Zscaler Inc

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 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 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 ("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 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, 2023 (the "Fiscal 2023 Form 10-K"), as filed with the SEC on September 14, 2023.

Interim Unaudited Condensed Consolidated Financial Statements

The accompanying condensed consolidated balance sheet as of July 31, 2023 was derived from the audited consolidated financial statements as of that date. The accompanying interim unaudited condensed consolidated financial statements, including the condensed consolidated balance sheet as of April 30, 2024, the condensed consolidated statements of operations for the three and nine months ended April 30, 2024 and 2023, the condensed consolidated statements of comprehensive income (loss) for the three and nine months ended April 30, 2024 and 2023, the condensed consolidated statements of stockholders’ equity for the three and nine months ended April 30, 2024 and 2023 and the condensed consolidated statements of cash flows for the nine months ended April 30, 2024 and 2023 are unaudited. The related financial data and the other financial information disclosed in the accompanying notes to these interim unaudited condensed consolidated financial statements are also unaudited. These interim unaudited condensed consolidated financial statements have been prepared on a basis consistent with our annual consolidated financial statements and, in our opinion, include all normal recurring adjustments necessary to state fairly our quarterly results. The results of operations for the three and nine months ended April 30, 2024 are not necessarily indicative of the results to be expected for our fiscal year ending July 31, 2024 or for any other future fiscal year or interim period.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported and disclosed in the financial statements and accompanying notes. Such estimates include, but are not limited to, the determination of revenue recognition, deferred revenue, deferred contract acquisition costs, capitalized internal-use software, 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 of convertible senior notes 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 thecondensed consolidated financial statements.

Due to uncertainty in the macroeconomic environment, including but not limited to the effects of inflation, and geopolitical events, there is ongoing 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.

In August 2023, we completed an assessment of the useful lives of our servers and networking equipment, which resulted in an extension of their useful lives from four tofive years. This change in accounting estimate was effective beginning fiscal 2024. Based on the carrying amount of these assets as of July 31, 2023, this change decreased depreciation expense by $3.4 million and $9.7 million for the three and nine months ended April 30, 2024, respectively.

Fiscal Year

Our fiscal year ends on July 31. References to fiscal 2024, for example, refer to our fiscal year ending July 31, 2024.

Significant Accounting Policies

Our significant accounting policies are described in the Fiscal 2023 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 and nine months ended April 30, 2024.

Recently Issued Accounting Pronouncements Not Yet Adopted

In November 2023, the Financial Accounting Standards Board ("FASB") issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires disclosure of incremental segment information on an annual and interim basis. This standard is effective for us in the annual periods beginning in fiscal 2025 and interim periods beginning in the first quarter of fiscal 2026. We are currently evaluating the potential impact of this standard.

In December 2023, the FASB issued 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The amended guidance enhances income tax disclosures primarily related to the effective tax rate reconciliation and income taxes paid information. This guidance requires disclosures of specific categories in the effective tax rate reconciliation and further information on reconciling items meeting a quantitative threshold. In addition, the amended guidance requires disaggregating income taxes paid (net of refunds received) by federal, state and foreign taxes. It also requires disaggregating individual jurisdictions in which income taxes paid (net of refunds received) is equal to or greater than 5% of total income taxes paid (net of refunds received). This standard is effective for us in the annual periods beginning in fiscal 2026 and interim periods beginning in the first quarter of fiscal 2027. We are currently evaluating the potential impact of this standard.

Note 2. Revenue Recognition

Disaggregation of Revenue

Subscription and support revenue is recognized over time and accounted for approximately 98% and 97% of our revenue for the three and nine months ended April 30, 2024, respectively, and 97% for each of the three andnine months ended April 30, 2023, respectively.

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

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

Significant Customers

No single customer accounted for 10% or more of the total revenue or the total balance of accounts receivable, net in the periods presented.

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 April 30, 2024 and July 31, 2023 was $1,577.0 million and $1,439.7 million, respectively. In the nine months ended April 30, 2024 and 2023, we recognized revenue of $1,115.1 million and $802.1 million, respectively, that was included in the corresponding contract liability balance at the beginning of these periods.

