The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. 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 Annual Report on Form 10-K. Our fiscal year end isJuly 31 , and our fiscal quarters end onOctober 31 ,January 31 ,April 30 andJuly 31 . Our fiscal years endedJuly 31, 2021 ,July 31, 2020 andJuly 31, 2019 are referred to as fiscal 2021, fiscal 2020 and fiscal 2019, respectively. 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 primarily 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, 2021 , we had expanded our operations to over 5,600 customers across major industries, with users in 185 countries. Government agencies and some of the largest enterprises in the world rely on us to support their digital transformation, including more than 500 of the Forbes Global 2000 as ofJuly 31, 2021 . We operate our business as one reportable segment. Our revenue has experienced significant growth in recent periods. For fiscal 2021, fiscal 2020 and fiscal 2019, our revenue was$673.1 million ,$431.3 million and$302.8 million , respectively. We have incurred net losses in all periods since our inception. For fiscal 2021, fiscal 2020 and fiscal 2019, our net loss was$262.0 million ,$115.1 million and$28.7 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 11, Commitments and Contingencies, of the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. 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 to our operations or financial performance from the COVID-19 pandemic to date, we are unable to accurately predict the full impact that COVID-19 will have due to numerous uncertainties, including the duration of the outbreak, the current or a future resurgence of the outbreak in connection with new variants and mutations, 60 -------------------------------------------------------------------------------- the widespread distribution and long-term efficacy of vaccines, the efficacy of vaccines against new variants or mutations, 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 I, Item 1A Risk Factors of this Annual Report on Form 10-K. 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 embrace digital transformation, 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, 2021 , 2020 and 2019, we had over 5,600, 4,500 and over 3,900 customers, respectively, across all major geographies. As ofJuly 31, 2021 , we had over 500 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 or Transformation edition; 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. These purchases increase the Annual Recurring Revenue ("ARR") attributable to our customers over time. To establish ARR for a customer, we use the total amount of each order booked to compute the annual recurring value of revenue that we would recognize if the customer continues to renew all contractual subscriptions. For example, a contract for$3.0 million with a contractual term of three years would have ARR of$1.0 million as long as our customer uses our cloud platform. 61 -------------------------------------------------------------------------------- Table of Contents 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 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 11, Commitments and Contingencies, of the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. 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 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 higher-end bundles, selling multiple-pillars from the start of our contract 62 -------------------------------------------------------------------------------- Table of Contents with new customers, faster upsells within a year, the 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 Annual Report on Form 10-K. Trailing 12 Months Ended July 31, 2021 2020 2019 Dollar-based net retention rate 128% 120% 118% 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 provided by 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. Year Ended July 31, 2021 2020 2019 (in thousands) Gross profit$ 522,783 $ 335,536 $ 243,167 Add: Stock-based compensation expense and related payroll taxes 15,272 7,851 3,453 Amortization expense of acquired intangible assets 6,468 2,030 512 Non-GAAP gross profit$ 544,523 $ 345,417 $ 247,132 Gross margin 78 % 78 % 80 % Non-GAAP gross margin 81 % 80 % 82 % 63
-------------------------------------------------------------------------------- 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. Year Ended July 31, 2021 2020 2019 (in thousands) Loss from operations$ (207,812) $ (113,956) $ (35,313) Add: Stock-based compensation expense and related payroll taxes 278,562 129,636 54,157 Litigation-related expenses - 18,356 13,079 Amortization expense of acquired intangible assets 6,795 3,384 908 Asset impairment related to facility exit(1) 416 746 - Non-GAAP income from operations$ 77,961 $ 38,166 $ 32,831 Operating margin (31) % (26) % (12) % Non-GAAP operating margin 12 % 9 % 11 % (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 began to present 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. 64 -------------------------------------------------------------------------------- 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 ofJuly 31, 2021 , the accrued employee payroll contributions to our ESPP was$5.2 million , which will be used to purchase shares at the end of the current purchase period ending onDecember 15, 2022 . Payroll contributions ultimately used to purchase shares will be reclassified to stockholders' equity upon issuance of the shares during our second quarter of fiscal 2022. Year Ended July 31, 2021 2020 2019 (in thousands) Net cash provided by operating activities$ 202,040 $ 79,317 $ 58,027 Less: Purchases of property, equipment and other assets (48,165) (43,072) (25,520) Capitalized internal-use software (10,132) (8,737) (3,162) Free cash flow$ 143,743 $ 27,508 $ 29,345 As a percentage of revenue: Net cash provided by operating activities 30 % 18 % 19 % Less: Purchases of property, equipment and other assets (7) (10) (8) Capitalized internal-use software (2) (2) (1) Free cash flow margin 21 % 6 % 10 % 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$384.1 million , or 70%, in fiscal 2021 over fiscal 2020, and$159.8 million , or 41%, in fiscal 2020 over fiscal 2019. As calculated billings continues to grow in absolute terms, we expect our calculated billings growth rate to trend down over time. We also expect that calculated billings will be affected by seasonality in terms of when we enter into agreements with customers; and the mix of billings in each reporting period as we typically invoice customers annually in advance, and to a lesser extent quarterly in advance, monthly in advance or multi-year in advance. Year Ended July 31, 2021 2020 2019 (in thousands) Revenue$ 673,100 $ 431,269 $ 302,836 Add: Total deferred revenue, end of period 630,601 369,767 251,202 Less: Total deferred revenue, beginning of period (369,767) (251,202) (164,023) Calculated billings$ 933,934 $ 549,834 $ 390,015 65
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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%, 98% and 99% of our revenue for
fiscal 2021, fiscal 2020 and fiscal 2019, 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
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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
Annual Report on Form 10-K, 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.
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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 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 11, Commitments and Contingencies
to, the consolidated financial statements included elsewhere in this Annual
Report on Form 10-K. 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 in June 2020 . See Note 9, Convertible Senior Notes, of the
consolidated financial statements included elsewhere in this Annual Report on
Form 10-K.
Interest Income
Interest income consists primarily of income earned on our cash equivalents and
short-term investments.
Other Income (Expense), Net
Other income (expense), 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
any U.S. federal income tax expense. In the United States , we have recorded
deferred tax assets for which we provide a full valuation allowance, which
includes net operating loss carryforwards and research and development 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 the
U.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.
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Results of Operations
The following table sets forth our results of operations for the periods
presented:
Year Ended July 31,
2021 2020 2019
(in thousands)
Revenue $ 673,100 $ 431,269 $ 302,836
Cost of revenue(1)(2) 150,317 95,733 59,669
Gross profit 522,783 335,536 243,167
Operating expenses:
Sales and marketing(1)(2) 459,407 277,981 169,913
Research and development(1)(2) 174,653 97,879 61,969
General and administrative(1)(3)(4) 96,535 73,632 46,598
Total operating expenses 730,595 449,492 278,480
Loss from operations (207,812) (113,956) (35,313)
Interest income 2,812 6,477 7,730
Interest expense(5) (53,364) (5,025) -
Other income (expense), net 1,186 (224) (329)
Loss before income taxes (257,178) (112,728) (27,912)
Provision for income taxes 4,851 2,388 743
Net loss $ (262,029) $ (115,116) $ (28,655)
_____
(1) Includes stock-based compensation expense and related payroll taxes as
follows:
Cost of revenue $ 15,272 $ 7,851 $ 3,453
Sales and marketing 144,273 71,468 29,211
Research and development 73,238 31,937 15,565
General and administrative 45,779 18,380 5,928
Total $ 278,562 $ 129,636 $ 54,157
(2) Includes amortization expense of acquired intangible assets as follows:
Cost of revenue $ 6,468 $ 2,030 $ 512
Sales and marketing 327 74 10
Research and development - 1,280 386
Total $ 6,795 $ 3,384 $ 908
(3) Includes depreciation of assets linked to leaving the facility as follows:
(4) Includes expenses related to litigation as follows: – $
(5) Includes amortization of debt discount and issuance costs as follows:$ 51,923 $ 4,885 $ - 69
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Table of Contents The following table presents our operating results for the periods presented as a percentage of our revenues:
Year Ended July 31,
2021 2020 2019
Revenue 100% 100% 100%
Cost of revenue 22 22 20
Gross margin 78 78 80
Operating expenses
Sales and marketing 68 64 56
Research and development 26 23
21
General and administrative 15 17 15 Total operating expenses 109 104 92 Operating margin (31) (26) (12) Interest income 1 1 3 Interest expense (8) (1) - Other income (expense), net - -
–
Loss before income taxes (38) (26)
(9)
Provision for income taxes 1 1 -
Net loss (39)% (27)% (9)%
Comparison of Fiscal 2021 and Fiscal 2020
Revenue
Year Ended July 31, Change
2021 2020 $ %
(in thousands)
Revenue $ 673,100 $ 431,269 $ 241,831 56 %
Revenue increased by $241.8 million , or 56%, in fiscal 2021, compared to fiscal
2020. The increase in revenue was driven by an increase in users and sales of
additional subscriptions to existing customers, which contributed $179.5 million
in revenue, as reflected by our dollar-based net retention rate of 128% for the
trailing 12 months ended July 31, 2021 . The remainder of the increase was
attributable to the addition of new customers, as we increased our customer base
by 23% from July 31, 2020 to July 31, 2021 .
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Cost of Revenue and Gross Margin
Year Ended July 31, Change
2021 2020 $ %
(in thousands)
Cost of revenue $ 150,317 $ 95,733 $ 54,584 57 %
Gross margin 78 % 78 %
Cost of revenue increased by $54.6 million , or 57%, in fiscal 2021, compared to
fiscal 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 $37.2 million for data center and equipment related costs for
hosting and operating our cloud platform. Additionally, our employee-related
expenses increased by $17.2 million , inclusive of an increase of $6.7 million in
stock-based compensation expense, driven primarily by a 48% increase in
headcount in our customer support and cloud operations organizations from July
31, 2020 to July 31, 2021 .
Operating Expenses
Sales and Marketing Expenses
Year Ended July 31, Change
2021 2020 $ %
(in thousands)
Sales and marketing $ 459,407 $ 277,981 $ 181,426 65 %
Sales and marketing expenses increased by $181.4 million , or 65%, for fiscal
2021, compared to fiscal 2020. The increase was primarily due to a 59% increase
in headcount from July 31, 2020 to July 31, 2021 , resulting in an increase of
$176.9 million in employee-related expenses, inclusive of an increase of $66.6
million in stock-based compensation expense, and an increase of $20.8 million in
sales commissions expense. The remainder of the increase was primarily
attributable to increased expenses of $6.6 million for facility and IT services
and $4.6 million for professional services and $1.8 million in marketing and
advertising expenses. Expense increases were partially offset by the decrease of
$9.4 million in travel expenses due to the COVID-19 pandemic.
Research and Development Expenses
Year Ended July 31, Change
2021 2020 $ %
(in thousands)
Research and development $ 174,653 $ 97,879 $ 76,774 78 %
Research and development expenses increased by $76.8 million , or 78%, for fiscal
2021, compared to fiscal 2020 as we continued to develop and enhance the
functionality of our cloud platform. The increase was primarily driven by an
increase of $71.4 million in employee-related expenses, inclusive of an increase
of $37.6 million in stock-based compensation expense, driven by a 59% increase
in headcount from July 31, 2020 to July 31, 2021 . The remainder of the increase
was primarily attributable to increased expenses of $5.1 million in facility,
software and equipment related expenses to support our growth and $2.2 million
for professional services. This increase was partially offset by higher
capitalized internal-use software development costs of $1.4 million to support
the enhancement and growth of our cloud platform.
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General and Administrative Expenses
Year Ended July 31, Change
2021 2020 $ %
(in thousands)
General and administrative $ 96,535 $ 73,632 $ 22,903 31 %
General and administrative expenses increased by $22.9 million , or 31%, for
fiscal 2021, compared to fiscal 2020. The overall increase was primarily due to
an increase of $37.1 million in employee-related expenses, inclusive of an
increase of $26.2 million in stock-based compensation expense, driven in part by
a 46% increase in headcount from July 31, 2020 to July 31, 2021 . The remainder
of the increase was primarily attributable to increased expenses of $2.7 million
in professional services. This increase is partially offset by a decrease of
$18.0 million in legal expenses, primarily attributable to a $15.0 million
litigation settlement payment to Broadcom during fiscal 2020. For further
information on the Broadcom settlement refer to Note 11, Commitments and
Contingencies, of the consolidated financial statements included elsewhere in
this Annual Report Form 10-K.
Interest Expense
Year Ended July 31, Change
2021 2020 $ %
(in thousands)
Interest expense $ (53,364) $ (5,025) $ (48,339) 962 %
Interest expense increased by $48.3 million for fiscal 2021, compared to fiscal
2020 as a result of 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 the
consolidated financial statements included elsewhere in this Annual Report on
Form 10-K.
Interest Income
Year Ended July 31, Change
2021 2020 $ %
(in thousands)
Interest income $ 2,812 $ 6,477 $ (3,665) (57) %
Interest income decreased by $3.7 million , or 57%, for fiscal 2021, compared to
fiscal 2020. The decrease was primarily driven by lower market interest rates
earned on cash equivalents and short-term investments.
Other Income (expense), net
Year Ended July 31, Change
2021 2020 $ %
(in thousands)
Other income (expense), net $ 1,186 $ (224) $ 1,410 (629) %
Other income (expense), net increased by $1.4 million for fiscal 2021, compared
to fiscal 2020. The increase was primarily driven by fluctuations in foreign
currency transaction gains and losses.
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Provision for Income Taxes
Year Ended July 31, Change
2021 2020 $ %
(in thousands)
Provision for income taxes $ 4,851 $ 2,388 $ 2,463 103 %
Our provision for income taxes increased by $2.5 million , or 103%, for fiscal
2021, compared to fiscal 2020, primarily related to income and withholding taxes
in the foreign jurisdictions in which we operate. In fiscal 2020, we recognized
a non-recurring income tax benefit associated with the acquisition of intangible
assets from Cloudneeti Corporation ("Cloudneeti") and Edgewise Networks Inc.
("Edgewise") which reduced our income tax expense as compared to 2021. For
further information, refer to Note 14, Income Taxes, of the consolidated
financial statements included elsewhere in this Annual Report on Form 10-K. Our
effective tax rate of (1.9)% and (2.1)% in fiscal 2021 and fiscal 2020,
respectively, differs from the applicable U.S. statutory federal income tax rate
due to our valuation allowance against our U.S. federal, state, and U.K.
deferred tax assets as well as our foreign income being taxed at different rates
than the U.S. statutory rate.
While we believe our current valuation allowance is sufficient, we assess the
need for an adjustment to the valuation allowance on a quarterly basis. The
assessment is based on our estimates of future sources of taxable income for the
jurisdictions in which we operate and the periods over which our deferred tax
assets will be realizable. In the event we determine that we will be able to
realize all or part of our net deferred tax assets in the future, the valuation
allowance will be reversed in the period in which we make such determination.
The release of a valuation allowance against deferred tax assets may cause
greater volatility in the effective tax rate in the periods in which it is
reversed.
Comparison of Fiscal 2020 and Fiscal 2019
Revenue
Year Ended July 31, Change
2020 2019 $ %
(in thousands)
Revenue $ 431,269 $ 302,836 $ 128,433 42 %
Revenue increased by $128.4 million , or 42%, in fiscal 2020, compared to fiscal
2019. The increase in revenue was driven by an increase in users and sales of
additional subscriptions to existing customers, which contributed $98.6 million
in revenue, as reflected by our dollar-based net retention rate of 120% for the
trailing 12 months ended July 31, 2020 . The remainder of the increase was
attributable to the addition of new customers, as we increased our customer base
by 17% from July 31, 2019 to July 31, 2020 .
Cost of revenues and gross margin
Year Ended July 31, Change
2020 2019 $ %
(in thousands)
Cost of revenue $ 95,733 $ 59,669 $ 36,064 60 %
Gross margin 78 % 80 %
73
-------------------------------------------------------------------------------- Table of Contents Cost of revenue increased by$36.1 million , or 60%, for fiscal 2020, compared to fiscal 2019. 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$24.8 million for data center and equipment related costs for hosting and operating our cloud platform. Additionally, our employee-related expenses increased by$10.0 million , inclusive of an increase of$4.4 million in stock-based compensation expense, driven primarily by a 6% increase in headcount in our customer support and cloud operations organizations fromJuly 31, 2019 toJuly 31, 2020 and by the shift from granting stock options to restricted stock units. Gross margin decreased from 80% to 78% in fiscal 2020 as compared to fiscal 2019. The decline in gross margin is primarily 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 beginningMarch 2020 . While the public cloud allows us to quickly meet increases in customer demand, using public cloud infrastructure to manage traffic is significantly more expensive compared to using our data centers. Operating Expenses Sales and Marketing Expenses Year Ended July 31, Change 2020 2019 $ % (in thousands) Sales and marketing$ 277,981 $ 169,913 $ 108,068 64 % Sales and marketing expenses increased by$108.1 million , or 64%, for fiscal 2020, compared to fiscal 2019. The increase was primarily due to a 54% increase in headcount fromJuly 31, 2019 toJuly 31, 2020 , resulting in an increase of$92.6 million in employee-related expenses, inclusive of an increase of$43.4 million in stock-based compensation expense, and an increase of$9.7 million in sales commissions expense. Additionally, our sales and marketing expenses increased by$7.0 million primarily due to growth of certain major sales and marketing events held during fiscal 2020, including ourZenith Live events. The remainder of the increase was primarily attributable to increased expenses of$2.2 million in costs related to in-person and virtual events and$3.9 million for facility and IT services. Research and Development Expenses Year Ended July 31, Change 2020 2019 $ % (in thousands) Research and development$ 97,879 $ 61,969 $ 35,910 58 % Research and development expenses increased by$35.9 million , or 58%, for fiscal 2020, compared to fiscal 2019 as we continued to develop and enhance the functionality of our cloud platform. The increase was primarily driven by an increase of$34.7 million in employee-related expenses, inclusive of an increase of$15.1 million in stock-based compensation expense, driven by a 38% increase in headcount fromJuly 31, 2019 toJuly 31, 2020 and by our shift from granting stock options to granting restricted stock units. The remainder of the increase was primarily attributable to increased expenses of$4.4 million for facility, software and equipment related expenses to support our growth. Expense increases were partially offset by higher capitalized internal-use software development costs of$5.6 million to support the enhancement and growth of our cloud platform. 74 -------------------------------------------------------------------------------- Table of Contents General and Administrative Expenses Year Ended July 31, Change 2020 2019 $ % (in thousands) General and administrative$ 73,632 $ 46,598 $ 27,034 58 % General and administrative expenses increased by$27.0 million , or 58%, for fiscal 2020, compared to fiscal 2019. The overall increase was primarily due to an increase of$16.4 million in employee-related expenses, inclusive of a net increase of$12.1 million in stock-based compensation expense, driven by a 29% increase in headcount fromJuly 31, 2019 toJuly 31, 2020 , and also by our shift from granting stock options to granting restricted stock units. Additionally, we recognized an increase of$5.2 million in legal expenses, which is primarily attributable to a$15.0 million litigation settlement payment to Broadcom in fiscal 2020, partially offset by lower legal fees in fiscal 2020. For further information on litigation settlements, refer to Note 11, Commitments and Contingencies, of the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The remainder of the increase was primarily attributable to$1.9 million in professional services and$1.2 million for insurance premiums. Interest Expense Year Ended July 31, Change 2020 2019 $ % (in thousands) Interest expense$ (5,025) $ -$ (5,025) 100 % Interest expense increased by$5.0 million or 100% for fiscal 2020, compared to fiscal 2019. The increase is due to amortization of debt discount and contractual interest expense for our Notes issued inJune 2020 . For further information on the Notes, refer to Note 9, Convertible Senior Notes, of the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Interest Income Year Ended July 31, Change 2020 2019 $ % (in thousands) Interest income$ 6,477 $ 7,730 $ (1,253) (16) % Interest income decreased by$1.3 million , or 16%, for fiscal 2020, compared to fiscal 2019. The decrease was primarily driven by lower market interest rates earned on cash equivalents and short-term investments. Other Income (Expense), net Year Ended July 31, Change 2020 2019 $ % (in thousands) Other income (expense), net$ (224) $ (329) $ 105 (32) % Other income (expense), net increased by$0.1 million , or 32%, for fiscal 2020, compared to fiscal 2019. The increase was primarily driven by fluctuations in foreign currency transaction gains and losses for fiscal 2020, compared to fiscal 2019. 75
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Provision for Income Taxes
Year Ended July 31, Change
2020 2019 $ %
(in thousands)
Provision for income taxes $ 2,388 $ 743 $ 1,645 221 %
Our provision for income taxes increased by $1.6 million , or 221%, for fiscal
2020, compared to fiscal 2019, primarily related to income and withholding taxes
in the foreign jurisdictions in which we operate. The overall income tax expense
recorded for fiscal 2020 was driven by income taxes for the foreign countries in
which we operate partially offset by the tax benefit associated with the
acquisition of intangible assets from Cloudneeti Corporation ("Cloudneeti") and
Edgewise Networks Inc. ("Edgewise") which reduced our deferred tax asset and the
related valuation allowance. For further information, refer to Note 14, Income
Taxes, of the consolidated financial statements included elsewhere in this
Annual Report on Form 10-K. Our effective tax rate of (2.1)% and (2.7)% in
fiscal 2020 and fiscal 2019, respectively, differs from the applicable U.S.
statutory federal income tax rate due to our valuation allowance against our
U.S. federal, state, and U.K. deferred tax assets as well as our foreign income
being taxed at different rates than the U.S. statutory rate.
