10q10k10q10k.net

What changed in Zscaler, Inc.'s 10-K — 2022 vs 2023

vs

Paragraph-level year-over-year comparison of Zscaler, Inc.'s 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+414 added−386 removedSource: 10-K (2023-09-14) vs 10-K (2022-09-15)

Top changes in Zscaler, Inc.'s 2023 10-K

414 paragraphs added · 386 removed · 323 edited across 7 sections

Item 1. Business

Business — how the company describes what it does

78 edited+18 added−20 removed59 unchanged
Biggest changeBy creating seamless access to applications regardless of a user’s network, our ZPA solution eliminates the need for traditional remote access VPNs, reverse proxies and other similar products. • Application Discovery : Similar to CASB application discovery reports for internet applications, our ZPA solution provides granular discovery of internally managed applications to aid in the creation of segmentation policies. 6 Table of Contents Because our ZPA solution sits on the application layer and is name-based or domain-based, organizations can quickly and seamlessly identify their internally-managed applications and then easily provision appropriate policies. • Application Segmentation: Our architecture provides capabilities that enable user and application level segmentation, a vast improvement over traditional network segmentation.
Biggest changeBecause our ZPA solution sits on the application layer and is name-based or domain-based, organizations can quickly and seamlessly identify their internally-managed applications and then easily provision appropriate policies. • Application Segmentation: Our architecture provides capabilities that enable user and application level segmentation, a vast improvement over traditional network segmentation.
Nevertheless, compliance with existing or future governmental regulations, including, but not limited to, those pertaining to global trade, business acquisitions, consumer and data protection, data privacy and employment and labor and taxes, could have a material impact on our business in subsequent periods.
Nevertheless, compliance with existing or future governmental regulations, including, but not limited to, those pertaining to global trade, business acquisitions, consumer and data protection, privacy, employment, labor and taxes, could have a material impact on our business in subsequent periods.
From time to time, third parties, including certain of these leading companies and non-practicing entities, have in the past and may in the future, assert claims of infringement, misappropriation and other violations of intellectual property rights against us or our customers or channel partners, with whom our license or other agreements may obligate us to indemnify against these claims.
From time to time, third parties, including certain of these companies and non-practicing entities, have in the past and may in the future, assert claims of infringement, misappropriation and other violations of intellectual property rights against us or our customers or channel partners, with whom our license or other agreements may obligate us to indemnify against these claims.
Ensuring that our people and culture are aligned with this vision is critical to our success. In order to continue to innovate and to execute our business strategy, we must attract, develop, and retain skilled employees, particularly in the areas of product development, engineering, sales and customer success.
Specifically, ensuring that our people and culture are aligned with this vision is critical to our success. In order to continue to innovate and to execute our business strategy, we must attract, develop, and retain skilled employees, particularly in the areas of product development, engineering, sales and customer success.
We believe that competitors will try to develop products and services that are similar to ours and that may infringe our intellectual property rights. Our competitors or other third-parties may also claim that our platform infringes their intellectual property rights. In particular, leading companies in our industry have extensive patent portfolios.
We believe that competitors will try to develop products and services that are similar to ours and that may infringe our intellectual property rights. Our competitors or other third-parties may also claim that our platform infringes their intellectual property rights. In particular, companies in our industry have extensive patent portfolios.
Organizations are increasingly relying on internet destinations for a range of business activities, adopting new external SaaS applications for critical business functions and moving their internally managed applications to the public cloud, Infrastructure as a Service, or IaaS, or PaaS.
Organizations are increasingly relying on internet destinations for a range of business activities, adopting new external SaaS applications for critical business functions and moving their internally managed applications to the public cloud, Infrastructure as a Service, or IaaS, or Platform as a Service, or PaaS.
In addition to base pay, employees may be eligible for annual bonuses that are tied to our financial performance and long-term equity incentives that vest subject to continued service. Certain employees may also need to achieve defined performance metrics for their long-term incentives to vest.
In addition to base pay, employees may be eligible for annual bonuses that are tied to our financial performance and long-term equity incentives that vest subject to continued service. Certain employees may also need to achieve defined performance metrics for certain of their long-term incentives to vest.
Our Posture Control solution is comprised of the following functionalities: • Cloud Security Posture Management, or CSPM, automatically identifies and remediates application misconfigurations in SaaS, IaaS, and PaaS to reduce risk and ensure compliance with industry and organizational benchmarks. • Cloud Infrastructure Entitlement Management, or CIEM detects and remediates excessive or unused cloud permissions and enforces least privileged access without disrupting productivity. • Infrastructure as Code, or IaC, scanning analyzes a broad range of IaC templates to identify misconfigurations and other security issues prior to deployment to cloud infrastructure. • Vulnerability Scanning leverages agentless technology to scan container and virtual machine assets for unpatched software vulnerabilities in both running cloud assets and in images stored in cloud registries. • Data Loss Prevention, or DLP, leverages the same DLP technology offered with ZIA to identify and protect sensitive or exposed data in public cloud storage services, such as AWS S3.
Our Posture Control solution is comprised of the following functionalities: • Cloud Security Posture Management, or CSPM, automatically identifies and remediates application misconfigurations in SaaS, IaaS, and PaaS to reduce risk and ensure compliance with industry and organizational benchmarks. • Cloud Infrastructure Entitlement Management, or CIEM detects and remediates excessive or unused cloud permissions and enforces least privileged access without disrupting productivity. • Infrastructure as Code, or IaC, scanning analyzes a broad range of IaC templates to identify misconfigurations and other security issues prior to deployment to cloud infrastructure. • Vulnerability Scanning leverages agentless technology to scan container and virtual machine assets for unpatched software vulnerabilities in both running cloud assets and in images stored in cloud registries. 8 Table of Contents • Data Loss Prevention, or DLP, leverages the same DLP technology offered with ZIA to identify and protect sensitive or exposed data in public cloud storage services, such as AWS S3.
We provide secure internet communications for IoT and OT devices, privileged access to IoT and OT devices (e.g. for maintenance), secure access to production applications (e.g. on a factory floor) and deception to provide active defense.
We provide secure internet communications for IoT and OT devices, privileged access to IoT and OT devices (e.g. for maintenance), secure access to production applications (e.g. on a factory floor) and deception technology to provide active defense.
Today, this network perimeter approach consists of appliances that have become fundamentally less effective as applications, data, users and devices rapidly move off the corporate network, making the notion of a corporate perimeter obsolete. In a world where more companies are shifting their most critical IT assets to the cloud, a zero trust architecture is required.
Traditionally, this network perimeter approach consists of appliances that have become fundamentally less effective as applications, data, users and devices rapidly move off the corporate network, making the notion of a corporate perimeter obsolete. In a world where more companies are shifting their most critical IT assets to the cloud, a zero trust architecture is required.
Once we detect a new threat to a user, we block it for all users. We call this the “cloud security effect.” • Sandbox: Our cloud sandbox enables enterprises to block zero-day exploits and advanced persistent threats, or APTs, by analyzing unknown files for malicious behavior, and it can scale to every user regardless of location.
Once we detect a new threat to a user, we block it for all users. We call this the “cloud security effect.” • Sandbox: Our cloud sandbox enables enterprises to block zero-day exploits and advanced persistent threats by analyzing unknown files for malicious behavior, and it can scale to every user regardless of location.
Secure Private Application Access - Zscaler Private Access Zscaler Private Access, or ZPA, provides Zero Trust Network Access, or ZTNA, to secure access to internally managed applications, either hosted internally in data centers or hosted in private or public clouds.
Secure Private Application Access - Zscaler Private Access Zscaler Private Access provides Zero Trust Network Access, or ZTNA, to secure access to internally managed applications, either hosted internally in data centers or hosted in private or public clouds.
Our cloud native, multitenant architecture is distributed across more than 150 data centers globally which brings security and business policy close to users and devices in 185 countries and provides fast, secure, and reliable access. Each day, we block over 150 million threats and perform over 200,000 unique security updates.
Our cloud native, multitenant architecture is distributed across more than 150 data centers globally which brings security and business policy close to users and devices in 185 countries and provides fast, secure, and reliable access. Each day, we block over 150 million threats and perform over 250,000 unique security updates.
Experience Management - Zscaler Digital Experience Zscaler Digital Experience, or ZDX, is designed to measure end-to-end user experience across key business applications, providing an easy to understand digital experience score for each user, application and location within an enterprise. As users have become mobile and applications have moved to the cloud, traditional network performance monitoring tools have become increasingly irrelevant.
Experience Management - Zscaler Digital Experience Zscaler Digital Experience is designed to measure end-to-end user experience across key business applications, providing an easy to understand digital experience score for each user, application and location within an enterprise. As users have become mobile and applications have moved to the cloud, traditional network performance monitoring tools have become increasingly irrelevant.
Preventing Lateral Threat Movement in Public Clouds — Workload Segmentation Our Workload Segmentation solution secures application-to-application communications inside public clouds and data centers to stop lateral threat movement, preventing application compromise and reducing the risk of data breaches. Workload Segmentation utilizes an innovative approach that makes it significantly simpler to deploy and operate than traditional segmentation solutions.
Preventing Lateral Threat Movement in Public Clouds - Workload Segmentation Our Workload Segmentation solution secures application-to-application communications inside public clouds and data centers to stop lateral threat movement, preventing application compromise and reducing the risk of data breaches. Workload Segmentation utilizes an innovative, AI-enabled approach that makes it significantly simpler to deploy and operate than traditional segmentation solutions.
The principal competitive factors in the markets in which we operate include: • delivering security from the cloud regardless of location of the user; • platform features, effectiveness and extensibility; • platform reliability, availability and scalability; • rapid development and delivery of new capabilities and services; • ability to integrate with other participants in the security and networking ecosystem; • price, total cost of ownership and network cost savings; • brand awareness, reputation and trust in the provider’s services; • strength of sales, marketing and channel partner relationships; and • quality of customer support.
The principal competitive factors in the markets in which we operate include: • delivering security from the cloud regardless of location of the user; • platform features, effectiveness and extensibility; • platform reliability, availability and scalability; • rapid development and delivery of new capabilities and services; • ability to integrate with other participants in the security and networking ecosystem; • price, total cost of ownership and network cost savings; • brand awareness, reputation and trust in the provider’s services; • strength of sales, marketing and channel partner relationships; and 12 Table of Contents • quality of customer support.
We do not collect customer data other than logs, and those logs are encrypted and transmitted to our log server at a destination of choice without ever writing to disk at the enforcement nodes. Logs are transmitted to our logging servers over secure connections and multicast to multiple servers for redundancy.
We do not collect customer data other than logs, and those logs are encrypted and transmitted to our log server at a destination of choice selected by the customer without ever writing to disk at the enforcement nodes. Logs are transmitted to our logging servers over secure connections and multicast to multiple servers for redundancy.
Our customers operate in a variety of industries, including airlines and transportation, conglomerates, consumer goods and retail, financial services, healthcare, manufacturing, media and communications, public sector and education, technology and telecommunications services. Approximately 51% of our revenue was from customers outside the United States for all periods presented.
Our customers operate in a variety of industries, including airlines and transportation, conglomerates, consumer goods and retail, financial services, healthcare, manufacturing, media and communications, public sector and education, technology and telecommunications services. Approximately 50% of our revenue was from customers outside the United States for all periods presented.
We offer an Employee Stock Purchase Plan which allows employees to contribute a percentage of their wages to purchase our stock at a discount. In addition to cash and equity compensation, we offer our employees a robust portfolio of benefits, such as health, wellbeing and retirement programs, to meet their individual and family needs.
We offer an Employee Stock Purchase Plan which allows employees to contribute a percentage of their wages to purchase our stock at a discount. In addition to cash and equity compensation, we offer our employees a robust portfolio of benefits, such as health, wellbeing, parental leave, and retirement programs, to meet their individual and family needs.
(previously, Websense, Inc.), Netskope, Inc. and Pulse Secure, LLC with point 11 Table of Contents solutions that compete with some of the features of our cloud platform, such as proxy, firewall, CASB, sandboxing and advanced threat protection, data loss prevention, encryption, load balancing and VPN; and • other providers of IT security services that offer, or may leverage related technologies to introduce, products that compete with or are alternatives to our cloud platform.
(previously, Websense, Inc.), Netskope, Inc. and Pulse Secure, LLC with point solutions that compete with some of the features of our cloud platform, such as proxy, firewall, CASB, sandboxing and advanced threat protection, data loss prevention, encryption, load balancing and VPN; and • other providers of IT security services that offer, or may leverage related technologies to introduce, products that compete with or are alternatives to our cloud platform.
See “Risk Factors-Claims by others that we infringe their proprietary technology or other rights, or other lawsuits asserted against us, could result in significant costs and substantially harm our business, financial condition, results of operations and prospects” for additional information. Government Regulation Our business activities are subject to various federal, state, local, and foreign laws, rules, and regulations.
See “Risk Factors-Claims by others that we infringe their proprietary technology or other rights, or other lawsuits asserted against us, could result in significant costs and substantially harm our business, financial condition, results of operations and prospects” for additional information. 13 Table of Contents Government Regulation Our business activities are subject to various federal, state, local, and foreign laws, rules, and regulations.
By doing Transport Layer Security, or TLS, inspection at scale, we provide malware protection, data loss prevention and CASB functions that can be performed both inline and out-of-band, for specific sanctioned and unsanctioned applications.
By doing Transport Layer Security inspection at scale, we provide malware protection, data loss prevention and CASB functions that can be performed both inline and out-of-band, for specific sanctioned and unsanctioned applications.
We do not rely on batch reporting; we continuously update our dashboards and reporting and can stream logs to a third-party Security Information and Event Management, or SIEM, service as they arrive. Regardless of where users are located, customers can choose to have logs stored in the United States or the European Union/Switzerland.
We do not rely on batch reporting; we continuously update our dashboards and reporting and can stream logs to a third-party Security Information and Event Management, or 9 Table of Contents SIEM, service as they arrive. Regardless of where users are located, customers can choose to have logs stored in the United States or the European Union/Switzerland.
This strategy is account-based, enabling us to pursue targeted marketing activities across both digital and non-digital channels. We anticipate increasing our marketing team headcount and are investing in programs designed to 10 Table of Contents elevate our brand in the market and engage new enterprise accounts. We also participate in a number of cloud and security industry events.
This strategy is account-based, enabling us to pursue targeted marketing activities across both digital and non-digital channels. We anticipate increasing our marketing team headcount and are investing in programs designed to elevate our brand in the market and engage new enterprise accounts. We also participate in a number of cloud and security industry events.
Our architecture is vastly different from the traditional “hub-and-spoke” corporate network, where traffic from branch offices is routed to centralized data centers for security scanning and policy enforcement before reaching its destination.
Our architecture is vastly different from the legacy “hub-and-spoke” corporate network, where traffic from branch offices is routed to centralized data centers for security scanning and policy enforcement before reaching its destination.
Our competitors and potential competitors include legacy on-premises appliance vendors across a number of categories: • independent IT security vendors, such as Check Point Software Technologies Ltd., Fortinet, Inc., Palo Alto Networks, Inc. and Broadcom, which offer a broad mix of network and endpoint security products; • large networking vendors, such as Cisco Systems, Inc. and Juniper Networks, Inc., which offer security appliances and incorporate security capabilities in their networking products; • companies such as SkyHigh Security (previously McAfee Enterprise), Trellix (a combination of McAfee Enterprise and FireEye, Inc.), Forcepoint Inc.
Our competitors and potential competitors include legacy on-premises appliance vendors across a number of categories: • independent IT security vendors, such as Check Point Software Technologies Ltd., Fortinet, Inc., Palo Alto Networks, Inc. and Broadcom, which offer a broad mix of network and endpoint security products; • large networking and other vendors, such as Cisco Systems, Inc., Microsoft Corporation and Juniper Networks, Inc., which offer security appliances and/or incorporate security capabilities in their networking products and other services; • companies such as SkyHigh Security (previously McAfee Enterprise), Trellix (a combination of McAfee Enterprise and FireEye, Inc.), Forcepoint Inc.
In contrast, our Zero Trust Exchange acts as an intelligent switchboard that uses business policies to securely connect users, devices, and applications over any network and protect against cyberthreats and data loss. We provide all of these solutions at scale, processing well over 250 billion internet requests per day.
In contrast, our Zero Trust Exchange acts as an intelligent switchboard that uses business policies to securely connect users, devices, and applications over any network and protect against cyberthreats and data loss. We provide all of these solutions at scale, processing well over 320 billion internet transactions per day.
As an integrated cloud security platform, customers can set policies by users and destinations to prevent patient-zero scenarios by holding, detonating and analyzing suspicious files in the cloud sandbox before they are sent to the user. • Browser Isolation: Our cloud browser isolation functionality creates an isolated browsing session that enables users to access any webpage on the internet without downloading any of the web content served by the webpage onto a local device or the corporate network.
As an integrated cloud security platform, customers can set policies by users and destinations to prevent patient-zero scenarios to analyze, hold and detonate suspicious files in the cloud sandbox before they are sent to a user. • Browser Isolation: Our cloud browser isolation functionality creates an isolated browsing session that enables users to access any webpage on the internet without downloading any of the web content served by the webpage onto a local device or the corporate network.
Our cloud-native platform, the Zscaler Zero Trust Exchange, enables customers to secure and connect users, workloads and IoT/OT devices across three core products: • Zscaler for Users — leverages our comprehensive cloud platform to provide users secure, fast and reliable access to the internet including SaaS applications, via Zscaler Internet Access, or ZIA, and provides Zero Trust Network Access to internally hosted applications via Zscaler Private Access, or ZPA, in each case, regardless of device, location or network.
Our cloud-native platform, the Zscaler Zero Trust Exchange, enables customers to secure and connect users, workloads and IoT/OT devices across three core products: • Zscaler for Users — leverages our comprehensive cloud platform to provide users secure, fast and reliable access to the internet including SaaS applications, via Zscaler Internet Access, or ZIA, and provides Zero Trust Network Access to internally hosted or managed applications via Zscaler Private Access, or ZPA, in each case, regardless of device, location or network and also regardless of whether the users are internal or external.
ThreatLabZ, our internal team of security experts, researchers and network engineers, analyzes the global threat landscape, works to eliminate threats across our cloud platform and reports on emerging security issues. Research and development expense was $289.1 million, $174.7 million and $97.9 million for fiscal 2022, fiscal 2021 and fiscal 2020, respectively.
ThreatLabZ, our internal team of security experts, researchers and network engineers, analyzes the global threat landscape, works to eliminate threats across our cloud platform and reports on emerging security issues. Research and development expense was $349.7 million, $289.1 million and $174.7 million for fiscal 2023, fiscal 2022 and fiscal 2021, respectively.
We leverage a land-and-expand approach with our existing customers to sell subscriptions for additional users, additional solutions and premium solution bundles that contain more functionality. 9 Table of Contents • Leverage channel partners to participate in cloud transformation initiatives .
We leverage a land-and-expand approach with our existing customers to sell subscriptions for additional users, additional solutions and premium solution bundles that contain more functionality. • Leverage channel partners to participate in cloud transformation initiatives .
We also became the first cloud-based SaaS security company to achieve StateRamp for state and local governments, and have received TXRamp in Texas. Internationally, we are IRAP Protected and OAPRA in Australia, Cyber Essentials and G-Cloud in the UK, C5 in Germany and “in process” for ITSG-33 Prob B in Canada and ISMAP in Japan.
We also became the first cloud-based SaaS security company to achieve StateRamp for state and local governments, and have received 11 Table of Contents TXRamp in Texas. Internationally, we are IRAP Protected and APRA in Australia, Cyber Essentials and G-Cloud in the UK, C5 in Germany and “in process” for ITSG-33 Prob B in Canada and ISMAP in Japan.
Enterprises can no longer collect performance metrics or indicators along the traditional network path as they could when they owned the network and the applications ran in their own data 7 Table of Contents centers.
Enterprises can no longer collect performance metrics or indicators along the traditional network path as they could when they owned the network and the applications ran in their own data centers.
Despite our efforts to protect our trade secrets and proprietary rights through intellectual property rights, licenses and confidentiality agreements, unauthorized parties may still copy or otherwise obtain and use our software and 12 Table of Contents technology.
Despite our efforts to protect our trade secrets and proprietary rights through intellectual property rights, licenses and confidentiality agreements, unauthorized parties may still copy or otherwise obtain and use our software and technology.
We offer tuition reimbursement for eligible employees to further enhance their career growth through higher education. 14 Table of Contents Compensation and Benefits We provide competitive compensation and benefits packages to attract and retain our talent.
We offer tuition reimbursement for eligible employees to further enhance their career growth through higher education. Compensation and Benefits We provide competitive compensation and benefits packages to attract and retain our talent.
Comprehensive integrations with other Zscaler products provide unprecedented breadth in capabilities for protecting cloud assets from buildtime to runtime.
Comprehensive integrations with other Zscaler products provide unprecedented breadth in capabilities for protecting cloud assets from build time to runtime.
As of July 31, 2022, we had over 6,700 customers, including over 600 of th e Forbes Global 2000. Many of our customers include major global enterprises that send virtually all of their internet traffic through our cloud security platform.
As of July 31, 2023, we had over 7,700 customers, including over 640 of th e Forbes Global 2000. Many of our customers include major global enterprises that send virtually all of their internet traffic through our cloud security platform.
Talent Development We invest in our employees through a suite of programs to develop their talent and skills as our business grows. Over the past year, this intentional approach to talent development has led to us being able to promote 22% of our global workforce.
Talent Development We invest in our employees through a suite of programs from their first day of employment to develop their talent and skills as our business grows. Over the past year, this intentional approach to talent development led to us being able to promote 20% of our global workforce.
When a user's experience is suffering or an event is negatively impacting user experience, ZDX allows an organization to isolate where in the network path an issue is occurring and whether it is caused by a user’s device, the WiFi connection, the local internet connection, a service provider in the path or the destination application itself.
When a user's experience is suffering or an event is negatively impacting user experience, ZDX utilizes AI-enabled root cause analysis to allow an organization to isolate where in the network path an issue is occurring and whether it is caused by a user’s device, the WiFi connection, the local internet connection, a service provider in the path or the destination application itself.
