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 January 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: 001-38413

_____________________________________

ZSCALER, INC.

(Exact Name of Registrant as Specified in its Charter)

_____________________________________

Delaware (State or other jurisdiction of incorporation or organization)		26-1173892 (I.R.S. Employer Identification Number)
	120 Holger Way San Jose, California 95134
	(Address of principal executive offices)
	110 Rose Orchard Way San Jose, California 95134
(Former name, former address and former fiscal year, if changed since last report)

Registrant’s telephone number, including area code: (408) 533-0288

___________________________________________________

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, $0.001 Par Value	ZS	The Nasdaq Stock Market LLC

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 ý 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 ý 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	ý	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth 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 ý

As of February 28, 2020, the number of shares of registrant’s common stock outstanding was 129,351,577.

ZSCALER, INC.

Table of Contents

		Page No.
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)	3
	Condensed Consolidated Balance Sheets as of January 31, 2020 and July 31, 2019	3
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended January 31, 2020 and 2019	4
	Condensed Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended January 31, 2020 and 2019	5
	Condensed Consolidated Statements of Stockholders' Equity for the Three and Six Months Ended January 31, 2020 and 2019	6
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended January 31, 2020 and 2019	8
	Notes to Unaudited Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	44
Item 4.	Controls and Procedures	44
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	46
Item 1A.	Risk Factors	46
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	80
Item 6.	Exhibits	80
	Signatures	81

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including but not limited to, statements regarding our financial outlook and market positioning. These forward-looking statements are made as of the date they were first issued and were based on current expectations, estimates, forecasts and projections as well as the beliefs and assumptions of management. The words "believe," "may," "will," "potentially," "estimate," "continue," "anticipate," "intend," "could," "would," "project," "plan," "expect," and similar expressions that convey uncertainty of future events or outcomes are intended to identify forward-looking statements.

These forward-looking statements include, but are not limited to, statements concerning the following:

•our future financial performance, including our expectations regarding our revenue, cost of revenue, gross profit or gross margin, operating expenses (including changes in sales and marketing, research and development and general and administrative expenses), and our ability to achieve, and maintain, future profitability;

•market acceptance of our cloud platform;

•the effects of increased competition in our markets and our ability to compete effectively;

•our ability to maintain the security and availability of our cloud platform;

•our ability to maintain and expand our customer base, including by attracting new customers;

•our ability to develop new solutions, or enhancements to our existing solutions, and bring them to market in a timely manner;

•market acceptance of any new solutions or enhancements to our existing solutions;

•anticipated trends, growth rates and challenges in our business and in the markets in which we operate;

•our business plan and our ability to effectively manage our growth and associated investments;

•beliefs about and objectives for future operations;

•beliefs about and objectives for future acquisitions, strategic investments, partnerships and alliances;

•our relationships with third parties, including channel partners;

•our ability to maintain, protect and enhance our intellectual property rights;

•our ability to successfully defend litigation brought against us;

•our ability to successfully expand in our existing markets and into new markets;

•sufficiency of cash to meet cash needs for at least the next 12 months;

•our ability to comply with laws and regulations that currently apply or become applicable to our business both in the United States and internationally;

•beliefs about the impacts of legal and geopolitical developments upon our business;

•the attraction and retention of qualified employees and key personnel; and

•the future trading prices of our common stock.

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These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in "Risk Factors" elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements and you should not place undue reliance on our forward-looking statements.

The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law.

You should read this Quarterly Report on Form 10-Q 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 filed with the Securities and Exchange Commission, or the SEC, on September 18, 2019.

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PART I. FINANCIAL INFORMATION

Item. 1 Financial Statements

ZSCALER, INC.

Condensed Consolidated Balance Sheets

(in thousands, except per share amounts)

(unaudited)

