PURE STORAGE, INC. The following discussion and analysis of our financial condition, results of operations and cash flows should be read in conjunction with the (1) unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q, and (2) audited consolidated financial statements and notes thereto and management's discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the fiscal year endedJanuary 31, 2021 . This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements are often identified by the use of words such as "may," "will," "expect," "believe," "anticipate," "intend," "could," "estimate," or "continue," and similar expressions or variations. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, impacts on our business and general economic conditions due to the COVID-19 pandemic, those identified herein, and those discussed in the section titled "Risk Factors", set forth in Part II, Item 1A of this Form 10-Q and in our otherSEC filings. We disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. Our fiscal year end is the first Sunday afterJanuary 30 . Overview Data is foundational to our customers' digital transformation and we are focused on delivering innovative and disruptive technology and data storage solutions that enable customers to maximize the value of their data. In our first decade, we completely changed customers' expectations of what they should see from storage arrays and storage vendors, making flash storage widely available to enterprise organizations and revolutionizing the customer experience with our Evergreen Storage subscription model that radically simplified and reduced total cost of storage ownership. Today, we are changing the expectations for data and storage management by providing customers a cloud experience with flexible on-demand data services consumption through delivery of a Modern Data Experience that empowers organizations to run their operations as a true, automated, storage as-a-service model seamlessly across multiple clouds. Our solutions support a wide range of structured and unstructured data, at scale and across any data workloads on-premise, in the cloud, or hybrid environments and include mission-critical production, test/development, analytics, disaster recovery, and backup/recovery. Our Modern Data Experience vision begins with our portfolio of products and subscription services that is transforming and modernizing storage operations for our customers. Our Modern Data Experience vision extends to an innovative and highly-integrated data platform of products and subscription services, consisting of Cloud Data Infrastructure (integrated hardware and software appliances which run in on-premise data centers), Cloud Data Services (software and container data services, which run natively in major public cloud infrastructures), Cloud Data Management (software hosted data management services to manage our entire platform). The Modern Data Experience is based on four key pillars: Fast Matters, Cloud Everywhere, Simple is Smart, and Subscription to Innovation. Fast Matters - Speed is critical to customer experience and engagement, and therefore, we design our high-performance solutions to allow applications, analytics, and development to move and execute quickly in order for our customers to make impactful decisions. We redefine fast by delivering low-latency, high bandwidth, and maximum density technologies. For example, accelerating core applications enables rapid response and deployment which reduces costs while increasing enterprise resilience. Cloud Everywhere - Providing our customers the opportunity to transform their data management to a full or hybrid cloud model. This model reduces costs and adds agility through an API-defined platform, a consistent on-premise and public cloud experience, seamless data mobility and comprehensive data protection. This multi-cloud environment delivers increased flexibility, fast global recovery, and minimized application downtime through automated response. 24 -------------------------------------------------------------------------------- Table of Contents Simple is Smart - From day one, our storage solutions are designed to be simple, allowing our customers to reduce time spent managing the storage platform including issue resolution. Our storage dashboards present real-time and intuitive platform analytics; meanwhile, AI-based optimization proactively analyzes future workloads and global network issues to limit unforeseen infrastructure problems. Subscription to Innovation - Delivering a subscription with low total cost of ownership, eliminating the need for forklift hardware replacements, and providing customizable capacity and mobility, whether on-premise, in the cloud or hybrid cloud. Coronavirus (COVID-19) We continue to actively monitor, evaluate and respond to developments relating to the Coronavirus (COVID-19) pandemic. The global pandemic has resulted in significant global social and business disruption and economic contraction. Our business and financial results strengthened during the first quarter of fiscal 2022 during continued COVID-19 restrictions primarily due to improved operating leverage, our customers' increasing confidence in our brand and renewed strength in our commercial business. The global economic contraction due to COVID-19 continues to create uncertainty and the full extent and duration of the impact on our operational and financial performance remains unpredictable. As such, we are not able to estimate the ultimate impact and our past results may not be indicative of future performance. To the extent the pandemic continues to disrupt economic activity globally we, like