The primary use cases for our ZPA solution include: • remote workforce access to private applications without legacy VPN, providing zero trust from office to data center; • providing non-employees with secure access to internal applications; • securely connecting business-to-business, or B2B, customers, service providers and supplier access to applications typically deployed as business to business portals in an extranet; • direct-to-cloud access to internally managed applications hosted in public cloud environments, such as Microsoft Azure, Amazon Web Services, or AWS, and Google Cloud Platform, or GCP; and • access to applications following a merger or acquisition by providing named users with access to named applications, without the need to merge networks.
The high-fidelity low-volume alerts allow customers to implement meaningful automation workflows to prevent lateral spread. 7 Table of Contents The primary use cases for our ZPA solution include: • remote workforce access to private applications without legacy VPN, providing zero trust from office to data center; • providing non-employees with secure access to internal applications; • securely connecting business-to-business, or B2B, customers, service providers and supplier access to applications typically deployed as business to business portals in an extranet; • direct-to-cloud access to internally managed applications hosted in public cloud environments, such as Microsoft Azure, Amazon Web Services, or AWS, and Google Cloud Platform, or GCP; and • access to applications following a merger or acquisition by providing named users with access to named applications, without the need to merge networks.
For more information on the potential impacts of government regulations affecting our business, see “Item 1A - Risk Factors.” Human Capital As of July 31, 2022, we had a total of 4,975 employees, including 2,737 employees located outside the United States, with the majority of non-US based employees located in India.
For more information on the potential impacts of government regulations affecting our business, see “Item 1A - Risk Factors.” Human Capital As of July 31, 2023, we had a total of 5,962 employees, including 3,656 employees located outside the United States, with the majority of non-US based employees located in India.
We have experienced significant growth, with revenue increasing from $431.3 million in fiscal 2020 to $673.1 million in fiscal 2021 to $1,090.9 million in fiscal 2022, representing year-over-year revenue growth of 56% and 62%, respectively. We experienced net losses of $390.3 million, $262.0 million and $115.1 million in fiscal 2022, fiscal 2021 and fiscal 2020, respectively.
We have experienced significant growth, with revenue increasing from $673.1 million in fiscal 2021 to $1,090.9 million in fiscal 2022 to $1,617.0 million in fiscal 2023, representing year-over-year revenue growth of 62% and 48%, respectively. We experienced net losses of $202.3 million, $390.3 million and $262.0 million in fiscal 2023, fiscal 2022 and fiscal 2021, respectively.
Our cloud sandbox was designed and built to be multi-tenant and allows customers to determine which traffic should be sent for detonation.
Our cloud sandbox was designed and built to be multi-tenant and allows customers, using AI among other analytics, to determine which traffic should be sent for detonation.
Our core cloud platform threat prevention services include: • Advanced Threat Protection: Our advanced threat protection functionality delivers real-time protection from malicious internet content like browser exploits, scripts, zero-pixel iFrames, malware and botnet callbacks. Over 200,000 unique security updates are performed every day to the Zscaler cloud to keep users protected.
Our core cloud platform threat prevention services include: • Advanced Threat Protection: Our advanced threat protection functionality uses techniques including AI/ML, signatures and reputation to deliver real-time protection from malicious internet content like browser exploits, scripts, zero-pixel iFrames, malware and botnet callbacks. Over 250,000 unique security updates are performed every day to the Zscaler cloud to keep users protected.
Diversity, Equity and Inclusion We believe that a diversity of backgrounds, experiences and thinking contributes to creating a culture that enables innovation, execution and performance. At the end of fiscal 2022, women represented 23% of our global workforce in 26 countries and underrepresented racial and ethnic minorities represented 8% of our U.S. based employees.
We believe that a diversity of backgrounds, experiences and thinking contributes to creating a culture that enables innovation, execution and performance. At the end of fiscal 2023, women represented 22% of our global workforce in 28 countries and underrepresented racial and ethnic minorities represented 10% of our U.S. based employees.
As of July 31, 2022, we had 340 issued patents and pending patent applications, including 155 issued patents, in the United States and other countries. Our issued patents expire between 2028 and 2041 and cover various aspects of our cloud platform.
As of July 31, 2023, we had more than 430 issued patents and pending patent applications, including more than 190 issued patents, in the United States and other countries. Our issued patents expire between 2028 and 2041 and cover various aspects of our cloud platform.
We predicted that with rapid cloud adoption and increasing workforce mobility, traditional perimeter security approaches would provide inadequate protection for users and data and an increasingly poor user experience. We pioneered a cloud platform, the Zscaler Zero Trust Exchange, that represents a fundamental shift in the architectural design and approach to networking and security.
We predicted that with rapid cloud adoption and increasing workforce mobility, traditional perimeter security approaches would prove to be inadequate in protecting users and data and result in poor user experience. We pioneered a cloud platform, the Zscaler Zero Trust Exchange TM platform, which represents a fundamental shift in the architectural design and approach to networking and security.
We believe that we have a significant opportunity to expand our customer base, both in the United States and internationally. We have invested significantly in our sales and marketing organization to execute against this opportunity. • Expand in existing customers.
Key elements of our growth strategy include: • Continue to win new customers . We believe that we have a significant opportunity to expand our customer base, both in the United States and internationally. We have invested significantly in our sales and marketing organization to execute against this opportunity. • Expand in existing customers.
Our 4 Table of Contents cloud security platform provides full inline content inspection to assess and correlate the risk of the content to protect against sophisticated attacks, including ransomware and phishing. The cloud platform applies machine learning across our well over 250 billion daily transactions to quickly identify and block unknown threats.
Our cloud security platform provides full inline content inspection to assess and correlate the risk of the content to protect against sophisticated attacks, including ransomware and phishing. The cloud platform applies AI, and ML, across our well over 320 billion daily transactions to quickly identify and block unknown threats and to identify and categorize unknown destinations.
ZPA is designed around four key tenets that fundamentally change the way users access internal applications: • connect users to applications without bringing users on the network; • never expose applications to the internet; • segment access to applications without relying on the traditional approach of network segmentation; and • provide remote access over the internet without virtual private networks, or VPNs.
ZPA is designed around four key tenets that fundamentally change the way users access internal applications: • connect users to applications without bringing users on the network; • never expose applications to the internet; • segment access to applications without relying on the traditional approach of network segmentation; and • provide remote access over the internet without virtual private networks, or VPNs. 6 Table of Contents ZPA enforces a global policy engine that manages access to internally managed applications regardless of location.
We believe that securing the on-premises corporate network to protect users and data is becoming increasingly irrelevant in a cloud and mobile-first world where organizations depend on the internet, a network they do not control and cannot secure, to access critical applications that power their businesses.
We believe that securing the corporate network is becoming increasingly irrelevant in a cloud and mobile-first world where organizations depend on the internet, a network they do not control and cannot secure, to access critical applications that power their businesses. We pioneered a unique approach that securely connects users, devices, and applications using business policies, regardless of the network.
Similarly, by completely removing the need for an exposed IP address or DNS to the internet, we eliminate the need for DDoS mitigation systems. • Browser Isolation: Our cloud browser isolation is used with ZPA to provide isolated sessions to internal web applications without allowing data to transfer down to unmanaged devices or active content to be uploaded into sensitive internal applications. • Deception : Our deception solution augments our customers' ability to detect the presence of an adversary in their network by deploying decoys and lures.
This reduce their attack surface by not exposing IP addresses of all devices, applications, appliances or workloads to the internet. • Browser Isolation: Our cloud browser isolation is used with ZPA to provide isolated sessions to internal web applications without allowing data to transfer down to unmanaged devices or active content to be uploaded into sensitive internal applications. • Deception : Our deception solution augments our customers' ability to detect the presence of an adversary in their network by deploying decoys and lures.
Sales and Marketing Although we have a channel sales model, we use a joint sales approach in which our sales force develops relationships directly with our customers, and together with our channel account teams, works with our channel partners on account penetration, account coordination, sales and overall market development.
No end customer contributed more than 10% of our revenue in fiscal 2023, fiscal 2022 and fiscal 2021. 10 Table of Contents Sales and Marketing Although we have a channel sales model, we use a joint sales approach in which our sales force develops relationships directly with our customers, and together with our channel account teams, works with our channel partners on account penetration, account coordination, sales and overall market development.
We have taken steps to address the diversity challenges that we face in the cybersecurity industry. We initiated a hiring practice where our recruiters strive to build a talent pipeline that is diverse at the top of the hiring funnel, connecting with candidates from under-represented groups.
We have taken steps to address the diversity challenges that we face in the cybersecurity industry because we believe diverse representation and development of our talent enriches our industry. We enhanced hiring practices where our recruiters strive to build a talent pipeline that is diverse at the top of the hiring funnel, with proactive outreach to candidates from underrepresented groups.
With cloud browser isolation, users are not directly accessing active web content; instead, only a safe rendering of pixels is delivered to the user. Malicious code that may be hidden in the web content is kept at bay.
With cloud browser isolation, users are not directly accessing active web content; instead, only a safe rendering of pixels is delivered to the user. Malicious code that may be hidden in the web content is kept at bay. Customers can select and isolate traffic based on specific policies and/or automatically based on our AI enabled risk determination.
As a provider of a fully integrated, multi-tenant cloud security solution, we enable our customers to accelerate this secure transformation to the cloud and believe we are uniquely positioned to maximize value as they undertake these transitions. Key elements of our growth strategy include: • Continue to win new customers .
Growth Strategies The growing use of the internet and the increasing adoption of the cloud and mobility are driving network and application transformation. As a provider of a fully integrated, multi-tenant cloud security solution, we enable our customers to accelerate this secure transformation to the cloud and believe we are uniquely positioned to maximize value as they undertake these transitions.
Our purpose-built, multi-tenant, distributed cloud platform incorporates the security functionality needed to enable users, applications, and devices to safely and efficiently utilize authorized applications and services based on an organization’s business policies.
Our Zero Trust Exchange eliminates the need for traditional on-premises security appliances that are difficult to maintain and require compromises between security, cost and user experience. Our purpose-built, multi-tenant, distributed cloud platform incorporates the security functionality needed to enable users, applications, and devices to safely and efficiently utilize authorized applications and services based on an organization’s business policies.
We operate a program called “Leading at Z” that establishes clear expectations, enables measurement and feedback, and ensures that our people managers have access to the development programming which helps them to live by our leadership principles. In addition, new employees in our customer care and success teams are enrolled in structured sales training to complete internal certifications.
We operate a program called “Leading at Z” that establishes clear expectations, 14 Table of Contents enables measurement and actionable feedback, and ensures that our people managers have access to the development programming which helps them to live by our leadership principles.
Data Protection- Our data protection functionality enables enterprises to prevent unauthorized sharing or exfiltration of confidential information for users, devices, and servers, reducing our customers’ business and compliance risk.
Data Protection – Our data protection functionality enables enterprises to prevent unauthorized sharing or exfiltration of confidential information for users, devices, and servers, reducing our customers’ business and compliance risk. Core cloud platform data protection services include: • Advanced Data Classification : Our data classification engines leverage a variety of technologies and techniques to identify customer sensitive data.
To supplement our internal resources, we partner with leading development organizations and tools. In 2022, we invested in partnerships with leading executive coaching organizations to offer even more focused development for key leaders.
In 2023, we launched our Senior Leadership Program to prepare our executives to navigate our company through our next phases of growth. To supplement our internal resources, we partner with external development organizations and tools. In 2023, we invested in partnerships with leading executive coaching organizations to offer even more focused development for key leaders.
Business policies can be defined with granular access control for specified cloud applications, such as the ability to upload or download files or post comments on videos based on different user or group identity. 5 Table of Contents • File Type Controls: Our file type control functionality allows policies to be defined that control which file types are allowed to be downloaded and uploaded based on application, user, location and destination. • Browser Isolation: With cloud browser isolation, users are not directly accessing active web content; instead, only a safe rendering of pixels is delivered to the user.
Our file type control functionality allows our customers to define policies to control which file types are allowed to be downloaded and uploaded based on application, user, location and destination. • Browser Isolation: With cloud browser isolation, users do not directly access active web content; instead, only a safe rendering of pixels is delivered to the user.
In 2022, we invested in a cohort-based executive leadership program that builds the capabilities of the next generation of women leaders at Zscaler. Our foundational leadership programs emphasize the role of diversity in building high performing teams. We have also hosted external diversity events, for example, bringing together accomplished women technology leaders to share their experiences with the broader community.
We also offer a cohort based leadership program that builds the capabilities of the next generation of women leaders at Zscaler. Our foundational leadership programs emphasize the role of diversity in building high performing teams.
In addition to running company-wide events and programs to share perspectives, these groups provide safe places for employees to connect with colleagues facing similar professional and personal challenges. To further support our efforts, we offer courses for diversity awareness and training on topics such as managing bias.
In addition to running company-wide events and programs to share perspectives, these groups provide a safe community where employees can celebrate what makes them unique while also connecting with colleagues who share their identity. 15 Table of Contents To further support our efforts, we offer courses for diversity awareness and training on topics such as managing bias.
ZPA enforces a global policy engine that manages access to internally managed applications regardless of location. If access is granted to a user, our ZPA solution connects the user’s device only to the authorized application without exposing the identity or location of the application. Hence applications are not exposed to the internet, further limiting the external attack surface.
If access is granted to a user, our ZPA solution connects the user’s device only to the authorized application without exposing the identity or location of the application. As a result, applications are not exposed to the internet, further limiting the external attack surface. This results in reduced cost and complexity, while offering better security and an improved user experience.
Our customers benefit from the cloud security effect of our ever-expanding ecosystem because once a new threat is detected, it can be blocked across our entire customer base within minutes. Many of the largest enterprises and government agencies in the world rely on our solutions to help them accelerate their move to the cloud.
Our customers benefit from the cloud security effect of our ever-expanding ecosystem, enhanced by our advanced AI and machine learning, or ML, capabilities, because once a new threat is detected, it can be blocked across our entire customer base within minutes.
Our company supports the following employee resource groups: Women in Zscaler Engage, Asian American Pacific Islander Employees at Zscaler, Black Employees at Zscaler, Latinx and Hispanic at Zscaler, Pride at Zscaler and Veterans at Zscaler.
We recently hired a Head of Diversity, Equity & Inclusion to partner with senior leadership to develop and advance our global DEI strategy. Our company supports the following six employee resource groups: Women in Zscaler Engage, Asian American Pacific Islander Employees at Zscaler, Black Employees at Zscaler, Latinx and Hispanic at Zscaler, Pride at Zscaler and Veterans at Zscaler.
We complement and interoperate with key technology and cloud vendors across major market segments, including software-defined wide area network, or SD-WAN, identity and access management, or IAM, device and endpoint management, as well as SIEM for reporting and analytics.
We complement and interoperate with key technology and cloud vendors across major market segments, including identity and access management, or IAM, device and endpoint management, as well as SIEM for reporting and analytics. Many of these vendors, like us, were developed in the cloud and together provide a foundation for a modern access and security architecture.
We expect we will continue to incur net losses for the foreseeable future. Our Zero Trust Exchange Platform Our Zero Trust Exchange cloud security platform delivers our core products; Zscaler for Users, Zscaler for Workloads and Zscaler for IoT/OT, through the deployment of our comprehensive and integrated solutions, each built natively in the cloud to power digital transformation.
Our Zero Trust Exchange Platform Our Zero Trust Exchange cloud security platform delivers our core products; Zscaler for Users, Zscaler for Workloads and Zscaler for IoT/OT, through the deployment of our comprehensive and integrated solutions, each built natively in the cloud to power digital transformation. 4 Table of Contents Secure Internet and SaaS Access - Zscaler Internet Access Zscaler Internet Access, or ZIA, provides users, workloads, IoT, and OT devices secure access to externally managed applications, including SaaS applications and internet destinations regardless of device, location or network.
Health, Safety and Wellbeing The health and safety of our employees is our top priority. We recognize the need to create a flexible working environment that balances collaboration, innovation, and connectivity with personal preferences for employees to do their best work.
We recognize the need to create a flexible working environment that balances collaboration, innovation, and connectivity with personal preferences for employees to do their best work. We also offer a holistic wellness experience for our employees with “Wellbeing at Z,” our wellness program that supports employees across four pillars: physical, emotional, social, and financial.
Our cloud is distributed across more than 150 data centers on five continents and processes over 240 billion requests per day from users across 185 countries . 8 Table of Contents Our platform is designed to be resilient, redundant and high-performing. It is built as software modules that run on standard x86 platforms without any dependency on custom hardware.
Our cloud platform is protected by more than 430 issued and pending patents in the United States and other countries. Our cloud is distributed across more than 150 data centers on five continents and processes over 320 billion requests per day from users across 185 countries. Our platform is designed to be resilient, redundant and high-performing.
We have over 6,700 customers across all major geographies, with an emphasis on larger organizations, and we currently count over 600 of the Forbes Global 2000 as customers. Our customers span every major industry, including financial services, healthcare, manufacturing, airlines and transportation, conglomerates, consumer goods and retail, media and communications, public sector and education, technology and telecommunications services.
Our customers span every major industry, including financial services, healthcare, insurance, manufacturing, auto, airlines and transportation, conglomerates, consumer goods and retail, media and communications, public sector and education, energy, technology and telecommunications services.
Our principal executive offices are located at 120 Holger Way, San Jose, CA 95134, and our telephone number is (408) 533-0288 . Our website address is www.zscaler.com. Information contained on, or that can be accessed through, our website does not constitute part of this Annual Report on Form 10-K.
Information contained on, or that can be accessed through, our website does not constitute part of this Annual Report on Form 10-K.
This results in reduced cost and complexity, while offering better security and an improved user experience. Our ZPA solution includes broad functionality, which we categorize by the following areas: • Secure Application Access: Our ZPA solution delivers seamless connectivity to internally managed applications and assets whether they are in the cloud, enterprise data center, or both.
Our ZPA solution delivers the same cyberthreat protection and data protection functionality that is applied to internet traffic via our ZIA solution. • Secure Application Access: Our ZPA solution delivers seamless connectivity to internally managed applications and assets whether they are in the cloud, enterprise data center, or both.
We receive feedback on our culture from our employees through multiple surveys throughout the year, including our annual Employee Engagement Survey. In fiscal 2022, 86% of our employees participated in the survey. We found that 87% of responding employees are highly engaged and 94% of responding employees are aligned with our strategic direction.
In our most recent employee engagement survey conducted in fiscal 2023, we found that 88% of responding employees are highly engaged and 92% of responding employees are aligned with our strategic direction.
Our technical teams have access to live and online training resources and participate in frequent company tech talks where training on best practices and latest developments are shared. In 2021, we launched “Zscaler Elevate,” our internal mentorship program to support employee career and personal growth; we now have more than 450 employees engaged as mentors, mentees or both.
In addition, new employees in our customer care and success teams are enrolled in structured sales training to complete internal certifications. Our technical teams have access to live and online training resources and participate in frequent company tech talks where training on best practices and latest developments are shared.
We do this all while optimizing end-to-end user experience with Zscaler Digital Experience, or ZDX, which allows an organization to identify and isolate issues negatively impacting its users. • Zscaler for Workloads – leverages Zscaler’s Zero Trust Exchange to secure workloads, whether in a public cloud or in private data centers, using our cloud-native zero trust access service to provide fast and secure app-to-internet (via ZIA) and app-to-app (via ZPA) connectivity across multi- and hybrid cloud environments, and our Posture Control solutions automatically identify and remediate cloud service, application, and identity misconfigurations for assets deployed in public cloud infrastructure.
In addition to enabling secure access to the internet and internal applications, Zscaler Data Protection™ secures customers’ proprietary data that is traversing the public internet (data-in-motion) and data that is stored in the public cloud applications (data-at-rest). • Zscaler for Workloads – leverages Zscaler’s Zero Trust Exchange to secure workloads, whether in a public cloud or in private data centers, using our cloud-native zero trust access service to provide fast and secure app-to-internet (via ZIA) and app-to-app (via ZPA) connectivity across multi- and hybrid cloud environments.
We will continue to review and invest in programs to provide for the health, safety and well-being of our employees. Corporate Information We were incorporated in the state of Delaware in September 2007 as SafeChannel, Inc., and in August 2008, we changed our name to Zscaler, Inc.
Corporate Information We were incorporated in the state of Delaware in September 2007 as SafeChannel, Inc., and in August 2008, we changed our name to Zscaler, Inc. Our principal executive offices are located at 120 Holger Way, San Jose, CA 95134, and our telephone number is (408) 533-0288 . Our website address is www.zscaler.com.
We understand the importance of human capital so investing in our culture, talent development, compensation and benefits, and diversity and inclusion continues to be a priority. 13 Table of Contents Our Culture Our culture is about creating an environment where a global and diverse workforce can contribute their best work to help our customers and our business succeed.
Our Culture Our culture is about creating an environment where a global and diverse workforce can contribute their best work to help our customers and our business succeed. Zscaler's cultural values are: • Teamwork • Open Communication • Passion • Innovation • Customer Obsession We receive feedback on our culture from our employees through multiple surveys throughout the year.
Removed
We pioneered a unique approach that securely connects users, devices, and applications using business policies, regardless of the network. Our Zero Trust Exchange eliminates the need for traditional on-premises security appliances that are difficult to maintain and require compromises between security, cost and user experience.
Added
Our unique ZPA technology not only provides secure access to applications, but also secures the applications themselves. We do this all while optimizing end-to-end user experience with Zscaler Digital Experience, or ZDX, which allows an organization to identify and isolate issues negatively impacting its users.

