances and services. VM-Series and CN-Series enforces
in-line network security in multi- and hybrid- cloud environments.
Secure the Future:
•Secure the future through our Cortex security offerings, which includes Cortex
XDR for prevention, detection, and response platforms to stop modern security
attacks, Cortex XSOAR for security orchestration, automation, and response
("SOAR"), Autofocus for threat intelligence, and Cortex Data Lake to collect and
integrate security data for analytics. These products are delivered as software
or SaaS subscriptions. In addition, Crypsis provides incident response, risk
management, and digital forensics services to help and protect our customers.
For the first quarter of fiscal 2021 and 2020, total revenue was $946.0 million
and $771.9 million , respectively, representing year-over-year growth of 22.6%.
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 as we continue to grow our installed
end-customer base. As of October 31, 2020 , we had end-customers in more than 170
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
some of the largest Fortune 100 and Global 2000 companies in the world. We
maintain a field sales force that works closely with our channel partners in
developing sales opportunities. We 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 was $237.3 million , or 25.1% of total revenue, for the first
quarter of fiscal 2021, representing year-over-year growth of 2.6%. Product
revenue is generated from sales of our appliances, primarily our ML-powered
Next-Generation Firewall, which is available in a number of form factors,
including as physical, virtual, and containerized appliances. Our ML-powered
Next-Generation Firewall incorporates our PAN-OS operating system, which
provides a consistent set of capabilities across our entire product line. Our
products are designed for different performance requirements throughout an
organization, ranging from our PA-220, which is designed for small organizations
and remote or branch offices, to our top-of-the-line PA-7080, which is designed
for large-scale data centers and service provider use. 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 $708.7 million , or 74.9% of total
revenue, for the first quarter of fiscal 2021, representing year-over-year
growth of 31.1%. Our subscriptions provide our end-customers with near real-time
access to the latest antivirus, intrusion prevention, web filtering, and modern
malware prevention capabilities across the network, endpoints, and the cloud.
When end-customers purchase our physical, virtual, or container firewall
appliances, 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. 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 platforms, 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
September 2020 , we acquired The Crypsis Group ("Crypsis"), which we believe will
expand our capabilities and strengthen our Cortex strategy.
We believe that the growth of our business and our short-term and long-term
success are dependent upon many factors, including our ability to extend our
technology leadership, grow our base of end-customers, expand deployment of our
portfolio and support offerings within existing end-customers, and focus on
end-customer satisfaction. To manage any future growth effectively, we must
continue to improve and expand our information technology and financial
infrastructure, our operating and administrative systems and controls, and our
ability to manage headcount, capital, and processes in an efficient manner.
While these areas present significant opportunities for us, they also pose
challenges and risks that we must successfully address in order to sustain the
growth of our business and improve our operating results. For additional
information regarding the challenges and risks we face, see the "Risk Factors"
section in Part II, Item 1A of this Quarterly Report on Form 10-Q.
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Impact of COVID-19 on Our Business
We are actively monitoring, evaluating, and responding to developments relating
to COVID-19, which has and is expected to result in continued significant
global, social, and business disruption. While we instituted a global
work-from-home policy beginning in March 2020 , we did not incur significant
disruptions in our work operations during the first quarter of fiscal 2021. We
are conducting business as usual with restrictions to employee travel and
transitioning of in-person marketing events to virtual formats, among other
modifications. These changes will substantially remain in effect in the second
quarter of fiscal 2021, and are likely to extend to future quarters. We will
continue to actively monitor the situation and will make further changes to 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, end-customers,
partners, suppliers, and stockholders. Our focus remains on the safety of our
employees, striving to protect the health and well-being of the communities in
which we operate, and providing technology to our employees, end-customers, and
partners to help them do their best work while remote.