Remaining Performance Obligations

The typical subscription and support term isone tothree 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 April 30, 2024, the aggregate amount of the transaction price allocated to remaining performance obligations was $3,824.1 million. We expect to recognize 51% of the transaction price over the next 12 months and 95% 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 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:

The outstanding balance of the deferred contract acquisition costs consisted of the following:

Sales commissions accrued but not paid as of April 30, 2024 and July 31, 2023, totaled $33.4 million and $48.0 million, respectively, which are included within accrued compensation in the condensed consolidated balance sheets.

Note 3. Cash Equivalents and Short-Term Investments

Cash equivalents and short-term investments consisted of the following as of April 30, 2024:

Cash equivalents and short-term investments consisted of the following as of July 31, 2023:

The amortized cost and fair value of our short-term investments based on their stated maturities consisted of the following as of April 30, 2024:

Short-term investments that were in an unrealized loss position as of April 30, 2024 consisted of the following:

Short-term investments that were in an unrealized loss position as of July 31, 2023 consisted of the following:

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 their 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 April 30, 2024 and July 31, 2023.

As of April 30, 2024 and July 31, 2023, we recorded $10.6 million and $7.2 million, respectively, of accrued interest receivable within prepaid expenses and other current assets in the condensed consolidated balance sheets.

Strategic Investments

Our strategic investments consist primarily of non-marketable equity securities of privately held companies which do not have a readily determinable fair value. As of April 30, 2024 and July 31, 2023, the carrying amount of our strategic investments was $9.8 million and $7.8 million, respectively, and is included within other noncurrent assets in the condensed consolidated balance sheets. There were no material events or circumstances impacting their carrying amount 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 and our interest rate swap 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.

Assets and liabilities that are measured at fair value on a recurring basis consisted of the following as of April 30, 2024:

(1)Included within prepaid expenses and other current assets in the condensed consolidated balance sheets.

(2)Included within other noncurrent assets in the condensed consolidated balance sheets.

(3)Included within accrued expenses and other current liabilities in the condensed consolidated balance sheets.

(4)Included within other noncurrent liabilities in the condensed consolidated balance sheets.

Assets that are measured at fair value on a recurring basis consisted of the following as of July 31, 2023:

(1)Included within prepaid expenses and other current assets in the consolidated balance sheets.

(2)Included within other noncurrent assets in the consolidated balance sheets.

(3)Included within accrued expenses and other current liabilities in the consolidated balance sheets.

(4)Included within 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 10, Convertible Senior Notes, for the carrying amount and estimated fair value of our convertible senior notes as of April 30, 2024 and July 31, 2023.

Note 5. Property and Equipment and Purchased Intangible Assets

Property and equipment consisted of the following:

Purchased intangible assets consist of internet protocol (IP) addresses and source codes, which are amortized on a straight-line basis over an estimated useful life ranging from five years to 10 years. As of April 30, 2024, their historical cost and accumulated amortization were $12.4 million and $2.5 million, respectively. As of July 31, 2023, their historical cost and accumulated amortization were $8.6 million and $1.6 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 $17.7 million and $14.5 million for the three months ended April 30, 2024 and 2023, respectively, and $47.0 million and $39.8 million for the nine months ended April 30, 2024 and 2023, respectively. Additionally, we recognized stock-based compensation expense on the amortization of capitalized stock-based compensation associated with capitalized internal-use software of $3.4 million and $2.2 million for the three months ended April 30, 2024 and 2023, respectively, and $9.3 million and $5.9 million for the nine months ended April 30, 2024 and 2023, respectively.

Note 6. Business Combinations

Airgap Networks Inc.

On April 12, 2024, we completed the acquisition of Airgap Networks Inc. ("Airgap"), an early-stage technology company incorporated in United States, for total purchase price consideration of $124.4 million. We plan to integrate Airgap's technology into our cloud platform.

In addition to the cash consideration noted above, pursuant to the terms of the purchase agreement, certain Airgap employees who became our employees are entitled to receive deferred merger consideration of $22.7 million payable in the form of restricted shares of our authorized common stock. These awards are subject to time-based vesting and will be recognized as stock-based compensation expense during the post-combination period. Additionally, in connection with this acquisition, we committed to issue replacement awards with a fair value of $6.2 million, of which $1.4 million attributable to pre-combination vesting was allocated to the purchase price consideration. The remaining fair value is attributable to post-combination vesting and will be recognized as compensation expense during the post-combination period.

