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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________ 
FORM 10-Q
 _____________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2019
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 001-35594
PALO ALTO NETWORKS, INC.
(Exact name of registrant as specified in its charter)  
 
Delaware
20-2530195
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
3000 Tannery Way
Santa Clara, California 95054
(Address of principal executive office, including zip code)
(408) 753-4000
(Registrant’s telephone number, including area code)

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  x    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  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company
¨
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨    No  x
The number of shares outstanding of the registrant’s common stock as of February 14, 2019 was 93,732,953.
 


Table of Contents

TABLE OF CONTENTS

 
 
 
 
 
Page
 
PART I - FINANCIAL INFORMATION
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
PART II - OTHER INFORMATION
 
Item 1.
Item 1A.
Item 2.
Item 6.
 

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Table of Contents

PART I
ITEM 1.
FINANCIAL STATEMENTS
PALO ALTO NETWORKS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in millions, except per share data)

 
January 31, 2019
 
July 31, 2018
 
 
 
(As Adjusted)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,127.8

 
$
2,506.9

Short-term investments
1,702.2

 
896.5

Accounts receivable, net of allowance for doubtful accounts of $1.2 at January 31, 2019 and July 31, 2018
415.0

 
467.0

Prepaid expenses and other current assets
242.5

 
268.1

Total current assets
3,487.5

 
4,138.5

Property and equipment, net
273.2

 
273.1

Long-term investments
808.6

 
547.5

Goodwill
636.4

 
522.8

Intangible assets, net
171.8

 
140.8

Other assets
330.0

 
326.2

Total assets
$
5,707.5

 
$
5,948.9

Liabilities, temporary equity, and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
27.9

 
$
49.4

Accrued compensation
143.4

 
163.7

Accrued and other liabilities
171.4

 
124.6

Deferred revenue
1,369.2

 
1,213.6

Convertible senior notes, net
156.3

 
550.4

Total current liabilities
1,868.2

 
2,101.7

Convertible senior notes, net
1,399.5

 
1,369.7

Long-term deferred revenue
1,156.5

 
1,065.7

Other long-term liabilities
208.7

 
229.6

Commitments and contingencies (Note 10)


 


Temporary equity
2.8

 
21.9

Stockholders’ equity:
 
 
 
Preferred stock; $0.0001 par value; 100.0 shares authorized; none issued and outstanding at January 31, 2019 and July 31, 2018
—

 
—

Common stock and additional paid-in capital; $0.0001 par value; 1,000.0 shares authorized; 93.7 and 93.6 shares issued and outstanding at January 31, 2019 and July 31, 2018, respectively
1,941.5

 
1,967.4

Accumulated other comprehensive loss
(9.8
)
 
(16.4
)
Accumulated deficit
(859.9
)
 
(790.7
)
Total stockholders’ equity
1,071.8

 
1,160.3

Total liabilities, temporary equity, and stockholders’ equity
$
5,707.5

 
$
5,948.9

 
See notes to condensed consolidated financial statements.

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PALO ALTO NETWORKS, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in millions, except per share data)
 
 
Three Months Ended
 
Six Months Ended
 
January 31,
 
January 31,
 
2019
 
2018
 
2019
 
2018
 
 
 
(As Adjusted)
 
 
 
(As Adjusted)
Revenue:
 
 
 
 
 
 
 
Product
$
271.6

 
$
204.8

 
$
512.1

 
$
389.6

Subscription and support
439.6

 
340.8

 
855.1

 
657.8

Total revenue
711.2

 
545.6

 
1,367.2

 
1,047.4

Cost of revenue:
 
 
 
 
 
 
 
Product
82.5

 
63.9

 
155.7

 
121.5

Subscription and support
120.1

 
95.5

 
230.4

 
179.2

Total cost of revenue
202.6

 
159.4

 
386.1

 
300.7

Total gross profit
508.6

 
386.2

 
981.1

 
746.7

Operating expenses:
 
 
 
 
 
 
 
