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Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________ 
FORM 10-Q
 _____________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2019
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
Commission File Number 001-35594
PALO ALTO NETWORKS, INC.
(Exact name of registrant as specified in its charter)  
 
Delaware
20-2530195
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
3000 Tannery Way
Santa Clara, California 95054
(Address of principal executive office, including zip code)
(408753-4000
(Registrant’s telephone number, including area code)
NA
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common stock, $0.0001 par value per share
 
PANW
 
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Emerging growth company
Non-accelerated filer
Smaller reporting company
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes     No  
The number of shares outstanding of the registrant’s common stock as of November 13, 2019 was 97,957,435.
 



Table of Contents

TABLE OF CONTENTS

 
 
 
 
 
Page
 
PART I - FINANCIAL INFORMATION
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
PART II - OTHER INFORMATION
 
Item 1.
Item 1A.
Item 2.
Item 6.
 

- 2 -

Table of Contents

PART I
ITEM 1.
FINANCIAL STATEMENTS
PALO ALTO NETWORKS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in millions, except per share data)

 
October 31, 2019
 
July 31, 2019
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,263.7

 
$
961.4

Short-term investments
1,597.5

 
1,841.7

Accounts receivable, net of allowance for doubtful accounts of $1.0 and $0.8 at October 31, 2019 and July 31, 2019, respectively
499.2

 
582.4

Prepaid expenses and other current assets
289.4

 
279.3

Total current assets
3,649.8

 
3,664.8

Property and equipment, net
316.4

 
296.0

Operating lease right-of-use assets
282.6

 

Long-term investments
467.6

 
575.4

Goodwill
1,400.4

 
1,352.3

Intangible assets, net
284.1

 
280.6

Other assets
423.9

 
423.1

Total assets
$
6,824.8

 
$
6,592.2

Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
74.7

 
$
73.3

Accrued compensation
125.7

 
235.5

Accrued and other liabilities
192.3

 
162.4

Deferred revenue
1,658.9

 
1,582.1

Total current liabilities
2,051.6

 
2,053.3

Convertible senior notes, net
1,445.5

 
1,430.0

Long-term deferred revenue
1,357.1

 
1,306.6

Long-term operating lease liabilities
371.6

 

Other long-term liabilities
82.6

 
216.0

Commitments and contingencies (Note 11)


 


Stockholders’ equity:
 
 
 
Preferred stock; $0.0001 par value; 100.0 shares authorized; none issued and outstanding at October 31, 2019 and July 31, 2019

 

Common stock and additional paid-in capital; $0.0001 par value; 1,000.0 shares authorized; 97.6 and 96.8 shares issued and outstanding at October 31, 2019 and July 31, 2019, respectively
2,477.5

 
2,490.9

Accumulated other comprehensive loss
(0.6
)
 
(3.7
)
Accumulated deficit
(960.5
)
 
(900.9
)
Total stockholders’ equity
1,516.4

 
1,586.3

Total liabilities and stockholders’ equity
$
6,824.8

 
$
6,592.2


See notes to condensed consolidated financial statements.

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PALO ALTO NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in millions, except per share data)

 
Three Months Ended
 
October 31,
 
2019
 
2018
Revenue:
 
 
 
Product
$
231.2

 
$
240.5

Subscription and support
540.7

 
415.5

Total revenue
771.9

 
656.0

Cost of revenue:
 
 
 
Product
65.1

 
73.2

Subscription and support
152.6

 
110.3

Total cost of revenue
217.7

 
183.5

Total gross profit
554.2

 
472.5

Operating expenses:
 
 
 
Research and development
170.5

 
113.4

Sales and marketing
365.7

 
314.6

General and administrative
69.8

 
76.6

Total operating expenses
606.0

 
504.6

Operating loss
(51.8
)
 
(32.1
)
Interest expense
(18.9
)
 
(22.7
)
Other income, net
16.2

 
13.0

Loss before income taxes
(54.5
)
 
(41.8
)
Provision for (benefit from) income taxes
5.1

 
(3.5
)
Net loss
$
(59.6
)
 
$
(38.3
)
Net loss per share, basic and diluted
$
(0.62
)
 
$
(0.41
)
Weighted-average shares used to compute net loss per share, basic and diluted
96.6

 
93.8


See notes to condensed consolidated financial statements.