other businesses, would not be immune at it could adversely affect our business, operations and financial results. See "Risk Factors" in Part II, Item 1A. for additional details. Components of Results of Operations Revenue We derive revenue primarily from the sale of our Cloud Data Infrastructure, including FlashArray and FlashBlade products and subscription services which includes our Evergreen Storage subscription, our unified subscription that includes Pure as-a-Service and Cloud Block Store . Subscription services also include our professional services offerings such as installation and implementation consulting services. Provided that all other revenue recognition criteria have been met, we typically recognize product revenue upon transfer of control to our customers and the satisfaction of our performance obligations. Products are typically shipped directly by us to customers, and our channel partners do not stock our inventory. We expect our product revenue may vary from period to period based on, among other things, the timing and size of orders and delivery of products and the impact of significant transactions. We generally recognize revenue from subscription services ratably over the contractual service period and professional services as delivered. We expect our subscription services revenue to increase and continue to grow faster than our product revenue as more customers choose to consume our storage solutions as a service and our existing subscription customers renew and expand their consumption and service levels. Cost of Revenue Cost of product revenue primarily consists of costs paid to our third-party contract manufacturers, which includes the costs of our raw material components, and personnel costs associated with our supply chain operations. Personnel costs consist of salaries, bonuses and stock-based compensation expense. Our cost of product revenue also includes allocated overhead costs, inventory write-offs, amortization of intangible assets pertaining to developed technology, and freight. Allocated overhead costs consist of certain employee benefits and facilities-related costs. We expect our cost of product revenue to increase in absolute dollars as our product revenue increases. 25 -------------------------------------------------------------------------------- Table of Contents Cost of subscription services revenue primarily consists of personnel costs associated with delivering our subscription and professional services, part replacements, allocated overhead costs and depreciation of infrastructure used to deliver our subscription services. We expect our cost of subscription services revenue to increase in absolute dollars, as our subscription services revenue increases. Operating Expenses Our operating expenses consist of research and development, sales and marketing, and general and administrative expenses. Salaries and personnel-related costs, including stock-based compensation expense, are the most significant component of each category of operating expenses. Operating expenses also include allocated overhead costs for employee benefits and facilities-related costs. Research and Development. Research and development expenses consist primarily of employee compensation and related expenses, prototype expenses, depreciation associated with assets acquired for research and development, third-party engineering and contractor support costs, as well as allocated overhead. We expect our research and development expense to increase in absolute dollars and it may decrease as a percentage of revenue. Sales and Marketing. Sales and marketing expenses consist primarily of employee compensation and related expenses, sales commissions, marketing programs, travel and entertainment expenses as well as allocated overhead. Marketing programs consist of advertising, events, corporate communications and brand-building activities. We expect our sales and marketing expense to increase in absolute dollars and it may decrease as a percentage of revenue as we continue to realize efficiencies from scaling our business. General and Administrative. General and administrative expenses consist primarily of employee compensation and related expenses for administrative functions including finance, legal, human resources, IT and fees for third-party professional services as well as amortization of intangible assets pertaining to defensive technology patents and allocated overhead. We expect our general and administrative expenses to increase in absolute dollars and it may decrease as a percentage of revenue. Other Income (Expense), Net Other income (expense), net consists primarily of interest income related to cash, cash equivalents and marketable securities, interest expense related to our debt and gains (losses) from foreign currency transactions. Provision for Income Taxes Provision for income taxes consists primarily of income taxes in certain foreign jurisdictions in which we conduct business and state income taxes inthe United States . We have recorded noU.S. federal current income tax and provided a full valuation allowance forU.S. deferred tax assets, which includes net operating loss carryforwards and tax credits related primarily to research and development. We expect to maintain this full valuation allowance for the foreseeable future as it is more likely than not that the assets will not be realized based on our history of losses. 