In connection with this acquisition, we completed a valuation of the acquired identifiable intangible assets as of April 12, 2024. The purchase price consideration was allocated on a preliminary basis, subject to working capital adjustment, to identified intangible assets, which include $28.7 million of developed technology, $3.1 million of customer relationships, and

$95.5 million of goodwill. The developed technology was valued using a replacement cost approach, which is based on the cost of a market participant to reconstruct a substitute asset of comparable utility. The customer relationships were also valued using the replacement cost approach, which is based on the cost a market participant would incur to generate the acquired portfolio of customers. Goodwill represents the excess of the purchase price paid over the fair value of the net assets acquired and is primarily attributable to the acquired workforce and expected operating synergies. The acquisition related transaction expenses were not material and recorded as incurred within general and administrative expenses in the condensed consolidated statement of operations for the three months ended April 30, 2024.

During the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the fair value of the acquired intangible assets, deferred tax and goodwill.

The preliminary allocation of the purchase price consideration consisted of the following:

Avalor Technologies Ltd.

On March 8, 2024 we completed the acquisition of Avalor Technologies Ltd. ("Avalor"), an early-stage technology company incorporated in Israel, for total purchase price consideration of $256.7 million. We plan to integrate this company's technology into our cloud platform.

In addition to the cash consideration noted above, pursuant to the terms of the stock purchase agreement, certain Avalor employees who became our employees are entitled to receive deferred merger consideration of $54.8 million payable in the form of restricted shares of our authorized common stock. These awards are subject to time-based vesting and will be recognized as stock-based compensation expense during the post-combination period. Additionally, in connection with this acquisition, we committed to issue replacement awards with a fair value $14.4 million, of which $2.4 million attributable to pre-combination vesting was allocated to the purchase price consideration. The remaining fair value is attributable to post-combination vesting and will be recognized as compensation expense during the post-combination period.

In connection with this acquisition, we completed a valuation of the acquired identifiable intangible assets as of March 8, 2024. The purchase price consideration was allocated on a preliminary basis, subject to working capital adjustment, to identified intangible assets, which include $14.7 million of developed technology, $3.3 million of customer relationships, and $229.2 million of goodwill. The developed technology was valued using a replacement cost approach, which is based on the cost of a market participant to reconstruct a substitute asset of comparable utility. The customer relationships were also valued using the replacement cost approach, which is based on the cost a market participant would incur to generate the acquired portfolio of customers. Goodwill represents the excess of the purchase price paid over the fair value of the net assets acquired and is primarily attributable to the acquired workforce and expected operating synergies. The acquisition related transaction expenses were not material and recorded as incurred within general and administrative expenses in the condensed consolidated statement of operations for the three months ended April 30, 2024.

During the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the fair value of the acquired intangible assets, deferred tax and goodwill.

The preliminary allocation of the purchase price consideration consisted of the following:

Securelyshare Software Private Ltd.

On August 31, 2023, we completed the acquisition of Securelyshare Software Private Ltd. ("Securelyshare"), an early-stage technology company incorporated in India, for total purchase price consideration of $5.3 million. We plan to integrate this company's technology into our cloud platform. The transaction was accounted for as a business combination. We recognized intangible assets of $2.8 million for developed technology and goodwill of $3.2 million. The developed technology is amortized over its economic useful life offive years. Goodwill represents the excess of the purchase price paid over the fair value of the net assets acquired and is primarily attributable to the acquired workforce and expected operating synergies. The acquisition qualified as a stock transaction for tax purposes. The goodwill is not expected to be deductible for income tax purposes.

Canonic Security Technologies Ltd.

On February 20, 2023, we completed the acquisition of Canonic Security Technologies Ltd. ("Canonic"), an early-stage technology company incorporated in Israel, for total purchase price consideration of $16.5 million. We plan to integrate this company's technology into our cloud platform.

In addition to the cash consideration noted above, pursuant to the terms of the purchase agreement, certain of Canonic's employees who became our employees are entitled to receive deferred merger consideration of $3.8 million payable in the form of restricted shares of our authorized common stock. These awards are subject to time-based vesting and will be recognized as stock-based compensation expense during the post-combination period.