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PALO ALTO NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited, in millions)

 
Three Months Ended
 
October 31,
 
2019
 
2018
Net loss
$
(59.6
)
 
$
(38.3
)
Other comprehensive income (loss), net of tax:
 
 
 
Change in unrealized gains (losses) on investments
2.7

 
0.9

Change in unrealized gains (losses) on cash flow hedges
0.4

 
(3.5
)
Other comprehensive income (loss)
3.1

 
(2.6
)
Comprehensive loss
$
(56.5
)
 
$
(40.9
)

See notes to condensed consolidated financial statements.

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PALO ALTO NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited, in millions)

 
Three Months Ended October 31, 2019
 
Common Stock
and
Additional Paid-In Capital
 
Accumulated
Other
Comprehensive Income (Loss)
 
Accumulated
Deficit
 
Total 
Stockholders’
Equity
 
Shares
 
Amount
 
Balance as of July 31, 2019
96.8

 
$
2,490.9

 
$
(3.7
)
 
$
(900.9
)
 
$
1,586.3

Net loss

 

 

 
(59.6
)
 
(59.6
)
Other comprehensive income

 

 
3.1

 

 
3.1

Issuance of common stock in connection with employee equity incentive plans
1.0

 
36.3

 

 

 
36.3

Taxes paid related to net share settlement of equity awards

 
(5.3
)
 

 

 
(5.3
)
Share-based compensation for equity-based awards

 
153.7

 

 

 
153.7

Repurchase and retirement of common stock
(0.9
)
 
(198.1
)
 

 

 
(198.1
)
Settlement of warrants
0.7

 

 

 

 

Balance as of October 31, 2019
97.6

 
$
2,477.5

 
$
(0.6
)
 
$
(960.5
)
 
$
1,516.4

 
Three Months Ended October 31, 2018
 
Common Stock
and
Additional Paid-In Capital
 
Accumulated
Other
Comprehensive Income (Loss)
 
Accumulated
Deficit
 
Total 
Stockholders’
Equity
 
Shares
 
Amount
 
Balance as of July 31, 2018
93.6

 
$
1,967.4

 
$
(16.4
)
 
$
(790.7
)
 
$
1,160.3

Cumulative-effect adjustment from adoption of new accounting pronouncement

 

 

 
(28.3
)
 
(28.3
)
Net loss

 

 

 
(38.3
)
 
(38.3
)
Other comprehensive loss

 

 
(2.6
)
 

 
(2.6
)
Issuance of common stock in connection with employee equity incentive plans
1.1

 
30.8

 

 

 
30.8

Taxes paid related to net share settlement of equity awards

 
(13.9
)
 

 

 
(13.9
)
Share-based compensation for equity-based awards

 
140.2

 

 

 
140.2

Settlement of convertible notes
1.4

 
(10.2
)
 

 

 
(10.2
)
Common stock received from exercise of note hedges
(1.4
)
 

 

 

 

Temporary equity reclassification

 
15.0

 

 

 
15.0

Balance as of October 31, 2018
94.7

 
$
2,129.3

 
$
(19.0
)
 
$
(857.3
)
 
$
1,253.0


See notes to condensed consolidated financial statements.

