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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, 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.  


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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, 2020 was 95,211,700.



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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 -

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RISK FACTOR SUMMARY
Our business is subject to numerous risks and uncertainties, including those highlighted in Part II, Item 1A titled “Risk Factors.” These risks include, but are not limited to, the following:
The ongoing global COVID-19 outbreak could harm our business and results of operations.
Our business and operations have experienced growth in recent periods, and if we do not effectively manage any future growth or are unable to improve our systems, processes, and controls, our operating results could be adversely affected.
Our operating results may vary significantly from period to period and be unpredictable, which could cause the market price of our common stock to decline.
The sudden and significant global economic downturn could have an adverse effect on our business and operating results.
Our revenue growth rate in recent periods may not be indicative of our future performance.
We have a history of losses, anticipate increasing our operating expenses in the future, and may not be able to achieve or maintain profitability or maintain or increase cash flow on a consistent basis, which could cause our business, financial condition, and operating results to suffer.
If we are unable to sell new and additional product, subscription, and support offerings to our end-customers, our future revenue and operating results will be harmed.
We face intense competition in our market and we may lack sufficient financial or other resources to maintain or improve our competitive position.
A network or data security incident may allow unauthorized access to our network or data, harm our reputation, create additional liability, and adversely impact our financial results.
Reliance on shipments at the end of the quarter could cause our revenue for the applicable period to fall below expected levels.
Seasonality may cause fluctuations in our revenue.
If we are unable to hire, integrate, train, retain, and motivate qualified personnel and senior management, our business could suffer.
If we are not successful in executing our strategy to increase sales of our products, subscriptions and support offerings to new and existing medium and large enterprise end-customers, our operating results may suffer.
We rely on revenue from subscription and support offerings, and because we recognize revenue from subscription and support over the term of the relevant service period, downturns or upturns in sales of these subscription and support offerings are not immediately reflected in full in our operating results.
Defects, errors, or vulnerabilities in our products, subscriptions, or support offerings, the failure of our products or subscriptions to block a virus or prevent a security breach, misuse of our products, or risks of product liability claims could harm our reputation and adversely impact our operating results.
False detection of applications, viruses, spyware, vulnerability exploits, data patterns, or URL categories could adversely affect our business.
We rely on our channel partners to sell substantially all of our products, including subscriptions and support, and if these channel partners fail to perform, our ability to sell and distribute our products and subscriptions will be limited, and our operating results will be harmed.
If we do not accurately predict, prepare for, and respond promptly to rapidly evolving technological and market developments and successfully manage product and subscription introductions and transitions to meet changing end-customer needs in the enterprise security market, our competitive position and prospects will be harmed.
Our current research and development efforts may not produce successful products, subscriptions, or features that result in significant revenue, cost savings or other benefits in the near future, if at all.
We may acquire other businesses, which could require significant management attention, disrupt our business, dilute stockholder value, and adversely affect our operating results.
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Because we depend on manufacturing partners to build and ship our products, we are susceptible to manufacturing and logistics delays and pricing fluctuations that could prevent us from shipping customer orders on time, if at all, or on a cost-effective basis, which may result in the loss of sales and end-customers.
Managing the supply of our products and product components is complex. Insufficient supply and inventory may result in lost sales opportunities or delayed revenue, while excess inventory may harm our gross margins.
Because some of the key components in our products come from limited sources of supply, we are susceptible to supply shortages or supply changes, which could disrupt or delay our scheduled product deliveries to our end-customers and may result in the loss of sales and end-customers.
The sales prices of our products and subscriptions may decrease, which may reduce our gross profits and adversely impact our financial results.
We generate a significant amount of revenue from sales to distributors, resellers, and end-customers outside of the United States, and we are therefore subject to a number of risks associated with international sales and operations.
We are exposed to fluctuations in currency exchange rates, which could negatively affect our financial condition and operating results.
We are exposed to the credit and liquidity risk of some of our channel partners and end-customers, and to credit exposure in weakened markets, which could result in material losses.
A portion of our revenue is generated by sales to government entities, which are subject to a number of challenges and risks.
Our ability to sell our products and subscriptions is dependent on the quality of our technical support services and those of our channel partners, and the failure to offer high-quality technical support services could have a material adverse effect on our end-customers’ satisfaction with our products and subscriptions, our sales, and our operating results.
