10-Q 1 zs-20211031.htm 10-Q zs-20211031
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________________________
FORM 10-Q
_____________________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2021
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _to_
Commission File Number: 001-38413
_____________________________________
ZSCALER, INC.
(Exact Name of Registrant as Specified in its Charter)
_____________________________________
Delaware
(State or other jurisdiction of
incorporation or organization)
26-1173892
(I.R.S. Employer
Identification Number)
120 Holger Way
San Jose, California 95134
(Address of principal executive offices)
Registrant’s telephone number, including area code: (408) 533-0288
___________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading Symbol(s)Name of Each Exchange on Which Registered
Common Stock, $0.001 Par ValueZSThe Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ☐
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files) Yes ý No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filerýAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No ý
As of November 30, 2021, the number of shares of registrant’s common stock outstanding was 140,081,679.

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



SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including but not limited to, statements regarding our financial outlook and market positioning. These forward-looking statements are made as of the date they were first issued and were based on current expectations, estimates, forecasts and projections as well as the beliefs and assumptions of management. The words "believe," "may," "will," "potentially," "estimate," "continue," "anticipate," "intend," "could," "would," "project," "plan," "expect," and similar expressions that convey uncertainty of future events or outcomes are intended to identify forward-looking statements.
These forward-looking statements include, but are not limited to, statements concerning the following:
the potential impact on our business of the ongoing COVID-19 pandemic;
our future financial performance, including our expectations regarding our revenue, cost of revenue, gross profit or gross margin, operating expenses (including changes in sales and marketing, research and development and general and administrative expenses), and our ability to achieve, and maintain, future profitability;
market acceptance of our cloud platform;
the effects of increased competition in our markets and our ability to compete effectively;
our ability to maintain the security and availability of our cloud platform;
our ability to maintain and expand our customer base, including by attracting new customers;
our ability to develop new solutions, or enhancements to our existing solutions, and bring them to market in a timely manner;
market acceptance of any new solutions or enhancements to our existing solutions;
anticipated trends, growth rates and challenges in our business and in the markets in which we operate;
our business plan and our ability to effectively manage our growth and associated investments;
beliefs about and objectives for future operations;
beliefs about and objectives for future acquisitions, strategic investments, partnerships and alliances and our ability to successfully integrate completed acquisitions;
our relationships with third parties, including channel partners;
our ability to maintain, protect and enhance our intellectual property rights;
our ability to successfully defend litigation brought against us;
our ability to successfully expand in our existing markets and into new markets;
sufficiency of cash to meet cash needs for at least the next 12 months and service our outstanding debt;
our need and ability to raise additional capital in future debt or equity financings;
our expectations regarding settlement of our Notes (defined below);
our ability to comply with laws and regulations that currently apply or become applicable to our business both in the United States and internationally;
1

beliefs about the impacts of legal and geopolitical developments upon our business;
the attraction and retention of qualified employees and key personnel; and
the future trading prices of our common stock.
These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in "Risk Factors" elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements and you should not place undue reliance on our forward-looking statements.
The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law.
You should read this Quarterly Report on Form 10-Q in conjunction with the audited consolidated financial statements and related notes in our Annual Report on Form 10-K for the fiscal year ended July 31, 2021 filed with the Securities and Exchange Commission, or the SEC, on September 16, 2021.
2