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PALO ALTO NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in millions)
 
Three Months Ended
 
October 31,
 
2019
 
2018
Cash flows from operating activities
 
 
 
Net loss
$
(59.6
)
 
$
(38.3
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Share-based compensation for equity-based awards
149.9

 
136.9

Depreciation and amortization
44.0

 
32.5

Amortization of deferred contract costs
55.6

 
43.6

Amortization of debt discount and debt issuance costs
15.5

 
19.4

Amortization of operating lease right-of-use assets
10.4

 

Amortization of investment premiums, net of accretion of purchase discounts
(3.2
)
 
(2.4
)
Loss on conversions of convertible senior notes

 
2.2

Repayments of convertible senior notes attributable to debt discount

 
(52.3
)
Changes in operating assets and liabilities, net of effects of acquisitions:
 
 
 
Accounts receivable, net
83.9

 
86.6

Prepaid expenses and other assets
(59.2
)
 
(25.1
)
Accounts payable
(2.5
)
 
(0.8
)
Accrued compensation
(109.9
)
 
(65.0
)
Accrued and other liabilities
(25.2
)
 
12.5

Deferred revenue
125.5

 
102.5

Net cash provided by operating activities
225.2

 
252.3

Cash flows from investing activities
 
 
 
Purchases of investments
(274.3
)
 
(741.0
)
Proceeds from sales of investments

 
2.5

Proceeds from maturities of investments
632.4

 
214.5

Business acquisitions, net of cash acquired
(66.4
)
 
(154.8
)
Purchases of property, equipment, and other assets
(47.2
)
 
(34.3
)
Net cash provided by (used in) investing activities
244.5

 
(713.1
)
Cash flows from financing activities
 
 
 
Repayments of convertible senior notes attributable to principal and equity component

 
(275.0
)
Payments for debt issuance costs

 
(3.6
)
Repurchases of common stock
(198.1
)
 

Proceeds from sales of shares through employee equity incentive plans
36.3

 
30.7

Payments for taxes related to net settlement of equity awards
(5.3
)
 
(13.9
)
Net cash used in financing activities
(167.1
)
 
(261.8
)
Net increase (decrease) in cash, cash equivalents, and restricted cash
302.6

 
(722.6
)
Cash, cash equivalents, and restricted cash - beginning of period
965.0

 
2,509.2

Cash, cash equivalents, and restricted cash - end of period
$
1,267.6

 
$
1,786.6

 
 
 
 
Reconciliation of cash, cash equivalents, and restricted cash to the condensed consolidated balance sheets
 
 
 
Cash and cash equivalents
$
1,263.7

 
$
1,784.4

Restricted cash included in prepaid expenses and other current assets
1.9

 
1.0

Restricted cash included in other assets
2.0

 
1.2

Total cash, cash equivalents, and restricted cash
$
1,267.6

 
$
1,786.6

See notes to condensed consolidated financial statements.