While we believe our valuation allowance is sufficient, we assess the need for
an adjustment to the valuation allowance on a quarterly basis. The assessment is
based on our estimates of future sources of taxable income for the jurisdictions
in which we operate and the periods over which our deferred tax assets will be
realizable. In the event we determine that we will be able to realize all or
part of our net deferred tax assets in the future, the valuation allowance will
be reversed in the period in which we make such determination. The release of a
valuation allowance against deferred tax assets may cause greater volatility in
the effective tax rate in the periods in which it is reversed.
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Quarterly Results of Operations and Other Data
The following sets forth selected unaudited quarterly consolidated statements of
operations data for each of the eight quarters in the period ended July 31,
2021 . The unaudited quarterly statements of operations data set forth below have
been prepared on the same basis as our audited consolidated financial statements
and, in the opinion of management, reflect all adjustments, consisting only of
normal recurring adjustments, that are necessary for the fair statement of such
data. The following quarterly financial data should be read in conjunction with
the consolidated financial statements and the related notes included elsewhere
in this Annual Report on Form 10-K. Our historical results are not necessarily
indicative of the results that may be expected in the future, and the results
for any quarter are not necessarily indicative of results to be expected for a
full year or any other period.
Consolidated statements of income
Three Months Ended
Oct. 31 Jan. 31 Apr. 30 Jul. 31 Oct. 31 Jan. 31 Apr. 30 Jul. 31
2019 2020 2020 2020 2020 2021 2021 2021
(in thousands)
Revenue $ 93,590 $ 101,268 $ 110,524 $ 125,887 $ 142,578 $ 157,044 $ 176,404 $ 197,074
Cost of revenue(1)(2) 19,558 20,238 24,579 31,358 31,727 34,135 38,977 45,478
Gross profit 74,032 81,030 85,945 94,529 110,851 122,909 137,427 151,596
Operating expenses:
Sales and marketing(1)(2) 59,411 61,621 67,727 89,222 96,889 110,403 115,730 136,385
Research and development(1)(2) 20,271 20,706 24,117 32,785 35,770 41,751 40,952 56,180
General and administrative(1)(3)(4) 12,625 28,983 14,615 17,409 20,859 24,653 24,595 26,428
Total operating expenses 92,307 111,310 106,459 139,416 153,518 176,807 181,277 218,993
Loss from operations (18,275) (30,280) (20,514) (44,887) (42,667) (53,898) (43,850) (67,397)
Interest income 2,022 1,855 1,528 1,072 940 755 593 524
Interest expense(5) - - - (5,025) (13,049) (13,245) (13,436) (13,634)
Other income (expense), net (29) (13) 70 (252) 268 518 71 329
Loss before income taxes (16,282) (28,438) (18,916) (49,092) (54,508) (65,870) (56,622) (80,178)
Provision for income taxes(6) 794 716 421 457 498 1,671 1,837 845
Net loss $
(17,076)
Net loss per share, basic and diluted
$ (0.13) $ (0.23) $ (0.15) $ (0.38) $ (0.41) $ (0.50) $ (0.43) $ (0.59) _____
(1) Includes stock-based compensation costs and associated social charges as follows: Cost of operating income
$ 1,414 $ 1,648 $ 1,672 $ 3,117 $ 3,266 $ 3,308 $ 3,665 $ 5,033 Sales and marketing 10,586 13,033 15,795 32,054 32,654 33,864 34,798 42,957 Research and development 5,054 6,280 7,145 13,458 14,900 17,747 15,033 25,558 General and administrative 2,167 4,392 4,470 7,351 9,509 12,194 11,681 12,395 Total$ 19,221 $ 25,353 $ 29,082 $ 55,980 $ 60,329 $ 67,113 $ 65,177 $ 85,943 _____ 77
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(2) Includes amortization expense of acquired intangible assets as follows:
Three Months Ended
Oct. 31 Jan. 31 Apr. 30 Jul. 31 Oct. 31 Jan. 31 Apr. 30 Jul. 31
2019 2020 2020 2020 2020 2021 2021 2021
(in thousands)
Cost of revenue $ 205 $ 205 $ 348 $ 1,272 $ 1,504 $ 1,503 $ 1,503 $ 1,958
Sales and marketing 8 8 8 50 73 73 73 108
Research and development 566 429 285 - - - - -
Total $ 779 $ 642 $ 641 $ 1,322 $ 1,577 $ 1,576 $ 1,576 $ 2,066
(3) Includes asset
impairment related to
facility exit as follows : $ - $ 316 $ 430 $ - $ 416 $ - $ - $ -
(4) Includes litigation-related
expenses as follows: $ 2,007 $ 16,334 $ 12 $ 3 $ - $ - $ - $ -
(5) Includes amortization
of debt discount and
issuance costs as follows: $ - $ -
$ -$ 4,885 $ 12,690 $ 12,882 $ 13,077 $ 13,274 (6) In the fiscal quarter endedApril 30, 2020 andJuly 31, 2020 , we recorded a tax benefit of$0.5 million and$0.6 million , respectively, associated with intangible assets recognized as a result of our acquisitions of Cloudneeti and Edgewise, respectively. For further information, refer to Note 6, Business Combinations, of the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Consolidated Statements of Operations as a Percentage of Revenue Three Months EndedOct. 31 Jan. 31 Apr. 30 Jul. 31 Oct. 31 Jan. 31 Apr. 30 Jul. 31 2019 2020 2020 2020 2020 2021 2021 2021 Revenue 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % Cost of revenue 21 20 22 25 22 22 22 23 Gross profit 79 80 78 75 78 78 78 77 Operating expenses: Sales and marketing 63 61 62 71 68 70 66 69 Research and development 22 20 22 26 25 26 23 29 General and administrative 14 29 13 14 15 16 14 13 Total operating expenses 99 110 97 111 108 112 103 111 Loss from operations (20) (30) (19) (36) (30) (34) (25) (34) Interest income 3 2 1 1 1 - - - Interest expense - - - (4) (9) (8) (7) (7) Other income (expense), net - - 1 - - - - - Loss before income taxes (17) (28) (17) (39) (38) (42) (32) (41) Provision for income taxes 1 1 - - 1 1 1 - Net loss (18) % (29) % (17) % (39) % (39) % (43) % (33) % (41) % 78
-------------------------------------------------------------------------------- Table of Contents Quarterly Trends The sequential increase in the net loss for the fiscal quarter endedJanuary 31, 2020 was primarily due to a$15.0 million payment to Broadcom inJanuary 2020 in connection with the legal settlement of the Symantec Cases. For further information refer to Note 11, Commitments and Contingencies, of the consolidated financial statements included elsewhere in this Annual Report Form 10-K. The sequential increase in the net loss for the fiscal quarter endedJuly 31, 2020 was primarily due to an increase in stock-based compensation expense as a result of attainment of performance related equity awards and higher overall compensation expense as a result of an increase in headcount, primarily in sales and marketing and research and development organizations. Liquidity and Capital Resources As ofJuly 31, 2021 , our principal sources of liquidity were cash, cash equivalents and short-term investments totaling$1,502.6 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. InJune 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$601.6 million as ofJuly 31, 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. 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. 79 -------------------------------------------------------------------------------- Table of Contents 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 the 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 ofJuly 31, 2021 , we had deferred revenue of$630.6 million , of which$571.3 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: Year Ended July 31, 2021 2020 2019 (in thousands)
Net cash flow generated by operating activities
$ 58,027 Net cash used in investing activities$ (109,668) $ (1,038,162) $ (162,074) Net cash provided by financing activities$ 41,675 $ 1,022,212
Operating Activities Net cash provided by operating activities during fiscal 2021 was$202.0 million , which resulted from a net loss of$262.0 million , adjusted for non-cash charges of$418.5 million and net cash inflows of$45.6 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of$258.5 million for stock-based compensation expense,$51.9 million for amortization of debt discount and issuance costs,$40.6 million for amortization of deferred contract acquisition costs,$29.7 million for depreciation and amortization expense,$21.0 million for non-cash operating lease costs,$11.7 million for amortization (accretion) of investments purchased at a premium (discount),$6.8 million for amortization expense of acquired intangible assets, partially offset by deferred income taxes of$2.4 million . Net cash inflows from changes in operating assets and liabilities were primarily the result of an increase of$262.4 million in deferred revenue from advance invoicing in accordance with our subscription contracts, an increase of$43.9 million in accrued compensation, an increase of$7.5 million in accounts payable and an increase of$6.5 million in accrued expenses, other current and noncurrent liabilities. Net cash inflows were partially offset by cash outflows resulting from an increase of$137.7 million in deferred contract acquisition costs, as our sales commission payments increased due to the addition of new customers and expansion of our existing customer subscriptions, an increase of$111.6 million in accounts receivable primarily due to timing of billings and collections, a decrease of$22.1 million in operating lease liabilities primarily due to lease payments, net of tenant incentives received and an increase of$3.4 million in prepaid expenses, other current and noncurrent assets. Net cash provided by operating activities during fiscal 2020 was$79.3 million , which resulted from a net loss of$115.1 million , adjusted for non-cash charges of$185.8 million and net cash inflows of$8.6 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of$121.4 million for stock-based compensation expense,$24.9 million for amortization of deferred contract acquisition costs,$17.7 million for depreciation and amortization expense,$13.6 million for non-cash operating lease costs,$4.9 million for amortization of debt discount and issuance costs,$3.4 million for amortization expense of acquired intangible assets, partially offset by deferred income taxes of$1.2 million . Net cash inflows from changes in operating assets and liabilities were primarily the result of an increase of$118.0 million in deferred revenue from advance invoicing in accordance with our subscription contracts, an increase of$27.9 80 -------------------------------------------------------------------------------- Table of Contents million in accrued compensation, an increase of$2.3 million in accrued expenses, other current and noncurrent liabilities and an increase of$0.9 million in accounts payable. Net cash inflows were partially offset by cash outflows resulting from an increase of$65.1 million in deferred contract acquisition costs, as our sales commission payments increased due to the addition of new customers and expansion of our existing customer subscriptions, an increase of$54.2 million in accounts receivable primarily due to timing of billings and collections, an increase of$13.6 million in prepaid expenses, other current and noncurrent assets and a decrease of$7.6 million in operating lease liabilities primarily due to lease payments, net of tenant incentives received. Net cash provided by operating activities during fiscal 2019 was$58.0 million , which resulted from a net loss of$28.7 million , adjusted for non-cash charges of$73.1 million and net cash inflows of$13.6 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of$46.4 million for stock-based compensation expense,$18.7 million for amortization of deferred contract acquisition costs,$10.4 million for depreciation and amortization expense and$0.9 million for amortization expense of acquired intangible assets, partially offset by accretion of purchased discounts, net of amortization of investment premiums of$2.2 million and deferred income taxes of$1.4 million . Net cash inflows from changes in operating assets and liabilities were primarily the result of an increase of$87.2 million in deferred revenue from advance invoicing in accordance with our subscription contracts and an increase of$0.5 million in accounts payable. Net cash inflows were partially offset by cash outflows resulting from an increase of$32.5 million in deferred contract acquisition costs, as our sales commission payments increased due to the addition of new customers and expansion of our existing customer subscriptions, an increase of$31.7 million in accounts receivable primarily due to customer growth, an increase of$7.6 million in prepaid expenses, other current and noncurrent assets, a decrease of$1.8 million in accrued compensation. Investing Activities Net cash used in investing activities during fiscal 2021 of$109.7 million was primarily attributable to the purchases of short-term investments of$815.5 million , capital expenditures of$58.3 million to support the growth of our cloud platform,$40.5 million for payments for business acquisitions, net of cash acquired, in connection with our acquisition of Trustdome and Smokescreen and$3.1 million for strategic investments. These activities were partially offset by proceeds from the maturities and sales of short-term investments of$807.7 million . Net cash used in investing activities during fiscal 2020 of$1,038.2 million was primarily attributable to the purchases of short-term investments of$1,255.6 million , capital expenditures of$51.8 million to support the growth of our cloud platform,$39.6 million for payments for business acquisitions, net of cash acquired, in connection with our acquisition of Cloudneeti and Edgewise and$2.0 million for strategic investments. These activities were partially offset by proceeds from the maturities and sales of short-term investments of$310.9 million . Net cash used in investing activities during fiscal 2019 of$162.1 million was primarily attributable to the purchases of short-term investments of$335.2 million , capital expenditures to support the growth of our cloud platform and increased headcount, including increased office space needs of$28.7 million , payments for business acquisitions, net of cash acquired, of$11.4 million and payments for acquired intangible assets of$1.5 million . These transactions were partially offset by proceeds from the maturities of short-term investments of$214.7 million . Financing Activities Net cash provided by financing activities of$41.7 million during fiscal 2021 was attributable to$25.7 million in proceeds from issuance of common stock under the employee stock purchase plan and$18.2 million in proceeds from the 81 -------------------------------------------------------------------------------- Table of Contents exercise of stock options. These transactions were partially offset by a payment of deferred merger consideration related to a business acquisition for$2.3 million . Net cash provided by financing activities of$1,022.2 million during fiscal 2020 was attributable to$1,130.5 million in proceeds from the issuance of our Notes, net of debt discount and issuance costs,$21.6 million in proceeds from the exercise of stock options and$15.3 million in proceeds from issuance of common stock under the employee stock purchase plan. These transactions were partially offset by purchases of capped calls for$145.2 million related to issuance of the Notes. Net cash provided by financing activities of$46.4 million during fiscal 2019 was attributable to$29.9 million in proceeds from the exercise of stock options, driven mainly by the end of our initial public offering lock-up period inSeptember 2018 ,$16.4 million in proceeds from issuance of common stock under the employee stock purchase plan and$1.9 million in proceeds from repayments of notes receivable for early exercised stock options. Proceeds were partially offset by$1.8 million in payments for offering costs related to our IPO. Contractual Obligations and Commitments The following table summarizes our contractual obligations asJuly 31, 2021 : Payments Due by Period Less Than 1 1 to 3 3 to 5 More Than Total Year Years Years 5 Years (in thousands) Real estate arrangements$ 37,746 $ 7,501 $ 14,142 $ 14,703 $ 1,400 Co-location and bandwidth arrangements 40,440 24,557 15,860 23 - Convertible senior notes(1) 1,155,515 1,318 2,875 1,151,322 - Non-cancelable purchase arrangements 58,317 43,191 15,126 - - Other current liabilities(2) 250 250 - - - Total$ 1,292,268 $ 76,817 $ 48,003 $ 1,166,048 $ 1,400
_____
(1) Includes the principal and future interest payments related to our Notes. For additional information refer to Note 9, Convertible Senior Notes, of the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. (2) Includes holdback amounts associated with business acquisitions, which are payable upon the lapse of the contractual indemnification period. The contractual commitment amounts in the table above are associated with agreements that are enforceable and legally binding. Obligations under contracts, including purchase orders, that can be cancelled without a significant penalty are not included in the table above. Off-Balance Sheet Arrangements As ofJuly 31, 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. 82 -------------------------------------------------------------------------------- As ofJuly 31, 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 included in Note 10, Operating Leases to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. 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. The critical accounting policies, estimates, assumptions and judgments that we believe have the most significant impact on the consolidated financial statements are described below. Revenue Recognition In accordance with Accounting Standards Codification ("ASC") Topic 606, Revenue From Contracts With Customers ("ASC 606"), revenue is recognized when a customer obtains control of promised services. The amount of revenue recognized reflects the consideration that we expect to be entitled to receive in exchange for these services. To achieve the core principle of this standard, we apply the following five steps: 1) Identify the contract with a customer We consider the terms and conditions of the contracts and our customary business practices in identifying our contracts under ASC 606. We determine we have a contract with a customer when the contract is approved, we can identify each party's rights regarding the services to be transferred, we can identify the payment terms for the services, we have determined the customer to have the ability and intent to pay, and the contract has commercial substance. We apply judgment in determining the customer's ability and intent to pay, which is based on a variety of factors, including the customer's historical payment experience or, in the case of a new customer, credit and financial information pertaining to the customer. 2) Identify the performance obligations in the contract Performance obligations promised in a contract are identified based on the services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the service either on its own or together with other resources that are readily available from third parties or from us, and are distinct in the context of the contract, whereby the transfer of the services is separately identifiable from other promises in the contract. Our performance obligations consist of (i) our subscription and support services and (ii) professional and other services. 3) Determine the transaction price The transaction price is determined based on the consideration to which we expect to be entitled in exchange for transferring services to the customer. Variable consideration is included in the transaction price if, in our judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. None of our contracts contain a significant financing component. 83 -------------------------------------------------------------------------------- Table of Contents 4) Allocate the transaction price to performance obligations in the contract If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price, or SSP. 5) Recognize revenue when or as we satisfy a performance obligation Revenue is recognized at the time the related performance obligation is satisfied by transferring the promised service to a customer. Revenue is recognized when control of the services is transferred to our customers, in an amount that reflects the consideration that we expect to receive in exchange for those services. We generate all our revenue from contracts with customers and apply judgment in identifying and evaluating any terms and conditions in contracts which may impact revenue recognition. Subscription and Support Revenue We generate revenue primarily from sales of subscriptions to access our cloud platform, together with related support services to our customers. Arrangements with customers do not provide the customer with the right to take possession of our software operating our cloud platform at any time. Instead, customers are granted continuous access to our cloud platform over the contractual period. A time-elapsed output method is used to measure progress because we transfer control evenly over the contractual period. Accordingly, the fixed consideration related to subscription and support revenue is generally recognized on a straight-line basis over the contract term beginning on the date that our service is made available to the customer. The typical subscription and support term is one to three years. Most of our contracts are non-cancelable over the contractual term. Customers typically have the right to terminate their contracts for cause if we fail to perform in accordance with the contractual terms. Some of our customers have the option to purchase additional subscription and support services at a stated price. These options generally do not provide a material right as they are priced at our SSP. Professional and Other Services Revenue Professional and other services revenue consists of fees associated with providing deployment advisory services that educate and assist our customers on the best use of our solutions, as well as advise customers on best practices as they deploy our solution. These services are distinct from subscription and support services. Professional services do not result in significant customization of the subscription service. Revenue from professional services provided on a time and materials basis is recognized as the services are performed. Total professional and other services revenue has historically been insignificant. Contracts with Multiple Performance Obligations Most of our contracts with customers contain multiple promised services consisting of (i) our subscription and support services and (ii) professional and other services that are distinct and accounted for separately. The transaction price is allocated to the separate performance obligations on a relative SSP basis. We determine SSP based on our overall pricing objectives, taking into consideration the type of subscription and support services and professional and other services, the geographical region of the customer and the number of users. Variable Consideration Revenue from sales is recorded at the net sales price, which is the transaction price, and includes estimates of variable consideration. The amount of variable consideration that is included in the transaction price is constrained, and is included in 84 -------------------------------------------------------------------------------- Table of Contents the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue will not occur when the uncertainty is resolved. If our services do not meet certain service level commitments, our customers are entitled to receive service credits, and in certain cases, refunds, each representing a form of variable consideration. We have not historically experienced any significant incidents affecting the defined levels of reliability and performance as required by our subscription contracts. Accordingly, any estimated refunds related to these agreements in the consolidated financial statements were not material during the periods presented. We provide rebates and other credits within our contracts with certain customers which are estimated based on the most likely amounts expected to be earned or claimed on the related sales transaction. Overall, the transaction price is reduced to reflect our estimate of the amount of consideration to which we are entitled based on the terms of the contract. Estimated rebates and other credits were not material during the periods presented. Contract Balances Contract liabilities consist of deferred revenue and include payments received in advance of performance under the contract. Such amounts are recognized as revenue over the contractual period. We receive payments from customers based upon contractual billing schedules; accounts receivable are recorded when the right to consideration becomes unconditional. Payment terms on invoiced amounts are typically 30 days. Contract assets include amounts related to our contractual right to consideration for both completed and partially completed performance obligations that may not have been invoiced and such amounts have been insignificant to date. Costs to Obtain and Fulfill a Contract We capitalize sales commissions and associated payroll taxes paid to internal sales personnel that are incremental to the acquisition of channel partner and direct customer contracts. These costs are recorded as deferred contract acquisition costs on the consolidated balance sheets. We determine whether costs should be deferred based on our sales compensation plans, if the commissions are in fact incremental and would not have occurred absent the customer contract. Sales commissions for renewal of a contract are not considered commensurate with the commissions paid for the acquisition of the initial contract given the substantive difference in commission rates in proportion to their respective contract values. Commissions paid upon the initial acquisition of a contract are amortized over an estimated period of benefit of five years while commissions paid for renewal contracts are amortized over the contractual term of the renewals. Amortization is recognized on a straight-line basis commensurate with the pattern of revenue recognition. We determine the period of benefit for commissions paid for the acquisition of the initial contract by taking into consideration the expected subscription term and expected renewals of our customer contracts, the duration of our relationships with customers, customer retention data, our technology development life cycle and other factors. Management exercises judgment to determine the period of benefit to amortize contract acquisition costs by considering factors such as expected renewals of customer contracts, duration of customer relationships and our technology development life cycle. Although we believe that the historical assumptions and estimates we have made are reasonable and appropriate, different assumptions and estimates could materially impact our reported financial results. Amortization of deferred contract acquisition costs is included in sales and marketing expense in the consolidated statements of operations. We periodically review these deferred costs to determine whether events or changes in circumstances have occurred that could impact the period of benefit of these deferred contract acquisition costs. 