26 -------------------------------------------------------------------------------- Table of Contents Results of Operations The following tables set forth our results of operations for the periods presented in dollars and as a percentage of total revenue (dollars in thousands, unaudited): Revenue First Quarter of Fiscal Change 2021 2022 $ % (dollars in thousands, unaudited) Product revenue$ 246,939 $ 249,888 $ 2,949 1 % Subscription services revenue 120,180 162,819 42,639 35 % Total revenue$ 367,119 $ 412,707 $ 45,588 12 % Total revenue increased by$45.6 million , or 12%, during the first quarter of fiscal 2022 compared to the first quarter of fiscal 2021. The increase in total revenue during the first quarter of fiscal 2022 compared to the first quarter of fiscal 2021 was largely driven by increases in sales of both our Evergreen Storage subscription services, and our unified subscription that includes Pure as-a-Service and Cloud Block Store . Sales of FlashArray//C, renewed strength in acquiring new commercial customers, and repeat sales to existing customers contributed to the growth of product revenue during the first quarter of fiscal 2022. During the first quarter of fiscal 2022, total revenue inthe United States grew 12% from$264.1 million to$295.1 million year over year and total rest of the world revenue grew 14% from$103.0 million to$117.6 million year over year. For further details on revenue by geography, see Note 15 of Part I, Item 1 of this Quarterly Report on Form 10-Q. Deferred Revenue Deferred revenue primarily consists of amounts that have been invoiced but have not yet been recognized as revenue including performance obligations pertaining to subscription services. The current portion of deferred revenue represents the amounts that are expected to be recognized as revenue within one year of the condensed consolidated balance sheet dates. Changes in total deferred revenue during the periods presented are as follows (in thousands, unaudited): First Quarter of Fiscal 2021 2022 Beginning balance$ 697,288 $ 843,697 Additions 131,734 186,851 Recognition of deferred revenue (122,962) (164,388) Ending balance$ 706,060 $ 866,160
Revenue recognized during the first quarter of fiscal 2021 and 2022 from
deferred revenue at the beginning of each respective period was
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Remaining Performance Obligations
Total contracted but not recognized revenue was $1,129.2 million at the end of
the first quarter of fiscal 2022. Contracted but not recognized revenue consists
of both deferred revenue and non-cancelable amounts that are expected to be
invoiced and recognized as revenue in future periods. Orders that are contracted
but have not been fulfilled and are cancelable by customers are excluded from
remaining performance obligations. Of the $1,129.2 million contracted but not
recognized revenue at the end of the first quarter of fiscal 2022, we expect to
recognize approximately 44% over the next 12 months, and the remainder
thereafter. Cancelable orders that we expect to ship at a future date continue
to increase.
Cost of Revenue and Gross Margin
First Quarter of Fiscal Change
2021 2022 $ %
(dollars in thousands, unaudited)
Product cost of revenue $ 68,289 $ 77,717 $ 9,428 14 %
Stock-based compensation 996 1,347 351 35 %
Total product cost of revenue $ 69,285 $ 79,064 $ 9,779 14 %
% of Product revenue 28 % 32 %
Subscription services cost of revenue
$ 9,754 26 % Stock-based compensation 3,392 4,406 1,014 30 % Total subscription services cost of revenue$ 41,009 $ 51,777 $ 10,768 26 % % of Subscription services revenue 34 % 32 % Total cost of revenue$ 110,294 $ 130,841 $ 20,547 19 % % of Total revenue 30 % 32 % Product gross margin 72 % 68 % Subscription services gross margin 66 % 68 % Total gross margin 70 % 68 % Cost of revenue increased by$20.5 million , or 19%, during the first quarter of fiscal 2022 compared to the first quarter of fiscal 2021. The increase in product cost of revenue was primarily attributable to increased costs within our supply chain operations associated with increased headcount and an increase in the amortization of acquired intangible assets. The increase in subscription services cost of revenue was primarily attributable to higher costs in our customer support organization. The decline in product gross margin during the first quarter of fiscal 2022 was primarily driven by a shift in product mix dynamics across our product portfolio, including increased sales of FlashArray//C and FlashBlade products which generally have a modestly lower gross margin compared to our FlashArray products, and higher component costs due to supply chain shortages. The increase in subscription services gross margin during the first quarter of fiscal 2022 was driven by increased sales of unified subscription services, Pure as-a-Service and Cloud Block Store , higher renewals in Evergreen Storage subscriptions, and increasing economies of scale. 28 --------------------------------------------------------------------------------
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Operating Expenses
Research and Development
First Quarter of Fiscal Change
2021 2022 $ %
(dollars in thousands, unaudited)
Research and development $ 83,735 $ 100,960 $ 17,225 21 %
Stock-based compensation 28,711 30,421 1,710 6 %
Total expenses $ 112,446 $ 131,381 $ 18,935 17 %
% of Total revenue 31 % 32 %
Research and development expense increased by $18.9 million , or 17%, during the
first quarter of fiscal 2022 compared to the first quarter of fiscal 2021, as we
continue to innovate and develop technologies to both enhance and expand our
solution portfolio. The increase was primarily driven by a $12.0 million
increase in employee compensation and related costs, a $4.7 million increase in
outside services expenses, and a $2.5 million increase in depreciation expense
from property and equipment.