PART I. FINANCIAL INFORMATION
Item. 1 Financial Statements
ZSCALER, INC.
Condensed Consolidated Balance Sheets
(in thousands, except per share amounts)
(unaudited)
October 31, 2021July 31, 2021
Assets
Current assets:
Cash and cash equivalents$371,696 $275,898 
Short-term investments1,212,946 1,226,654 
Accounts receivable, net172,028 257,109 
Deferred contract acquisition costs62,067 57,373 
Prepaid expenses and other current assets36,699 31,269 
Total current assets1,855,436 1,848,303 
Property and equipment, net112,999 108,576 
Operating lease right-of-use assets44,153 44,339 
Deferred contract acquisition costs, noncurrent154,036 149,657 
Acquired intangible assets, net29,903 32,129 
Goodwill58,977 58,977 
Other noncurrent assets15,614 15,650 
Total assets$2,271,118 $2,257,631 
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable$14,961 $12,547 
Accrued expenses and other current liabilities22,859 22,908 
Accrued compensation72,667 93,622 
Deferred revenue584,325 571,286 
Operating lease liabilities20,488 19,842 
Total current liabilities715,300 720,205 
Convertible senior notes, net927,014 913,538 
Deferred revenue, noncurrent63,491 59,315 
Operating lease liabilities, noncurrent30,534 31,225 
Other noncurrent liabilities4,580 4,453 
Total liabilities1,740,919 1,728,736 
Commitments and contingencies (Note 9)
Stockholders’ Equity
Common stock; $0.001 par value; 1,000,000 shares authorized as of October 31, 2021 and July 31, 2021; 140,032 and 138,662 shares issued and outstanding as of October 31, 2021 and July 31, 2021, respectively
140 139 
Additional paid-in capital1,225,224 1,131,006 
Accumulated other comprehensive loss(2,764)(650)
Accumulated deficit(692,401)(601,600)
Total stockholders’ equity530,199 528,895 
Total liabilities and stockholders’ equity$2,271,118 $2,257,631 

The accompanying notes are an integral part of these condensed consolidated financial statements.
3

ZSCALER, INC.
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)
Three Months Ended October 31,
20212020
Revenue$230,517 $142,578 
Cost of revenue52,169 31,727 
Gross profit178,348 110,851 
Operating expenses:
Sales and marketing153,786 96,889 
Research and development65,216 35,770 
General and administrative33,717 20,859 
Total operating expenses252,719 153,518 
Loss from operations(74,371)(42,667)
Interest income473 940 
Interest expense(13,835)(13,049)
Other income (expense), net(589)268 
Loss before income taxes(88,322)(54,508)
Provision for income taxes2,479 498 
Net loss$(90,801)$(55,006)
Net loss per share, basic and diluted $(0.65)$(0.41)
Weighted-average shares used in computing net loss per share, basic and diluted
139,296 133,452 

The accompanying notes are an integral part of these condensed consolidated financial statements.
4

ZSCALER, INC.
Condensed Consolidated Statements of Comprehensive Loss
(in thousands)
(unaudited)
Three Months Ended October 31,
20212020
Net loss$(90,801)$(55,006)
Available-for-sale securities:
Change in net unrealized gains (losses) on available-for-sale securities(1,164)(730)
Cash flow hedging instruments:
Change in net unrealized gains and (losses)(1,304) 
Net realized losses (gains) reclassified into net loss354  
Net change on cash flow hedges(950) 
Other comprehensive loss(2,114)(730)
Comprehensive loss$(92,915)$(55,736)

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

5

ZSCALER, INC.
Condensed Consolidated Statements of Stockholders’ Equity
(in thousands)
(unaudited)

Stockholders' equity activity for the three months ended October 31, 2021:
Common Stock Additional
Paid-In
Capital
Accumulated Other Comprehensive
Loss
Accumulated DeficitTotal
Stockholders’ Equity
Shares Amount  
Balance as of July 31, 2021138,662 $139 $1,131,006 $(650)$(601,600)$528,895 
Issuance of common stock upon exercise of stock options387 — 2,644 — — 2,644 
Vesting of restricted stock units and other stock issuances983 1 (1)— —  
Stock-based compensation— — 91,575 — — 91,575 
Other comprehensive loss— — — (2,114)— (2,114)
Net loss— — — — (90,801)(90,801)
Balance as of October 31, 2021140,032 $140 $1,225,224 $(2,764)$(692,401)$530,199 
Stockholders' equity activity for the three months ended October 31, 2020:
Common Stock Additional
Paid-In
Capital
Accumulated Other Comprehensive
Loss
Accumulated DeficitTotal
Stockholders’ Equity
Shares Amount  
Balance as of July 31, 2020132,817 $133 $823,804 $463 $(339,571)$484,829 
Issuance of common stock upon exercise of stock options690 1 4,518 — — 4,519 
Vesting of restricted stock units and other stock issuances656 — — — — — 
Vesting of early exercised common stock options— — 70 — — 70 
Stock-based compensation— — 58,423 — — 58,423 
Other comprehensive loss— — — (730)— (730)
Net loss— — — — (55,006)(55,006)
Balance as of October 31, 2020134,163 $134 $886,815 $(267)$(394,577)$492,105 