85 -------------------------------------------------------------------------------- Table of Contents Business Combinations We account for our business combinations using the acquisition method of accounting, which requires, among other things, allocation of the fair value of purchase consideration to the tangible and intangible assets acquired and liabilities assumed at their estimated fair values on the acquisition date. The excess of the fair value of purchase consideration over the values of these identifiable assets and liabilities is recorded as goodwill. When determining the fair value of assets acquired and liabilities assumed, we make estimates and assumptions, especially with respect to intangible assets. Our estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. During the measurement period, not to exceed one year from the date of acquisition, we may record adjustments to the assets acquired and liabilities assumed, with a corresponding offset to goodwill if new information is obtained related to facts and circumstances that existed as of the acquisition date. After the measurement period, any subsequent adjustments are reflected in the consolidated statements of operations. Acquisition costs, such as legal and consulting fees, are expensed as incurred. Derivative Instruments We enter into foreign currency forward contracts, a portion of which we designate as cash flow hedges, in order to manage the volatility of cash flows that relate to our cost of revenues and operating expenses denominated in foreign currencies. Gains or losses related to our cash flow hedges are recorded as a component of accumulated other comprehensive income (loss) ("AOCI") on the consolidated statements of stockholders' equity until the forecasted transaction occurs in earnings. When the forecasted transaction occurs, the related gains and losses are reclassified into earnings within the financial statement line item associated with the underlying hedged transaction. If the underlying hedged transaction does not occur, or it becomes probable that the hedged transaction will not occur, the cumulative unrealized gain or loss is reclassified immediately from AOCI into earnings within the financial statement line item associated with the underlying hedged transaction. We measure hedge effectiveness using regression analysis at hedge inception and periodically thereafter. We include time value in our effectiveness assessment. We recognize changes in the fair value of non-designated derivative instruments within other income (expense), net in the consolidated statements of operations in the same period that the fair value measurement occurs. All of our derivative instruments are measured at fair value and reported on a gross basis on the consolidated balance sheets. Derivative instruments are classified in the consolidated statements of cash flows as cash from operating activities, which reflect the classification of the underlying hedged transactions. Operating Leases We enter into operating lease arrangements for real estate assets related to office space and co-location assets related to space and racks at data center facilities. We determine if an arrangement contains a lease at its inception by assessing whether there is an identified asset and whether the arrangement conveys the right to control the use of the identified asset in exchange for consideration. Operating leases related balances are included in "operating lease right-of-use assets," "operating lease liabilities," and "operating lease liabilities, noncurrent" in the consolidated balance sheets. Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make payments arising from the lease. Operating lease right-of-use assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. Lease payments consist of the fixed payments under the arrangement. The operating lease liabilities are adjusted for any unpaid lease incentives, such as tenant improvement allowances. Variable costs, such as maintenance and utilities based on actual usage, are not included in the measurement of right-to-use assets and lease liabilities but are expensed when the event determining the amount of variable consideration to 86 -------------------------------------------------------------------------------- Table of Contents be paid occurs. As the implicit rate of our leases is not determinable, we use an incremental borrowing rate ("IBR") based on the information available at the lease commencement date in determining the present value of lease payments. The lease expense is recognized on a straight-line basis over the lease term. We generally use the base, non-cancelable lease term when recognizing the right-of-use assets and lease liabilities, unless it is reasonably certain that a renewal or termination option will be exercised. We account for lease components and non-lease components as a single lease component. Leases with a term of twelve months or less are not recognized on the consolidated balance sheets. We recognize lease expense for these leases on a straight-line basis over the term of the lease. Stock-Based Compensation Compensation expense related to stock-based awards granted to employees and non-employees is calculated based on the fair value of stock-based awards on the date of grant. We recognize stock-based compensation expense over an award's requisite service period based on the award's fair value. Stock-based compensation for common stock options is recognized based on the fair value of the awards granted, determined using the Black-Scholes option pricing model. Stock-based compensation expense is recognized on a straight-line basis over the requisite service period, generally four years. Stock-based compensation for purchase rights granted under the employee stock purchase plan is based on the Black-Scholes option pricing model fair value of the number of awards estimated as of the beginning of the offering period. Stock-based compensation expense is recognized following the straight-line attribution method over the offering period. Stock-based compensation for restricted stock units is measured based on the market closing price of our common stock on the grant date. Stock-based compensation expense is recognized on a straight-line basis over the requisite service period, generally four years. Stock-based compensation for performance stock awards ("PSAs") which have the same grant date and service inception date, is based on the probable number of shares to be attained and the market closing price of our common stock at the grant date. For PSAs where the service inception date of the awards precedes the grant date, stock-based compensation expense is recognized based on the number of PSAs for which it is probable that the performance condition will be met, using the accelerated attribution method and the market closing price of our common stock at each reporting date up to the grant date. The number of these PSAs for which it is probable that the performance condition will be met is determined using management's best estimate at the end of each reporting period. At the completion of the performance period for these PSAs, any earned PSAs are granted upon approval of the compensation committee of our board of directors. Convertible Senior Notes In accounting for the issuance of our Notes, we separated the Notes into liability and equity components. The carrying amounts of the liability component was calculated by measuring the fair value of similar liabilities that do not have associated convertible features. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the Notes as a whole. This difference represents the debt discount that is amortized to interest expense over the respective terms of the Notes using the effective interest rate method. The equity component was recorded in additional paid-in capital and is not remeasured as long as it continues to meet the conditions for equity classification. In accounting for the related debt issuance costs, we allocated the total amount incurred to the liability and equity components of the Notes based on their relative values. Issuance costs attributable to the liability component are being 87 -------------------------------------------------------------------------------- Table of Contents amortized to interest expense over the contractual term of the Notes. The issuance costs attributable to the equity component were netted against the equity component representing the conversion option in additional paid-in capital. To the extent that we receive the Notes conversion requests prior to the maturity of the Notes, a portion of the equity component is classified as temporary equity, which is measured as the difference between the principal and net carrying amount of the Notes requested for conversion. Upon settlement of the conversion requests, the difference between the fair value and the amortized book value of the liability component of the Notes requested for conversion is recorded as a gain or loss on early note conversion. The fair value of the Notes is measured based on a similar liability that does not have an associated convertible feature based on the remaining term of the Notes. Income Taxes We are subject to federal, state and local taxes inthe United States as well as in other tax jurisdictions or countries in which we conduct business. Earnings generated by our non-U.S. activities are related to applicable transfer pricing requirements under local country income tax laws. We account for uncertain tax positions based on those positions taken or expected to be taken in a tax return. We determine if the amount of available support indicates that it is more likely than not that the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. We then measure the tax benefit as the largest amount that is more than 50% likely to be realized upon settlement. We have a full valuation allowance for our net deferred tax assets generated from ourU.S. andU.K. operations. We will continue to assess the need for such valuation allowance on our deferred tax assets by evaluating both positive and negative evidence that may exist. Any adjustment to the deferred tax asset valuation allowance would be recorded in the periods in which the adjustment is determined to be required. Recently Issued Accounting Pronouncements Refer to Note 1, Business and Summary of Significant Accounting Policies, to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for more information regarding recently issued accounting pronouncements. Item 7A. Quantitative and Qualitative Disclosures about Market Risk We have operations inthe United States and internationally, and we are exposed to market risk in the ordinary course of our business. Interest Rate Risk As ofJuly 31, 2021 , we had cash, cash equivalents and short-term investments totaling$1,502.6 million , which were held for working capital 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. 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. The carrying amount of our cash equivalents reasonably approximates fair value, due to the short maturities of these instruments. Our investments are exposed to market risk due to a fluctuation in interest rates, which may affect our interest income and the fair market value of our investments. As ofJuly 31, 2021 , the effect of a hypothetical 100 basis point change in interest rates would have changed the fair value of our investments in available-for-sale securities by$6.2 million . Fluctuations in the fair value of our investments in available-for-sale securities caused by a change in interest rates (gains or losses on the carrying amount) are recorded in other comprehensive income (loss), and are realized only if we sell the underlying securities prior to maturity. 88 -------------------------------------------------------------------------------- Table of Contents Convertible Senior Notes InJune 2020 , we issued our Notes with an aggregate principal amount of$1,150.0 million . In connection with the issuance of the Notes, we entered into privately negotiated capped call transactions with certain counterparties (the "Capped Calls"). The Capped Calls are expected generally to offset the potential dilution to our common stock as a result of any conversion of the Notes. The Notes have a fixed annual interest rate of 0.125%, accordingly, we do not have economic interest rate exposure on the Notes. However, the fair value of the Notes is exposed to interest rate risk. Generally, the fair value of the Notes will increase as interest rates fall and decrease as interest rates rise. We carry the Notes at face value less unamortized discount and issuance costs on our balance sheet, and we present the fair value for required disclosure purposes only. In addition, the fair value of the Notes also fluctuates when the market price of our common stock fluctuates. The fair value was determined based on the quoted bid price of the Notes in an over-the-counter market on the last trading day of the reporting period. For further information refer to Note 9, Convertible Senior Notes, to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Foreign Currency Risk The vast majority of our sales contracts are denominated inU.S. dollars, with a small number of contracts denominated in foreign currencies. A portion of our operating expenses are incurred outsidethe United States , denominated in foreign currencies and subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the British Pound, Indian Rupee, Euro, Canadian dollar and Australian dollar. Additionally, fluctuations in foreign currency exchange rates may cause us to recognize transaction gains and losses in the consolidated statements of operations. The effect of a hypothetical 10% change in foreign currency exchange rates applicable to our business would not have a material impact on the consolidated financial statements for fiscal 2021, fiscal 2020 and fiscal 2019. During the fiscal 2021, we implemented a foreign currency risk management program and entered into foreign currency forward contracts to hedge a portion of our forecasted foreign currency-denominated expenses. These foreign currency derivative contracts have a maturity up to 18 months or less and are designated as cash flow hedges to protect our earnings subjected to foreign currency risk. 89 -------------------------------------------------------------------------------- Table of Contents Item 8. Financial Statements and Supplementary Data Index to Consolidated Financial Statements Page Report of Independent Registered Public Accounting Firm 91 Consolidated Financial Statements: Consolidated Balance Sheets as of July 31, 20 2 1 and 20 20 94
Consolidated statements of income for the years ended
95
Consolidated statements of comprehensive income for the years ended
20 2 1 , 20 20 and 201 9 96
Consolidated statements of equity for the years ended
97
Consolidated statements of cash flows for the years ended
20 2 1 , 20 20 and 201 9 98
Notes to Consolidated Financial Statements 99
The supplementary financial information required by this Item 8, is included in
Part II, Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations, under the caption "Quarterly Results of Operations and Other
Data," which is incorporated herein by reference. 77
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Zscaler, Inc.
Opinions on the Financial Statements and Internal Control over Financial
Reporting
We have audited the accompanying consolidated balance sheets of Zscaler, Inc.
and its subsidiaries (the "Company") as of July 31, 2021 and 2020, and the
related consolidated statements of operations, of comprehensive loss, of
stockholders' equity and of cash flows for each of the three years in the period
ended July 31, 2021 , including the related notes (collectively referred to as
the "consolidated financial statements"). We also have audited the Company's
internal control over financial reporting as of July 31, 2021 , based on criteria
established in Internal Control - Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
July 31, 2021 and 2020, and the results of its operations and its cash flows for
each of the three years in the period ended July 31, 2021 in conformity with
accounting principles generally accepted in the United States of America . Also
in our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of July 31, 2021 , based on criteria
established in Internal Control - Integrated Framework (2013) issued by the
COSO.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company
changed the manner in which it accounts for leases effective August 1, 2019 .
Basis for Opinions
The Company's management is responsible for these consolidated financial
statements, for maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control over financial
reporting, included in Management's Report on Internal Control Over Financial
Reporting appearing under Item 9A. Our responsibility is to express opinions on
the Company's consolidated financial statements and on the Company's internal
control over financial reporting based on our audits. We are a public accounting
firm registered with the Public Company Accounting Oversight Board (United
States ) (PCAOB) and are required to be independent with respect to the Company
in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those
standards require that we plan and perform the audits to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement, whether due to error or fraud, and whether effective
internal control over financial reporting was maintained in all material
respects.
Our audits of the consolidated financial statements included performing
procedures to assess the risks of material misstatement of the consolidated
financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test
basis, evidence regarding the amounts and disclosures in the
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consolidated financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the consolidated financial statements.
Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audits provide a reasonable basis for
our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the
current period audit of the consolidated financial statements that was
communicated or required to be communicated to the audit committee and that (i)
relates to accounts or disclosures that are material to the consolidated
financial statements and (ii) involved our especially challenging, subjective,
or complex judgments. The communication of critical audit matters does not alter
in any way our opinion on the consolidated financial statements, taken as a
whole, and we are not, by communicating the critical audit matter below,
providing a separate opinion on the critical audit matter or on the accounts or
disclosures to which it relates.
Revenue recognition - Identifying and evaluating terms and conditions in
contracts
As described in Note 1 to the consolidated financial statements, management
applies the following steps in their determination of revenue to be recognized:
1) identification of the contract with a customer; 2) identification of the
performance obligations in the contract; 3) determination of the transaction
price; 4) allocation of the transaction price to the performance obligations in
the contract; and 5) recognition of revenue when, or as, the Company satisfies a
performance obligation. Management applies judgment in identifying and
evaluating any terms and conditions in contracts which may impact revenue
recognition. For the fiscal year ended July 31, 2021 , the Company's revenue was
$673.1 million .
The principal considerations for our determination that performing procedures
relating to revenue recognition, specifically the identification and evaluation
of terms and conditions in contracts, is a critical audit matter are the
significant amount of effort and judgment required by management in identifying
and evaluating terms and conditions in contracts that impact revenue
recognition. This in turn led to a high degree of auditor judgment, subjectivity
and significant audit effort in performing our audit procedures to evaluate
whether terms and conditions in contracts were appropriately identified and
evaluated by management.
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Addressing the matter involved performing procedures and evaluating audit
evidence in connection with forming our overall opinion on the consolidated
financial statements. These procedures included testing the effectiveness of
controls relating to the revenue recognition process, including controls related
to the identification and evaluation of terms and conditions in contracts that
impact revenue recognition. These procedures also included, among others,
testing the completeness and accuracy of management's identification and
evaluation of the terms and conditions in contracts by examining revenue
arrangements on a test basis and testing management's process of identifying and
evaluating the terms and conditions in contracts, including management's
determination of the impact of those terms and conditions on revenue
recognition.
/s/ PricewaterhouseCoopers LLP
San Jose, California
September 16, 2021
We have been acting as the Company’s statutory auditor since 2015.
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ZSCALER, INC.
Consolidated Balance Sheets
(in thousands, except per share amounts)
July 31,
2021 2020
Assets
Current assets:
Cash and cash equivalents $ 275,898 $ 141,851
Short-term investments 1,226,654 1,228,722
Accounts receivable, net 257,109 147,584
Deferred contract acquisition costs 57,373 32,240
Prepaid expenses and other current assets 31,269 31,396
Total current assets 1,848,303 1,581,793
Property and equipment, net 108,576 75,734
Operating lease right-of-use assets 44,339 36,119
Deferred contract acquisition costs, noncurrent 149,657 77,675
Acquired intangible assets, net 32,129 24,024
Goodwill 58,977 30,059
Other noncurrent assets 15,650 8,054
Total assets $ 2,257,631 $ 1,833,458
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 12,547 $ 5,233
Accrued expenses and other current liabilities 22,908 16,361
Accrued compensation 93,622 49,444
Deferred revenue 571,286 337,263
Operating lease liabilities 19,842 15,600
Total current liabilities 720,205 423,901
Convertible senior notes, net 913,538 861,615
Deferred revenue, noncurrent 59,315 32,504
Operating lease liabilities, noncurrent 31,225 28,023
Other noncurrent liabilities 4,453 2,586
Total liabilities 1,728,736 1,348,629
Commitments and contingencies (Note 11)
Stockholders' Equity
Preferred stock; $0.001 par value; 200,000 shares authorized as
of July 31, 2021 and 2020, respectively; no shares issued and
outstanding as of July 31, 2021 and 2020 - -
Ordinary actions;
133 Additional paid-in capital 1,131,006 823,804 Accumulated other comprehensive income (loss) (650) 463 Accumulated deficit (601,600) (339,571) Total stockholders' equity 528,895 484,829 Total liabilities and stockholders' equity $
2 257 631
The accompanying notes are an integral part of these consolidated financial statements
statements.
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ZSCALER, INC.
Consolidated Statements of Operations
(in thousands, except per share amounts)
Year Ended July 31,
2021 2020 2019
Revenue $ 673,100 $ 431,269 $ 302,836
Cost of revenue 150,317 95,733 59,669
Gross profit 522,783 335,536 243,167
Operating expenses:
Sales and marketing 459,407 277,981 169,913
Research and development 174,653 97,879 61,969
General and administrative 96,535 73,632 46,598
Total operating expenses 730,595 449,492 278,480
Loss from operations
(207,812) (113,956) (35,313) Interest income 2,812 6,477 7,730 Interest expense (53,364) (5,025) - Other income (expense), net 1,186 (224) (329) Loss before income taxes (257,178) (112,728) (27,912) Provision for income taxes 4,851 2,388 743 Net loss$ (262,029) $ (115,116) $ (28,655) Net loss per share, basic and diluted $
(1.93)
Weighted average stocks used in the calculation of net loss per share, basic and diluted
135,654 129,323 123,566
The accompanying notes are an integral part of these consolidated financial statements
statements.
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ZSCALER, INC.
Consolidated Statements of Comprehensive Loss
(in thousands)
Year Ended July 31,
2021 2020 2019
Net loss $ (262,029) $ (115,116) $ (28,655)
Available-for-sale securities:
Change in net unrealized gains (losses) on
available-for-sale securities (486) 195 392
Cash flow hedging instruments:
Change in net unrealized gains and (losses) (228) - -
Net realized losses (gains) reclassified into net
loss (399) - -
Net change on cash flow hedges (627) - -
Other comprehensive income (loss) (1,113) 195 392
Comprehensive loss $ (263,142) $ (114,921) $ (28,263)
The accompanying notes are an integral part of these consolidated financial statements
statements.