… 36 more changes not shown on this page.

Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

118 edited+41 added−18 removed322 unchanged
Biggest changeThe principal factors and uncertainties that make investing in our common stock risky include, among others: • we have a history of losses and may not be able to achieve or sustain profitability in the future; • if organizations do not adopt our cloud platform, our ability to grow our business and operating results may be adversely affected; • if we are unable to attract new customers or our customers do not renew their subscriptions for our services and add additional users and services to their subscriptions, our future results of operations could be harmed; • we face intense and increasing competition and could lose market share to our competitors; • we have experienced rapid revenue and other growth in recent periods, which may not be indicative of our future performance; • our operating results may fluctuate significantly, which could make our future results difficult to predict and could cause our operating results to fall below expectations: • if the delivery of our services to our customers is interrupted or delayed for any reason, our business could suffer; • the actual or perceived failure of our cloud platform to block malware or prevent a security breach or incident could harm our reputation and adversely impact our business; • our business and growth depend in part on the success of our relationships with our channel partners; • if our cloud platform or internal networks, systems or data are or are perceived to have been breached, our solution may be perceived as insecure, our reputation may be damaged and our financial results may be negatively impacted; • we rely on our key technical, sales and management personnel to grow our business, and the loss of one or more key employees or the inability to attract and retain qualified personnel could harm our business; • claims by others that we infringe their proprietary technology or other rights, or other lawsuits asserted against us, could result in significant costs and substantially harm our business; • servicing our debt may require a significant amount of cash, and we may not have sufficient cash flow from our business or the ability to raise funds to pay our substantial debt; and • the impact of the ongoing COVID-19 pandemic, including the resulting global economic disruptions, remains uncertain and may have a material adverse impact on our business. 17 Table of Contents Risks Related to Our Business We have a history of losses and may not be able to achieve or sustain profitability in the future.
Biggest changeThe principal factors and uncertainties that make investing in our common stock risky include, among others: • we have a history of losses and may not be able to achieve or sustain profitability in the future; • if organizations do not adopt our cloud platform, our ability to grow our business and operating results may be adversely affected; • if we are unable to attract new customers or our customers do not renew their subscriptions for our services and add additional users and services to their subscriptions, our future results of operations could be harmed; • we face intense and increasing competition and could lose market share to our competitors; • we have experienced rapid revenue and other growth in recent periods, which may not be indicative of our future performance; • our operating results may fluctuate significantly, which could make our future results difficult to predict and could cause our operating results to fall below expectations; • if the delivery of our services to our customers is interrupted or delayed for any reason, our business would suffer; • the actual or perceived failure of our cloud platform to block malware or prevent a security breach or incident could harm our reputation and adversely impact our business; • our business and growth depend in part on the success of our relationships with our channel partners; • if our cloud platform or internal networks, systems or data are or are perceived to have been breached, our solution may be perceived as insecure, our reputation may be damaged and our financial results may be negatively impacted; • we rely on our key technical, sales and management personnel to grow our business, and the loss of one or more key employees or the inability to attract and retain qualified personnel could harm our business; • claims by others that we infringe their proprietary technology or other rights, or other lawsuits asserted against us, could result in significant costs and substantially harm our business; • If we are unable to effectively manage certain risks and challenges related to our India operations, our business could be harmed; • servicing our debt may require a significant amount of cash, and we may not have sufficient cash flow from our business or the ability to raise funds to pay our substantial debt; and 17 Table of Contents • the impact of global economic disruptions, including as a result of geopolitical uncertainty and instability, inflation, global health crises like the COVID-19 pandemic, and governmental responses thereto, remains uncertain and may have a material adverse impact on our business.
The number of emerging and existing data privacy laws creates the risk that obligations may be interpreted inconsistently between jurisdictions which may generate tension with our efforts to align our practices to comply with our privacy, data protection, and security obligations globally. Many of these laws and regulations impose substantial penalties for noncompliance.
The number of emerging and existing data privacy laws and regulations creates the risk that obligations may be interpreted inconsistently between jurisdictions which may generate tension with our efforts to align our practices to comply with our privacy, data protection, and security obligations globally. Many of these laws and regulations impose substantial penalties for noncompliance.
Risks Related to Our Notes The conditional conversion feature of the Notes, when triggered, may adversely affect our financial condition and operating results. During any period, the conditional conversion feature of the Notes is triggered, holders will be entitled to convert the Notes at any time during specified periods at their option.
Risks Related to the Notes The conditional conversion feature of the Notes, when triggered, may adversely affect our financial condition and operating results. During any period, the conditional conversion feature of the Notes is triggered, holders will be entitled to convert the Notes at any time during specified periods at their option.
Some of the factors that may cause our results of operations to fluctuate from quarter to quarter include: • broad market acceptance and the level of demand for our cloud platform; • our ability to attract new customers, particularly large enterprises; • our ability to retain customers and expand their usage of our platform, particularly our largest customers; • our ability to successfully expand internationally and penetrate key markets; • the effectiveness of our sales and marketing programs; • the length of our sales cycle, including the timing of renewals; • technological changes and the timing and success of new service introductions by us or our competitors or any other change in the competitive landscape of our market; • increases in and timing of operating expenses that we may incur to grow and expand our operations and to remain competitive; • pricing pressure as a result of competition or otherwise; • seasonal buying patterns for IT spending, including the possible slowdown in IT spending due to the recent global economic downturn; • the quality and level of our execution of our business strategy and operating plan; • adverse litigation judgments, settlements or other litigation-related costs; • changes in the legislative or regulatory environment; • the impact and costs related to the acquisition of businesses, talent, technologies or intellectual property rights; 22 Table of Contents • fluctuations in currency exchange rates and changes in the proportion of our revenue and expenses denominated in foreign currencies; • changes in U.S. generally accepted accounting principles; and • general economic conditions in either domestic or international markets, including as a result of geopolitical uncertainty and instability (such as the Russia-Ukraine crisis) and global health crises and pandemics, and governmental responses thereto.
Some of the factors that may cause our results of operations to fluctuate from quarter to quarter include: • broad market acceptance and the level of demand for our cloud platform; • our ability to attract new customers, particularly large enterprises; • our ability to retain customers and expand their usage of our platform, particularly our largest customers; • our ability to successfully expand internationally and penetrate key markets; • the effectiveness of our sales and marketing programs; • the length of our sales cycle, including the timing of renewals; • technological changes and the timing and success of new service introductions by us or our competitors or any other change in the competitive landscape of our market; 22 Table of Contents • increases in and timing of operating expenses that we may incur to grow and expand our operations and to remain competitive; • pricing pressure as a result of competition or otherwise; • seasonal buying patterns for IT spending, including the possible slowdown in IT spending due to the recent global economic downturn; • the quality and level of our execution of our business strategy and operating plan; • adverse litigation judgments, settlements or other litigation-related costs; • changes in the legislative or regulatory environment; • the impact and costs related to the acquisition of businesses, talent, technologies or intellectual property rights; • fluctuations in currency exchange rates and changes in the proportion of our revenue and expenses denominated in foreign currencies; • changes in U.S. generally accepted accounting principles; and • general economic conditions in either domestic or international markets, including as a result of geopolitical uncertainty and instability (such as the Russia-Ukraine crisis) and global health crisis and pandemics, and governmental responses thereto.
Responding to any infringement or noncompliance claim by an open source vendor, regardless of its validity, or discovering open source software code in our platform could harm our business, operating results and financial condition by, among other things: • resulting in time-consuming and costly litigation; • diverting management’s time and attention from developing our business; • requiring us to pay monetary damages or enter into royalty and licensing agreements that we would not normally find acceptable; • causing delays in the deployment of our platform or service offerings to our customers; • requiring us to stop offering certain services on or features of our platform; • requiring us to redesign certain components of our platform using alternative non-infringing or non-open source technology, which could require significant effort and expense; • requiring us to disclose our software source code and the detailed program commands for our software; and • requiring us to satisfy indemnification obligations to our customers. 33 Table of Contents We rely on a limited number of suppliers for certain components of the equipment we use to operate our cloud platform, and any disruption in the availability of these components could delay our ability to expand or increase the capacity of our global data center network or replace defective equipment in our existing data centers.
Responding to any infringement or noncompliance claim by an open source vendor, regardless of its validity, or discovering open source software code in our platform could harm our business, operating results and financial condition by, among other things: • resulting in time-consuming and costly litigation; • diverting management’s time and attention from developing our business; • requiring us to pay monetary damages or enter into royalty and licensing agreements that we would not normally find acceptable; • causing delays in the deployment of our platform or service offerings to our customers; • requiring us to stop offering certain services on or features of our platform; • requiring us to redesign certain components of our platform using alternative non-infringing or non-open source technology, which could require significant effort and expense; • requiring us to disclose our software source code and the detailed program commands for our software; and • requiring us to satisfy indemnification obligations to our customers. 34 Table of Contents We rely on a limited number of suppliers for certain components of the equipment we use to operate our cloud platform, and any disruption in the availability of these components could delay our ability to expand or increase the capacity of our global data center network or replace defective equipment in our existing data centers.
In addition, under Section 382 and 383 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an "ownership change," generally defined as a greater than 50% change (by value) in its equity ownership by "5% shareholders" over a three-year period, the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes, such as research and development tax credits, to offset its post-change income may be limited.
In addition, under Section 382 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an "ownership change," generally defined as a greater than 50% change (by value) in its equity ownership by "5% shareholders" over a three-year period, the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes, such as research and development tax credits, to offset its post-change income may be limited.
Our larger competitors have substantially broader and more diverse product and services offerings, which may allow them to leverage their relationships based on other products or incorporate functionality into existing products to gain business in a manner that discourages users from purchasing our services, including through selling at zero or negative margins, offering concessions, bundling products or maintaining closed technology platforms.
Our larger competitors have substantially broader and more diverse product and services offerings, which may allow them to leverage their relationships based on other products or incorporate functionality into existing products to gain business in a manner that discourages users from purchasing our services, including through selling at zero or negative margins, offering free services and other concessions, bundling products or maintaining closed technology platforms.
These provisions include: • a classified board of directors with three-year staggered terms, which could delay the ability of stockholders to change the membership of a majority of our board of directors; • the ability of our board of directors to issue shares of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer; • the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of our board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors; • a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders; • the requirement that a special meeting of stockholders may be called only by the chairperson of our board of directors, chief executive officer or president (in the absence of a chief executive officer) or a majority vote of our board of directors, which could delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors; • the requirement for the affirmative vote of holders of at least 66 2⁄3% of the voting power of all of the then outstanding shares of the voting stock, voting together as a single class, to amend the provisions of our amended and restated certificate of incorporation relating to the issuance of preferred stock and management of our business or our amended and restated bylaws, which may inhibit the ability of an acquirer to affect such amendments to facilitate an unsolicited takeover attempt; • the ability of our board of directors, by majority vote, to amend our amended and restated bylaws, which may allow our board of directors to take additional actions to prevent an unsolicited takeover and inhibit the ability of an acquirer to amend our amended and restated bylaws to facilitate an unsolicited takeover attempt; and 45 Table of Contents • advance notice procedures with which stockholders must comply to nominate candidates to our board of directors or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of us.
These provisions include: • a classified board of directors with three-year staggered terms, which could delay the ability of stockholders to change the membership of a majority of our board of directors; • the ability of our board of directors to issue shares of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer; • the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of our board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors; • a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders; • the requirement that a special meeting of stockholders may be called only by the chairperson of our board of directors, chief executive officer or president (in the absence of a chief executive officer) or a majority vote of our board of directors, which could delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors; • the requirement for the affirmative vote of holders of at least 66 2⁄3% of the voting power of all of the then outstanding shares of the voting stock, voting together as a single class, to amend the provisions of our amended and restated certificate of incorporation relating to the issuance of preferred stock and management of our business or our amended and restated bylaws, which may inhibit the ability of an acquirer to affect such amendments to facilitate an unsolicited takeover attempt; • the ability of our board of directors, by majority vote, to amend our amended and restated bylaws, which may allow our board of directors to take additional actions to prevent an unsolicited takeover and inhibit the ability of an acquirer to amend our amended and restated bylaws to facilitate an unsolicited takeover attempt; and • advance notice procedures with which stockholders must comply to nominate candidates to our board of directors or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of us.
Factors that could cause fluctuations in the market price of our common stock include the following: • actual or anticipated changes or fluctuations in our operating results; • the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections; • announcements by us or our competitors of new products or new or terminated significant contracts, commercial relationships or capital commitments; • industry or financial analyst or investor reaction to our press releases, other public announcements and filings with the SEC; • rumors and market speculation involving us or other companies in our industry; • price and volume fluctuations in the overall stock market from time to time; • volume fluctuations in the trading of our common stock from time to time; • changes in operating performance and stock market valuations of other technology companies generally, or those in our industry in particular; • the sales of shares of our common stock by us or our stockholders; • issuances of shares of our common stock, whether in connection with an acquisition or upon conversion of some or all of our outstanding Notes; • failure of industry or financial analysts to maintain coverage of us, changes in financial estimates by any analysts who follow our company, or our failure to meet these estimates or the expectations of investors; • actual or anticipated developments in our business or our competitors’ businesses or the competitive landscape generally; • litigation involving us, our industry or both, or investigations by regulators into our operations or those of our competitors; • developments or disputes concerning our intellectual property rights or our solutions, or third-party proprietary rights; 46 Table of Contents • announced or completed acquisitions of businesses or technologies by us or our competitors; • actual or perceived privacy, data protection, or security incidents or breaches; • new laws or regulations or new interpretations of existing laws or regulations applicable to our business and our responses thereto; • any major changes in our management or our board of directors, particularly with respect to Mr.
Factors that could cause fluctuations in the market price of our common stock include the following: • actual or anticipated changes or fluctuations in our operating results; • the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections; • announcements by us or our competitors of new products or new or terminated significant contracts, commercial relationships or capital commitments; • industry or financial analyst or investor reaction to our press releases, other public announcements and filings with the SEC; • rumors and market speculation involving us or other companies in our industry; • price and volume fluctuations in the overall stock market from time to time; • volume fluctuations in the trading of our common stock from time to time; • changes in operating performance and stock market valuations of other technology companies generally, or those in our industry in particular; • the sales of shares of our common stock by us or our stockholders; • issuances of shares of our common stock, whether in connection with an acquisition or upon conversion of some or all of our outstanding Notes; • failure of industry or financial analysts to maintain coverage of us, changes in financial estimates by any analysts who follow our company, or our failure to meet these estimates or the expectations of investors; • actual or anticipated developments in our business or our competitors’ businesses or the competitive landscape generally; • litigation involving us, our industry or both, or investigations by regulators into our operations or those of our competitors; • developments or disputes concerning our intellectual property rights or our solutions, or third-party proprietary rights; • announced or completed acquisitions of businesses or technologies by us or our competitors; • actual or perceived privacy, data protection, or security incidents or breaches; • new laws or regulations or new interpretations of existing laws or regulations applicable to our business and our responses thereto; • any major changes in our management or our board of directors, particularly with respect to Mr.
If we fail to meet or exceed such expectations for these or any other reasons, the market price of our common stock could fall substantially, and we could face costly lawsuits, including securities class action suits. If the delivery of our services to our customers is interrupted or delayed for any reason, our business could suffer.
If we fail to meet or exceed such expectations for these or any other reasons, the market price of our common stock could fall substantially, and we could face costly lawsuits, including securities class action suits. If the delivery of our services to our customers is interrupted or delayed for any reason, our business would suffer.
Any failure or perceived failure by us to comply with applicable laws, regulations, standards or actual or asserted obligations, or any actual or suspected security breach or other security incident, whether or not resulting in unauthorized access to, or acquisition, release or transfer of information relating to individuals or other data, may result in governmental investigations, enforcement actions and other proceedings, private claims and litigation, fines and penalties or adverse publicity, and could cause our customers and prospective customers to lose trust in us, which could have an adverse effect on our reputation and business. 38 Table of Contents We are subject to governmental export and import controls that could impair our ability to compete in international markets and subject us to liability if we are not in full compliance with applicable laws.
Any failure or perceived failure by us to comply with applicable laws, regulations, standards or actual or asserted obligations, or any actual or suspected security breach or other security incident, whether or not resulting in unauthorized access to, or acquisition, release or transfer of information relating to individuals or other data, may result in governmental investigations, enforcement actions and other proceedings, private claims and litigation, fines and penalties or adverse publicity, and could cause our customers and prospective customers to lose trust in us, which could have an adverse effect on our reputation and business. 39 Table of Contents We are subject to governmental export and import controls that could impair our ability to compete in international markets and subject us to liability if we are not in full compliance with applicable laws.
We expect that there will continue to be new proposed laws, regulations and industry standards concerning privacy, data protection, information security, and telecommunications services jurisdictions in which we operate or may operate, and we cannot yet determine the impact such future laws, regulations and standards may have on our business.
We expect that there will continue to be new proposed laws, regulations and industry standards concerning privacy, data protection, cybersecurity, information security, and telecommunications services jurisdictions in which we operate or may operate, and we cannot yet determine the impact such future laws, regulations and standards may have on our business.
Any of the above results could materially and adversely affect our business, financial condition and results of operations. Additionally, with data security a critical competitive factor in our industry, we make public statements in our privacy policies, on our website, and elsewhere describing the security of our platform and the performance of our solutions.
Any of the above results could materially and adversely affect our business, financial condition and results of operations. Additionally, with data security being a critical competitive factor in our industry, we make public statements in our privacy policies, on our website, and elsewhere describing the security of our platform and the performance of our solutions.
We have been advised that, in connection with establishing their initial hedges of the capped call transactions, the Option Counterparties purchased shares of our common stock and/or entered into various derivative transactions with respect to our common stock concurrently with or shortly after the pricing of the Notes. 49 Table of Contents In addition, the Option Counterparties or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions prior to the maturity of the Notes (and are likely to do so following any conversion, repurchase, or redemption of the Notes, to the extent we exercise the relevant election under the capped call transactions).
We have been advised that, in connection with establishing their initial hedges of the capped call transactions, the Option Counterparties purchased shares of our common stock and/or entered into various derivative transactions with respect to our common stock concurrently with or shortly after the pricing of the Notes. 51 Table of Contents In addition, the Option Counterparties or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions prior to the maturity of the Notes (and are likely to do so following any conversion, repurchase, or redemption of the Notes, to the extent we exercise the relevant election under the capped call transactions).
These international operations will require significant management attention and financial resources and are subject to substantial risks, including: • political, economic and social uncertainty or international conflict, such as the Russia-Ukraine crisis; • unexpected costs for the localization of our services, including translation into foreign languages and adaptation for local practices and regulatory requirements; • greater difficulty in enforcing contracts and accounts receivable collection, and longer collection periods; • reduced or uncertain protection for intellectual property rights in some countries; • greater risk of unexpected changes in regulatory practices, tariffs and tax laws and treaties; 39 Table of Contents • greater risk of a failure of foreign employees, partners, distributors and resellers to comply with both U.S. and foreign laws, including antitrust regulations, anti-bribery laws, export and import control laws, and any applicable trade regulations ensuring fair trade practices; • requirements to comply with foreign privacy, data protection, cybersecurity and information security laws and regulations and the risks and costs of noncompliance; • increased expenses incurred in establishing and maintaining office space and equipment for our international operations; • greater difficulty in identifying, attracting and retaining local qualified personnel, and the costs and expenses associated with such activities; • differing employment practices and labor relations issues; • difficulties in managing and staffing international offices and increased travel, infrastructure and legal compliance costs associated with multiple international locations; • fluctuations in exchange rates between the U.S. dollar and foreign currencies in markets where we do business, including the British Pound, Indian Rupee and Euro, and related impact on sales cycles; • the impact of natural disasters and public health pandemics and epidemics, such as the COVID-19 pandemic, on customers, partners, suppliers, employees, travel and the global economy; and • the legal uncertainty in Europe as a result of Brexit.
These international operations will require significant management attention and financial resources and are subject to substantial risks, including: • political, economic and social uncertainty or international conflict, such as the Russia-Ukraine crisis; • unexpected costs for the localization of our services, including translation into foreign languages and adaptation for local practices and regulatory requirements; • greater difficulty in enforcing contracts and accounts receivable collection, and longer collection periods; • reduced or uncertain protection for intellectual property rights in some countries; • greater risk of unexpected changes in regulatory practices, tariffs and tax laws and treaties; 40 Table of Contents • greater risk of a failure of foreign employees, partners, distributors and resellers to comply with both U.S. and foreign laws, including antitrust regulations, anti-bribery laws, export and import control laws, and any applicable trade regulations ensuring fair trade practices; • requirements to comply with foreign privacy, data protection, cybersecurity and information security laws and regulations and the risks and costs of noncompliance; • increased expenses incurred in establishing and maintaining office space and equipment for our international operations; • greater difficulty in identifying, attracting and retaining local qualified personnel, and the costs and expenses associated with such activities; • differing employment practices and labor relations issues; • difficulties in managing and staffing international offices and increased travel, infrastructure and legal compliance costs associated with multiple international locations; • fluctuations in exchange rates between the U.S. dollar and foreign currencies in markets where we do business, including the British Pound, Indian Rupee and Euro, and related impact on sales cycles; and • the impact of natural disasters and public health pandemics and epidemics, such as the COVID-19 pandemic, on customers, partners, suppliers, employees, travel and the global economy.
If we must again increase our use of public cloud infrastructure in the future, our results of operations could be negatively impacted. Our business and growth depend in part on the success of our relationships with our channel partners.
If we must again materially increase our use of public cloud infrastructure in the future, our results of operations could be negatively impacted. Our business and growth depend in part on the success of our relationships with our channel partners.
Though it is difficult to determine what, if any, harm may directly result from any specific interruption or attack, any failure to maintain performance, reliability, security and availability of our platform to the satisfaction of our users may materially harm our reputation and our ability to retain existing customers and attract new customers. 50 Table of Contents We rely on third parties for certain essential financial and operational services, and a failure or disruption in these services could materially and adversely affect our ability to manage our business effectively.
Though it is difficult to determine what, if any, harm may directly result from any specific interruption or attack, any failure to maintain performance, reliability, security and availability of our platform to the satisfaction of our users may materially harm our reputation and our ability to retain existing customers and attract new customers. 52 Table of Contents We rely on third parties for certain essential financial and operational services, and a failure or disruption in these services could materially and adversely affect our ability to manage our business effectively.
Any real or perceived flaws in our cloud platform or any real or perceived security breaches or other security incidents of our customers could result in: • a loss of existing or potential customers or channel partners; • delayed or lost sales and harm to our financial condition and results of operations; • a delay in attaining, or the failure to attain, market acceptance; • the expenditure of significant financial resources in efforts to analyze, correct, eliminate, remediate or work around errors or defects, to address and eliminate vulnerabilities and to address any applicable legal or contractual obligations relating to any actual or perceived security breach or incident; • negative publicity and damage to our reputation and brand; and • legal claims and demands (including for stolen assets or information, repair of system damages, and compensation to customers and business partners), litigation, regulatory inquiries or investigations and other liability.
Any real or perceived flaws in our cloud platform or any real or perceived security breaches or other security incidents of our customers could result in: • a loss of existing or potential customers or channel partners; 25 Table of Contents • delayed or lost sales and harm to our financial condition and results of operations; • a delay in attaining, or the failure to attain, market acceptance; • the expenditure of significant financial resources in efforts to analyze, correct, eliminate, remediate or work around errors or defects, to address and eliminate vulnerabilities and to address any applicable legal or contractual obligations relating to any actual or perceived security breach or incident; • negative publicity and damage to our reputation and brand; and • legal claims and demands (including for stolen assets or information, repair of system damages, and compensation to customers and business partners), litigation, regulatory inquiries or investigations and other liability.
We base our estimates on historical experience and on various other 52 Table of Contents assumptions that we believe to be reasonable under the circumstances, as provided in the section titled "Management’s Discussion and Analysis of Financial Condition and Results of Operations." The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities and equity, and the amount of revenue and expenses that are not readily apparent from other sources.
We base our estimates on historical experience and on various other 54 Table of Contents assumptions that we believe to be reasonable under the circumstances, as provided in the section titled "Management’s Discussion and Analysis of Financial Condition and Results of Operations." The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities and equity, and the amount of revenue and expenses that are not readily apparent from other sources.
Our success will depend in part on our ability to manage this growth effectively, which will require that we continue to improve our administrative, operational, financial and management systems and controls by, among other things: • effectively attracting, retaining, training and integrating, including collaborating with, a large number of new employees; • further improving our key business applications, processes and IT infrastructure, including our data centers, to support our business needs; • enhancing our information and communication systems to ensure that our employees and offices around the world are well coordinated and can effectively communicate with each other and our growing base of channel partners, customers and users; and • appropriately documenting and testing our IT systems and business processes.
Our success will depend in part on our ability to manage this growth effectively, which will require that we continue to improve our administrative, operational, financial and management systems and controls by, among other things: 21 Table of Contents • effectively attracting, retaining, training and integrating, including collaborating with, a large number of new employees; • further improving our key business applications, processes and IT infrastructure, including our data centers, to support our business needs; • enhancing our information and communication systems to ensure that our employees and offices around the world are well coordinated and can effectively communicate with each other and our growing base of channel partners, customers and users; and • appropriately documenting and testing our IT systems and business processes.
The occurrence of any of the foregoing could cause governments and governmental agencies to delay or refrain from purchasing our solutions in the future or otherwise have an adverse effect on our business and operating results. 36 Table of Contents Failure to comply with laws and regulations applicable to our business could subject us to fines and penalties and could also cause us to lose customers in the public sector or negatively impact our ability to contract with the public sector.
The occurrence of any of the foregoing could cause governments and governmental agencies to delay or refrain from purchasing our solutions in the future or otherwise have an adverse effect on our business and operating results. 37 Table of Contents Failure to comply with laws and regulations applicable to our business could subject us to fines and penalties and could also cause us to lose customers in the public sector or negatively impact our ability to contract with the public sector.
Sales to government entities are subject to substantial risks, including the following: • selling to government agencies can be highly competitive, expensive and time-consuming, often requiring significant upfront time and expense without any assurance that such efforts will generate a sale; • U.S. or other government certification requirements applicable to our cloud platform, including the Federal Risk and Authorization Management Program, are often difficult and costly to obtain and maintain and failure to do so will restrict our ability to sell to government customers; • government demand and payment for our services may be impacted by public sector budgetary cycles and funding authorizations; and • governments routinely investigate and audit government contractors’ administrative processes and any unfavorable audit could result in fines, civil or criminal liability, further investigations, damage to our reputation and debarment from further government business.
Sales to government entities are subject to substantial risks, including the following: • selling to government agencies can be highly competitive, expensive and time-consuming, often requiring significant upfront time and expense without any assurance that such efforts will generate a sale; • U.S. or other government certification requirements applicable to our cloud platform, including the Federal Risk and Authorization Management Program, are often difficult and costly to obtain and maintain and failure to do so will restrict our ability to sell to government customers; • government demand and payment for our services may be impacted by public sector budgetary cycles and funding authorizations, including the impacts of possible government shutdowns; and • governments routinely investigate and audit government contractors’ administrative processes and any unfavorable audit could result in fines, civil or criminal liability, further investigations, damage to our reputation and debarment from further government business.
Furthermore, because of the substantial amount of discovery required in connection with patent and other intellectual property rights litigation, there is a risk that some of our confidential information could be compromised by the discovery process. 34 Table of Contents As the number of products and competitors in our market increases and overlaps occur, claims of infringement, misappropriation and other violations of intellectual property rights may increase.
Furthermore, because of the substantial amount of discovery required in connection with patent and other intellectual property rights litigation, there is a risk that some of our confidential information could be compromised by the discovery process. 35 Table of Contents As the number of products and competitors in our market increases and overlaps occur, claims of infringement, misappropriation and other violations of intellectual property rights may increase.
Our business is subject to regulation by various federal, state, local and foreign governmental agencies, including agencies responsible for monitoring and enforcing laws and regulations relating to privacy, data protection and cybersecurity, employment and labor laws, workplace safety, product safety, environmental laws, consumer protection laws, anti-bribery laws, import and export controls, federal securities laws and tax laws and regulations.