Claims by others that we infringe their proprietary technology or other rights could harm our business.
Our proprietary rights may be difficult to enforce or protect, which could enable others to copy or use aspects of our products or subscriptions without compensating us.
Our use of open source software in our products and subscriptions could negatively affect our ability to sell our products and subscriptions and subject us to possible litigation.
We license technology from third parties, and our inability to maintain those licenses could harm our business.
Our failure to adequately protect personal information could have a material adverse effect on our business.
We face risks associated with having operations and employees located in Israel.
We are subject to governmental export and import controls that could subject us to liability or impair our ability to compete in international markets.
Our failure to raise additional capital or generate the significant capital necessary to expand our operations and invest in new products and subscriptions could reduce our ability to compete and could harm our business.
We have a corporate structure aligned with the international nature of our business activities, and if we do not achieve increased tax benefits as a result of our corporate structure, our financial condition and operating results could be adversely affected.
We may not have the ability to raise the funds necessary to settle conversions of our convertible senior notes, repurchase our convertible senior notes upon a fundamental change or repay our convertible senior notes in cash at their maturity, and our future debt may contain limitations on our ability to pay cash upon conversion or repurchase of our convertible senior notes.
Our charter documents and Delaware law, as well as certain provisions contained in the indentures governing our convertible senior notes, could discourage takeover attempts and lead to management entrenchment, which could also reduce the market price of our common stock.
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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)

October 31, 2020July 31, 2020
Assets
Current assets:
Cash and cash equivalents$2,142.0 $2,958.0 
Short-term investments1,075.6 789.8 
Accounts receivable, net of allowance for credit losses of $9.0 and $2.3 at October 31, 2020 and July 31, 2020, respectively
675.5 1,037.1 
Prepaid expenses and other current assets407.8 344.3 
Total current assets4,300.9 5,129.2 
Property and equipment, net337.9 348.1 
Operating lease right-of-use assets251.2 258.7 
Long-term investments873.2 554.4 
Goodwill1,968.6 1,812.9 
Intangible assets, net388.8 358.2 
Other assets605.9 603.9 
Total assets$8,726.5 $9,065.4 
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable$48.5 $63.6 
Accrued compensation188.4 322.2 
Accrued and other liabilities260.7 256.8 
Deferred revenue2,137.5 2,049.1 
Total current liabilities2,635.1 2,691.7 
Convertible senior notes, net3,119.2 3,084.1 
Long-term deferred revenue1,809.3 1,761.1 
Long-term operating lease liabilities323.9 336.6 
Other long-term liabilities92.0 90.1 
Commitments and contingencies (Note 11)
Stockholders’ equity:
Preferred stock; $0.0001 par value; 100.0 shares authorized; none issued and outstanding at October 31, 2020 and July 31, 2020
  
Common stock and additional paid-in capital; $0.0001 par value; 1,000.0 shares authorized; 95.2 and 96.3 shares issued and outstanding at October 31, 2020 and July 31, 2020, respectively
2,003.9 2,259.2 
Accumulated other comprehensive income3.2 10.5 
Accumulated deficit(1,260.1)(1,167.9)
Total stockholders’ equity747.0 1,101.8 
Total liabilities and stockholders’ equity$8,726.5 $9,065.4 

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,
20202019
Revenue:
Product$237.3 $231.2 
Subscription and support708.7 540.7 
Total revenue946.0 771.9 
Cost of revenue:
Product62.2 65.1 
Subscription and support215.6 152.6 
Total cost of revenue277.8 217.7 
Total gross profit668.2 554.2 
Operating expenses:
Research and development237.4 170.5 
Sales and marketing388.6 365.7 
General and administrative86.7 69.8 
Total operating expenses712.7 606.0 
Operating loss(44.5)(51.8)
Interest expense(40.2)(18.9)
Other income, net2.4 16.2 
Loss before income taxes(82.3)(54.5)
Provision for income taxes9.9 5.1 
Net loss$(92.2)$(59.6)
Net loss per share, basic and diluted$(0.97)$(0.62)
Weighted-average shares used to compute net loss per share, basic and diluted95.5 96.6 

