ZSCALER, 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 included elsewhere in this Quarterly Report on Form 10-Q and with our Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year endedJuly 31, 2020 , filed with theSEC . As discussed in the section titled "Special Note Regarding Forward-Looking Statements," the following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such difference include, but are not limited to, those identified below and those discussed in the section titled "Risk Factors" and elsewhere in this Quarterly Report on Form 10-Q. Our fiscal year end isJuly 31 , and our fiscal quarters end onOctober 31 ,January 31 ,April 30 andJuly 31 . Our fiscal year endedJuly 31, 2020 is referred to as fiscal 2020 and our fiscal year endingJuly 31, 2021 is referred to as fiscal 2021. OverviewZscaler was incorporated in 2007, during the early stages of cloud adoption and mobility, based on a vision that the internet would become the new corporate network as the cloud becomes the new data center. We predicted that with rapid cloud adoption and increasing workforce mobility, traditional perimeter security approaches would provide inadequate protection for users and data and an increasingly poor user experience. We pioneered a cloud platform, theZscaler Zero Trust Exchange, that represents a fundamental shift in the architectural design and approach to networking and security. We generate revenue primarily from sales of subscriptions to access our cloud platform, together with related support services. We also generate an immaterial amount of revenue from professional and other services, which consist primarily of fees associated with mapping, implementation, network design and training. Our subscription pricing is calculated on a per-user basis. We recognize subscription and support revenue ratably over the life of the contract, which is generally one to three years. As ofJuly 31, 2020 , we had expanded our operations to over 4,500 customers across major industries, with users in 185 countries. Government agencies and some of the largest enterprises in the world rely on us to help them transform to the cloud, including more than 450 of the Forbes Global 2000 as ofJuly 31, 2020 . We operate our business as one reportable segment. Our revenue has experienced significant growth in recent periods. For nine months endedApril 30, 2021 and 2020, our revenue was$476.0 million and$305.4 million , respectively. We have incurred net losses in all periods since our inception. For the nine months endedApril 30, 2021 and 2020, our net loss was$181.0 million and$65.6 million , respectively. We expect we will continue to incur net losses for the foreseeable future, as we continue to invest in our sales and marketing organization to take advantage of our market opportunity, to invest in research and development efforts to enhance the functionality of our cloud platform, to incur additional compliance and other related costs as we operate as a public company, and to address any legal matters and related accruals, as further described in Note 10, Commitments and Contingencies, of our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Impacts of COVID-19 InMarch 2020 , theWorld Health Organization declared the COVID-19 outbreak to be a pandemic. As a result of the COVID-19 pandemic, we have modified certain aspects of our business, including restricting employee travel, requiring employees to work from home, transitioning our employee onboarding and training processes to remote or online programs, and canceling certain events and meetings, among other modifications. We will continue to actively monitor and evaluate the situation and may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees, customers, partners, suppliers and stockholders. The effects of these operational modifications are unknown and may not be known until future reporting periods. While we have not experienced significant disruptions from the COVID-19 pandemic to date, we are unable to accurately predict the 31 -------------------------------------------------------------------------------- Table of Contents full impact that COVID-19 will have due to numerous uncertainties, including the duration of the outbreak, the widespread distribution and long-term efficacy of vaccines and the availability of effective treatments, actions that may be taken by governmental authorities, the impact on our business including our sales cycle, sales execution and marketing efforts, and the impact to the business of our customers, vendors and partners. For further discussion of the challenges and risks we confront related to the COVID-19 pandemic, please refer to Part II, Item 1A Risk Factors of this Quarterly Report on Form 10-Q. Certain Factors Affecting Our Performance Increased Internet Traffic and Adoption ofCloud-Based Software and Security The adoption of cloud applications and infrastructure, explosion of internet traffic volumes and shift to mobile-first computing generally, and the pace at which enterprises adopt the internet as their corporate network in particular, impact our ability to drive market adoption of our cloud platform. We believe that most enterprises are in the early stages of a broad transformation to the cloud. Organizations are increasingly relying on the internet to operate their businesses, deploying new SaaS applications and migrating internally managed line-of-business applications to the cloud. However, the growing dependence on the internet has increased exposure to malicious or compromised websites, and sophisticated hackers are exploiting the gaps left by legacy network security appliances. To securely access the internet and transform their networks, organizations must also make fundamental changes in their network and security architectures. We believe that most organizations have yet to fully make these investments. Since we enable organizations to securely transform to the cloud, we believe that the imperative for organizations to securely move to the cloud will increase demand for our cloud platform and broaden our customer base. New Customer Acquisition We believe that our ability to increase the number of customers, and more significantly, customers in the Forbes Global 2000, on our cloud platform is an indicator of our market penetration and our future business opportunities. As ofJuly 31, 2020 and 2019, we had over 4,500 and over 3,900 customers, respectively, across all major geographies. As ofJuly 31, 2020 , we had over 450 of the Forbes Global 2000 as customers. Our ability to continue to grow these numbers will increase our future opportunities for renewals and follow-on sales. We believe that we have significant room to capture additional market share and intend to continue to invest significantly in sales and marketing to engage our prospective customers, increase brand awareness, further leverage our channel partnerships and drive adoption of our solution. Follow-On Sales We typically expand our relationship with our customers over time. While most of our new customers route all of their internet-bound web traffic through our cloud platform, some of our customers initially use our services for specific users or specific security functionality. We leverage our land-and-expand model with the goal of generating incremental revenue, often within the term of the initial subscription, by increasing sales to our existing customers in one of three ways: •expanding deployment of our cloud platform to cover additional users; •upgrading to a more advanced Business, Transformation or Secure Transformation suite; and •selling a subscription to a new solution or product, for example selling a ZPA subscription to a ZIA customer or a ZIA subscription to a ZPA customer. Investing in Business Growth Since our founding, we have invested significantly in growing our business. We intend to continue (i) investing in our research and development organization and our development efforts to offer new solutions on our cloud platform and (ii) dedicating resources to update and upgrade our existing solutions. In addition, we expect our general and administrative 32 -------------------------------------------------------------------------------- Table of Contents expenses to increase in absolute dollars in the foreseeable future, as we continue to operate as a public company, and address any legal matters and related accruals, as further described in Note 10, Commitments and Contingencies, of our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. We also intend to continue to invest significantly in sales and marketing to grow and train our sales force, broaden our brand awareness and expand and deepen our channel partner relationships. While these planned investments will increase our operating expenses in the short term, we believe that over the long term these investments will help us to expand our customer base and grow our business. We also are investing in programs to increase recognition of our brand and solutions, including joint marketing activities with our channel partners and strategic partners. While we expect our operating expenses to increase in absolute dollars in the foreseeable future, as a result of these activities, we intend to balance these investments in future growth with a continued focus on managing our results of operations and investing judiciously. In the long term we anticipate that these investments will positively impact our business and results of operations. Key Business Metrics and Other Financial Measures We review a number of operating and financial metrics, including the following key metrics, to measure our performance, identify trends, formulate business plans and make strategic decisions. Dollar-Based Net Retention Rate We believe that dollar-based net retention rate is a key metric to measure the long-term value of our customer relationships because it is driven by our ability to retain and expand the recurring revenue generated from our existing customers. Our dollar-based net retention rate compares the recurring revenue from a set of customers against the same metric for the prior 12-month period on a trailing basis. Because our customers have repeat buying patterns and the average term of our contracts is more than 12 months, we measure this metric over a set of customerswho were with us as of the last day of the same reporting period in the prior fiscal year. Our dollar-based net retention rate includes customer attrition. We have not experienced a material increase in customer attrition rates in recent periods. We calculate our dollar-based net retention rate as follows: Denominator: To calculate our dollar-based net retention rate as of the end of a reporting period, we first establish the annual recurrent revenue ("ARR") from all active subscriptions as of the last day of the same reporting period in the prior fiscal year. This effectively represents recurring dollars that we expect in the next 12-month period from the cohort of customers that existed on the last day of the same reporting period in the prior fiscal year. Numerator: We measure the ARR for that same cohort of customers representing all subscriptions based on confirmed customer orders booked by us as of the end of the reporting period. Dollar-based net retention rate is obtained by dividing the numerator by the denominator. Our dollar-based net retention rate may fluctuate due to a number of factors, including the performance of our cloud platform, our success in selling bigger deals, including deals for all employees with our ZIA Transformation bundle, faster upsells within a year, the 33 -------------------------------------------------------------------------------- Table of Contents timing and the rate of ARR expansion of our existing customers, potential changes in our rate of renewals and other risk factors described elsewhere in this Quarterly Report on Form 10-Q. Trailing 12 Months Trailing 12 Months Ended April 30, 2021 Ended April 30, 2020 Dollar-based net retention rate 126% 119% Non-GAAP Financial Measures In addition to our results determined in accordance withU.S. GAAP, we believe the following non-GAAP measures are useful in evaluating our operating performance. We use the following non-GAAP financial information to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that non-GAAP financial information, when taken collectively, may be helpful to investors because it provides consistency and comparability with past financial performance. However, non-GAAP financial information is presented for supplemental informational purposes only, has limitations as an analytical tool and should not be considered in isolation or as a substitute for financial information presented in accordance withU.S. GAAP. In particular, free cash flow is not a substitute for cash used in operating activities. Additionally, the utility of free cash flow as a measure of our liquidity is further limited as it does not represent the total increase or decrease in our cash balance for a given period. In addition, other companies, including companies in our industry, may calculate similarly-titled non-GAAP measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures as tools for comparison. A reconciliation is provided below for each non-GAAP financial measure to the most directly comparable financial measure stated in accordance withU.S. GAAP. Investors are encouraged to review the relatedU.S. GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparableU.S. GAAP financial measures, and not to rely on any single financial measure to evaluate our business. Non-GAAP Gross Profit and Non-GAAP Gross Margin We define non-GAAP gross profit asU.S. GAAP gross profit excluding stock-based compensation expense and related payroll taxes and amortization expense of acquired intangible assets. We define non-GAAP gross margin as non-GAAP gross profit as a percentage of revenue. Three Months Ended April 30, Nine Months Ended April 30, 2021 2020 2021 2020 (in thousands) Gross profit$ 137,427 $ 85,945 $ 371,187 $ 241,007 Add: Stock-based compensation expense and 3,665 1,672 10,239 4,734 related payroll taxes Amortization expense of acquired 1,503 348 4,510 758 intangible assets Non-GAAP gross profit$ 142,595 $ 87,965 $ 385,936 $ 246,499 Gross margin 78 % 78 % 78 % 79 % Non-GAAP gross margin 81 % 80 % 81 % 81 % 34
-------------------------------------------------------------------------------- Table of Contents Non-GAAP Income from Operations and Non-GAAP Operating Margin We define non-GAAP income from operations asU.S. GAAP loss from operations excluding stock-based compensation expense and related payroll taxes, certain litigation-related expenses, amortization expense of acquired intangible assets and asset impairment related to facility exit. We define non-GAAP operating margin as non-GAAP income from operations as a percentage of revenue. The excluded litigation-related expenses are professional fees and related costs incurred by us in defending or settling against significant claims that we deem not to be in the ordinary course of our business and, if applicable, accruals related to estimated losses in connection with these claims. There are many uncertainties and potential outcomes associated with any litigation, including the expense of litigation, timing of such expenses, court rulings, unforeseen developments, complications and delays, each of which may affect our results of operations from period to period, as well as the unknown magnitude of the potential loss relating to any lawsuit, all of which are inherently subject to change, difficult to estimate and could adversely affect our results of operations. Three Months Ended April 30, Nine Months Ended April 30, 2021 2020 2021 2020 (in thousands) Loss from operations$ (43,850) $ (20,514) $ (140,415) $ (69,069)
Add:
Stock-based compensation expense and related 65,177 29,082 192,619 73,656 payroll taxes Litigation-related expenses - 12 - 18,353 Amortization expense of acquired intangible 1,576 641 4,729 2,062
