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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 April 30, 2020
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)  
 
Delaware20-2530195
(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 classTrading Symbol(s)Name of each exchange on which registered
Common stock, $0.0001 par value per sharePANWNew 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 filerAccelerated filerEmerging growth company
Non-accelerated filerSmaller 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 May 14, 2020 was 96,465,888.



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.

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

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

April 30, 2020July 31, 2019
Assets
Current assets:
Cash and cash equivalents$1,484.7  $961.4  
Short-term investments554.1  1,841.7  
Accounts receivable, net of allowance for doubtful accounts of $1.8 and $0.8 at April 30, 2020 and July 31, 2019, respectively
668.8  582.4  
Prepaid expenses and other current assets306.4  279.3  
Total current assets3,014.0  3,664.8  
Property and equipment, net357.2  296.0  
Operating lease right-of-use assets263.8    
Long-term investments151.2  575.4  
Goodwill1,812.9  1,352.3  
Intangible assets, net380.6  280.6  
Other assets522.1  423.1  
Total assets$6,501.8  $6,592.2  
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable$52.3  $73.3  
Accrued compensation174.9  235.5  
Accrued and other liabilities253.9  162.4  
Deferred revenue1,854.6  1,582.1  
Total current liabilities2,335.7  2,053.3  
Convertible senior notes, net1,477.0  1,430.0  
Long-term deferred revenue1,516.0  1,306.6  
Long-term operating lease liabilities344.6    
Other long-term liabilities83.8  216.0  
Commitments and contingencies (Note 11)
Stockholders’ equity:
Preferred stock; $0.0001 par value; 100.0 shares authorized; none issued and outstanding at April 30, 2020 and July 31, 2019
    
Common stock and additional paid-in capital; $0.0001 par value; 1,000.0 shares authorized; 96.5 and 96.8 shares issued and outstanding at April 30, 2020 and July 31, 2019, respectively
1,855.7  2,490.9  
Accumulated other comprehensive loss(2.0) (3.7) 
Accumulated deficit(1,109.0) (900.9) 
Total stockholders’ equity744.7  1,586.3  
Total liabilities and stockholders’ equity$6,501.8  $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 EndedNine Months Ended
April 30,April 30,
2020201920202019
Revenue:
Product$280.9  $278.4  $758.6  $790.5  
Subscription and support588.5  448.2  1,699.4  1,303.3  
Total revenue869.4  726.6  2,458.0  2,093.8  
Cost of revenue:
Product73.3  78.0  207.1  233.7  
Subscription and support185.0  126.9  502.0  357.3  
Total cost of revenue258.3  204.9  709.1  591.0  
Total gross profit611.1  521.7  1,748.9  1,502.8  
Operating expenses:
Research and development196.3  139.1  552.2  380.8  
Sales and marketing388.4  339.0  1,129.0  973.6  
General and administrative82.9  62.3  228.9  192.6  
Total operating expenses667.6  540.4  1,910.1  1,547.0  
Operating loss(56.5) (18.7) (161.2) (44.2) 
Interest expense(19.4) (20.6) (57.3) (63.9) 
Other income, net8.1  18.2  35.1  47.2  
Loss before income taxes(67.8) (21.1) (183.4) (60.9) 
Provision for (benefit from) income taxes7.0  (0.9) 24.7  0.2  
Net loss$(74.8) $(20.2) $(208.1) $(61.1) 
Net loss per share, basic and diluted$(0.77) $(0.21) $(2.14) $(0.65) 
Weighted-average shares used to compute net loss per share, basic and diluted96.7  94.4  97.2  94.1  

See notes to condensed consolidated financial statements.
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PALO ALTO NETWORKS, INC.

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

Three Months EndedNine Months Ended
April 30,April 30,
2020201920202019
Net loss$(74.8) $(20.2) $(208.1) $(61.1) 
Other comprehensive income (loss), net of tax:
Change in unrealized gains (losses) on investments0.4  2.4  2.0  8.1  
Change in unrealized gains (losses) on cash flow hedges(0.6) 0.2  (0.3) 1.1  
Other comprehensive income (loss)(0.2) 2.6  1.7  9.2  
Comprehensive loss$(75.0) $(17.6) $(206.4) $(51.9) 