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





6

ZSCALER, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Three Months Ended October 31,
20212020
Cash Flows From Operating Activities
Net loss$(90,801)$(55,006)
Adjustments to reconcile net loss to cash provided by operating activities:
Depreciation and amortization expense9,017 6,092 
Amortization expense of acquired intangible assets2,226 1,577 
Amortization of deferred contract acquisition costs14,912 8,678 
Amortization of debt discount and issuance costs13,476 12,690 
Non-cash operating lease costs6,031 4,513 
Stock-based compensation expense89,903 57,185 
Amortization of investment premiums, net of accretion of purchase discounts2,671 2,605 
Deferred income taxes(223)(520)
Impairment of assets 416 
Other(13)29 
Changes in operating assets and liabilities
Accounts receivable84,927 41,634 
Deferred contract acquisition costs(23,985)(18,042)
Prepaid expenses, other current and noncurrent assets(4,126)7,883 
Accounts payable(1,088)76 
Accrued expenses, other current and noncurrent liabilities(192)(1,243)
Accrued compensation(20,955)(12,347)
Deferred revenue17,381 2,133 
Operating lease liabilities(5,890)(4,821)
Net cash provided by operating activities93,271 53,532 
Cash Flows From Investing Activities
Purchases of property, equipment and other assets(6,454)(8,904)
Capitalized internal-use software(3,450)(2,401)
Purchases of short-term investments(312,840)(174,663)
Proceeds from maturities of short-term investments322,677 76,582 
Proceeds from sale of short-term investments 11,500 
Net cash used in investing activities(67)(97,886)
Cash Flows From Financing Activities
Proceeds from issuance of common stock upon exercise of stock options2,644 4,519 
Payment of deferred consideration related to a business acquisition(50) 
Net cash provided by financing activities2,594 4,519 
Net increase (decrease) in cash and cash equivalents(1)
95,798 (39,835)
Cash and cash equivalents at beginning of period(1)
275,898 141,851 
Cash and cash equivalents at end of period(1)
$371,696 $102,016 
Supplemental Disclosure of Cash Flow Information:
Cash paid for income taxes, net of tax refunds$2,479 $1,496 
Non-Cash Activities
Net change in purchased equipment included in accounts payable and accrued expenses$2,906 $1,884 
Operating lease right-of-use assets obtained in exchange for operating lease obligations, net of terminations$5,426 $13,787 

(1) We did not hold restricted cash for any periods presented.
The accompanying notes are an integral part of these condensed consolidated financial statements.
7