assets
Asset impairment related to facility exit (1) - 430 416 746 Non-GAAP income from operations$ 22,903 $ 9,651 $ 57,349 $ 25,748 U.S. GAAP operating margin (25) % (19) % (29) % (23) % Non-GAAP operating margin 13 % 9 % 12 % 8 % ___________ (1) Consists of asset impairment charges related to the relocation of our corporate headquarters. Change in Non-GAAP Measures Presentation EffectiveAugust 1, 2020 , the beginning of our fiscal year endingJuly 31, 2021 , we have presented employer payroll taxes related to employee equity award transactions, which is a cash expense, as part of stock-based compensation expense in our non-GAAP results. These payroll taxes have been excluded from our non-GAAP results as they are tied to the timing and size of the exercise or vesting of the underlying equity awards and the price of our common stock at the time of vesting or exercise, which may vary from period to period independent of the operating performance of our business. Prior period amounts have been recast to conform to this presentation. Free Cash Flow and Free Cash Flow Margin Free cash flow is a non-GAAP financial measure that we calculate as net cash provided by operating activities less purchases of property, equipment and other assets and capitalized internal-use software. Free cash flow margin is calculated as free cash flow divided by revenue. We believe that free cash flow and free cash flow margin are useful indicators of liquidity that provide information to management and investors about the amount of cash generated from our operations that, after the investments in property, equipment and other assets and capitalized internal-use software, can be used for strategic initiatives, including investing in our business and strengthening our financial position. 35 -------------------------------------------------------------------------------- Table of Contents Free cash flow includes the cyclical impact of inflows and outflows resulting from contributions to our employee stock purchase plan for which the purchase period of approximately six months ends in each of our second and fourth fiscal quarter. As ofApril 30, 2021 , the accrued employee payroll contributions to our ESPP was$14.3 million , which will be used to purchase shares at the end of the current purchase period ending onJune 15, 2021 . Payroll contributions ultimately used to purchase shares will be reclassified to stockholders' equity upon issuance of the shares during our fourth quarter of fiscal 2021. In the nine months endedApril 30, 2020 , we made a$15.0 million payment to Broadcom in connection with the settlement of the Symantec Cases. For further information on this settlement refer to Note 10, Commitments and Contingencies, of our condensed consolidated financial statements included elsewhere in this Quarterly Report Form 10-Q. Three Months Ended April 30, Nine Months Ended April 30, 2021 2020 2021 2020 (in thousands) Net cash provided by operating activities$ 73,368 $ 20,822 $ 157,304 $ 47,682
Less:
Purchases of property, equipment and (14,812) (9,694) (34,215) (24,793) other assets Capitalized internal-use software (2,775) (2,023) (7,047) (6,296) Free cash flow$ 55,781 $ 9,105 $ 116,042 $ 16,593 As a percentage of revenue: Net cash provided by operating activities 42 % 19 % 33 % 15 %
Less:
Purchases of property, equipment and (8) % (9) % (7) % (8) % other assets Capitalized internal-use software (2) % (2) % (2) % (2) % Free cash flow margin 32 % 8 % 24 % 5 % Calculated Billings Calculated billings is a non-GAAP financial measure that we believe is a key metric to measure our periodic performance. Calculated billings represents our total revenue plus the change in deferred revenue in a period. Calculated billings in any particular period aims to reflect amounts invoiced for subscriptions to access our cloud platform, together with related support services for our new and existing customers. We typically invoice our customers annually in advance, and to a lesser extent quarterly in advance, monthly in advance or multi-year in advance. Calculated billings increased$93.7 million , or 71%, for the three months endedApril 30, 2021 over the three months endedApril 30, 2020 , and$246.7 million , or 70%, for the nine months endedApril 30, 2021 over the nine months endedApril 30, 2020 . As calculated billings continues to grow in absolute terms, we expect our calculated billings growth rate to trend down over time. We also expect that calculated billings will be affected by seasonality in terms of when we enter into agreements with customers; and the mix of billings in each reporting period as we typically invoice customers annually in advance, and to a lesser extent quarterly in advance, monthly in advance or multi-year in advance. Three Months Ended April 30, Nine Months Ended April 30, 2021 2020 2021 2020 (in thousands) Revenue$ 176,404 $ 110,524 $ 476,026 $ 305,382 Add: Total deferred revenue, end of 495,434 300,791 495,434 300,791
period
Less: Total deferred revenue, beginning (446,817) (280,022)
(369,767) (251,202)
of period
Calculated billings $ 225,021 $ 131,293 $ 601,693 $ 354,971
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Components of Results of Operations Revenue We generate revenue primarily from sales of subscriptions to access our cloud platform, together with related support services. These subscription and related support services accounted for approximately 97% and 98% of our revenue for the three months endedApril 30, 2021 and 2020, respectively, and approximately 97% and 98% for the nine months endedApril 30, 2021 and 2020, respectively. Our contracts with our customers do not at any time provide the customer with the right to take possession of the software that runs our cloud platform. Our customers may also purchase professional services, such as mapping, implementation, network design and training. Professional services account for an immaterial portion of our revenue. We generate revenue from contracts with typical durations ranging from one to three years. We typically invoice our customers annually in advance, and to a lesser extent quarterly in advance, monthly in advance or multi-year in advance. We recognize revenue ratably over the life of the contract. Amounts that have been invoiced are recorded in deferred revenue, or they are recorded in revenue if the revenue recognition criteria have been met. Subscriptions that are invoiced annually in advance or multi-year in advance represent a significant portion of our short-term and long-term deferred revenue in comparison to invoices issued quarterly in advance or monthly in advance. Accordingly, we cannot predict the mix of invoicing schedules in any given period. We generally experience seasonality in terms of when we enter into agreements with our customers. We typically enter into a higher percentage of agreements with new customers, as well as renewal agreements with existing customers, in our second and fourth fiscal quarters. However, because we recognize revenue ratably over the terms of our subscription contracts, a substantial portion of the revenue that we report in each period is attributable to the recognition of deferred revenue relating to agreements that we entered into during previous periods. Consequently, increases or decreases in new sales or renewals in any one period may not be immediately reflected as revenue for that period. Accordingly, the effect of downturns in sales and market acceptance of our platform, and potential changes in our rate of renewals, may not be fully reflected in our results of operations until future periods. Cost of Revenue Cost of revenue includes expenses related to operating our cloud platform in data centers, depreciation of our data center equipment, related overhead costs and the amortization of our capitalized internal-use software. Cost of revenue also includes employee-related costs, including salaries, bonuses, stock-based compensation expense and employee benefit costs associated with our customer