Research and development
128.3

 
96.6

 
241.7

 
190.8

Sales and marketing
320.0

 
258.8

 
634.6

 
512.9

General and administrative
53.7

 
53.3

 
130.3

 
119.0

Total operating expenses
502.0

 
408.7

 
1,006.6

 
822.7

Operating income (loss)
6.6

 
(22.5
)
 
(25.5
)
 
(76.0
)
Interest expense
(20.6
)
 
(6.4
)
 
(43.3
)
 
(12.7
)
Other income, net
16.0

 
4.9

 
29.0

 
9.7

Income (loss) before income taxes
2.0

 
(24.0
)
 
(39.8
)
 
(79.0
)
Provision for income taxes
4.6

 
1.6

 
1.1

 
9.8

Net loss
$
(2.6
)
 
$
(25.6
)
 
$
(40.9
)
 
$
(88.8
)
Net loss per share, basic and diluted
$
(0.03
)
 
$
(0.28
)
 
$
(0.44
)
 
$
(0.98
)
Weighted-average shares used to compute net loss per share, basic and diluted
94.0

 
91.1

 
93.9

 
91.0


See notes to condensed consolidated financial statements.


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PALO ALTO NETWORKS, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited, in millions)

 
Three Months Ended
 
Six Months Ended
 
January 31,
 
January 31,
 
2019
 
2018
 
2019
 
2018
 
 
 
(As Adjusted)
 
 
 
(As Adjusted)
Net loss
$
(2.6
)
 
$
(25.6
)
 
$
(40.9
)
 
$
(88.8
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Change in unrealized gains (losses) on investments
4.8

 
(5.3
)
 
5.7

 
(7.2
)
Change in unrealized gains (losses) on cash flow hedges
4.4

 
5.1

 
0.9

 
3.4

Other comprehensive income (loss)
9.2

 
(0.2
)
 
6.6


(3.8
)
Comprehensive income (loss)
$
6.6

 
$
(25.8
)
 
$
(34.3
)
 
$
(92.6
)

See notes to condensed consolidated financial statements.

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PALO ALTO NETWORKS, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited, in millions)

 
Three Months Ended January 31, 2019
 
Common Stock
and
Additional Paid-In Capital
 
Accumulated
Other
Comprehensive Income (Loss)
 
Accumulated
Deficit
 
Total 
Stockholders’
Equity
 
Shares
 
Amount
 
Balance as of October 31, 2018
94.7

 
$
2,129.3

 
$
(19.0
)
 
$
(857.3
)
 
$
1,253.0

Net loss
—

 
—

 
—

 
(2.6
)
 
(2.6
)
Other comprehensive income
—

 
—

 
9.2

 
—

 
9.2

Issuance of common stock in connection with employee equity incentive plans
0.9

 
3.1

 
—

 
—

 
3.1

Taxes paid related to net share settlement of equity awards
—

 
(7.1
)
 
—

 
—

 
(7.1
)
Share-based compensation for equity-based awards
—

 
144.1

 
—

 
—

 
144.1

Repurchase and retirement of common stock
(1.9
)
 
(330.0
)
 
—

 
—

 
(330.0
)
Settlement of convertible notes
0.3

 
(2.0
)
 
—

 
—

 
(2.0
)
Common stock received from exercise of note hedges
(0.3
)
 
—

 
—

 
—

 
—

Temporary equity reclassification
—

 
4.1

 
—

 
—

 
4.1

Balance as of January 31, 2019
93.7

 
$
1,941.5

 
$
(9.8
)
 
$
(859.9
)
 
$
1,071.8

 
Three Months Ended January 31, 2018
 
Common Stock
and
Additional Paid-In Capital
 
Accumulated
Other
Comprehensive Income (Loss)
 
Accumulated
Deficit
 
Total 
Stockholders’
Equity
 
Shares
 
Amount
 
 
 
 
 
 
 
 
(As Adjusted)
 
(As Adjusted)
Balance as of October 31, 2017
91.9

 
$
1,573.2

 
$
(7.0
)
 
$
(731.7
)
 