Our business is subject to regulation by various federal, state, local and foreign governmental agencies, including agencies responsible for monitoring and enforcing laws and regulations relating to privacy, data protection, information security and cybersecurity, employment and labor laws, workplace safety, product safety, environmental laws, consumer protection laws, anti-bribery laws, import and export controls, federal securities laws and tax laws and regulations.
Such changes to existing standards or changes in their interpretation may have an adverse effect on our reputation, business, financial position and profit, or cause an adverse deviation from our revenue and operating profit target, which may negatively impact our financial results. 53 Table of Contents Item 1B. Unresolved Staff Comments None.
Such changes to existing standards or changes in their interpretation may have an adverse effect on our reputation, business, financial position and profit, or cause an adverse deviation from our revenue and operating profit target, which may negatively impact our financial results. 55 Table of Contents Item 1B. Unresolved Staff Comments None.
Cloud technologies are still evolving, and it is difficult to predict customer demand and adoption rates for our solutions. We believe that our cloud platform offers superior protection to our customers, who are becoming increasingly dependent on the internet as they move their applications and data to the cloud.
Cloud technologies are still evolving, and it remains difficult to predict customer demand and adoption rates for our solutions. We believe that our cloud platform offers superior protection to our customers, who are becoming increasingly dependent on the internet as they move their applications and data to the cloud.
(previously, Websense, Inc.), Netskope, Inc. and Pulse Secure, LLC with point 19 Table of Contents solutions that compete with some of the features of our cloud platform, such as proxy, firewall, CASB, sandboxing and advanced threat protection, data loss prevention, encryption, load balancing and VPN; and • other providers of IT security services that offer, or may leverage related technologies to introduce, products that compete with or are alternatives to our cloud platform.
(previously, Websense, Inc.), Netskope, Inc. and Pulse Secure, LLC with point solutions that compete with some of the features of our cloud platform, such as proxy, firewall, CASB, sandboxing and advanced threat protection, data loss prevention, encryption, load balancing and VPN; and • other providers of IT security services that offer, or may leverage related technologies to introduce, products that compete with or are alternatives to our cloud platform.
We provide service level commitments under our customer contracts. If we fail to meet these contractual commitments, we could be obligated to provide credits for future service and our business could suffer. Our customer agreements contain service level commitments, which contain specifications regarding the availability and performance of our cloud platform.
If we fail to meet these contractual commitments, we could be obligated to provide credits for future service and our business could suffer. Our customer agreements contain service level commitments, which contain specifications regarding the availability and performance of our cloud platform.
Moreover, we may need to expend additional resources to defend our intellectual property 35 Table of Contents rights in these countries, and our inability to do so could impair our business or adversely affect our international expansion.
Moreover, we may need to expend additional resources to defend our intellectual property 36 Table of Contents rights in these countries, and our inability to do so could impair our business or adversely affect our international expansion.
As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and the rules and regulations of The 51 Table of Contents Nasdaq Global Select Market, or Nasdaq.
As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and the rules and regulations of The 53 Table of Contents Nasdaq Global Select Market, or Nasdaq.
These risks include: • competition from companies that traditionally target larger enterprises and that may have pre-existing relationships or purchase commitments from such customers; • increased purchasing power and leverage held by larger customers in negotiating contractual arrangements with us; • more stringent requirements in our support obligations; and • longer sales cycles and the associated risk that substantial time and resources may be spent on a potential customer that elects not to purchase our solutions.
These risks include: 28 Table of Contents • competition from companies that traditionally target larger enterprises and that may have pre-existing relationships or purchase commitments from such customers; • increased purchasing power and leverage held by larger customers in negotiating contractual arrangements with us; • more stringent requirements in our support obligations; and • longer sales cycles and the associated risk that substantial time and resources may be spent on a potential customer that elects not to purchase our solutions.
We also may find it necessary or desirable to join industry or other self-regulatory bodies or other information security or data protection-related organizations that require us to comply with rules pertaining to data protection and information security.
We also may find it necessary or desirable to join industry or other self-regulatory bodies or other cybersecurity or information security or data protection-related organizations that require us to comply with rules pertaining to privacy, data protection, cybersecurity, and information security.
In addition, natural disasters, acts of war, international conflicts, such as the Russia-Ukraine crisis, terrorism and other geo-political unrest or health issues, such as outbreak of pandemic or epidemic disease, such as COVID-19, or fear of such events, could cause disruptions in our or our customers’ businesses, national economies or the world economy as a whole.
In addition, natural disasters, acts of war, international conflicts, such as the Russia-Ukraine crisis, terrorism and other geo-political unrest or health issues, such as an outbreak of a pandemic or epidemic disease, or fear of such events, could cause disruptions in our or our customers’ businesses, national economies or the world economy as a whole.
In addition, large companies with substantial communications infrastructure, such as global telecommunications services provider partners or public cloud providers, could choose to enter the security solutions market.
In addition, large companies with substantial communications infrastructure, such as global telecommunications services provider partners or public cloud providers, have entered or could choose to enter the security solutions market.
Not only does our joint sales approach require additional investment to grow and train our sales force, but we believe that continued growth in our business is dependent upon identifying, developing and maintaining strategic relationships with our existing and potential channel partners, including global systems integrators and regional telecommunications service providers that will in turn drive substantial revenue and provide additional value-added services to our customers.
Not only does our joint sales approach require additional investment to grow and train our sales force, but we believe that continued growth in our business 26 Table of Contents is dependent upon identifying, developing and maintaining strategic relationships with our existing and potential channel partners, including global systems integrators and regional telecommunications service providers that will in turn drive substantial revenue and provide additional value-added services to our customers.
The U.S. federal government, and various state and foreign governments, have adopted or proposed laws and regulations on the collection, distribution, use and storage of information relating to individuals.
The U.S. federal government, and various state and foreign governments, have adopted or proposed laws and regulations on the collection, distribution, use, storage, and other processing of information relating to individuals.
Therefore, we continue to be substantially dependent on our sales force to obtain new customers. Increasing our customer base and achieving broader market acceptance of our cloud platform will depend, to a significant extent, on our ability to expand and further invest in our sales and marketing operations and activities.
Therefore, we continue to be substantially dependent on our sales force to obtain new customers. Increasing our customer base and achieving broader market acceptance of our cloud platform will depend, to a significant extent, on our ability to expand and further invest in our 27 Table of Contents sales and marketing operations and activities.
If we fail to achieve market acceptance of our cloud platform or are unable to keep pace with industry changes, our ability to grow our business and our operating results will be materially and adversely affected. If we are unable to attract new customers, our future results of operations could be harmed.
If we fail to achieve market acceptance of our cloud platform or are unable to keep pace with industry changes, our ability to grow our business and our operating results will be materially and adversely affected. 18 Table of Contents If we are unable to attract new customers, our future results of operations could be harmed.
The regulatory framework for privacy, data protection and security matters are rapidly evolving and are likely to remain volatile for the foreseeable future. Our handling of personal data is subject to various data protection, information security and other telecommunications regulations where we offer our solutions around the world.
The regulatory framework for privacy, data protection and security matters are rapidly evolving and are likely to remain volatile for the foreseeable future. Our handling of personal data is subject to various data protection, cybersecurity, information security and other telecommunications regulations or requirements where we offer our solutions around the world.
If our efforts to expand our relationship with our existing customers are not successful, our business may materially suffer. We face intense and increasing competition and could lose market share to our competitors, which could adversely affect our business, financial condition and results of operations.
If our efforts to expand our relationship with our existing customers are not successful, our business may materially suffer. 19 Table of Contents We face intense and increasing competition and could lose market share to our competitors, which could adversely affect our business, financial condition and results of operations.
ASC 470-20 requires the value of the conversion option of the Notes, representing the equity component, to be recorded as additional paid-in capital within stockholders’ equity in the consolidated balance sheet and as a discount to the Notes, which reduces their initial carrying value.
ASC 470-20 requires the value of the conversion option of the Notes, representing the equity component, to be recorded as additional paid-in capital within stockholders’ equity in the consolidated balance sheet and as a discount to the Notes, which reduces their initial carrying 50 Table of Contents value.
The growth in state sponsored cyber activity, including the increased rate of cyberattacks arising from the Russia-Ukraine crisis and the risk that these cyberattacks could spread globally, showcases the increasing sophistication of cyber 24 Table of Contents threats and could dramatically expand the global threat landscape.
The growth in state sponsored cyber activity, including the increased rate of cyberattacks arising from the Russia-Ukraine crisis and the risk that these cyberattacks could spread globally, showcases the increasing sophistication of cyber threats and could dramatically expand the global threat landscape.
Our competitors or other 30 Table of Contents vendors may refuse to work with us to allow their products to interoperate with our solutions, which could make it difficult for our cloud platform to function properly in customer networks that include these third-party products. We may not deliver or maintain interoperability quickly or cost-effectively, or at all.
Our competitors or other vendors may refuse to work with us to allow their products to interoperate with our solutions, which could make it difficult for our cloud platform to function properly in customer networks that include these third-party products. We may not deliver or maintain interoperability quickly or cost-effectively, or at all.
The success of our cloud platform depends on our continued investment in our research and development organization to increase the reliability, availability and scalability of our existing solutions. The 28 Table of Contents success of any enhancement depends on several factors, including the timely completion and market acceptance of the enhancement.
The success of our cloud platform depends on our continued investment in our research and development organization to increase the reliability, availability and scalability of our existing solutions. The success of any enhancement depends on several factors, including the timely completion and market acceptance of the enhancement.
The following factors, many of which are beyond our control, can affect the delivery and availability of our services and the performance of our cloud: • the development and maintenance of the infrastructure of the internet; • the performance and availability of third-party telecommunications services with the necessary speed, data capacity and security for providing reliable internet access and services; • decisions by the owners and operators of the data centers where our cloud infrastructure is deployed or by global telecommunications service provider partners who provide us with network bandwidth to terminate our contracts, discontinue services to us, shut down operations or facilities, increase prices, change service levels, limit bandwidth, declare bankruptcy or prioritize the traffic of other parties; 23 Table of Contents • the occurrence of earthquakes, floods, fires, pandemics, power loss, system failures, physical or electronic break-ins, acts of war, international conflicts (such as the Russia-Ukraine crisis) or terrorism, human error or interference (including by disgruntled employees, former employees or contractors) and other catastrophic events; • cyberattacks, including denial of service attacks, targeted at us, our data centers, our global telecommunications service provider partners or the infrastructure of the internet; • government action to limit access to the internet; • failure by us to maintain and update our cloud infrastructure to meet our traffic capacity requirements; • errors, defects or performance problems in our software, including third-party software incorporated in our software, which we use to operate our cloud platform; • improper classification of websites by our vendors who provide us with lists of malicious websites; • improper deployment or configuration of our services; • the failure of our redundancy systems, in the event of a service disruption at one of our data centers, to provide failover to other data centers in our data center network; and • the failure of our disaster recovery and business continuity arrangements.
While we do not consider them to have been material, we have experienced, and may in the future experience, service disruptions and other performance problems due to a variety of factors. 23 Table of Contents The following factors, many of which are beyond our control, can affect the delivery and availability of our services and the performance of our cloud: • the development and maintenance of the infrastructure of the internet; • the performance and availability of third-party telecommunications services with the necessary speed, data capacity and security for providing reliable internet access and services; • decisions by the owners and operators of the data centers where our cloud infrastructure is deployed or by global telecommunications service provider partners who provide us with network bandwidth to terminate our contracts, discontinue services to us, shut down operations or facilities, increase prices, change service levels, limit bandwidth, declare bankruptcy or prioritize the traffic of other parties; • the occurrence of earthquakes, floods, fires, pandemics, power loss, system failures, physical or electronic break-ins, acts of war, international conflicts (such as the Russia-Ukraine crisis) or terrorism, human error or interference (including by disgruntled employees, former employees or contractors) and other catastrophic events; • cyberattacks, including denial of service attacks, targeted at us, our data centers, our global telecommunications service provider partners or the infrastructure of the internet; • government action to limit access to the internet; • failure by us to maintain and update our cloud infrastructure to meet our traffic capacity requirements; • errors, defects or performance problems in our software, including third-party software incorporated in our software, which we use to operate our cloud platform; • improper classification of websites by our vendors who provide us with lists of malicious websites; • improper deployment or configuration of our services; • the failure of our redundancy systems, in the event of a service disruption at one of our data centers, to provide failover to other data centers in our data center network; and • the failure of our disaster recovery and business continuity arrangements.
Our competitors and potential competitors include: • independent IT security vendors, such as Check Point Software Technologies Ltd., Fortinet, Inc., Palo Alto Networks, Inc. and Broadcom Inc., which offer a broad mix of network and endpoint security products; • large networking vendors, such as Cisco Systems, Inc. and Juniper Networks, Inc., which offer security appliances and incorporate security capabilities in their networking products; • companies such as Skyhigh Security (previously McAfee Enterprise), Trellix (a combination of McAfee Enterprise and FireEye, Inc.), Forcepoint Inc.
Our competitors and potential competitors include: • independent IT security vendors, such as Check Point Software Technologies Ltd., Fortinet, Inc., Palo Alto Networks, Inc. and Broadcom Inc., which offer a broad mix of network and endpoint security products; • large networking and other vendors, such as Cisco Systems, Inc., Microsoft Corporation and Juniper Networks, Inc., which offer security appliances and/or incorporate security capabilities in their networking products and other services; • companies such as Skyhigh Security (previously McAfee Enterprise), Trellix (a combination of McAfee Enterprise and FireEye, Inc.), Forcepoint Inc.
Under Financial Accounting Standards Board Accounting Standards Codification 470-20, Debt with Conversion and Other Options, or ASC 470-20, an entity must separately account for the liability and equity components of convertible debt instruments (such as the Notes) that may be settled entirely or partially in cash upon conversion, in a manner that reflects the issuer’s non-convertible debt interest cost.
Under Financial Accounting Standards Board ( "FASB") issued Accounting Standard Update ("ASU") Standards Codification 470-20, Debt with Conversion and Other Options, or ASC 470-20, an entity must separately account for the liability and equity components of convertible debt instruments (such as the Notes) that may be settled entirely or partially in cash upon conversion, in a manner that reflects the issuer’s non-convertible debt interest cost.
In addition, the impact of economic conditions, including the ongoing impact to the global and U.S. economies as a result of COVID-19, international conflicts or the increasing effects of inflation, could materially and adversely affect our business, operating results and financial condition in a number of ways, including by reducing sales, lengthening sales cycles and lowering prices for our services.
In addition, the impact of macroeconomic conditions, including the ongoing impact to global and U.S. economies as a result of COVID-19 or other widespread pandemics, international conflicts or the increasing effects of inflation, could materially and adversely affect our business, operating results and financial condition in a number of ways, including by reducing sales, lengthening sales cycles and lowering prices for our services.
In addition, the stock prices of many companies in the technology industry have declined significantly after 47 Table of Contents those companies have failed to meet, or significantly exceed, the financial guidance publicly announced by the companies or the expectations of analysts.
In addition, the stock prices of many companies in the technology industry have declined significantly after those companies have failed to meet, or significantly exceed, the financial guidance publicly announced by the companies or the expectations of analysts.
During the three months ended July 31, 2022, the conditions allowing holders of the Notes to convert was not met.
During the three months ended July 31, 2023, the conditions allowing holders of the Notes to convert was not met.
As of July 31, 2022, our executive officers, directors, current 5% or greater stockholders and affiliated entities together beneficially owned approxim ately 50.5% of o ur common stock outstanding with Jay Chaudhry, our chief executive officer and chairman of our board of directors, and his affiliates beneficially owning approxi mately 18.8% of ou r common stock.
As of July 31, 2023, our executive officers, directors, current 5% or greater stockholders and affiliated entities together beneficially owned approxim ately 44.8% of o ur common stock outstanding with Jay Chaudhry, our chief executive officer and chairman of our board of directors, and his affiliates beneficially owning approxi mately 18.3% of ou r common stock.
Moreover, we cannot assure you that the anticipated benefits of any acquisition or investment would be realized or that we would not be exposed to unknown liabilities.
Any acquisition or investment could expose us to unknown liabilities. Moreover, we cannot assure you that the anticipated benefits of any acquisition or investment would be realized or that we would not be exposed to unknown liabilities.
Our ability to achieve revenue growth in the future will depend in large part on our success in maintaining successful relationships 26 Table of Contents with our channel partners, identifying additional channel partners and training our channel partners to independently sell and deploy our platform.
Our ability to achieve revenue growth in the future will depend in large part on our success in maintaining successful relationships with our channel partners, identifying additional channel partners and training our channel partners to independently sell and deploy our platform.
Our customer retention and expansion may decline or fluctuate as a result of a number of factors, including our customers’ satisfaction with our services, our prices and pricing plans, our customers’ spending levels, decreases in the number of users to which our customers deploy our solutions, mergers and acquisitions involving our customers, competition and deteriorating general economic conditions.
Our customer retention and expansion may decline or fluctuate as a result of a number of factors, including our customers’ satisfaction with our services, our prices and pricing plans, our customers’ spending levels, decreases in the number of users to which our customers deploy our solutions, mergers and acquisitions involving our customers, competition, deteriorating general economic conditions which may result in reductions in IT budgets and lower employee headcounts.
Any real or perceived security breaches or other security incidents that we suffer with regard to our platform, systems, networks or data, including any such actual or perceived security breaches or security incidents that result, or are believed to result, in actual or perceived breaches of our customers’ networks or systems, could result in: • the expenditure of significant financial resources in efforts to analyze, correct, eliminate, remediate or work around errors or defects, to address and eliminate vulnerabilities and to address any applicable legal or contractual obligations relating to any actual or perceived security breach or other security incident; • negative publicity and damage to our reputation, brand, and market position; • harm to our relationships with, and a loss of, existing or potential customers or channel partners; • delayed or lost sales and harm to our financial condition and results of operations; • a delay in attaining, or the failure to attain, market acceptance; and • legal claims and demands (including for stolen assets or information, repair of system damages and compensation to customers and business partners), litigation, regulatory inquiries or investigations and other liability.
Geo-political factors including international conflicts, like the Russia-Ukraine crisis, may increase the risk of such cyberattacks. 30 Table of Contents Any real or perceived security breaches or other security incidents that we suffer with regard to our platform, systems, networks or data, including any such actual or perceived security breaches or security incidents that result, or are believed to result, in actual or perceived breaches of our customers’ networks or systems, could result in: • the expenditure of significant financial resources in efforts to analyze, correct, eliminate, remediate or work around errors or defects, to address and eliminate vulnerabilities and to address any applicable legal or contractual obligations relating to any actual or perceived security breach or other security incident; • negative publicity and damage to our reputation, brand, and market position; • harm to our relationships with, and a loss of, existing or potential customers or channel partners; • delayed or lost sales and harm to our financial condition and results of operations; • a delay in attaining, or the failure to attain, market acceptance; and • legal claims and demands (including for stolen assets or information, repair of system damages and compensation to customers and business partners), litigation, regulatory inquiries or investigations and other liability.
These fluctuations could cause you to lose all or part of your investment in our common stock.
These fluctuations could cause you to lose all or part of your 47 Table of Contents investment in our common stock.
For example, sales through our top five channel partners and their affiliates, in aggregate, represented 28% of our revenue for fiscal 2022, 34% of our revenue for fiscal 2021 and 40% of our revenue for fiscal 2020.
For example, sales through our top five channel partners and their affiliates, in aggregate, represented 26% of our revenue for fiscal 2023, 28% of our revenue for fiscal 2022 and 34% of our revenue for fiscal 2021.
Future acquisitions, strategic investments, partnerships or alliances could be difficult to identify and integrate, divert the attention of key management personnel, disrupt our business, dilute stockholder value and adversely affect our operating results, financial condition and prospects. Our business strategy includes acquiring other complementary solutions, technologies or businesses.
Furthermore, our state carryforwards may be subject to similar and additional limitations. Future acquisitions, strategic investments, partnerships or alliances could be difficult to identify and integrate, divert the attention of key management personnel, disrupt our business, dilute stockholder value and adversely affect our operating results, financial condition and prospects. Our business strategy includes acquiring other complementary solutions, technologies or businesses.
In addition, we believe that our corporate culture has been a contributor to our success, which we believe fosters innovation, teamwork and an emphasis on customer-focused results. We also believe that our culture creates an environment that drives and perpetuates our strategy and cost-effective distribution approach. As we grow, we may find it difficult to maintain our corporate culture.
In addition, we believe that our corporate culture has been a contributor to our success, which we believe fosters innovation, teamwork and an emphasis on customer-focused results. We also believe that our culture creates an environment that drives and perpetuates our strategy and cost-effective distribution approach.
Our business and operating results may be 27 Table of Contents harmed if our efforts do not generate a correspondingly significant increase in revenue.
Our business and operating results may be harmed if our efforts do not generate a correspondingly significant increase in revenue.
If we fail to maintain compatibility of our cloud platform with our customers’ network and security infrastructures, our customers may not be able to fully utilize our solutions, and we may, among other consequences, lose or fail to increase our market share and experience reduced demand for our services, which would materially harm our business, operating results and financial condition.
If we fail to maintain compatibility of our cloud platform with our customers’ network and security infrastructures, our customers may not be able to fully utilize our solutions, and we may, among other consequences, lose or fail to increase our market share and experience reduced demand for our services, which would materially harm our business, operating results and financial condition. 31 Table of Contents We provide service level commitments under our customer contracts.
Our competitors may be successful in convincing IT decision makers that legacy appliance-based security products or hybrid security cloud solutions based on legacy technology are sufficient to meet their security needs and provide security performance that competes with our cloud platform. In addition, our competitors may develop cloud-based solutions with architectures similar to our products.
Our competitors may be successful in convincing IT decision makers that legacy appliance-based security products or hybrid security cloud solutions based on legacy technology are sufficient to meet their security needs and provide security 20 Table of Contents performance that competes with our cloud platform.
As of August 1, 2022, the adoption of this new standard resulted in an increase of $169.9 million to the carrying amount of the convertible senior notes, a decrease of $273.7 million to additional paid-in capital and a cumulative-effect adjustment of $103.8 million to accumulated deficit. The capped call transactions may affect the value of our common stock.
As of August 1, 2022, the adoption of this new standard resulted in an increase of $169.9 million to the carrying amount of the convertible senior Notes, a decrease of $273.7 million to additional paid-in capital and a cumulative-effect adjustment of $103.8 million to accumulated deficit.
We derived approximately 51%, 51% and 51% of our revenue from our international customers in fiscal 2022, fiscal 2021 and fiscal 2020, respectively. As of July 31, 2022, approximately 55% of our full-time employees were located outside of the United States.
We derived approximately 50%, 51% and 51% of our revenue from our international customers in each of fiscal 2023, fiscal 2022 and fiscal 2021. As of July 31, 2023, approximately 61% of our full-time employees were located outside of the United States.
Acquisitions may also disrupt our ongoing business, divert our resources and require significant management attention that would otherwise be available for development of our business. We may not successfully evaluate or utilize the acquired technology or personnel, or accurately forecast the financial impact of an acquisition transaction, including accounting charges. Any acquisition or investment could expose us to unknown liabilities.
Acquisitions may also disrupt our ongoing business, divert our resources and require significant management attention that would otherwise be available for development of our business. We may not successfully evaluate 45 Table of Contents or utilize the acquired technology or personnel, or accurately forecast the financial impact of an acquisition transaction, including accounting charges.
This will further eliminate the need for amortization of the debt discount as interest expense and the portion of the issuance costs initially allocated to equity will be classified to debt and amortized as interest expense.
This further eliminated the need for amortization of the debt discount as interest expense and the portion of the issuance costs initially allocated to equity is now classified as debt and amortized as interest expense.
In addition, numerous other factors, many of which are out of our control, may now or in the future impact our ability to add new customers, including potential customers’ commitments to legacy IT security vendors and products, real or perceived switching costs, competition from hybrid or cloud security products, our failure to expand, retain and motivate our sales and marketing personnel, our failure to develop or expand relationships with our channel partners or to attract new channel partners, failure by us to help our customers to successfully deploy our cloud platform, negative media or industry or financial analyst commentary regarding us or our solutions, litigation and deteriorating general economic conditions, including as a result of COVID-19 and increased inflation, which has disproportionately affected certain of the industries and markets which we serve, such as transportation, hospitality, leisure and retail.
In addition, numerous other factors, many of which are out of our control, may now or in the future impact our ability to add new customers, including potential customers’ commitments to legacy IT security vendors and products, real or perceived switching costs, competition from hybrid or cloud security products, our failure to expand, retain and motivate our sales and marketing personnel, our failure to develop or expand relationships with our channel partners or to attract new channel partners, failure by us to help our customers to successfully deploy our cloud platform, negative media or industry or financial analyst commentary regarding us or our solutions, or similar solutions offered by our competitors, litigation and deteriorating general economic conditions.
As a 25 Table of Contents result, we may face claims, including claims of unfair or deceptive trade practices, brought by the U.S. Federal Trade Commission, state, local, or foreign regulators, and private litigants.
As a result, we may face claims, including claims of unfair or deceptive trade practices alleging these statements are not accurate, brought by the U.S. Federal Trade Commission, state, local, or foreign regulators, and private litigants.
These laws and regulations impose added costs on our business, and failure to comply with these or other applicable regulations and requirements could lead to claims for damages from our channel partners or customers, penalties, termination 37 Table of Contents of contracts, loss of exclusive rights in our intellectual property and temporary suspension or permanent debarment from government contracting.
Any of these outcomes could have a material adverse effect on our revenue, operating results, financial condition and prospects. 38 Table of Contents These laws and regulations impose added costs on our business, and failure to comply with these or other applicable regulations and requirements could lead to claims for damages from our channel partners or customers, penalties, termination of contracts, loss of exclusive rights in our intellectual property and temporary suspension or permanent debarment from government contracting.
Accordingly, we report lower net income or higher net loss in our financial results because ASC 470-20 requires interest to include both the current period’s accretion of the debt discount and the instrument’s coupon interest, which could adversely affect our reported or future financial results, the trading price of our common stock and the trading price of the Notes.
Accordingly, we report lower net income or higher net loss in our financial results because ASC 470-20 requires interest to include both the current period’s accretion of the debt discount and the instrument’s coupon interest.
While we expect to continue to expand our operations and to increase our headcount significantly in the future, both domestically and internationally, our growth may not be sustainable.
While we expect to continue to expand our operations and to increase our headcount significantly in the future, both domestically and internationally, our growth may not be sustainable and may not be sufficient to achieve and sustain profitability, as we also expect our costs to increase in future periods.
These challenges related to acquisitions or investments could adversely affect our business, operating results, financial condition and prospects. The impact of the ongoing COVID-19 pandemic, including the resulting global economic disruptions, remains uncertain at this time, and it may have a material adverse impact on our business, results of operations, financial condition, liquidity and cash flows.
These challenges related to acquisitions or investments could adversely affect our business, operating results, financial condition and prospects. Global health crises, like the COVID-19 pandemic, and associated global economic disruptions may have a material adverse impact on our business, results of operations, financial condition, liquidity and cash flows.
This could have an adverse effect on our business, operating results and financial condition. Sales of substantial amounts of our common stock in the public markets, or the perception that they might occur, could reduce the price that our common stock might otherwise attain and may dilute your voting power and your ownership interest in us.
Sales of substantial amounts of our common stock in the public markets, or the perception that they might occur, could reduce the price that our common stock might otherwise attain and may dilute your voting power and your ownership interest in us.
These competitive pressures in our market or our failure to compete effectively may result in price reductions, fewer orders, reduced revenue and gross margins, increased net losses and loss of market share.
These competitive pressures in our market or our failure to compete effectively may result in price reductions, fewer orders, reduced revenue and gross margins, increased net losses and loss of market share. Any failure to meet and address these factors could materially harm our business and operating results.
Governments are raising interest rates and implementing fiscal policy interventions in response to high levels of inflation. Even if these interventions lower inflation, they may also reduce economic growth rates, create recessions and increase unemployment rates. This could have an adverse effect on our consolidated financial condition and results of operations.
Even if these interventions lower inflation, they may also reduce economic growth rates, create recessions and increase unemployment rates. This could have an adverse effect on our consolidated financial condition and results of operations.
Our cloud platform is complex and may contain performance issues that are not detected until after its deployment. We also provide frequent solution updates and fundamental enhancements, which increase the possibility of errors, and our reporting, tracking, monitoring and quality assurance procedures may not be sufficient to ensure we detect any such defects in a timely manner.
We also provide frequent solution updates and fundamental enhancements, which increase the possibility of errors, and our reporting, tracking, monitoring and quality assurance procedures may not be sufficient to ensure we detect any such defects in a timely manner.
The amount of taxes we pay in different jurisdictions may depend on the application of the tax laws of the various jurisdictions, 42 Table of Contents including the United States, to our international business activities, changes in tax rates, new or revised tax laws or interpretations of existing tax laws and policies, global minimum taxes (such as the framework agreed to by members of the Organization for Economic Cooperation and Development in 2022), and our ability to operate our business in a manner consistent with our corporate structure and intercompany arrangements.
The amount of taxes we pay in different jurisdictions may depend on the application of the tax laws of the various jurisdictions, including the United States, to our international business activities, changes in tax rates, new or revised tax laws or interpretations of existing tax laws and policies, and our ability to operate our business in a manner consistent with our corporate structure and intercompany arrangements.
In addition, even if holders do not elect to convert their Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital. 48 Table of Contents The accounting method for convertible debt securities that may be settled in cash, such as the Notes, could have a material effect on our reported financial results.
In addition, even if holders do not elect to convert their Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.
Part of our business strategy is to primarily focus on our long-term growth. As a result, our profitability may be lower in the near term than it would be if our strategy were to maximize short-term profitability.
As a result, our profitability may be lower in the near term than it would be if our strategy were to maximize short-term profitability.
If our efforts to attract new customers are not successful, our revenue and rate of revenue growth may decline, we may not achieve profitability and our future results of operations could be materially harmed. 18 Table of Contents If our customers do not renew their subscriptions for our services and add additional users and services to their subscriptions, our future results of operations could be harmed.
If our efforts to attract new customers are not successful, our revenue and rate of revenue growth may decline, we may not achieve profitability and our future results of operations could be materially harmed.

