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: the
effects of supply chain constraints and the global chip and component shortages
and other factors affecting the manufacture, delivery and cost of certain of our
products; 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, technologies and businesses that we acquire and
introduce; our strategy of acquiring complementary businesses and our ability to
successfully acquire and integrate businesses and technologies; 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, investments and available financing
instruments 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; 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 discovered 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 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, 2021 to the three months ended October 31, 2020 .
•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, clouds and devices with comprehensive
visibility and context, continuously across all locations. We deliver
cybersecurity products covering a broad range of zero trust use cases, enabling
our end-customers to secure their networks, remote and hybrid workforces, branch
locations, and public and private clouds, and to advance their Security
Operations Centers ("SOC"). We believe our portfolio offers the ability to
achieve a zero trust enterprise through advanced security capabilities, 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 five fundamental areas:
Network Security:
•Enabling network security 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. Network security
also
- 21 -
--------------------------------------------------------------------------------
Table of Content
includes our add-on Cloud-Delivered Security Services, such as Threat
Prevention, WildFire, URL Filtering, Advanced URL Filtering, DNS Security, IoT
Security, GlobalProtect, SD-WAN, Enterprise Data Loss Prevention ("Enterprise
DLP"), SaaS Security API and SaaS Security Inline that secure content,
applications, users, and devices across our ML-Powered Next-Generation
Firewalls, Prisma, and Cortex product lines, to enable best-in-class security
across a broad range of applications. 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 Access Service Edge:
•Prisma Access, the industry's most complete cloud-delivered security platform,
together with Prisma SD-WAN, SaaS Security API and SaaS Security Inline, provide
a comprehensive Secure Access Service Edge ("SASE") offering that is used to
secure remote workforces and enable the cloud-delivered branch.
Cloud Security:
•Enabling cloud security 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. VM-Series and
CN-Series enforce in-line network security in multi- and hybrid-cloud
environments.
Security Analytics and Automation:
•Delivering the next generation of endpoint security, security analytics and
security automation solutions through our Cortex portfolio. These include our
industry-leading extended detection and response platform Cortex XDR to prevent,
detect, and respond to complex cybersecurity attacks, Cortex XSOAR for security
orchestration, automation, and response ("SOAR"), Cortex Xpanse for attack
surface management ("ASM") and Cortex Data Lake allowing our customers to
collect and analyze large amounts of context-rich data across endpoints,
networks, and clouds. These products are delivered as software or SaaS
subscriptions.
Threat Intelligence and Security Consulting (Unit 42):
•Enabling security teams with up-to-date threat intelligence and deep
cybersecurity expertise before, during and after attacks through our Unit 42
threat research and security consulting team. Unit 42 offers incident response,
risk management, board advisory and proactive cybersecurity assessment services.
For the first quarter of fiscal 2022 and 2021, total revenue was $1.2 billion
and $946.0 million , respectively, representing year-over-year growth of 31.9%.
Our growth reflects the increased adoption of our portfolio, which consists of
product, subscriptions, and support. We believe our portfolio will enable us to
benefit from recurring revenues as we continue to grow our installed
end-customer base. As of October 31, 2021 , we had end-customers in over 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
almost all of the Fortune 100 companies and a majority of the Global 2000
companies in the world. We maintain a field sales force that works closely with
our channel partners in developing sales opportunities. We primarily use a
two-tiered, indirect fulfillment model whereby we sell our products,
subscriptions, and support to our distributors, which, in turn, sell to our
resellers, which then sell to our end-customers.
Our product revenue was $295.5 million , or 23.7% of total revenue, for the first
quarter of fiscal 2022, representing year-over-year growth of 24.5%. 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 network security
product line. Our products are designed for different performance requirements
throughout an organization, ranging from our PA-410, 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 $951.9 million , or 76.3% of total
revenue, for the first quarter of fiscal 2022, representing year-over-year
growth of 34.3%. Our subscriptions provide our end-customers with near real-time
access to the latest antivirus, intrusion prevention, web filtering, modern
malware prevention, data loss prevention, and cloud access security broker
capabilities across the network, endpoints, and the cloud. When end-customers
purchase our physical, virtual, or container firewall appliances, or certain
cloud offerings they typically purchase support in order to receive ongoing
security updates, upgrades, bug fixes, and repairs. In addition to the
subscriptions purchased with these appliances, end-customers may also purchase
other subscriptions on a per-user, per-endpoint, or capacity-based basis. We
also offer professional services, including incident response, risk management,
and digital forensic services.