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ZSCALER, INC.
Consolidated Statements of Stockholders' Equity
(in thousands)
Notes
Common Stock Additional Receivable Accumulated Other Total
Paid-In From Comprehensive Income Accumulated Stockholders'
Shares Capital Stockholders (Loss) Deficit Equity Amount
Balance as of July 31, 2018 119,764 $ 119 $ 438,392 $ (2,051) $ (124) $ (196,100) $ 240,236
Cumulative effect of accounting change - - (300) - - 300 -
Issuance of common stock upon exercise of
stock options 6,277 7 29,855 - - - 29,862
Issuance of common stock under the
employee stock purchase plan 1,131 1 16,435 - - - 16,436
Vesting of restricted units 89 - - - - - -
Repurchases of unvested common stock (8) - - - - - -
Repayments of principal amount on notes
receivable from stockholders - - - 1,905 - - 1,905
Accrued interest on notes receivable from
stockholders, net of repayments - - - 146 - - 146
Adjustment to initial public offering
costs - - 300 - - - 300
Vesting of early exercised stock options - - 983 - - - 983
Stock-based compensation - - 46,953 - - - 46,953
Other comprehensive income - - - - 392 - 392
Net loss - - - - - (28,655) (28,655)
Balance as of July 31, 2019 127,253 127 532,618 - 268 (224,455) 308,558
Issuance of common stock upon exercise of
stock options 3,450 4 21,598 - - - 21,602
Issuance of common stock under the
employee stock purchase plan 817 1 15,332 - - - 15,333
Vesting of restricted stock units 1,297 1 (1) - - - -
Vesting of early exercised stock options - - 463 - - - 463
Stock-based compensation - - 125,675 - - - 125,675
Equity component of convertible senior
notes, net of deferred tax - - 273,364 - - - 273,364
Purchases of capped calls related to
convertible senior notes - - (145,245) - - - (145,245)
Other comprehensive income - - - - 195 - 195
Net loss - - - - - (115,116) (115,116)
Balance as of July 31, 2020 132,817 133 823,804 - 463 (339,571) 484,829
Issuance of common stock upon exercise of
stock options 2,466 3 18,218 - - - 18,221
Issuance of common stock under the
employee stock purchase plan 338 - 25,704 - - - 25,704
Vesting of restricted stock units 3,041 3 (3) - - - -
Vesting of early exercised stock options - - 93 - - - 93
Stock-based compensation - - 263,190 - - - 263,190
Other comprehensive loss - - - - (1,113) - (1,113)
Net loss - - - - - (262,029) (262,029)
Balance as of July 31, 2021 138,662 $ 139 $ 1,131,006 $ - $ (650) $ (601,600) $ 528,895
The accompanying notes are an integral part of these consolidated financial statements
statements.
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ZSCALER, INC. Consolidated Statements of Cash Flows
(in thousands)
Year Ended July 31,
2021 2020 2019
Cash Flows From Operating Activities
Net loss $ (262,029) $ (115,116) $ (28,655)
Adjustments to reconcile net loss to cash provided by
operating activities:
Depreciation and amortization expense 29,663 17,734 10,398
Amortization expense of acquired intangible assets 6,795 3,384 908
Amortization of deferred contract acquisition costs 40,558 24,922 18,651
Amortization of debt discount and issuance costs 51,923 4,885 -
Non-cash operating lease costs 20,995 13,555 -
Stock-based compensation expense 258,535 121,395 46,423
Amortization (accretion) of investments purchased at a
premium (discount) 11,715 50 (2,181)
Deferred income taxes (2,406) (1,172) (1,392)
Impairment of assets 416 746 -
Other 307 321 284
Changes in operating assets and liabilities, net of the effects of business acquisitions Trade receivables
(111,605) (54,222) (31,730) Deferred contract acquisition costs (137,673) (65,052) (32,526) Prepaid expenses, other current and noncurrent assets (3,388) (13,580) (7,642) Accounts payable 7,451 862 495
Accrued expenses, other current and non-current liabilities 6,532
2,292 (336) Accrued compensation 43,877 27,900 (1,849) Deferred revenue 262,425 118,017 87,179 Operating lease liabilities (22,051) (7,604) - Net cash provided by operating activities 202,040 79,317 58,027 Cash Flows From Investing Activities Purchases of property, equipment and other assets (48,165) (43,072) (25,520) Capitalized internal-use software (10,132) (8,737) (3,162) Acquired intangible assets - - (1,480)
Payments for business acquisitions, net of cash acquired (40,530)
(39,601) (11,432) Purchases of strategic investments (3,077) (2,000) - Purchases of short-term investments (815,480) (1,255,629) (335,186) Proceeds from maturities of short-term investments 785,217 289,785 199,716 Proceeds from sale of short-term investments 22,499 21,092 14,990 Net cash used in investing activities (109,668) (1,038,162) (162,074) Cash Flows From Financing Activities Payments of offering costs related to initial public offering - - (1,797)
Proceeds from the issuance of ordinary shares upon exercise of stock options
18,221 21,602 29,862
Proceeds from the issuance of ordinary shares under the employee share purchase plan
25,704 15,333 16,436
Payment of deferred consideration related to a business acquisition
(2,250) - -
Proceeds from the issuance of convertible senior notes, net of issue costs
- 1,130,522 -
Purchases of capped call options linked to senior convertible bonds
- (145,245) - Repurchases of unvested common stock - - (22) Repayments of notes receivable from stockholders - - 1,905 Net cash provided by financing activities 41,675 1,022,212 46,384
Net increase (decrease) in cash and cash equivalents (1) 134,047
63,367 (57,663) Cash and cash equivalents at beginning of period(1) 141,851 78,484 136,147 Cash and cash equivalents at end of period(1)$ 275,898
Supplemental Disclosure of Cash Flow Information: Cash paid for income taxes, net of tax refunds$ 4,144 $ 2,525 $ 1,770 Cash paid for interest expense$ 1,462 $ - $ - Non-cash activities Net change in purchased equipment included in accounts payable and accrued expenses$ 14
Rights of use of operating leases obtained in exchange for operating lease obligations, net of terminations
Vesting of early exercised common stock options$ 93 $ 463 $ 983 Net change in deferred offering costs accrued $ -
$ –
(1) We did not hold any restricted cash for the periods presented.
The accompanying notes are an integral part of these consolidated financial statements
statements.
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ZSCALER, INC.
Notes to Consolidated Financial Statements
Note 1. Business and Summary of Significant Accounting Policies
Description of the Business
Zscaler, Inc. ("Zscaler ," the "Company," "we," "us," or "our") is a cloud
security company that developed a platform incorporating core security
functionalities needed to enable fast and secure access to cloud resources based
on identity, context and organization's policies. Our solution is a
purpose-built, multi-tenant, distributed cloud platform that secures
user-to-app, app-to-app, and machine-to-machine communications, over any network
and any location. We deliver our solutions using a software-as-a-service
("SaaS") business model and sell subscriptions to customers to access our cloud
platform, together with related support services. We were incorporated in
Delaware in September 2007 and conduct business worldwide, with presence in
North America , Europe and Asia . Our headquarters are in San Jose, California .
Fiscal Year
Our fiscal year ends on July 31 . References to fiscal 2021, for example, refer
to our fiscal year ended July 31, 2021 .
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries and have been prepared in conformity
with accounting principles generally accepted in the United States ("U.S.
GAAP"). All intercompany balances and transactions have been eliminated in
consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S.
GAAP requires management to make estimates, judgments and assumptions that
affect the amounts reported and disclosed in the financial statements and
accompanying notes. Such estimates include, but are not limited to, the
determination of revenue recognition, deferred revenue, deferred contract
acquisition costs, valuation of acquired intangible assets, period of benefit
generated from our deferred contract acquisition costs, allowance for doubtful
accounts, valuation of common stock options and stock-based awards, useful lives
of property and equipment, useful lives of acquired intangible assets,
recoverability of goodwill, valuation of deferred tax assets and liabilities,
loss contingencies related to litigation, fair value and effective interest rate
of convertible senior notes, valuation of non-marketable equity investments and
the discount rate used for operating leases. Management determines these
estimates and assumptions based on historical experience and on various other
assumptions that are believed to be reasonable. Actual results could differ
significantly from these estimates, and such differences may be material to the
consolidated financial statements.
Due to the COVID-19 pandemic, there is ongoing uncertainty and significant
disruption in the global economy and financial markets. We are not aware of any
specific event or circumstances that would require an update to our estimates,
judgments or assumptions or a revision to the carrying value of our assets or
liabilities as of the date of issuance of these consolidated financial
statements. These estimates, judgments and assumptions may change in the future,
as new events occur or additional information is obtained.
Foreign Currency
The functional currency of our foreign subsidiaries is the U.S. dollar.
Accordingly, monetary assets and liabilities of our foreign subsidiaries are
re-measured into U.S. dollars at the exchange rates in effect at the reporting
date, non-monetary assets and liabilities are re-measured at historical rates,
revenue and expenses are re-measured at average exchange rates in
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effect during each reporting period. Foreign currency transaction gains and
losses are recorded in other income (expense), net in the consolidated
statements of operations. Foreign currency remeasurement gains and losses and
foreign currency transaction gains and losses are not significant to the
consolidated financial statements.
Concentration of Risks
We generate revenue primarily from sale of subscriptions to access our cloud
platform, together with related support services. Our sales team, along with our
channel partner network of global telecommunications service providers, system
integrators and value-added resellers (collectively "channel partners"), sells
our services worldwide to organizations of all sizes. Due to the nature of our
services and the terms and conditions of our contracts with our channel
partners, our business could be affected unfavorably if we are not able to
continue our relationships with them.
Our financial instruments that are exposed to concentrations of credit risk
consist primarily of cash, cash equivalents, short-term investments and accounts
receivable. Although we deposit our cash with multiple financial institutions,
the deposits, at times, may exceed federally insured limits. Cash equivalents
and short-term investments consist of highly liquid investments in money market
funds, U.S. treasury, U.S. agency securities and corporate debt securities,
which are invested through financial institutions in the United States .
We grant credit to our customers in the normal course of business. We monitor
the financial condition of our customers to reduce credit risk. Refer to Note 2,
Revenue Recognition, for information regarding customers with concentration of
10% or more of the total balance of accounts receivable, net.
Segment Information
We operate as one reportable and operating segment. Our chief operating decision
maker is our chief executive officer, who reviews financial information
presented on a consolidated basis for purposes of making operating decisions,
assessing financial performance and allocating resources.
Revenue Recognition
In accordance with Accounting Standards Codification ("ASC") Topic 606, Revenue
From Contracts With Customers ("ASC 606"), revenue is recognized when a customer
obtains control of promised services. The amount of revenue recognized reflects
the consideration that we expect to be entitled to receive in exchange for these
services. To achieve the core principle of this standard, we apply the following
five steps:
1) Identify the contract with a customer
We consider the terms and conditions of the contracts and our customary business
practices in identifying our contracts under ASC 606. We determine we have a
contract with a customer when the contract is approved, we can identify each
party's rights regarding the services to be transferred, we can identify the
payment terms for the services, we have determined the customer has the ability
and intent to pay and the contract has commercial substance. We apply judgment
in determining the customer's ability and intent to pay, which is based on a
variety of factors, including the customer's historical payment experience or,
in the case of a new customer, credit and financial information pertaining to
the customer.
2) Identify the performance obligations in the contract
Performance obligations promised in a contract are identified based on the
services that will be transferred to the customer that are both capable of being
distinct, whereby the customer can benefit from the service either on its own or
together with other resources that are readily available from third parties or
from us, and are distinct in the context of the
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contract, whereby the transfer of the services is separately identifiable from
other promises in the contract. Our performance obligations consist of (i) our
subscription and support services and (ii) professional and other services.
3) Determine the transaction price
The transaction price is determined based on the consideration to which we
expect to be entitled in exchange for transferring services to the customer.
Variable consideration is included in the transaction price if, in our judgment,
it is probable that a significant future reversal of cumulative revenue under
the contract will not occur. None of our contracts contain a significant
financing component.
4) Allocate the transaction price to performance obligations in the contract
If the contract contains a single performance obligation, the entire transaction
price is allocated to the single performance obligation. Contracts that contain
multiple performance obligations require an allocation of the transaction price
to each performance obligation based on a relative standalone selling price
("SSP").
5) Recognize revenue when or as we satisfy a performance obligation
Revenue is recognized at the time the related performance obligation is
satisfied by transferring the promised service to a customer. Revenue is
recognized when control of the services is transferred to our customers, in an
amount that reflects the consideration that we expect to receive in exchange for
those services. We generate all our revenue from contracts with customers and
apply judgment in identifying and evaluating any terms and conditions in
contracts which may impact revenue recognition.
Subscription and Support Revenue
We generate revenue primarily from sales of subscriptions to access our cloud
platform, together with related support services to our customers. Arrangements
with customers do not provide the customer with the right to take possession of
our software operating our cloud platform at any time. Instead, customers are
granted continuous access to our cloud platform over the contractual period. A
time-elapsed output method is used to measure progress because we transfer
control evenly over the contractual period. Accordingly, the fixed consideration
related to subscription and support revenue is generally recognized on a
straight-line basis over the contract term beginning on the date that our
service is made available to the customer.
The typical subscription and support term is one to three years. Most of our
contracts are non-cancelable over the contractual term. Customers typically have
the right to terminate their contracts for cause if we fail to perform in
accordance with the contractual terms. Some of our customers have the option to
purchase additional subscription and support services at a stated price. These
options generally do not provide a material right as they are priced at our SSP.
Professional and Other Services Revenue
Professional and other services revenue consists of fees associated with
providing deployment advisory services that educate and assist our customers on
the best use of our solutions, as well as advise customers on best practices as
they deploy our solution. These services are distinct from subscription and
support services. Professional services do not result in significant
customization of the subscription service. Revenue from professional services
provided on a time and materials basis is recognized as the services are
performed. Total professional and other services revenue has historically not
been material.
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Contracts with Multiple Performance Obligations
Most of our contracts with customers contain multiple promised services
consisting of: (i) our subscription and support services and (ii) professional
and other services that are distinct and accounted for separately. The
transaction price is allocated to the separate performance obligations on a
relative SSP basis. We determine SSP based on our overall pricing objectives,
taking into consideration the type of subscription and support services and
professional and other services, the geographical region of the customer and the
number of users.
Variable Consideration
Revenue from sales is recorded at the net sales price, which is the transaction
price, and includes estimates of variable consideration. The amount of variable
consideration that is included in the transaction price is constrained and is
included in the net sales price only to the extent that it is probable that a
significant reversal in the amount of the cumulative revenue will not occur when
the uncertainty is resolved.
If our services do not meet certain service level commitments, our customers are
entitled to receive service credits, and in certain cases, refunds, each
representing a form of variable consideration. We have historically not
experienced any significant incidents affecting the defined levels of
reliability and performance as required by our subscription contracts.
Accordingly, estimated refunds related to these agreements were not material to
the periods presented.
We provide rebates and other credits within our contracts with certain
customers, which are estimated based on the value expected to be earned or
claimed on the related sales transaction. Overall, the transaction price is
reduced to reflect our estimate of the amount of consideration to which we are
entitled based on the terms of the contract. Estimated rebates and other credits
were not material during the periods presented.
Accounts Receivable and Allowance
Accounts receivable are recorded at the invoiced amount and are non-interest
bearing. Accounts receivable are stated at their net realizable value, net of an
allowance for doubtful accounts. We have a well-established collections history
from our customers. Credit is extended to customers based on an evaluation of
their financial condition and other factors. In determining the necessary
allowance for doubtful accounts, we estimate the lifetime expected credit losses
against the existing accounts receivable balance. Our estimate is based on
certain factors including historical loss rates, current economic conditions,
reasonable and supportable forecasts and customer-specific circumstances. The
allowance for doubtful accounts has historically not been material. There were
no material write-offs recognized in the periods presented. Accordingly, the
movements in the allowance for doubtful accounts were not material for any of
the periods presented. We do not have any off-balance-sheet credit exposure
related to our customers.
Cash Equivalents and Short-Term Investments
We classify all highly liquid investments purchased with an original maturity of
90 days or less from the date of purchase as cash equivalents and all highly
liquid investments with original maturities beyond 90 days at the time of
purchase as short-term investments. Our cash equivalents and short-term
investments consist of highly liquid investments in money market funds, U.S.
treasury securities, U.S. government agency securities and corporate debt
securities.
We classify our investments as available-for-sale investments and present them
within current assets since these investments represent funds available for
current operations and we have the ability and intent, if necessary, to
liquidate any of these investments in order to meet our liquidity needs or to
grow our business, including for potential business acquisitions or other
strategic transactions. Our investments are carried at fair value, with
unrealized gains and losses unrelated to credit loss factors reported in
accumulated other comprehensive income (loss) ("AOCI").
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Our investments are reviewed periodically when there is a decline in a
security's fair value below the amortized cost basis. We consider our intent to
sell and whether it is more likely than not that we will be required to sell the
securities before the recovery of its cost basis. If either of these criteria
are triggered, the amortized cost basis of the debt security is written down to
fair value through other income (expense), net. If neither criteria is met, we
evaluate whether the decline in fair value below the amortized cost basis is
related to credit-related factors or other factors such as interest rate
fluctuations. The factors considered in this analysis include the extent the
fair value is less than the amortized cost basis, whether there were changes to
the rating of the security by a ratings agency, whether the issuer has failed to
make scheduled interest payments and other adverse conditions as applicable.
Credit-related impairment losses, limited by the amount that the fair value is
less than the amortized cost basis, are recorded through an allowance for credit
losses in other income (expense), net. For purposes of identifying and measuring
credit-related impairments, our policy is to exclude the applicable accrued
interest from both the fair value and amortized cost basis of the related debt
security. Accrued interest receivable, net of the allowance for credit losses,
if any, is recorded to prepaid expenses and other current assets. There were no
credit-related impairments recognized on our investments during the periods
presented.
Interest income, amortization (accretion) of investments purchased at a premium
(discount) and realized gains and losses are included in interest income in the
consolidated statements of operations. We use the specific identification method
to determine the cost in calculating realized gains and losses upon the sale of
these investments.
Strategic Investments
Our strategic investments consist of non-marketable equity investments of
privately held companies. Investments in non-marketable equity investments of
privately held companies without readily determinable fair values are measured
using the measurement alternative, as we have less than 20% ownership and do not
have the ability to exercise significant influence over their operations. The
carrying amount of non-marketable equity investments is adjusted based on
observable price changes from orderly transactions for identical or similar
investments of the same issuer and by impairments, when events or circumstances
indicate a decline in value has occurred. Non-marketable equity investments that
have been remeasured during the period due to an observable event or impairment
are classified within Level 3 in the fair value hierarchy because we estimate
the value based on valuation methods which may include a combination of the
observable transaction price at the transaction date and other unobservable
inputs including volatility, rights, and obligations of the investments we hold.
Our strategic investments are included within other noncurrent assets in the
consolidated balance sheets and adjustments to their carrying amounts are
recorded in other income (expense), net in the consolidated statements of
operations. There were no material events or circumstances impacting the
carrying amount of our strategic investments during the periods presented.
Fair Value of Financial Instruments
Our financial instruments consist of cash equivalents, short-term investments,
accounts receivable, accounts payable, accrued liabilities and convertible
senior notes. Cash equivalents and short-term investments are recorded at fair
value. Accounts receivable, accounts payable and accrued liabilities are stated
at their carrying value, which approximates fair value due to the short-time to
the expected receipt or payment date. Assets recorded at fair value on a
recurring basis in the consolidated balance sheets, consisting of cash
equivalents and short-term investments, are categorized in accordance with the
fair value hierarchy based upon the level of judgment associated with the inputs
used to measure their fair values. Convertible senior notes are carried at the
initially allocated liability value less unamortized debt discount and issuance
costs on the consolidated balance sheets, and the fair value of the convertible
senior notes is presented at each reporting period for disclosure purposes only.
Property and Equipment
Property and equipment, net are stated at historical cost net of accumulated
depreciation. Property and equipment, excluding leasehold improvements, are
depreciated using the straight-line method over the estimated useful lives of
the
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respective assets, generally ranging from three to five years. Leasehold
improvements are amortized using the straight-line method over the shorter of
the estimated useful lives of the respective assets or the lease term.