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 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Description of Business and Summary of Significant Accounting Policies
Description of Business
Palo Alto Networks, Inc. (the “Company,” “we,” “us,” or “our”), located in Santa Clara, California, was incorporated in March 2005 under the laws of the State of Delaware and commenced operations in April 2005. We offer platforms that empower enterprises, service providers, and government entities to secure their organizations by safely enabling applications and data running in their networks, on their endpoints, and in the cloud, and by preventing breaches that stem from targeted cyberattacks.
Basis of Presentation and Principles of Consolidation
The accompanying condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”), consistent in all material respects with those applied in our Annual Report on Form 10-K for the fiscal year ended July 31, 2019, filed with the Securities and Exchange Commission (“SEC”) on September 9, 2019. Our condensed consolidated financial statements include our accounts and our wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Our condensed consolidated financial statements are unaudited, but include all adjustments of a normal recurring nature necessary for a fair presentation of our quarterly results. We have made estimates and judgments affecting the amounts reported in our condensed consolidated financial statements and the accompanying notes. The actual results that we experience may differ materially from our estimates.
Certain prior period amounts have been reclassified to conform to our current period presentation.
Our condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes in our Annual Report on Form 10-K for the fiscal year ended July 31, 2019.
Summary of Significant Accounting Policies
There have been no material changes to our significant accounting policies as of and for the three months ended October 31, 2019, as compared to the significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended July 31, 2019, except for the change in our accounting policies for leases due to our adoption of new lease accounting guidance. Refer to “Recently Adopted Accounting Pronouncements” below and Note 10. Leases.
Recently Adopted Accounting Pronouncements
Leases
In February 2016, the Financial Accounting Standards Board (“FASB”) issued new authoritative guidance on lease accounting. Among its provisions, the standard requires lessees to recognize right-of-use assets and lease liabilities on the balance sheet for operating leases and also requires additional qualitative and quantitative disclosures about lease arrangements.
We adopted this standard effective August 1, 2019 on a modified retrospective basis, under which financial results reported in periods prior to fiscal 2020 were not adjusted. We elected the package of practical expedients, which allowed us to carry forward our historical assessments of whether contracts are or contain leases, lease classification, and initial direct costs. Additionally, we elected to account for lease and non-lease components as a single lease component and to not recognize right-of-use assets and lease liabilities for leases with a term of 12 months or less.
The most significant impact of adopting this guidance was the recognition of $286.4 million of operating lease right-of-use assets and $437.6 million of operating lease liabilities on our condensed consolidated balance sheet as of August 1, 2019, which included reclassifying previously recognized $124.2 million in lease incentives, deferred or prepaid rent, as well as $27.0 million in cease-use liabilities to operating lease right-of-use assets.
The adoption of this standard had no impact on our condensed consolidated statements of operations and condensed consolidated statements of cash flows. Refer to Note 10. Leases for further discussion.
Recently Issued Accounting Pronouncements
Financial Instruments - Credit Losses
In June 2016, the FASB issued new authoritative guidance on the accounting for credit losses on most financial assets and certain financial instruments. The standard replaces the existing incurred loss model with an expected credit loss model for financial

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assets measured at amortized cost, including trade receivables, and requires that credit losses on available-for-sale debt securities be presented as an allowance rather than as a write-down. The standard is effective for us in our first quarter of fiscal 2021 and will be applied on a modified retrospective basis. We are currently evaluating whether this standard will have a material impact on our condensed consolidated financial statements.
2. Revenue
Disaggregation of Revenue
The following table presents revenue by geographic theater (in millions):
 
Three Months Ended October 31,
 
2019
 
2018
Revenue:
 
 
 
Americas
 
 
 
United States
$
494.9

 
$
415.9

Other Americas
34.7

 
34.3

Total Americas
529.6

 
450.2

Europe, the Middle East, and Africa (“EMEA”)
147.6

 
127.7

Asia Pacific and Japan (“APAC”)
94.7

 
78.1

Total revenue
$
771.9

 
$
656.0


The following table presents revenue for groups of similar products and services (in millions):
 
Three Months Ended October 31,
 
2019
 
2018
Revenue:
 
 
 
Product
$
231.2

 
$
240.5

Subscription and support


 


Subscription
318.6

 
231.3

Support
222.1

 
184.2

Total subscription and support
540.7

 
415.5

Total revenue
$
771.9

 
$
656.0


Deferred Revenue
During the three months ended October 31, 2019, we recognized approximately $485.0 million of revenue pertaining to amounts that were deferred as of July 31, 2019.
Remaining Performance Obligations
Revenue expected to be recognized from remaining performance obligations was $3.1 billion as of October 31, 2019, of which we expect to recognize approximately $1.7 billion over the next 12 months and the remainder thereafter.
3. Fair Value Measurements
We categorize assets and liabilities recorded or disclosed at fair value on our condensed consolidated balance sheets based upon the level of judgment associated with inputs used to measure their fair value. The categories are as follows:
Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2—Inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the assets or liabilities, either directly or indirectly through market corroboration, for substantially the full term of the financial instruments.
Level 3—Inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. The inputs require significant management judgment or estimation.

