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: our expectation of achieving and maintaining profitability underU.S. GAAP; the effects of supply chain challenges 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 theSecurities 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
•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, organizations, service providers, and government
entities to protect themselves against today's most sophisticated cyber threats.
Our cybersecurity platforms and services help secure enterprise users, networks,
clouds, and endpoints by delivering comprehensive cybersecurity backed by
industry-leading artificial intelligence and automation. We are a leading
provider of zero trust solutions that start with the next-generation of zero
trust network access to secure remote workforces and extend into securing all
users, applications and infrastructure with zero trust principles. Our security
solutions are designed to reduce customers' total cost of ownership by improving
operational efficiency and eliminating the need for siloed point products. Our
company focuses on delivering value in five fundamental areas:
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Network Security:
•Our network security platform, which includes 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, has been a
leader in the industry for ten consecutive years. Our network security platform
also includes our Cloud-Delivered Security Services, such as Threat Prevention,
Advanced Threat Prevention, WildFire®, Advanced URL Filtering, DNS Security, IoT
Security, GlobalProtect™, SD-WAN, Enterprise Data Loss Prevention ("Enterprise
DLP"), AIOps, SaaS Security API and SaaS Security Inline. Through these add-on
security services, our customers are able to secure their applications, users,
devices, and content across our network security platform as well as the Prisma®
and Cortex® product lines. Panorama™, our network security management solution,
available as hardware or virtual machine, can centrally manage our network
security platform irrespective of form factor, location, or scale.
Secure Access Service Edge:
•Prisma Access is our next-generation Zero Trust Network Access ("ZTNA")
platform that provides secure network access for all employees with unified
policy management and continuous threat inspection. We have recently introduced
ZTNA 2.0, which addresses major shortcomings in the first-generation ZTNA
products in the industry (which we refer to as ZTNA 1.0). Prisma Access delivers
granular least-privileged access along with continuous trust verification and
security inspection and protects security for all applications and data across
the enterprise infrastructure. Prisma Access, when combined with Prisma SD-WAN,
provides a comprehensive single-vendor Secure Access Service Edge ("SASE")
offering that is used to secure remote workforces and enable the cloud-delivered
branch.
Cloud Security:
•We enable cloud native security through our Prisma Cloud platform. As a
comprehensive Cloud Native Application Protection Platform ("CNAPP"), Prisma
Cloud secures hybrid and multi-cloud environments for applications, data, and
the entire cloud-native technology stack across the full development lifecycle;
from code to runtime. For inline network security on multi and hybrid-cloud
environments, we also offer our VM-Series and CN-Series Firewall offerings.
Security Operations:
•We deliver 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 solution Cortex XDR® to
prevent, detect, and respond to complex cybersecurity attacks, Cortex XSOAR® for
security orchestration, automation, and response ("SOAR"), and Cortex Xpanse®
for attack surface management ("ASM"). In October 2022 , we released Cortex
XSIAM®, our autonomous Security Operations Services ("SOC") platform that
delivers unified security operations functions including automated threat
detection and response, user behavioral analytics, threat intelligence
management, orchestration and workflow, endpoint protection, and cloud detection
and response. These products are delivered as software or SaaS subscriptions.
•We enable 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, proactive cybersecurity assessment services, and managed detection and response and threat hunting services. For the first quarter of fiscal 2023 and 2022, total revenue was$1.6 billion and$1.2 billion , respectively, representing year-over-year growth of 25.3%. Our growth reflects the increased adoption of our portfolio, which consists of product, subscriptions, and support. We believe our portfolio will enable us to benefit from recurring revenues and new revenues as we continue to grow our end-customer base. As ofOctober 31, 2022 , we had end-customers in over 180 countries. Our end-customers represent a broad range of industries, including education, energy, financial services, government entities, healthcare, Internet and media, manufacturing, public sector, and telecommunications, and include almost all of the Fortune 100 companies and a majority of the Global 2000 companies. 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 grew to$330.0 million , or 21.1% of total revenue, for the first quarter of fiscal 2023, representing year-over-year growth of 11.7%. Product revenue is primarily 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. - 21 -
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Our subscription and support revenue grew to$1.2 billion , or 78.9% of total revenue, for the first quarter of fiscal 2023, representing year-over-year growth of 29.6%. Our subscriptions provide our end-customers with near real-time access to the latest antivirus, intrusion prevention, web filtering, modern malware prevention, data loss prevention, and cloud access security broker capabilities across the network, endpoints, and the cloud. When end-customers purchase our physical, virtual, or container firewall appliances, or certain cloud offerings, they typically purchase support in order to receive ongoing security updates, upgrades, bug fixes, and repairs. In addition to the subscriptions purchased with these appliances, end-customers may also purchase other subscriptions on a per-user, per-endpoint, or capacity-based basis. We also offer professional services, including incident response, risk management, and digital forensic services.