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,
20202019
Net loss$(92.2)$(59.6)
Other comprehensive income (loss), net of tax:
Change in unrealized gains (losses) on investments(1.3)2.7 
Change in unrealized gains (losses) on cash flow hedges(6.0)0.4 
Other comprehensive income (loss)(7.3)3.1 
Comprehensive loss$(99.5)$(56.5)

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, 2020
 Common Stock
and
Additional Paid-In Capital
Accumulated
Other
Comprehensive Income (Loss)
Accumulated
Deficit
Total 
Stockholders’
Equity
 SharesAmount
Balance as of July 31, 202096.3 $2,259.2 $10.5 $(1,167.9)$1,101.8 
Net loss— — — (92.2)(92.2)
Other comprehensive loss— — (7.3)— (7.3)
Issuance of common stock in connection with employee equity incentive plans1.0 45.6 — — 45.6 
Taxes paid related to net share settlement of equity awards— (9.7)— — (9.7)
Share-based compensation for equity-based awards— 208.8 — — 208.8 
Repurchase and retirement of common stock(2.1)(500.0)— — (500.0)
Balance as of October 31, 202095.2 $2,003.9 $3.2 $(1,260.1)$747.0 

Three Months Ended October 31, 2019
 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— — — (59.6)(59.6)
Other comprehensive income— — 3.1 — 3.1 
Issuance of common stock in connection with employee equity incentive plans1.0 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 warrants0.7 — — — — 
Balance as of October 31, 201997.6 $2,477.5 $(0.6)$(960.5)$1,516.4 


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,
20202019
Cash flows from operating activities
Net loss
$(92.2)$(59.6)
Adjustments to reconcile net loss to net cash provided by operating activities:
Share-based compensation for equity-based awards205.8 149.9 
Depreciation and amortization58.0 44.0 
Amortization of deferred contract costs65.8 55.6 
Amortization of debt discount and debt issuance costs35.1 15.5 
Amortization of operating lease right-of-use assets10.0 10.4 
Amortization of investment premiums, net of accretion of purchase discounts2.7 (3.2)
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable, net
382.3 83.9 
Prepaid expenses and other assets
(96.9)(59.2)
Accounts payable
(17.7)(2.5)
Accrued compensation
(134.8)(109.9)
Accrued and other liabilities
(20.0)(25.2)
Deferred revenue
136.8 125.5 
Net cash provided by operating activities534.9 225.2 
Cash flows from investing activities
Purchases of investments(829.7)(274.3)
Proceeds from maturities of investments198.2 632.4 
Business acquisitions, net of cash acquired(225.1)(66.4)
 Purchases of property, equipment, and other assets
(29.6)(47.2)
Net cash provided by (used in) investing activities(886.2)244.5 
Cash flows from financing activities
Payments for debt issuance costs
(0.2) 
Repurchases of common stock
(500.0)(198.1)
Proceeds from sales of shares through employee equity incentive plans
45.4 36.3 
Payments for taxes related to net settlement of equity awards
(9.7)(5.3)
Net cash used in financing activities(464.5)(167.1)
Net increase (decrease) in cash, cash equivalents, and restricted cash(815.8)302.6 
Cash, cash equivalents, and restricted cash - beginning of period2,961.7 965.0 
Cash, cash equivalents, and restricted cash - end of period $2,145.9 $1,267.6 
Reconciliation of cash, cash equivalents, and restricted cash to the condensed consolidated balance sheets
Cash and cash equivalents$2,142.0 $1,263.7 
Restricted cash included in prepaid expenses and other current assets2.9 1.9 
Restricted cash included in other assets1.0 2.0 
Total cash, cash equivalents, and restricted cash$2,145.9 $1,267.6 
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 empower enterprises, service providers, and government entities to secure all users, applications, data, networks, and devices with comprehensive context at all times, across all locations.
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, 2020, filed with the Securities and Exchange Commission (“SEC”) on September 4, 2020. 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. 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, 2020.
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 COVID-19.
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, 2020, as compared to the significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended July 31, 2020, except for the change in our accounting policies for credit losses due to our adoption of the new credit losses guidance. Refer to “Recently Adopted Accounting Pronouncements” below.