In connection with this acquisition, we completed a valuation of the acquired identifiable assets as of February 20, 2023. The allocation of the purchase price consideration resulted in the recognition of $10.6 million of goodwill and $5.1 million of developed technology. The developed technology was valued using a replacement cost approach, which is based on the cost of a market participant to reconstruct a substitute asset of comparable utility. Goodwill represents the excess of the purchase price paid over the fair value of the net assets acquired and is primarily attributable to the acquired workforce and expected operating synergies. The acquisition related transaction expenses were not material and recorded as incurred within general and administrative expenses in the condensed consolidated statement of operations for the three months ended April 30, 2023.

The allocation of the purchase price consideration consisted of the following:

Pro Forma Financial Information

The pro forma financial information from the above business acquisitions, assuming the acquisition had occurred as of the beginning of the fiscal year prior to the fiscal year of the acquisition, as well as revenue and earnings generated during the current fiscal year, were not material for disclosure purposes.

Note 7. Goodwill and Acquired Intangible Assets

Goodwill

Changes in the carrying amount of goodwill for the nine months ended April 30, 2024 consisted of the following:

Acquired Intangible Assets

Acquired intangible assets consist of developed technology and customer relationships acquired through our business acquisitions and asset acquisitions. Acquired intangible assets are amortized using the straight-line method over their estimated useful lives.

During the three and nine months ended April 30, 2024, in connection with the acquisition of Airgap, Avalor and Securelyshare, we acquired developed technology and customer relationships with a fair value of $46.2 million and $6.4 million, respectively, and each of them with an estimated useful life offive years. For further information refer to Note 6, Business Combinations.

Changes in acquired intangible assets for the nine months ended April 30, 2024 consisted of the following:

Amortization expense of acquired intangible assets for the three and nine months ended April 30, 2024 was $3.4 million and $9.5 million, respectively, and for the three and nine months ended April 30, 2023 was $3.0 million and $8.1 million, respectively. Amortization expense of developed technology and customer relationships is included primarily within cost of revenue and sales and marketing expenses, respectively, in the condensed consolidated statements of operations.

Future amortization expense of acquired intangible assets as of April 30, 2024 consists of the following:

Note 8. Derivative Instruments

Foreign Currency Forward Contracts

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 revenue 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 and nine months ended April 30, 2024 and 2023.

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. The outstanding non-designated derivative instruments are carried at fair value with the change in fair value recorded in other 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 approximatelyone tofour months. Changes in the fair value of these derivatives were not material for the three and nine months ended April 30, 2024 and 2023.

As of April 30, 2024 and July 31, 2023, the total notional amount of our outstanding designated foreign currency forward contracts was $530.9 million and $457.6 million, respectively, and for our outstanding non-designated foreign currency forward contracts was $303.0 million and $182.9 million, respectively. The maximum length of time over which forecasted foreign currency denominated operating expenses are hedged is 21 months. As of April 30, 2024, an estimated $5.3 million of the unrealized gain 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 April 30, 2024 and July 31, 2023.

During the three and nine months ended April 30, 2024 and 2023, changes in the fair value of our non-designated derivative instruments recorded within other expense, net within the condensed consolidated statement of operations, werenot material.

The changes in accumulated other comprehensive income (loss) ("AOCI") related to our cash flow hedges consisted of the following:

(1)(Gains) losses related to our cash flow hedges reclassified from AOCI into the condensed consolidated statement of operations consisted of the following:

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 April 30, 2024 and July 31, 2023. 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.

Interest Rate Swap Contracts

During the three months ended April 30, 2023, we entered into interest rate swaps contracts, maturing on July 1, 2025, designated as fair value hedges intended to hedge a portion of our fair value risk exposure due to changing interest rates by economically converting the fixed interest rate of a certain tranche of our convertible senior notes to a floating interest rate. As of April 30, 2024 and July 31, 2023 the carrying amount of the hedged convertible senior notes was $496.6 million and $496.4 million, respectively. The total notional amount of our outstanding interest rate swaps was $500.0 million as of April 30, 2024 and July 31, 2023. The gains and losses related to changes in the fair value of the interest rate swaps are included within interest expense in the condensed consolidated statement of operations and substantially offset changes in the fair value of the hedged portion of the underlying convertible senior notes that are attributable to the changes in underlying benchmark interest rates. As of April 30, 2024 and July 31, 2023, the cumulative amount of fair value hedge accounting adjustments included in the carrying amount of hedged liabilities was $7.7 million and $8.3 million, respectively.