… 97 more changes not shown on this page.

Item 2. Properties

Properties — owned and leased real estate

2 edited+0 added−0 removed3 unchanged
Biggest changeWhile we believe that our facilities are adequate to meet our needs for the immediate futur e, we continue to evaluate our real estate needs in light of the COVID-19 pandemic and believe, should it be needed, suitable additional space will be available to accommodate our operations.
Biggest changeWe believe that our facilities are adequate to meet our needs for the immediate futur e and that, should it be needed, suitable additional space will be available to accommodate our operations.
We also maintain offices elsewhere in the United States, including in Alpharetta, Georgia; Burlington, Massachusetts; Boston, Massachusetts; Plano, Texas; Raleigh, North Carolina; and Tysons, Virginia, as well as multiple locations internationally, including in Australia, Austria, Canada, Costa Rica, France, Germany, India, Japan, Netherlands, Singapore, Spain, Sweden, Switzerland, Israel and the United Kingdom.
We also maintain offices elsewhere in the United States, including in Alpharetta, Georgia; Burlington, Massachusetts; Boston, Massachusetts; Plano, Texas; Raleigh, North Carolina; McLean, Virginia, and Bellevue, Washington, as well as multiple locations internationally, including in Australia, Austria, Canada, Costa Rica, France, Germany, India, Israel, Japan, Netherlands, Singapore, Spain, Sweden, Switzerland and the United Kingdom.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

1 edited+0 added−0 removed0 unchanged
Biggest changeItem 3. Legal Proceedings The information called for by this Item is incorporated herein by reference to Item 8. "Financial Statements and Supplementary Data," Note 11, Commitments and Contingencies, of the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Biggest changeItem 3. Legal Proceedings The information called for by this Item is incorporated herein by reference to Item 8. "Financial Statements and Supplementary Data," Note 12, Commitments and Contingencies, of the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

5 edited+2 added−6 removed3 unchanged
Biggest changeWe have presented below the cumulative total return to our stockholders between March 16, 2018 (the date our common stock commenced trading on the Nasdaq) through July 31, 2022 in comparison to the Standard & Poor's 500 Index and Standard & Poor Information Technology Index.
Biggest changeThis performance graph compares the cumulative total return to our stockholders to the Standard & Poor's 500 Index and Standard & Poor Information Technology Index for the five years ended July 31, 2023.
Securities Authorized for Issuance under Equity Compensation Plans The information required by this item with respect to our equity compensation plans is incorporated by reference to our Proxy Statement for the 2022 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days of the fiscal year ended July 31, 2022.
Securities Authorized for Issuance under Equity Compensation Plans The information required by this item with respect to our equity compensation plans is incorporated by reference to our Proxy Statement for the 2023 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days of the fiscal year ended July 31, 2023.
All values assume a $100 initial investment and data for the Standard & Poor's 500 Index and Standard & Poor Information Technology Index assume reinvestment of dividends. The comparisons are based on historical data and are not indicative of, nor intended to forecast, the future performance of our common stock.
All values assume a $100 initial investment and data for the Standard & Poor's 500 Index and Standard & Poor Information Technology Index assume 57 Table of Contents reinvestment of dividends. The comparisons are based on historical data and are not indicative of, nor intended to forecast, the future performance of our common stock.
Holders of Record As of July 31, 2022, we had 60 holders of record of our common stock. The actual number of stockholders is greater than this number of record holders and includes stockholders who are beneficial owners but whose shares are held in street name by brokers and other nominees.
Holders of Record As of July 31, 2023, we had 58 holders of record of our common stock. The actual number of stockholders is greater than this number of record holders and includes stockholders who are beneficial owners but whose shares are held in street name by brokers and other nominees.
(b) Issuer Purchases of Equity Securities None. 55 Table of Contents Stock Performance Graph This performance graph shall not be deemed "soliciting material" or to be "filed" with the SEC for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of Zscaler, Inc. under the Securities Act or the Exchange Act.
Stock Performance Graph This performance graph shall not be deemed "soliciting material" or to be "filed" with the SEC for purposes of the Exchange Act, or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of Zscaler, Inc. under the Securities Act or the Exchange Act.
Removed
Recent Sales of Unregistered Equity Securities and Use of Proceeds (a) Sale of Unregistered Equity Securities In connection with a business acquisition completed during the three months ended July 31, 2022, we agreed to issue a total of 105,568 shares of our common stock as consideration for certain key employees. These awards are subject to time-based vesting.
Added
Recent Sales of Unregistered Equity Securities and Use of Proceeds (a) Sale of Unregistered Equity Securities None. (b) Use of Proceeds None. (c) Issuer Purchases of Equity Securities None.
Removed
The foregoing transaction did not involve any underwriters, any underwriting discounts or commissions, or any public offering.
Added
Company/Index July 31, 2018 (*) July 31, 2019 July 31, 2020 July 31, 2021 July 31, 2022 July 31, 2023 Zscaler, Inc. $ 100.00 $ 238.66 $ 367.74 $ 668.11 $ 439.14 $ 454.21 S&P 500 Index $ 100.00 $ 107.99 $ 120.90 $ 164.96 $ 157.31 $ 177.78 S&P 500 Information Technology Index $ 100.00 $ 115.72 $ 160.75 $ 225.10 $ 212.69 $ 269.79 _____ (*) Base period. 58 Table of Contents
Removed
We believe the offer, sale, and issuance of the above securities was exempt from registration under the Securities Act of 1933, as amended (the “Act”) by virtue of Section 4(a)(2) of the Act, because the issuance of securities to the recipients did not involve a public offering.
Removed
The recipients of the securities in this transaction represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were placed upon the securities issued in this transaction.
Removed
All recipients had adequate access, through their relationships with us or otherwise, to information about us. The issuance of these securities was made without any general solicitation or advertising.
Removed
Company/Index March 16, 2018 (*) July 31, 2018 July 31, 2019 July 31, 2020 July 31, 2021 July 31, 2022 Zscaler, Inc. $ 100.00 $ 107.00 $ 255.36 $ 393.48 $ 714.88 $ 469.88 S&P 500 Index $ 100.00 $ 104.56 $ 112.91 $ 126.41 $ 172.48 $ 164.48 S&P 500 Information Technology Index $ 100.00 $ 105.06 $ 121.58 $ 168.89 $ 236.49 $ 223.46 _____ (*) Base period. 56 Table of Contents