Recently Adopted Accounting Pronouncements
Credit Losses
In June 2016, the Financial Accounting Standards Board (“FASB”) issued new authoritative guidance on the accounting for credit losses on most financial assets and certain financial instruments. The standard replaces the incurred loss model with an expected credit loss model for financial assets measured at amortized cost, including trade accounts receivables and financing receivables. Credit losses on available-for-sale debt securities are required to be recorded through an allowance rather than as a write-down.
We adopted this standard in our first quarter of fiscal 2021 using the modified-retrospective approach. The adoption of this standard did not have a material impact on our condensed consolidated financial statements. We updated the following accounting policies as a result of the adoption of this guidance.
Cash, Cash Equivalents, and Investments
We consider all highly liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents. Investments not considered cash equivalents, and with maturities of one year or less from the condensed consolidated balance sheet date, are classified as short-term investments. Investments with maturities greater than one year from the condensed consolidated balance sheet date are classified as long-term investments.
We classify our investments in marketable debt securities as available-for-sale at the time of purchase. When the fair value of a security is below its amortized cost, the amortized cost will be reduced to its fair value if it is more likely than not that we are required to sell the impaired security before recovery of its amortized cost basis, or we have the intention to sell the security. If neither of these conditions are met, we determine whether the impairment is due to credit losses by comparing the present value of the expected cash flows of the security with its amortized cost basis. The amount of impairment recognized is limited to the excess of the amortized cost over the fair value of the security. An allowance for credit losses for the excess of amortized cost over the expected cash flows is
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recorded in other income, net in our condensed consolidated statements of operations. Impairment losses that are not credit-related are included in accumulated other comprehensive income (loss) (“AOCI”) in stockholders’ equity.
Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount, net of allowances for credit losses for any potential uncollectible amounts. The allowance for credit losses is based on our assessment of the collectability of accounts. Management regularly reviews the adequacy of the allowance for credit losses on a collective basis by considering the age of each outstanding invoice, each customer’s expected ability to pay and collection history, current market conditions, and reasonable and supportable forecasts of future economic conditions to determine whether the allowance is appropriate. Accounts receivable deemed uncollectible are charged against the allowance for credit losses when identified. For the three months ended October 31, 2020 and 2019, the allowance for credit losses activity was not significant.
Financing Receivables
We provide financing arrangements, primarily loans, for certain qualified end-user customers to purchase our products and services. Payment terms on these financing arrangements are generally up to three years. We evaluate our allowance for credit losses by assessing the risks and losses inherent in our financing receivables on either an individual or a collective basis. Our assessment considers various factors, including lifetime expected losses determined using customer risk profile, current economic conditions that may affect a customer’s ability to pay, and forward-looking economic considerations. Financing receivables are written off when they are considered uncollectible, and related outstanding balances are reversed and charged against the allowance for credit losses. Short-term financing receivables are included in prepaid expenses and other current assets, and long-term financing receivables are included in other assets on our condensed consolidated balance sheets. Refer to Note 5. Financing Receivables for additional information.
Recently Issued Accounting Pronouncements
Debt with Conversion Options
In August 2020, the FASB issued new authoritative guidance to simplify the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The standard reduces the number of models used to account for convertible instruments, and simplifies both the classification of debt on the balance sheet and the earnings per share calculation. The standard is effective for us in our first quarter of fiscal 2023 and will be applied on a modified retrospective basis. Early adoption is permitted from our first quarter of fiscal 2022. We are currently evaluating the impact of this standard 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,
20202019
Revenue:
Americas
United States$628.4 $494.9 
Other Americas41.9 34.7 
Total Americas670.3 529.6 
Europe, the Middle East, and Africa (“EMEA”)170.9 147.6 
Asia Pacific and Japan (“APAC”)104.8 94.7 
Total revenue$946.0 $771.9 
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The following table presents revenue for groups of similar products and services (in millions):
Three Months Ended October 31,
20202019
Revenue:
Product$237.3 $231.2 
Subscription and support
Subscription428.0 318.6 
Support280.7 222.1 
Total subscription and support708.7 540.7 
Total revenue$946.0 $771.9 
Deferred Revenue
During the three months ended October 31, 2020, we recognized approximately $630.0 million of revenue pertaining to amounts that were deferred as of July 31, 2020.
