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, 2021

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)

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 26, 2021, the number of shares of registrant’s common stock outstanding was 135,940,233.

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, 2021 and July 31, 2020	3
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended January 31, 2021 and 2020	4
	Condensed Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended January 31, 2021 and 2020	5
	Condensed Consolidated Statements of Stockholders' Equity for the Three and Six Months Ended January 31, 2021 and 2020	6
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended January 31, 2021 and 2020	8
	Notes to Unaudited Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	49
Item 4.	Controls and Procedures	50
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	51
Item 1A.	Risk Factors	51
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	89
Item 6.	Exhibits	89
	Signatures	90

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:

•the potential impact on our business of the ongoing COVID-19 pandemic;

•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 and service our outstanding debt;

•our need and ability to raise additional capital in future debt or equity financings;

•our expectations regarding settlement of our Notes (defined below);

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

1

•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.

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, 2020 filed with the Securities and Exchange Commission, or the SEC, on September 17, 2020.

2

PART I. FINANCIAL INFORMATION

Item. 1 Financial Statements

ZSCALER, INC.

Condensed Consolidated Balance Sheets

(in thousands, except per share amounts)

(unaudited)

	January 31, 2021		July 31, 2020
Assets
Current assets:
Cash and cash equivalents	$	95,347	$	141,851
Short-term investments	1,349,402		1,228,722
Accounts receivable, net	170,412		147,584
Deferred contract acquisition costs	39,902		32,240
Prepaid expenses and other current assets	23,586		31,396
Total current assets	1,678,649		1,581,793
Property and equipment, net	90,527		75,734
Operating lease right-of-use assets	45,942		36,119
Deferred contract acquisition costs, noncurrent	95,044		77,675
Acquired intangible assets, net	20,871		24,024
Goodwill	30,059		30,059
Other noncurrent assets	8,325		8,054
Total assets	$	1,969,417	$	1,833,458
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	13,170	$	5,233
Accrued expenses and other current liabilities	14,208		16,361
Accrued compensation	47,861		49,444
Deferred revenue	406,184		337,263
Operating lease liabilities	20,152		15,600
Total current liabilities	501,575		423,901
Convertible senior notes, net	887,186		861,615
Deferred revenue, noncurrent	40,633		32,504
Operating lease liabilities, noncurrent	33,829		28,023
Other noncurrent liabilities	3,490		2,586
Total liabilities	1,466,713		1,348,629
Commitments and contingencies (Note 9)
Stockholders’ Equity
Common stock; $0.001 par value; 1,000,000 shares authorized as of January 31, 2021 and July 31, 2020; 135,858 and 132,817 shares issued and outstanding as of January 31, 2021 and July 31, 2020, respectively	136		133
Additional paid-in capital	964,214		823,804
Accumulated other comprehensive income	472		463
Accumulated deficit	(462,118)		(339,571)
Total stockholders’ equity	502,704		484,829
Total liabilities and stockholders’ equity	$	1,969,417	$	1,833,458

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

3

ZSCALER, INC.

Condensed Consolidated Statements of Operations

(in thousands, except per share amounts)

(unaudited)

	Three Months Ended January 31,				Six Months Ended January 31,
	2021		2020		2021		2020
Revenue	$	157,044	$	101,268	$	299,622	$	194,858
Cost of revenue	34,135		20,238		65,862		39,796
Gross profit	122,909		81,030		233,760		155,062
Operating expenses:
Sales and marketing	110,403		61,621		207,292		121,032
Research and development	41,751		20,706		77,521		40,977
General and administrative	24,653		28,983		45,512		41,608
Total operating expenses	176,807		111,310		330,325		203,617
Loss from operations	(53,898)		(30,280)		(96,565)		(48,555)
Interest income	755		1,855		1,695		3,877
Interest expense	(13,245)		—		(26,294)		—
Other income (expense), net	518		(13)		786		(42)
Loss before income taxes	(65,870)		(28,438)		(120,378)		(44,720)
Provision for income taxes	1,671		716		2,169		1,510
Net loss	$	(67,541)	$	(29,154)	$	(122,547)	$	(46,230)
Net loss per share, basic and diluted	$	(0.50)	$	(0.23)	$	(0.91)	$	(0.36)
Weighted-average shares used in computing net loss per share, basic and diluted	135,024		128,408		134,238		127,978

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

4

ZSCALER, INC.