$
834.5

Net loss
—

 
—

 
—

 
(25.6
)
 
(25.6
)
Other comprehensive loss
—

 
—

 
(0.2
)
 
—

 
(0.2
)
Issuance of common stock in connection with employee equity incentive plans
0.8

 
1.3

 
—

 
—

 
1.3

Taxes paid related to net share settlement of equity awards
—

 
(11.5
)
 
—

 
—

 
(11.5
)
Share-based compensation for equity-based awards
—

 
132.2

 
—

 
—

 
132.2

Repurchase and retirement of common stock
(0.9
)
 
(125.0
)
 
—

 
—

 
(125.0
)
Temporary equity reclassification
—

 
5.7

 
—

 
—

 
5.7

Balance as of January 31, 2018
91.8

 
$
1,575.9

 
$
(7.2
)
 
$
(757.3
)
 
$
811.4


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Six Months Ended January 31, 2019
 
Common Stock
and
Additional Paid-In Capital
 
Accumulated
Other
Comprehensive Income (Loss)
 
Accumulated
Deficit
 
Total 
Stockholders’
Equity
 
Shares
 
Amount
 
Balance as of July 31, 2018 (as adjusted)
93.6

 
$
1,967.4

 
$
(16.4
)
 
$
(790.7
)
 
$
1,160.3

Cumulative-effect adjustment from adoption of new accounting pronouncement
—

 
—

 
—

 
(28.3
)
 
(28.3
)
Net loss
—

 
—

 
—

 
(40.9
)
 
(40.9
)
Other comprehensive income
—

 
—

 
6.6

 
—

 
6.6

Issuance of common stock in connection with employee equity incentive plans
2.0

 
33.9

 
—

 
—

 
33.9

Taxes paid related to net share settlement of equity awards
—

 
(21.0
)
 
—

 
—

 
(21.0
)
Share-based compensation for equity-based awards
—

 
284.3

 
—

 
—

 
284.3

Repurchase and retirement of common stock
(1.9
)
 
(330.0
)
 
—

 
—

 
(330.0
)
Settlement of convertible notes
1.7

 
(12.2
)
 
—

 
—

 
(12.2
)
Common stock received from exercise of note hedges
(1.7
)
 
—

 
—

 
—

 
—

Temporary equity reclassification
—

 
19.1

 
—

 
—

 
19.1

Balance as of January 31, 2019
93.7

 
$
1,941.5

 
$
(9.8
)
 
$
(859.9
)
 
$
1,071.8

 
Six Months Ended January 31, 2018
 
Common Stock
and
Additional Paid-In Capital
 
Accumulated
Other
Comprehensive Income (Loss)
 
Accumulated
Deficit
 
Total 
Stockholders’
Equity
 
Shares
 
Amount
 
 
 
 
 
 
 
 
(As Adjusted)
 
(As Adjusted)
Balance as of July 31, 2017
91.5

 
$
1,599.7

 
$
(3.4
)
 
$
(668.5
)
 
$
927.8

Net loss
—

 
—

 
—

 
(88.8
)
 
(88.8
)
Other comprehensive loss
—

 
—

 
(3.8
)
 
—

 
(3.8
)
Issuance of common stock in connection with employee equity incentive plans
2.0

 
23.6

 
—

 
—

 
23.6

Taxes paid related to net share settlement of equity awards
—

 
(22.9
)
 
—

 
—

 
(22.9
)
Share-based compensation for equity-based awards
—

 
259.0

 
—

 
—

 
259.0

Repurchase and retirement of common stock
(1.7
)
 
(250.0
)
 
—

 
—

 
(250.0
)
Temporary equity reclassification
—

 
(33.5
)
 
—

 
—

 
(33.5
)
Balance as of January 31, 2018
91.8

 
$
1,575.9

 
$
(7.2
)
 
$
(757.3
)
 
$
811.4


See notes to condensed consolidated financial statements.