Remaining Performance Obligations
Revenue expected to be recognized from remaining performance obligations was $4.4 billion as of October 31, 2020, of which we expect to recognize approximately $2.3 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, 2020 and July 31, 2020 (in millions):
October 31, 2020July 31, 2020
Level 1Level 2Level 3TotalLevel 1Level 2Level 3Total
Cash equivalents:
Money market funds$392.3 $ $ $392.3 $1,589.5 $ $ $1,589.5 
Certificates of deposit  150.0  150.0     
U.S. government and agency securities 407.6  407.6  342.0  342.0 
Total cash equivalents392.3 557.6  949.9 1,589.5 342.0  1,931.5 
Short-term investments:
Certificates of deposit 31.1  31.1  26.9  26.9 
Commercial paper 10.0  10.0     
Corporate debt securities 169.1  169.1  100.2  100.2 
U.S. government and agency securities 827.3  827.3  645.6  645.6 
Non-U.S. government and agency securities38.1 38.1 17.1 17.1 
Total short-term investments 1,075.6  1,075.6  789.8  789.8 
Long-term investments:
Certificates of deposit     5.0  5.0 
Corporate debt securities 162.9  162.9  91.7  91.7 
U.S. government and agency securities 667.2  667.2  447.4  447.4 
Non-U.S. government and agency securities 43.1  43.1  10.3  10.3 
Total long-term investments 873.2  873.2  554.4  554.4 
Prepaid expenses and other current assets:
Foreign currency forward contracts 9.2  9.2  13.6  13.6 
Total prepaid expenses and other current assets 9.2  9.2  13.6  13.6 
Other assets:
Foreign currency forward contracts     1.4  1.4 
Total other assets:     1.4  1.4 
Total assets measured at fair value$392.3 $2,515.6 $ $2,907.9 $1,589.5 $1,701.2 $ $3,290.7 
Refer to Note 10. Debt for the carrying amount and estimated fair value of our convertible senior notes as of October 31, 2020 and July 31, 2020.
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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, 2020 and July 31, 2020 (in millions):
October 31, 2020
Amortized Cost Unrealized GainsUnrealized LossesFair Value
Cash equivalents:
Certificates of deposit$150.0 $ $ $150.0 
U.S. government and agency securities407.6   407.6 
Total available-for-sale cash equivalents$557.6 $ $ $557.6 
Investments:
Certificates of deposit$31.1 $ $ $31.1 
Commercial paper10.0   10.0 
Corporate debt securities330.7 1.3  332.0 
U.S. government and agency securities1,492.6 2.0 (0.1)1,494.5 
Non-U.S. government securities81.2   81.2 
Total available-for-sale investments$1,945.6 $3.3 $(0.1)$1,948.8 

July 31, 2020
Amortized Cost Unrealized GainsUnrealized LossesFair Value
Cash equivalents:
U.S. government and agency securities$342.0 $ $ $342.0 
Total available-for-sale cash equivalents$342.0 $ $ $342.0 
Investments:
Certificates of deposit$31.9 $ $ $31.9 
Corporate debt securities190.1 1.8  191.9 
U.S. government and agency securities1,090.3 2.8 (0.1)1,093.0 
Non-U.S. government and agency securities27.4   27.4 
Total available-for-sale investments$1,339.7 $4.6 $(0.1)$1,344.2 
We do not intend to sell any of the securities in an unrealized loss position 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. We did not recognize any credit losses related to our available-for-sale debt securities during the three months ended October 31, 2020.
The following table summarizes the amortized cost and fair value of our available-for-sale debt securities as of October 31, 2020, by contractual years-to-maturity (in millions):
Amortized CostFair Value
Due within one year$1,631.7 $1,633.2 
Due between one and three years871.5 873.2 
Total$2,503.2 $2,506.4 
Marketable Equity Securities
Marketable equity securities consist of money market funds and are included in cash and cash equivalents on our condensed consolidated balance sheets. As of October 31, 2020 and July 31, 2020, the carrying value of our marketable equity securities were $392.3 million and $1.6 billion, respectively. There were no unrealized gains or losses recognized for these securities during the three months ended October 31, 2020 and 2019.