Expenditures for maintenance and repairs are expensed as incurred and
significant improvements and betterments that substantially enhance the life of
an asset are capitalized.
Capitalized Internal-Use Software Development Costs
We capitalize certain costs incurred during the application development stage in
connection with software development for our cloud security platform. Costs
related to preliminary project activities and post-implementation activities are
expensed as incurred. Capitalized costs are recorded as part of property and
equipment in the consolidated balance sheets. Maintenance and training costs are
expensed as incurred. Capitalized internal-use software is amortized on a
straight-line basis over its estimated useful life, which is generally three
years, and is recorded as cost of revenue in the consolidated statements of
operations. Capitalization of development costs, inclusive of stock-based
compensation, of software for internal-use in fiscal 2021, fiscal 2020 and
fiscal 2019 was $16.5 million , $13.2 million and $3.7 million , respectively.
Amortization expense of capitalized software for internal-use in fiscal 2021,
fiscal 2020 and fiscal 2019 was $5.9 million , $1.4 million and $1.0 million ,
respectively.
Business Combinations
We account for our business combinations using the acquisition method of
accounting, which requires, among other things, allocation of the fair value of
purchase consideration to the tangible and intangible assets acquired and
liabilities assumed at their estimated fair values on the acquisition date. The
excess of the fair value of purchase consideration over the values of these
identifiable assets and liabilities is recorded as goodwill. When determining
the fair value of assets acquired and liabilities assumed, we make estimates and
assumptions, especially with respect to intangible assets. Our estimates of fair
value are based upon assumptions believed to be reasonable, but which are
inherently uncertain and unpredictable and, as a result, actual results may
differ from estimates. During the measurement period, not to exceed one year
from the date of acquisition, we may record adjustments to the assets acquired
and liabilities assumed, with a corresponding offset to goodwill if new
information is obtained related to facts and circumstances that existed as of
the acquisition date. After the measurement period, any subsequent adjustments
are reflected in the consolidated statements of operations. Acquisition costs,
such as legal and consulting fees, are expensed as incurred.
Goodwill and Other Long-Lived Assets, including Acquired Intangible Assets
Goodwill represents the excess of the fair value of purchase consideration in a
business combination over the fair value of net tangible and intangible assets
acquired. Goodwill amounts are not amortized, but rather tested for impairment
at least annually or more often if circumstances indicate that the carrying
value may not be recoverable. No indications of impairment of goodwill were
noted during the periods presented.
Acquired intangible assets consist of identifiable intangible assets, including
developed technology and customer relationships, resulting from business
combinations. Acquired finite-lived intangible assets are initially recorded at
fair value and are amortized on a straight-line basis over their estimated
useful lives. Amortization expense of developed technology and customer
relationships is recorded primarily within cost of revenues and sales and
marketing expenses, respectively, in the consolidated statements of operations.
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Long-lived assets, such as property and equipment and acquired intangible
assets, are reviewed for impairment whenever events or changes in circumstances
indicate that their carrying amounts may not be recoverable. We measure the
recoverability of these assets by comparing the carrying amounts to the future
undiscounted cash flows that these assets are expected to generate. If the total
of the future undiscounted cash flows are less than the carrying amount of an
asset, we record an impairment charge for the amount by which the carrying
amount of the asset exceeds the fair value. In fiscal 2021 and fiscal 2020, we
recognized asset impairments of $0.4 million and $0.7 million , respectively, in
general and administrative expenses in the consolidated statement of operations
related primarily to the abandonment of a leased facility and relocation of our
corporate headquarters.
Derivative Instruments
We enter into foreign currency forward contracts, a portion of which we
designate as cash flow hedges, in order to manage the volatility of cash flows
that relate to our cost of revenues and operating expenses denominated in
foreign currencies.
Gains or losses related to our cash flow hedges are recorded as a component of
AOCI on the consolidated statements of stockholders' equity until the forecasted
transaction occurs in earnings. When the forecasted transaction occurs, the
related gains and losses are reclassified into earnings within the financial
statement line item associated with the underlying hedged transaction. If the
underlying hedged transaction does not occur, or it becomes probable that the
hedged transaction will not occur, the cumulative unrealized gain or loss is
reclassified immediately from AOCI into earnings within the financial statement
line item associated with the underlying hedged transaction. We measure hedge
effectiveness using regression analysis at hedge inception and periodically
thereafter. We include time value in our effectiveness assessment.
We recognize changes in the fair value of non-designated derivative instruments
within other income (expense), net in the consolidated statements of operations
in the same period that the fair value measurement occurs.
All of our derivative instruments are measured at fair value. We have elected to
present the derivative assets and derivative liabilities on a gross basis on the
consolidated balance sheets. Derivative instruments are classified in the
consolidated statements of cash flows as cash from operating activities, which
reflect the classification of the underlying hedged transactions.
Operating Leases
We enter into operating lease arrangements for real estate assets related to
office space and co-location assets related to space and racks at data center
facilities. We determine if an arrangement contains a lease at its inception by
assessing whether there is an identified asset and whether the arrangement
conveys the right to control the use of the identified asset in exchange for
consideration. Operating leases related balances are included in "operating
lease right-of-use assets," "operating lease liabilities," and "operating lease
liabilities, noncurrent" in the consolidated balance sheets. Right-of-use assets
represent our right to use an underlying asset for the lease term and lease
liabilities represent our obligation to make payments arising from the lease.
Operating lease right-of-use assets and lease liabilities are recognized at the
lease commencement date based on the present value of lease payments over the
lease term. Lease payments consist of the fixed payments under the arrangement.
The operating lease liabilities are adjusted for any unpaid lease incentives,
such as tenant improvement allowances. Variable costs, such as maintenance and
utilities based on actual usage, are not included in the measurement of
right-to-use assets and lease liabilities but are expensed when the event
determining the amount of variable consideration to be paid occurs. As the
implicit rate of our leases is not determinable, we use an incremental borrowing
rate ("IBR") based on
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the information available at the lease commencement date in determining the
present value of lease payments. The lease expense is recognized on a
straight-line basis over the lease term.
We generally use the base, non-cancelable lease term when recognizing the
right-of-use assets and lease liabilities, unless it is reasonably certain that
a renewal or termination option will be exercised. We account for lease
components and non-lease components as a single lease component.
Leases with a term of twelve months or less are not recognized on the
consolidated balance sheets. We recognize lease expense for these leases on a
straight-line basis over the term of the lease.
Stock-Based Compensation
Compensation expense related to stock-based awards granted to employees and
non-employees is calculated based on the fair value of stock-based awards on the
date of grant. We recognize stock-based compensation expense over an award's
requisite service period based on the award's fair value.
Stock-based compensation for common stock options is recognized based on the
fair value of the awards granted, determined using the Black-Scholes option
pricing model. Stock-based compensation expense is recognized on a straight-line
basis over the requisite service period, generally four years.
Stock-based compensation for purchase rights granted under the employee stock
purchase plan is based on the Black-Scholes option pricing model fair value of
the number of awards estimated as of the beginning of the offering period.
Stock-based compensation expense is recognized following the straight-line
attribution method over the offering period.
Stock-based compensation for restricted stock units is measured based on the
market closing price of our common stock on the grant date. Stock-based
compensation expense is recognized on a straight-line basis over the requisite
service period, generally four years.
Stock-based compensation for performance stock awards ("PSAs") which have the
same grant date and service inception date, is based on the probable number of
shares to be attained and the market closing price of our common stock at the
grant date. For PSAs where the service inception date of the awards precedes the
grant date, stock-based compensation expense is recognized based on the number
of PSAs for which it is probable that the performance condition will be met,
using the accelerated attribution method and the market closing price of our
common stock at each reporting date up to the grant date. The number of these
PSAs for which it is probable that the performance condition will be met is
determined using management's best estimate at the end of each reporting period.
At the completion of the performance period for these PSAs, any earned PSAs are
granted upon approval of the compensation committee of our board of directors.
Convertible Senior Notes
In accounting for the issuance of the convertible senior notes, we separated the
convertible senior notes into liability and equity components. The carrying
amounts of the liability component was calculated by measuring the fair value of
similar liabilities that do not have associated convertible features. The
carrying amount of the equity component representing the conversion option was
determined by deducting the fair value of the liability component from the par
value of the convertible senior notes as a whole. This difference represents the
debt discount that is amortized to interest expense over the respective terms of
the convertible senior notes using the effective interest rate method. The
equity component was recorded in additional paid-in capital and is not
remeasured as long as it continues to meet the conditions for equity
classification.
In accounting for the related debt issuance costs, we allocated the total amount
incurred to the liability and equity components of the convertible senior notes
based on their relative values. Issuance costs attributable to the liability
component are being amortized to interest expense over the contractual term of
the convertible senior notes. The issuance
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costs attributable to the equity component were netted against the equity
component representing the conversion option in additional paid-in capital.
To the extent that we receive the convertible senior notes conversion requests
prior to their maturity, a portion of the equity component is classified as
temporary equity, which is measured as the difference between the principal and
net carrying amount of the convertible senior notes requested for conversion.
Upon settlement of the conversion requests, the difference between the fair
value and the amortized book value of the liability component of the convertible
senior notes requested for conversion is recorded as a gain or loss on early
note conversion. The fair value of the convertible senior notes is measured
based on a similar liability that does not have an associated convertible
feature based on the remaining term of the convertible senior notes.
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 our solutions.
Accordingly, the majority of our research and development expenses result from
employee-related costs, including salaries, bonuses, benefits, stock-based
compensation and costs associated with technology tools used by our engineers.
Advertising Expenses
Advertising expenses are charged to sales and marketing expenses in the
consolidated statements of operations as incurred. We recognized advertising
expense of $11.8 million , $11.8 million and $8.6 million in fiscal 2021, fiscal
2020 and fiscal 2019, respectively.
Warranties and Indemnification
Our cloud platform is generally warranted to be free of defects under normal use
and to perform substantially in accordance with the subscription agreement.
Additionally, our contracts generally include provisions for indemnifying
customers and channel partners against liabilities if our services infringe or
misappropriate a third party's intellectual property rights. Costs and
liabilities incurred as a result of warranties and indemnification obligations
were not material during the periods presented.
Legal Contingencies
We may be subject to legal proceedings and litigation arising from time to time.
We record a liability when we believe that it is both probable that a loss has
been incurred and the amount can be reasonably estimated. We periodically
evaluate developments in our legal matters that could affect the amount of
liability that we accrue, if any, and adjust, as appropriate. Until the final
resolution of any such matter for which we may be required to record a
liability, there may be a loss exposure in excess of the liability recorded and
such amount could be significant. We expense legal fees as incurred.
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Income Taxes
We account for income taxes using the asset and liability method. Deferred
income taxes are recognized by applying the enacted statutory tax rates
applicable to future years to differences between the carrying amounts of
existing assets and liabilities and their respective tax bases and net operating
loss and tax credit carryforwards. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the period that includes
the enactment date. The measurement of deferred tax assets is reduced, if
necessary, by a valuation allowance to amounts that are more likely than not to
be realized.
We recognize tax benefits from uncertain tax positions only if we believe that
it is more likely than not that the tax position will be sustained on
examination by the taxing authorities based on the technical merits of the
position. The tax benefits recognized in the financial statements from such
positions are then measured based on the largest benefit that has a greater than
50% likelihood of being realized upon settlement.
Comprehensive Loss
Comprehensive loss is comprised of the net loss and other comprehensive income
(loss). Our other comprehensive income (loss) includes unrealized gains and
losses on available-for-sale securities and unrealized gains and losses and
realized gains and losses reclassified into net loss on cash flow hedges, as
reflected in the consolidated statements of comprehensive loss.
Net Loss Per Share
Basic net loss per share is computed by dividing the net loss by the
weighted-average number of shares of common stock outstanding during the period,
less shares subject to repurchase.
Diluted earnings per share adjusts basic earnings per share for all potentially
dilutive common stock equivalents outstanding during the period. Potentially
dilutive securities consist primarily of stock options, shares subject to
repurchase from early exercised stock options, share purchase rights under the
employee stock purchase plan, unvested restricted stock units ("RSUs"), unvested
performance stock awards ("PSAs") and shares related to convertible senior
notes. Since we have reported net losses for all periods presented, we have
excluded all potentially dilutive securities from the calculation of the diluted
net loss per share as their effect is antidilutive and accordingly, basic and
diluted net loss per share is the same for all periods presented.
Recently Adopted Accounting Pronouncements
In February 2016 , the FASB issued ASU No. 2016-02, Leases (Topic 842) ("ASU
2016-02"), as amended, which requires recognition of lease assets and
liabilities for leases with terms of more than 12 months. This standard is
effective for fiscal years beginning after December 15, 2018 , with early
adoption permitted. We adopted this standard effective August 1, 2019 using the
transitional provision which allows for the adoption of Topic 842 to be applied
on a modified retrospective basis at the beginning of the fiscal year of
adoption in fiscal 2020. The adoption of this new standard resulted in the
recognition of operating lease right-of-use assets of $16.9 million and
operating lease liabilities of $18.0 million . We have elected the package of
practical expedients permitted under the transition guidance, which allows us to
carryforward our historical lease classification, our assessment on whether a
contract is or contains a lease, and our initial direct costs for any leases
that existed prior to adoption of the new standard. We have also elected to
combine lease and non-lease components for real estate and co-location
arrangements. In addition, we elected not to recognize lease liabilities and
related right-of-use assets for leases that, at the lease commencement date,
have a lease term of 12 months or less.
In December 2019 , the FASB issued ASU No. 2019-12, Income Taxes (Topic 740)
("ASU 2019-12"): Simplifying the Accounting for Income Taxes. The new standard
eliminates certain exceptions related to the approach for intraperiod tax
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allocation, the methodology for calculating income taxes in an interim period,
and the recognition of deferred tax liabilities for outside basis differences
related to changes in ownership of equity method investments and foreign
subsidiaries. The guidance also simplifies aspects of accounting for franchise
taxes and enacted changes in tax laws or rates, and clarifies the accounting for
transactions that result in a step-up in the tax basis of goodwill. For public
business entities, it is effective for fiscal years beginning after December 15,
2020 , including interim periods within those fiscal years. Early adoption is
permitted. We early adopted this standard as of November 1, 2019 , and it did not
have a material impact to the consolidated financial statements.
In June 2016 , the Financial Accounting Standards Board ("FASB") issued ASU No.
2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments. This standard amends guidance on reporting
credit losses for assets held at amortized cost basis and available-for-sale
debt securities to require that credit losses on available-for-sale debt
securities be presented as an allowance rather than as a write-down. The
measurement of credit losses for newly recognized financial assets and
subsequent changes in the allowance for credit losses are recorded in the
statements of operations. We adopted this standard on August 1, 2020 , and it did
not have a material impact to the consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
In June 2020 , the FASB issued ASU No. 2020-06, Debt with Conversion and Other
Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's
Own Equity (Subtopic 815-40). This standard eliminates the beneficial conversion
and cash conversion accounting models for convertible instruments. It also
amends the accounting for certain contracts in an entity's own equity that are
currently accounted for as derivatives because of specific settlement
provisions. In addition, the new guidance modifies how particular convertible
instruments and certain contracts that may be settled in cash or shares impact
the diluted earnings per share computation. For public business entities, it is
effective for fiscal years beginning after December 15, 2021 , including interim
periods within those fiscal years using the fully retrospective or modified
retrospective method. The ASU No. 2020-06 is effective for us beginning August
1, 2022 , although early adoption is permitted. We are currently evaluating the
potential impact of this standard on the consolidated financial statements.
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Note 2. Revenue Recognition
Disaggregation of Revenue
Subscription and support revenue is recognized over time and accounted for
approximately 97%, 98% and 99% of our revenue in fiscal 2021, fiscal 2020 and
fiscal 2019, respectively.
The following table summarizes the revenue by region based on the shipping
address of customers who have contracted to use our cloud platform:
Year Ended July 31,
2021 2020 2019
Amount % Revenue Amount % Revenue Amount % Revenue
(in thousands, except for percentage data)
United States $ 329,299 49 % $ 210,288 49 % $ 148,807 49 %
Europe , Middle East
and Africa (*) 253,138 38 174,497 40 124,437 41
Asia Pacific 76,105 11 38,793 9 23,838 8
Other 14,558 2 7,691 2 5,754 2
Total $ 673,100 100 % $ 431,269 100 % $ 302,836 100 %
_____
110
represent 10% of total sales for the periods presented.
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The following table summarizes the revenue from contracts by type of customer:
Year Ended July 31,
2021 2020 2019
Amount % Revenue Amount % Revenue Amount % Revenue
(in thousands, except for percentage data)
Channel partners $ 632,416 94 % $ 414,908 96 % $ 289,579 96 %
Direct customers 40,684 6 16,361 4 13,257 4
Total $ 673,100 100 % $ 431,269 100 % $ 302,836 100 %
Significant Customers
No single customer accounted for 10% or more of the total revenue in the periods
presented. The following table summarizes the concentration of 10% or more of
the total balance of accounts receivable, net:
July 31,
2021 2020
Channel partner A * 11 %
* Represents less than 10%.
Contract Balances
Contract liabilities consist of deferred revenue and include payments received
in advance of performance under the contract. Such amounts are recognized as
revenue over the contractual period. Deferred revenue, including current and
noncurrent balances as of July 31, 2021 and July 31, 2020 was $630.6 million and
$369.8 million , respectively. In fiscal 2021, fiscal 2020 and fiscal 2019 we
recognized revenue of $335.5 million , $220.9 million and $143.9 million ,
respectively, that was included in the corresponding contract liability balance
at the beginning of the related fiscal year.
We receive payments from customers based upon contractual billing schedules and
accounts receivable are recorded when the right to consideration becomes
unconditional. Payment terms on invoiced amounts are typically 30 days but may
be up to 90 days for some of our channel partners. Contract assets include
amounts related to our contractual right to consideration for both completed and
partially completed performance obligations that may not have been invoiced and
such amounts have historically not been material.
Remaining Performance Obligations
The typical subscription and support term is one to three years. Most of our
subscription and support contracts are non-cancelable over the contractual term.
However, customers typically have the right to terminate their contracts for
cause, if we fail to perform. As of July 31, 2021 , the aggregate amount of the
transaction price allocated to remaining performance obligations was $1,553.5
million . We expect to recognize 49% of the transaction price over the next 12
months and 97% of the transaction price over the next three years, with the
remainder recognized thereafter.
Costs to Obtain and Fulfill a Contract
We capitalize sales commission and associated payroll taxes paid to internal
sales personnel that are incremental to the acquisition of channel partner and
direct customer contracts. These costs are recorded as deferred contract
acquisition costs in the consolidated balance sheets. We determine whether costs
should be deferred based on our sales compensation plans, if the commissions are
in fact incremental and would not have occurred absent the customer contract.
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Sales commissions for renewal of a contract are not considered commensurate with
the commissions paid for the acquisition of the initial contract given the
substantive difference in commission rates in proportion to their respective
contract values. Commissions paid upon the initial acquisition of a contract are
amortized over an estimated period of benefit of five years while commissions
paid for renewal contracts are amortized over the contractual term of the
renewals. Amortization of deferred contract acquisition costs is recognized on a
straight-line basis commensurate with the pattern of revenue recognition and
included in sales and marketing expense in the consolidated statements of
operations. We determine the period of benefit for commissions paid for the
acquisition of the initial contract by taking into consideration the expected
subscription term and expected renewals of our customer contracts, the duration
of our relationships with our customers, customer retention data, our technology
development lifecycle and other factors. We periodically review the carrying
amount of deferred contract acquisition costs to determine whether events or
changes in circumstances have occurred that could impact the period of benefit
of these deferred costs. We did not recognize any impairment losses of deferred
contract acquisition costs during the periods presented.