ZSCALER, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1. Business and Summary of Significant Accounting Policies
Description of the Business
Zscaler, Inc. ("Zscaler," the "Company," "we," "us," or "our") is a cloud security company that developed a platform incorporating core security functionalities needed to enable fast and secure access to cloud resources based on identity, context and organization’s policies. Our solution is a purpose-built, multi-tenant, distributed cloud platform that secures user-to-app, app-to-app, and machine-to-machine communications over any network and any location. We deliver our solutions using a software-as-a-service ("SaaS") business model and sell subscriptions to customers to access our cloud platform, together with related support services. We were incorporated in Delaware in September 2007 and conduct business worldwide, with presence in North America, Europe and Asia. Our headquarters are in San Jose, California.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States ("U.S. GAAP") and applicable regulations of the Securities and Exchange Commission ("SEC") regarding interim financial reporting, and include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Certain information and note disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the applicable required disclosures and regulations of the SEC. Therefore, these unaudited condensed consolidated financial statements and accompanying notes should be read in conjunction with the Company's audited consolidated financial statements and related notes in its Annual Report on Form 10-K for the fiscal year ended July 31, 2021 (the "Fiscal 2021 Form 10-K"), as filed with the SEC on September 16, 2021.
Interim Unaudited Condensed Consolidated Financial Statements
The accompanying condensed consolidated balance sheet as of July 31, 2021 was derived from the audited consolidated financial statements as of that date. The accompanying interim condensed consolidated financial statements, including the condensed consolidated balance sheet as of October 31, 2021, the condensed consolidated statements of operations for the three months ended October 31, 2021 and 2020, the condensed consolidated statements of comprehensive loss for the three months ended October 31, 2021 and 2020, the condensed consolidated statements of stockholders’ equity for the three months ended October 31, 2021 and 2020 and the condensed consolidated statements of cash flows for the three months ended October 31, 2021 and 2020 are unaudited. The related financial data and the other financial information disclosed in the accompanying notes to these condensed consolidated financial statements are also unaudited. These interim unaudited condensed consolidated financial statements have been prepared on a basis consistent with our annual consolidated financial statements and, in our opinion, include all normal recurring adjustments necessary to state fairly our quarterly results. The results of operations for the three months ended October 31, 2021 are not necessarily indicative of the results to be expected for our fiscal year ending July 31, 2022 or for any other future fiscal year or interim period.
8

Use of Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported and disclosed in the financial statements and accompanying notes. Such estimates include, but are not limited to, the determination of revenue recognition, deferred revenue, deferred contract acquisition costs, valuation of acquired intangible assets, period of benefit generated from our deferred contract acquisition costs, allowance for doubtful accounts, valuation of common stock options and stock-based awards, useful lives of property and equipment, useful lives of acquired intangible assets, recoverability of goodwill, valuation of deferred tax assets and liabilities, loss contingencies related to litigation, fair value and effective interest rate of convertible senior notes, valuation of non-marketable equity investments and the discount rate used for operating leases. Management determines these estimates and assumptions based on historical experience and on various other assumptions that are believed to be reasonable. Actual results could differ significantly from these estimates, and such differences may be material to the condensed consolidated financial statements.
Due to the COVID-19 pandemic, there is ongoing uncertainty and significant disruption in the global economy and financial markets. We are not aware of any specific event or circumstances that would require an update to our estimates, judgments or assumptions or a revision to the carrying value of our assets or liabilities as of the date of issuance of these condensed consolidated financial statements. These estimates, judgments and assumptions may change in the future, as new events occur or additional information is obtained.
Fiscal Year
Our fiscal year ends on July 31. References to fiscal 2022, for example, refer to our fiscal year ending July 31, 2022.
Significant Accounting Policies
Our significant accounting policies are described in the Fiscal 2021 Form 10-K. There have been no significant changes to these policies that have had a material impact on the condensed consolidated financial statements and related notes for the three months ended October 31, 2021.
Recently Adopted Accounting Pronouncements
In October 2021, the Financial Accounting Standards Board ("FASB") issued ASU No. 2021-08, Business Combinations (Topic 805) on Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This standard requires contract assets and contract liabilities from contracts with customers that are acquired in a business combination to be recognized and measured as if the acquirer had originated the original contract. Previously, acquired contract assets and liabilities were measured at fair value. This standard is effective for us in the first quarter of fiscal 2024, though early adoption is permitted. We early adopted this standard in the first quarter of fiscal 2022 and it did not have a material impact to the condensed consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
In June 2020, the FASB issued ASU No. 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40). This standard eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, the new guidance modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted earnings per share computation. This standard is effective for us in the first quarter of fiscal 2023, using the fully retrospective or modified retrospective method, though early adoption is permitted. We are currently evaluating the potential impact of this standard on the condensed consolidated financial statements.
9