	January 31, 2020		July 31, 2019
Assets
Current assets:
Cash and cash equivalents	$	76,534	$	78,484
Short-term investments	308,380		286,162
Accounts receivable, net	94,784		93,341
Deferred contract acquisition costs	23,527		21,219
Prepaid expenses and other current assets	19,917		16,880
Total current assets	523,142		496,086
Property and equipment, net	52,355		41,046
Operating lease right-of-use assets	32,142		—
Deferred contract acquisition costs, noncurrent	50,523		48,566
Acquired intangible assets, net	7,287		8,708
Goodwill	7,479		7,479
Other noncurrent assets	3,497		2,277
Total assets	$	676,425	$	604,162
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	2,675	$	6,208
Accrued expenses and other current liabilities	13,606		12,810
Accrued compensation	25,019		21,544
Deferred revenue	251,221		221,387
Operating lease liabilities	11,142		—
Total current liabilities	303,663		261,949
Deferred revenue, noncurrent	28,801		29,815
Operating lease liabilities, noncurrent	23,300		—
Other noncurrent liabilities	1,497		3,840
Total liabilities	357,261		295,604
Commitments and contingencies (Note 8)
Stockholders’ Equity
Common stock; $0.001 par value; 1,000,000 shares authorized as of January 31, 2020 and July 31, 2019; 129,266 and 127,253 shares issued and outstanding as of January 31, 2020 and July 31, 2019, respectively	129		127
Additional paid-in capital	589,229		532,618
Accumulated other comprehensive income	491		268
Accumulated deficit	(270,685)		(224,455)
Total stockholders’ equity	319,164		308,558
Total liabilities and stockholders’ equity	$	676,425	$	604,162

The accompanying notes are an integral part of these condensed consolidated financial statements.

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ZSCALER, INC.

Condensed Consolidated Statements of Operations

(in thousands, except per share amounts)

(unaudited)

	Three Months Ended January 31,				Six Months Ended January 31,
	2020		2019		2020		2019
Revenue	$	101,268	$	74,302	$	194,858	$	137,600
Cost of revenue	20,238		15,271		39,796		27,370
Gross profit	81,030		59,031		155,062		110,230
Operating expenses:
Sales and marketing	61,621		38,756		121,032		75,301
Research and development	20,706		15,071		40,977		28,257
General and administrative	28,983		10,386		41,608		20,517
Total operating expenses	111,310		64,213		203,617		124,075
Loss from operations	(30,280)		(5,182)		(48,555)		(13,845)
Interest income	1,855		1,924		3,877		3,514
Other income (expense), net	(13)		250		(42)		62
Loss before income taxes	(28,438)		(3,008)		(44,720)		(10,269)
Provision for income taxes	716		547		1,510		874
Net loss	$	(29,154)	$	(3,555)	$	(46,230)	$	(11,143)
Net loss per share, basic and diluted	$	(0.23)	$	(0.03)	$	(0.36)	$	(0.09)
Weighted-average shares used in computing net loss per share, basic and diluted	128,408		122,741		127,978		121,664

The accompanying notes are an integral part of these condensed consolidated financial statements.

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ZSCALER, INC.

Condensed Consolidated Statements of Comprehensive Loss

(in thousands)

(unaudited)

	Three Months Ended January 31,				Six Months Ended January 31,
	2020		2019		2020		2019
Net loss	$	(29,154)	$	(3,555)	$	(46,230)	$	(11,143)
Other comprehensive income, net of tax:
Unrealized net gains on available-for-sale securities	55		258		223		65
Other comprehensive income	55		258		223		65
Comprehensive loss	$	(29,099)	$	(3,297)	$	(46,007)	$	(11,078)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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ZSCALER, INC.

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands)

(unaudited)

Stockholders' equity activity for the three months ended January 31, 2020:

	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount
Balance as of October 31, 2019	127,926	$	128	$	555,019	$	436	$	(241,531)	$	314,052
Issuance of common stock upon exercise of stock options	675	1		3,698		—		—		3,699
Issuance of common stock in connection with employee stock purchase plan	284	—		5,334		—		—		5,334
Vesting of restricted stock units	381	—		—		—		—		—
Vesting of early exercised common stock options	—	—		131		—		—		131
Stock-based compensation	—	—		25,047		—		—		25,047
Unrealized net gains on available-for-sale-securities	—	—		—		55		—		55
Net loss	—	—		—		—		(29,154)		(29,154)
Balance as of January 31, 2020	129,266	$	129	$	589,229	$	491	$	(270,685)	$	319,164

Stockholders' equity activity for the three months ended January 31, 2019:

	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount
Balance as of October 31, 2018	122,106	$	122	$	455,761	$	(317)	$	(203,388)	$	252,178
Issuance of common stock upon exercise of stock options	1,161	1		5,696		—		—		5,697
Issuance of common stock under the employee stock purchase plan	627	1		8,690		—		—		8,691
Vesting of restricted stock units	3	—		—		—		—		—
Adjustment to initial public offering costs	—	—		300		—		—		300
Vesting of early exercised common stock options	—	—		277		—		—		277
Stock-based compensation	—	—		13,227		—		—		13,227
Unrealized net gains on available-for-sale-securities, net of tax	—	—		—		258		—		258
Net loss	—	—		—		—		(3,555)		(3,555)
Balance as of January 31, 2019	123,897	$	124	$	483,951	$	(59)	$	(206,943)	$	277,073

The accompanying notes are an integral part of these condensed consolidated financial statements.