support and cloud operations organizations. Cost of revenue also includes overhead costs for facilities, IT, amortization and depreciation expense. As our customers expand and increase the use of our cloud platform driven by additional applications and connected devices, our cost of revenue will increase due to higher bandwidth and data center expenses. However, we expect to continue to benefit from economies of scale as our customers increase the use of our cloud platform. We intend to continue to invest additional resources in our cloud platform and our customer support organizations as we grow our business. The level and timing of investment in these areas could affect our cost of revenue in the future. Gross Profit and Gross Margin Gross profit, or revenue less cost of revenue, and gross margin, or gross profit as a percentage of revenue, have been and will continue to be affected by various factors, including the timing of our acquisition of new customers and our renewals of and follow-on sales to existing customers, the average sales price of our services, mix of services offered in our solutions, including new product introductions, the data center and bandwidth costs associated with operating our cloud platform, the 37 -------------------------------------------------------------------------------- Table of Contents extent to which we expand our customer support and cloud operations organizations and the extent to which we can increase the efficiency of our technology, infrastructure and data centers through technological improvements. We expect our gross profit to increase in absolute dollars and our gross margin to increase slightly over the long term, although our gross profit and gross margin could fluctuate from period to period depending on the interplay of all of the above factors. Operating Expenses Our operating expenses consist of sales and marketing, research and development and general and administrative expenses. Personnel costs are the most significant component of operating expenses and consist of salaries, benefits, bonuses, stock-based compensation expense and, with respect to sales and marketing expenses, sales commissions that are recognized as expenses over the period of benefit. Operating expenses also include overhead costs for facilities, IT, depreciation expense and amortization expense. Sales and Marketing Sales and marketing expenses consist primarily of employee compensation and related expenses, including salaries, bonuses and benefits for our sales and marketing employees, sales commissions that are recognized as expenses over the period of benefit, stock-based compensation expense, marketing programs, travel and entertainment expenses, expenses for conferences and events and allocated overhead costs. We capitalize our sales commissions and associated payroll taxes and recognize them as expenses over the estimated period of benefit. The amount recognized in our sales and marketing expenses reflects the amortization of costs previously deferred as attributable to each period presented in this Quarterly Report on Form 10-Q, as described below under "Critical Accounting Policies and Estimates." We intend to continue to make significant investments in our sales and marketing organization to drive additional revenue, further penetrate the market and expand our global customer base. As a result, we expect our sales and marketing expenses to continue to increase in absolute dollars and to be our largest operating expense category for the foreseeable future. In particular, we will continue to invest in growing and training our sales force, broadening our brand awareness and expanding and deepening our channel partner relationships. However, we expect our sales and marketing expenses to decrease as a percentage of our revenue over the long term, although our sales and marketing expenses may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses. Research and Development Our research and development expenses support our efforts to add new features to our existing offerings and to ensure the reliability, availability and scalability of our solutions. Our cloud platform is software-driven, and our research and development teams employ software engineers in the design, and the related development, testing, certification and support, of these solutions. Accordingly, a majority of our research and development expenses result from employee-related costs, including salaries, bonuses and benefits, stock-based compensation expense and costs associated with technology tools used by our engineers. We expect our research and development expenses to continue to increase in absolute dollars for the foreseeable future, as we continue to invest in research and development efforts to enhance the functionality of our cloud platform, improve the reliability, availability and scalability of our platform and access new customer markets. However, we expect our research and development expenses to decrease as a percentage of our revenue over the long term, although our research and development expenses may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses. General and Administrative General and administrative expenses consist primarily of employee-related costs, including salaries and bonuses, stock-based compensation expense and employee benefit costs for our finance, legal, human resources and administrative personnel, as well as professional fees for external legal services (including certain litigation-related expenses), accounting 38 -------------------------------------------------------------------------------- Table of Contents and other related consulting services. The litigation-related expenses include professional fees and related costs incurred by us in defending or settling significant claims that we deem not to be in the ordinary course of our business and, if applicable, accruals related to estimated losses in connection with these claims. We expect our general and administrative expenses to increase in absolute dollars for the foreseeable future, as we continue to incur compliance costs, and other related costs necessary to operate as a public company, and due to any legal matters and related accruals, as further described in Note 10, Commitments and Contingencies, to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. However, we expect our general and administrative expenses to decrease as a percentage of our revenue over the long term, although our general and administrative expenses may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses. In particular, litigation-related expenses related to significant litigation claims may result in significant fluctuations from period to period as they are inherently subject to change and difficult to estimate. Interest Expense Interest expense consists primarily of amortization of debt discount and issuance costs and recognition of contractual interest expense related to our Notes issued inJune 2020 . See Note 9, Convertible Senior Notes, of our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Interest Income Interest income consists primarily of income earned on our cash equivalents and short-term investments. Other Income, Net Other income, net consists primarily of foreign currency transaction gains and losses. Provision for Income Taxes Our provision for income taxes consists primarily of income and withholding taxes in the foreign jurisdictions in which we conduct business, offset by the tax benefit for excess stock-based compensation deduction. We have not recorded anyU.S. federal income tax expense. Inthe United States , we have recorded deferred tax assets for which we provide a full valuation allowance, which includes net operating loss carryforwards and tax credits. We expect to maintain this full valuation allowance for the foreseeable future as it is more likely than not that some or all of those deferred tax assets may not be realized based on our history of losses. Additionally, in theU.K. , we have recorded deferred tax assets for which we provide a full valuation allowance, which includes net operating loss carryforwards. We expect to maintain this full valuation allowance for the foreseeable future as it is more likely than not that some or all of those deferred tax assets may not be realized based on our history of losses. 39 -------------------------------------------------------------------------------- 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 our revenue: Three Months Ended April 30, Nine Months Ended April 30, 2021 2020 2021 2020 (in thousands) Revenue$ 176,404 $