Condensed Consolidated Statements of Comprehensive Loss

(in thousands)

(unaudited)

	Three Months Ended January 31,				Six Months Ended January 31,
	2021		2020		2021		2020
Net loss	$	(67,541)	$	(29,154)	$	(122,547)	$	(46,230)
Other comprehensive income:
Unrealized net gains (losses) on available-for-sale securities	388		55		(342)		223
Unrealized net gains on cash flow hedges	351		—		351		—
Total	739		55		9		223
Comprehensive loss	$	(66,802)	$	(29,099)	$	(122,538)	$	(46,007)

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

5

ZSCALER, INC.

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands)

(unaudited)

Stockholders' equity activity for the three months ended January 31, 2021:

	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount
Balance as of October 31, 2020	134,163	$	134	$	886,815	$	(267)	$	(394,577)	$	492,105
Issuance of common stock upon exercise of stock options	809	1		6,725		—		—		6,726
Issuance of common stock in connection with employee stock purchase plan	131	—		8,563		—		—		8,563
Vesting of restricted stock units and other stock issuances	755	1		(1)		—		—		—
Vesting of early exercised common stock options	—	—		23		—		—		23
Stock-based compensation	—	—		62,089		—		—		62,089
Other comprehensive income	—	—		—		739		—		739
Net loss	—	—		—		—		(67,541)		(67,541)
Balance as of January 31, 2021	135,858	$	136	$	964,214	$	472	$	(462,118)	$	502,704

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

	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Income		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 and other stock issuances	381	—		—		—		—		—
Vesting of early exercised common stock options	—	—		131		—		—		131
Stock-based compensation	—	—		25,047		—		—		25,047
Other comprehensive income	—	—		—		55		—		55
Net loss	—	—		—		—		(29,154)		(29,154)
Balance as of January 31, 2020	129,266	$	129	$	589,229	$	491	$	(270,685)	$	319,164

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

6

ZSCALER, INC.

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands)

(unaudited)

Stockholders' equity activity for the six months ended January 31, 2021:

	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Income		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount
Balance as of July 31, 2020	132,817	$	133	$	823,804	$	463	$	(339,571)	$	484,829
Issuance of common stock upon exercise of stock options	1,499	2		11,243		—		—		11,245
Issuance of common stock in connection with employee stock purchase plan	131	—		8,563		—		—		8,563
Vesting of restricted stock units and other stock issuances	1,411	1		(1)		—		—		—
Vesting of early exercised common stock options	—	—		93		—		—		93
Stock-based compensation	—	—		120,512		—		—		120,512
Other comprehensive income	—	—		—		9		—		9
Net loss	—	—		—		—		(122,547)		(122,547)
Balance as of January 31, 2021	135,858	$	136	$	964,214	$	472	$	(462,118)	$	502,704

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

	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Income		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 in connection with employee stock purchase plan	284	—		5,334		—		—		5,334
Vesting of restricted stock units and other stock issuances	509	—		—		—		—		—
Vesting of early exercised common stock options	—	—		262		—		—		262
Stock-based compensation	—	—		44,259		—		—		44,259
Other comprehensive income	—	—		—		223		—		223
Net loss	—	—		—		—		(46,230)		(46,230)
Balance as of January 31, 2020	129,266	$	129	$	589,229	$	491	$	(270,685)	$	319,164