We continue to invest in innovation and acquire businesses as we evolve and
further extend the capabilities of our portfolio, as we believe that innovation
and timely development of new features and products are essential to meeting the
needs of our end-
- 22 -
--------------------------------------------------------------------------------
Table of Content
customers and improving our competitive position. For example, in August 2021 ,
we acquired Gamma Networks, Inc. ("Gamma"), which we expect will enhance and
expand our data loss prevention offerings.
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.
Impact of COVID-19 and Other Macroeconomic Factors on Our Business
We are actively monitoring, evaluating, and responding to developments relating
to COVID-19, which has resulted in, and is expected to continue to result in
significant global, social, and business disruption. While we instituted a
global work-from-home policy beginning in March 2020 , which has been modified to
provide employees with the choice to work in certain of our offices when and as
they feel comfortable, we have not experienced significant disruptions in our
work operations. We are conducting business as usual with modifications to
employee travel and continue to hold most of the marketing events virtually. We
expect these changes will substantially remain in effect in the second quarter
of fiscal 2022 and could extend to future quarters. We will continue to actively
monitor the situation, including progress made through vaccinations, and we 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, and we strive to protect the health and
well-being of the communities in which we operate, in part, by providing
technology to our employees, end-customers, and partners to help them do their
best work while working remotely.
Although some end-customers adopted Prisma Access as their secure work-from-home
solution for the longer term, COVID-19 has affected 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 and
its variants, 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. The global supply chain and
the semiconductor industry are experiencing challenges. We have seen supply
chain challenges increase, including chip and component shortages, which have,
in certain cases, caused delays in acquiring chips, components and inventory and
have resulted in increased costs as compared to historic levels. We continue to
work to minimize the effects from supply chain constraints, however, we have
experienced increases in lead time for product deliveries to our end-customers.
Given the dynamic nature of these circumstances, the full impact of COVID-19 and
other macroeconomic factors on our ongoing business, results of operations and
overall financial performance cannot be reasonably estimated at this time.
- 23 -
--------------------------------------------------------------------------------
Table of Content
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, 2021 July 31, 2021
(in millions)
Total deferred revenue $ 5,158.2 $ 5,024.0
Cash, cash equivalents, and investments $ 4,360.2
Three Months Ended
2021 2020
(dollars in millions)
Total revenue $ 1,247.4 $ 946.0
Total revenue year-over-year percentage increase 31.9 % 22.6 %
Gross margin 69.5 % 70.6 %
Operating loss $ (82.7) $ (44.5)
Operating margin (6.6) % (4.7) %
Billings $ 1,381.6 $ 1,082.8
Billings year-over-year percentage increase 27.6 % 20.7 %
Cash flow provided by operating activities $ 588.9 $ 534.9
Free cash flow (non-GAAP) $ 554.3 $ 505.3
•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. We
believe billings provides investors with an important indicator of the health
and visibility of our business because it includes subscription and support
revenue, which is recognized ratably over the contractual service period, and
product revenue, which is recognized at the time of 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 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,
2021 2020
(in millions)
Billings:
Total revenue $ 1,247.4 $ 946.0
Add: change in total deferred revenue, net of acquired deferred
revenue 134.2 136.8
Billings $ 1,381.6 $ 1,082.8
• 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.