Note 2. Revenue Recognition
Disaggregation of Revenue
Subscription and support revenue is recognized over time and accounted for approximately 97% of our revenue for the three months ended October 31, 2021 and 2020, respectively.
The following table summarizes the revenue by region based on the shipping address of customers who have contracted to use our cloud platform:
Three Months Ended October 31,
20212020
Amount% RevenueAmount% Revenue
(in thousands, except per percentage data)
United States$113,413 49 %$70,159 49 %
Europe, Middle East and Africa 80,549 35 %55,205 39 %
Asia Pacific31,052 14 %14,280 10 %
Other5,503 2 %2,934 2 %
Total $230,517 100 %$142,578 100 %
The following table summarizes the revenue from contracts by type of customer:
Three Months Ended October 31,
20212020
Amount% RevenueAmount% Revenue
(in thousands, except per percentage data)
Channel partners$215,073 93 %$133,440 94 %
Direct customers15,444 7 %9,138 6 %
Total $230,517 100 %$142,578 100 %
Significant Customers
No single customer accounted for 10% or more of the total revenue in the periods presented. The following table summarizes the concentration of 10% or more of the total balance of accounts receivable, net:
October 31, 2021July 31, 2021
Channel partner A14%*
(*) Represents less than 10%.
10

Contract Balances
Contract liabilities consist of deferred revenue and include payments received in advance of performance under the contract. Such amounts are recognized as revenue over the contractual period. Deferred revenue, including current and noncurrent balances as of October 31, 2021 and July 31, 2021 was $647.8 million and $630.6 million, respectively. In the three months ended October 31, 2021 and 2020, we recognized revenue of $206.4 million and $127.6 million, respectively, that was included in the corresponding contract liability balance at the beginning of these periods.
Remaining Performance Obligations
The typical subscription and support term is one to three years. Most of our subscription and support contracts are non-cancelable over the contractual term. However, customers typically have the right to terminate their contracts for cause, if we fail to perform. As of October 31, 2021, the aggregate amount of the transaction price allocated to remaining performance obligations was $1,705.7 million. We expect to recognize 50% of the transaction price over the next 12 months and 97% of the transaction price over the next three years, with the remainder recognized thereafter.
Costs to Obtain and Fulfill a Contract
We capitalize sales commission and associated payroll taxes paid to internal sales personnel that are incremental to the acquisition of channel partner and direct customer contracts. These costs are recorded as deferred contract acquisition costs in the condensed consolidated balance sheets.
The activity of the deferred contract acquisition costs consisted of the following:
Three Months Ended October 31,
20212020
(in thousands)
Beginning balance
$207,030 $109,915 
Capitalization of contract acquisition costs
23,985 18,042 
Amortization of deferred contract acquisition costs
(14,912)(8,678)
Ending balance
$216,103 $119,279 
The outstanding balance of the deferred contract acquisition costs consisted of the following:
October 31, 2021July 31, 2021
(in thousands)
Deferred contract acquisition costs, current
$62,067 $57,373 
Deferred contract acquisition costs, noncurrent
154,036 149,657 
Total$216,103 $207,030 
Sales commissions accrued but not paid as of October 31, 2021 and July 31, 2021, totaled $16.3 million and $46.7 million, respectively, which are included within accrued compensation in the condensed consolidated balance sheets.




11

Note 3. Cash Equivalents and Short-Term Investments
Cash equivalents and short-term investments consisted of the following as of October 31, 2021:
Amortized
Cost
Unrealized
Gains
Unrealized
Losses

Fair Value
(in thousands)
Cash equivalents:
Money market funds$183,556 $ $ $183,556 
U.S. treasury securities94,998  (2)94,996 
Total$278,554 $ $(2)$278,552 
Short-term investments:
U.S. treasury securities$414,326 $1 $(49)$414,278 
U.S. government agency securities473,738 47 (496)473,289 
Corporate debt securities325,952 21 (594)325,379 
Total$1,214,016 $69 $(1,139)$1,212,946 
Total cash equivalents and short-term investments$1,492,570 $69 $(1,141)$1,491,498 
Cash equivalents and short-term investments consisted of the following as of July 31, 2021:
Amortized
Cost
Unrealized
Gains
Unrealized
Losses