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

7

ZSCALER, INC.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

	Six Months Ended January 31,
	2021		2020
Cash Flows From Operating Activities
Net loss	$	(122,547)	$	(46,230)
Adjustments to reconcile net loss to cash provided by operating activities:
Depreciation and amortization expense	13,327		7,508
Amortization expense of acquired intangible assets	3,153		1,421
Amortization of deferred contract acquisition costs	18,123		11,425
Amortization of debt discount and issuance costs	25,572		—
Non-cash operating lease costs	9,500		6,215
Stock-based compensation expense	118,565		42,242
Amortization (accretion) of investments purchased at a premium (discount)	5,446		(442)
Deferred income taxes	(981)		—
Impairment of assets	416		316
Other	59		248
Changes in operating assets and liabilities:
Accounts receivable	(24,681)		(1,432)
Deferred contract acquisition costs	(43,154)		(15,690)
Prepaid expenses, other current and noncurrent assets	6,722		(3,981)
Accounts payable	4,627		(603)
Accrued expenses, other current and noncurrent liabilities	1,733		(1,243)
Accrued compensation	(1,583)		3,475
Deferred revenue	78,884		28,820
Operating lease liabilities	(9,245)		(5,189)
Net cash provided by operating activities	83,936		26,860
Cash Flows From Investing Activities
Purchases of property, equipment and other assets	(19,403)		(15,099)
Capitalized internal-use software	(4,272)		(4,273)
Purchases of short-term investments	(419,638)		(147,543)
Proceeds from maturities of short-term investments	283,815		126,013
Proceeds from sale of short-term investments	11,500		—
Net cash used in investing activities	(147,998)		(40,902)
Cash Flows From Financing Activities
Proceeds from issuance of common stock upon exercise of stock options	11,245		6,758
Proceeds from issuance of common stock under the employee stock purchase plan	8,563		5,334
Payment of deferred consideration related to a business acquisition	(2,250)		—
Net cash provided by financing activities	17,558		12,092
Net decrease in cash, cash equivalents and restricted cash	(46,504)		(1,950)
Cash, cash equivalents and restricted cash at beginning of period	141,851		78,484
Cash, cash equivalents and restricted cash at end of period	$	95,347	$	76,534
Supplemental Disclosure of Cash Flow Information:
Cash paid for income taxes, net of tax refunds	$	2,479	$	1,473
Interest paid	$	743	$	—
Non-cash activities
Net change in purchased equipment included in accounts payable and accrued expenses	$	3,037	$	(1,785)
Operating lease right-of-use assets obtained in exchange for operating lease obligations, net of terminations	$	18,652	$	20,905
Vesting of early exercised common stock options	$	93	$	262
Reconciliation of cash, cash equivalents and restricted cash to the consolidated balance sheets:
Cash and cash equivalents	$	95,347	$	76,534
Restricted cash, current and noncurrent	—		—
Total cash, cash equivalents and restricted cash	$	95,347	$	76,534

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

8

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 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 notes 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, 2020 (the "Fiscal 2020 Form 10-K"), as filed with the SEC on September 17, 2020.

Interim Unaudited Condensed Consolidated Financial Statements

The accompanying condensed consolidated balance sheet as of July 31, 2020 was derived from the audited consolidated financial statements as of that date. The accompanying interim condensed consolidated financial statements, including the condensed consolidated balance sheet as of January 31, 2021, the condensed consolidated statements of operations for the three and six months ended January 31, 2021 and 2020, the condensed consolidated statements of comprehensive loss for the three and six months ended January 31, 2021 and 2020, the condensed consolidated statements of stockholders’ equity for the three and six months ended January 31, 2021 and 2020 and the condensed consolidated statements of cash flows for the six months ended January 31, 2021 and 2020 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 ended January 31, 2021 are not necessarily indicative of the results to be expected for our fiscal year ending July 31, 2021 or for any other future fiscal year or interim period.

9

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, recoverability of goodwill, valuation of deferred tax assets and liabilities, loss contingencies related to litigation, fair value and effective interest rate of our convertible senior notes, valuation of strategic investments and the discount rate used for operating leases. Management determines these estimates and assumptions based on historical experience and on various other assumptions that are believed to be reasonable. Actual results could differ significantly from these estimates, and such differences may be material to the condensed consolidated financial statements.

Due to the COVID-19 pandemic, there is ongoing uncertainty and significant disruption in the global economy and financial markets. We are not aware of any specific event or circumstances that would require an update to our estimates, judgments or assumptions or a revision to the carrying value of our assets or liabilities as of the date of issuance of these condensed consolidated financial statements. These estimates, judgments and assumptions may change in the future, as new events occur or additional information is obtained.