- 24 -
--------------------------------------------------------------------------------
Table of Content
• 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
stockholders 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
2021 2020
(in millions)
Free cash flow (non-GAAP):
Net cash provided by operating activities $ 588.9 $ 534.9
Less: purchases of property, equipment, and other assets 34.6 29.6
Free cash flow (non-GAAP) $ 554.3 $ 505.3
Net cash used in investing activities $ (229.9) $ (886.2)
Net cash provided by (used in) financing activities $ 38.7 $ (464.5)
- 25 -
--------------------------------------------------------------------------------
Table of Content
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 October 31,
2021 2020
Amount % of Revenue Amount % of Revenue
(dollars in millions)Revenue: Product$ 295.5 23.7 %$ 237.3 25.1 % Subscription and support 951.9 76.3 % 708.7 74.9 % Total revenue 1,247.4 100.0 % 946.0 100.0 % Cost of revenue: Product 88.9 7.1 % 62.2 6.6 % Subscription and support 291.7 23.4 % 215.6 22.8 % Total cost of revenue(1) 380.6 30.5 % 277.8 29.4 % Total gross profit 866.8 69.5 % 668.2 70.6 % Operating expenses: Research and development 339.5 27.2 % 237.4 25.1 % Sales and marketing 505.9 40.6 % 388.6 41.0 % General and administrative 104.1 8.3 % 86.7 9.2 % Total operating expenses(1) 949.5 76.1 % 712.7 75.3 % Operating loss (82.7) (6.6) % (44.5) (4.7) % Interest expense (6.9) (0.6) % (40.2) (4.2) % Other income (expense), net (1.6) (0.1) % 2.4 0.2 % Loss before income taxes (91.2) (7.3) % (82.3) (8.7) % Provision for income taxes 12.4 1.0 % 9.9 1.0 % Net loss$ (103.6) (8.3) %$ (92.2) (9.7) % ______________
(1)Includes share-based compensation as follows:
Three Months Ended
2021 2020
(in millions)
Cost of product revenue $ 2.3 $ 1.5
Cost of subscription and support revenue 26.7 22.2
Research and development 125.6 95.4
Sales and marketing 73.3 64.9
General and administrative 32.4 28.9
Total share-based compensation $ 260.3 $ 212.9
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 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.
- 26 -
--------------------------------------------------------------------------------
Table of Content
Product Revenue
Product revenue is derived 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. Product
revenue also includes revenue derived from software licenses of Panorama. Our
appliances and software licenses include a broad set of built-in networking and
security features and functionalities. We recognize product revenue at the time
of hardware shipment or delivery of software license.
Three Months Ended October 31,
2021 2020 Change
Amount Amount Amount %
(dollars in millions)
Product $ 295.5 $ 237.3 $ 58.2 24.5 %
Product revenue for the three months ended October 31, 2021 increased compared
to the same period in 2020 primarily due to increased demand for our existing
and newly introduced product offerings.
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 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,
2021 2020 Change
Amount Amount Amount %
(dollars in millions)
Subscription $ 578.8 $ 428.0 $ 150.8 35.2 %
Support 373.1 280.7 92.4 32.9 %
Total subscription and support $ 951.9 $ 708.7 $ 243.2 34.3 %
Subscription and support revenue increased for the three months ended October
31, 2021 compared to the same period in 2020. 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.
Revenue by Geographic Theater
Three Months Ended October 31,
2021 2020 Change
Amount Amount Amount %
(dollars in millions)
Americas $ 866.7 $ 666.5 $ 200.2 30.0 %
EMEA 233.8 173.4 60.4 34.8 %
APAC 146.9 106.1 40.8 38.5 %
Total revenue $ 1,247.4 $ 946.0 $ 301.4 31.9 %
With respect to geographic theaters, the increase in revenue for the three
months ended October 31, 2021 compared to the same period in 2020 was driven
primarily by the Americas , due to its larger sales force and a larger percentage
of our customers being located in the Americas . 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,
2021 compared to the same period in 2020 due to continued investment in our
global sales force in order to support our growth and increase our customer base
in the region.
Cost of Revenue
Our cost of revenue consists of cost of product revenue and cost of subscription
and support revenue.
- 27 -
--------------------------------------------------------------------------------
Table of Content
Cost of Product Revenue
Cost of product revenue primarily includes costs paid to our manufacturing
partners for procuring components and manufacturing our products. 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 shared costs. Shared 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,
2021 2020 Change
Amount Amount Amount %
(dollars in millions)
Cost of product revenue $ 88.9 $ 62.2 $ 26.7 42.9 %
Number of employees at period end 130 114 16 14.0 %
Cost of product revenue increased for the three months ended October 31, 2021
compared to the same period in 2020, primarily due to an increase in product
volume and higher costs related to our new product offerings.