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PALO ALTO NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in millions)
 
Six Months Ended
 
January 31,
 
2019
 
2018
 
 
 
(As Adjusted)
Cash flows from operating activities
 
 
 
Net loss
$
(40.9
)
 
$
(88.8
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Share-based compensation for equity-based awards
279.3

 
256.5

Depreciation and amortization
71.3

 
43.4

Cease-use loss related to facility exit
—

 
16.7

Amortization of deferred contract costs
83.0

 
57.3

Amortization of debt discount and debt issuance costs
36.5

 
12.7

Amortization of investment premiums, net of accretion of purchase discounts
(7.7
)
 
0.6

Loss on conversions of convertible senior notes
2.6

 
—

Repayments of convertible senior notes attributable to debt discount
(67.1
)
 
—

Changes in operating assets and liabilities, net of effects of acquisitions:
 
 
 
Accounts receivable, net
53.9

 
68.0

Prepaid expenses and other assets
(83.2
)
 
(105.8
)
Accounts payable
(11.2
)
 
(6.4
)
Accrued compensation
(21.0
)
 
(4.3
)
Accrued and other liabilities
(11.6
)
 
47.5

Deferred revenue
243.8

 
221.2

Net cash provided by operating activities
527.7

 
518.6

Cash flows from investing activities
 
 
 
Purchases of investments
(2,031.9
)
 
(372.5
)
Proceeds from sales of investments
3.5

 
—

Proceeds from maturities of investments
1,004.2

 
341.8

Business acquisitions, net of cash acquired
(154.9
)
 
—

Purchases of property, equipment, and other assets
(57.8
)
 
(57.8
)
Net cash used in investing activities
(1,236.9
)
 
(88.5
)
Cash flows from financing activities
 
 
 
Repayments of convertible senior notes attributable to principal and equity component
(348.5
)
 
—

Payments for debt issuance costs
(3.7
)
 
—

Repurchases of common stock
(330.0
)
 
(259.1
)
Proceeds from sales of shares through employee equity incentive plans
33.6

 
23.4

Payments for taxes related to net share settlement of equity awards
(21.0
)
 
(22.9
)
Net cash used in financing activities
(669.6
)
 
(258.6
)
Net increase (decrease) in cash, cash equivalents, and restricted cash
(1,378.8
)
 
171.5

Cash, cash equivalents, and restricted cash—beginning of period
2,509.2

 
745.5

Cash, cash equivalents, and restricted cash—end of period
$
1,130.4

 
$
917.0

 
 
 
 
Reconciliation of cash, cash equivalents, and restricted cash to the condensed consolidated balance sheets
 
 
 
Cash and cash equivalents
$
1,127.8

 
$
915.0

Restricted cash included in prepaid expenses and other current assets
1.3

 
0.7

Restricted cash included in other assets
1.3

 
1.3

Total cash, cash equivalents, and restricted cash
$
1,130.4

 
$
917.0

 
 
 
 
Non-cash investing and financing activities
 
 
 
Property and equipment acquired through lease incentives
$
—

 
$
37.8

See notes to condensed consolidated financial statements.