Although some end-customers adopted Prisma Access as their secure work-from-home
solution for the longer term, COVID-19 may curtail our end-customers' spending
and could lead them to delay or defer purchasing decisions, and lengthen sales
cycles and payment terms, which could materially adversely impact our business,
results of operations, and overall financial performance. Also, certain of our
end-customers or partners may be or may become credit or cash constrained,
making it difficult for them to fulfill their payment obligations to us. The
extent of the impact of COVID-19 on our operational and financial performance
will depend on developments, including the duration and spread of the virus,
impact on our end-customers' spending, volume of sales and length of our sales
cycles, impact on our partners, suppliers, and employees, actions that may be
taken by governmental authorities, and other factors identified in Part II, Item
1A "Risk Factors" in this Form 10-Q. Given the dynamic nature of these
circumstances, the full impact of COVID-19 on our ongoing business, results of
operations, and overall financial performance cannot be reasonably estimated at
this time.
Key Financial Metrics
We monitor the key financial metrics set forth in the tables below to help us
evaluate growth trends, establish budgets, measure the effectiveness of our
sales and marketing efforts, and assess operational efficiencies. We discuss
revenue, gross margin, and the components of operating loss and margin below
under "-Results of Operations."
October 31, 2020 July 31, 2020
(in millions)
Total deferred revenue $ 3,946.8 $ 3,810.2 Cash, cash equivalents, and investments $ 4,090.8 $
4,302.2
Three Months Ended
October 31,
2020 2019
(dollars in millions)
Total revenue $ 946.0 $ 771.9
Total revenue year-over-year percentage increase 22.6 % 17.7 %
Gross margin 70.6 % 71.8 %
Operating loss $ (44.5) $ (51.8)
Operating margin (4.7) % (6.7) %
Billings $ 1,082.8 $ 897.4
Billings year-over-year percentage increase 20.7 % 18.3 %
Cash flow provided by operating activities $ 534.9 $ 225.2
Free cash flow (non-GAAP) $ 505.3 $ 178.0
•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.
•Billings. 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 given our
hybrid SaaS revenue model, and 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 shipment, 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
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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
October 31,
2020 2019
(in millions)
Billings:
Total revenue $ 946.0 $ 771.9
Add: change in total deferred revenue, net of acquired deferred
revenue 136.8 125.5
Billings $ 1,082.8 $ 897.4
• Cash Flow Provided by Operating Activities. We monitor cash flow provided by
operating activities as a measure of our overall business performance. Our cash
flow provided by operating activities is driven in large part by sales of our
products and from up-front payments for subscription and support offerings.
Monitoring cash flow provided by operating activities enables us to analyze our
financial performance without the non-cash effects of certain items such as
depreciation, amortization, and share-based compensation costs, thereby allowing
us to better understand and manage the cash needs of our business.
• Free Cash Flow (non-GAAP). We define free cash flow, a non-GAAP financial
measure, as cash provided by operating activities less purchases of property,
equipment, and other assets. We consider free cash flow to be a profitability
and liquidity measure that provides useful information to management and
investors about the amount of cash generated by the business after necessary
capital expenditures. A limitation of the utility of free cash flow as a measure
of our financial performance and liquidity is that it does not represent the
total increase or decrease in our cash balance for the period. In addition, it
is important to note that other companies, including companies in our industry,
may not use free cash flow, may calculate free cash flow in a different manner
than we do, or may use other financial measures to evaluate their performance,
all of which could reduce the usefulness of free cash flow as a comparative
measure. A reconciliation of free cash flow to cash flow provided by operating
activities, the most directly comparable financial measure calculated and
presented in accordance with GAAP, is provided below:
Three
Months Ended
2020 2019
(in millions)
Free cash flow (non-GAAP):
Net cash provided by operating activities $ 534.9 $ 225.2
Less: purchases of property, equipment, and other assets 29.6 47.2
Free cash flow (non-GAAP) $ 505.3 $ 178.0
Net cash provided by (used in) investing activities $ (886.2) $ 244.5
Net cash used in financing activities $ (464.5) $ (167.1)
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Results of Operations
The following table summarizes our results of operations for the periods
presented and as a percentage of our total revenue for those periods based on
our condensed consolidated statements of operations data. The period-to-period
comparison of results is not necessarily indicative of results for future
periods.