Cost of Subscription and Support Revenue
Cost of subscription and support revenue includes personnel costs, which consist
of salaries, benefits, bonuses, share-based compensation, and travel and
entertainment 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 shared costs. Shared costs consist of certain facilities,
depreciation, benefits, recruiting, and information technology costs that we
allocate based on headcount. 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,
2021 2020 Change
Amount Amount Amount %
(dollars in millions)
Cost of subscription and support revenue $ 291.7 $ 215.6 $ 76.1 35.3 %
Number of employees at period end 2,321 1,569 752 47.9 %
Cost of subscription and support revenue increased for the three months ended
October 31, 2021 compared to the same period in 2020, primarily due to personnel
costs, which grew $35.2 million to $122.8 million for the three months ended
October 31, 2021 compared to the same period in 2020 primarily due to headcount
growth. The remaining increase was primarily due to increased outside service
costs for global customer support resulting from the expansions of our customer
base and product portfolio, amortization of intangible assets from our
acquisitions, and cloud hosting service costs to support our cloud-based
subscription offerings.
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 vary over time depending on the
factors described above.
Three Months Ended
2021 2020
Amount Gross Margin Amount Gross Margin
(dollars in millions)
Product $ 206.6 69.9 % $ 175.1 73.8 %
Subscription and support 660.2 69.4 % 493.1 69.6 %
Total gross profit $ 866.8 69.5 % $ 668.2 70.6 %
- 28 --------------------------------------------------------------------------------- Table of Content Product gross margin decreased for the three months endedOctober 31, 2021 compared to the same period in 2020, primarily due to product mix and higher costs of materials as a result of supply chain constraints. Subscription and support gross margin decreased for the three months endedOctober 31, 2021 compared to the same period in 2020 primarily due to higher costs to fulfill professional services arrangements, partially offset by increased efficiency in our cloud hosting usage, which supports our cloud-based subscription offerings. Operating Expenses Our operating expenses consist of research and development, sales and marketing, and general and administrative expenses. 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 shared costs, which consist of certain facilities, depreciation, benefits, recruiting, and information technology costs that we allocate based on headcount to each department. In response to COVID-19, we instituted a global work-from-home policy, which has been modified to provide employees with the choice to work in certain of our offices when and as they feel comfortable. We also made modifications to employee travel beginning inMarch 2020 , and we continue to hold most of the marketing events virtually. 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. As ofOctober 31, 2021 , we expect to recognize approximately$2.3 billion of share-based compensation expense over a weighted-average period of approximately 2.8 years, excluding additional share-based compensation expense related to any future grants of share-based awards. Share-based compensation expense is generally recognized on a straight-line basis over the requisite service periods of the awards. Research and Development Research and development expense consists primarily of personnel costs. Research and development expense also includes prototype-related expenses and allocated shared costs. We expect research and development expense to increase in absolute dollars as we continue to invest in our future products and services, although our research and development expense may fluctuate as a percentage of total revenue. Three Months Ended October 31, 2021 2020 Change Amount Amount Amount % (dollars in millions) Research and development$ 339.5 $ 237.4 $ 102.1 43.0 % Number of employees at period end 2,745 1,943 802 41.3 % Research and development expense increased for the three months endedOctober 31, 2021 compared to the same period in 2020 primarily due to personnel costs, which grew$78.9 million to$266.9 million . The increase in personnel costs was primarily due to headcount growth. The remaining increase was primarily driven by an increase in allocated shared costs. Sales and Marketing Sales and marketing expense consists primarily of personnel costs, including commission expense. Sales and marketing expense also includes costs for market development programs, promotional and other marketing costs, professional services, and allocated shared costs. We continue to strategically invest in headcount and have substantially grown our international sales presence. We expect sales and marketing expense to continue to increase in absolute dollars as we increase the size of our sales and marketing organizations to grow customer base, increase touch points with end-customers and expand our global presence, although our sales and marketing expense may fluctuate as a percentage of total revenue. Three Months Ended October 31, 2021 2020 Change Amount Amount Amount % (dollars in millions) Sales and marketing$ 505.9 $ 388.6 $ 117.3 30.2 % Number of employees at period end 4,664 3,855 809 21.0 % Sales and marketing expense increased for the three months endedOctober 31, 2021 compared to