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 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Description of Business and Summary of Significant Accounting Policies
Description of Business
Palo Alto Networks, Inc. (the “Company,” “we,” “us,” or “our”), located in Santa Clara, California, was incorporated in March 2005 under the laws of the State of Delaware and commenced operations in April 2005. We offer a security operating platform that empowers enterprises, service providers, and government entities to secure their organizations by safely enabling applications and data running in their networks, on their endpoints, and in the cloud, and by preventing breaches that stem from targeted cyberattacks.
Basis of Presentation and Principles of Consolidation
The accompanying condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”), consistent in all material respects with those applied in our Annual Report on Form 10-K for the fiscal year ended July 31, 2018, filed with the Securities and Exchange Commission (“SEC”) on September 13, 2018. Our condensed consolidated financial statements include our accounts and our wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Our condensed consolidated financial statements are unaudited, but include all adjustments of a normal recurring nature necessary for a fair presentation of our quarterly results. We have made estimates and judgments affecting the amounts reported in our condensed consolidated financial statements and the accompanying notes. The actual results that we experience may differ materially from our estimates.
Certain prior period amounts have been adjusted due to our retrospective adoption of new accounting guidance related to revenue from contracts with customers and new accounting guidance related to the presentation of restricted cash and cash equivalents in the statement of cash flows. Refer to “Recently Adopted Accounting Pronouncements” below for more information.
Our condensed consolidated financial statements should be read 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, 2018.
Summary of Significant Accounting Policies
There have been no material changes to our significant accounting policies as of and for the six months ended January 31, 2019, as compared to the significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended July 31, 2018, except for the change in our accounting policies for revenue recognition and deferred contract costs due to our adoption of new accounting guidance related to revenue from contracts with customers. Refer to “Recently Adopted Accounting Pronouncements” below, Note 2. Revenue, and Note 8. Deferred Contract Costs for more information.
Recently Adopted Accounting Pronouncements
Implementation Costs Incurred in a Cloud Computing Arrangement
In August 2018, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance on customers’ accounting for implementation costs incurred in a cloud computing arrangement that is a service contract, which requires customers to apply internal-use software guidance to determine the implementation costs that are able to be capitalized. Under the new standard, capitalized implementation costs are generally amortized over the term of the arrangement, beginning when the module or component of the hosting arrangement is ready for its intended use. We early adopted this standard in our second quarter of fiscal 2019 on a prospective basis. The adoption of the standard did not have a material impact on our condensed consolidated financial statements.
Business Combinations - Definition of a Business
In January 2017, the FASB issued authoritative guidance clarifying the definition of a business to assist companies with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. We adopted this standard in our first quarter of fiscal 2019 on a prospective basis. The adoption of the standard did not have an impact on our condensed consolidated financial statements.
Statement of Cash Flows - Restricted Cash
In November 2016, the FASB issued authoritative guidance on the presentation of restricted cash or restricted cash equivalents in the statement of cash flows. Under the new standard, restricted cash or restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. We

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adopted this standard in our first quarter of fiscal 2019 on a retrospective basis. The adoption of the standard did not have a material impact on our condensed consolidated financial statements because our restricted cash balance has not been material.
Income Taxes - Intra-Entity Asset Transfers
In October 2016, the FASB issued authoritative guidance requiring the recognition of income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. We adopted the standard in our first quarter of fiscal 2019 on a modified retrospective basis. As a result, we recorded the cumulative effect of the change as an increase to accumulated deficit of $28.3 million, with a corresponding decrease to prepaid expenses and other current assets and other assets in our condensed consolidated balance sheets as of August 1, 2018, the date of adoption. The cumulative effect adjustment represents the reclassification of unrecognized income tax effects from intra-entity transfers of assets other than inventory that occurred prior to the date of adoption.
Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments
In August 2016, the FASB issued new authoritative guidance addressing eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain transactions are presented and classified in the statement of cash flows. We adopted this standard in our first quarter of fiscal 2019 on a retrospective basis. The adoption of the standard did not have an impact on our condensed consolidated financial statements.
Financial Instruments - Recognition and Measurement
In January 2016, the FASB issued authoritative guidance requiring equity instruments to be measured at fair value with changes in fair value recognized through net income. We adopted this standard in our first quarter of fiscal 2019 on a prospective basis for non-marketable equity securities and a modified retrospective basis for marketable equity investments. The adoption of the standard did not have an impact on our condensed consolidated financial statements.
Revenue Recognition
In May 2014, the FASB issued new authoritative guidance on revenue from contracts with customers. The new standard provides principles for recognizing revenue when control of promised goods or services is transferred to customers with the expected consideration in exchange for those goods or services, as well as guidance on the recognition of costs related to obtaining and fulfilling customer contracts. The standard also requires expanded disclosures about the nature, amount, timing, and uncertainty of revenues and cash flows arising from customer contracts, including significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. We adopted the standard in our first quarter of fiscal 2019 using the full retrospective method.
The adoption of the new standard did not have a material impact on our condensed consolidated financial statements for the fiscal years ended July 31, 2018 and 2017, with the exception of the accounting for incremental costs to obtain customer contracts, which primarily consist of sales commissions, due to the longer period of amortization. Under the previous accounting guidance, we deferred and amortized these costs over the term of the related contract. Under the new standard, we defer and amortize these costs for initial contracts that are not commensurate with renewal commissions over a benefit period of five years, which is typically longer than the initial contract term.
The adoption of the standard using the full retrospective method required us to restate the prior periods presented in this Quarterly Report on Form 10-Q, with the cumulative effect of the change of $168.2 million reflected in accumulated deficit as of July 31, 2017. In adopting the new standard, we have also applied a transition practical expedient and have not disclosed revenue expected to be recognized from remaining performance obligations for periods prior to August 1, 2018.

