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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: 001-38413
_____________________________________
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 ClassTrading Symbol(s)Name of Each Exchange on Which Registered
Common Stock, $0.001 Par ValueZSThe 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 filerýAccelerated filer
Non-accelerated filerSmaller 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 November 30, 2020, the number of shares of registrant’s common stock outstanding was 134,191,860.

ZSCALER, INC.
Table of Contents
Page No.
PART I. FINANCIAL INFORMATION
PART II. OTHER INFORMATION



Table of Contents
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

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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

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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)

October 31, 2020July 31, 2020
Assets
Current assets:
Cash and cash equivalents$102,016 $141,851 
Short-term investments1,313,938 1,228,722 
Accounts receivable, net105,942 147,584 
Deferred contract acquisition costs35,589 32,240 
Prepaid expenses and other current assets22,040 31,396 
Total current assets1,579,525 1,581,793 
Property and equipment, net83,976 75,734 
Operating lease right-of-use assets45,586 36,119 
Deferred contract acquisition costs, noncurrent83,690 77,675 
Acquired intangible assets, net22,447 24,024 
Goodwill30,059 30,059 
Other noncurrent assets7,664 8,054 
Total assets$1,852,947 $1,833,458 
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable$7,663 $5,233 
Accrued expenses and other current liabilities13,871 16,361 
Accrued compensation37,097 49,444 
Deferred revenue340,035 337,263 
Operating lease liabilities17,796 15,600 
Total current liabilities416,462 423,901 
Convertible senior notes, net874,359 861,615 
Deferred revenue, noncurrent31,865 32,504 
Operating lease liabilities, noncurrent35,266 28,023 
Other noncurrent liabilities2,890 2,586 
Total liabilities1,360,842 1,348,629 
Commitments and contingencies (Note 8)
Stockholders’ Equity
Common stock; $0.001 par value; 1,000,000 shares authorized as of October 31, 2020 and July 31, 2020; 134,163 and 132,817 shares issued and outstanding as of October 31, 2020 and July 31, 2020, respectively
134 133 
Additional paid-in capital886,815 823,804 
Accumulated other comprehensive income (loss)(267)463 
Accumulated deficit(394,577)(339,571)
Total stockholders’ equity492,105 484,829 
Total liabilities and stockholders’ equity$1,852,947 $1,833,458 

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 October 31,
20202019
Revenue$142,578 $93,590 
Cost of revenue31,727 19,558 
Gross profit110,851 74,032 
Operating expenses:
Sales and marketing96,889 59,411 
Research and development35,770 20,271 
General and administrative20,859 12,625 
Total operating expenses153,518 92,307 
Loss from operations(42,667)(18,275)
Interest income940 2,022 
Interest expense(13,049) 
Other income (expense), net268 (29)
Loss before income taxes(54,508)(16,282)
Provision for income taxes498 794 
Net loss$(55,006)$(17,076)
Net loss per share, basic and diluted $(0.41)$(0.13)
Weighted-average shares used in computing net loss per share, basic and diluted
133,452 127,548 

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 October 31,
20202019
Net loss$(55,006)$(17,076)
Other comprehensive income (loss):
Unrealized net gains (losses) on available-for-sale securities(730)168 
Total(730)168 
Comprehensive loss$(55,736)$(16,908)

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 October 31, 2020:
Common Stock Additional
Paid-In
Capital
Accumulated Other Comprehensive
Income (Loss)
Accumulated DeficitTotal
Stockholders’ Equity
Shares Amount  
Balance as of July 31, 2020132,817 $133 $823,804 $463 $(339,571)$484,829 
Issuance of common stock upon exercise of stock options690 1 4,518 — — 4,519 
Vesting of restricted stock units and other stock issuances656 — — — —  
Vesting of early exercised common stock options— — 70 — — 70 
Stock-based compensation— — 58,423 — — 58,423 
Unrealized net losses on available-for-sale-securities— — — (730)— (730)
Net loss— — — — (55,006)(55,006)
Balance as of October 31, 2020134,163 $134 $886,815 $(267)$(394,577)$492,105 
Stockholders' equity activity for the three months ended October 31, 2019:
Common Stock Additional
Paid-In
Capital
Accumulated Other Comprehensive
Income
Accumulated DeficitTotal
Stockholders’ Equity
Shares Amount  
Balance as of July 31, 2019127,253 $127 $532,618 $268 $(224,455)$308,558 
Issuance of common stock upon exercise of stock options545 1 3,058 — — 3,059 
Vesting of restricted stock units and other stock issuances128 — — — —  
Vesting of early exercised common stock options— — 131 — — 131 
Stock-based compensation— — 19,212 — — 19,212 
Unrealized net gains on available-for-sale-securities— — — 168 — 168 
Net loss— — — — (17,076)(17,076)
Balance as of October 31, 2019127,926 $128 $555,019 $436 $(241,531)$314,052 