the same period in 2020, primarily due to personnel costs, which grew$87.7 million to$381.0 million for the three months endedOctober 31, 2021 compared to the same period in 2020. The increase in personnel costs was largely due to headcount growth. The remaining increase was primarily driven by an increase in costs associated with go-to-market initiatives, including advertising. - 29 - -------------------------------------------------------------------------------- Table of Content General and Administrative General and administrative expense consists primarily of personnel costs and allocated shared costs for our executive, finance, human resources, and legal organizations, and professional services costs, which consist primarily of legal, auditing, accounting, and other consulting costs. General and administrative expense also includes certain non-recurring general expenses. We expect general and administrative expense to increase in absolute dollars due to additional costs associated with accounting, compliance, and insurance, although our general and administrative expense may fluctuate as a percentage of total revenue. Three Months Ended October 31, 2021 2020 Change Amount Amount Amount % (dollars in millions) General and administrative$ 104.1 $ 86.7 $ 17.4 20.1 % Number of employees at period end 1,238 895 343 38.3 % General and administrative expense increased for the three months endedOctober 31, 2021 compared to the same period in 2020 primarily due to personnel costs, which increased$13.9 million to$67.4 million . The increase in personnel costs was primarily due to headcount growth, partially offset by lower share-based compensation related to accelerated vesting of equity awards in connection with acquisitions during the three months endedOctober 31, 2021 . Interest Expense Interest expense primarily consists of interest expense 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"). Three Months Ended October 31, 2021 2020 Change Amount Amount Amount % (dollars in millions) Interest expense $ 6.9$ 40.2 $ (33.3) (82.8) % Interest expense decreased for the three months endedOctober 31, 2021 compared to the same period in 2020 primarily because we no longer recognize interest expense for amortization of the debt discount as a result of the adoption of new debt guidance. Refer to Note 1. Description of Business and Summary of Significant Accounting Policies and Note 9. Debt in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information. Other Income (Expense), Net Other income (expense), 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, 2021 2020 Change Amount Amount Amount % (dollars in millions) Other income (expense), net$ (1.6) $ 2.4 $ (4.0) (166.7) % The change in other income (expense), net for the three months endedOctober 31, 2021 compared to the same period in 2020 was primarily due to foreign currency remeasurement and transaction losses for the three months endedOctober 31, 2021 compared to foreign currency remeasurement and transaction gains for the same period in 2020. - 30 - -------------------------------------------------------------------------------- Table of Content 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 prior 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. Three Months Ended October 31, Change 2021 2020 Amount % (dollars in millions) Provision for income taxes$ 12.4 $ 9.9 $ 2.5 25.3 % Effective tax rate (13.6) % (12.0) %
Our income taxes for the three months ended
October 31, 2021 July 31, 2021
(in millions)
Working capital(1) $ (2,305.3) $ (469.4)
Cash, cash equivalents, and investments:
Cash and cash equivalents $ 2,272.9 $ 1,874.2
Investments 2,087.3
1,915.2
Total cash, cash equivalents, and investments $ 4,360.2 $
3,789.4
______________
(1)Current liabilities included net carrying amounts of convertible senior notes of$3.7 billion and$1.6 billion as ofOctober 31, 2021 andJuly 31, 2021 , respectively. Refer to Note 9. Debt in Part I, Item 1 of this Quarterly Report on Form 10-Q for information on the Notes. As ofOctober 31, 2021 , our total cash, cash equivalents, and investments of$4.4 billion were held for general corporate purposes, of which approximately$938.4 million was held outside ofthe United States . As ofOctober 31, 2021 , 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. Debt 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. The sale price condition for the Notes was met during the fiscal quarter endedOctober 31, 2021 , and as a result, holders may convert their Notes at any time during the fiscal quarter endingJanuary 31, 2022 . If all of the holders of the Notes converted their Notes during this period, we would be obligated to settle the$3.7 billion principal amount of the Notes in cash. We believe that our cash provided by operating activities, our existing cash, cash equivalents and investments, and existing sources of and access to financing will be sufficient to meet our anticipated cash needs should the holders choose to convert their Notes during the fiscal quarter endingJanuary 31, 2022 . As ofOctober 31, 2021 , substantially all of our Notes remained outstanding. Refer to Note 9. Debt in Part I, Item 1 of this Quarterly Report on Form 10-Q for more 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, 2021 , there were no amounts outstanding and we were in compliance with all covenants under the Credit Agreement. Refer to Note 9. Debt in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information