Three
Months Ended
2020 2019
Amount % of Revenue Amount % of Revenue
(dollars in millions)
Revenue:
Product $ 237.3 25.1 % $ 231.2 30.0 %
Subscription and support 708.7 74.9 % 540.7 70.0 %
Total revenue 946.0 100.0 % 771.9 100.0 %
Cost of revenue:
Product 62.2 6.6 % 65.1 8.4 %
Subscription and support 215.6 22.8 % 152.6 19.8 %
Total cost of revenue(1) 277.8 29.4 % 217.7 28.2 %
Total gross profit 668.2 70.6 % 554.2 71.8 %
Operating expenses:
Research and development 237.4 25.1 % 170.5 22.1 %
Sales and marketing 388.6 41.0 % 365.7 47.4 %
General and administrative 86.7 9.2 % 69.8 9.0 %
Total operating expenses(1) 712.7 75.3 % 606.0 78.5 %
Operating loss (44.5) (4.7) % (51.8) (6.7) %
Interest expense (40.2) (4.2) % (18.9) (2.4) %
Other income, net 2.4 0.2 % 16.2 2.0 %
Loss before income taxes (82.3) (8.7) % (54.5) (7.1) %
Provision for income taxes 9.9 1.0 % 5.1 0.6 %
Net loss $ (92.2) (9.7) % $ (59.6) (7.7) %
______________(1)Includes share-based compensation as follows:
Three Months Ended October 31,
2020 2019
(in millions)
Cost of product revenue $ 1.5 $ 1.3
Cost of subscription and support revenue 22.2 18.9
Research and development 95.4 62.4
Sales and marketing 64.9 43.8
General and administrative 28.9 24.8
Total share-based compensation $ 212.9 $ 151.2
Revenue
Our revenue consists of product revenue and subscription and support revenue.
Revenue is recognized upon transfer of control of the corresponding promised
products and subscriptions and support to our customers in an amount that
reflects the consideration we expect to be entitled to in exchange for those
products and subscriptions and support. We expect our revenue to vary from
quarter to quarter based on seasonal and cyclical factors.
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Product Revenue
Product revenue is derived primarily from sales of our appliances. Product
revenue also includes revenue derived from software licenses of Panorama and the
VM-Series. Our appliances and software licenses include a broad set of built-in
networking and security features and functionalities. We generally recognize
product revenue at the time of hardware shipment or delivery of software
licenses.
Three Months Ended October 31,
2020 2019 Change
Amount Amount Amount %
(dollars in millions)
Product $
237.3
The change in product revenue for the three months endedOctober 31, 2020 compared to the same period in 2019 represented a modest increase in product sales. Subscription and Support Revenue Subscription and support revenue is derived primarily from sales of our subscription and support offerings. Our contractual subscription and support contracts are typically one to five years. We recognize revenue from subscriptions and support over time as the services are performed. As a percentage of total revenue, we expect our subscription and support revenue to vary from quarter to quarter and to 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 October 31, 2020 2019 Change Amount Amount Amount % (dollars in millions) Subscription$ 428.0 $ 318.6 $ 109.4 34.3 % Support 280.7 222.1 58.6 26.4 % Total subscription and support$ 708.7 $ 540.7 $ 168.0 31.1 % Subscription and support revenue increased for the three months endedOctober 31, 2020 compared to the same period in 2019. The increase was due to increased demand for our subscription and support offerings from both new and existing 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. The change in subscription and support revenue due to changes in pricing was not significant. Revenue byGeographic Theater Three Months Ended October 31, 2020 2019 Change Amount Amount Amount %
(dollars in millions)
Americas $ 670.3 $ 529.6 $ 140.7 26.6 %
EMEA 170.9 147.6 23.3 15.8 %
APAC 104.8 94.7 10.1 10.7 %
Total revenue $ 946.0 $ 771.9 $ 174.1 22.6 %
With respect to geographic theaters, the increase in revenue for the three
months ended October 31, 2020 compared to the same period in 2019 was driven
primarily by the Americas , due to its larger and more established sales force.