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)
Three Months Ended October 31,
20202019
Cash Flows From Operating Activities
Net loss$(55,006)$(17,076)
Adjustments to reconcile net loss to cash provided by operating activities:
Depreciation and amortization expense6,092 3,582 
Amortization expense of acquired intangible assets1,577 779 
Amortization of deferred contract acquisition costs8,678 5,535 
Amortization of debt discount and issuance costs12,690  
Noncash operating lease costs4,513 2,596 
Stock-based compensation expense57,185 18,376 
Amortization (accretion) of investments purchased at a premium (discount)2,605 (300)
Deferred income taxes(520)(49)
Impairment of assets416  
Other29 223 
Changes in operating assets and liabilities:
Accounts receivable41,634 22,859 
Deferred contract acquisition costs(18,042)(6,176)
Prepaid expenses, other current and noncurrent assets7,883 (2,471)
Accounts payable76 (38)
Accrued expenses, other current and noncurrent liabilities(1,243)(466)
Accrued compensation(12,347)1,382 
Deferred revenue2,133 (5,333)
Operating lease liabilities(4,821)(1,994)
Net cash provided by operating activities53,532 21,429 
Cash Flows From Investing Activities
Purchases of property, equipment and other assets(8,904)(10,210)
Capitalized internal-use software(2,401)(1,802)
Purchases of short-term investments(174,663)(88,410)
Proceeds from maturities of short-term investments76,582 66,796 
Proceeds from sale of short-term investments11,500  
Net cash used in investing activities(97,886)(33,626)
Cash Flows From Financing Activities
Proceeds from issuance of common stock upon exercise of stock options4,519 3,059 
Net cash provided by financing activities4,519 3,059 
Net decrease in cash, cash equivalents and restricted cash(39,835)(9,138)
Cash, cash equivalents and restricted cash at beginning of period141,851 78,484 
Cash, cash equivalents and restricted cash at end of period$102,016 $69,346 
Supplemental Disclosure of Cash Flow Information:
Cash paid for income taxes, net of tax refunds$1,496 $810 
Noncash activities
Net change in purchased equipment included in accounts payable and accrued expenses$1,884 $(1,893)
Operating lease right-of-use assets obtained in exchange for operating lease obligations, net of terminations$13,787 $18,237 
Reconciliation of cash, cash equivalents and restricted cash to the consolidated balance sheets:
Cash and cash equivalents$102,016 $69,346 
Restricted cash, current and noncurrent  
Total cash, cash equivalents and restricted cash$102,016 $69,346 
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 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 October 31, 2020, the condensed consolidated statements of operations for the three months ended October 31, 2020 and 2019, the consolidated statements of comprehensive loss for the three months ended October 31, 2020 and 2019, the condensed consolidated statements of stockholders’ equity for the three months ended October 31, 2020 and 2019 and the condensed consolidated statements of cash flows for the three months ended October 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 months ended October 31, 2020 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.
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
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awards, useful lives of property and equipment, useful lives of acquired intangible assets, 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 months ended October 31, 2020 other than for the adoption of new accounting guidance related to current expected credit losses effective August 1, 2020 further described below.
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.
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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 accumulated other comprehensive income (loss) within stockholders’ equity.
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), realized gains and losses and declines in fair value judged to be related to credit loss on our available-for-sale securities 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 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.
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Note 2. Revenue Recognition
Disaggregation of Revenue
Subscription and support revenue is recognized over time and accounted for approximately 97% and 99% of our revenue for the three months ended October 31, 2020 and 2019, 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 October 31,
20202019
Amount% RevenueAmount% Revenue
(in thousands, except per percentage data)
United States$70,159 49 %$45,944 49 %
Europe, Middle East and Africa (*)
55,205 39 %38,288 41 %
Asia Pacific14,280 10 %7,821 8 %
Other2,934 2 %1,537 2 %
Total $142,578 100 %$93,590 100 %
(*) Revenue from the United Kingdom ("U.K.") represented 10% of our revenue for each of the three months ended October 31, 2020 and 2019.
The following table summarizes the revenue from contracts by type of customer:
Three Months Ended October 31,
20202019
Amount% RevenueAmount% Revenue
(in thousands, except per percentage data)
Channel partners$133,440 94 %$90,243 96 %
Direct customers9,138 6 %3,347 4 %
Total $142,578 100 %$93,590 100 %
Significant Customers
No single customer accounted for 10% or more of our revenue for the three months ended October 31, 2020 and 2019. The following table summarizes 10% or more of the total balance of accounts receivable, net:
October 31, 2020July 31, 2020
Channel partner A
*11%
(*) Represents less than 10%.
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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 three months ended October 31, 2020 and 2019, we recognized revenue of $127.6 million and $84.1 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 October 31, 2020, the aggregate amount of the transaction price allocated to remaining performance obligations was $864.0 million. We expect to recognize 54% of the transaction price over the next 12 months and 97% 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.
The following table summarizes the activity of the deferred contract acquisition costs:
Three Months Ended October 31,
20202019
(in thousands)
Beginning balance
$109,915 $69,785 
Capitalization of contract acquisition costs
18,042 6,176 
Amortization of deferred contract acquisition costs
(8,678)(5,535)
Ending balance
$119,279 $70,426 
Deferred contract acquisition costs, current
$35,589 $22,060 
Deferred contract acquisition costs, noncurrent
83,690 48,366 
Total deferred contract acquisition costs $119,279 $70,426 
Sales commissions accrued but not paid as of October 31, 2020 and July 31, 2020, totaled $9.0 million and $21.0 million, respectively, which are included within accrued compensation in the condensed consolidated balance sheets.
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Note 3. Cash Equivalents and Short-Term Investments
Cash equivalents and short-term investments consisted of the following as of October 31, 2020:
Amortized
Cost
Unrealized
Gains
Unrealized
Losses