The effect of derivative instruments designated as fair value hedges included within interest expense in the condensed statement of operations consisted of the following:

Note 9. Restructuring and Other Charges

On March 1, 2023, we announced a restructuring plan as a part of our planned efforts to streamline operations and to align people, roles, and projects to our strategic priorities. These actions included the reduction of our worldwide headcount by approximately 3%.

During the three months ended April 30, 2023, we incurred$7.6 million of restructuring charges, consisting of$6.6 million of employee severance and benefit charges and$1.0 million of stock-based compensation expense related to modified equity incentive awards. These charges were recorded within restructuring and other charges in the condensed consolidated statements of operations. The restructuring plan was completed during the three months ended October 31, 2023.

Note 10. Convertible Senior Notes

On June 25, 2020, we issued $1,150.0 million in aggregate principal amount of 0.125% convertible senior notes due 2025 (the “Notes”), including the exercise in full by the initial purchasers of the Notes of their option to purchase an additional $150.0 million principal amount of the Notes. The Notes are unsecured obligations and bear interest at a rate of 0.125% per year and interest is payable semiannually in arrears on January 1 and July 1 of each year, beginning on January 1, 2021. The Notes mature on July 1, 2025, unless earlier converted, redeemed or repurchased. The total net proceeds from the offering, after deducting initial purchase discounts and other debt issuance costs, was $1,130.5 million. Refer to Note 10, Convertible Senior Notes, to the audited consolidated financial statements included in our Fiscal 2023 Form 10-K for further information on the Notes.

During the three months ended April 30, 2024, the conditions allowing holders of the Notes to convert were not met. Conversion notices received through April 30, 2024 have not been material.

During the three months ended April 30, 2023, we entered into interest rate swap contracts designated as fair value hedges of certain of our Notes. For further information refer to Note 8, Derivative Instruments.

The net carrying amount of the liability component of the Notes consisted of the following:

The interest expense related to the Notes consisted of the following:

The total fair value of the Notes was $1,455.7 million and $1,411.4 million as of April 30, 2024 and July 31, 2023, respectively. The fair value was determined based on the closing trading price per $1,000 of the Notes as of the last day of trading for the period. We consider the fair value of the Notes as of April 30, 2024 to be a Level II measurement as they are not actively traded. The fair value of the Notes is primarily affected by the trading price of our common stock and market interest rates.

In connection with the pricing of the Notes, we entered into capped call transactions with the option counterparties (the "Capped Calls"). The Capped Calls each have an initial strike price of $150.80 per share, subject to certain adjustments, which corresponds to the initial conversion price of the Notes. The Capped Calls have an initial cap price of $246.76 per share, subject to certain adjustments. The Capped Calls are generally expected to reduce potential dilution to our common stock upon any conversion of the Notes and/or offset any cash payments we are required to make in excess of the principal amount of the converted Notes, as the case may be, with such reduction and/or offset subject to a cap. During the three and nine months ended April 30, 2024 and 2023, we have not exercised any Capped Call options. Refer to Note 10, Convertible

Senior Notes, to the audited consolidated financial statements included in our Fiscal 2023 Form 10-K for further information on the Capped Calls.

Note 11. Commitments and Contingencies

Non-cancelable Purchase Obligations

In the normal course of business, we enter into non-cancelable purchase commitments with various third parties to purchase products and services such as technology equipment, subscription-based cloud service arrangements, corporate and marketing events and consulting services. As of April 30, 2024, there have been no material changes outside the ordinary course of our business to our non-cancelable purchase obligations from those disclosed in the Fiscal 2023 Form 10-K, except for a Cloud Platform Service agreement entered with a third-party service provider in December 2023 for a total minimum purchase commitment of $100.0 million over afive-year term.