The activity of the deferred contract acquisition costs consisted of the
following:
Year Ended July 31,
2021 2020 2019
(in thousands)
Beginning balance $ 109,915 $ 69,785 $ 55,910
Capitalization of contract acquisition costs 137,673
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Amortization of deferred contract acquisition costs (40,558) (24,922) (18,651) Ending balance$ 207,030 $ 109,915 $ 69,785 The outstanding balance of the deferred contract acquisition costs consisted of the following: July 31, 2021 2020 (in thousands) Deferred contract acquisition costs$ 57,373 $
65 052 32 526
32 240
Acquisition costs of deferred, non-current contracts 149,657 77,675
Sales commissions accrued but not paid as ofJuly 31, 2021 and 2020, totaled$46.7 million and$21.0 million , respectively, which are included within accrued compensation in the consolidated balance sheets. 112 -------------------------------------------------------------------------------- Table of Contents Note 3. Cash Equivalents and Short-Term Investments Cash equivalents and short-term investments consisted of the following as ofJuly 31, 2021 : Amortized Unrealized Unrealized Cost Gains Losses Fair Value (in thousands) Cash equivalents: Money market funds$ 167,337 $ - $ -$ 167,337 U.S. government agency securities 10,999 - - 10,999 Total cash equivalents$ 178,336 $ - $ -$ 178,336 Short-term investments: U.S. treasury securities$ 387,428 $ 9 $ (17) $ 387,420 U.S. government agency securities 511,622 144 (34) 511,732 Corporate debt securities 327,512 102 (112) 327,502 Total short-term investments$ 1,226,562 $ 255
Total cash equivalents and short-term investments$ 1,404,898 $ 255
Cash equivalents and short-term investments consisted of the following as ofJuly 31, 2020 : Amortized Unrealized Unrealized Cost Gains Losses Fair Value (in thousands) Cash equivalents: Money market funds$ 51,690 $ - $ -$ 51,690 U.S. treasury securities 39,997 - (1) 39,996 U.S. government agency securities 14,997 - - 14,997 Total cash equivalents$ 106,684 $ -$ (1) $ 106,683 Short-term investments: U.S. treasury securities$ 415,539 $ 152 $ (127) $ 415,564 U.S. government agency securities 595,725 186 (114) 595,797 Corporate debt securities 216,879 569 (87) 217,361 Total short-term investments$ 1,228,143 $ 907
Total cash equivalents and short-term investments$ 1,334,827 $ 907
$ 1,335,405
Amortized
Cost Fair Value
(in thousands)
Due within one year $800,659 $800,793
Due between one to three years 425,903 425,861
Total $1,226,562 $1,226,654
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-------------------------------------------------------------------------------- Table of Contents Short-term investments that were in an unrealized loss position as ofJuly 31, 2021 consisted of the following: Less than 12 Months Greater than 12 Months Total Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses (in thousands) U.S. treasury securities$ 306,908 $ (17)
:
(34) - - 104,782 (34) Corporate debt securities 157,208 (112) - - 157,208 (112) Total$ 568,898 $ (163) $ - $ -$ 568,898 $ (163)
titles of public bodies 104,782
Less than 12 Months Greater than 12 Months Total
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
(in thousands)
U.S. treasury securities $ 347,959 $ (127)
consisted of the following:
(113) 5,502 (1) 346,005 (114) Corporate debt securities 105,953 (87) - - 105,953 (87) Total$ 794,415 $ (327) $ 5,502 $ (1) $ 799,917 $ (328) We review the individual securities that have unrealized losses in our short-term investment portfolio on a regular basis. We evaluate, among others, whether we have the intention to sell any of these investments and whether it is not more likely than not that we will be required to sell any of them before recovery of the amortized cost basis. Neither of these criteria were met in any period presented. We additionally evaluate whether the decline in fair value of the corporate debt securities below its amortized cost basis is related to credit losses or other factors. Based on this evaluation, we determined that unrealized losses of the above securities were primarily attributable to changes in interest rates and non credit-related factors. Accordingly, we determined that an allowance for credit losses was unnecessary for our short-term investments as ofJuly 31, 2021 and 2020. We recorded$3.9 million and$3.8 million of accrued interest receivable within prepaid expenses and other current assets in the consolidated balance sheets as ofJuly 31, 2021 and 2020, respectively. Strategic Investments During fiscal 2021, we invested an additional$3.1 million in non-marketable equity securities of privately held companies which do not have a readily determinable fair value. These investments are primarily accounted for under the cost method as we have less than 20% ownership and do not have the ability to exercise significant influence over their operations. The carrying amount of our strategic investments was$5.1 million and$2.0 million as ofJuly 31, 2021 and 2020, respectively, which are included within other noncurrent assets in the consolidated balance sheets. There were no material events or circumstances impacting the carrying amount of our strategic investments during the periods presented. Note 4. Fair Value Measurements Fair value is defined as the exchange price that would be received from sale of an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. We measure our financial assets and liabilities at fair value at each reporting period using a fair value hierarchy which requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when 114 -------------------------------------------------------------------------------- Table of Contents measuring fair value. A financial instrument's classification within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Three levels of inputs may be used to measure fair value: •Level I - Observable inputs are unadjusted quoted prices in active markets for identical assets or liabilities; •Level II - Observable inputs are quoted prices for similar assets and liabilities in active markets or inputs other than quoted prices that are observable for the assets or liabilities, either directly or indirectly through market corroboration, for substantially the full term of the financial instruments; and •Level III - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. These inputs are based on our own assumptions used to measure assets and liabilities at fair value and require significant management judgment or estimation. Our money market funds are classified within Level I due to the highly liquid nature of these assets and have quoted prices in active markets. Certain of our investments in available-for-sale securities (i.e.,U.S. treasury securities,U.S. government agency securities and corporate debt securities), as well as our assets and liabilities arising from our foreign currency forward contracts, are classified within Level II. The fair value of our Level II financial assets and liabilities is determined by using inputs based on non-binding market consensus prices that are primarily corroborated by observable market data or quoted market prices for similar instruments, for substantially the full term of the financial assets and liabilities. 115
titles of public bodies 340 503
————————————————– ——————————
Assets and liabilities that are measured at fair value on a recurring basis
consisted of the following as of July 31, 2021:
Level I Level II Level III
Quoted Prices
in Active Significant
Markets for Other Significant
Identical Observable Unobservable
Fair Value Assets Inputs Inputs
(in thousands)
Cash equivalents:
Money market funds $ 167,337 $ 167,337 $ - $ -
U.S. treasury securities 10,999 - 10,999 -
Total cash equivalents $ 178,336 $ 167,337 $ 10,999 $ -
Short-term investments:
U.S. treasury securities $ 387,420 $ - $ 387,420 $ -
U.S. government agency securities 511,732 - 511,732 -
Corporate debt securities 327,502 - 327,502 -
Total short-term investments $ 1,226,654 $ - $ 1,226,654 $ -
Total cash equivalents and short-term $ 1,404,990 $
Contents
Designated derivative instruments: Foreign currency contracts assets-current (1)$ 459 $ -$ 459 $ - Foreign currency contracts assets-noncurrent $ -$ 26 $ - (2)$ 26 Foreign currency contracts liabilities-current $ -$ 1,083 $ - (3)$ 1,083 Foreign currency contracts $ -$ 42 $ - liabilities-noncurrent (4)$ 42 Non-designated derivative instruments: Foreign currency contracts assets-current (1)$ 83 $ -$ 83 $ - Foreign currency contracts liabilities-current $ -$ 240 $ - (3)$ 240 (1)Reported as prepaid expenses and other current assets in the consolidated balance sheets. (2)Reported as other noncurrent assets in the consolidated balance sheets. (3)Reported as accrued expenses and other current liabilities in the consolidated balance sheets. (4)Reported as other noncurrent liabilities in the consolidated balance sheets. 116
-------------------------------------------------------------------------------- Table of Contents Assets that are measured at fair value on a recurring basis consisted of the following as ofJuly 31, 2020 : Level I Level II Level III Quoted Prices in Active Significant Markets for Other Significant Identical Observable Unobservable Fair Value Assets Inputs Inputs (in thousands) Cash equivalents: Money market funds$ 51,690 $ 51,690 $ - $ - U.S. treasury securities 39,996 - 39,996 - U.S. government agency securities 14,997 - 14,997 - Total cash equivalents$ 106,683 $ 51,690 $ 54,993 $ - Short-term investments: U.S. treasury securities$ 415,564 $ -$ 415,564 $ - U.S. government agency securities 595,797 - 595,797 - Corporate debt securities 217,361 - 217,361 - Total short-term investments$ 1,228,722 $ -$ 1,228,722 $ -
$ – investments
$ 1,283,715 $ - investments We did not have transfers between levels of the fair value hierarchy of assets measured at fair value during the periods presented. Additionally, we did not have derivatives in fiscal 2020. Refer to Note 9, Convertible Senior Notes, for the carrying amount and estimated fair value of our convertible senior notes as ofJuly 31, 2021 and 2020. 117
$ 51,690
————————————————– ——————————
July 31,
Estimated Useful Life 2021 2020
(in thousands)
Hosting equipment 3-4 years $ 130,981 $ 87,418
Computers and equipment 3-5 years 5,599 3,875
Purchased software 3 years 1,311 1,311
Capitalized internal-use software 3 years 39,542 23,081
Furniture and fixtures 5 years 1,021 1,965
Leasehold improvements Shorter of useful life or
lease term 7,339 8,712
Total property and equipment, gross 185,793 126,362
Less: Accumulated depreciation and
amortization (77,217) (50,628)
Total property and equipment, net
Purchased intangible assets consist of internet protocol (IP) addresses, which are amortized on a straight-line basis over an estimated useful life of 10 years. As ofJuly 31, 2021 , the historical cost and accumulated amortization was$3.0 million and$0.4 million , respectively. As ofJuly 31, 2020 , the historical cost and accumulated amortization was$2.5 million and$0.1 million , respectively. Purchased intangible assets are included within other noncurrent assets in the consolidated balance sheets. We recognized depreciation and amortization expense on property and equipment and purchased intangible assets of$29.7 million ,$17.7 million and$10.4 million in fiscal 2021, fiscal 2020 and fiscal 2019, respectively. Note 6. Business CombinationsSmokescreen Technologies Private Limited OnJune 1, 2021 , we completed the acquisition ofSmokescreen Technologies Private Limited ("Smokescreen"), a technology company incorporated inIndia . Smokescreen is a leader in active defense and deception technology. Smokescreen's cutting-edge capabilities will be integrated into the Zscaler Zero Trust Exchange platform, further building upon our ability to detect sophisticated, highly targeted attacks, ransomware and lateral movement attempts. Pursuant to the terms of the stock purchase agreement, the aggregate purchase price was approximately$11.7 million in cash. In connection with this acquisition, we completed a valuation of the acquired intangible assets as ofJune 1, 2021 , in order to allocate the purchase price consideration. The purchase price allocation resulted in the recognition of$5.7 million of goodwill,$5.6 million of developed technology and$2.1 million of customer relationships. The developed technology was valued using a replacement cost approach, which is based on the cost of a market participant to reconstruct a substitute asset of comparable utility. The customer relationships were also valued using the replacement cost approach, which is based on the cost a market participant would incur to generate the acquired portfolio of customers.Goodwill represents the excess of the purchase price paid over the fair value of the net assets acquired and is primarily attributable to the acquired workforce and expected operating synergies. Both goodwill and acquired intangible assets will be fully deductible for income tax purposes. We incurred approximately$0.5 million of acquisition related costs, which were recorded as general and administrative expenses in fiscal 2021. 118 -------------------------------------------------------------------------------- Table of Contents The acquisition qualified as a stock transaction for tax purposes. As a result, we recognized a deferred tax liability of approximately$1.6 million , generated primarily from the difference between the tax basis and fair value of the acquired developed technology, which increased goodwill by the same amount. The allocation of the purchase price consideration consisted of the following: Amount Estimated Useful Life (in thousands) Assets acquired: Cash and other assets $ 1,347 Acquired intangible assets: Developed technology 5,600 5 years Customer relationships 2,100 5 years Goodwill 5,686 Total$ 14,733 Less liabilities assumed: Other liabilities $ 1,516 Deferred tax liability 1,558 Total $ 3,074 Total purchase price consideration$ 11,659 Trustdome Limited OnApril 15, 2021 , we completed the acquisition ofTrustdome Limited ("Trustdome"), a technology company incorporated inIsrael . Trustdome is a leading innovator in Cloud Infrastructure Entitlement Management, which we plan to integrate with our existing Cloud Security Posture Management offering and provide a comprehensive solution for reducing public cloud attack surfaces and improving security posture. With this acquisition, we also have expanded our global footprint with our first development center inIsrael . Pursuant to the terms of the purchase agreement, the aggregate purchase price was approximately$31.1 million in cash. Additionally, certain of Trustdome's employeeswho became our employees are entitled to receive deferred merger consideration payable in the form of shares of our authorized common stock and restricted stock units. These awards are subject to time-based vesting and will be recognized as stock-based compensation expense during the post-combination period. In connection with this acquisition, we completed a valuation of the acquired intangible assets as ofApril 15, 2021 , in order to allocate the purchase price consideration. The purchase price allocation resulted in the recognition of$23.2 million of goodwill and$7.2 million of developed technology. The developed technology was valued using a replacement cost approach, which is based on the cost of a market participant to reconstruct a substitute asset of comparable utility.Goodwill represents the excess of the purchase price paid over the fair value of the net assets acquired and is primarily attributable to the acquired workforce and expected operating synergies. Both goodwill and acquired developed technology will be fully deductible for income tax purposes. We incurred approximately$0.4 million of acquisition related costs, which were recorded as general and administrative expenses in fiscal 2021. The acquisition qualified as a stock transaction for tax purposes. As a result, we recognized a deferred tax liability for approximately$0.6 million , generated primarily from the difference between the tax basis and fair value of the acquired developed technology, which increased goodwill by the same amount. 119
$ 75,734
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The allocation of the purchase price consideration consisted of the following:
Amount Estimated Useful Life
(in thousands)
Assets acquired:
Cash and other assets $ 1,611
Acquired intangible assets:
Developed technology 7,200 5 years
Goodwill 23,232
Total $ 32,043
Less Liabilities assumed:
Other liabilities $ 277
Deferred tax liability 624
Total $ 901
Total purchase price consideration $ 31,142
Edgewise Networks Inc.
On May 22, 2020 , we completed the acquisition of Edgewise Networks Inc.
("Edgewise"), a technology company incorporated in the United States . Edgewise
is a pioneer in securing application-to-application communications in public
clouds and data centers. Edgewise customers measurably reduce the attack surface
to lower the risk of application compromise and data breaches by simplifying the
security of east-west communications through identity-based segmentation. With
this acquisition, we secure workloads and application-to-application
communications for our customers.
Pursuant to the terms of the purchase agreement, the aggregate purchase price
consideration was approximately $30.7 million in cash. Additionally, certain of
Edgewise's employees who became our employees are entitled to receive additional
consideration in the form of restricted stock units. These awards are subject to
time-based vesting and will be recognized as stock-based compensation expense
during the post-combination period.
In connection with this acquisition, we completed a valuation of the acquired
intangible assets as of May 22, 2020 , in order to allocate the purchase price
consideration. The purchase price allocation resulted in the recognition of
$16.7 million of goodwill, $13.9 million of developed technology and
$1.3 million of customer relationships. The developed technology was valued
using a replacement cost approach, which is based on the cost of a market
participant to reconstruct a substitute asset of comparable utility. The
customer relationships were also valued using the replacement cost approach,
which is based on the cost a market participant would incur to generate the
acquired portfolio of customers. Goodwill represents the excess of the purchase
price paid over the fair value of the net assets acquired and is primarily
attributable to the acquired workforce and expected operating synergies.
Goodwill is not expected to be deductible for income tax purposes. We incurred
approximately $0.6 million of acquisition related costs, which were recorded as
general and administrative expenses in fiscal 2020.
The acquisition qualified as a stock transaction for tax purposes. As a result,
we recognized a deferred tax liability for approximately $0.6 million , generated
primarily from the difference between the tax basis and fair value of the
acquired developed technology and customer relationships, which increased
goodwill by the same amount. As we had a full valuation allowance as of July 31,
2020 , we recorded an income tax benefit as a result of the reduction of the
valuation allowance due to establishment of the deferred tax liability in the
consolidated statement of operations in fiscal 2020. Refer to Note 14, Income
Taxes, for further information.
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The allocation of the purchase price consideration consisted of the following:
Amount Estimated Useful Life
(in thousands)
Assets acquired:
Cash and other assets $ 294
Operating lease right-of-use asset 630
Acquired intangible assets:
Developed technology 13,900 5 years
Customer relationships 1,300 5 years
Goodwill 16,709
Total $ 32,833
Less liabilities assumed:
Accounts payable and accrued liabilities $ 333
Deferred revenue 540
Operating lease liability 630
Deferred tax liability 620
Total $ 2,123
Total purchase price consideration $ 30,710
Cloudneeti Corporation
On April 16, 2020 , we completed the acquisition of Cloudneeti Corporation
("Cloudneeti"), a technology company incorporated in the United States .
Cloudneeti is a cloud security posture management company, which prevents and
remediates application misconfigurations in cloud service models, including
SaaS; infrastructure as a service, or IaaS; and platform as a service, or PaaS.
With this acquisition, we further provide our industry-leading data protection
coverage for our customers.
Pursuant to the terms of the purchase agreement, the aggregate purchase price
consideration was approximately $8.9 million in cash. Additionally, certain of
Cloudneeti's employees who became our employees are entitled to receive
additional consideration payable in the form of restricted stock units. These
awards are subject to performance and time-based vesting and will be recognized
as stock-based compensation expense during the post-combination period.
In connection with this acquisition, we completed a valuation of the acquired
intangible assets as of April 16, 2020 , in order to allocate the purchase price
consideration. The purchase price allocation resulted in the recognition of $5.9
million of goodwill and $3.5 million of developed technology. The developed
technology was valued using a replacement cost approach, which is based on the
cost of a market participant to reconstruct a substitute asset of comparable
utility. Goodwill represents the excess of the purchase price paid over the fair
value of the net assets acquired and is primarily attributable to the acquired
workforce and expected operating synergies. Goodwill is not expected to be
deductible for income tax purposes. We incurred approximately $0.5 million of
acquisition related costs, which were recorded as general and administrative
expenses in fiscal 2020.
The acquisition qualified as a stock transaction for tax purposes. As a result,
we recognized a deferred tax liability for approximately $0.5 million , generated
primarily from the difference between the tax basis and fair value of the
acquired developed technology, which increased goodwill by the same amount. As
we have a full valuation allowance as of July 31, 2020 , we recorded an income
tax benefit as a result of the reduction of the valuation allowance due to
establishment of the
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deferred tax liability in the consolidated statement of operations in fiscal
2020. Refer to Note 14, Income Taxes, for further information.
The allocation of the purchase price consideration consisted of the following:
Amount Estimated Useful Life
(in thousands)
Assets acquired:
Cash and other assets $ 66
Acquired intangible assets:
Developed technology 3,500 5 years
Goodwill 5,871
Total $ 9,437
Less liabilities assumed:
Deferred tax liability $ 490
Other liabilities 12
Total $ 502
Total purchase price consideration $ 8,935
Appsulate, Inc.
On May 29, 2019 , we completed the acquisition Appsulate, Inc. ("Appsulate"), an
early stage technology company incorporated in the United States . Pursuant to
the terms of the purchase agreement, the aggregate purchase price was
approximately $12.9 million in cash.
In connection with this acquisition, we completed a valuation of the acquired
intangible assets as of May 29, 2019 , in order to allocate the purchase price
consideration. The purchase price allocation resulted in the recognition of
$7.3 million of goodwill and $7.0 million of developed technology. The developed
technology was valued using a replacement cost approach, which is based on the
cost a market participant to reconstruct a substitute asset of comparable
utility. Goodwill represents the excess of the purchase price paid over the fair
value of the net assets acquired and is primarily attributable to the acquired
workforce and expected operating synergies. Goodwill is not expected to be
deductible for income tax purposes. We incurred approximately $0.3 million of
acquisition related costs, which were recorded as general and administrative
expenses in fiscal 2019.
The acquisition qualified as a stock transaction for tax purposes. As a result,
we recognized a deferred tax liability for approximately $1.4 million , generated
primarily from the difference between the tax basis and fair value of the
acquired developed technology, which increased goodwill by the same amount. As
we have a full valuation allowance as of July 31, 2019 , we recorded an income
tax benefit as a result of the reduction of the valuation allowance due to
establishment of the deferred tax liability in the consolidated statement of
operations in fiscal 2019. Refer to Note 14, Income Taxes, for further
information.