110,524
38,977 24,579 104,839 64,375
Gross profit 137,427 85,945 371,187 241,007
Operating expenses:
Sales and marketing(1) (2) 115,730 67,727 323,022 188,759
Research and development(1) (2) 40,952 24,117 118,473 65,094
General and administrative(1) (3) (4) 24,595 14,615 70,107 56,223
Total operating expenses 181,277 106,459 511,602 310,076
Loss from operations (43,850) (20,514) (140,415) (69,069)
Interest income 593 1,528 2,288 5,405
Interest expense(5) (13,436) - (39,730) -
Other income, net 71 70 857 28
Loss before income taxes (56,622) (18,916) (177,000) (63,636)
Provision for income taxes 1,837 421 4,006 1,931
Net loss $ (58,459) $ (19,337) $ (181,006) $ (65,567)
(1) Includes stock-based compensation expense and related payroll taxes as follows:
Cost of revenue $ 3,665 $ 1,672 $ 10,239 $ 4,734
Sales and marketing 34,798 15,795 101,316 39,414
Research and development 15,033 7,145 47,680 18,479
General and administrative 11,681 4,470 33,384 11,029
Total $ 65,177 $ 29,082 $ 192,619 $ 73,656
(2) Includes amortization expense of acquired intangible assets as follows:
Cost of revenue $ 1,503 $ 348 $ 4,510 $ 758
Sales and marketing 73 8 219 24
Research and development - 285 - 1,280
Total $ 1,576 $ 641 $ 4,729 $ 2,062
(3) Includes asset impairment related
to facility exit as follows: $ - $ 430
(4) Includes litigation-related expenses as follows: $ -
(5) Includes amortization of debt
$ 38,649 $ - discount and issuance costs as follows: 40
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Three Months Ended April 30, Nine Months Ended April 30,
2021 2020 2021 2020
Revenue 100% 100% 100% 100%
Cost of revenue 22 22 22 21
Gross margin 78 78 78 79
Operating expenses
Sales and marketing 66 62 68 62
Research and development 23 22 25 21
General and administrative 14 13 14 19
Total operating expenses 103 97 107 102
Operating margin (25) (19) (29) (23)
Interest income - 1 - 2
Interest expense (7) - (8) -
Other income, net - 1 - -
Loss before income taxes (32) (17) (37) (21)
Provision for income taxes 1 - 1 -
Net loss (33)% (17)% (38)% (21)%
Comparison of the Three Months Ended April 30, 2021 and 2020
Revenue
Three Months Ended April 30, Change
2021 2020 $ %
(in thousands)
Revenue $ 176,404 $ 110,524 $ 65,880 60 %
Revenue increased by $65.9 million , or 60%, for the three months ended April 30,
2021 , compared to the three months ended April 30, 2020 . The increase in revenue
was driven by an increase in users and sales of additional subscriptions to
existing customers, which contributed $36.9 million in revenue, as reflected by
our dollar-based net retention rate of 126% for the trailing 12 months ended
April 30, 2021 . The remainder of the increase was attributable to the addition
of new customers, as we increased our customer base by 21% from April 30, 2020
to April 30, 2021 .
Cost of Revenue and Gross Margin
Three Months Ended April 30, Change
2021 2020 $ %
(in thousands)
Cost of revenue $ 38,977 $ 24,579 $ 14,398 59 %
Gross margin 78 % 78 %
Cost of revenue increased by $14.4 million , or 59%, for the three months ended
April 30, 2021 , compared to the three months ended April 30, 2020 . The overall
increase in cost of revenue was driven primarily by the expanded use of our
cloud platform by existing and new customers, which led to an increase of $9.7
million for data center and equipment related costs for hosting and operating
our cloud platform. Additionally, our employee-related expenses increased by
$4.8 million , inclusive of an increase of $1.7 million in stock-based
compensation expense, driven primarily by a 35% increase in headcount in our
customer support and cloud operations organizations from April 30, 2020 to April
30, 2021 .
41
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Gross margin remained unchanged from 78% for the three months ended April 30,
2020 compared to the three months ended April 30, 2021 .
Operating Expenses
Sales and Marketing Expenses
Three Months Ended April 30, Change
2021 2020 $ %
(in thousands)
Sales and marketing $ 115,730 $ 67,727 $ 48,003 71 %
Sales and marketing expenses increased by $48.0 million , or 71%, for the three
months ended April 30, 2021 , compared to the three months ended April 30, 2020 .
The increase was primarily due to a 65% increase in headcount from April 30,
2020 to April 30, 2021 , resulting in an increase of $46.9 million in
employee-related expenses, inclusive of an increase of $16.8 million in
stock-based compensation expense and an increase of $4.8 million in sales
commissions expense. The remainder of the increase was primarily attributable to
increased expenses of $1.8 million for facility and IT services. Expense
increases were partially offset by the decrease of $2.3 million for travel
expenses due to the COVID-19 pandemic.
Research and Development Expenses
Three Months Ended April 30, Change
2021 2020 $ %
(in thousands)
Research and development $ 40,952 $ 24,117 $ 16,835 70 %
Research and development expenses increased by $16.8 million , or 70%, for the
three months ended April 30, 2021 , compared to the three months ended April 30,
2020 , as we continued to develop and enhance the functionality of our cloud
platform. The increase was primarily driven by an increase of $15.4 million in
employee-related expenses, inclusive of an increase of $6.7 million in
stock-based compensation expense, driven by a 53% increase in headcount from
April 30, 2020 to April 30, 2021 . The remainder of the increase was primarily
attributable to increased expenses of $1.4 million in facility, software and
equipment related expenses to support our growth.
General and Administrative Expenses
Three Months Ended April 30, Change
2021 2020 $ %
(in thousands)
General and administrative $ 24,595 $ 14,615 $ 9,980 68 %
General and administrative expenses increased by $10.0 million , or 68%, for the
three months ended April 30, 2021 , compared to the three months ended April 30,
2020 . The overall increase was primarily due to an increase of $9.8 million in
employee-related expenses, inclusive of an increase of $6.9 million in
stock-based compensation expense, driven in part by a 36% increase in headcount
from April 30, 2020 to April 30, 2021 .
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Interest Expense
Three Months Ended April 30, Change
2021 2020 $ %
(in thousands)
Interest expense $ (13,436) $ - $ (13,436) 100 %
Interest expense increased by $13.4 million for the three months ended April 30,
2021 , compared to the three months ended April 30, 2020 , as a result of the
amortization of debt discount and contractual interest expense related to our
Notes. issued in June 2020 . For further information on the Notes, refer to Note
9, Convertible Senior Notes, of our condensed consolidated financial statements
included elsewhere in this Quarterly Report on Form 10-Q.
Interest Income
Three Months Ended April 30, Change
2021 2020 $ %
(in thousands)
Interest income $ 593 $ 1,528 $ (935) (61) %
Interest income decreased by $0.9 million for the three months ended April 30,
2021 , compared to the three months ended April 30, 2020 . The decrease was
primarily driven by lower market interest rates on cash equivalents and
short-term investments.
Other Income, Net
Three Months Ended April 30, Change
2021 2020 $ %
(in thousands)
Other income, net $ 71 $ 70 $ 1 (1) %
Other income, net remained approximately unchanged for the three months ended
April 30, 2021 compared to the three months ended April 30, 2020 .