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5. Financing Receivables
We provide financing arrangements, primarily loans, for certain qualified end-user customers to purchase our products. The following table summarizes our short-term and long-term financing receivables as of October 31, 2020 (in millions):
October 31, 2020
Short-term financing receivables, gross
$11.2 
Allowance for credit losses(0.2)
Short-term financing receivables, net
$11.0 
Long-term financing receivables, gross
$9.5 
Allowance for credit losses(0.2)
Long-term financing receivables, net
$9.3 
Through July 31, 2020, financing receivables were not significant to our condensed consolidated balance sheet. There was no significant activity in allowance for credit losses during the three months ended October 31, 2020. There were no past due amounts on financing receivables as of October 31, 2020 and July 31, 2020.
6. 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.
As of October 31, 2020 and July 31, 2020, the total notional amount of our outstanding foreign currency forward contracts was $386.7 million and $443.6 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, 2020.
During the three months ended October 31, 2020 and 2019, both unrealized gains and losses recognized in AOCI related to our cash flow hedges and amounts reclassified into earnings were not material. Unrealized gains and losses in AOCI related to our cash flow hedges as of October 31, 2020 and 2019 were not material.
7. Acquisition
The Crypsis Group
On September 17, 2020, we completed our acquisition of The Crypsis Group (“Crypsis”), an incident response, risk management, and digital forensics consulting firm. We believe the acquisition will expand our capabilities and strengthen our Cortex strategy. The total purchase consideration for the acquisition of Crypsis was $227.7 million, which consisted of the following (in millions):
Amount
Cash$225.7 
Fair value of replacement awards2.0 
Total$227.7 
As part of the acquisition, we issued $27.1 million of replacement awards, of which the portion attributable to services performed prior to the acquisition date was allocated to purchase consideration. The remaining fair value was allocated to future services and will be expensed over the remaining service periods as share-based compensation.
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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$157.6 
Identified intangible assets54.4 
Net assets acquired15.7 
Total$227.7 
Goodwill generated from this business combination is primarily attributable to the assembled workforce and expected post-acquisition synergies from integrating Crypsis technology into our platforms. The goodwill is deductible for income tax purposes.
The following table presents details of the identified intangible assets acquired (in millions, except years):
Fair ValueEstimated Useful Life
Developed technology
$6.9 3 years
Customer relationships47.5 7 years
Total$54.4 
Additional Acquisition-Related Information
The operating results of the acquired company are included in our condensed consolidated statement of operations from the date of acquisition. Pro forma results of operations have not been presented because the effects of the acquisition were not material to our condensed consolidated statements of operations.
Additional information related to the acquired company, 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.
8. Goodwill and Intangible Assets
Goodwill
The following table presents details of our goodwill during the three months ended October 31, 2020 (in millions):
Amount
Balance as of July 31, 2020$1,812.9 
Goodwill acquired157.6 
Measurement period adjustment(1.9)
Balance as of October 31, 2020$1,968.6 
Purchased Intangible Assets
The following table presents details of our purchased intangible assets as of October 31, 2020 and July 31, 2020 (in millions):
October 31, 2020July 31, 2020
Gross Carrying AmountAccumulated AmortizationNet Carrying AmountGross Carrying AmountAccumulated AmortizationNet Carrying Amount
Intangible assets subject to amortization:
Developed technology$432.6 $(166.6)$266.0 $425.9 $(146.6)$279.3 
Customer relationships134.0 (14.6)119.4 87.6 (12.4)75.2 
Acquired intellectual property6.3 (3.3)3.0 6.3 (3.2)3.1 
Trade name and trademarks9.4 (9.4) 9.4 (9.4) 
Other2.8 (2.4)0.4 3.1 (2.5)0.6 
Total purchased intangible assets$585.1 $(196.3)$388.8 $532.3 $(174.1)$358.2 
We recognized amortization expense of $23.6 million and $16.9 million for the three months ended October 31, 2020 and 2019, respectively.
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The following table summarizes estimated future amortization expense of our intangible assets as of October 31, 2020 (in millions):
Amount
Fiscal years ending July 31:
Remaining 2021$74.1 
202294.3 
202368.2 
202458.2 
202544.5 
2026 and thereafter49.5 
Total future amortization expense$388.8 

9. Deferred Contract Costs
The following table presents details of our short-term and long-term deferred contract costs as of October 31, 2020 and July 31, 2020 (in millions):
October 31, 2020July 31, 2020
Short-term deferred contract costs$213.0 $206.0 
Long-term deferred contract costs408.8 422.3 
Total deferred contract costs$621.8 $628.3 
We recognized amortization expense for our deferred contract costs of $65.8 million and $55.6 million during the three months ended October 31, 2020 and 2019, respectively. We did not recognize any impairment losses on our deferred contract costs during the three months ended October 31, 2020 or 2019.