We continue to invest in innovation as we evolve and further extend the
capabilities of our portfolio, as we believe that innovation and timely
development of new features and products are essential to meeting the needs of
our end-customers and improving our competitive position. For example, in
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 Macroeconomic Developments and Other Factors on Our Business
Our overall performance depends in part on worldwide economic and geopolitical
conditions and their impact on customer behavior. Worsening economic conditions,
including inflation, higher interest rates, slower growth, fluctuations in
foreign exchange rates, and other changes in economic conditions, may adversely
affect our results of operations and financial performance.
We continue to monitor and respond to developments relating to COVID-19, which
has resulted in significant global, social, and business disruption. The extent
of the continued 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
the "Risk Factors" section in Part II, Item 1A of this Quarterly Report on
Form 10-Q. The global supply chain and the semiconductor industry continue to
experience significant challenges. We have experienced supply chain challenges,
including chip and component shortages, which have, in certain cases, caused
delays for us in acquiring chips, components and inventory and have resulted in
increased costs as compared to historic levels. While we incurred increased
costs and experienced increased lead time for certain product deliveries to our
end-customers, we continue to work to minimize the effects from supply chain
challenges.
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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 income (loss) and margin
below under "Results of Operations."
October 31, 2022 July 31, 2022
(in millions)
Total deferred revenue $ 7,179.6 $ 6,994.0
Cash, cash equivalents, and investments $ 5,898.4 $ 4,686.4
Three Months Ended
October 31,
2022 2021
(dollars in millions)
Total revenue $ 1,563.4 $ 1,247.4
Total revenue year-over-year percentage increase 25.3 % 31.9 %
Gross margin 70.5 % 69.5 %
Operating income (loss) $ 15.2 $ (82.7)
Operating margin 1.0 % (6.6) %
Billings $ 1,749.0 $ 1,381.6
Billings year-over-year percentage increase 26.6 % 27.6 %
Cash flow provided by operating activities $ 1,236.7 $ 588.9
Free cash flow (non-GAAP) $ 1,197.1 $ 554.3
•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,
2022 2021
(in millions)
Billings:
Total revenue $ 1,563.4 $ 1,247.4
Add: change in total deferred revenue, net of acquired
deferred revenue 185.6 134.2
Billings $ 1,749.0 $ 1,381.6
• 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.
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• 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 October 31,
2022 2021
(in millions)
Free cash flow (non-GAAP):
Net cash provided by operating activities $ 1,236.7 $ 588.9
Less: purchases of property, equipment, and other assets 39.6 34.6
Free cash flow (non-GAAP) $ 1,197.1 $ 554.3
Net cash used in investing activities $ (1,319.8) $ (229.9)
Net cash provided by financing activities $ 31.1 $ 38.7
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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 October 31,
2022 2021
Amount % of Revenue Amount % of Revenue
(dollars in millions)
Revenue:
Product $ 330.0 21.1 % $ 295.5 23.7 %
Subscription and support 1,233.4 78.9 % 951.9 76.3 %
Total revenue 1,563.4 100.0 % 1,247.4 100.0 %
Cost of revenue:
Product 120.1 7.7 % 88.9 7.1 %
Subscription and support 341.8 21.8 % 291.7 23.4 %
Total cost of revenue(1) 461.9 29.5 % 380.6 30.5 %
Total gross profit 1,101.5 70.5 % 866.8 69.5 %
Operating expenses:
Research and development 371.8 23.8 % 339.5 27.2 %
Sales and marketing 615.0 39.3 % 505.9 40.6 %
General and administrative 99.5 6.4 % 104.1 8.3 %
Total operating expenses(1) 1,086.3 69.5 % 949.5 76.1 %
Operating income (loss) 15.2 1.0 % (82.7) (6.6) %
Interest expense (6.8) (0.4) % (6.9) (0.6) %
Other income (expense), net 26.0 1.6 % (1.6) (0.1) %
Income (loss) before income taxes 34.4 2.2 % (91.2) (7.3) %
Provision for income taxes 14.4 0.9 % 12.4 1.0 %
Net income (loss) $ 20.0 1.3 % $ (103.6) (8.3) %
______________(1)Includes share-based compensation as follows:
Three Months Ended October 31,
2022 2021
(in millions)
Cost of product revenue $ 2.4 $ 2.3
Cost of subscription and support revenue 28.8 26.7
Research and development 118.0 125.6
Sales and marketing 87.4 73.3
General and administrative 29.4 32.4
Total share-based compensation $ 266.0 $ 260.3
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 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,
2022 2021 Change