Revenue from our other geographic theaters, both Europe , the Middle East , and
Africa ("EMEA") and Asia Pacific and Japan ("APAC"), increased for the three
months ended October 31, 2020 compared to the same period in 2019 due to
continued investment in our global sales force in order to support our growth
and innovation.
Cost of Revenue
Our cost of revenue consists of cost of product revenue and cost of subscription
and support revenue.
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Cost of Product Revenue
Cost of product revenue primarily includes costs paid to our manufacturing
partners. Our cost of product revenue also includes personnel costs, which
consist of salaries, benefits, bonuses, share-based compensation, and travel and
entertainment associated with our operations organization, amortization of
intellectual property licenses, product testing costs, shipping and tariff
costs, and allocated costs. Allocated costs consist of certain facilities,
depreciation, benefits, recruiting, and information technology costs that we
allocate based on headcount. We expect our cost of product revenue to fluctuate
with our product revenue.
Three Months Ended
October 31,
2020 2019 Change
Amount Amount Amount %
(dollars in millions)
Cost of product revenue $ 62.2 $ 65.1 $ (2.9) (4.5) %
Number of employees at period end 114 108 6 5.6 %
Cost of product revenue decreased slightly for the three months ended October
31, 2020 compared to the same period in 2019, primarily due to product mix.
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 allocated 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
October 31,
2020 2019 Change
Amount Amount Amount %
(dollars in millions)
Cost of subscription and support revenue $ 215.6 $ 152.6 $ 63.0 41.3 %
Number of employees at period end 1,569 1,288 281 21.8 %
Cost of subscription and support revenue increased for the three months ended
October 31, 2020 compared to the same period in 2019, primarily due to increased
costs to support the growth of our subscription and support offerings. Cloud
hosting service costs, which support the adoption of our cloud-based
subscription offerings, increased $26.2 million for the three months ended
October 31, 2020 compared to the same period in 2019. Personnel costs grew
$13.7 million to $87.6 million for the three months ended October 31, 2020
compared to the same period in 2019, primarily due to headcount growth. The
remaining increase was primarily due to increases in outside service costs and
amortization of internally developed software.
Gross Margin
Gross margin, or gross profit as a percentage of revenue, has been and will
continue to be affected by a variety of factors, including the introduction of
new products, manufacturing costs, tariff 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. For sales of our products, our higher-end firewall products generally
have higher gross margins than our lower-end firewall products within each
product series. We expect our gross margins to fluctuate over time depending on
the factors described above.
Three Months Ended October 31,
2020 2019
Amount Gross Margin Amount Gross Margin
(dollars in millions)
Product $ 175.1 73.8 % $ 166.1 71.8 %
Subscription and support 493.1 69.6 % 388.1 71.8 %
Total gross profit $ 668.2 70.6 % $ 554.2 71.8 %
Product gross margin increased for the three months ended
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Subscription and support gross margin decreased for the three months ended
October 31, 2020 compared to the same period in 2019, primarily due to an
increase in costs to support our cloud-based subscription offerings.
Operating Expenses
Our operating expenses consist of research and development, sales and marketing,
and general and administrative expense. Personnel costs are the most significant
component of operating expenses and consist of salaries, benefits, bonuses,
share-based compensation, travel and entertainment, and with regard to sales and
marketing expense, sales commissions. Our operating expenses also include
allocated costs, which consist of certain facilities, depreciation, benefits,
recruiting, and information technology costs that we allocate based on
headcount. We expect operating expenses generally to increase in absolute
dollars and decrease over the long term as a percentage of revenue as we
continue to scale our business. In response to COVID-19, we instituted a global
work-from-home policy and limited employee travel beginning in March 2020 .