Fair Value
(in thousands)
Cash equivalents:
Money market funds$52,638 $ $ $52,638 
Short-term investments:
U.S. treasury securities$383,016 $24 $(111)$382,929 
U.S. government agency securities718,740 94 (466)718,368 
Corporate debt securities212,333 381 (73)212,641 
Total short-term investments$1,314,089 $499 $(650)$1,313,938 
Total cash equivalents and short-term investments$1,366,727 $499 $(650)$1,366,576 
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 securities39,997  (1)39,996 
U.S. government agency securities14,997   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 securities595,725 186 (114)595,797 
Corporate debt securities216,879 569 (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 October 31, 2020:
Amortized
Cost
Fair Value
(in thousands)
Due within one year$740,385 $740,633 
Due between one to three years573,704 573,305 
Total$1,314,089 $1,313,938 
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Short-term investments that were in an unrealized loss position as of October 31, 2020 consisted of the following:
Less than 12 MonthsGreater than 12 MonthsTotal
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
(in thousands)
U.S. treasury securities$296,929 $(111)$ $ $296,929 $(111)
U.S. government agency securities436,495 (465)3,001 (1)439,496 (466)
Corporate debt securities106,226 (73)1,002  107,228 (73)
Total$839,650 $(649)$4,003 $(1)$843,653 $(650)