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ZSCALER, INC.

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands)

(unaudited)

Stockholders' equity activity for the six months ended January 31, 2020:

	Common Stock			Additional Paid-In Capital		Notes Receivable From Stockholders		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount
Balance as of July 31, 2019	127,253	$	127	$	532,618	$	—	$	268	$	(224,455)	$	308,558
Issuance of common stock upon exercise of stock options	1,220	2		6,756		—		—		—		6,758
Issuance of common stock under the employee stock purchase plan	284	—		5,334		—		—		—		5,334
Vesting of restricted stock units	509	—		—		—		—		—		—
Vesting of early exercised stock options	—	—		262		—		—		—		262
Stock-based compensation	—	—		44,259		—		—		—		44,259
Unrealized net gains on available-for-sale-securities	—	—		—		—		223		—		223
Net loss	—	—		—		—		—		(46,230)		(46,230)
Balance as of January 31, 2020	129,266	$	129	$	589,229	$	—	$	491	$	(270,685)	$	319,164

Stockholders' equity activity for the six months ended January 31, 2019:

	Common Stock			Additional Paid-In Capital		Notes Receivable From Stockholders		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount
Balance as of July 31, 2018	119,764	$	119	$	438,392	$	(2,051)	$	(124)	$	(196,100)	$	240,236
Cumulative effect of accounting change	—	—		(300)		—		—		300		—
Issuance of common stock upon exercise of stock options	3,511	4		15,489		—		—		—		15,493
Issuance of common stock under the employee stock purchase plan	627	1		8,690		—		—		—		8,691
Vesting of restricted stock units	3	—		—		—		—		—		—
Repurchases of unvested common stock	(8)	—		—		—		—		—		—
Repayments of principal amount on notes receivable from stockholders	—	—		—		1,905		—		—		1,905
Accrued interest on notes receivable from stockholders, net of repayments	—	—		—		146		—		—		146
Adjustment to initial public offering costs	—	—		300		—		—		—		300
Vesting of early exercised stock options	—	—		567		—		—		—		567
Stock-based compensation	—	—		20,813		—		—		—		20,813
Unrealized net gains on available-for-sale-securities, net of tax	—	—		—		—		65		—		65
Net loss	—	—		—		—		—		(11,143)		(11,143)
Balance as of January 31, 2019	123,897	$	124	$	483,951	$	—	$	(59)	$	(206,943)	$	277,073

The accompanying notes are an integral part of these condensed consolidated financial statements.

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ZSCALER, INC.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

	Six Months Ended January 31,
	2020		2019
Cash Flows From Operating Activities
Net loss	$	(46,230)	$	(11,143)
Adjustments to reconcile net loss to cash provided by operating activities:
Depreciation and amortization expense	7,508		4,662
Amortization expense of acquired intangible assets	1,421		239
Amortization of deferred contract acquisition costs	11,425		8,781
Noncash operating lease costs	6,215		—
Stock-based compensation expense	42,242		20,813
Accretion of purchased discounts, net of amortization of investment premiums	(442)		(1,125)
Impairment of assets	316		—
Other	248		202
Changes in operating assets and liabilities:
Accounts receivable	(1,432)		(13,859)
Deferred contract acquisition costs	(15,690)		(13,472)
Prepaid expenses, other current and noncurrent assets	(3,981)		(2,778)
Accounts payable	(603)		(786)
Accrued expenses, other current and noncurrent liabilities	(1,243)		1,042
Accrued compensation	3,475		(7,852)
Deferred revenue	28,820		41,997
Operating lease liabilities	(5,189)		—
Net cash provided by operating activities	26,860		26,721
Cash Flows From Investing Activities
Purchases of property, equipment and other assets	(15,099)		(8,607)
Capitalized internal-use software	(4,273)		(903)
Acquired intangible assets	—		(1,480)
Purchases of short-term investments	(147,543)		(179,896)
Proceeds from maturities of short-term investments	126,013		71,603
Net cash used in investing activities	(40,902)		(119,283)
Cash Flows From Financing Activities
Payments of offering costs related to initial public offering	—		(1,797)
Proceeds from issuance of common stock upon exercise of stock options	6,758		15,493
Proceeds from issuance of common stock under the employee stock purchase plan	5,334		8,691
Repurchases of unvested common stock	—		(22)
Repayments of notes receivable from stockholders	—		1,905
Net cash provided by financing activities	12,092		24,270
Net decrease in cash, cash equivalents and restricted cash	(1,950)		(68,292)
Cash, cash equivalents and restricted cash at beginning of period	78,484		136,147
Cash, cash equivalents and restricted cash at end of period	$	76,534	$	67,855
Supplemental Disclosure of Cash Flow Information:
Cash paid for income taxes, net of tax refunds	$	1,473	$	1,121
Noncash activities
Net change in purchased equipment included in accounts payable and accrued expenses	$	(1,785)	$	1,544
Operating lease right-of-use assets obtained in exchange for operating lease obligations, net of terminations	$	20,905	$	—
Vesting of early exercised common stock options	$	262	$	567
Net change in deferred offering costs accrued	$	—	$	(2,097)
Reconciliation of cash, cash equivalents and restricted cash to the consolidated balance sheets:
Cash and cash equivalents	$	76,534	$	67,467
Restricted cash, current	—		96
Restricted cash, non-current	—		292
Total cash, cash equivalents and restricted cash	$	76,534	$	67,855