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The following table presents the fair value of our financial assets and liabilities measured at fair value on a recurring basis using the above input categories as of October 31, 2019 and July 31, 2019 (in millions):
 
 
October 31, 2019
 
July 31, 2019
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash equivalents:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
 
$
617.3

 
$

 
$

 
$
617.3

 
$
369.1

 
$

 
$

 
$
369.1

Certificates of deposit
 

 
4.0

 

 
4.0

 

 
12.0

 
 
 
12.0

Commercial paper
 

 
4.5

 

 
4.5

 

 
19.3

 

 
19.3

U.S. government and agency securities
 

 
15.0

 

 
15.0

 

 
54.4

 

 
54.4

Total cash equivalents
 
617.3

 
23.5

 

 
640.8

 
369.1

 
85.7

 

 
454.8

Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit
 

 
23.7

 

 
23.7

 

 
17.5

 

 
17.5

Commercial paper
 

 
15.9

 

 
15.9

 

 
8.9

 

 
8.9

Corporate debt securities
 

 
369.9

 

 
369.9

 

 
375.5

 

 
375.5

U.S. government and agency securities
 

 
1,188.0

 

 
1,188.0

 

 
1,439.8

 

 
1,439.8

Total short-term investments
 

 
1,597.5

 

 
1,597.5

 

 
1,841.7

 

 
1,841.7

Long-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt securities
 

 
198.3

 

 
198.3

 

 
214.3

 

 
214.3

U.S. government and agency securities
 

 
269.3

 

 
269.3

 

 
361.1

 

 
361.1

Total long-term investments
 

 
467.6

 

 
467.6

 

 
575.4

 

 
575.4

Prepaid expenses and other current assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency forward contracts
 

 
0.4

 

 
0.4

 

 
1.3

 

 
1.3

Total prepaid expenses and other current assets
 

 
0.4

 

 
0.4

 

 
1.3

 

 
1.3

Total assets measured at fair value
 
$
617.3

 
$
2,089.0

 
$

 
$
2,706.3

 
$
369.1

 
$
2,504.1

 
$

 
$
2,873.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accrued and other liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency forward contracts
 
$

 
$
2.2

 
$

 
$
2.2

 
$

 
$
3.8

 
$

 
$
3.8

Total accrued and other liabilities
 

 
2.2




2.2

 


3.8




3.8

Total liabilities measured at fair value
 
$

 
$
2.2

 
$

 
$
2.2

 
$

 
$
3.8

 
$

 
$
3.8


Refer to Note 9. Debt for the carrying amount and estimated fair value of our convertible senior notes as of October 31, 2019 and July 31, 2019.

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4. Cash Equivalents and Investments
Available-for-sale Debt Securities
The following tables summarize the amortized cost, unrealized gains and losses, and fair value of our available-for-sale debt securities as of October 31, 2019 and July 31, 2019 (in millions):
 
October 31, 2019
 
Amortized Cost 
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
Cash equivalents:
 
 
 
 
 
 
 
Certificates of deposit
$
4.0

 
$

 
$

 
$
4.0

Commercial paper
4.5

 

 

 
4.5

U.S. government and agency securities
15.0

 

 

 
15.0

Total available-for-sale cash equivalents
$
23.5

 
$

 
$

 
$
23.5

Investments:
 
 
 
 
 
 
 
Certificates of deposit
$
23.7

 
$

 
$

 
$
23.7

Commercial paper
15.9

 

 

 
15.9

Corporate debt securities
565.2

 
3.0

 

 
568.2

U.S. government and agency securities
1,454.0

 
3.6

 
(0.3
)
 
1,457.3

Total available-for-sale investments
$
2,058.8

 
$
6.6

 
$
(0.3
)
 
$
2,065.1

 
July 31, 2019
 
Amortized Cost 
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
Cash equivalents:
 
 
 
 
 
 
 
Certificates of deposit
$
12.0

 
$

 
$

 
$
12.0

Commercial paper
19.3

 

 

 
19.3

U.S. government and agency securities
54.4

 

 

 
54.4

Total available-for-sale cash equivalents
$
85.7

 
$

 
$

 
$
85.7

Investments:
 
 
 
 
 
 
 
Certificates of deposit
$
17.5

 
$

 
$

 
$
17.5

Commercial paper
8.9

 