Short-term investments that were in an unrealized loss position as of July 31, 2020 consisted of the following:
Less than 12 MonthsGreater than 12 MonthsTotal
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
(in thousands)
U.S. treasury securities$347,959 $(127)$ $ $347,959 $(127)
U.S. government agency securities340,503 (113)5,502 (1)346,005 (114)
Corporate debt securities105,953 (87)  105,953 (87)
Total $794,415 $(327)$5,502 $(1)$799,917 $(328)
We review the individual securities that have unrealized losses in our short-term investment portfolio on a regular basis. We evaluate, among others, whether we have the intention to sell any of these investments and whether it is not more likely than not that we will be required to sell any of them before recovery of the amortized cost basis. Neither of these criteria were met in any period presented. We additionally evaluate whether the decline in fair value of the security below its amortized cost basis is related to credit losses or other factors. Based on this evaluation, we determined that unrealized losses of the above securities were primarily attributable to changes in interest rates and not credit-related factors. Accordingly, we determined that an allowance for credit losses was unnecessary for our short-term investments as of October 31, 2020 and July 31, 2020.
We recorded $3.5 million and $3.8 million of accrued interest receivable within prepaid expenses and other current assets in our condensed consolidated balance sheet as of October 31, 2020 and July 31, 2020, respectively.
Note 4. Fair Value Measurements
We measure our financial assets and liabilities at fair value at each reporting period using a fair value hierarchy which requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Our money market funds are classified within Level I due to the highly liquid nature of these assets and have quoted prices in active markets. Certain of our investments in available-for-sale securities (i.e., U.S. treasury securities, U.S. government agency securities and corporate debt securities) are classified within Level II. The fair value of these securities is priced by using inputs based on non-binding market consensus prices that are primarily corroborated by observable market data or quoted market prices for similar instruments.
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Assets that are measured at fair value on a recurring basis consisted of the following as of October 31, 2020:
Level ILevel IILevel III
Fair Value
Quoted Prices
in Active
Markets for
Identical Assets
Significant
Other
Observable
Inputs
Significant
Unobservable
Inputs
Cash equivalents:(in thousands)
Money market funds$52,638 $52,638 $ $ 
Short-term investments:
U.S. treasury securities$382,929 $ $382,929 $ 
U.S. government agency securities718,368  718,368  
Corporate debt securities212,641  212,641  
Total short-term investments$1,313,938 $ $1,313,938 $ 
Total cash equivalents and short-term investments$1,366,576 $52,638 $1,313,938 $ 

Assets that are measured at fair value on a recurring basis consisted of the following as of July 31, 2020:
Level ILevel IILevel III
Fair Value
Quoted Prices
in Active
Markets for
Identical Assets
Significant
Other
Observable
Inputs
Significant
Unobservable
Inputs
Cash equivalents:(in thousands)
Money market funds$51,690 $51,690 $ $ 
U.S. treasury securities39,996  39,996  
U.S. government agency securities14,997  14,997  
Total cash equivalents$106,683 $51,690 $54,993 $ 
Short-term investments:
U.S. treasury securities$415,564 $ $415,564 $ 
U.S. government agency securities595,797  595,797  
Corporate debt securities217,361  217,361  
Total short-term investments$1,228,722 $ $1,228,722 $ 
Total cash equivalents and short-term investments$1,335,405 $51,690 $1,283,715 $ 
We did not have transfers between levels of the fair value hierarchy of assets measured at fair value during the periods presented.
Refer to Note 7, Convertible Senior Notes, for the carrying amount and estimated fair value of our convertible senior notes as of October 31, 2020.
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Note 5. Property and Equipment
Property and equipment consisted of the following:
October 31, 2020July 31, 2020
(in thousands)
Hosting equipment$97,511 $87,418 
Computers and equipment4,221 3,875 
Purchased software1,311 1,311 
Capitalized internal-use software26,931 23,081 
Furniture and fixtures1,017 1,965 
Leasehold improvements7,211 8,712 
Property and equipment, gross138,202 126,362 
Less: Accumulated depreciation and amortization(54,226)(50,628)
Total property and equipment, net$83,976 $75,734 
We recognized depreciation and amortization expense on property and equipment of $6.1 million and $3.6 million for the three months ended October 31, 2020 and 2019, respectively.
Note 6. Goodwill and Acquired Intangible Assets
Goodwill
The carrying amount of goodwill was $30.1 million as of October 31, 2020 and July 31, 2020.
Acquired Intangible Assets
Acquired intangible assets consist of developed technology and customer relationships acquired through our asset and business acquisitions. Acquired intangible assets are amortized using the straight-line method over their useful lives.
Acquired intangible assets subject to amortization consisted of the following as of October 31, 2020 and July 31, 2020:
Gross Carrying AmountAccumulated AmortizationNet Carrying Amount
July 31, 2020AdditionsOctober 31, 2020July 31, 2020Amortization ExpenseOctober 31, 2020October 31, 2020July 31, 2020
(in thousands)
Developed technology$26,856 $ $26,856 $(4,206)$(1,504)$(5,710)$21,146 $22,650 
Customer relationships1,460  1,460 (86)(73)(159)1,301 1,374 
Total$28,316 $ $28,316 $(4,292)$(1,577)$(5,869)$22,447 $24,024 
Amortization expense of acquired intangible assets was $1.6 million and $0.8 million for the three months ended October 31, 2020 and 2019, respectively. Amortization expense of developed technology is recorded primarily within cost of revenue and research and development in the condensed consolidated statements of operations. Amortization expense of customer relationships is recorded within sales and marketing expenses in the condensed consolidated statements of operations.
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Future amortization expense of acquired intangible assets consisted of the following as of October 31, 2020:
Amount
Year ending July 31,(in thousands)
2021 (remaining nine months)$4,732 
20225,700 
20235,196 
20243,761 
20253,058 
Total$22,447 