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

108 edited+26 added−19 removed102 unchanged
Biggest changeWe are currently assessing the impact of the provision; however, a material impact to cash taxes is not expected due to available net operating losses and tax credits. 66 Table of Contents Results of Operations The following table sets forth our results of operations for the periods presented: Year Ended July 31, 2022 2021 2020 (in thousands) Revenue $ 1,090,946 $ 673,100 $ 431,269 Cost of revenue (1)(2) 242,282 150,317 95,733 Gross profit 848,664 522,783 335,536 Operating expenses: Sales and marketing (1)(2) 735,219 459,407 277,981 Research and development (1)(2) 289,139 174,653 97,879 General and administrative (1)(3)(4) 151,735 96,535 73,632 Total operating expenses 1,176,093 730,595 449,492 Loss from operations (327,429) (207,812) (113,956) Interest income 4,586 2,812 6,477 Interest expense (5) (56,579) (53,364) (5,025) Other income (expense), net (4,208) 1,186 (224) Loss before income taxes (383,630) (257,178) (112,728) Provision for income taxes 6,648 4,851 2,388 Net loss $ (390,278) $ (262,029) $ (115,116) _____ (1) Includes stock-based compensation expense and related payroll taxes as follows: Cost of revenue $ 25,292 $ 15,272 $ 7,851 Sales and marketing 202,211 144,273 71,468 Research and development 123,422 73,238 31,937 General and administrative 79,095 45,779 18,380 Total $ 430,020 $ 278,562 $ 129,636 (2) Includes amortization expense of acquired intangible assets as follows: Cost of revenue $ 7,975 $ 6,468 $ 2,030 Sales and marketing 704 327 74 Research and development 331 — 1,280 Total $ 9,010 $ 6,795 $ 3,384 (3) Includes asset impairment related to facility exit as follows: $ — $ 416 $ 746 (4) Includes litigation-related expenses as follows: $ — $ — $ 18,356 (5) Includes amortization of debt discount and issuance costs as follows: $ 55,141 $ 51,923 $ 4,885 67 Table of Contents The following table sets forth our results of operations for the periods presented as a percentage of our revenue: Year Ended July 31, 2022 2021 2020 Revenue 100% 100% 100% Cost of revenue 22 22 22 Gross margin 78 78 78 Operating expenses Sales and marketing 67 68 64 Research and development 27 26 23 General and administrative 14 15 17 Total operating expenses 108 109 104 Operating margin (30) (31) (26) Interest income — 1 1 Interest expense (5) (8) (1) Other income (expense), net — — — Loss before income taxes (35) (38) (26) Provision for income taxes 1 1 1 Net loss (36)% (39)% (27)% Comparison of Fiscal 2022 and Fiscal 2021 Revenue Year Ended July 31, Change 2022 2021 $ % (in thousands) Revenue $ 1,090,946 $ 673,100 $ 417,846 62 % Revenue increased by $417.8 million, or 62%, in fiscal 2022, compared to fiscal 2021.
Biggest changeResults of Operations The following tables set forth our results of operations for the periods presented in dollars and as a percentage of our revenue: Year Ended July 31, 2023 2022 2021 (in thousands) Revenue $ 1,616,952 $ 1,090,946 $ 673,100 Cost of revenue (1)(2) 362,832 242,282 150,317 Gross profit 1,254,120 848,664 522,783 Operating expenses: Sales and marketing (1)(2) 953,864 735,219 459,407 Research and development (1)(2) 349,735 289,139 174,653 General and administrative (1)(3) 177,544 151,735 96,535 Restructuring and other charges (1) 7,600 — — Total operating expenses 1,488,743 1,176,093 730,595 Loss from operations (234,623) (327,429) (207,812) Interest income 60,462 4,586 2,812 Interest expense (4)(5) (6,541) (56,579) (53,364) Other income (expense), net (1,862) (4,208) 1,186 Loss before income taxes (182,564) (383,630) (257,178) Provision for income taxes 19,771 6,648 4,851 Net loss $ (202,335) $ (390,278) $ (262,029) _____ (1) Includes stock-based compensation expense and related payroll taxes as follows: Cost of revenue $ 40,297 $ 25,292 $ 15,272 Sales and marketing 222,280 202,211 144,273 Research and development 121,151 123,422 73,238 General and administrative 73,051 79,095 45,779 Restructuring and other charges 1,036 — — Total $ 457,815 $ 430,020 $ 278,562 69 Table of Contents (2) Includes amortization expense of acquired intangible assets as follows: Cost of revenue $ 9,574 $ 7,975 $ 6,468 Sales and marketing 773 704 327 Research and development 713 331 — Total $ 11,060 $ 9,010 $ 6,795 (3) Includes asset impairment related to facility exit as follows: $ — $ — $ 416 (4) Includes amortization of debt discount and issuance costs as follows: $ 3,894 $ 55,141 $ 51,923 (5) Effective August 1, 2022, we adopted ASU 2020-06 using the modified retrospective method under which prior period amounts have not been adjusted.
In the event we determine that we will be able to realize all or part of our net deferred tax assets in the future, the valuation allowance will be reversed in the period in which we make such determination.
In the event we determine that we will be able to realize all or part of our net deferred tax assets in the future, the valuation allowance will be reversed in the period in which we make such determination.
Our cash equivalents and investments consist of highly liquid investments in money market funds, U.S. treasury securities, U.S. government agency securities and corporate debt securities. In June 2020, we completed the private offering of our Notes with an aggregate principal amount of $1,150.0 million.
Our cash equivalents and investments consist of highly liquid investments in money market funds, U.S. treasury securities, U.S. government agency securities and corporate debt securities. In June 2020, we completed the private offering of the Notes with an aggregate principal amount of $1,150.0 million.
In connection with the Notes, we entered into capped call transactions which are expected to reduce the potential dilution of our common stock upon any conversion of the Notes and/or offset any cash payments we could be required to make in excess of the principal amount of converted Notes.
In connection with the Notes, we entered into the Capped Call transactions which are expected to reduce the potential dilution of our common stock upon any conversion of the Notes and/or offset any cash payments we could be required to make in excess of the principal amount of converted Notes.
Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price, or SSP. 5) Recognize revenue when or as we satisfy a performance obligation Revenue is recognized at the time the related performance obligation is satisfied by transferring the promised service to a customer.
Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price ("SSP"). 5) Recognize revenue when or as we satisfy a performance obligation Revenue is recognized at the time the related performance obligation is satisfied by transferring the promised service to a customer.
Gross Profit and Gross Margin Gross profit, or revenue less cost of revenue, and gross margin, or gross profit as a percentage of revenue, have been and will continue to be affected by various factors, including the timing of our acquisition of new customers and our renewals of and follow-on sales to existing customers, the average sales price of our services, mix of services offered in our solutions, including new product introductions, the data center and bandwidth costs associated with operating our cloud platform, the extent to which we expand our customer support and cloud operations organizations and the extent to which we can increase 64 Table of Contents the efficiency of our technology, infrastructure and data centers through technological improvements.
Gross Profit and Gross Margin Gross profit, or revenue less cost of revenue, and gross margin, or gross profit as a percentage of revenue, have been and will continue to be affected by various factors, including the timing of our acquisition of new customers and our renewals of and follow-on sales to existing customers, the average sales price of our services, mix of services offered in our solutions, including new product introductions, the data center and bandwidth costs associated with operating our cloud platform, the extent to which we expand our customer support and cloud operations organizations and the extent to which we can increase 66 Table of Contents the efficiency of our technology, infrastructure and data centers through technological improvements.
Costs to Obtain and Fulfill a Contract We capitalize sales commissions 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 on the consolidated balance sheets.
Costs to Obtain and Fulfill a Contract We capitalize sales commissions and associated payroll taxes paid to sales personnel that are incremental to the acquisition of channel partner and direct customer contracts. These costs are recorded as deferred contract acquisition costs on the consolidated balance sheets.
For example, a contract for $3.0 million with a contractual term of three years would have ARR of $1.0 million as long as our customer uses our cloud platform. Investing in Business Growth Since our founding, we have invested significantly in growing our business.
For example, a contract for $3.0 million with a contractual term of three years would have an ARR of $1.0 million as long as our customer uses our cloud platform. Investing in Business Growth Since our founding, we have invested significantly in growing our business.
We expect we will continue to incur net losses for the foreseeable future, as we continue to invest in our sales and marketing organization to take advantage of our market opportunity, to invest in research and development efforts to enhance the functionality of our cloud platform, to incur additional compliance and other related costs as we operate as a public company, and to address any legal matters and related accruals, as further described in Note 11, Commitments and Contingencies, of the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
We expect we will continue to incur net losses for the foreseeable future, as we continue to invest in our sales and marketing organization to take advantage of our market opportunity, to invest in research and development efforts to enhance the functionality of our cloud platform, to incur additional compliance and other related costs as we operate as a public company, and to address any legal matters and related accruals, as further described in Note 12, Commitments and Contingencies, of the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
However, we expect our research and development expenses to decrease as a percentage of our revenue over the long term, although our research and development expenses may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses. 65 Table of Contents General and Administrative General and administrative expenses consist primarily of employee-related expenses, including salaries and bonuses, stock-based compensation expense and employee benefit expenses for our finance, legal, human resources and administrative personnel, as well as professional fees for external legal services (including certain litigation-related expenses), accounting and other related consulting services.
However, we expect our research and development expenses to decrease as a percentage of our revenue over the long term, although our research and development expenses may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses. 67 Table of Contents General and Administrative General and administrative expenses consist primarily of employee-related expenses, including salaries and bonuses, stock-based compensation expense and employee benefit expenses for our finance, legal, human resources and administrative personnel, as well as professional fees for external legal services (including certain litigation-related expenses), accounting and other related consulting services.
The remainder of the increase was primarily attributable to increased expenses of $23.0 million in marketing and advertising expense, $17.1 million in travel expenses, $16.0 million for facility and IT services and $11.4 million for professional services.
The remainder of the increase was primarily attributable to increased expenses of $23.0 million in marketing and advertising expense, $17.1 million in travel expenses, $16.0 million in facility and IT services and $11.4 million in professional services.
We believe that free cash flow and free cash flow margin are useful indicators of liquidity that provide information to management and investors about the amount of cash generated from our operations that, after the investments in property, equipment and other assets and capitalized internal-use software, can be used for strategic initiatives, including investing in our business, and strengthening our financial position. 62 Table of Contents Free cash flow includes the cyclical impact of inflows and outflows resulting from contributions to our employee stock purchase plan ("ESPP"), for which the purchase period of approximately six months ends in each of our second and fourth fiscal quarters.
We believe that free cash flow and free cash flow margin are useful indicators of liquidity that provide information to management and investors about the amount of cash generated from our operations that, after the investments in property, equipment and other assets and capitalized internal-use software, can be used for strategic initiatives, including investing in our business, and strengthening our financial position. 64 Table of Contents Free cash flow includes the cyclical impact of inflows and outflows resulting from contributions to our employee stock purchase plan for which the purchase period of approximately six months ends in each of our second and fourth fiscal quarters.
For further information on the Notes, refer to Note 9, Convertible Senior Notes, of the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
For further information on the Notes, refer to Note 10, Convertible Senior Notes, of the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
We apply judgment in determining the customer’s ability and intent to pay, which is based on a variety of factors, including the customer’s historical payment experience or, in the case of a new customer, credit and financial information pertaining to the customer. 2) Identify the performance obligations in the contract Performance obligations promised in a contract are identified based on the services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the service either on its own or together with other resources that are readily available from third parties or from us, and are distinct in the context of the contract, whereby the transfer of the services is separately identifiable from other promises in the contract.
We apply judgment in 81 Table of Contents determining the customer’s ability and intent to pay, which is based on a variety of factors, including the customer’s historical payment experience or, in the case of a new customer, credit and financial information pertaining to the customer. 2) Identify the performance obligations in the contract Performance obligations promised in a contract are identified based on the services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the service either on its own or together with other resources that are readily available from third parties or from us, and are distinct in the context of the contract, whereby the transfer of the services is separately identifiable from other promises in the contract.
In addition, we expect our general and administrative expenses to increase in absolute dollars in the foreseeable future, as we continue to operate as a public company and address any legal matters and related accruals, as further described in Note 11, Commitments and Contingencies, of the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
In addition, we expect our general and administrative expenses to increase in absolute dollars in the foreseeable future, as we continue to operate as a public company and address any legal matters and related accruals, as further described in Note 12, Commitments and Contingencies, of the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Net cash inflows were partially offset by cash outflows resulting from an increase of $137.7 million in deferred contract acquisition costs, as our sales commission payments increased due to the addition of new customers and expansion of our existing customer subscriptions, an increase of $111.6 million in accounts 76 Table of Contents receivable primarily due to timing of billings and collections, a decrease of $22.1 million in operating lease liabilities primarily due to lease payments and an increase of $3.4 million in prepaid expenses, other current and noncurrent assets.
Net cash inflows were partially offset by cash outflows resulting from an increase of $137.7 million in deferred contract acquisition costs, as our sales commission payments increased due to the addition of new customers and expansion of our existing customer subscriptions, an increase of $111.6 million in accounts receivable primarily due to timing of billings and collections, a decrease of $22.1 million in operating lease liabilities primarily due to lease payments and an increase of $3.4 million in prepaid expenses, other current and noncurrent assets.
Net cash inflows were partially offset by cash outflows resulting from an increase of $158.5 million in deferred contract acquisition costs, as our sales commission payments increased due to the addition of new customers and expansion of our existing customer subscriptions, an increase of $143.3 million in accounts receivable primarily due to timing of billings and collections, a decrease of $27.7 million in operating lease liabilities primarily due to lease payments and an increase of $10.3 million in prepaid expenses, other current and noncurrent assets.
Net cash inflows were partially offset by cash outflows resulting from an 79 Table of Contents increase of $158.5 million in deferred contract acquisition costs, as our sales commission payments increased due to the addition of new customers and expansion of our existing customer subscriptions, an increase of $143.3 million in accounts receivable primarily due to timing of billings and collections, a decrease of $27.7 million in operating lease liabilities primarily due to lease payments and an increase of $10.3 million in prepaid expenses, other current and noncurrent assets.
We expect our general and administrative expenses to increase in absolute dollars for the foreseeable future, as we continue to incur compliance expenses and other related expenses necessary to operate as a public company, and due to any legal matters and related accruals, as further described in Note 11, Commitments and Contingencies, of the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
We expect our general and administrative expenses to increase in absolute dollars for the foreseeable future, as we continue to incur compliance expenses and other related expenses necessary to operate as a public company, and due to any legal matters and related accruals, as further described in Note 12, Commitments and Contingencies, to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Net cash provided by financing activities of $41.7 million during fiscal 2021 was attributable to $25.7 million in proceeds from issuance of common stock under the ESPP and $18.2 million in proceeds from the exercise of stock options. 77 Table of Contents These transactions were partially offset by a payment of deferred merger consideration related to a business acquisition for $2.3 million.
Net cash provided by financing activities of $41.7 million during fiscal 2021 was attributable to $25.7 million in proceeds from issuance of common stock under the ESPP and $18.2 million in proceeds from the exercise of stock options. These transactions were partially offset by a payment of deferred merger consideration related to a business acquisition for $2.3 million.
As of July 31, 2022, the accrued employee payroll contributions to our ESPP was $4.7 million, which will be used to purchase shares at the end of the current purchase period ending on December 15, 2022.
As of July 31, 2023, the accrued employee payroll contributions to our ESPP was $7.4 million, which will be used to purchase shares at the end of the current purchase period ending on December 15, 2023.
Although we believe that the historical assumptions and estimates we have made are reasonable and appropriate, different assumptions and estimates could materially impact our reported financial results. Amortization of deferred contract acquisition costs is included in sales 80 Table of Contents and marketing expense in the consolidated statements of operations.
Although we believe that the historical assumptions and estimates we have made are reasonable and appropriate, different assumptions and estimates could materially impact our reported financial results. Amortization of deferred contract acquisition costs is included in sales and marketing expense in the consolidated statements of operations.
Gross margin remained flat at 78% for fiscal 2021 compared to fiscal 2020 as our cost of providing our services were proportionately offset by growth in our revenue.
Gross margin remained flat at 78% for fiscal 2022 compared to fiscal 2021 as our cost of providing our services were proportionately offset by growth in our revenue.
Professional and Other Services Revenue Professional and other services revenue consists of fees associated with providing deployment advisory services that educate and assist our customers on the best use of our solutions, as well as advise customers on best practices as they deploy our solution. These services are distinct from subscription and support services.
Professional and Other Services Revenue Professional and other services revenue consists of fees associated with providing deployment advisory services that educate and assist our customers on the best use of our solutions, as well as advise customers on best practices as they deploy 82 Table of Contents our solution. These services are distinct from subscription and support services.
We expect to maintain this full valuation allowance for the foreseeable fut ure as it is more likely than not that some or all of those deferred tax assets may not be realized based on our history of losses.
We expect to maintain this full valuation allowance for the foreseeable future as it is more likely than not that some or all of those deferred tax assets may not be realized based on our history of losses.
For further information, refer to Note 14, Income Taxes, of the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
For further information, refer to Note 15, Income Taxes, of the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Our performance obligations consist of (i) our subscription and support services and (ii) professional and other services. 78 Table of Contents 3) Determine the transaction price The transaction price is determined based on the consideration to which we expect to be entitled in exchange for transferring services to the customer.
Our performance obligations consist of (i) our subscription and support services and (ii) professional and other services. 3) Determine the transaction price The transaction price is determined based on the consideration to which we expect to be entitled in exchange for transferring services to the customer.
The overall increase in cost of revenue was driven primarily by the expanded use of our cloud platform by existing and new customers, which led to an increase of $42.4 million for data center and equipment related costs for hosting and operating our cloud platform.
The overall increase was driven primarily by the expanded use of our cloud platform by existing and new customers, which led to an increase of $42.4 million for data center and equipment related costs for hosting and operating our cloud platform.
Payroll contributions ultimately used to purchase shares will be reclassified to stockholders' equity upon issuance of the shares during our second quarter of fiscal 2023.
Payroll contributions ultimately used to purchase shares will be reclassified to stockholders' equity upon issuance of the shares during our second quarter of fiscal 2024.
Government agencies and some of the largest enterprises in the world rely on us to support their digital transformation, including more than 600 of the Forbes Global 2000 as of July 31, 2022. We operate our business as one reportable segment. Our revenue has experienced significant growth in recent periods.
Government agencies and some of the largest enterprises in the world rely on us to support their digital transformation, including more than 640 of the Forbes Global 2000 as of July 31, 2023. We operate our business as one reportable segment. Our revenue has experienced significant growth in recent periods.
New Customer Acquisition We believe that our ability to increase the number of customers, and more significantly customers in the Forbes Global 2000, on our cloud platform is an indicator of our market penetration and our future business opportunities. As of July 31, 2022, 2021 and 2020, we had over 6,700, 5,600 and 4,500 customers, respectively, across all major geographies.
New Customer Acquisition We believe that our ability to increase the number of customers, and more significantly customers in the Forbes Global 2000, on our cloud platform is an indicator of our market penetration and our future business opportunities. As of July 31, 2023, 2022 and 2021, we had over 7,700, 6,700 and 5,600 customers, respectively, across all major geographies.
We recognize subscription and support revenue ratably over the life of the contract, which is generally one to three years. As of July 31, 2022, we had expanded our operations to over 6,700 customers across major industries, with users in 185 countries.
We recognize subscription and support revenue ratably over the life of the contract, which is generally one to three years. As of July 31, 2023, we had expanded our operations to over 7,700 customers across major industries, with users in 185 countries.
Subscription and related support services accounted for approximately 97%, 97% and 98% of our revenue for fiscal 2022, fiscal 2021 and fiscal 2020, respectively. Our contracts with our customers do not at any time provide the customer with the right to take possession of the software that runs our cloud platform.
Subscription and related support services accounted for approximately 97% of our revenue for each of the fiscal 2023, fiscal 2022 and fiscal 2021, respectively. Our contracts with our customers do not at any time provide the customer with the right to take possession of the software that runs our cloud platform.
Additionally, some of the factors that may influence our operations are not within our control, such as general economic conditions, geopolitical developments and the impact of the COVID-19 pandemic. We may be required to seek additional equity or debt financing.
Additionally, some of the factors that may influence our operations are not within our control, such as general economic conditions, geopolitical developments and the impact of global health crises like the COVID-19 pandemic. We may be required to seek additional equity or debt financing.
Sales commissions for renewal of a contract are not considered commensurate with the commissions paid for the acquisition of the initial contract given the substantive difference in commission rates in proportion to their respective contract values.
Sales commissions for renewal of a contract are not considered commensurate with the commissions paid for the acquisition of the initial contract given the substantive difference in commission rates in proportion to their respective 83 Table of Contents contract values.
We have not experienced a material increase in customer attrition rates in recent periods. For the trailing 12 months ended July 31, 2022 and 2021, the dollar-based net retention rate was above 125%.
We have not experienced a material increase in customer attrition rates in recent periods. For the trailing 12 months ended July 31, 2023 and 2022, the dollar-based net retention rate was 121% and above 125%, respectively.
As of July 31, 2022, we had over 600 of the Forbes Global 2000 as customers. Our ability to continue to grow these numbers will increase our future opportunities for renewals and follow-on sales.
As of July 31, 2023, we had over 640 of the Forbes Global 2000 as customers. Our ability to continue to grow these numbers will increase our future opportunities for renewals and follow-on sales.
Our fiscal years ended July 31, 2022, July 31, 2021 and July 31, 2020 are referred to as fiscal 2022, fiscal 2021 and fiscal 2020, respectively.
Our fiscal years ended July 31, 2023, July 31, 2022 and July 31, 2021 are referred to as fiscal 2023, fiscal 2022 and fiscal 2021, respectively.
Net cash used in investing activities during fiscal 2021 of $109.7 million was primarily attributable to the purchases of short-term investments of $815.5 million, capital expenditures of $58.3 million, primarily to support the growth of our cloud platform, $40.5 million for payments for business acquisitions, net of cash acquired, in connection with our acquisitions of Trustdome and Smokescreen and $3.1 million for strategic investments.
Net cash used in investing activities during fiscal 2021 of $109.7 million was primarily attributable to the purchases of short-term investments of $815.5 million, capital expenditures of $58.3 million to support the growth of our cloud platform, $40.5 million, net of cash acquired for business acquisitions and expenditures on strategic investments of $3.1 million.
The overall increase in cost of revenue was driven primarily by the expanded use of our cloud platform by existing and new customers, which led to an increase of $37.2 million for data center and equipment related costs for hosting and operating our cloud platform.
The overall increase was driven primarily by the expanded use of our cloud platform by existing and new customers, which led to an increase of $68.2 million for data center and equipment related costs for hosting and operating our cloud platform.
As of July 31, 2022, we had deferred revenue of $1,021.1 million, of which $923.7 million was recorded as a current liability and is expected to be recorded as revenue in the next 12 months, provided all other revenue recognition criteria have been met.