Sales and Marketing
First Quarter of Fiscal Change
2021 2022 $ %
(dollars in thousands, unaudited)
Sales and marketing $ 157,161 $ 166,688 $ 9,527 6 %
Stock-based compensation 16,272 16,808 536 3 %
Total expenses $ 173,433 $ 183,496 $ 10,063 6 %
% of Total revenue 47 % 44 %
Sales and marketing expense increased by $10.1 million , or 6%, during the first
quarter of fiscal 2022 compared to the first quarter of fiscal 2021, primarily
due to a $15.6 million increase in employee compensation and related costs,
which included a $3.9 million increase in sales commission expense, partially
offset by a $5.0 million decrease in outside services expense and a $1.7 million
decrease in marketing and travel spend due to the COVID-19 pandemic.
General and Administrative
First Quarter of Fiscal Change
2021 2022 $ %
(dollars in thousands, unaudited)
General and administrative $ 31,802 $ 34,794 $ 2,992 9 %
Stock-based compensation 9,323 8,352 (971) (10) %
Total expenses $ 41,125 $ 43,146 $ 2,021 5 %
% of Total revenue 11 % 10 %
General and administrative expense increased by $2.0 million , or 5%, during the
first quarter of fiscal 2022 compared to the first quarter of fiscal 2021,
primarily due to a $4.6 million increase in employee compensation and related
costs driven by increased headcount, partially offset by a $2.1 million decrease
in office and facilities-related expenses.
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Restructuring and Other
First Quarter of Fiscal Change
2021 2022 $
(dollars in thousands, unaudited)
Restructuring and other $ 14,702 $ - $ (14,702)
% of Total revenue 4 % - %
In February 2020 and prior to the effects of the COVID-19 pandemic, we effected
a workforce realignment plan to streamline our operations and recognized
$5.8 million of restructuring costs related to involuntary termination benefit
costs. Additionally, during the first quarter of fiscal 2021, we incurred
incremental costs of $8.9 million directly related to the COVID-19 pandemic.
These costs primarily included the write-off of marketing commitments no longer
deemed to have value for the remainder of fiscal 2021 and estimated
non-recoverable costs for internal events that could not be held.
Other Income (Expense), Net
First Quarter of Fiscal Change
2021 2022 $
(dollars in thousands, unaudited)
Other income (expense), net $ (3,416) $ (4,727) $ (1,311)
% of Total revenue (1) % (1) %
Other income (expense), net decreased by $1.3 million during the first quarter
of fiscal 2022 compared to the first quarter of fiscal 2021, primarily due to a
decrease in interest income resulting from lower interest rate environment and
higher interest expense due to borrowings under our revolving line of credit,
partially offset by an increase in net foreign exchange gains as the U.S. dollar
weakened relative to certain foreign currencies.
Provision for Income Taxes
First Quarter of Fiscal Change
2021 2022 $ %
(dollars in thousands, unaudited)
Provision for income taxes $ 2,297 $ 3,322 $ 1,025 45 %
% of Total revenue 1 % 1 %
The provision for income taxes increased during the first quarter of fiscal 2022 compared to the first quarter of fiscal 2021 primarily attributable to an increase in foreign income taxes.