Fair Value
Cash equivalents:(in thousands)
Money market funds$167,337 $ $ $167,337 
U.S. government agency securities10,999   10,999 
Total$178,336 $ $ $178,336 
Short-term investments:
U.S. treasury securities$387,428 $9 $(17)$387,420 
U.S. government agency securities511,622 144 (34)511,732 
Corporate debt securities327,512 102 (112)327,502 
Total$1,226,562 $255 $(163)$1,226,654 
Total cash equivalents and short-term investments$1,404,898 $255 $(163)$1,404,990 
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The amortized cost and fair value of our short-term investments based on their stated maturities consisted of the following as of October 31, 2021:
Amortized
Cost
Fair Value
(in thousands)
Due within one year$757,847 $757,830 
Due between one to three years456,169 455,116 
Total$1,214,016 $1,212,946 
Short-term investments that were in an unrealized loss position as of October 31, 2021, consisted of the following:
Less than 12 MonthsGreater than 12 MonthsTotal
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
(in thousands)
U.S. treasury securities$320,337 $(49)$ $ $320,337 $(49)
U.S. government agency securities252,257 (486)4,995 (11)257,252 (497)
Corporate debt securities249,483 (592)2,225 (1)251,708 (593)
Total$822,077 $(1,127)$7,220 $(12)$829,297 $(1,139)
Short-term investments that were in an unrealized loss position as of July 31, 2021, consisted of the following:
Less than 12 MonthsGreater than 12 MonthsTotal
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
(in thousands)
U.S. treasury securities$306,908 $(17)$ $ $306,908 $(17)
U.S. government agency securities104,782 (34)  104,782 (34)
Corporate debt securities157,208 (112)  157,208 (112)
Total $568,898 $(163)$ $ $568,898 $(163)
We review the individual securities that have unrealized losses in our short-term investment portfolio on a regular basis. We evaluate, among others, whether we have the intention to sell any of these investments and whether it is not more likely than not that we will be required to sell any of them before recovery of the amortized cost basis. Neither of these criteria were met in any period presented. We additionally evaluate whether the decline in fair value of the corporate debt securities below the amortized cost basis is related to credit losses or other factors. Based on this evaluation, we determined that unrealized losses of the above securities were primarily attributable to changes in interest rates and non credit-related factors. Accordingly, we determined that an allowance for credit losses was unnecessary for our short-term investments as of October 31, 2021 and July 31, 2021.
We recorded $3.0 million and $3.9 million of accrued interest receivable within prepaid expenses and other current assets in the condensed consolidated balance sheets as of October 31, 2021 and July 31, 2021, respectively.
13

Strategic Investments
The carrying amount of our strategic investments, which consist of non-marketable investments, was $5.1 million as of October 31, 2021 and July 31, 2021, which are included within other noncurrent assets in the condensed consolidated balance sheets. There were no material events or circumstances impacting the carrying amount of our strategic investments during the periods presented.
Note 4. Fair Value Measurements
We measure our financial assets and liabilities at fair value at each reporting period using a fair value hierarchy which requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Our money market funds are classified within Level I due to the highly liquid nature of these assets and have quoted prices in active markets. Certain of our investments in available-for-sale securities (i.e., U.S. treasury securities, U.S. government agency securities and corporate debt securities), as well as our assets and liabilities arising from our foreign currency forward contracts, are classified within Level II. The fair value of our Level II financial assets and liabilities is determined by using inputs based on non-binding market consensus prices that are primarily corroborated by observable market data or quoted market prices for similar instruments, for substantially the full term of the financial assets and liabilities.
14