Provision for Income Taxes
Three Months Ended April 30, Change
2021 2020 $ %
(in thousands)
Provision for income taxes $ 1,837 $ 421 $ 1,416 336 %
Our provision for income taxes increased by $1.4 million for the three months
ended April 30, 2021 , compared to the three months ended April 30, 2020 . The
increase in the provision for income taxes was primarily due to the increase in
our non-U.S. pre-tax income and a tax benefit associated with the acquisition of
intangible assets from Cloudneeti Corporation ("Cloudneeti"), which reduced our
deferred tax asset and the related valuation allowance in the three months ended
April 30, 2020 .
Our tax provision for interim periods is determined using an estimate of our
annual effective tax rate, adjusted for discrete items, if any, that arise
during the period. Each quarter, we update our estimate of the annual effective
tax rate, and if the estimated annual effective tax rate changes, we make a
cumulative adjustment in such period.
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Our quarterly tax provision, and estimate of our annual effective tax rate, is
subject to variation due to several factors, including variability in pre-tax
income or loss, the mix of jurisdictions to which such income relates, changes
in how we do business, and tax law developments. Our estimated annual effective
tax rate for the year differs from the U.S. statutory rate of 21% primarily due
to the benefit of a portion of our earnings being taxed at rates lower than the
U.S. statutory rate.
The realization of deferred tax assets is dependent upon the generation of
sufficient taxable income of the appropriate character in future periods. We
assess our ability to realize our deferred tax assets on a quarterly basis and
we establish a valuation allowance if it is more-likely-than-not that some
portion of the deferred tax assets will not be realized. We weigh all available
positive and negative evidence, including our earnings history and results of
recent operations, scheduled reversals of deferred tax liabilities, projected
future taxable income and tax planning strategies. Due to the weight of
objectively verifiable negative evidence, including our history of losses in
certain jurisdictions, we believe that it is more likely than not that our U.S.
federal, state, and U.K. deferred tax assets will not be realized. Accordingly,
we have maintained a valuation allowance on our U.S. federal, state, and U.K.
deferred tax assets.
Comparison of the Nine Months Ended April 30, 2021 and 2020
Revenue
Nine Months Ended April 30, Change
2021 2020 $ %
(in thousands)
Revenue $ 476,026 $ 305,382 $ 170,644 56 %
Revenue increased by $170.6 million , or 56%, for the nine months ended April 30,
2021 , compared to the nine months ended April 30, 2020 . The increase in revenue
was driven by an increase in users and sales of additional subscriptions to
existing customers, which contributed $112.5 million in revenue, as reflected by
our dollar-based net retention rate of 126% for the trailing 12 months ended
April 30, 2021 . The remainder of the increase was attributable to the addition
of new customers, as we increased our customer base by 21% from April 30, 2020
to April 30, 2021 .
Cost of Revenue and Gross Margin
Nine Months Ended April 30, Change
2021 2020 $ %
(in thousands)
Cost of revenue $ 104,839 $ 64,375 $ 40,464 63 %
Gross margin 78 % 79 %
Cost of revenue increased by $40.5 million , or 63%, for the nine months ended
April 30, 2021 , compared to the nine months ended April 30, 2020 . The overall
increase in cost of revenue was driven primarily by the expanded use of our
cloud platform by existing and new customers, which led to an increase of $29.8
million for data center and equipment related costs for hosting and operating
our cloud platform. Additionally, our employee-related expenses increased by
$11.1 million , inclusive of an increase of $4.9 million in stock-based
compensation expense, driven primarily by a 35% increase in headcount in our
customer support and cloud operations organizations from April 30, 2020 to April
30, 2021 .
Gross margin decreased from 79% during the nine months ended April 30, 2020 to
78% during the nine months ended April 30, 2021 . The decline in gross margin is
partially due to the cost incurred for our increased use of public cloud
infrastructure to manage the increased ZPA traffic, which resulted from our
customers' employees working from home beginning in March 2020 , and to a lesser
extent, to efficiently introduce and sell new solutions to our customers. While
the
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public cloud allows us to quickly meet increases in customer demand and to
accelerate the introduction of new solutions, using public cloud infrastructure
is significantly more expensive compared to using our data centers.
Additionally, the decline in gross margin is also attributable to an increase in
stock-based compensation expense and amortization expense of acquired intangible
assets.
Operating Expenses
Sales and Marketing Expenses
Nine Months Ended April 30, Change
2021 2020 $ %
(in thousands)
Sales and marketing $ 323,022 $ 188,759 $ 134,263 71 %
Sales and marketing expenses increased by $134.3 million , or 71%, for the nine
months ended April 30, 2021 , compared to the nine months ended April 30, 2020 .
The increase was primarily due to a 65% increase in headcount from April 30,
2020 to April 30, 2021 , resulting in an increase of $138.0 million in
employee-related expenses, inclusive of an increase of $56.2 million in
stock-based compensation expense and an increase of $15.5 million in sales
commissions expense. The remainder of the increase was primarily attributable to
increased expenses of $4.5 million for facility and IT services and $3.0 million
for professional services. Expense increases were partially offset by the
decrease of $9.3 million in travel expenses due to the COVID-19 pandemic and
$2.3 million in marketing and advertising expenses due to transition to less
expensive virtual events and increased reliance on digital marketing.
Research and Development Expenses
Nine Months Ended April 30, Change
2021 2020 $ %
(in thousands)
Research and development $ 118,473 $ 65,094 $ 53,379 82 %
Research and development expenses increased by $53.4 million , or 82%, for the
nine months ended April 30, 2021 , compared to the nine months ended April 30,
2020 , as we continued to develop and enhance the functionality of our cloud
platform. The increase was primarily driven by an increase of $49.6 million in
employee-related expenses, inclusive of an increase of $26.2 million in
stock-based compensation expense, driven by a 53% increase in headcount from
April 30, 2020 to April 30, 2021 . The remainder of the increase was primarily
attributable to increased expenses of $3.2 million in facility, software and
equipment related expenses to support our growth and $1.8 million for
professional services.
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General and Administrative Expenses
Nine Months Ended April 30, Change
2021 2020 $ %
(in thousands)
General and administrative $ 70,107 $ 56,223 $ 13,884 25 %
General and administrative expenses increased by $13.9 million , or 25%, for the
nine months ended April 30, 2021 , compared to the nine months ended April 30,
2020 . The overall increase was primarily due to an increase of $29.2 million in
employee-related expenses, inclusive of an increase of $21.2 million in
stock-based compensation expense, driven in part by a 36% increase in headcount
from April 30, 2020 to April 30, 2021 . The remainder of the increase was
primarily attributable to increased expenses of $1.7 million in professional
services. This increase is partially offset by a decrease of $17.9 million in
legal expenses, primarily attributable to a $15.0 million litigation settlement
payment to Broadcom during the six months ended January 31, 2020 . For further
information on the Broadcom settlement refer to Note 10, Commitments and
Contingencies, of our condensed consolidated financial statements included
elsewhere in this Quarterly Report Form 10-Q.