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Liquidity and Capital Resources
At the end of the first quarter of fiscal 2022, we had cash, cash equivalents
and marketable securities of $1,234.2 million . Our cash and cash equivalents
primarily consist of bank deposits and money market accounts. Our marketable
securities consist of highly rated debt instruments of the U.S. government and
its agencies, debt instruments of highly rated corporations, debt instruments
issued by foreign governments, asset-backed securities, and municipal bonds.
We believe our existing cash, cash equivalents and marketable securities will be
sufficient to fund our operating and capital needs for at least the next 12
months. Our future capital requirements will depend on many factors including
our sales growth, the timing and extent of spending to support development
efforts, the expansion of sales and marketing and international operation
activities, the addition or closure of office space, the timing of new product
introductions and the continuing market acceptance of our products and services,
the volume and timing of our share repurchases, the timing and settlement
election of the Notes, and any potential impacts of the COVID-19 pandemic on our
business which has resulted in reduced sales and certain of our customers or
partners being unable to timely fulfill their payment obligations to us. We may
continue to enter into arrangements to acquire or invest in complementary
businesses, services and technologies, including intellectual property rights.
We may seek additional equity or debt financing in the future.
Revolving Credit Facility
In August 2020 , we entered into a Credit Agreement with a consortium of
financial institutions and lenders that provides for a five-year, senior secured
revolving credit facility of $300.0 million (Credit Facility). Proceeds from the
Credit Facility may be used for general corporate purposes and working capital.
The Credit Facility expires, absent default or early termination by us, on the
earlier of (i) August 24, 2025 or (ii) 91 days prior to the stated maturity of
the convertible senior notes unless, on such date and each subsequent day until
the convertible senior notes are paid in full, the sum of our cash, cash
equivalents and marketable securities and the aggregate unused commitments then
available to us exceed $625.0 million . The annual interest rates applicable to
loans under the Credit Facility are, at our option, equal to either a base rate
plus a margin ranging from 0.50% to 1.25% or LIBOR (based on one, three, or
six-month interest periods), subject to a floor of 0%, plus a margin ranging
from 1.50% to 2.25%. Interest on revolving loans is payable quarterly in arrears
with respect to loans based on the base rate and at the end of an interest
period in the case of loans based on LIBOR (or at each three-month interval, if
the interest period is longer than three months). We are also required to pay a
commitment fee on the unused portion of the commitments ranging from 0.25% to
0.40% per annum, payable quarterly in arrears. Loans under the Credit Facility
are collateralized by substantially all of our assets and subject to certain
restrictions and two financial ratios measured as of the last day of each fiscal
quarter: a Consolidated Leverage Ratio not to exceed 4.5:1 and an Interest
Coverage Ratio not to be less than 3:1.
In September 2020 , we drew down $250.0 million under the Credit Facility to fund
the acquisition of Portworx which remained outstanding at the end of the first
quarter of fiscal 2022. The outstanding loan bore weighted-average interest at
the one-month LIBOR of approximately 1.61%. Assuming interest rates remain
relatively constant and no repayment, we expect our quarterly interest expense
for the outstanding borrowing under the revolver to be approximately
$1.0 million . We were in compliance with all covenants under the Credit Facility
at the end of the first quarter of fiscal 2022.
Letters of Credit
At the end of fiscal 2021 and the end of the first quarter of fiscal 2022, we
had outstanding letters of credit in the aggregate amount of $6.7 million in
connection with our facility leases. The letters of credit are collateralized by
restricted cash and mature on various dates through August 2029 .
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Convertible Senior Notes
In April 2018 , we issued $575.0 million of 0.125% convertible senior notes due
2023 (the Notes), in a private placement and received proceeds of $562.1
million , after deducting the underwriters' discounts and commissions. The Notes
are unsecured obligations that do not contain any financial covenants or
restrictions on the payments of dividends, the incurrence of indebtedness, or
the issuance or repurchase of securities by us or any of our subsidiaries. The
Notes mature on April 15, 2023 unless repurchased or redeemed by us or converted
in accordance with their terms prior to the maturity date. The Notes are
convertible for up to 21,884,155 shares of our common stock at an initial
conversion rate of approximately 38.0594 shares of common stock per $1,000
principal amount, which is equal to an initial conversion price of approximately
$26.27 per share of common stock, subject to adjustment.