As of July 31, 2023, we had deferred revenue of $1,439.7 million, of which $1,281.1 million was recorded as a current liability and is expected to be recorded as revenue in the next 12 months, provided all other revenue recognition criteria have been met.
The release of a valuation allowance against deferred tax assets may cause greater volatility in the effective tax rate in the periods in which it is reversed. 74 Table of Contents Liquidity and Capital Resources As of July 31, 2022, our principal sources of liquidity were cash, cash equivalents and short-term investments totaling $1,731.3 million, which were held for working capital and general corporate purposes.
The release of a valuation allowance against deferred tax assets may cause greater volatility in the effective tax rate in the periods in which it is reversed. 77 Table of Contents Liquidity and Capital Resources As of July 31, 2023, our principal sources of liquidity were cash, cash equivalents and short-term investments totaling $2,100.2 million, which were held for working capital and general corporate purposes.
Our actual results could vary as a result of, and our future capital requirements, both near-term and long-term, will depend on, many factors, including our growth rate, the timing and extent of spending to support our research and development efforts, the expansion of sales and marketing and international operating activities, the timing of new introductions of solutions or features, and the continuing market acceptance of our services, and the impact of COVID-19 pandemic to our and our customers', vendors' and partners' businesses.
Our actual results could vary as a result of, and our future capital requirements, both near-term and long-term, will depend on, many factors, including our growth rate, the timing and extent of spending to support our research and development efforts, the expansion of sales and marketing and international operating activities, the timing of new introductions of solutions or features, and the continuing market acceptance of our services, the impact of macroeconomic conditions, such as high inflation and recessionary environments, and global health crises like the COVID-19 pandemic to our and our customers', vendors' and partners' businesses.
For fiscal 2022, fiscal 2021 and fiscal 2020, our revenue was $1,090.9 million, $673.1 million and $431.3 million, respectively. We have incurred net losses in all periods since our inception. For fiscal 2022, fiscal 2021 and fiscal 2020, our net loss was $390.3 million, $262.0 million and $115.1 million, respectively.
For fiscal 2023, fiscal 2022 and fiscal 2021, our revenue was $1,617.0 million, $1,090.9 million and $673.1 million, respectively. We have incurred net losses in all periods since our inception. For fiscal 2023, fiscal 2022 and fiscal 2021, our net loss was $202.3 million, $390.3 million and $262.0 million, respectively.
This effectively represents recurring dollars that we expect in the next 12-month period from the cohort of customers that existed on the last day of the same reporting period in the prior fiscal year. • Numerator: We measure the ARR for that same cohort of customers representing all subscriptions based on confirmed customer orders booked by us as of the end of the reporting period. 60 Table of Contents Dollar-based net retention rate is obtained by dividing the numerator by the denominator.
This effectively represents recurring dollars that we expect in the next 12-month period from the cohort of customers that existed on the last day of the same reporting period in the prior fiscal year. 62 Table of Contents • Numerator: We measure the ARR for that same cohort of customers representing all subscriptions based on confirmed customer orders booked by us as of the end of the reporting period.
We used an aggregate amount of $145.2 million of the net proceeds of the Notes to purchase the capped calls. We have generated significant losses from operations, as reflected in our accumulated deficit of $991.9 million as of July 31, 2022.
We used an aggregate amount of $145.2 million of the net proceeds of the Notes to purchase the Capped Calls. We have generated significant losses from operations, as reflected in our accumulated deficit of $1,090.4 million as of July 31, 2023.
We leverage our land-and-expand model with the goal of generating incremental revenue, often within the term of the initial subscription, by increasing sales to our existing customers in one of three ways: • expanding deployment of our cloud platform to cover additional users; • upgrading to a more advanced Business or Transformation edition; and • selling a subscription to a new solution or product, for example selling a ZPA subscription to a ZIA customer or a ZIA subscription to a ZPA customer.
We leverage our land-and-expand model with the goal of generating incremental revenue, often within the term of the initial subscription, by increasing sales to our existing customers in one of three ways: • expanding deployment of our cloud platform to cover additional users; • upgrading to a more advanced Business or Transformation edition; and • selling a subscription to a new solution or product, for example selling a ZPA subscription to a ZIA customer or a ZIA subscription to a ZPA customer. 61 Table of Contents These purchases increase the Annual Recurring Revenue ("ARR") attributable to our customers over time.
The increase in the provision for income taxes was due to the increase in our non-U.S. pre-tax income in the foreign jurisdictions in which we conduct business.
The increase was primarily related to income and withholding taxes in the foreign jurisdictions in which we operate. The increase in the provision for income taxes was due to the increase in our non-U.S. pre-tax income in the foreign jurisdictions in which we conduct business.
We believe that we have significant room to capture additional market share and intend to continue to invest significantly in sales and marketing to engage our prospective customers, increase brand awareness, further leverage our channel partnerships and drive adoption of our solution. Follow-On Sales We typically expand our relationship with our customers over time.
We believe that we have significant room to capture additional market share and intend to continue to invest significantly in sales and marketing to engage our prospective customers, increase brand awareness, further leverage our channel partnerships and drive adoption of our solution.
These activities were partially offset by proceeds from the maturities and sales of short-term investments of $807.7 million.
These activities were partially offset by proceeds from the maturities and sales of short-term investments of $952.4 million.
The increase was primarily driven by an increase of $109.4 million in employee-related expenses, inclusive of an increase of $50.5 million in stock-based compensation expense, driven by a 54% increase in headcount from July 31, 2021 to July 31, 2022.
The increase was driven primarily by an increase of $109.4 million in employee-related expenses, inclusive of an increase of $50.5 million in stock-based compensation expense, driven by a 54% increase in headcount.
The remainder of the increase was primarily attributable to increased expenses of $5.1 million in facility, software and equipment related expenses to support our growth and $2.2 million for professional services. This increase was partially offset by higher capitalized internal-use software development costs of $1.4 million to support the enhancement and growth of our cloud platform.
The remainder of the increase was primarily attributable to increased expenses of $11.1 million in facility, software and equipment related expenses to support our growth and $2.9 million in professional services. This increase was partially offset by higher capitalized internal-use software of $10.6 million to support the enhancement and growth of our cloud platform.
Our effective tax rate of (1.9)% and (2.1)% in fiscal 2021 and fiscal 2020, respectively, differs from the applicable U.S. statutory federal income tax rate due to our valuation allowance against our U.S. federal, state, and U.K. deferred tax assets as well as our foreign income being taxed at different rates than the U.S. statutory rate.
Our effective tax rate of (10.9)% and (1.7)% in fiscal 73 Table of Contents 2023 and fiscal 2022, respectively, differs from the applicable U.S. statutory federal income tax rate due to our valuation allowance against our U.S. federal, state, and U.K. deferred tax assets as well as our foreign income being taxed at different rates than the U.S. statutory rate.
Year Ended July 31, 2022 2021 2020 (in thousands) Net cash provided by operating activities $ 321,912 $ 202,040 $ 79,317 Less: Purchases of property, equipment and other assets (69,296) (48,165) (43,072) Capitalized internal-use software (21,284) (10,132) (8,737) Free cash flow $ 231,332 $ 143,743 $ 27,508 As a percentage of revenue: Net cash provided by operating activities 30 % 30 % 18 % Less: Purchases of property, equipment and other assets (7) (7) (10) Capitalized internal-use software (2) (2) (2) Free cash flow margin 21 % 21 % 6 % Calculated Billings Calculated billings is a non-GAAP financial measure that we believe is a key metric to measure our periodic performance.
Year Ended July 31, 2023 2022 2021 (in thousands) Net cash provided by operating activities $ 462,343 $ 321,912 $ 202,040 Less: Purchases of property, equipment and other assets (97,197) (69,296) (48,165) Capitalized internal-use software (31,527) (21,284) (10,132) Free cash flow $ 333,619 $ 231,332 $ 143,743 As a percentage of revenue: Net cash provided by operating activities 29 % 30 % 30 % Less: Purchases of property, equipment and other assets (6) (7) (7) Capitalized internal-use software (2) (2) (2) Free cash flow margin 21 % 21 % 21 % Calculated Billings Calculated billings is a non-GAAP financial measure that we believe is a key metric to measure our periodic performance.
For further discussion of the challenges and risks we confront related to the COVID-19 pandemic, please refer to Part I, Item 1A Risk Factors of this Annual Report on Form 10-K.
For further discussion of the challenges and risks we confront related to macroeconomic conditions and global health crises, like the COVID-19 pandemic, please refer to Part II, Item 1A Risk Factors of this Annual Report on Form 10-K.
We typically invoice our customers annually in advance, and to a lesser extent quarterly in advance, monthly in advance or multi-year in advance. Calculated billings increased $547.5 million, or 59%, in fiscal 2022 over fiscal 2021, and $384.1 million, or 70%, in fiscal 2021 over fiscal 2020.
We typically invoice our customers annually in advance, and to a lesser extent quarterly in advance, monthly in advance or multi-year in advance. Calculated billings increased $554.0 million, or 37%, in fiscal 2023 over fiscal 2022, and $547.5 million, or 59%, in fiscal 2022 over fiscal 2021.
Year Ended July 31, 2022 2021 2020 (in thousands) Revenue $ 1,090,946 $ 673,100 $ 431,269 Add: Total deferred revenue, end of period 1,021,123 630,601 369,767 Less: Total deferred revenue, beginning of period (630,601) (369,767) (251,202) Calculated billings $ 1,481,468 $ 933,934 $ 549,834 63 Table of Contents Components of Results of Operations Revenue We generate revenue primarily from sales of subscriptions to access our cloud platform, together with related support services.
Year Ended July 31, 2023 2022 2021 (in thousands) Revenue $ 1,616,952 $ 1,090,946 $ 673,100 Add: Total deferred revenue, end of period 1,439,676 1,021,123 630,601 Less: Total deferred revenue, beginning of period (1,021,123) (630,601) (369,767) Calculated billings $ 2,035,505 $ 1,481,468 $ 933,934 65 Table of Contents Components of Results of Operations Revenue We generate revenue primarily from sales of subscriptions to access our cloud platform, together with related support services.
These activities were partially offset by proceeds from the maturities and sales of short-term investments of $310.9 million. Financing Activities Net cash provided by financing activities of $41.3 million during fiscal 2022 was primarily attributable to $34.6 million in proceeds from issuance of common stock under the ESPP and $6.9 million in proceeds from the exercise of stock options.
Net cash provided by financing activities of $41.3 million during fiscal 2022 was primarily attributable to $34.6 million in proceeds from issuance of common stock under the ESPP and $6.9 million in proceeds from the exercise of stock options.
For further information on the Notes, refer to Note 9, Convertible Senior Notes, of the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
For further information, refer to Note 15, Income Taxes, of the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Net cash inflows were partially offset by cash outflows resulting from an increase of $65.1 million in deferred contract acquisition costs, as our sales commission payments increased due to the addition of new customers and expansion of our existing customer subscriptions, an increase of $54.2 million in accounts receivable primarily due to timing of billings and collections, an increase of $13.6 million in prepaid expenses, other current and noncurrent assets and a decrease of $7.6 million in operating lease liabilities primarily due to lease payments, net of tenant incentives received.
Net cash inflows were partially offset by cash outflows resulting from an increase of $183.9 million in accounts receivable primarily due to timing of billings and collections, an increase of $177.0 million in deferred contract acquisition costs, as our sales commission payments increased due to the addition of new customers and expansion of our existing customer subscriptions, an increase of $39.9 million in prepaid expenses, other current and noncurrent assets, a decrease of $32.2 million in operating lease liabilities primarily due to lease payments and a decrease of $8.4 million in accounts payable.
The release of a valuation allowance against deferred tax assets may cause greater volatility in the effective tax rate in the periods in which it is reversed. 71 Table of Contents Comparison of Fiscal 2021 and Fiscal 2020 Revenue Year Ended July 31, Change 2021 2020 $ % (in thousands) Revenue $ 673,100 $ 431,269 $ 241,831 56 % Revenue increased by $241.8 million, or 56%, in fiscal 2021, compared to fiscal 2020.
The release of a valuation allowance against deferred tax assets may cause greater volatility in the effective tax rate in the periods in which it is reversed. 74 Table of Contents Comparison of Fiscal 2022 and Fiscal 2021 Revenue Year Ended July 31, Change 2022 2021 $ % (in thousands) Revenue $ 1,090,946 $ 673,100 $ 417,846 62 % Revenue increased by $417.8 million, or 62%, in fiscal 2022, compared to fiscal 2021.
The increase in revenue was driven by an increase in users and sales of additional subscriptions to existing customers, which contributed $179.5 million in additional revenue. The remainder of the increase was attributable to the addition of new customers, as we increased our customer base by 23% from July 31, 2020 to July 31, 2021.
The increase in revenue was driven by an increase in users and sales of additional subscriptions to existing customers, which contributed $337.6 million in additional revenue. The remainder of the increase was attributable to the addition of new customers, as we increased our customer base by 20%.
Accordingly, we cannot predict the mix of invoicing schedules in any given period. 75 Table of Contents As of July 31, 2022, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
As of July 31, 2023, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
These purchases increase the Annual Recurring Revenue ("ARR") attributable to our customers over time. To establish ARR for a customer, we use the total amount of each order booked to compute the annual recurring value of revenue that we 59 Table of Contents would recognize if the customer continues to renew all contractual subscriptions.
To establish ARR for a customer, we use the total amount of each order booked to compute the annual recurring value of revenue that we would recognize if the customer continues to renew all contractual subscriptions.
Interest Expense Year Ended July 31, Change 2022 2021 $ % (in thousands) Interest expense $ (56,579) $ (53,364) $ (3,215) 6 % Interest expense increased by $3.2 million for fiscal 2022, compared to fiscal 2021 as a result of amortization of debt discount and recognition of contractual interest expense related to our Notes issued in June 2020.
The increase was driven primarily by higher interest rates and our increased balance of cash equivalents and short-term investments. 76 Table of Contents Interest Expense Year Ended July 31, Change 2022 2021 $ % (in thousands) Interest expense $ (56,579) $ (53,364) $ (3,215) 6 % Interest expense increased by $3.2 million for fiscal 2022, compared to fiscal 2021 as a result of higher amortization of debt discount and recognition of contractual interest expense related to our Notes issued in June 2020.
The following table summarizes our cash flows for the periods presented: Year Ended July 31, 2022 2021 2020 (in thousands) Net cash provided by operating activities $ 321,912 $ 202,040 $ 79,317 Net cash provided by (used in) investing activities $ 374,063 $ (109,668) $ (1,038,162) Net cash provided by financing activities $ 41,337 $ 41,675 $ 1,022,212 Operating Activities Net cash provided by operating activities during fiscal 2022 was $321.9 million, which resulted from a net loss of $390.3 million, adjusted for non-cash charges of $614.7 million and net cash inflows of $97.5 million from changes in operating assets and liabilities.
The following table summarizes our cash flows for the periods presented: Year Ended July 31, 2023 2022 2021 (in thousands) Net cash provided by operating activities $ 462,343 $ 321,912 $ 202,040 Net cash provided by (used in) investing activities $ (259,337) $ 374,063 $ (109,668) Net cash provided by financing activities $ 45,990 $ 41,337 $ 41,675 Operating Activities Net cash provided by operating activities during fiscal 2023 was $462.3 million, which resulted from a net loss of $202.3 million, adjusted for non-cash charges of $636.1 million and net cash inflows of $28.6 million from changes in operating assets and liabilities.
Other Income (expense), net Year Ended July 31, Change 2021 2020 $ % (in thousands) Other income (expense), net $ 1,186 $ (224) $ 1,410 (629) % Other income (expense), net increased by $1.4 million for fiscal 2021, compared to fiscal 2020. The increase was primarily driven by fluctuations in foreign currency transaction gains and losses.
Other Income (Expense), net Year Ended July 31, Change 2022 2021 $ % (in thousands) Other income (expense), net $ (4,208) $ 1,186 $ (5,394) (455) % Other income (expense), net decreased by $5.4 million for fiscal 2022, compared to fiscal 2021. The decrease was driven primarily by fluctuations in foreign currency transaction gains and losses.
The increase was primarily due to a 54% increase in headcount from July 31, 2021 to July 31, 2022, resulting in an increase of $201.1 million in employee-related expenses, inclusive of an increase of $58.0 million in stock-based compensation expense, and an increase of $32.9 million in sales commissions expense.
The increase was driven primarily by a 54% increase in headcount, resulting in an increase of $201.1 million in employee-related expenses, inclusive of an increase of $58.0 million in stock-based compensation expense, and an increase of $32.9 million in sales 75 Table of Contents commissions expense.
Prior period amounts have been recast to conform to this presentation. Free Cash Flow and Free Cash Flow Margin Free cash flow is a non-GAAP financial measure that we calculate as net cash provided by operating activities less purchases of property, equipment and other assets and capitalized internal-use software.
Free Cash Flow and Free Cash Flow Margin Free cash flow is a non-GAAP financial measure that we calculate as net cash provided by operating activities less purchases of property, equipment and other assets and capitalized internal-use software. Free cash flow margin is calculated as free cash flow divided by revenue.
Net cash inflows from changes in operating assets and liabilities were primarily the result of an increase of $118.0 million in deferred revenue from advance invoicing in accordance with our subscription contracts, an increase of $27.9 million in accrued compensation, an increase of $2.3 million in accrued expenses, other current and noncurrent liabilities and an increase of $0.9 million in accounts payable.
Net cash inflows from changes in operating assets and liabilities were primarily the result of an increase of $418.6 million in deferred revenue from advance invoicing in accordance with our subscription contracts, an increase of $26.8 million in accrued expenses, other current and noncurrent liabilities and an increase of $24.5 million in accrued compensation.
Operating Expenses Our operating expenses consist of sales and marketing, research and development and general and administrative expenses. Personnel expenses are the most significant component of operating expenses and consist of salaries, benefits, bonuses, stock-based compensation expense and, with respect to sales and marketing expenses, sales commissions that are recognized as expenses over the period of benefit.
Personnel expenses are the most significant component of operating expenses and consist of salaries, benefits, bonuses, stock-based compensation expense and, with respect to sales and marketing expenses, sales commissions that are recognized as expenses over the period of benefit. Operating expenses also include overhead expenses for facilities, IT, depreciation expense and amortization expense.
Year Ended July 31, 2022 2021 2020 (in thousands) GAAP Gross profit $ 848,664 $ 522,783 $ 335,536 Add: Stock-based compensation expense and related payroll taxes 25,292 15,272 7,851 Amortization expense of acquired intangible assets 7,975 6,468 2,030 Non-GAAP gross profit $ 881,931 $ 544,523 $ 345,417 GAAP Gross margin 78 % 78 % 78 % Non-GAAP gross margin 81 % 81 % 80 % 61 Table of Contents Non-GAAP Income from Operations and Non-GAAP Operating Margin We define non-GAAP income from operations as GAAP loss from operations excluding stock-based compensation expense and related payroll taxes, certain litigation-related expenses, amortization expense of acquired intangible assets and asset impairment related to facility exi t.
Year Ended July 31, 2023 2022 2021 (in thousands) GAAP gross profit $ 1,254,120 $ 848,664 $ 522,783 Add: Stock-based compensation expense and related payroll taxes 40,297 25,292 15,272 Amortization expense of acquired intangible assets 9,574 7,975 6,468 Non-GAAP gross profit $ 1,303,991 $ 881,931 $ 544,523 GAAP gross margin 78 % 78 % 78 % Non-GAAP gross margin 81 % 81 % 81 % 63 Table of Contents Non-GAAP Income from Operations and Non-GAAP Operating Margin We define non-GAAP income from operations as GAAP loss from operations excluding stock-based compensation expense and related payroll taxes, amortization expense of acquired intangible assets, asset impairment related to facility exi t, and restructuring and other charges.
Year Ended July 31, 2022 2021 2020 (in thousands) GAAP loss from operations $ (327,429) $ (207,812) $ (113,956) Add: Stock-based compensation expense and related payroll taxes 430,020 278,562 129,636 Litigation-related expenses — — 18,356 Amortization expense of acquired intangible assets 9,010 6,795 3,384 Asset impairment related to facility exit (1) — 416 746 Non-GAAP income from operations $ 111,601 $ 77,961 $ 38,166 GAAP operating margin (30) % (31) % (26) % Non-GAAP operating margin 10 % 12 % 9 % (1) Consists of asset impairment charges related to the relocation of our corporate headquarters.
Year Ended July 31, 2023 2022 2021 (in thousands) GAAP loss from operations $ (234,623) $ (327,429) $ (207,812) Add: Stock-based compensation expense and related payroll taxes 457,815 430,020 278,562 Amortization expense of acquired intangible assets 11,060 9,010 6,795 Asset impairment related to facility exit (1) — — 416 Restructuring and other charges (2) 6,564 — — Non-GAAP income from operations $ 240,816 $ 111,601 $ 77,961 GAAP operating margin (15) % (30) % (31) % Non-GAAP operating margin 15 % 10 % 12 % (1) Consists of asset impairment charges related to the relocation of our corporate headquarters.
The remainder of the increase was primarily attributable to increased expenses of $2.6 million for facility and IT services. Interest Income Year Ended July 31, Change 2022 2021 $ % (in thousands) Interest income $ 4,586 $ 2,812 $ 1,774 63 % Interest income increased by $1.8 million, or 63%, for fiscal 2022, compared to fiscal 2021.
Interest Income Year Ended July 31, Change 2022 2021 $ % (in thousands) Interest income $ 4,586 $ 2,812 $ 1,774 63 % Interest income increased by $1.8 million, or 63%, for fiscal 2022, compared to fiscal 2021.
Additionally, our employee-related expenses increased by $41.6 million, inclusive of an increase of $9.8 million in stock-based compensation expense, driven primarily by a 70% increase in headcount in our customer support and cloud operations organizations from July 31, 2021 to July 31, 2022.
Additionally, our employee-related expenses increased by $41.6 million, inclusive of an increase of $9.8 million in stock-based compensation expense, driven primarily by a 70% increase in headcount in our customer support and cloud operations organizations. The remainder of the increase was primarily attributable to increased expenses of $2.5 million for professional services and $2.0 million for facility and IT services.
While we have not experienced significant disruptions to our operations or financial performance from the COVID-19 pandemic to date, we are unable to accurately predict the full impact that COVID-19 will 58 have due to numerous uncertainties, including the duration of the outbreak, the current or a future resurgence of the outbreak in connection with new variants and mutations, the widespread distribution and long-term efficacy of vaccines, the efficacy of vaccines against new variants or mutations, actions that may be taken by governmental authorities, the impact on our business including our sales cycle, sales execution and marketing efforts, and the impact to the business of our customers, vendors and partners.
While we have not to date experienced significant disruptions to our operations or financial performance as a result of a health crisis, including the COVID-19 pandemic, we are unable to predict the impact of this or similar future events due to numerous uncertainties, 60 including the emergence or resurgence of an outbreak in connection with COVID-19 or a similar virus, actions that may be taken by governmental authorities, the impact on our business including our sales cycle, sales execution and marketing efforts, and the impact to the business of our customers, vendors and partners.
The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, as well as related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances.
Critical Accounting Policies and Estimates Our financial statements are prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, as well as related disclosures. We evaluate our estimates and assumptions on an ongoing basis.
The overall increase was primarily due to an increase of $48.7 million in employee-related expenses, inclusive of an increase of $32.7 million in stock-based compensation expense, driven in part by a 65% increase in headcount from July 31, 2021 to July 31, 2022.
The overall increase was driven primarily by an increase of $48.7 million in employee-related expenses, inclusive of an increase of $32.7 million in stock-based compensation expense, primarily due to a 65% increase in headcount. The remainder of the increase was primarily attributable to increased expenses of $2.6 million in facility and IT services.
Net cash provided by operating activities during fiscal 2020 was $79.3 million, which resulted from a net loss of $115.1 million, adjusted for non-cash charges of $185.8 million and net cash inflows of $8.6 million from changes in operating assets and liabilities.
Net cash provided by operating activities during fiscal 2022 was $321.9 million, which resulted from a net loss of $390.3 million, adjusted for non-cash charges of $614.7 million and net cash inflows of $97.5 million from changes in operating assets and liabilities.
These activities were partially offset by purchases of short-term investments of $844.9 million, capital expenditures of $90.6 million, primarily to support the growth and expansion of our cloud platform and $25.3 million, for payments for business acquisitions, net of cash acquired in connection with our acquisition of ShiftRight and another business acquisition.
Net cash provided by investing activities during fiscal 2022 of $374.1 million was primarily attributable to the proceeds from the maturities of short-term investments of $1,334.9 million These activities were partially offset by purchases of short-term investments of $844.9 million, capital expenditures of $90.6 million to support the growth and expansion of our cloud platform and $25.3 million, net of cash acquired for business acquisitions.
The remainder of the increase was attributable to the addition of new customers, as we increased our customer base by 20% from July 31, 2021 to July 31, 2022. 68 Table of Contents Cost of Revenue and Gross Margin Year Ended July 31, Change 2022 2021 $ % (in thousands) Cost of revenue $ 242,282 $ 150,317 $ 91,965 61 % Gross margin 78 % 78 % Cost of revenue increased by $92.0 million, or 61%, in fiscal 2022, compared to fiscal 2021.
Cost of Revenue and Gross Margin Year Ended July 31, Change 2022 2021 $ % (in thousands) Cost of revenue $ 242,282 $ 150,317 $ 91,965 61 % Gross margin 78 % 78 % Cost of revenue increased by $92.0 million, or 61%, in fiscal 2022, compared to fiscal 2021.