 

 
8.9

Corporate debt securities
587.8

 
2.3

 
(0.3
)
 
589.8

U.S. government and agency securities
1,799.5

 
2.6

 
(1.2
)
 
1,800.9

Total available-for-sale investments
$
2,413.7

 
$
4.9

 
$
(1.5
)
 
$
2,417.1


Unrealized losses related to these securities are due to interest rate fluctuations as opposed to credit quality. In addition, we do not intend to sell and it is not likely that we would be required to sell these securities before recovery of their amortized cost basis, which may be at maturity. As a result, there were no other-than-temporary impairments for these securities at October 31, 2019 and July 31, 2019.
The following table summarizes the amortized cost and fair value of our available-for-sale debt securities as of October 31, 2019, by contractual years-to-maturity (in millions):
 
Amortized Cost
 
Fair Value
Due within one year
$
1,618.4

 
$
1,621.0

Due between one and three years
463.9

 
467.6

Total
$
2,082.3

 
$
2,088.6


Marketable Equity Securities
Marketable equity securities consist of money market funds and are included in cash and cash equivalents in our condensed consolidated balance sheets. As of October 31, 2019 and July 31, 2019, the carrying value of our marketable equity securities were

- 11 -

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$617.3 million and $369.1 million, respectively. There were no unrealized gains or losses recognized for these securities during the three months ended October 31, 2019 and 2018.
5. Derivative Instruments
As a global business, we are exposed to currency exchange rate risk. Substantially all of our revenue is transacted in U.S. dollars, however, a portion of our operating expenditures are incurred outside of the United States and are denominated in foreign currencies, making them subject to fluctuations in foreign currency exchange rates. We enter into foreign currency derivative contracts with maturities of 15 months or less, which we designate as cash flow hedges, to manage the foreign currency exchange rate risk associated with these expenditures.
These derivative contracts expose us to credit risk to the extent that the counterparties may be unable to meet the terms of the arrangement. We mitigate this credit risk by transacting with major financial institutions with high credit ratings and also enter into master netting arrangements, which permit net settlement of transactions with the same counterparty. 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.
Our derivative financial instruments are recorded at fair value, on a gross basis, as either assets or liabilities in our condensed consolidated balance sheets. Gains or losses related to our cash flow hedges are recorded as a component of accumulated other comprehensive income (loss) (“AOCI”) in our condensed consolidated balance sheets and are reclassified into the financial statement line item associated with the underlying hedged transaction in our condensed consolidated statements of operations when the underlying hedged transaction is recognized in earnings. If it becomes probable that the hedged transaction will not occur, the cumulative unrealized gain or loss is reclassified immediately from AOCI into the financial statement line item associated with the underlying hedged transaction in our condensed consolidated statements of operations. Gains or losses related to non-designated derivative instruments are recognized in other income (expense), net in our condensed consolidated statements of operations for each period until the instrument matures, is terminated, is re-designated as a qualified cash flow hedge, or is sold. Derivatives designated as cash flow hedges are classified in our condensed consolidated statements of cash flows in the same manner as the underlying hedged transaction, primarily within cash flows from operating activities.
As of October 31, 2019 and July 31, 2019, the total notional amount of our outstanding foreign currency forward contracts was $233.9 million and $307.2 million, respectively. Refer to Note 3. Fair Value Measurements for the fair value of our derivative instruments as reported on our condensed consolidated balance sheets as of October 31, 2019.
During the three months ended October 31, 2019 and 2018, both unrealized gains and losses recognized in AOCI related to our cash flow hedges and amounts reclassified into earnings were not material. Unrealized losses in AOCI related to our cash flow hedges as of October 31, 2019 and 2018 were not material.
6. Acquisitions
Zingbox, Inc.
On September 20, 2019, we completed our acquisition of 100% of the voting equity interest of Zingbox, Inc. (“Zingbox”), a privately-held Internet of Things (“IoT”) security company. We believe the acquisition will accelerate our delivery of IoT security through our Next-Generation Firewall and Cortex platforms. The total purchase consideration for the acquisition of Zingbox was $66.4 million in cash.
As part of the acquisition, we issued replacement equity awards with a total fair value of $5.7 million, which will be expensed over the remaining service periods as share-based compensation.
We have accounted for this transaction as a business combination and allocated the purchase consideration to assets acquired and liabilities assumed based on preliminary estimated fair values, as presented in the following table (in millions):
 