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The allocation of the purchase price consideration, consisted of the following:
Amount Estimated Useful Life
(in thousands)
Assets acquired:
Cash and cash equivalents $ 13
Acquired intangible assets:
Developed technology 7,000 4 years
Goodwill 7,281
Total $ 14,294
Less liabilities assumed:
Deferred tax liability $ 1,422
————————————————– ——————————
Other acquisitions In fiscal 2019, we also completed the acquisition of a technology company for a purchase price approximately$1.1 million in cash. The goodwill and acquired intangible assets recorded for this acquisition were not material to the consolidated financial statements. Pro forma Financial Information The pro forma financial information from the above business acquisitions, assuming the acquisition had occurred as of the beginning of the fiscal year prior to the fiscal year of the acquisition, as well as revenue and earnings generated during the current fiscal year, were not material for disclosure purposes. Note 7. Derivative Instruments We implemented a foreign currency risk management program during the fiscal 2021. As a global business, we are exposed to foreign currency exchange rate risk. Substantially all of our revenue is transacted inU.S. dollars; however, a portion of our cost of revenues and operating expenditures are incurred outside ofthe United States and are denominated in foreign currencies, making them subject to fluctuations in foreign currency exchange rates. In order to mitigate the impact of foreign currency fluctuations on our future cash flows and earnings, we enter into foreign currency forward contracts, which we designate as cash flow hedges. All cash flow hedges were considered effective during fiscal 2021. As ofJuly 31, 2021 , the total notional amount of our outstanding foreign currency forward contracts was$118.9 million for designated and$28.2 million for non-designated foreign currency forward contracts. The maximum length of time over which forecasted foreign currency denominated operating expenses are hedged is 18 months. Substantially all of the unrealized gains and losses related to our cash flow hedges are expected to be released into earnings over the next 12 months. Refer to Note 4, Fair Value Measurements, for the fair value of our derivative instruments as reported on the consolidated balance sheet as ofJuly 31, 2021 . During the fiscal 2021, the unrealized gains and losses related to our cash flow hedges that were recognized in AOCI and the gains and losses reclassified into the consolidated statement of operations were not material. During fiscal 2021, changes in the fair value of our non-designated derivative instruments recorded in other income, net within the consolidated statement of operations were not material. 123 -------------------------------------------------------------------------------- Table of Contents Our derivative contracts expose us to credit risk to the extent that the counterparties may be unable to meet the terms of the underlying contracts. We mitigate this credit risk by transacting with major financial institutions with high credit ratings and standards. We periodically assess the creditworthiness of our counterparties to ensure they continue to meet our credit quality requirements. We also enter into master netting arrangements, which permit net settlement of transactions with the same counterparty. The potential impact of these rights of set-off associated with our derivative instruments was not material as ofJuly 31, 2021 . We are not required to pledge, and are not entitled to receive, cash collateral related to these derivative instruments. We do not enter into derivative contracts for trading or speculative purposes. Note 8.Goodwill and Acquired Intangible AssetsGoodwill The changes in the carrying amount of goodwill consisted of the following: Amount (in thousands) Balance as of July 31, 2020$ 30,059 Goodwill acquired 28,918 Balance as of July 31, 2021$ 58,977 Acquired Intangible Assets Acquired intangible assets consist of developed technology and customer relationships acquired through our business combinations and asset acquisitions. Acquired intangible assets are amortized using the straight-line method over their useful lives. Acquired intangible assets subject to amortization consisted of the following as ofJuly 31, 2021 and 2020: Weighted Average Remaining Gross Carrying Amount Accumulated Amortization Net Carrying Amount Useful life AmortizationJuly 31, 2020 AdditionsJuly 31, 2021 July 31, 2020 ExpenseJuly 31, 2021 July 31, 2020 July 31, 2021 July 31, 2021 (in thousands) (years) Developed technology$ 26,856 $ 12,800 $ 39,656 $ (4,206) $ (6,468) $ (10,674) $ 22,650 $ 28,982 4.0 Customer relationships 1,460 2,100 3,560 (86) (327) (413) 1,374 3,147 4.5 Total$ 28,316 $ 14,900 $ 43,216 $ (4,292) $ (6,795) $ (11,087) $ 24,024 $ 32,129 4.0 As ofJuly 31, 2020 , the weighted-average useful life for developed technology and customer relationships was 4.2 years and 4.7 years, respectively. During fiscal 2021, in connection with the acquisitions of Smokescreen and Trustdome, we acquired developed technology and customer relationships with a fair value of$12.8 million and$2.1 million , respectively, and each of them with an estimated useful life of 5.0 years. For further information refer to Note 6, Business Combinations. Amortization expense of acquired intangible assets was$6.8 million ,$3.4 million and$0.9 million in fiscal 2021, fiscal 2020 and fiscal 2019, respectively. Amortization expense of developed technology and customer relationships is recorded primarily within cost of revenue and sales and marketing expenses, respectively, in the consolidated statements of operations. 124
$ 12,872
————————————————– ——————————
Amortization Expense
(in thousands)
Year ending July 31,
2022 $ 8,678
2023 8,181
2024 6,741
2025 6,038
2026 2,491
Total $ 32,129
Note 9. Convertible Senior Notes
On June 25, 2020 , we issued $1,150.0 million in aggregate principal amount of
0.125% Convertible Senior Notes due 2025 (the "Notes"), including the exercise
in full by the initial purchasers of the Notes of their option to purchase an
additional $150.0 million principal amount of the Notes. The Notes bear interest
at a rate of 0.125% per year and interest is payable semiannually in arrears on
January 1 and July 1 of each year, beginning on January 1, 2021 . The Notes
mature on July 1, 2025 , unless earlier converted, redeemed or repurchased. The
total net proceeds from the offering, after deducting initial purchase discounts
and other debt issuance costs, was $1,130.5 million .
The Notes are unsecured obligations and 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 following table presents details of the Notes:
Initial Conversion Rate
per $1,000 Principal Initial Conversion Price Initial Number of Shares
(in thousands)
Notes 6.6315 shares $150.80 7,626
The Notes are convertible at the option of the holders at any time prior to the
close of business on the business day immediately preceding April 1, 2025, only
under the following circumstances:
•During any fiscal quarter commencing after the fiscal quarter ending on October
31, 2020 (and only during such fiscal quarter), if the last reported sale price
of our common stock for at least 20 trading days (whether or not consecutive)
during a period of 30 consecutive trading days ending on and including, the last
trading day of the immediately preceding fiscal quarter is greater than or equal
to 130% of the conversion price of the Notes on each applicable trading day;
•During the five-business day period after any five consecutive trading day
period (the "measurement period") in which the trading price
per $1,000 principal amount of the Notes for each trading day of the measurement
period was less than 98% of the product of the last reported sale price of our
common stock and the conversion rate of the Notes on each such trading day;
•If we call any or all of the Notes for redemption, the Notes called for
redemption (or, at our election all Notes) may be submitted for conversion at
any time prior to the close of business on the second scheduled trading day
immediately preceding the redemption date; or
•upon the occurrence of specified corporate events as set forth within the
indenture governing the Notes.
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On or after April 1, 2025, 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, in multiples of $1,000 principal amount,
at their option regardless of the foregoing circumstances. Upon conversion, we
will satisfy the conversion obligation by paying or delivering, as the case may
be, cash, shares of our common stock or a combination of cash and shares of our
common stock, at our election. It is our current intent to settle the principal
amount of the Notes in cash.
During the three months ended July 31, 2021, the conditional conversion feature
of the Notes was triggered as the last reported sale price of our common stock
was greater than or equal to 130% of the conversion price of the Notes for at
least 20 trading days during the period of 30 consecutive trading days ending on
July 30, 2021 (the last trading day of the fiscal quarter). Accordingly, the
Notes are currently convertible, in whole or in part, at the option of the
holders from August 1, 2021 through October 31, 2021. Whether the Notes will be
convertible following such period will depend on the continued satisfaction of
this condition or another conversion condition in the future. During fiscal 2021
and fiscal 2020, none of the Notes have been converted. Since we have the
election of repaying the Notes in cash, shares of our common stock, or a
combination of both, we continued to classify the Notes as a noncurrent
liability in the consolidated balance sheet as of July 31, 2021.
We may not redeem the Notes prior to July 5, 2023. On or after July 5, 2023, and
prior to the 21st scheduled trading day immediately preceding the maturity date,
we may redeem for cash all or any portion of the Notes, at our option, if the
last reported sale price of our common stock has been at least 130% of the
conversion price then in effect for at least 20 trading days (whether or not
consecutive) during any 30 consecutive trading day period (including the last
trading day of such period) ending on, and including, the trading day
immediately preceding the date on which we provide notice of redemption at a
redemption price equal to 100% of the principal amount of the Notes to be
redeemed, plus accrued and unpaid interest to, but excluding, the redemption
date. No sinking fund is provided for the Notes. If we redeem less than all the
outstanding Notes, and only Notes called for redemption may be converted in
connection with such partial redemption, at least $100.0 million aggregate
principal amount of Notes must be outstanding and not subject to such partial
redemption as of the relevant redemption notice date.
In the event of a corporate event that constitutes a "fundamental change (as
defined in the indenture governing the Notes)," holders of the Notes will have
the right, at their option to require us to repurchase for cash all or any
portion of the Notes upon the occurrence of a fundamental change, at a purchase
price equal to 100% of the principal amount of the Notes plus any accrued and
unpaid interest, up to but excluding, the date of such repurchase. In addition,
following certain corporate events that occur prior to the maturity date, or if
we issue a notice of redemption, we will, in certain circumstances, increase the
conversion rate for a holder who elects to convert its Notes in connection with
such corporate event or notice of redemption, as the case may be.
In accounting for the issuance of the Notes and the related transaction costs,
we separated the Notes into liability and equity components. The carrying amount
of the liability component was initially calculated by measuring the fair value
of similar liabilities that do not have associated convertible features
utilizing the interest rate of 5.75%. The carrying amount of the equity
component representing the conversion option was $278.5 million and was
determined by deducting the fair value of the liability component from the par
value of the Notes. This difference represents the debt discount that is
amortized to interest expense over the term of the Notes using the effective
interest rate method. The equity component was recorded in additional paid-in
capital and is not remeasured as long as it continues to meet the conditions for
equity classification.
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Total issuance costs of $19.5 million related to the Notes were allocated
between liability, totaling $14.8 million, and equity, totaling $4.7 million, in
the same proportion as the allocation of the total proceeds to the liability and
equity components. Issuance costs attributable to the liability component are
being amortized to interest expense over the term of the Notes. The excess of
the principal amount of the liability component over its carrying amount is
amortized to interest expense over the contractual term of the Notes at an
effective interest rate of 6.03%. The issuance costs attributable to the equity
component were netted against additional paid-in capital. The amount recorded
for the equity component of the Notes was $273.4 million, net of allocated
issuance costs of $4.7 million and deferred tax impact of $0.4 million.
The net carrying amount of the liability component of the Notes is as follows:
July 31,
2021 2020
(in thousands)
Principal amount $ 1,150,000 $ 1,150,000
Less:
Unamortized debt discount 224,527 273,829
Unamortized debt issuance costs 11,935 14,556
Net carrying amount $ 913,538 $ 861,615
The following table sets forth total interest expense recognized related to the
Notes:
Year Ended July 31,
2021 2020
(in thousands)
Contractual interest expense $ 1,441 $ 140
Amortization of debt discount 49,302 4,638
Amortization of debt issuance costs 2,621 247
Total $ 53,364 $ 5,025
The total fair value of the Notes was $1,931.7 million and $1,307.5 million as
of July 31, 2021 and 2020, respectively. The fair value was determined based on
the closing trading price per $1,000 of the Notes as of the last day of trading
for the period. We consider the fair value of the Notes as of July 31, 2021 and
2020 to be a Level II measurement as they are not actively traded. The fair
value of the Notes is primarily affected by the trading price of our common
stock and market interest rates.
Capped Calls
In connection with the pricing of the Notes, we entered into capped call
transactions with the option counterparties (the "Capped Calls"). The Capped
Calls each have an initial strike price of $150.80 per share, subject to certain
adjustments, which corresponds to the initial conversion price of the Notes. The
Capped Calls have an initial cap price of $246.76 per share, subject to certain
adjustments. The Capped Calls are generally expected to reduce potential
dilution to our common stock upon any conversion of the Notes and/or offset any
cash payments we are required to make in excess of the principal amount of the
converted Notes, as the case may be, with such reduction and/or offset subject
to a cap. The Capped Calls are subject to adjustment upon the occurrence of
specified extraordinary events affecting us, including merger events, tender
offers and the announcement of such events. In addition, the Capped Calls are
subject to certain specified additional disruption events that may give rise to
a termination of the Capped Calls, including nationalization, insolvency or
delisting, changes in law, failures to deliver, insolvency filings and hedging
disruptions. For accounting purposes, the Capped Calls are
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separate transactions, and not part of the terms of the Notes. As the Capped
Calls qualify for a scope exception from derivative accounting for instruments
that are both indexed to the issuer's own stock and classified in stockholder's
equity in its statement of financial position, the premium of $145.2 million
paid for the purchase of the Capped Calls was recorded as a reduction to
additional paid-in capital and will not be remeasured. As of July 31, 2021, we
have not exercised any Capped Call options.
Note 10. Operating Leases
The following is a summary of our operating lease costs:
Year Ended July 31,
2021 2020
Real Estate Co-Location Real Estate Co-Location
Arrangements Arrangements Total Arrangements Arrangements Total
(in thousands)
Operating lease, including
imputed interest $ 6,442 $ 14,504 $ 20,946 $ 5,020 $ 8,582 $ 13,602
Short-term lease cost 1,527 694 2,221 1,399 904 2,303
Variable lease cost 3,192 3,244 6,436 1,508 1,715 3,223
Sublease income (199) - (199) (126) - (126)
Total operating lease costs $ 10,962 $ 18,442 $ 29,404 $ 7,801 $ 11,201 $ 19,002
Weighted-average remaining
lease term (in years) 4.7 1.9 5.1 2.0
Weighted-average discount rate 4.4 % 2.3 % 4.8 % 3.2 %
The following table presents information about our leases in the consolidated
balance sheets:
July 31,
2021 2020
Real Estate Co-Location Real Estate Co-Location
Arrangements Arrangements Total Arrangements Arrangements Total
(in thousands)
Operating lease
right-of-use assets $ 20,829 $ 23,510 $ 44,339 $ 16,990 $ 19,129 $ 36,119
Operating lease
liabilities, current $ 5,388 $ 14,454 $ 19,842 $ 5,307 $ 10,293 $ 15,600
Operating lease
liabilities, noncurrent $ 20,424 $ 10,801 $ 31,225 $ 17,849 $ 10,174 $ 28,023
Cash paid, net of tenant incentives for amounts included in the measurement of
operating lease liabilities was $22.1 million and $7.6 million for fiscal 2021
and fiscal 2020, respectively.
For fiscal 2019, the rent expense and bandwidth and co-location expenses were
$3.0 million and $13.8 million, respectively. Rent expense prior to fiscal 2020
was recognized in accordance with ASC 840, Leases, using the straight-line
method over the term of the lease.
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Maturities of operating lease liabilities consisted of the following as of July
31, 2021:
Real Estate Co-Location
Arrangements Arrangements Total
Year ending July 31, (in thousands)
2022 $ 6,333 $ 14,834 $ 21,167
2023 5,992 8,047 14,039
2024 5,291 2,893 8,184
2025 4,994 - 4,994
2026 5,015 - 5,015
Thereafter 840 - 840
Total future minimum lease payments 28,465 25,774 54,239
Less: Imputed interest 2,653 519 3,172
Total $ 25,812 $ 25,255 $ 51,067
As of July 31, 2021, we have entered into non-cancelable operating leases with a
term greater than 12 months that have not yet commenced with undiscounted future
minimum payments of $10.1 million, which are excluded from the above table.
These operating leases will commence between August 2021 and October 2022 with
lease terms ranging from 1.7 years to 4.0 years.
Note 11. Commitments and Contingencies
Non-cancelable Purchase Obligations
In the normal course of business, we enter into non-cancelable purchase
commitments with various third parties to purchase products and services such as
technology equipment, subscription-based cloud service arrangements, corporate
and marketing events and consulting services. As of July 31, 2021 and 2020, we
had outstanding non-cancelable purchase obligations with a term of 12 months or
longer of $25.2 million and $20.0 million, respectively.
The maturities of non-cancelable purchase obligations with a term of 12 months
or longer consisted of the following as of July 31, 2021:
Amount
Year ending July 31, (in thousands)
2022 $ 10,118
2023 13,401
2024 1,725
Total $ 25,244
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Legal Matters
Symantec Litigation
On December 12, 2016 and April 18, 2017, Symantec Corporation ("Symantec") filed
two separate complaints in the U.S. District Court for the District of Delaware ,
alleging that "Zscaler's cloud security platform" infringed multiple U.S.
patents held by Symantec (the "Symantec Cases"). The complaints in the Symantec
Cases sought compensatory damages, injunctions, enhanced damages and attorney
fees. In July and August 2017, the Symantec Cases were transferred to the U.S.
District Court for the Northern District of California . On November 4, 2019,
Broadcom, Inc. ("Broadcom") announced the completion of its acquisition of
certain assets and assumption of certain liabilities of Symantec's enterprise
security business, including all rights, titles, and interests in the patents
asserted in the Symantec Cases.
On January 12, 2020, we entered into a settlement and patent license agreement
with CA, Inc., a Broadcom affiliate, pursuant to which the Symantec Cases were
dismissed with prejudice effective as of January 13, 2020. In connection with
the settlement, we made a payment of $15.0 million to Broadcom, and Broadcom
provided us with patent licenses, a release and a covenant not to sue. We
determined that there is no material future economic benefit from the acquired
Broadcom license and accordingly, we recorded an expense of $15.0 million within
general and administrative expenses in the consolidated statement of operations
in fiscal 2020.
Finjan Litigation
On December 5, 2017, Finjan, Inc. filed a complaint, in the U.S. District Court
for the Northern District of California , alleging that certain of our products
infringed four U.S. patents held by Finjan, Inc. and seeking compensatory
damages, an injunction, enhanced damages and attorney fees. On April 30, 2019,
we entered into patent license and settlement agreements with Finjan, Inc. and
its affiliates (collectively "Finjan"), resolving all claims in the lawsuit, and
made a payment of $7.3 million to Finjan, Inc. Pursuant to the agreements,
Finjan provided us with a worldwide fully paid license to the broader Finjan
patent portfolio, releases for past damages, and covenants not to sue. On May 1,
2019, the court dismissed Finjan, Inc.'s complaint with prejudice. We determined
that there is no material future economic benefit from the acquired Finjan
license and accordingly, we recorded an incremental expense of $4.1 million
within general and administrative expenses in the consolidated statement of
operations in fiscal 2019. In prior fiscal years, we had recorded accruals
related to this litigation totaling $3.2 million.
Other Litigation and Claims
We are a party to various litigation matters from time to time and subject to
claims that arise in the ordinary course of business, including patent,
commercial, product liability, employment, class action, whistleblower and other
litigation and claims, as well as governmental and other regulatory
investigations and proceedings. In addition, third parties may from time to time
assert claims against us in the form of letters and other communications. There
is no pending or threatened legal proceeding to which we are a party that, in
our opinion, is likely to have a material adverse effect on our future financial
results or operations; however, the results of litigation and claims are
inherently unpredictable. Regardless of the outcome, litigation can have an
adverse impact on us because of defense and settlement costs, diversion of
management resources and other factors. The expense of litigation and the timing
of this expense from period to period are difficult to estimate, subject to
change and could adversely affect our results of operations.
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Note 12. Common Stock
Holders of our common stock are entitled to one vote for each share of common
stock held and are not entitled to receive dividends unless declared by our
board of directors.
Common Stock Reserved for Future Issuance
The following table summarizes our shares of common stock reserved for future
issuance:
July 31, 2021
(in thousands)
Equity awards outstanding:
Stock options 2,597
Unvested restricted stock units 7,312
:
1,097
Allocation of committed and unvested performance shares, based on the target number of shares
128 Unvested performance stock awards 260
Unvested Committed Unissued Common Shares related to our acquisition of Edgewise and Trustdome
344 Equity awards available for future grants: Equity incentive plans
Share purchase rights committed under the employee share purchase plan
Employee stock purchase plan 3,368
Stock reserved for settlement of the Convertible Senior Notes 7,626
Total 44,048
Note 13. Stock-Based Compensation
Equity Incentive Plans
We adopted the Fiscal Year 2018 Equity Incentive Plan (the "2018 Plan") in
fiscal 2018 and the 2007 Stock Plan (the "2007 Plan") in fiscal 2008,
collectively referred to as the "Plans." Equity incentive awards which may be
granted to eligible participants under the Plans include restricted stock units,
restricted stock, stock options, nonstatutory stock options, stock appreciation
rights, performance units and performance shares. With the establishment of the
2018 Plan, we no longer grant stock-based awards under the 2007 Plan and any
shares underlying stock options that expire or terminate or are forfeited or
repurchased by us under the 2007 Plan are automatically transferred to the 2018
Plan.