Legal Matters

We are a party to various litigation matters from time to time and subject to claims that arise in the ordinary course of business, including patent, commercial, product liability, employment, class action, whistleblower and other litigation and claims, as well as governmental and other regulatory investigations and proceedings. In addition, third parties may from time to time assert claims against us in the form of letters and other communications. There is no pending or threatened legal proceeding to which we are a party that, in our opinion, is likely to have a material adverse effect on our future financial results or operations; however, the results of litigation and claims are inherently unpredictable. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors. The expense of litigation and the timing of this expense from period to period are difficult to estimate, subject to change and could adversely affect our results of operations.

Note 12. Stock-Based Compensation

Equity Incentive Plan

Equity incentive awards which may be granted to eligible participants under our Fiscal Year 2018 Equity Incentive Plan (the "Plan") include restricted stock units, restricted stock, stock options, nonstatutory stock options, stock appreciation rights, performance units and performance shares.

Stock Options

The activity of stock options for the nine months ended April 30, 2024 consisted of the following:

The total intrinsic value of options exercised for the nine months ended April 30, 2024 and 2023 was $141.5 million and $42.7 million, respectively. The weighted-average grant-date fair value per share of stock options granted in the nine months ended April 30, 2024 was $198.03. There wereno stock options granted during the nine months ended April 30, 2023.

We estimate thefair value of stock options using the Black-Scholes option pricing model with the following assumptions:

Restricted Stock Units and Performance Stock Awards

The activity of restricted stock units ("RSUs") and performance stock awards ("PSAs") consisted of the following for the nine months ended April 30, 2024:

As of April 30, 2024, the number of outstanding PSAs for which the performance metrics have not been defined as of such date was not material. These awards are not considered granted for accounting purposes as of April 30, 2024 and accordingly, have been excluded from the above table.

Employee Stock Purchase Plan

In fiscal 2018, we adopted the Fiscal Year 2018 Employee Stock Purchase Plan (the "ESPP"). During the nine months ended April 30, 2024, employees purchased 0.2 million shares of our common stock under the ESPP at an average purchase price of $104.69 per share, resulting in total cash proceeds of $18.4 million. ESPP employee payroll contributions accrued as of April 30, 2024 and July 31, 2023, were $27.9 million and $7.4 million, respectively, and are included within accrued compensation in the condensed consolidated balance sheets. Payroll contributions accrued as of April 30, 2024 will be used to purchase shares at the end of the current ESPP purchase period ending on June 17, 2024. Payroll contributions ultimately used to purchase shares are reclassified to stockholders’ equity on the purchase date.

The fair value of the purchase right for the ESPP was estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions:

Deferred Merger Consideration

In connection with certain business acquisitions completed in the nine months ended April 30, 2024 and 2023, as further described in Note 6, Business Combinations, certain onboarding employees are entitled to receive deferred merger consideration payable in shares of our common stock with an aggregate fair value of $77.5 million and $3.8 million, respectively. The number of unvested shares of common stock issued in connection with these business acquisitions was not material. These awards are subject to future employment services and are recognized as stock-based compensation expense over the requisite service period within research and development expenses in the consolidated statements of operations. The related stock-based compensation expense was not material for any of the periods presented.

Departure of the Chief Operating Officer of the Company

Effective February 2024, our Chief Operating Officer, who led sales activities, resigned from his position at the Company. In connection with his resignation, we recognized a reversal of stock-based compensation expense of $11.7 million associated with the cancellation of unvested incentive equity awards, which was recognized in sales and marketing expenses in the condensed consolidated statement of operations for the three months ended April 30, 2024.

Departure of the President of the Company

In October 2022, our President, who led research and development activities, resigned from his position as President of the Company but continued to serve as a member of our Board of Directors through January 2024. In connection with his resignation as President of the Company, we recognized a reversal of stock-based compensation expense of $9.9 million associated with the cancellation of unvested incentive equity awards, which was recognized in research and development expenses in the condensed consolidated statement of operations for the nine months ended April 30, 2023.

Stock-based Compensation Expense

The components of stock-based compensation expense recognized in the condensed consolidated statements of operations consisted of the following:

During the three months ended April 30, 2024 and 2023, we capitalized stock-based compensation primarily associated with the development of software for internal-use of $6.7 million and $4.1 million, respectively. During the nine months ended April 30, 2024 and 2023, the amount capitalized was $17.9 million and $12.4 million, respectively.