Assets and liabilities that are measured at fair value on a recurring basis consisted of the following as of October 31, 2021:    
Level ILevel IILevel III
Fair Value
Quoted Prices
in Active
Markets for
Identical Assets
Significant
Other
Observable
Inputs
Significant
Unobservable
Inputs
Cash equivalents:(in thousands)
Money market funds$183,556 $183,556 $ $ 
U.S. treasury securities94,996  94,996  
Total$278,552 $183,556 $94,996 $ 
Short-term investments:
U.S. treasury securities$414,278 $ $414,278 $ 
U.S. government agency securities473,289  473,289  
Corporate debt securities325,379  325,379  
Total$1,212,946 $ $1,212,946 $ 
Total cash equivalents and short-term investments$1,491,498 $183,556 $1,307,942 $ 
Designated derivative instruments:
Foreign currency contracts assets-current (1)
$300 $ $300 $ 
Foreign currency contract assets-noncurrent (2)
$38 $ $38 $ 
Foreign currency contracts liabilities-current (3)
$1,743 $ $1,743 $ 
Foreign currency contracts liabilities-noncurrent (4)
$79 $ $79 $ 
Non-designated derivative instruments:
Foreign currency contracts assets-current (1)
$159 $ $159 $ 
Foreign currency contracts liabilities-current (3)
$383 $ $383 $ 
(1) Reported as prepaid expenses and other current assets in the condensed consolidated balance sheets.
(2) Reported as other noncurrent assets in the condensed consolidated balance sheets.
(3) Reported as accrued expenses and other current liabilities in the condensed consolidated balance sheets.
(4) Reported as other noncurrent liabilities in the condensed consolidated balance sheets.

15

Assets that are measured at fair value on a recurring basis consisted of the following as of July 31, 2021:
Level ILevel IILevel III
Fair Value
Quoted Prices
in Active
Markets for
Identical Assets
Significant
Other
Observable
Inputs
Significant
Unobservable
Inputs
Cash equivalents:(in thousands)
Money market funds$167,337 $167,337 $ $ 
U.S. treasury securities10,999  10,999  
Total$178,336 $167,337 $10,999 $ 
Short-term investments:
U.S. treasury securities$387,420 $ $387,420 $ 
U.S. government agency securities511,732  511,732  
Corporate debt securities327,502  327,502  
Total$1,226,654 $ $1,226,654 $ 
Total cash equivalents and short-term investments$1,404,990 $167,337 $1,237,653 $ 
Designated derivative instruments:
Foreign currency contracts assets-current (1)
$459 $ $459 $ 
Foreign currency contract assets-noncurrent (2)
$26 $ $26 $ 
Foreign currency contracts liabilities-current (3)
$1,083 $ $1,083 $ 
Foreign currency contracts liabilities-noncurrent (4)
$42 $ $42 $ 
Non-designated derivative instruments:
Foreign currency contracts assets-current (1)
$83 $ $83 $ 
Foreign currency contracts liabilities-current (3)
$240 $ $240 $ 
(1) Reported as prepaid expenses and other current assets in the consolidated balance sheets.
(2) Reported as other noncurrent assets in the consolidated balance sheets.
(3) Reported as accrued expenses and other current liabilities in the consolidated balance sheets.
(4) Reported as other noncurrent liabilities in the consolidated balance sheets.
We did not have transfers between levels of the fair value hierarchy of assets measured at fair value during the periods presented.
Refer to Note 8, Convertible Senior Notes, for the carrying amount and estimated fair value of our convertible senior notes as of October 31, 2021 and July 31, 2021.
16