As of July 31, 2021, a total of 31.7 million shares of common stock have been
reserved for the issuance of equity awards under the 2018 Plan, of which 21.3
million shares were available for grant. The number of shares of common stock
available
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for issuance under the 2018 Plan also includes an annual increase on the first
day of each fiscal year pursuant to its automatic annual increase provision.
Stock Options
The stock option activity consisted of the following for fiscal 2021:
Weighted-Average
Outstanding Weighted-Average Remaining Aggregate
Stock Exercise Contractual Term Intrinsic
Options Price (in years) Value
(in thousands, except per share amounts)
Balance as of July 31, 2020 5,175 $8.90 4.0 $ 625,904
Granted - $-
Exercised (2,466) $7.39 $ 421,789
Canceled, forfeited or expired (112)
21,316
Balance as of July 31, 2021 2,597 $10.37 3.2 $ 585,829
Exercisable and expected to vest as of
July 31, 2020 2,546 $6.46 3.5 $ 314,111
Exercisable and expected to vest as of
July 31, 2021 1,777 $8.53 2.9 $ 404,151
The aggregate intrinsic value of the options exercised represents the difference
between the fair value of our common stock on the date of exercise and their
exercise price. The total intrinsic value of options exercised for fiscal 2021,
fiscal 2020 and fiscal 2019 was $421.8 million, $242.4 million and $300.9
million, respectively. The weighted-average grant-date fair value per share of
awards granted for fiscal 2020 was $22.76.
We estimated the fair value of stock options using the Black-Scholes option
pricing model with the following assumptions:
Year Ended July 31(1)
2020
Expected term (in years) 6.1
Expected stock price volatility 46.1%
Risk-free interest rate 1.7%
Dividend yield 0.0%
(1) There were no stock options granted during fiscal 2021 and fiscal 2019.
Restricted Stock Units and Performance Stock Awards
The 2018 Plan allows for the grant of RSUs. Generally, RSUs are subject to a
four-year vesting period, with 25% of the shares vesting approximately one year
from the vesting commencing date and quarterly thereafter over the remaining
vesting term.
The 2018 Plan allows for the grant of PSAs. The right to earn the PSAs is
subject to achievement of the defined performance metrics and continuous
employment service. The performance metrics are defined and approved by the
compensation committee of our board of directors or by our senior management for
certain types of awards. Generally, earned PSAs are subject to additional
time-based vesting.
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PSAs related to the fiscal 2019 performance period, totaling approximately
0.5 million shares with a weighted-average grant date fair value per share of
$36.90, were forfeited effective at the end of fiscal 2019, resulting in a
reversal of $3.8 million of accrued stock-based compensation expense recognized
in the nine months ended April 30, 2019. Accordingly, no stock-based
compensation expense was recognized for these awards in fiscal 2019.
As of July 31, 2021, we determined that the service inception date for 0.1
million PSAs preceded the grant date, and we recognized $13.1 million of
stock-based compensation expense associated with these PSAs in fiscal 2021.
As of July 31, 2021, there were 0.7 million outstanding PSAs for which the
performance metrics have not been defined as of such date. Accordingly, such
awards are not considered granted for accounting purposes as of July 31, 2021
and have been excluded from the below table.
The activity of RSUs and PSAs consisted of the following for fiscal 2021:
Weighted-Average Grant Date Aggregate
Underlying Shares Fair Value Intrinsic Value
(in thousands, except per share data)
Balance as of July 31, 2020 8,553 $60.72 $ 1,110,694
Granted 2,910 $172.79
Vested (2,953) $63.05 $ 530,027
Canceled or forfeited (747) $71.09
Balance as of July 31, 2021 7,763 $100.84 $ 1,831,376
Employee Stock Purchase Plan
We adopted the Fiscal Year 2018 Employee Stock Purchase Plan (the "ESPP") in the
third quarter of fiscal 2018. As of July 31, 2021, a total of 6.0 million shares
of common stock have been reserved for issuance under the ESPP, out of which 3.7
million shares were available for grant. The number of shares reserved includes
an annual increase on the first day of each fiscal year pursuant to its
automatic annual increase provision. The ESPP provides for consecutive offering
periods that will typically have a duration of approximately 24 months in length
and is comprised of four purchase periods of approximately six months in length.
The offering periods are scheduled to start on the first trading day on or after
June 15 and December 15 of each year. During fiscal 2021, fiscal 2020 and fiscal
2019, employees purchased approximately 0.3 million, 0.8 million and 1.1 million
shares of common stock, respectively, under the ESPP at an average purchase
price of $75.92, $18.76 and $14.53, respectively with proceeds of $25.7 million,
$15.3 million and $16.4 million, respectively.
ESPP employee payroll contributions accrued as of July 31, 2021 and 2020, was
$5.2 million and $3.5 million, respectively, and are included within accrued
compensation in the consolidated balance sheets. Payroll contributions accrued
as of July 31, 2021 will be used to purchase shares at the end of the current
ESPP purchase period ending on December 15, 2021. Payroll contributions
ultimately used to purchase shares are reclassified to stockholders' equity on
the purchase date.
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The fair value of the purchase right for the ESPP was estimated on the grant
date using the Black-Scholes option-pricing model with the following
assumptions:
Year Ended July 31,
2021 2020 2019
Expected term (in years) 0.5 - 2.0 0.5 - 2.0 0.5 - 2.0
Expected stock price volatility 46.2% - 67.4% 53.6% - 73.6% 44.0% - 61.9%
Risk-free interest rate 0.1% - 0.2% 0.2% - 1.7% 1.9% - 2.7%
Dividend yield 0.0% 0.0% 0.0%
Deferred Merger Consideration
In connection with the acquisition of Trustdome, as further described in Note 6,
Business Combinations, certain former employees who became our employees are
entitled to receive a deferred merger consideration payable in shares of our
authorized common stock and RSUs. These awards are subject to time-based
vesting. The fair value of these awards of approximately $10.1 million will be
recognized as stock-based compensation expense on a straight-line basis over the
vesting period within research and development expenses in the consolidated
statements of operations.
In connection with the acquisition of Edgewise, as further described in Note 6,
Business Combinations, certain former employees who became our employees are
entitled to receive a deferred merger consideration payable in shares of our
authorized common stock. These awards are subject to time-based vesting. The
fair value of these awards of approximately $9.3 million will be recognized as
stock-based compensation expense on a straight-line basis over the vesting
period within research and development expenses in the consolidated statements
of operations.
Stock-based Compensation Expense
The components of stock-based compensation expense recognized in the
consolidated statements of operations consisted of the following:
Year Ended July 31,
2021 2020 2019
(in thousands)
Cost of revenue $ 14,036 $ 7,318 $ 2,926
Sales and marketing 133,115 66,539 23,118
Research and development 67,803 30,173 15,090
General and administrative 43,581 17,365 5,289
Total $ 258,535 $ 121,395 $ 46,423
As of July 31, 2021, the unrecognized stock-based compensation cost related to
outstanding equity-based awards, including awards for which the service
inception date has been met but the grant date has not been met, was $729.2
million, which we expect to be amortized over a weighted-average period of 2.9
years.
During fiscal 2021, fiscal 2020 and fiscal 2019, we capitalized $6.3 million,
$4.4 million and $0.5 million, respectively, of stock-based compensation
associated with the development of software for internal-use.
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Note 14. Income Taxes
The following table sets forth the geographical breakdown of the income (loss)
before the provision for income taxes:
Year ended July 31,
2021 2020 2019
(in thousands)
Domestic $ (275,189) $ (123,085) $ (34,145)
International 18,011 10,357 6,233
$ 8.31
The following table sets forth the components of the provision for income taxes:
Year ended July 31,
2021 2020 2019
Current: (in thousands)
Federal $ - $ - $ -
State 126 45 64
Foreign 7,104 4,013 2,325
Total current tax expense 7,230 4,058 2,389
Deferred:
Federal (349) (864) (1,431)
State (3) (243) (107)
Foreign (2,027) (563) (108)
Total deferred tax expense (2,379) (1,670) (1,646)
Total provision for income taxes $ 4,851 $ 2,388 $ 743
Loss before provision for income taxes $ (257,178) $ (112,728) $ (27,912)
Year ended July 31,
2021 2020 2019
Tax at federal statutory rate 21.0 % 21.0 % 21.0 %
State taxes - 0.2 0.1
Impact of foreign rate differential 0.4 - (0.9)
Meals and entertainment (0.1) (0.2) (1.9)
Stock-based compensation 43.9 37.0 147.2
Provision to return adjustments 0.1 (0.3) 1.2
U.S. tax credits 4.1 6.8 10.0
Change in valuation allowance (70.6) (65.0) (176.9)
Withholding tax (0.7) (1.1) (2.4)
Other - (0.5) (0.1)
Effective tax rate (1.9) % (2.1) % (2.7) %
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-------------------------------------------------------------------------------- Table of Contents Our estimated effective tax rate for the periods presented differs from theU.S. statutory rate primarily due to our foreign earnings which are taxed at different rates than theU.S. statutory rate, as well as the benefit of stock compensation deductions, offset by the impact of the valuation allowance we maintain against ourU.S. federal and state deferred tax assets. During fiscal 2020 and fiscal 2019, we recognized an income tax benefit of $1.1 million and $1.4 million, respectively, as a result of a release in our valuation allowance on deferred tax assets due to deferred taxes recorded as part of the acquisition accounting of Cloudneeti, Edgewise and Appsulate. Refer to Note 6, Business Combinations, for further information. The following table presents the tax effects of temporary differences that give rise to significant portions of our deferred tax assets and liabilities: July 31, 2021 2020 (in thousands) Deferred tax assets: Net operating losses carryovers $ 341,777 $ 149,430 Accruals and reserves 7,769 3,896 Deferred revenue 33,028 27,123 Tax credits carryovers 42,225 23,573 Stock-based compensation 21,849 14,218 Property and equipment 1,273 1,002 Operating lease liabilities 10,505 8,571 Other 742 33 Gross deferred tax assets 459,168 227,846 Less: Valuation allowance (345,756) (130,236) Total deferred tax assets $ 113,412 $ 97,610 Deferred tax liabilities: Intangible assets $ (6,341) $ (4,224) Deferred contract acquisition costs (46,709) (24,727) Convertible senior notes (50,593) (61,071) Operating lease right-of-use assets (9,069) (6,978) Other - (131) Total deferred tax liabilities $ (112,712) $ (97,131) Net deferred tax assets $ 700 $ 479 A deferred tax liability has not been recognized on the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries that are indefinitely reinvested outside theU.S. Income taxes are generally incurred upon a repatriation of assets, a sale, or a liquidation of the subsidiary. The excess of the amount for financial reporting over the tax basis in the investments in foreign subsidiaries, as well as the unrecognized deferred tax liability, are not material for the periods presented. 136 -------------------------------------------------------------------------------- Table of Contents The following table presents the change in the valuation allowance: Year ended July 31, 2021 2020 2019 (in thousands)
Balance as of the beginning of the period $ 130,236 $ 103,732 $ 45,578
Change during the period 215,520 26,504 58,154
Balance as of the end of the period $ 345,756 $ 130,236 $ 103,732
The realization of deferred tax assets is dependent upon the generation of
sufficient taxable income of the appropriate character in future periods. We
regularly assess the ability to realize our deferred tax assets and 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, we believe that
it is more likely than not that our U.S. federal and, state deferred tax assets
will not be realized as of July 31, 2021 and 2020, and as such, we have
maintained a full valuation allowance against such deferred tax assets. During
fiscal 2019, we determined that due to the weight of objectively verifiable
negative evidence, our U.K. deferred tax assets are no longer more likely than
not to be realized in the future and a full valuation allowance was recorded and
has been maintained as of July 31, 2021 and 2020.
The amount of the deferred tax asset considered realizable, however, could be
adjusted if estimates of future taxable income during the carryforward period
are reduced or increased or if objective negative evidence in the form of
cumulative losses is no longer present and additional weight may be given to
subjective evidence such as our projections for growth. In the event we
determine that we will be able to realize all or part of our net deferred tax
assets in the future, the valuation allowance against our deferred tax assets
will be reversed in the period in which we make such determination. The release
of a valuation allowance may cause greater volatility in the effective tax rate
in the periods in which the valuation allowance is released. The valuation
allowance against our U.S. federal, state and U.K. deferred tax assets increased
by $215.5 million, $26.5 million and $58.2 million in fiscal 2021, fiscal 2020
and fiscal 2019, respectively. The increase in the valuation allowance in fiscal
2021, fiscal 2020 and fiscal 2019 was related to tax losses for which
insufficient positive evidence exists to support their realizability.
As of July 31, 2021 and 2020, we have net operating loss carryforwards for U.S.
federal income tax purposes of $1,421.0 million and $626.3 million,
respectively, which are available to offset future federal taxable income.
Beginning in 2027, $177.7 million of the federal net operating losses will begin
to expire. The remaining $1,243.3 million of the federal net operating losses
will carry forward indefinitely. As of July 31, 2021 and 2020, we have net
operating loss carryforwards for state income tax purposes of $396.3 million and
$177.1 million, respectively. Beginning in 2024, $300.1 million of state net
operating losses will begin to expire at different periods. The remaining $96.3
million of state net operating losses will carry forward indefinitely. As of
July 31, 2021 and 2020, we had foreign net operating loss carryforward of $54.6
million and $19.5 million, respectively, all of which will be carried forward
indefinitely. Beginning in 2027, $0.9 million of foreign net operating losses
will begin to expire. The remaining $53.7 million of foreign net operating
losses will carry forward indefinitely.
As of July 31, 2021, we had federal and California research and development tax
credit carryforwards of approximately $34.7 million and $26.1 million,
respectively. If not utilized, the federal credit carryforwards will begin
expiring at different periods beginning in 2033. The California credit will be
carried forward indefinitely.
Federal and state tax laws impose restrictions on the utilization of net
operating loss and research and development tax credit carryforwards in the
event of a change in our ownership as defined by the Internal Revenue Code,
Sections 382 and
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383. Under Section 382 and 383 of the Code, substantial changes in our ownership
and the ownership of acquired companies may limit the amount of net operating
loss and research and development tax credit carryforwards that are available to
offset taxable income. The annual limitation would not automatically result in
the loss of net operating loss or research and development tax credit
carryforwards but may limit the amount available in any given future period.
We are subject to income taxes in the U.S. and various foreign jurisdictions. As
of July 31, 2021, all years are open for examination and may become subject to
examination in the future. Significant judgment is required in evaluating our
tax positions and determining our income tax expense for the fiscal year. During
the ordinary course of business, there are transactions and calculations for
which the ultimate tax determination is uncertain. Our estimate of the potential
outcome of any tax position is subject to management's assessment of relevant
risks, facts and circumstances existing at that time. These unrecognized tax
benefits are established when we believe that certain positions might be
challenged despite the belief that our tax return positions are fully
supportable. We recognize interest and penalties associated with our
unrecognized tax benefits as a component of our income tax expense. For the
periods presented, we did not have material interest or penalties associated
with the unrecognized tax benefits in the consolidated financial statements.
We had $18.5 million of gross unrecognized tax benefits as of July 31, 2021,
none of which would affect our effective tax rate if recognized due to our U.S.
valuation allowance. The gross unrecognized tax benefits relate to income tax
positions which, if recognized, would be in the form of additional deferred tax
assets that would be offset by a valuation allowance. As of July 31, 2021, we do
not believe that our estimates, as otherwise provided for, on such tax positions
will significantly increase or decrease within the next twelve months.
The changes in our gross unrecognized tax benefits for fiscal 2021 consisted of
the following:
Amount
(in thousands)
Balance as of July 31, 2019 $
The following table shows the reconciliation between the statutory federal tax rate and our effective tax rate:
Gross increase for tax positions of prior fiscal years
4,427
Gross increase for tax positions of current fiscal years
1,611
Balance as of July 31, 2020
4,471
Gross (decrease) for tax positions of prior fiscal years
10,509
Gross increase for tax positions of current fiscal year
(581)
Balance as of July 31, 2021 $ 18,501
Note 15. Net Loss Per Share
Basic net loss per share is computed by dividing the net loss by the
weighted-average number of shares of common stock outstanding during the period,
less shares subject to repurchase. The diluted net loss per share is computed by
giving effect to all potential dilutive common stock equivalents outstanding for
the period. For purposes of this calculation, our stock options, shares subject
to repurchase from early exercised stock options, share purchase rights under
the employee stock purchase plan, unvested RSUs, unvested PSAs and shares
related to the Notes are considered to be potential common stock equivalents.
Since we have reported net losses for all periods presented, we have excluded
all potentially dilutive securities from the calculation of the diluted net loss
per share as their effect is antidilutive and accordingly, basic and diluted net
loss per share is the same for all periods presented.
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The following table sets forth the computation of basic and diluted net loss per
share:
Year Ended July 31,
2021 2020 2019
(in thousands, except per share data)
Net loss $ (262,029)
8,573
135,654 129,323 123,566 Net loss per share, basic and diluted $ (1.93)
$ (115,116) $ (28,655) Weighted average shares used in the calculation of net loss per share, basic and diluted
The following table summarizes the outstanding potentially dilutive securities
that were excluded from the computation of diluted net loss per share because
the impact of including them would have been antidilutive:
July 31,
2021 2020 2019
(in thousands)
Unvested RSUs and shares of common stock 7,440 8,088 4,274
Stock options 2,597 5,175 8,861
Unvested PSAs(1) 562 723 -
Share purchase rights under the ESPP 344 568 913
Convertible senior notes(2) 7,626 - -
Total 18,569 14,554 14,048
(1) The number of unvested PSAs is estimated at 100% of the target number of
shares granted and excludes unvested PSAs for which performance conditions have
not been established as of July 31, 2021, as they are not considered outstanding
for accounting purposes. Refer to Note 13, Stock-Based Compensation, for further
information.
(2) The shares underlying the conversion option in the Notes were not considered
in the calculation of diluted net loss per share as the effect would have been
antidilutive. Based on the initial conversion price, the entire outstanding
principal amount of the Notes as of July 31, 2021 would have been convertible
into approximately 7.6 million shares of our common stock, which is reflected in
the above table. As we expect to settle the principal amount of the Notes in
cash, only the amount by which the conversion value exceeds the aggregate
principal amount of the Notes (the "conversion spread") is considered in the
diluted earnings per share computation under the treasury stock method. The
conversion spread has a dilutive impact on diluted net income per share when the
average market price of our common stock for a given reporting period exceeds
the initial conversion price of $150.80 per share for the Notes. As of July 31,
2021, we have not received any conversion notices for the Notes. In connection
with the issuance of the Notes, we entered into Capped Calls, which will not be
included in the computation of the number of diluted shares outstanding, as
their effect would be antidilutive. The Capped Calls are expected to partially
offset the potential dilution to our common stock upon any conversion of the
Notes.
Note 16. Segment and Geographic Information
Our chief operating decision maker ("CODM") is our chief executive officer. We
derive our revenue primarily from sales of subscription services to our cloud
platform and related support services. Our CODM reviews financial information
presented on a consolidated basis for the purposes of allocating resources and
evaluating financial performance. Accordingly, we determined that we operate
as one operating segment.
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$ (0.89) $ (0.23)
July 31,
2021 2020
(in thousands)
United States $ 112,251 $ 74,264
Rest of the world 40,664 37,589
Total $ 152,915 $ 111,853
Refer to Note 2, Revenue Recognition for information on revenue by geography.
Note 17. 401(k) Plan
We have a defined-contribution plan intended to qualify under Section 401 of the
Internal Revenue Code (the "401(k) Plan"). We contract with a third-party
provider to act as a custodian and trustee, and to process and maintain the
records of participant data. We make matching contributions to the plan for our
employees.
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Our long-term assets consist of property, plant and equipment and operating lease rights, which are summarized by geographic area as follows:
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