Note 13. Income Taxes

Our tax provision for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items, if any, that arise during the period. Each quarter, we update our estimate of the annual effective tax rate, and if the estimated annual effective tax rate changes, we make a cumulative adjustment in such period.

Our quarterly tax provision, and estimate of our annual effective tax rate, is subject to variation due to several factors, including variability in pre-tax income (or loss), the mix of jurisdictions to which such income relates, changes in how we do business, and tax law developments. Our estimated annual effective tax rate for the year differs from the U.S. statutory rate of 21% as a result of our U.S. losses for which no benefit will be realized, as well as our foreign operations which are subject to tax rates that differ from those in the United States.

We recorded provision for income taxes of $1.7 million and $6.7 million for the three months ended April 30, 2024 and 2023, respectively, and$18.7 million and $15.1 million for thenine months ended April 30, 2024 and 2023. The decrease forthe three months ended April 30, 2024 was primarily driven by the reduction of the valuation allowance of $5.1 million due to the establishment of deferred tax liabilities from the business acquisition. The increase forthe nine months ended April 30, 2024 was primarily driven by the increase in our pre-tax income in both foreign and US jurisdictions in which we conduct business, offset by the reduction of the valuation allowance due to the establishment of deferred tax liabilities from the business acquisition. We are subject to income tax in the United States as well as other tax jurisdictions in which we conduct business. Earnings from our non-U.S. operations are subject to income taxes in the countries in which we operate.

The realization of deferred tax assets is dependent upon the generation of sufficient taxable income of the appropriate character in future periods. We assess our ability to realize the deferred tax assets on a quarterly basis and we establish a valuation allowance if it is more-likely-than-not that some portion of the deferred tax assets will not be realized. We weigh all available positive and negative evidence, including our earnings history and results of recent operations, scheduled reversals of deferred tax liabilities, projected future taxable income and tax planning strategies. Due to the weight of objectively verifiable negative evidence, including our history of losses in certain jurisdictions, we believe that it is more likely than not that our U.S. federal, state, and the United Kingdom ("U.K.") deferred tax assets will not be realized. Accordingly, we have maintained a valuation allowance on our U.S. federal, state and U.K. deferred tax assets.

Note 14. Net Income (Loss) Per Share

The computation of basic and diluted net income (loss) per share consisted of the following:

(1) For the three months ended April 30, 2024, the dilutive effect of common stock equivalents excludes the potentially dilutive effect of the Notes, as their effect would have been antidilutive.

Net income (loss) per share, basic is computed by dividing the net income (loss) by the weighted-average number of shares of common stock outstanding during the period. Diluted net income per share is calculated by dividing net income by the combination of the weighted-average number of common shares outstanding and the weighted-average number of dilutive common stock equivalents during the period.

We calculated the potential dilutive effect of the Notes under the if-converted method. Under this method, diluted earnings per share are determined by assuming that all of the Notes were converted into shares of our common stock at the beginning of the reporting period.

In connection with the issuance of the Notes, we entered into Capped Calls, which were not included for purposes of calculating the number of diluted shares outstanding, as their effect would have been anti-dilutive. The Capped Calls are expected to partially offset the potential dilution to our common stock upon any conversion of the Notes. We have not exercised any of the Capped Calls as of April 30, 2024.

The outstanding potentially dilutive securities that were excluded from the computation of diluted net loss per share for the periods in a net loss position, as their effect would have been antidilutive consisted of the following:

(1) The number of unvested PSAs is estimated at 100% of the target number of shares granted and excludes unvested PSAs for which performance conditions have not been established as of April 30, 2024 and 2023, as they are not considered outstanding for accounting purposes. For further information refer to Note 12, Stock-Based Compensation.

(2) The shares underlying the conversion option in the Notes were not considered in the calculation of diluted net income (loss) per share for all the periods presented, as their effect would have been antidilutive. Based on the initial conversion price, the entire outstanding principal amount of the Notes as of April 30, 2024 would have been convertible into approximately 7.6 million shares of our common stock, which is reflected in the above table. Conversion notices received through April 30, 2024, have not been material.