Fiscal Year

Our fiscal year ends on July 31. References to fiscal 2021, for example, refer to our fiscal year ending July 31, 2021.

Significant Accounting Policies

Our significant accounting policies are described in the Fiscal 2020 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, 2021 other than for derivative instruments and the adoption of new accounting guidance related to current expected credit losses effective August 1, 2020 further described below.

Derivative Instruments

We enter into foreign currency forward contracts, which we designate as cash flow hedges, in order to manage the volatility of cash flows that relate to our cost of revenues and operating expenses denominated in foreign currencies.

Derivative instruments are measured at fair value and reported on a gross basis as either current assets or liabilities on our condensed consolidated balance sheets.

Gains or losses related to our cash flow hedges are recorded as a component of accumulated other comprehensive income (loss) within stockholders' equity (“AOCI”) until the forecasted transaction occurs in earnings. When the forecasted transaction occurs, the related gains and losses are reclassified into earnings within the financial statement line item associated with the underlying hedged transaction. If the underlying hedged transaction does not occur, or it becomes probable that the hedged transaction will not occur, the cumulative unrealized gain or loss is reclassified immediately from AOCI into earnings within the financial statement line item associated with the underlying hedged transaction.

We measure hedge effectiveness using regression analyses at hedge inception and periodically thereafter. We include time value in our effectiveness assessment. Derivatives designated as cash flow hedges are classified in our condensed consolidated statements of cash flows as cash from operating activities, which reflect the classification of the underlying hedged transactions.

10

Accounts Receivable and Allowance

Accounts receivable are recorded at the invoiced amount and are non-interest bearing. Accounts receivable are stated at their net realizable value, net of an allowance for doubtful accounts. We have a well-established collections history from our customers. Credit is extended to customers based on an evaluation of their financial condition and other factors. In determining the necessary allowance for doubtful accounts, we estimate the lifetime expected credit losses against the existing accounts receivable balance. Our estimate is based on certain factors including historical loss rates, current economic conditions, reasonable and supportable forecasts and customer-specific circumstances. The allowance for doubtful accounts has historically not been material. There were no material write-offs recognized in the periods presented. Accordingly, the movements in the allowance for doubtful accounts were not material for any of the periods presented. We do not have any off-balance-sheet credit exposure related to our customers.

Cash Equivalents and Short-Term Investments

We classify all highly liquid investments purchased with an original maturity of 90 days or less from the date of purchase as cash equivalents and all highly liquid investments with original maturities beyond 90 days at the time of purchase as short-term investments. Our cash equivalents and short-term investments consist of highly liquid investments in money market funds, U.S. treasury securities, U.S. government agency securities and corporate debt securities.

We classify our investments as available-for-sale investments and present them within current assets since these investments represent funds available for current operations and we have the ability and intent, if necessary, to liquidate any of these investments in order to meet our liquidity needs or to grow our business, including for potential business acquisitions or other strategic transactions. Our investments are carried at fair value, with unrealized gains and losses unrelated to credit loss factors reported in AOCI.

Our investments are reviewed periodically when there is a decline in a security’s fair value below the amortized cost basis. We consider our intent to sell and whether it is more likely than not that the we will be required to sell the securities before the recovery of its cost basis. If either of these criteria are triggered, the amortized cost basis of the debt security is written down to fair value through other income (expense), net. If neither criteria is met, we evaluate whether the decline in fair value below the amortized cost basis is related to credit-related factors or other factors such as interest rate fluctuations. The factors considered in this analysis include the extent the fair value is less than the amortized cost basis, whether there were changes to the rating of the security by a ratings agency, whether the issuer has failed to make scheduled interest payments and other adverse conditions as applicable. Credit-related impairment losses, limited by the amount that the fair value is less than the amortized cost basis, are recorded through an allowance for credit losses in other income (expense), net. For purposes of identifying and measuring credit-related impairments, our policy is to exclude the applicable accrued interest from both the fair value and amortized cost basis of the related debt security. Accrued interest, net of the allowance for credit losses, if any, is recorded to prepaid expenses and other current assets. There were no credit-related impairments recognized on our investments during the periods presented.