on the Credit Agreement. - 31 - -------------------------------------------------------------------------------- Table of Content Capital Return InFebruary 2019 , our board of directors authorized a$1.0 billion share repurchase program. InDecember 2020 andAugust 2021 , our board of directors authorized an additional$700.0 million and$676.1 million increase, respectively, bringing the total authorization under this share repurchase program to$2.4 billion . Repurchases will be funded from available working capital and may be made at management's discretion from time to time. The expiration date of this repurchase authorization was extended toDecember 31, 2022 , and our repurchase program may be suspended or discontinued at any time. As ofOctober 31, 2021 ,$1.0 billion remained available for future share repurchases under this repurchase program. Refer to Note 11. Stockholders' Equity in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information on this repurchase program. Leases and Other Material Cash Requirements We have entered into various non-cancelable operating leases primarily for our facilities with original lease periods expiring through the year endingJuly 31, 2028 , with the most significant leases relating to corporate headquarters inSanta Clara, California . As ofOctober 31, 2021 , we have total of$363.9 million operating lease obligations recorded on our condensed consolidated balance sheet. During the three months endedOctober 31, 2021 , we entered into an agreement to purchase 4.6 acres of land adjacent to our headquarters for$38.9 million in cash. If consummated, the transaction would be expected to close during our fiscal quarter endingJanuary 31, 2022 . As ofOctober 31, 2021 , our purchase obligations including commitments of products and components with our manufacturing partners and component suppliers, as well as minimum or fixed purchase commitments for our use of certain cloud and other services with third-party providers, totaled$1.9 billion . Refer to Note 10. Commitments and Contingencies in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information on these commitments, Cash Flows The following table summarizes our cash flows for the three months endedOctober 31, 2021 and 2020: Three Months Ended October 31, 2021 2020 (in millions) Net cash provided by operating activities$ 588.9 $ 534.9 Net cash used in investing activities (229.9) (886.2) Net cash provided by (used in) financing activities 38.7 (464.5)
Net increase (decrease) in cash, cash equivalents, and restricted cash
$
397.7
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 Quarterly Report on 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 repayment obligations associated with our Notes, 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. Our largest source of cash provided by our operations is receipts from our product revenue and subscription and support revenue. Cash provided by operating activities during the three months endedOctober 31, 2021 was$588.9 million , an increase of$54.0 million compared to the same period in 2020. 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, 2021 , partially offset by higher cash expenditure to support our business growth. - 32 -
--------------------------------------------------------------------------------
Table of Content 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, 2021 was$229.9 million , a decrease of$656.3 million compared to the same period in 2020. The decrease was primarily due to lower purchases of investments and a decrease in net cash payments for business acquisitions during the three months endedOctober 31, 2021 . Financing Activities Our financing activities have consisted of cash used to repurchase shares of our common stock, payments for tax withholding obligations of certain employees related to the net share settlement of equity awards, and proceeds from sales of shares through employee equity incentive plans. Cash provided by financing activities during the three months endedOctober 31, 2021 was$38.7 million , a change of$503.2 million compared to cash used in financing activities of$464.5 million during the same period in 2020. The change was primarily due to us not repurchasing our common stock during the three months endedOctober 31, 2021 . Critical Accounting Estimates Our condensed consolidated financial statements have been prepared in accordance with 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. We evaluate our estimates and assumptions on an ongoing basis. Actual results could differ materially from those estimates due to risks and uncertainties, including uncertainty in the economic environment due to the global impact of COVID-19. 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, 2021 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, except for estimates related to convertible senior notes, which we no longer consider to be a critical accounting policy, due to our adoption of the new debt guidance. Refer to Note 1. Description of Business and Summary of Significant Accounting Policies in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information on our adoption of the new accounting guidance. Recent Accounting Pronouncements For a discussion of the recent accounting pronouncements, refer to Note 1. Description of Business and Summary of Significant Accounting Policies in Part I, Item 1 of this Quarterly Report on Form 10-Q.
© Edgar Online, source