Note 7. Convertible Senior Notes
On June 25, 2020, we issued $1,150.0 million in aggregate principal amount of 0.125% Convertible Senior Notes due 2025 (the “Notes”), including the exercise in full by the initial purchasers of the Notes of their option to purchase an additional $150.0 million principal amount of the Notes. The Notes bear interest at a rate of 0.125% per year and interest is payable semiannually in arrears on January 1 and July 1 of each year, beginning on January 1, 2021. The Notes mature on July 1, 2025, unless earlier converted, redeemed or repurchased. The total net proceeds from the offering, after deducting initial purchase discounts and other debt issuance costs, was $1,130.5 million.
The Notes are unsecured obligations and do 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 following table presents details of the Notes:
Initial Conversion Rate per $1,000 PrincipalInitial Conversion PriceInitial Number of Shares
(in thousands)
Notes6.6315 shares$150.80 $7,626 

The Notes will be convertible at the option of the holders at any time prior to the close of business on the business day immediately preceding April 1, 2025, only under the following circumstances:
During any fiscal quarter commencing after the fiscal quarter ending on October 31, 2020 (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, and including, the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price of the Notes on each applicable trading day;
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 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 conversion rate of the Notes on each such trading day;
If we call any or all of the Notes for redemption, the Notes called for redemption (or, at our election, all Notes) may be submitted for conversion at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; or
Upon the occurrence of specified corporate events as set forth within the indenture governing the Notes.
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On or after April 1, 2025, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert, all or any portion of their Notes at any time, in multiples of $1,000 principal amount, at their option regardless of the foregoing circumstances. Upon conversion, we will satisfy the conversion obligation by paying or delivering, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election. It is our current intent to settle the principal amount of the Notes in cash. During the three months ended October 31, 2020, the conditions allowing holders of the Notes to convert have not been met. The Notes were therefore not convertible during the three months ended October 31, 2020 and are classified as a noncurrent liability in our condensed consolidated balance sheet as of October 31, 2020.
We may not redeem the Notes prior to July 5, 2023. On or after July 5, 2023, and prior to the 21st scheduled trading day immediately preceding the maturity date, we may redeem for cash all or any portion of the Notes, at our option, 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 (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the Notes. If we redeem less than all the outstanding Notes, and only Notes called for redemption may be converted in connection with such partial redemption, at least $100.0 million aggregate principal amount of Notes must be outstanding and not subject to such partial redemption as of the relevant redemption notice date.
In the event of a corporate event that constitutes a “fundamental change (as defined in the indenture),” holders of the Notes may require us to purchase with cash all or any portion of the Notes upon the occurrence of a fundamental change, at a purchase price equal to 100% of the principal amount of the Notes plus any accrued and unpaid interest, if any. In addition, following certain corporate events that occur prior to the maturity date or if we issue a notice of redemption, we will, in certain circumstances, increase the conversion rate for a holder who elects to convert its Notes in connection with such corporate event or notice of redemption, as the case may be.
In accounting for the issuance of the Notes and the related transaction costs, we separated the Notes into liability and equity components. The carrying amount of the liability component was initially calculated by measuring the fair value of similar liabilities that do not have associated convertible features utilizing the interest rate of 5.75%. The carrying amount of the equity component representing the conversion option was $278.5 million and was determined by deducting the fair value of the liability component from the par value of the Notes. This difference represents the debt discount that is amortized to interest expense over the term of the Notes using the effective interest rate method. The equity component was recorded in additional paid-in capital and is not remeasured as long as it continues to meet the conditions for equity classification.
Total issuance costs of $19.5 million related to the Notes were allocated between liability, totaling $14.8 million, and equity, totaling $4.7 million, in the same proportion as the allocation of the total proceeds to the liability and equity components. Issuance costs attributable to the liability component are being amortized to interest expense over the term of the Notes. The excess of the principal amount of the liability component over its carrying amount is amortized to interest expense over the contractual term of the Notes at an effective interest rate of 6.03%. The issuance costs attributable to the equity component were netted against additional paid-in capital. The amount recorded for the equity component of the Notes was $273.4 million, net of allocated issuance costs of $4.7 million and deferred tax impact of $0.4 million.