Further, we have canceled in-person events and either replaced them with virtual
events or postponed them to future periods. As of October 31, 2020 , we expect to
recognize approximately $1.8 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. Share-based compensation expense is generally recognized on a
straight-line basis over the requisite service periods of the awards.
Research and Development
Research and development expense consists primarily of personnel costs. Research
and development expense also includes prototype-related expenses and allocated
costs. 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
October 31,
2020 2019 Change
Amount Amount Amount %
(dollars in millions)
Research and development $ 237.4 $ 170.5 $ 66.9 39.2 %
Number of employees at period end 1,943 1,598 345 21.6 %
Research and development expense increased for the three months ended October
31, 2020 compared to the same period in 2019, primarily due to personnel costs,
which grew $54.8 million to $188.0 million . The increase in personnel costs was
primarily due to headcount growth and accelerated vesting of certain equity
awards.
Sales and Marketing
Sales and marketing expense consists primarily of personnel costs, including
commission expense. Sales and marketing expense also includes costs for market
development programs, promotional and other marketing costs, professional
services, and allocated costs. We continue to thoughtfully invest in headcount
and have substantially grown our international sales presence. 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 increase touch points with
end-customers and to expand our international presence, although our sales and
marketing expense may fluctuate as a percentage of total revenue.
Three Months Ended
October 31,
2020 2019 Change
Amount Amount Amount %
(dollars in millions)
Sales and marketing $ 388.6 $ 365.7 $ 22.9 6.3 %
Number of employees at period end 3,855 3,557 298 8.4 %
Sales and marketing expense increased for the three months ended October 31,
2020 compared to the same period in 2019, primarily due to personnel costs,
which grew $30.2 million to $293.3 million , and increased expenses for
go-to-market initiatives, which were partially offset by a decrease in trade
shows and convention expenses as in-person events were replaced with virtual
events due to COVID-19. The increase in personnel costs was largely due to
headcount growth, and partially offset by decreased travel expenses due to
COVID-19.
General and Administrative
General and administrative expense consists primarily of personnel costs for our
executive, finance, human resources, legal, and information technology
organizations, and professional services costs, which consist primarily of
legal, auditing, accounting, and other consulting costs. General and
administrative expense also includes certain non-recurring general expenses and
impairment losses. Certain facilities, depreciation, benefits, recruiting, and
information technology costs are allocated to other organizations based on
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headcount. We expect general and administrative expense to increase in absolute
dollars due to additional costs associated with accounting, compliance, and
insurance, although our general and administrative expense may fluctuate as a
percentage of total revenue.
Three Months Ended
October 31,
2020 2019 Change
Amount Amount Amount %
(dollars in millions)
General and administrative $ 86.7 $ 69.8 $ 16.9 24.2 %
Number of employees at period end 895 831 64 7.7 %
General and administrative expense increased for the three months ended October
31, 2020 compared to the same period in 2019. Personnel costs increased
$7.2 million to $53.5 million , primarily due to the accelerated vesting of
certain equity awards in connection with our acquisitions. The remaining
increase was due to increases in credit losses and acquisition-related costs.
Interest Expense
Interest expense primarily consists of non-cash interest expense from the
amortization of the debt discount and debt issuance costs related to our 0.75%
Convertible Senior Notes due 2023 (the "2023 Notes") and the 0.375% Convertible
Senior Notes due 2025 (the "2025 Notes," and together with "2023 Notes," the
"Notes"), and also includes the contractual interest expense related to our
Notes.