… 73 more changes not shown on this page.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

11 edited+4 added−0 removed3 unchanged
Biggest changeGenerally, the fair value of the Notes will increase as interest rates fall and decrease as interest rates rise. We carry the Notes at face value less unamortized discount and issuance costs on our balance sheet, and we present the fair value for required disclosure purposes only.
Biggest changeThrough July 31, 2022, we carried the Notes at face value less unamortized debt discount and debt issuance costs on our consolidated balance sheet. Effective August 1,2022, upon adoption of ASU 2020-06, we carry the Notes at face value less debt issuance costs on our consolidated balance sheet.
Additionally, fluctuations in foreign currency exchange rates may cause us to recognize transaction gains and losses in the consolidated statements of operations. The effect of a hypothetical 10% change in foreign currency exchange rates applicable to our business would not have a material impact on the consolidated financial statements for fiscal 2022, fiscal 2021 and fiscal 2020.
Additionally, fluctuations in foreign currency exchange rates may cause us to recognize transaction gains and losses in our consolidated statements of operations. The effect of a hypothetical 10% change in foreign currency exchange rates applicable to our business would not have a material impact on the consolidated financial statements for fiscal 2023, fiscal 2022 and fiscal 2021.
We also use foreign currency forward contracts to mitigate variability in gains and losses generated from the remeasurement of certain monetary assets and liabilities denominated in foreign currencies. 82 Table of Contents
We also use foreign currency forward contracts to mitigate variability in gains and losses generated from the remeasurement of certain monetary assets and liabilities denominated in foreign currencies. 85 Table of Contents
As of July 31, 2022, the effect of a hypothetical 100 basis point change in interest rates would have changed the fair value of our investments in available-for-sale securities by $4.9 million.
As of July 31, 2023, the effect of a hypothetical 100 basis point change in interest rates would have changed the fair value of our investments in available-for-sale securities by $9.7 million.
A portion of our operating expenses are incurred outside the United States, denominated in foreign currencies and subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the British 81 Table of Contents Pound, Indian Rupee, Euro, Canadian dollar and Australian dollar.
A portion of our operating expenses are incurred outside the United States, denominated in foreign currencies and subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the British Pound, Indian Rupee, Euro, Japanese Yen, Canadian Dollar and Australian Dollar.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk We have operations in the United States and internationally, and we are exposed to market risk in the ordinary course of our business. Interest Rate Risk As of July 31, 2022, we had cash, cash equivalents and short-term investments totaling $1,731.3 million, which were held for working capital purposes.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk We have operations in the United States and internationally, and we are exposed to market risk in the ordinary course of our business. Interest Rate Risk As of July 31, 2023, we had cash, cash equivalents and short-term investments totaling $2,100.2 million, which were held for working capital purposes.
During the fiscal 2021, we implemented a foreign currency risk management program and entered into foreign currency forward contracts to hedge a portion of our forecasted foreign currency-denominated expenses. These foreign currency derivative contracts have a maturity up to 18 months or less and are designated as cash flow hedges to protect our earnings subjected to foreign currency risk.
We have a foreign currency risk management program, and we enter into foreign currency forward contracts to hedge a portion of our forecasted foreign currency-denominated expenses. These foreign currency derivative contracts have a maturity up to 24 months or less and are designated as cash flow hedges to protect our earnings subjected to foreign currency risk.
The Capped Calls are expected generally to offset the potential dilution to our common stock as a result of any conversion of the Notes. The Notes have a fixed annual interest rate of 0.125%, accordingly, we do not have economic interest rate exposure on the Notes. However, the fair value of the Notes is exposed to interest rate risk.
The Notes have a fixed annual interest rate of 0.125%, accordingly, we do not have economic interest rate exposure on the Notes. However, the fair value of the Notes is exposed to interest rate risk. Generally, the fair value of the Notes will increase as interest rates fall and decrease as interest rates rise.
For further information refer to Note 9, Convertible Senior Notes, to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Foreign Currency Risk The vast majority of our sales contracts are denominated in U.S. dollars, with a small number of contracts denominated in foreign currencies.
Foreign Currency Risk The vast majority of our sales contracts are denominated in U.S. dollars, with a small number of contracts denominated in foreign currencies.
In addition, the fair value of the Notes also fluctuates when the market price of our common stock fluctuates. The fair value was determined based on the quoted bid price of the Notes in an over-the-counter market on the last trading day of the reporting period.
The fair value was determined based on the quoted bid price of the Notes in an over-the-counter market on the last trading day of the reporting period. For further information refer to Note 10, Convertible Senior Notes, to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Convertible Senior Notes In June 2020, we issued our Notes with an aggregate principal amount of $1,150.0 million. In connection with the issuance of the Notes, we entered into privately negotiated capped call transactions with certain counterparties (the "Capped Calls").
In connection with the issuance of the Notes, we entered into privately negotiated capped call transactions with certain counterparties (the "Capped Calls"). The Capped Calls are expected generally to offset the potential dilution to our common stock as a result of any conversion of the Notes.
Added
We also use interest rate swaps to economically convert certain of our fixed interest rate Notes to floating interest rates, in order to match the floating rate nature of a portion of our cash, cash equivalents, and short-term investments.
Added
These interest rate swaps are designated as fair value hedges, and changes in fair value of the interest rate swaps offset the changes in fair market value of the Notes due to benchmark interest rate movements.
Added
Gains or losses related to our fair value hedges are included within interest expense in the consolidated statement of operations in the period of change together with the offsetting loss or gain on the hedged item attributed to risk being hedged. 84 Table of Contents Convertible Senior Notes In June 2020, we issued our Notes with an aggregate principal amount of $1,150.0 million.
Added
For further information refer to Note 1, Business and Summary of Significant Accounting Policies of our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. We present the fair value for required disclosure purposes only. In addition, the fair value of the Notes also fluctuates when the market price of our common stock fluctuates.

Other ZS 10-K year-over-year comparisons