Interest income, amortization (accretion) of investments purchased at a premium (discount) and realized gains and losses are included in interest income in the condensed consolidated statements of operations. We use the specific identification method to determine the cost in calculating realized gains and losses upon the sale of these investments.

Recently Adopted Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This standard amends guidance on reporting credit losses for assets held at amortized cost basis and available-for-sale debt securities to require that credit losses on available-for-sale debt securities be presented as an allowance rather than as a write-down. The measurement of credit

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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 adopted this standard as of August 1, 2020, and it did not have a material impact to our condensed consolidated financial statements.

Recently Issued Accounting Pronouncements Not Yet Adopted

In June 2020, the FASB issued ASU No. 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40). This standard eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, the new guidance modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted earnings per share computation. For public business entities, it is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years using the fully retrospective or modified retrospective method. Early adoption is permitted but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. We are currently evaluating the potential impact of this standard on our condensed consolidated financial statements.

Note 2. Revenue Recognition

Disaggregation of Revenue

Subscription and support revenue is recognized over time and accounted for approximately 97% and 98% of our revenue for the three months ended January 31, 2021 and 2020, respectively, and approximately 97% and 98% of our revenue for the six months ended January 31, 2021 and 2020, respectively.

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,
	2021				2020				2021				2020
	Amount		% Revenue		Amount		% Revenue		Amount		% Revenue		Amount		% Revenue
	(in thousands, except per percentage data)
United States	$	77,541	49	%	$	49,629	49	%	$	147,700	49	%	$	95,574	49	%
Europe, Middle East and Africa (*)	59,442		38	%	41,002		40	%	114,647		38	%	79,291		41	%
Asia Pacific	16,697		11	%	8,828		9	%	30,977		11	%	16,647		8	%
Other	3,364		2	%	1,809		2	%	6,298		2	%	3,346		2	%
Total	$	157,044	100	%	$	101,268	100	%	$	299,622	100	%	$	194,858	100	%

(*) Revenue from the United Kingdom ("U.K.") represented 10% of our revenue for each of the three months ended January 31, 2021 and 2020, and 10% and 11% of our revenue for the six months ended January 31, 2021 and 2020, respectively. Revenue from Germany represented 10% and 9% of our revenue for the three months ended January 31, 2021 and 2020, respectively, and 10% and 9% of our revenue for the six months ended January 31, 2021 and 2020, respectively.

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The following table summarizes the revenue from contracts by type of customer:

	Three Months Ended January 31,								Six Months Ended January 31,
	2021				2020				2021				2020
	Amount		% Revenue		Amount		% Revenue		Amount		% Revenue		Amount		% Revenue
	(in thousands, except per percentage data)
Channel partners	$	147,341	94	%	$	98,132	97	%	$	280,781	94	%	$	188,375	97	%
Direct customers	9,703		6	%	3,136		3	%	18,841		6	%	6,483		3	%
Total	$	157,044	100	%	$	101,268	100	%	$	299,622	100	%	$	194,858	100	%

Significant Customers

No single customer accounted for 10% or more of our revenue for the three and six months ended January 31, 2021 and 2020. The following table summarizes 10% or more of the total balance of accounts receivable, net:

	January 31, 2021	July 31, 2020
Channel partner A	13%	*
Channel partner B	11%	11%

(*) Represents less than 10%.

Contract Balances

Contract liabilities consist of deferred revenue and include payments received in advance of performance under the contract. Such amounts are recognized as revenue over the contractual period. For the six months ended January 31, 2021 and 2020, we recognized revenue of $228.9 million and $148.4 million, respectively, that was included in the corresponding contract liability balance at the beginning of these periods.

Remaining Performance Obligations

The typical subscription and support term is one to three years. Most of our subscription and support contracts are non-cancelable over the contractual term. However, customers typically have the right to terminate their contracts for cause, if we fail to perform. As of January 31, 2021, the aggregate amount of the transaction price allocated to remaining performance obligations was $1,024.8 million. We expect to recognize 53% of the transaction price over the next 12 months and 98% of the transaction price over the next three years, with the remainder recognized thereafter.