Holders may surrender their Notes for conversion at their option at any time
prior to the close of business on the business day immediately preceding October
15, 2022 , only under specific circumstances. On or after October 15, 2022 until
the close of business on the second scheduled trading day immediately preceding
the maturity date, holders may convert all or any portion of their Notes at any
time regardless of the foregoing conditions. Upon conversion, holders will
receive cash, shares of our common stock, or a combination of cash and shares of
our common stock, at our election. We intend to settle the principal of the
Notes in cash. See further discussion in Note 6 in Part I, Item 1 of this
report.
Share Repurchase Program
In February 2021 , our board of directors authorized the repurchase of up to an
additional $200.0 million of our common stock. The authorization allows us to
repurchase shares of our common stock opportunistically and will be funded from
available working capital. Repurchases may be made at management's discretion
from time to time on the open market through privately negotiated transactions
structured through investment banking institutions, block purchase techniques,
10b5-1 trading plans, or a combination of the foregoing. The share repurchase
program does not obligate us to acquire any of our common stock, has no end
date, and may be suspended or discontinued by us at any time without prior
notice.
During the first quarter of fiscal 2022, we repurchased and retired 1,383,069
shares of common stock at an average purchase price of $21.69 per share for an
aggregate repurchase price of $30.0 million . Approximately $170.0 million
remained under our share repurchase authorization as of the end of the first
quarter of fiscal 2022.
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Table of Contents The following table summarizes our cash flows for the periods presented (in thousands, unaudited):
First Quarter of Fiscal
2021 2022
Net cash provided by operating activities $ 35,103 $ 21,448
Net cash used in investing activities
Operating Activities Net cash provided by operating activities during the first quarter of fiscal 2021 and 2022 was primarily driven by cash collections from sales of our product and subscription services, partially offset by payments to our contract manufacturers, employee compensation, and general corporate operating expenditures. Net cash provided by operating activities decreased year-over-year primarily due to timing of vendor payments and payroll tax deferral under the CARES Act in the first quarter of fiscal 2021. Investing Activities Net cash used in investing activities during the first quarter of fiscal 2022 was driven by$27.8 million in capital expenditures and net purchases of$20.3 million in marketable securities. Net cash used in investing activities during the first quarter of fiscal 2021 was driven by$23.8 million in capital expenditures, partially offset by net sales and maturities of$14.9 million in marketable securities. Financing Activities Net cash used in financing activities during the first quarter of fiscal 2022 was primarily driven by share repurchases of$30.0 million and tax withholding on vesting of equity awards of$5.0 million , partially offset by proceeds from the issuance of common stock from ESPP of$17.7 million and proceeds from the exercise of stock options of$8.0 million . Net cash used in financing activities during the first quarter of fiscal 2021 was primarily driven by share repurchases of$70.1 million , partially offset by proceeds from the issuance of common stock from ESPP of$16.0 million , proceeds from the exercise of stock options of$9.3 million , and proceeds from borrowing of$5.0 million . Contractual Obligations and Commitments Except as set forth in Notes 6 to 8 of Part I, Item 1 of this Quarterly Report on Form 10-Q, there have been no material changes to our non-cancelable contractual obligations and commitments disclosed in our Annual Report on 10-K for fiscal 2021. Critical Accounting Policies and Estimates Our financial statements are prepared in accordance withU.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates. Refer to Note 2 of Part I, Item 1 of this Quarterly Report on Form 10-Q for the summary of significant accounting policies. In addition, see "Critical Accounting Policies and Estimates" in our latest 10-K. There have been no material changes to our critical accounting policies and estimates since our 10-K filed onMarch 25, 2021 . 33 -------------------------------------------------------------------------------- Table of Contents Available Information Our website is located at www.purestorage.com, and our investor relations website is located at investor.purestorage.com. The following filings will be available through our investor relations website free of charge after we file them with theSEC : Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and our Proxy Statements for our annual meetings of stockholders. We will also provide a link to the section of theSEC's website at www.sec.gov that has all of our public filings, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, all amendments to those reports, our Proxy Statements, and other ownership related filings. We webcast our earnings calls and certain events we participate in or host with members of the investment community on our investor