Interest Expense
Nine Months Ended April 30, Change
2021 2020 $ %
(in thousands)
Interest expense $ (39,730) $ - $ (39,730) 100 %
Interest expense increased by $39.7 million for the nine months ended April 30,
2021 , compared to the nine months ended April 30, 2020 , as a result of the
amortization of debt discount and recognition of contractual interest expense
related to our Notes issued in June 2020 . For further information on the Notes,
refer to Note 9, Convertible Senior Notes, of our condensed consolidated
financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Interest Income
Nine Months Ended April 30, Change
2021 2020 $ %
(in thousands)
Interest income $ 2,288 $ 5,405 $ (3,117) (58) %
Interest income decreased by $3.1 million for the nine months ended April 30,
2021 , compared to the nine months ended April 30, 2020 . The decrease was
primarily driven by lower market interest rates on cash equivalents and
short-term investments.
Other Income, Net
Nine Months Ended April 30, Change
2021 2020 $ %
(in thousands)
Other income, net $ 857 $ 28 $ 829 2,961 %
Other income, net increased by
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Provision for Income Taxes
Nine Months Ended April 30, Change
2021 2020 $ %
(in thousands)
Provision for income taxes $ 4,006 $ 1,931 $ 2,075 107 %
Our provision for income taxes increased by $2.1 million for the nine months
ended April 30, 2021 , compared to the nine months ended April 30, 2020 . The
increase in the provision for income taxes was primarily due to the increase in
our non-U.S. pre-tax income and a tax benefit associated with the acquisition of
intangible assets from Cloudneeti, which reduced our deferred tax asset and the
related valuation allowance in the nine months ended April 30, 2020 .
Our tax provision for interim periods is determined using an estimate of our
annual effective tax rate, adjusted for discrete items, if any, that arise
during the period. Each quarter, we update our estimate of the annual effective
tax rate, and if the estimated annual effective tax rate changes, we make a
cumulative adjustment in such period.
Our quarterly tax provision, and estimate of our annual effective tax rate, is
subject to variation due to several factors, including variability in pre-tax
income or loss, the mix of jurisdictions to which such income relates, changes
in how we do business, and tax law developments. Our estimated annual effective
tax rate for the year differs from the U.S. statutory rate of 21% primarily due
to the benefit of a portion of our earnings being taxed at rates lower than the
U.S. statutory rate.
The realization of deferred tax assets is dependent upon the generation of
sufficient taxable income of the appropriate character in future periods. We
assess our ability to realize our deferred tax assets on a quarterly basis and
we establish a valuation allowance if it is more-likely-than-not that some
portion of the deferred tax assets will not be realized. We weigh all available
positive and negative evidence, including our earnings history and results of
recent operations, scheduled reversals of deferred tax liabilities, projected
future taxable income and tax planning strategies. Due to the weight of
objectively verifiable negative evidence, including our history of losses in
certain jurisdictions, we believe that it is more likely than not that our U.S.
federal, state, and U.K. deferred tax assets will not be realized. Accordingly,
we have maintained a valuation allowance on our U.S. federal, state, and U.K.
deferred tax assets.
Liquidity and Capital Resources
As of April 30, 2021 , our principal sources of liquidity were cash, cash
equivalents and short-term investments totaling $1,467.6 million which were held
for working capital and general corporate purposes. Our cash equivalents and
investments consist of highly liquid investments in money market funds, U.S.
treasury securities, U.S. government agency securities and corporate debt
securities.
In June 2020 , we completed the private offering of our Notes with an aggregate
principal amount of $1,150.0 million . The total net proceeds from the offering,
after deducting initial purchase discount and issuance costs, was $1,130.5
million . In connection with the Notes, we entered into capped call transactions
which are expected to reduce the potential dilution of our common stock upon any
conversion of the Notes and/or offset any cash payments we could be required to
make in excess of the principal amount of converted Notes. We used an aggregate
amount of $145.2 million of the net proceeds of the Notes to purchase the Capped
Calls.
We have generated significant losses from operations, as reflected in our
accumulated deficit of $520.6 million as of April 30, 2021 . We expect to
continue to incur operating losses and have in the past and may in the future
generate negative cash flows due to expected investments to grow our business,
including potential business acquisitions and other strategic transactions.
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We believe that our existing cash, cash equivalents and short-term investments
will be sufficient to fund our operating and capital needs for at least the next
12 months from the issuance of our financial statements. Our foreseeable cash
needs, in addition to our recurring operating costs, include our expected
capital expenditures to support expansion of our infrastructure and workforce,
lease obligations, purchase commitments, potential business acquisitions and
other strategic transactions. Our assessment of the period of time through which
our financial resources will be adequate to support our operations is a
forward-looking statement and involves risks and uncertainties. Our actual
results could vary as a result of, and our future capital requirements, both
near-term and long-term, will depend on, many factors, including our growth
rate, the timing and extent of spending to support our research and development
efforts, the expansion of sales and marketing and international operating
activities, the timing of new introductions of solutions or features, and the
continuing market acceptance of our services, and the impact of COVID-19
pandemic to our and our customers', vendors' and partners' businesses. We have
and may in the future enter into arrangements to acquire or invest in
complementary businesses, services and technologies, including intellectual
property rights. We have based this estimate on assumptions that may prove to be
wrong, and we could use our available capital resources sooner than we currently
expect. Additionally, some of the factors that may influence our operations are
not within our control, such as general economic conditions and the length and
severity of the COVID-19 pandemic. We may be required to seek additional equity
or debt financing. In the event that additional financing is required from
outside sources, we may not be able to raise it on terms acceptable to us or at
all. If we are unable to raise additional capital when desired, or if we cannot
expand our operations or otherwise capitalize on our business opportunities
because we lack sufficient capital, our business, operating results and
financial condition would be adversely affected.