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The following tables present the impact of the adoption of the standard on our previously reported results (in millions, except per share data):
 
Three Months Ended January 31, 2018
 
Six Months Ended January 31, 2018
 
As Previously Reported
 
Impact of Adoption
 
As Adjusted
 
As Previously Reported
 
Impact of Adoption
 
As Adjusted
Condensed Consolidated Statements of Operations
 
 
 
 
 
 
 
 
 
 
 
Product revenue
$
202.2

 
$
2.6

 
$
204.8

 
$
388.7

 
$
0.9

 
$
389.6

Subscription and support revenue
340.2

 
0.6

 
340.8

 
659.2

 
(1.4
)
 
657.8

Total revenue
542.4

 
3.2

 
545.6

 
1,047.9

 
(0.5
)
 
1,047.4

Total cost of revenue
159.3

 
0.1

 
159.4

 
300.7

 
—

 
300.7

Total operating expenses
414.9

 
(6.2
)
 
408.7

 
833.3

 
(10.6
)
 
822.7

Operating loss
(31.8
)
 
9.3

 
(22.5
)
 
(86.1
)
 
10.1

 
(76.0
)
Net loss
(34.9
)
 
9.3

 
(25.6
)
 
(98.9
)
 
10.1

 
(88.8
)
Net loss per share, basic and diluted
$
(0.38
)
 
$
0.10

 
$
(0.28
)
 
$
(1.09
)
 
$
0.11

 
$
(0.98
)
 
July 31, 2018
 
As Previously Reported
 
Impact of Adoption
 
As Adjusted
Condensed Consolidated Balance Sheet
 
 
 
 
 
Accounts receivable, net
$
467.3

 
$
(0.3
)
 
$
467.0

Prepaid expenses and other current assets
261.3

 
6.8

 
268.1

Other assets
206.8

 
119.4

 
326.2

Accrued and other liabilities
107.0

 
17.6

 
124.6

Deferred revenue
1,268.9

 
(55.3
)
 
1,213.6

Long-term deferred revenue
1,096.0

 
(30.3
)
 
1,065.7

Accumulated deficit
$
(984.6
)
 
$
193.9

 
$
(790.7
)
The adoption of the standard did not impact net cash flows from operating, investing, or financing activities in our condensed consolidated statements of cash flows.
Recently Issued Accounting Pronouncements
Financial Instruments - Credit Losses
In June 2016, the FASB issued new authoritative guidance on the accounting for credit losses on most financial assets and certain financial instruments. The standard replaces the existing incurred loss model with an expected credit loss model for financial assets measured at amortized cost, including trade receivables, and requires that credit losses on available-for-sale debt securities be presented as an allowance rather than as a write-down. The standard is effective for us in our first quarter of fiscal 2021 and will be applied on a modified retrospective basis. Early adoption is permitted beginning our first quarter of fiscal 2020. We are currently evaluating adoption timing and whether this standard will have a material impact on our condensed consolidated financial statements.
Leases
In February 2016, the FASB issued new authoritative guidance on lease accounting. Among its provisions, the standard requires lessees to recognize right-of-use assets and lease liabilities on the balance sheet for operating leases and also requires additional qualitative and quantitative disclosures about lease arrangements. The standard is effective for us in our first quarter of fiscal 2020 and will be applied on a modified retrospective basis, with the option to elect certain practical expedients. Early adoption is permitted; however, we plan to adopt the new standard in our first quarter of fiscal 2020. Upon adoption, we will recognize right-of-use assets and operating lease liabilities on our condensed consolidated balance sheets, which will increase our total assets and total liabilities. We expect our operating leases, as disclosed in Note 10. Commitments and Contingencies, will be subject to the new standard. We continue to evaluate the accounting, transition, and disclosure requirements of this standard, including its impact on our systems, accounting policies, and processes.