Amount
Goodwill
$
48.1

Identified intangible assets
20.4

Net liabilities assumed
(2.1
)
Total
$
66.4


Goodwill generated from this business combination is primarily attributable to the assembled workforce and expected post-acquisition synergies from integrating Zingbox’s technology into our platforms. The goodwill is not deductible for income tax purposes.

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The following table presents details of the identified intangible assets acquired (in millions, except years):
 
Fair Value
 
Estimated Useful Life
Developed technology
$
18.6

 
5 years
Customer relationships
1.8

 
8 years
Total
$
20.4

 
 

Zingbox’s operating results are included in our condensed consolidated statements of operations from the date of acquisition. Pro forma results of operations have not been presented because the effect of the acquisition was not material to our condensed consolidated statements of operations.
Additional information, such as that related to income tax and other contingencies, existing as of the acquisition date but unknown to us may become known during the remainder of the measurement period, not to exceed 12 months from the acquisition date, which may result in changes to the amounts and allocations recorded.
7. Goodwill and Intangible Assets
Goodwill
The following table presents details of our goodwill during the three months ended October 31, 2019 (in millions):
 
Amount
Balance as of July 31, 2019
$
1,352.3

Goodwill acquired
48.1

Balance as of October 31, 2019
$
1,400.4


Purchased Intangible Assets
The following table presents details of our purchased intangible assets as of October 31, 2019 and July 31, 2019 (in millions):
 
October 31, 2019
 
July 31, 2019
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Intangible assets subject to amortization:
 
 
 
 
 
 
 
 
 
 
 
Developed technology
$
337.4

 
$
(93.9
)
 
$
243.5

 
$
318.8

 
$
(78.7
)
 
$
240.1

Customer relationships
41.6

 
(6.2
)
 
35.4

 
39.8

 
(4.7
)
 
35.1

Acquired intellectual property
8.9

 
(5.3
)
 
3.6

 
8.9

 
(5.1
)
 
3.8

Trade name and trademarks
9.4

 
(9.4
)
 

 
9.4

 
(9.4
)
 

Other
2.2

 
(2.2
)
 

 
2.2

 
(2.2
)
 

Total intangible assets subject to amortization
399.5

 
(117.0
)
 
282.5

 
379.1

 
(100.1
)
 
279.0

Intangible assets not subject to amortization:
 
 
 
 
 
 
 
 
 
 
 
In-process research and development
1.6

 

 
1.6

 
1.6

 

 
1.6

Total purchased intangible assets
$
401.1

 
$
(117.0
)
 
$
284.1

 
$
380.7

 
$
(100.1
)
 
$
280.6


We recognized amortization expense of $16.9 million and $9.4 million for the three months ended October 31, 2019 and 2018, respectively.

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The following table summarizes estimated future amortization expense of our intangible assets as of October 31, 2019 (in millions):

Amount
Fiscal years ending July 31:

Remaining 2020
$
52.5

2021
68.0

2022
63.5

2023
37.6

2024
30.1

2025 and thereafter
30.8

Total future amortization expense
$
282.5


8. Deferred Contract Costs
The following table presents details of our short-term and long-term deferred contract costs as of October 31, 2019 and July 31, 2019 (in millions):
 