We typically invoice our customers annually in advance, and to a lesser extent
quarterly in advance, monthly in advance or multi-year in advance. Therefore, a
substantial source of our cash is from such prepayments, which are included on
our consolidated balance sheets as a contract liability. Deferred revenue
consists of the unearned portion of billed fees for our subscriptions, which is
subsequently recognized as revenue in accordance with our revenue recognition
policy. As of April 30, 2021 , we had deferred revenue of $495.4 million , of
which $445.8 million was recorded as a current liability and is expected to be
recorded as revenue in the next 12 months, provided all other revenue
recognition criteria have been met. Subscriptions that are invoiced annually in
advance or multi-year in advance contribute significantly to our short-term and
long-term deferred revenue in comparison to our invoices issued quarterly in
advance or monthly in advance. Accordingly, we cannot predict the mix of
invoicing schedules in any given period.
The following table summarizes our cash flows for the periods presented:
Nine Months Ended April 30,
2021 2020
(in thousands)
Net cash provided by operating activities $ 157,304 $ 47,682
Net cash used in investing activities$ (212,788) $
(19,462)
Net cash provided by financing activities$ 20,223 $
17,888
Operating Activities Net cash provided by operating activities during the nine months endedApril 30, 2021 was$157.3 million , which resulted from a net loss of$181.0 million , adjusted for non-cash charges of$294.6 million and net cash inflows of$43.7 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of$178.5 million for stock-based compensation expense,$38.6 million for amortization of debt discount and issuance costs,$28.6 million for amortization of deferred contract acquisition costs,$21.4 million for depreciation and amortization expense,$15.2 million for non-cash operating lease costs,$8.6 million for amortization (accretion) of investments purchased at a premium (discount) and$4.7 million for amortization expense of acquired intangible assets. Net cash inflows from changes in operating assets and liabilities were primarily the result of an increase of$128.4 million in deferred revenue from advanced invoicing in 48 -------------------------------------------------------------------------------- Table of Contents accordance with our subscription contracts, an increase of$11.6 million in accrued compensation, an increase of$6.4 million in accounts payable, an increase of$3.0 million in accrued expenses, other current and noncurrent liabilities, and a decrease of$1.8 million in prepaid expenses, other current and noncurrent assets. Net cash inflows were partially offset by cash outflows resulting from an increase of$71.1 million in deferred contract acquisition costs, as our sales commission payments increased due to addition of new customers and expansion of our existing customer subscriptions, an increase of$20.1 million in accounts receivable primarily due to timing of billings and collections and a decrease of$16.2 million in operating lease liabilities. Net cash provided by operating activities during the nine months endedApril 30, 2020 was$47.7 million , which resulted from a net loss of$65.6 million , which included a$15.0 million litigation settlement payment to Broadcom inJanuary 2020 (refer to Note 10, Commitments and Contingencies, of our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q), adjusted for non-cash charges of$111.7 million and net cash inflows of$1.5 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of$70.0 million for stock-based compensation expense,$17.7 million for amortization of deferred contract acquisition costs,$12.3 million for depreciation and amortization expense,$9.6 million for non-cash operating lease costs and$2.1 million for amortization expense of acquired intangible assets and$0.7 million for impairment of assets, partially offset by$0.6 million for deferred income taxes and$0.5 million for accretion of purchased discounts, net of amortization of investment premiums. Net cash inflows from changes in operating assets and liabilities were primarily the result of an increase of$49.6 million in deferred revenue from advanced invoicing in accordance with our subscription contracts and an increase of$12.7 million in accrued compensation an increase of$1.9 million in accounts payable and increase of$0.7 million in accrued expenses, other current and noncurrent liabilities. Net cash inflows were partially offset by cash outflows resulting from an increase of$32.2 million in deferred contract acquisition costs, as our sales commission payments increased due to addition of new customers and expansion of our existing customer subscriptions, an increase of$13.4 million in prepaid expenses, other current and noncurrent assets to balance our working capital requirements, an increase of$12.2 million in accounts receivable primarily due to timing of billings and collections and a decrease of$5.5 million in operating lease liabilities primarily due to lease payments, net of tenant incentives. Investing Activities Net cash used in investing activities during the nine months endedApril 30, 2021 of$212.8 million was primarily attributable to the purchases of short-term investments of$724.5 million , capital expenditures of$41.3 million to support the growth of our cloud platform,$29.4 million , net of cash acquired, for the acquisition of Trustdome and$2.9 million for investments in privately held companies. These activities were partially offset by proceeds from the maturities and sales of short-term investments of$585.2 million . Net cash used in investing activities during the nine months endedApril 30, 2020 of$19.5 million was primarily attributable to the purchase of short-term investments of$202.8 million , capital expenditures of$31.1 million to support the growth of our cloud platform and$8.9 million , net of cash acquired, for the acquisition of Cloudneeti. These activities were partially offset by proceeds from the maturities and sales of short-term investments of$209.2 million . Financing Activities Net cash provided by financing activities of$20.2 million during the nine months endedApril 30, 2021 was attributable to$13.9 million in proceeds from the exercise of stock options and$8.6 million in proceeds from the issuance of common 49 -------------------------------------------------------------------------------- Table of Contents stock under the ESPP. These activities were partially offset by a payment of deferred merger consideration related to a business acquisition made in a prior fiscal year of$2.3 million . Net cash provided by financing activities of$17.9 million during the nine months endedApril 30, 2020 was attributable to$12.6 million in proceeds from the exercise of stock options and$5.3 million in proceeds from the issuance of common stock under the ESPP. Contractual Obligations and Commitments During the nine months endedApril 30, 2021 , there have been no material changes outside the ordinary course of business to our contractual obligations and commitments from those disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations, set forth in Part II, Item 7, of our Fiscal 2020 Form 10-K. Off-Balance Sheet Arrangements As ofApril 30, 2021 , we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As ofApril 30, 2021 , we had outstanding irrevocable standby unsecured letters of credits for an aggregate value of$3.0 million with a bank, which serve as security under certain real estate leases. Critical Accounting Policies and Estimates Our financial statements are prepared in accordance withU.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, as well as related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates. We refer to accounting estimates of this type as critical accounting policies and estimates, which we discuss below. Our significant accounting policies are discussed in Note 1, Business and Summary of Significant Accounting Policies of our consolidated financial statements included in our Fiscal 2020 Form 10-K. There have been no significant changes to these policies for the nine months endedApril 30, 2021 , except as described in Note 1, Business and Summary of Significant Accounting Policies, of our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Recently Issued Accounting Pronouncements Refer to Note 1, Business and Summary of Significant Accounting Policies, of our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for more information regarding recently issued accounting pronouncements. 50
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