Amount Amount Amount %
(dollars in millions)
Product $ 330.0 $ 295.5 $ 34.5 11.7 %
Product revenue for the three months ended October 31, 2022 increased compared
to the same period in 2021, primarily due to increased demand for our new and
existing 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,
2022 2021 Change
Amount Amount Amount %
(dollars in millions)
Subscription $ 764.0 $ 578.8 $ 185.2 32.0 %
Support 469.4 373.1 96.3 25.8 %
Total subscription and support $ 1,233.4 $ 951.9 $ 281.5 29.6 %
Subscription and support revenue increased for the three months ended October
31, 2022 compared to the same period in 2021 due to increased demand for our
subscription and support offerings from our end-customers. The mix between
subscription revenue and support revenue will fluctuate over time, depending on
the introduction of new subscription offerings, renewals of support services,
and our ability to increase sales to new and existing end-customers.
Revenue by
Three Months Ended October 31,
2022 2021 Change
Amount Amount Amount %
(dollars in millions)
Americas $ 1,070.7 $ 866.7 $ 204.0 23.5 %
EMEA 307.9 233.8 74.1 31.7 %
APAC 184.8 146.9 37.9 25.8 %
Total revenue $ 1,563.4 $ 1,247.4 $ 316.0 25.3 %
With respect to geographic theaters, the increase in revenue for the three
months ended October 31, 2022 compared to the same periods in 2021 was driven
primarily by the Americas , due to its larger sales force and a larger percentage
of our customers 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, 2022 compared
to the same periods in 2021 due to continued investment in our global sales
force to support our growth and increase our customer base in the regions.
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 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 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,
2022 2021 Change
Amount Amount Amount %
(dollars in millions)
Cost of product revenue $ 120.1 $ 88.9 $ 31.2 35.1 %
Number of employees at period end 154 130 24 18.5 %
Cost of product revenue increased for the three months ended October 31, 2022
compared to the same period in 2021 due to an increase in product volume and
higher costs related to our product offerings, primarily driven by supply chain
challenges.
Cost of Subscription and Support Revenue
Cost of subscription and support revenue includes personnel costs for our global
customer support and technical operations organizations, customer support and
repair costs, third-party professional services costs, data center and cloud
hosting service costs, amortization of acquired intangible assets and
capitalized software development costs, and shared costs. 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,
2022 2021 Change
Amount Amount Amount %
(dollars in millions)
Cost of subscription and support revenue $ 341.8 $ 291.7 $ 50.1 17.2 %
Number of employees at period end 2,616 2,321 295 12.7 %
Cost of subscription and support revenue increased for the three months ended
October 31, 2022 compared to the same period in 2021, primarily due to increased
costs to support the growth of our subscription and support offerings. Personnel
costs grew $19.8 million to $142.6 million , primarily due to headcount growth.
The remaining increase was primarily due to increased cloud hosting service
costs to support our cloud-based subscription offerings and increased shared
costs.
Gross Margin
Gross margin has been and will continue to be affected by a variety of factors,
including the introduction of new products, manufacturing costs, the average
sales price of our products, cloud hosting service costs, personnel costs, the
mix of products sold, and the mix of revenue between product and subscription
and support offerings. Our virtual and 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 October 31,
2022 2021
Amount Gross Margin Amount Gross Margin
(dollars in millions)
Product $ 209.9 63.6 % $ 206.6 69.9 %
Subscription and support 891.6 72.3 % 660.2 69.4 %
Total gross profit $ 1,101.5 70.5 % $ 866.8 69.5 %
Product gross margin decreased for the three months ended
Subscription and support gross margin increased for the three months ended
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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. 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, 2022 , we expect to recognize approximately$2.0 billion of share-based compensation expense over a weighted-average period of approximately 2.5 years, excluding additional share-based compensation expense related to any future grants of share-based awards. Share-based compensation expense is generally recognized on a straight-line basis over the requisite service periods of the awards.