Three Months Ended October 31,
2020 2019 Change
Amount Amount Amount %
(dollars in millions)
Interest expense Interest expense increased for the three months endedOctober 31, 2020 compared to the same period in 2019 primarily due to our 2025 Notes issued in fiscal 2020. Refer to Note 10. Debt in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information on our Notes. Other Income, Net Other income, net includes interest income earned on our cash, cash equivalents, and investments, foreign currency remeasurement gains and losses, and foreign currency transaction gains and losses. Three Months Ended October 31, 2020 2019 Change Amount Amount Amount % (dollars in millions) Other income, net$ 2.4 $ 16.2 $ (13.8) (85.2) % Other income, net decreased for the three months endedOctober 31, 2020 compared to the same period in 2019. The decrease was primarily due to lower interest income earned on our cash, cash equivalents, and investments balances as a result of lower interest rates atOctober 31, 2020 compared toOctober 31, 2019 . - 32 - -------------------------------------------------------------------------------- Table of Contents Provision for Income Taxes Provision for income taxes consists primarily of income taxes in foreign jurisdictions in which we conduct business and withholding taxes. We maintain a full valuation allowance for domestic and certain foreign deferred tax assets, including net operating loss carryforwards and certain domestic tax credits. In recent years, we reorganized our corporate structure and intercompany relationships to more closely align with the international nature of our business activities. Our corporate structure has caused, and may continue to cause, disproportionate relationships between our overall effective tax rate and other jurisdictional measures. To the extent we revisit our corporate structure, it may have an impact on our tax provision. Three Months Ended October 31, Change 2020 2019 Amount % (dollars in millions) Provision for income taxes$ 9.9 $ 5.1 $ 4.8 94.1 % Effective tax rate (12.0) % (9.4) % We recorded an income tax provision for the three months endedOctober 31, 2020 primarily due to income taxes in profitable foreign jurisdictions and withholding taxes. Our provision for income taxes increased for the three months endedOctober 31, 2020 compared to the same period in 2019, primarily due to an increase in foreign income and withholding taxes. Refer to Note 14. Income Taxes in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information. Liquidity and Capital Resources October 31, 2020 July 31, 2020 (in millions) Working capital $ 1,665.8$ 2,437.5 Cash, cash equivalents, and investments: Cash and cash equivalents $ 2,142.0$ 2,958.0 Investments 1,948.8 1,344.2 Total cash, cash equivalents, and investments $ 4,090.8$ 4,302.2 As ofOctober 31, 2020 , our total cash, cash equivalents, and investments of$4.1 billion were held for general corporate purposes, of which approximately$595.1 million was held outside ofthe United States . As ofOctober 31, 2020 , we had no unremitted earnings when evaluating our outside basis difference relating to ourU.S. investment in foreign subsidiaries. However, there could be local withholding taxes payable 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. InJuly 2018 , we issued the 2023 Notes with an aggregate principal amount of$1.7 billion . InJune 2020 , we issued the 2025 Notes with an aggregate principal amount of$2.0 billion . The 2023 Notes mature onJuly 1, 2023 and the 2025 Notes mature onJune 1, 2025 ; however, under certain circumstances, holders may surrender their Notes of a series for conversion prior to the applicable maturity date. Upon conversion of the Notes of a series, we will pay cash equal to the aggregate principal amount of the Notes of such series to be converted, and, at our election, will pay or deliver cash and/or shares of our common stock for the amount of our conversion obligation in excess of the aggregate principal amount of the Notes of such series being converted. As ofOctober 31, 2020 , all of our Notes remained outstanding. Refer to Note 10. Debt in Part I, Item 1 of this Quarterly Report on Form 10-Q for information on the Notes. InSeptember 2018 , we entered into a credit agreement (the "Credit Agreement") that provides for a$400.0 million unsecured revolving credit facility (the "Credit Facility"), with an option to increase the amount of the credit facility up to an additional$350.0 million , subject to certain conditions. As ofOctober 31, 2020 , there were no amounts outstanding and we were in compliance with all covenants under the Credit Agreement. Refer to Note 10. Debt in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information on the Credit Agreement. InFebruary 2019 , our board of directors authorized a$1.0 billion share repurchase program which is funded from available working capital and will expire onDecember 31, 2020 . During the three months endedOctober 31, 2020 , we purchased 2.1 million shares for$500.0 million , leaving$301.9 million available for future share repurchases under this repurchase authorization. Refer to Note 12. Stockholders' Equity in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information on our repurchase programs. - 33 - -------------------------------------------------------------------------------- Table of Contents The following table summarizes our cash flows for the three months endedOctober 31, 2020 and 2019: Three Months Ended October 31, 2020 2019 (in millions) Net cash provided by operating activities $ 534.9$ 225.2 Net cash provided by (used in) investing activities (886.2) 244.5 Net cash used in financing activities (464.5) (167.1)