October 31, 2019
 
July 31, 2019
Short-term deferred contract costs
$
155.4

 
$
151.1

Long-term deferred contract costs
317.6

 
324.2

Total deferred contract costs
$
473.0

 
$
475.3


We recognized amortization expense for our deferred contract costs of $55.6 million and $43.6 million during the three months ended October 31, 2019 and 2018, respectively. We did not recognize any impairment losses on our deferred contract costs during the three months ended October 31, 2019 or 2018.
9. Debt
Convertible Senior Notes
In June 2014, we issued $575.0 million aggregate principal amount of 0.0% Convertible Senior Notes due 2019 (the “2019 Notes”), and in July 2018, we issued $1.7 billion aggregate principal amount of 0.75% Convertible Senior Notes due 2023 (the “2023 Notes” and, together with the 2019 Notes, the “Notes”). The 2023 Notes bear interest at a fixed rate of 0.75% per year, payable semi-annually in arrears on January 1 and July 1 of each year, beginning on January 1, 2019. The 2023 Notes are governed by an indenture between us, as the issuer, and U.S. Bank National Association, as Trustee (the “Indenture”). The 2023 Notes are unsecured, unsubordinated obligations and the Indenture governing the 2023 Notes does 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 2019 Notes were converted prior to or settled on the maturity date of July 1, 2019, in accordance with their terms. The 2023 Notes mature on July 1, 2023. We cannot redeem the 2023 Notes prior to maturity.
The 2023 Notes are convertible for up to 6.4 million shares of our common stock at an initial conversion rate of approximately 3.7545 shares of common stock per $1,000 principal amount, which is equal to an initial conversion price of approximately $266.35 per share of common stock, subject to adjustments. Holders of the 2023 Notes may surrender their 2023 Notes for conversion at their option at any time prior to the close of business on the business day immediately preceding April 1, 2023, only under the following circumstances:
during any fiscal quarter commencing after the fiscal quarter ending on October 31, 2018 (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 the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the applicable conversion price for the 2023 Notes on each applicable trading day (the “sale price condition”);
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 2023 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 applicable conversion rate for the 2023 Notes on each such trading day; or
upon the occurrence of specified corporate events.

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On or after April 1, 2023, holders may surrender all or any portion of their 2023 Notes for conversion at any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date regardless of the foregoing conditions, and such conversions will be settled upon the maturity date. Upon conversion, holders of the 2023 Notes will receive cash equal to the aggregate principal amount of the 2023 Notes to be converted, and, at our election, cash and/or shares of our common stock for any amounts in excess of the aggregate principal amount of the 2023 Notes being converted.
The conversion price will be subject to adjustment in some events. Holders who convert their 2023 Notes in connection with certain corporate events that constitute a “make-whole fundamental change” under the Indenture are, under certain circumstances, entitled to an increase in the conversion rate. Additionally, upon the occurrence of a corporate event that constitutes a “fundamental change” under the Indenture, holders of the 2023 Notes may require us to repurchase for cash all or a portion of the 2023 Notes at a repurchase price equal to 100% of the principal amount of the 2023 Notes plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
The sale price condition was not met for the 2023 Notes during the fiscal quarters ended October 31, 2019 or July 31, 2019. Since the 2023 Notes were not convertible, the net carrying amount of the 2023 Notes was classified as a long-term liability and the equity component was included in additional paid-in capital in our condensed consolidated balance sheets as of October 31, 2019 and July 31, 2019. As of October 31, 2019, all of the 2023 Notes remained outstanding.
The following table sets forth the components of the 2023 Notes as of October 31, 2019 and July 31, 2019 (in millions):
 
October 31, 2019
 
July 31, 2019
Liability component:
 
 
 
Principal
$
1,693.0

 
$
1,693.0

Less: debt discount and debt issuance costs, net of amortization
247.5

 
263.0

Net carrying amount
$
1,445.5

 
$
1,430.0

 
 
 
 
Equity component
$
315.0

 
$
315.0


The total estimated fair value of the 2023 Notes was $1.9 billion at both October 31, 2019 and July 31, 2019. The fair value was determined based on the closing trading price per $100 of the 2023 Notes as of the last day of trading for the period. We consider the fair value of the 2023 Notes at