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 April 30, 2020
 Common Stock
and
Additional Paid-In Capital
Accumulated
Other
Comprehensive Income (Loss)
Accumulated
Deficit
Total 
Stockholders’
Equity
 SharesAmount
Balance as of January 31, 202099.7  $2,644.5  $(1.8) $(1,034.2) $1,608.5  
Net loss—  —  —  (74.8) (74.8) 
Other comprehensive loss—  —  (0.2) —  (0.2) 
Issuance of common stock in connection with employee equity incentive plans1.0  46.4  —  —  46.4  
Taxes paid related to net share settlement of equity awards—  (4.8) —  —  (4.8) 
Share-based compensation for equity-based awards—  169.6  —  —  169.6  
Repurchase and retirement of common stock(4.2) (1,000.0) —  —  (1,000.0) 
Balance as of April 30, 202096.5  $1,855.7  $(2.0) $(1,109.0) $744.7  

Three Months Ended April 30, 2019
 Common Stock
and
Additional Paid-In Capital
Accumulated
Other
Comprehensive Income (Loss)
Accumulated
Deficit
Total 
Stockholders’
Equity
 SharesAmount
Balance as of January 31, 201993.7  $1,941.5  $(9.8) $(859.9) $1,071.8  
Net loss—  —  —  (20.2) (20.2) 
Other comprehensive income—  —  2.6  —  2.6  
Issuance of common stock in connection with employee equity incentive plans1.0  36.6  —  —  36.6  
Taxes paid related to net share settlement of equity awards—  (3.6) —  —  (3.6) 
Share-based compensation for equity-based awards—  140.4  —  —  140.4  
Issuance of common and restricted common stock in connection with acquisition1.2224.2  —  —  224.2  
Temporary equity reclassification—  1.7  —  —  1.7  
Balance as of April 30, 201995.9  $2,340.8  $(7.2) $(880.1) $1,453.5  


Nine Months Ended April 30, 2020
 Common Stock
and
Additional Paid-In Capital
Accumulated
Other
Comprehensive Income (Loss)
Accumulated
Deficit
Total 
Stockholders’
Equity
 SharesAmount
Balance as of July 31, 201996.8  $2,490.9  $(3.7) $(900.9) $1,586.3  
Net loss—  —  —  (208.1) (208.1) 
Other comprehensive income—  —  1.7  —  1.7  
Issuance of common stock in connection with employee equity incentive plans2.8  83.5  —  —  83.5  
Taxes paid related to net share settlement of equity awards—  (16.8) —  —  (16.8) 
Share-based compensation for equity-based awards—  496.2  —  —  496.2  
Repurchase and retirement of common stock(5.1) (1,198.1) —  —  (1,198.1) 
Settlement of warrants2.0  —  —  —  —  
Balance as of April 30, 202096.5  $1,855.7  $(2.0) $(1,109.0) $744.7  

Nine Months Ended April 30, 2019
 Common Stock
and
Additional Paid-In Capital
Accumulated
Other
Comprehensive Income (Loss)
Accumulated
Deficit
Total 
Stockholders’
Equity
 SharesAmount
Balance as of July 31, 201893.6  $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—  —  —  (61.1) (61.1) 
Other comprehensive income—  —  9.2  —  9.2  
Issuance of common stock in connection with employee equity incentive plans3.0  70.5  —  —  70.5  
Taxes paid related to net share settlement of equity awards—  (24.6) —  —  (24.6) 
Share-based compensation for equity-based awards—  423.0  —  —  423.0  
Repurchase and retirement of common stock(1.9) (330.0) —  —  (330.0) 
Settlement of convertible notes1.7  (12.2) —  —  (12.2) 
Common stock received from exercise of note hedges(1.7) —  —  —  —  
Issuance of common and restricted common stock in connection with acquisition1.2  225.9  —  —  225.9  
Temporary equity reclassification—  20.8  —  —  20.8  
Balance as of April 30, 201995.9  $2,340.8  $(7.2) $(880.1) $1,453.5  