Research and Development
Research and development expense consists primarily of personnel costs. Research
and development expense also includes prototype-related expenses and 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,
2022 2021 Change
Amount Amount Amount %
(dollars in millions)
Research and development $ 371.8 $ 339.5 $ 32.3 9.5 %
Number of employees at period end 3,532 2,745 787 28.7 %
Research and development expense increased for the three months ended October
31, 2022 compared to the same period in 2021, primarily due to an increase in
personnel costs, which grew $23.2 million to $290.1 million , largely due to
headcount growth. The remaining increase in research and development expense was
further driven by increased 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 shared costs. We continue to strategically invest in headcount and
have grown our 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 our customer base, increase touch points with
end-customers, and expand our global presence, although our sales and marketing
expense may fluctuate as a percentage of total revenue.
Three Months Ended
October 31,
2022 2021 Change
Amount Amount Amount %
(dollars in millions)
Sales and marketing $ 615.0 $ 505.9 $ 109.1 21.6 %
Number of employees at period end 5,616 4,664 952 20.4 %
Sales and marketing expense increased for the three months ended October 31,
2022 compared to the same period in 2021, primarily due to an increase in
personnel costs, which grew $75.1 million to $456.1 million , largely due to
headcount growth and increased travel and entertainment expenses. The increase
in sales and marketing expense was further driven by increased costs associated
with in-person events and go-to-market initiatives, and increased shared costs.
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General and Administrative
General and administrative expense consists primarily of personnel costs and
shared costs for our executive, finance, human resources, information
technology, and legal organizations, and professional services costs, which
consist primarily of legal, auditing, accounting, and other consulting costs. We
expect general and administrative expense to increase in absolute dollars over
time as we increase the size of our general and administrative organizations and
incur additional costs to support our business growth, although our general and
administrative expense may fluctuate as a percentage of total revenue.
Three Months Ended
October 31,
2022 2021 Change
Amount Amount Amount %
(dollars in millions)
General and administrative $ 99.5 $ 104.1 $ (4.6) (4.4) %
Number of employees at period end 1,595 1,238 357 28.8 %
General and administrative expense decreased for the three months ended October
31, 2022 compared to the same period in 2021 primarily due to a decrease in
professional services expense and acquisition-related costs, partially offset by
a modest increase in personnel costs.
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,
2022 2021 Change
Amount Amount Amount %
(dollars in millions)
Interest expense
Interest expense was relatively flat for the three months ended
Other Income (Expense), Net
Other income (expense), net includes interest income earned on our cash, cash equivalents, and investments, and gains and losses from foreign currency remeasurement and foreign currency transactions.
Three Months Ended
2022 2021 Change
Amount Amount Amount %
(dollars in millions)
Other income (expense), net $ 26.0 $ (1.6) $ 27.6 *
______________
* Not meaningful
The increase in other income (expense), net for the three months ended October
31, 2022 compared to the same period in 2021 was primarily due to higher
interest income earned on our cash, cash equivalent, and investment balances as
a result of higher interest rates for the three months ended October 31, 2022
compared to 2021, and increased foreign currency exchange gains, partially
offset by increased losses from our investments and non-designated derivative
instruments.
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Provision for Income Taxes
Provision for income taxes consists primarily ofU.S. taxes driven by capitalization of research and development expenditures, foreign income taxes, 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. Our valuation allowance has caused, and may continue to cause, disproportionate relationships between our overall effective tax rate and other jurisdictional measures. Three Months Ended October 31, 2022 2021 Change Amount Amount Amount % (dollars in millions) Provision for income taxes$ 14.4 $ 12.4 $ 2.0 16.1 % Effective tax rate 41.9 % (13.6) % Our provision for income taxes for the three months endedOctober 31, 2022 was primarily due toU.S. taxes driven by capitalization of research and development expenditures, withholding taxes, and foreign income taxes. Our income taxes for the three months endedOctober 31, 2021 was primarily due to income taxes in profitable foreign jurisdictions and withholding taxes. Our effective tax rate varied for the three months endedOctober 31, 2022 compared to the same period in 2021, primarily due to an increase in current taxes with no offsetting deferred benefit as a result of our valuation allowance. Refer to Note 12. Income Taxes in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information.