Costs to Obtain and Fulfill a Contract

We capitalize sales commission and associated payroll taxes paid to internal sales personnel that are incremental to the acquisition of channel partner and direct customer contracts. These costs are recorded as deferred contract acquisition costs in the condensed consolidated balance sheets.

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The following table summarizes the activity of the deferred contract acquisition costs:

	Three Months Ended January 31,				Six Months Ended January 31,
	2021		2020		2021		2020
	(in thousands)
Beginning balance	$	119,279	$	70,426	$	109,915	$	69,785
Capitalization of contract acquisition costs	25,112		9,514		43,154		15,690
Amortization of deferred contract acquisition costs	(9,445)		(5,890)		(18,123)		(11,425)
Ending balance	$	134,946	$	74,050	$	134,946	$	74,050
Deferred contract acquisition costs, current	$	39,902	$	23,527	$	39,902	$	23,527
Deferred contract acquisition costs, noncurrent	95,044		50,523		95,044		50,523
Total deferred contract acquisition costs	$	134,946	$	74,050	$	134,946	$	74,050

Sales commissions accrued but not paid as of January 31, 2021 and July 31, 2020, totaled $13.5 million and $21.0 million, respectively, which are included within accrued compensation in the condensed consolidated balance sheets.

Note 3. Cash Equivalents and Short-Term Investments

Cash equivalents and short-term investments consisted of the following as of January 31, 2021:

	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
	(in thousands)
Cash equivalents:
Money market funds	$	39,038	$	—	$	—	$	39,038
Short-term investments:
U.S. treasury securities	$	338,856	$	7	$	(35)	$	338,828
U.S. government agency securities	764,997		170		(66)		765,101
Corporate debt securities	245,312		263		(102)		245,473
Total short-term investments	$	1,349,165	$	440	$	(203)	$	1,349,402
Total cash equivalents and short-term investments	$	1,388,203	$	440	$	(203)	$	1,388,440

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Cash equivalents and short-term investments consisted of the following as of July 31, 2020:

	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
Cash equivalents:	(in thousands)
Money market funds	$	51,690	$	—	$	—	$	51,690
U.S. treasury securities	39,997		—		(1)		39,996
U.S. government agency securities	14,997		—		—		14,997
Total cash equivalents	$	106,684	$	—	$	(1)	$	106,683
Short-term investments:
U.S. treasury securities	$	415,539	$	152	$	(127)	$	415,564
U.S. government agency securities	595,725		186		(114)		595,797
Corporate debt securities	216,879		569		(87)		217,361
Total short-term investments	$	1,228,143	$	907	$	(328)	$	1,228,722
Total cash equivalents and short-term investments	$	1,334,827	$	907	$	(329)	$	1,335,405

The amortized cost and fair value of our short-term investments based on their stated maturities consisted of the following as of January 31, 2021:

	Amortized Cost		Fair Value
	(in thousands)
Due within one year	$	766,043	$	766,266
Due between one to two years	583,122		583,136
Total	$	1,349,165	$	1,349,402

Short-term investments that were in an unrealized loss position as of January 31, 2021 consisted of the following:

	Less than 12 Months				Greater than 12 Months				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(in thousands)
U.S. treasury securities	$	173,048	$	(35)	$	—	$	—	$	173,048	$	(35)
U.S. government agency securities	219,264		(66)		6,001		—		225,265		(66)
Corporate debt securities	107,978		(102)		1,001		—		108,979		(102)
Total	$	500,290	$	(203)	$	7,002	$	—	$	507,292	$	(203)

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Short-term investments that were in an unrealized loss position as of July 31, 2020 consisted of the following:

	Less than 12 Months				Greater than 12 Months		Total
	Fair Value		Unrealized Losses		Fair Value	Unrealized Losses	Fair Value	Unrealized Losses
	(in thousands)
U.S. treasury securities	$	347,959	$	(127)	$