See notes to condensed consolidated financial statements.
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PALO ALTO NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in millions)
Nine Months Ended
April 30,
20202019
Cash flows from operating activities
Net loss
$(208.1) $(61.1) 
Adjustments to reconcile net loss to net cash provided by operating activities:
Share-based compensation for equity-based awards484.2  417.5  
Depreciation and amortization145.6  111.6  
(Gain) loss related to facility exit(3.1) 4.1  
Amortization of deferred contract costs171.4  147.6  
Amortization of debt discount and debt issuance costs47.0  53.6  
Amortization of operating lease right-of-use assets34.2    
Amortization of investment premiums, net of accretion of purchase discounts(6.2) (13.0) 
Loss on conversions of convertible senior notes  2.6  
Repayments of convertible senior notes attributable to debt discount  (67.1) 
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable, net
(67.2) 63.8  
Prepaid expenses and other assets
(208.0) (164.4) 
Accounts payable
(22.8) 23.2  
Accrued compensation
(71.6) (22.7) 
Accrued and other liabilities
(47.1) (10.7) 
Deferred revenue
453.7  339.1  
Net cash provided by operating activities
702.0  824.1  
Cash flows from investing activities
Purchases of investments(295.5) (2,426.6) 
Proceeds from sales of investments310.8  3.5  
Proceeds from maturities of investments1,706.4  1,506.8  
Business acquisitions, net of cash acquired(583.5) (382.8) 
Purchases of property, equipment, and other assets
(182.6) (78.1) 
Net cash provided by (used in) investing activities955.6  (1,377.2) 
Cash flows from financing activities
Repayments of convertible senior notes attributable to principal and equity component
  (348.5) 
Payments for debt issuance costs
  (3.7) 
Repurchases of common stock
(1,198.1) (330.0) 
Proceeds from sales of shares through employee equity incentive plans
83.7  70.3  
Payments for taxes related to net settlement of equity awards
(16.8) (24.6) 
Payments for deferred consideration related to business acquisitions
(1.3) (1.3) 
Net cash used in financing activities
(1,132.5) (637.8) 
Net increase (decrease) in cash, cash equivalents, and restricted cash
525.1  (1,190.9) 
Cash, cash equivalents, and restricted cash - beginning of period
965.0  2,509.2  
Cash, cash equivalents, and restricted cash - end of period $1,490.1  $1,318.3  
Reconciliation of cash, cash equivalents, and restricted cash to the condensed consolidated balance sheets
Cash and cash equivalents$1,484.7  $1,314.9  
Restricted cash included in prepaid expenses and other current assets
2.7  2.2  
Restricted cash included in other assets
2.7  1.2  
Total cash, cash equivalents, and restricted cash$1,490.1  $1,318.3  
Non-cash investing and financing activities
Equity consideration for business acquisitions$(11.0) $(225.9) 
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.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. We base our estimates on historical experience and also on assumptions that we believe are reasonable. Actual results could differ materially from those estimates due to risks and uncertainties, including uncertainty in the current economic environment due to the recent outbreak of COVID-19.
Summary of Significant Accounting Policies
There have been no material changes to our significant accounting policies as of and for the nine months ended April 30, 2020, 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 and Other Office Facilities.
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 $442.4 million of operating lease liabilities on our condensed consolidated balance sheet as of August 1, 2019, which included reclassifying previously recognized $129.0 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 and Other Office Facilities for further discussion.
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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 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 April 30,Nine Months Ended April 30,
2020201920202019
Revenue:
Americas
United States$553.5  $464.3  $1,554.0  $1,314.8  
Other Americas40.7  33.5  114.5  108.2  
Total Americas594.2  497.8  1,668.5  1,423.0  
Europe, the Middle East, and Africa (“EMEA”)171.5  138.7  485.3  414.7  
Asia Pacific and Japan (“APAC”)103.7  90.1  304.2  256.1  
Total revenue$869.4  $726.6  $2,458.0  $2,093.8  
The following table presents revenue for groups of similar products and services (in millions):
Three Months Ended April 30,Nine Months Ended April 30,
2020201920202019
Revenue:
Product$280.9  $278.4  $758.6  $790.5  
Subscription and support
Subscription354.3  258.8  1,015.5  739.8  
Support234.2  189.4  683.9  563.5  
Total subscription and support588.5  448.2  1,699.4  1,303.3  
Total revenue$869.4  $726.6  $2,458.0  $2,093.8  
Deferred Revenue
During the nine months ended April 30, 2020, we recognized approximately $1,265.0 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 $3.5 billion as of April 30, 2020, of which we expect to recognize approximately $1.9 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.
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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.
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 April 30, 2020 and July 31, 2019 (in millions):
April 30, 2020July 31, 2019
Level 1Level 2Level 3TotalLevel 1Level 2Level 3Total
Cash equivalents:
Money market funds$762.6  $  $  $762.6  $369.1  $  $  $369.1  
Certificates of deposit           12.0  12.0  
Commercial paper          19.3    19.3  
U.S. government and agency securities          54.4    54.4  
Total cash equivalents762.6      762.6  369.1  85.7    454.8  
Short-term investments:
Certificates of deposit  22.3    22.3    17.5    17.5  
Commercial paper