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2. Revenue
Revenue Recognition
Our revenue consists of product revenue and subscription and support revenue. Revenue is recognized when control of promised products, subscriptions and support services are transferred to customers with the expected consideration in exchange for those products and services. Depending on who the contract is with, our customers are either our channel partners or our end-customers.
We determine revenue recognition through the following steps:
•
Identification of the contract, or contracts, with a customer.
•
Identification of the performance obligations in the contract.
•
Determination of the transaction price.
•
Allocation of the transaction price to the performance obligations in the contract.
•
Recognition of revenue when, or as, we satisfy a performance obligation.
Revenues are reported net of sales taxes. Shipping charges billed to channel partners are included in revenues and related costs are included in cost of revenue.
Product Revenue
Product revenue is derived primarily from sales of our appliances. Product revenue also includes revenue derived from software licenses of Panorama and the VM-Series. We recognize product revenue at the time of hardware shipment or delivery of software license.
Subscription and Support Revenue
Subscription and support revenue is derived primarily from sales of our subscription and support offerings. We recognize subscription and support revenue over time as the services are performed. Our contractual subscription and support contracts are typically one to five years.
Contracts with Multiple Performance Obligations
The majority of our contracts with our customers include various combinations of our products and subscriptions and support which are distinct and accounted for as separate performance obligations. We account for multiple agreements with a single customer as a single contract if the contractual terms and/or substance of those agreements indicate that they may be so closely related that they are, in effect, parts of a single contract. The amount of consideration we expect to receive in exchange for delivering on the contract is allocated to each performance obligation based on its relative standalone selling price. If a contract contains a single performance obligation, no allocation is required.
We establish standalone selling price using the prices charged for a deliverable when sold separately. If the standalone selling price is not observable through past transactions, we estimate the standalone selling price based on our pricing model and our go-to-market strategy, which include factors such as type of sales channel (reseller, distributor, or end-customer), the geographies in which our offerings were sold (domestic or international), and offering type (products, subscriptions, or support).
Deferred Revenue
We record deferred revenue when cash payments are received or due in advance of our performance. Our payment terms typically require payment within 30 to 45 days of the date we issue an invoice. The current portion of deferred revenue represents the amounts that are expected to be recognized as revenue within one year of the condensed consolidated balance sheet date. During the six months ended January 31, 2019, we recognized approximately $695.0 million of revenue pertaining to amounts that were deferred as of July 31, 2018.
Remaining Performance Obligations
Revenue expected to be recognized from remaining performance obligations was $2.6 billion as of January 31, 2019, of which we expect to recognize approximately $1.4 billion over the next 12 months and the remainder thereafter.

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Disaggregation of Revenue
The following table presents revenue by geographic theater (in millions):
 
Three Months Ended January 31,
 
Six Months Ended January 31,
 
2019
 
2018
 
2019
 
2018
 
 
 
(As Adjusted)
 
 
 
(As Adjusted)
Revenue:
 
 
 
 
 
 
 
Americas
 
 
 
 
 
 
 
United States
$
434.6

 
$
346.0

 
$
850.5

 
$
672.0

Other Americas
40.4

 
27.3

 
74.7

 
50.6

Total Americas
475.0

 
373.3

 
925.2

 
722.6

Europe, the Middle East, and Africa (“EMEA”)
148.3

 
107.2

 
276.0

 
201.9

Asia Pacific and Japan (“APAC”)
87.9

 
65.1

 
166.0

 
122.9

Total revenue
$
711.2

 
$
545.6

 
$
1,367.2

 
$
1,047.4

The following table presents revenue for groups of similar products and services (in millions):
 