relations website. Additionally, we provide notifications of news or announcements regarding our financial performance, includingSEC filings, investor events, press and earnings releases, social media accounts (Twitter, Facebook and LinkedIn), and blogs as part of our investor relations website. Investors and others can receive notifications of new information posted on our investor relations website in real time by signing up for email alerts and RSS feeds. Further corporate governance information, including our certificate of incorporation, bylaws, governance guidelines, board committee charters, and code of conduct, is also available on our investor relations website under the heading "Corporate Governance." The content of our websites are not incorporated by reference into this Quarterly Report on Form 10-Q or in any other report or document we file with theSEC , and any references to our websites are intended to be inactive textual references only. Item 3. Quantitative and Qualitative Disclosures about Market Risk. We have operations both withinthe United States and internationally, and we are exposed to market risk in the ordinary course of our business. Interest Rate Risk Our cash, cash equivalents and marketable securities primarily consist of bank deposits and money market accounts, highly rated debt instruments of theU.S. government and its agencies, debt instruments of highly rated corporations, debt instruments issued by foreign governments, and asset-backed securities. At the end of the first quarter of fiscal 2022 we had cash, cash equivalents and marketable securities of$1,234.2 million . The carrying amount of our cash equivalents reasonably approximates fair value, due to the short maturities of these instruments. The primary objectives of our investment activities are the preservation of capital, the fulfillment of liquidity needs and the fiduciary control of cash and investments. We do not enter into investments for trading or speculative purposes. Our investments are exposed to market risk due to fluctuation in interest rates, which may affect our interest income and the fair value of our investments. We considered the historical volatility of short-term interest rates and determined that it was reasonably possible that an adverse change of 100 basis points could be experienced in the near term. A hypothetical 1.00% (100 basis points) increase in interest rates would have resulted in a decrease in the fair value of our marketable securities of approximately$10.2 million at the end of the first quarter of fiscal 2022. Foreign Currency Exchange Risk Our sales contracts are primarily denominated inU.S. dollars with a proportionally small number of contracts denominated in foreign currencies. A portion of our operating expenses are incurred outsidethe United States and denominated in foreign currencies and are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the British pound and Euro. Additionally, fluctuations in foreign currency exchange rates may cause us to recognize transaction gains and losses in our statement of operations. Given the impact of foreign currency exchange rates has not been material to our historical operating results, we have not entered into any derivative or hedging transactions, but we may do so in the future if our exposure to foreign currency exchange should become more significant. 34 -------------------------------------------------------------------------------- Table of Contents We considered the historical trends in currency exchange rates and determined that it was reasonably possible that adverse changes in exchange rates of 10% for all currencies could be experienced in the near term. These reasonably possible adverse changes in exchange rates of 10% were applied to total monetary assets and liabilities denominated in currencies other thanU.S. dollar at the end of the first quarter of fiscal 2022 to compute the adverse impact these changes would have had on our loss before income taxes in the near term. These changes would have resulted in an adverse impact on loss before provision for income taxes of approximately$4.9 million at the end of the first quarter of fiscal 2022. Item 4. Controls and Procedures. Evaluation of Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this report. Based on such evaluation, our CEO and CFO concluded that, at the end of the first quarter of fiscal 2022, our disclosure controls and procedures were designed at a reasonable assurance level and were effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in theSEC's rules and forms, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. Changes in Internal Control over Financial Reporting As a result of COVID-19, most of our workforce has been working from home sinceMarch 2020 . During the first quarter of fiscal 2022 there were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) or 15d-15(d) of the Exchange Act that occurred during the first quarter of fiscal 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Limitations on Effectiveness of Controls In designing and evaluating the disclosure controls and procedures and internal control over financial reporting, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures and internal control over financial reporting must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs. 35
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