The accompanying notes are an integral part of these condensed consolidated financial statements.

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ZSCALER, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1. Business and Summary of Significant Accounting Policies

Description of the Business

Zscaler, Inc. ("Zscaler," the "Company," "we," "us," or "our") is a cloud security company that developed a platform incorporating core security functionalities needed to enable users to safely utilize authorized applications and services based on an organization’s policies. Our solution is a purpose-built, multi-tenant, distributed cloud security platform that secures access for users and devices to applications and services, regardless of location. We deliver our solutions using a software-as-a-service ("SaaS") business model and sell subscriptions to customers to access our cloud platform, together with related support services. We were incorporated in Delaware in September 2007 and conduct business worldwide, with presence in North America, Europe and Asia. Our headquarters are in San Jose, California.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States ("U.S. GAAP") and applicable regulations of the Securities and Exchange Commission ("SEC") regarding interim financial reporting, and include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Certain information and note disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the applicable required disclosures and regulations of the SEC. Therefore, these unaudited condensed consolidated financial statements and accompanying footnotes should be read in conjunction with the Company's audited consolidated financial statements and related notes in its Annual Report on Form 10-K for the fiscal year ended July 31, 2019 (the "Fiscal 2019 Form 10-K"), as filed with the SEC on September 18, 2019.

JOBS Act Extended Transition Period

As a result of the market value of our common stock held by our non-affiliates as of January 31, 2019, we ceased to be an "emerging growth company" ("EGC"), as defined in the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"), with our transition to a large accelerated filer status as of July 31, 2019. As an EGC, we elected not to avail ourselves of the extended transition periods available for complying with new or revised accounting pronouncements applicable to public companies that are not emerging growth companies. Accordingly, the transition to a large accelerated filer did not have an impact to our consolidated financial statements.

Interim Unaudited Condensed Consolidated Financial Statements

The accompanying condensed consolidated balance sheet as of July 31, 2019 was derived from the audited financial statements as of that date. The accompanying interim condensed consolidated financial statements, including the consolidated balance sheets as of January 31, 2020, the consolidated statements of operations for the three and six months ended January 31, 2020 and 2019, the consolidated statements of comprehensive loss for the three and six months ended January 31, 2020 and 2019, the consolidated statements of stockholders’ equity for the three and six months ended January 31, 2020 and 2019 and the consolidated statements of cash flows for the six months ended January 31, 2020 and 2019 are unaudited. The related financial data and the other financial information disclosed in the accompanying notes to these condensed consolidated financial statements are also unaudited. These interim unaudited condensed consolidated financial statements have been prepared on a basis consistent with our annual consolidated financial statements and, in our opinion, include all normal recurring adjustments necessary to state fairly our quarterly results. The results of operations for the three and six months

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ended January 31, 2020 are not necessarily indicative of the results to be expected for our fiscal year ending July 31, 2020 or for any other future fiscal year or interim period.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported and disclosed in the financial statements and accompanying notes. Such estimates include, but are not limited to, the determination of revenue recognition, deferred revenue, deferred contract acquisition costs, valuation of acquired intangible assets, the period of benefit generated from our deferred contract acquisition costs, allowance for doubtful accounts, valuation of common stock options and stock-based awards, useful lives of property and equipment, useful lives of acquired intangible assets, loss contingencies related to litigation, valuation of deferred tax assets and the discount rate used for operating leases. Management determines these estimates and assumptions based on historical experience and on various other assumptions that are believed to be reasonable. Actual results could differ significantly from these estimates, and such differences may be material to the condensed consolidated financial statements.