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The net carrying amount of the liability component of the Notes is as follows :
October 31, 2020July 31, 2020
(in thousands)
Principal amount$1,150,000 $1,150,000 
Less:
Unamortized debt discount261,780 273,829 
Unamortized debt issuance costs13,861 14,556 
Net carrying amount$874,359 $861,615 

The following table sets forth total interest expense recognized related to the Notes for the three months ended October 31, 2020:
Amount
(in thousands)
Contractual interest expense$359 
Amortization of debt discount12,049 
Amortization of issuance costs641 
Total$13,049 

The total fair value of the Notes was $1,338.5 million as of October 31, 2020. The fair value was determined based on the closing trading price per $1,000 of the Notes as of the last day of trading for the period. We consider the fair value of the Notes at October 31, 2020 to be a Level II measurement as they are not actively traded. The fair value of the Notes is primarily affected by the trading price of our common stock and market interest rates.

Capped Calls

In connection with the pricing of the Notes, we entered into capped call transactions with the option counterparties (the "Capped Calls"). The Capped Calls each have an initial strike price of $150.80 per share, subject to certain adjustments, which corresponds to the initial conversion price of the Notes. The Capped Calls have an initial cap price of $246.76 per share, subject to certain adjustments. The capped call transactions are generally expected to reduce potential dilution to our common stock upon any conversion of the Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted Notes, as the case may be, with such reduction and/or offset subject to a cap. The Capped Calls are subject to adjustment upon the occurrence of specified extraordinary events affecting us, including merger events, tender offers and the announcement of such events. In addition, the Capped Calls are subject to certain specified additional disruption events that may give rise to a termination of the Capped Calls, including nationalization, insolvency or delisting, changes in law, failures to deliver, insolvency filings and hedging disruptions. For accounting purposes, the Capped Calls are separate transactions, and not part of the terms of the Notes. As the Capped Calls qualify for a scope exception from derivative accounting for instruments that are both indexed to the issuer's own stock and classified in stockholder's equity in its statement of financial position, the premium of $145.2 million paid for the purchase of the Capped Calls in June 2020 was recorded as a reduction to additional paid-in capital and will not be remeasured.
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Note 8. Commitments and Contingencies
Non-cancelable Purchase Obligations
In the normal course of business, we enter into non-cancelable purchase commitments with various third parties to purchase products and services such as technology equipment, subscription-based cloud service arrangements, corporate events and consulting services. During the three months ended October 31, 2020, there have been no material changes outside the ordinary course of business to our non-cancelable purchase commitments from those disclosed in our Fiscal 2020 Form 10-K.
Legal Matters
Litigation and Claims
We are a party to various litigation matters from time to time and subject to claims that arise in the ordinary course of business, including patent, commercial, product liability, employment, class action, whistleblower and other litigation and claims, as well as governmental and other regulatory investigations and proceedings. In addition, third parties may from time to time assert claims against us in the form of letters and other communications. There is no pending or threatened legal proceeding to which we are a party that, in our opinion, is likely to have a material adverse effect on our future financial results or operations; however, the results of litigation and claims are inherently unpredictable. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors. The expense of litigation and the timing of this expense from period to period are difficult to estimate, subject to change and could adversely affect our results of operations.
Note 9. Stock-Based Compensation
Equity Incentive Plans
We adopted the Fiscal Year 2018 Equity Incentive Plan (the "2018 Plan") in fiscal 2018 and the 2007 Stock Plan (the "2007 Plan") in fiscal 2008, collectively referred to as the "Plans." Equity incentive awards which may be granted to eligible participants under the Plans include restricted stock units, restricted stock, stock options, nonstatutory stock options, stock appreciation rights, performance units and performance shares. With the establishment of the 2018 Plan, we no longer grant stock-based awards under the 2007 Plan and any shares underlying stock options that expire or terminate or are forfeited or repurchased by us under the 2007 Plan are automatically transferred to the 2018 Plan.
As of October 31, 2020, a total of 31.7 million shares of common stock have been reserved for the issuance of equity awards under the 2018 Plan, of which 22.6 million shares were available for grant.
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Stock Options