Note 5. Property and Equipment and Purchased Intangible Assets
Property and equipment consisted of the following:
October 31, 2021July 31, 2021
(in thousands)
Hosting equipment$137,752 $130,981 
Computers and equipment6,113 5,599 
Purchased software1,311 1,311 
Capitalized internal-use software45,487 39,542 
Furniture and fixtures1,022 1,021 
Leasehold improvements7,340 7,339 
Total property and equipment, gross199,025 185,793 
Less: Accumulated depreciation and amortization(86,026)(77,217)
Total property and equipment, net$112,999 $108,576 
Purchased intangible assets consist of internet protocol (IP) addresses, which are amortized on a straight-line basis over an estimated useful life of 10 years. As of October 31, 2021, the historical cost and accumulated amortization was $3.0 million and $0.5 million, respectively. As of July 31, 2021, the historical cost and accumulated amortization was $3.0 million and $0.4 million, respectively. Purchased intangible assets are included within other noncurrent assets in the condensed consolidated balance sheets.
We recognized depreciation and amortization expense on property and equipment and purchased intangible assets of $9.0 million and $6.1 million for the three months ended October 31, 2021 and 2020, respectively.
Note 6. Derivative Instruments
We implemented a foreign currency risk management program during the three months ended January 31, 2021. As a global business, we are exposed to foreign currency exchange rate risk. Substantially all of our revenue is transacted in U.S. dollars; however, a portion of our cost of revenues and operating expenditures are incurred outside of the United States and are denominated in foreign currencies, making them subject to fluctuations in foreign currency exchange rates. In order to mitigate the impact of foreign currency fluctuations on our future cash flows and earnings, we enter into foreign currency forward contracts, which we designate as cash flow hedges. All cash flow hedges were considered effective during the three months ended October 31, 2021.
During the three months ended October 31, 2021, we began to 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. The outstanding non-designated derivative instruments are carried at fair value with changes recorded in other income (expense), net in the condensed consolidated statement of operations in the same period as the changes in fair value from the remeasurement of the underlying assets and liabilities. Cash flows from such derivatives are classified as operating activities. These foreign exchange contracts typically have maturities of approximately one to four months. Changes in the fair value of these derivatives were not material for the three months ended October 31, 2021.
As of October 31, 2021 and July 31, 2021, the total notional amount of our outstanding foreign currency forward contracts was $123.4 million and $118.9 million, respectively for designated and $47.7 million and $28.2 million, respectively for non-designated foreign currency forward contracts. The maximum length of time over which forecasted foreign currency denominated operating expenses are hedged is 18 months. Substantially all of the unrealized gains and
17

losses related to our cash flow hedges are expected to be released into earnings over the next 12 months. Refer to Note 4, Fair Value Measurements, for the fair value of our derivative instruments as reported on the condensed consolidated balance sheet as of October 31, 2021 and July 31, 2021.
During the three months ended October 31, 2021, the unrealized gains and losses related to our cash flow hedges that were recognized in accumulated other comprehensive income (loss) ("AOCI") and the gains and losses reclassified into the condensed consolidated statement of operations were not material. During the three months ended October 31, 2021, changes in the fair value of our non-designated derivative instruments recorded in other income (expense), net within the condensed consolidated statements of operations were not material.
Our derivative contracts expose us to credit risk to the extent that the counterparties may be unable to meet the terms of the underlying contracts. We mitigate this credit risk by transacting with major financial institutions with high credit ratings and standards. We periodically assess the creditworthiness of our counterparties to ensure they continue to meet our credit quality requirements. We also enter into master netting arrangements, which permit net settlement of transactions with the same counterparty. The potential impact of these rights of set-off associated with our derivative instruments was not material as of October 31, 2021 and July 31, 2021. We are not required to pledge, and are not entitled to receive, cash collateral related to these derivative instruments. We do not enter into derivative contracts for trading or speculative purposes.
Note 7. Goodwill and Acquired Intangible Assets
Goodwill
The carrying amount of goodwill was $59.0 million as of October 31, 2021 and July 31, 2021.
Acquired Intangible Assets
Acquired intangible assets consist of developed technology and customer relationships acquired through our business combinations and asset acquisitions. Acquired intangible assets are amortized using the straight-line method over their estimated useful lives.
Acquired intangible assets subject to amortization consisted of the following as of October 31, 2021 and July 31, 2021:
Gross Carrying AmountAccumulated AmortizationNet Carrying Amount
July 31, 2021AdditionsOctober 31, 2021July 31, 2021Amortization ExpenseOctober 31, 2021October 31, 2021July 31, 2021
(in thousands)
Developed technology$39,656 $ $39,656 $(10,674)