Fiscal Year

Our fiscal year ends on July 31. References to fiscal 2020, for example, refer to our fiscal year ending July 31, 2020.

Significant Accounting Policies

Our significant accounting policies are described in the Fiscal 2019 Form 10-K. There have been no significant changes to these policies that have had a material impact on our condensed consolidated financial statements and related notes for the three and six months ended January 31, 2020 other than for the adoption of new accounting guidance related to leases effective August 1, 2019 further described below.

Operating Leases

We enter into operating lease arrangements for real estate assets related to office space and co-location assets related to space and racks at data center facilities. We determine if an arrangement contains a lease at its inception by assessing whether there is an identified asset and whether the arrangement conveys the right to control the use of the identified asset in exchange for consideration. Operating leases related balances are included in "operating lease right-of-use assets," "operating lease liabilities," and "operating lease liabilities, noncurrent" in our condensed consolidated balance sheets. Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make payments arising from the lease. Operating lease right-of-use assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. Lease payments consist of the fixed payments under the arrangement, less any lease incentives, such as tenant improvement allowances. Variable costs, such as maintenance and utilities based on actual usage, are not included in the measurement of right-to-use assets and lease liabilities but are expensed when the event determining the amount of variable consideration to be paid occurs. As the implicit rate of our leases is not determinable, we use an incremental borrowing rate ("IBR") based on the information available at the lease commencement date in determining the present value of lease payments. The lease expense is recognized on a straight-line basis over the lease term.

We generally use the base, non-cancelable lease term when recognizing the right-of-use assets and lease liabilities, unless it is reasonably certain that a renewal or termination option will be exercised. We account for lease components and non-lease components as a single lease component.

Leases with a term of twelve months or less are not recognized on the consolidated balance sheets. We recognize lease expense for these leases on a straight-line basis over the term of the lease.

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Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02"), as amended, which requires recognition of lease assets and liabilities for leases with terms of more than 12 months. This standard is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. We adopted this standard effective August 1, 2019 using the transitional provision which allows for the adoption of Topic 842 to be applied prospectively at the beginning of the fiscal year of adoption. As such, the condensed consolidated balance sheets for prior periods are not comparable to our fiscal 2020 periods. The adoption of this new standard resulted in the recognition of operating lease right-of-use assets of $16.9 million and operating lease liabilities of $18.0 million. We have elected the package of practical expedients permitted under the transition guidance, which allows us to carryforward our historical lease classification, our assessment on whether a contract is or contains a lease, and our initial direct costs for any leases that existed prior to adoption of the new standard. We have also elected to combine lease and non-lease components for real estate and co-location arrangements. In addition, we elected not to recognize lease liabilities and related right-of-use assets for leases that, at the lease commencement date, have a lease term of 12 months or less.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740) ("ASU 2019-12"): Simplifying the Accounting for Income Taxes. The new standard eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences related to changes in ownership of equity method investments and foreign subsidiaries. The guidance also simplifies aspects of accounting for franchise taxes and enacted changes in tax laws or rates, and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. For public business entities, it is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted. We early adopted this standard as of November 1, 2019, and it did not have a material impact to our consolidated financial statements.

Recently Issued Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This standard amends guidance on reporting credit losses for assets held at amortized cost basis and available-for-sale debt securities to require that credit losses on available-for-sale debt securities be presented as an allowance rather than as a write-down. The measurement of credit losses for newly recognized financial assets and subsequent changes in the allowance for credit losses are recorded in the statements of operations. For public business entities, it is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the potential impact of this standard on our consolidated financial statements.

Note 2. Revenue Recognition

Disaggregation of Revenue

Subscription and support revenue is recognized over time and accounted for approximately 98% and 97% of our revenue for the three months ended January 31, 2020 and 2019, respectively, and approximately 98% of our revenue for the six months ended January 31, 2020 and 2019.

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Table of Contents

The following table summarizes the revenue by region based on the shipping address of customers who have contracted to use our cloud platform:

	Three Months Ended January 31,								Six Months Ended January 31,
	2020				2019				2020				2019
	Amount		% Revenue		Amount		% Revenue		Amount		% Revenue		Amount		% Revenue
	(in thousands, except per percentage data)
United States	$	49,629	49	%	$	37,626	51	%	$	95,574	49	%	$	67,433	49	%
Europe, Middle East and Africa (*)	41,002		40	%	29,552		40	%	79,291		41	%	56,946		41	%
Asia Pacific	8,828		9	%	5,674		7	%	16,647		8	%	10,463		8	%
Other	1,809		2	%	1,450		2	%	3,346		2	%	2,758		2	%
Total	$	101,268	100	%	$