Net increase (decrease) in cash, cash equivalents, and restricted cash
$
(815.8)
Cash from operations could be affected by various risks and uncertainties, including, but not limited to, the effects of COVID-19 and other risks detailed in Part II, Item 1A "Risk Factors" in this Form 10-Q. We believe that our cash flow from operations with existing cash and cash equivalents will be sufficient to meet our anticipated cash needs for at least the next 12 months and thereafter for the foreseeable future. Our future capital requirements will depend on many factors including our growth rate, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced products and subscription and support offerings, the costs to acquire or invest in complementary businesses and technologies, the costs to ensure access to adequate manufacturing capacity, the investments in our infrastructure to support the adoption of our cloud-based subscription offerings, the investments in our new corporate headquarters, the continuing market acceptance of our products and subscription and support offerings, and macroeconomic events such as COVID-19. In addition, from time to time we may incur additional tax liability in connection with certain corporate structuring decisions. We may also choose 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, our business, operating results, and financial condition may be adversely affected. Operating Activities Our operating activities have consisted of net losses adjusted for certain non-cash items and changes in assets and liabilities. Cash provided by operating activities during the three months endedOctober 31, 2020 was$534.9 million , an increase of$309.7 million compared to the same period in 2019. The increase was primarily due to growth of our business as reflected by an increase in billings, and an increase in collections during the three months endedOctober 31, 2020 . Investing Activities Our investing activities have consisted of capital expenditures, net investment purchases, sales, and maturities, and business acquisitions. We expect to continue such activities as our business grows. Cash used in investing activities during the three months endedOctober 31, 2020 was$886.2 million , a net change of$1.1 billion compared to cash provided by investing activities of$244.5 million during the same period in 2019. The change was primarily due to higher purchases of investments, an increase in net cash payments for business acquisitions and a decrease in proceeds from maturities of investments during fiscal 2020. Financing Activities Our financing activities have consisted of cash used to repurchase shares of our common stock, 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 three months endedOctober 31, 2020 was$464.5 million , an increase of$297.4 million compared to the same period in 2019. The increase was primarily due to higher repurchases of our common stock during the three months endedOctober 31, 2020 . Contractual Obligations and Commitments Except for those disclosed in Note 11. Commitments and Contingencies in Part I, Item 1 of this Quarterly Report on Form 10-Q, there have been no material changes outside of the ordinary course of business to our contractual obligations and commitments disclosed in our Annual Report on Form 10-K for the fiscal year endedJuly 31, 2020 . Off-Balance Sheet Arrangements As ofOctober 31, 2020 , we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. - 34 -
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Table of Contents Critical Accounting Estimates Our condensed consolidated financial statements have been prepared in accordance withU.S. GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. These estimates and assumptions are affected by management's application of accounting policies, as well as uncertainties, including the current economic environment due to the global impact of COVID-19. We evaluate our estimates and assumptions on an ongoing basis. Actual results may differ from these estimates. To the extent that there are material differences between these estimates and our actual results, our future financial statements will be affected. 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 endedJuly 31, 2020 reflect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements. There have been no significant changes to our critical accounting estimates as filed in such report. Recent Accounting Pronouncements For a discussion of the recent accounting pronouncements, refer to "Recently Adopted Accounting Pronouncements" and "Recently Issued Accounting Pronouncements" in Note 1. Description of Business and Summary of Significant Accounting Policies in Part I, Item 1 of this Quarterly Report on Form 10-Q.
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