10. Debt
Convertible Senior Notes
In July 2018, we issued $1.7 billion aggregate principal amount of 0.75% Convertible Senior Notes due 2023 (the “2023 Notes”) and, in June 2020, we issued $2.0 billion aggregate principal amount of 0.375% Convertible Senior Notes due 2025 (the “2025 Notes,” and together with the 2023 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 2025 Notes bear interest at a fixed rate of 0.375% per year, payable semi-annually in arrears on June 1 and December 1 of each year, beginning on December 1, 2020. Each series of the convertible notes is governed by an indenture between us, as the issuer, and U.S. Bank National Association, as Trustee (individually, each an “Indenture,” and together, the “Indentures”). The Notes of each series are unsecured, unsubordinated obligations and the applicable Indenture governing each series of 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 2023 Notes and the 2025 Notes mature on July 1, 2023 and June 1, 2025, respectively. We cannot redeem the 2023 Notes prior to maturity. We may redeem for cash all or any portion of the 2025 Notes, at our option, on or after June 5, 2023, and prior to the 31st scheduled trading day immediately preceding the maturity date 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 during any 30 consecutive trading day period ending on and including the trading day preceding the date on which we provide notice of redemption. The redemption will be at a price equal to 100% of the principal amount of the 2025 Notes and adjusted for interest. If we call any or all of the 2025 Notes for redemption, holders may convert such 2025 Notes called for redemption at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date.
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The following table presents details of our Notes (number of shares in millions):
 Conversion Rate per $1,000 PrincipalInitial Conversion PriceConvertible DateInitial Number of Shares
2023 Notes3.7545 $266.35 April 1, 20236.4 
2025 Notes3.3602 $297.60 March 1, 20256.7 
Holders of the Notes may surrender their Notes for conversion at their option at any time prior to the close of business on the business day immediately preceding their respective convertible dates only under the following circumstances:
during any fiscal quarter commencing after the fiscal quarters ending on October 31, 2018 and October 31, 2020 for the 2023 Notes and the 2025 Notes, respectively (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 respective 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 applicable series of 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 respective Notes on each such trading day; or
upon the occurrence of specified corporate events.
On or after the respective convertible date, holders may surrender all or any portion of their Notes for conversion at any time prior to the close of business on the second scheduled trading day immediately preceding the applicable maturity date regardless of the foregoing conditions, and such conversions will be settled upon the applicable maturity date. Upon conversion, holders of the Notes of a series will receive cash equal to the aggregate principal amount of the Notes of such series 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 Notes of such series being converted.
The conversion price will be subject to adjustment in some events. Holders of the Notes of a series who convert their Notes of such series in connection with certain corporate events that constitute a “make-whole fundamental change” under the applicable Indenture are, under certain circumstances, entitled to an increase in the conversion rate for such series of Notes. Additionally, upon the occurrence of a corporate event that constitutes a “fundamental change” under the applicable Indenture, holders of the Notes of such series may require us to repurchase for cash all or a portion of the Notes of such series at a repurchase price equal to 100% of the principal amount of the Notes of such series plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
The sale price condition was not met for the Notes during the fiscal quarters ended October 31, 2020 or July 31, 2020. Since the Notes were not convertible, the net carrying amount of the 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 in the periods presented. As of October 31, 2020, all of the Notes remained outstanding.
The following table sets forth the components of the Notes as of October 31, 2020 and July 31, 2020 (in millions):
October 31, 2020July 31, 2020
2023 Notes2025 NotesTotal2023 Notes2025 NotesTotal
Liability component:
Principal$1,693.0 $2,000.0 $3,693.0 $1,693.0 $2,000.0 $3,693.0 
Less: debt discount and debt issuance costs, net of amortization183.8 390.1 573.9 200.0 408.9 608.9 
Net carrying amount$1,509.2 $1,609.9 $3,119.1 $1,493.0 $1,591.1 $3,084.1 
Equity component$