Liquidity and Capital Resources
October 31, 2022 July 31, 2022
(in millions)
Working capital(1) $ (2,461.6) $ (1,891.4)
Cash, cash equivalents, and investments:
Cash and cash equivalents $ 2,067.2 $ 2,118.5
Investments 3,831.2
2,567.9
Total cash, cash equivalents, and investments $ 5,898.4 $
4,686.4 ______________ (1)Current liabilities included net carrying amounts of convertible senior notes of$3.7 billion as of bothOctober 31, 2022 andJuly 31, 2022 . Refer to Note 8. Debt in Part I, Item 1 of this Quarterly Report on Form 10-Q for information on the Notes. As ofOctober 31, 2022 , our total cash, cash equivalents, and investments of$5.9 billion were held for general corporate purposes. As ofOctober 31, 2022 , 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, 2022 , and as a result, holders may convert their Notes at any time during the fiscal quarter endingJanuary 31, 2023 . 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, 2023 or hold the 2023 Notes until maturity onJuly 1, 2023 . As ofOctober 31, 2022 , substantially all of our Notes remained outstanding. Refer to Note 8. 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, 2022 , there were no amounts outstanding and we were in compliance - 30 -
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with all covenants under the Credit Agreement. Refer to Note 8. Debt in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information on the Credit Agreement. Capital Return InFebruary 2019 , our board of directors authorized a$1.0 billion share repurchase program. InDecember 2020 ,August 2021 , andAugust 2022 , our board of directors authorized additional$700.0 million ,$676.1 million , and$915.0 million increases to this share repurchase program, respectively, bringing the total authorization under this share repurchase program to$3.3 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, 2023 , and our repurchase program may be suspended or discontinued at any time. As ofOctober 31, 2022 ,$1.0 billion remained available for future share repurchases under this repurchase program. Refer to Note 10. 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, 2032 , with the most significant leases relating to our corporate headquarters inSanta Clara, California . As ofOctober 31, 2022 , we have total operating lease obligations of$346.1 million recorded on our condensed consolidated balance sheet. As ofOctober 31, 2022 , our commitments to purchase products, components, cloud and other services totaled$2.3 billion . Refer to Note 9. Commitments and Contingencies in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information on these commitments.
Cash Flows
The following table summarizes our cash flows for the three months endedOctober 31, 2022 and 2021: Three Months Ended October 31, 2022 2021 (in millions) Net cash provided by operating activities$ 1,236.7 $ 588.9 Net cash used in investing activities (1,319.8) (229.9) Net cash provided by financing activities 31.1 38.7
Net increase (decrease) in cash, cash equivalents, and restricted cash
$
(52.0)
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 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 income (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, 2022 was$1.2 billion , an increase of$647.8 million compared to the same period in 2021. The increase was primarily due to growth of our business as reflected by increases in collections during the three months endedOctober 31, 2022 , partially offset by higher cash expenditure to support our business growth. - 31 -
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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, 2022 was$1.3 billion , a increase of$1.1 billion compared to the same period in 2021. The increase was primarily due to an increase in purchases of investments, offset by an increase in proceeds from sales and maturities of investments and a decrease in net cash payments for business acquisitions during the three months endedOctober 31, 2022 . Financing Activities Our financing activities have consisted of cash used to repurchase shares of our common stock, proceeds from sales of shares through employee equity incentive plans, and payments for tax withholding obligations of certain employees related to the net share settlement of equity awards. Cash provided by financing activities during the three months endedOctober 31, 2022 was$31.1 million , a decrease of$7.6 million compared to the same period in 2021. The decrease was primarily due to payments made for share repurchases of our common stock that were not settled as ofJuly 31, 2022 , offset by an increase in proceeds from the sale of shares through employee equity incentive plans and a decrease in payments for tax withholding obligations of certain employees related to the net share settlement of equity awards during the three months endedOctober 31, 2022 .
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 current economic environment. To the extent that there are material differences between these estimates and our actual results, our future consolidated 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, 2022 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.
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