Three Months Ended January 31,
 
Six Months Ended January 31,
 
2019
 
2018
 
2019
 
2018
 
 
 
(As Adjusted)
 
 
 
(As Adjusted)
Revenue:
 
 
 
 
 
 
 
Product
$
271.6

 
$
204.8

 
$
512.1

 
$
389.6

Subscription and support
 
 
 
 
 
 
 
Subscription
249.7

 
183.3

 
481.0

 
352.3

Support
189.9

 
157.5

 
374.1

 
305.5

Total subscription and support
439.6

 
340.8

 
855.1

 
657.8

Total revenue
$
711.2

 
$
545.6

 
$
1,367.2

 
$
1,047.4

3. Fair Value Measurements
We categorize assets and liabilities recorded or disclosed at fair value on our condensed consolidated balance sheets based upon the level of judgment associated with inputs used to measure their fair value. The categories are as follows:
•
Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities.
•
Level 2—Inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the assets or liabilities, either directly or indirectly through market corroboration, for substantially the full term of the financial instruments.
•
Level 3—Inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. The inputs require significant management judgment or estimation.

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The following table presents the fair value of our financial assets and liabilities measured at fair value on a recurring basis using the above input categories as of January 31, 2019 and July 31, 2018 (in millions):
 
 
January 31, 2019
 
July 31, 2018
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash equivalents:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
 
$
430.6

 
$
—

 
$
—

 
$
430.6

 
$
1,512.3

 
$
—

 
$
—

 
$
1,512.3

Commercial paper
 
—

 
39.4

 
—

 
39.4

 
—

 
52.0

 
—

 
52.0

U.S. government and agency securities
 
—

 
279.4

 
—

 
279.4

 
—

 
397.3

 
—

 
397.3

Total cash equivalents
 
430.6

 
318.8

 
—

 
749.4

 
1,512.3

 
449.3

 
—

 
1,961.6

Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit
 
—

 
—

 
—

 
—

 
—

 
5.4

 
—

 
5.4

Non-U.S. government securities
 
—

 
—

 
—

 
—

 
—

 
20.0

 
—

 
20.0

Commercial paper
 
—

 
50.2

 
—

 
50.2

 
—

 
22.3

 
—

 
22.3

Corporate debt securities
 
—

 
216.3

 
—

 
216.3

 
—

 
139.8

 
—

 
139.8

U.S. government and agency securities
 
—

 
1,435.7

 
—

 
1,435.7

 
—

 
709.0

 
—

 
709.0

Total short-term investments
 
—

 
1,702.2

 
—

 
1,702.2

 
—

 
896.5

 
—

 
896.5

Long-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt securities
 
—

 
279.1

 
—

 
279.1

 
—

 
153.6

 
—

 
153.6

U.S. government and agency securities
 
—

 
529.5

 
—

 
529.5

 
—

 
393.9

 
—

 
393.9

Total long-term investments
 
—

 
808.6

 
—

 
808.6

 
—

 
547.5

 
—

 
547.5

Prepaid expenses and other current assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency forward contracts
 
—

 
0.3

 
—

 
0.3

 
—

 
—

 
—

 
—

Total prepaid expenses and other current assets
 
—

 
0.3

 
—

 
0.3

 
—

 
—

 
—

 
—

Total assets measured at fair value
 
$
430.6

 
$
2,829.9

 
$
—

 
$
3,260.5

 
$
1,512.3

 
$
1,893.3

 
$
—

 
$
3,405.6

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accrued and other liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency forward contracts
 
$
—

 
$
5.6

 
$
—

 
$
5.6

 
$
—

 
$
6.9

 
$
—

 
$
6.9

Total accrued and other liabilities
 
—

 
5.6


—


5.6

 
—


6.9


—


6.9

Total liabilities measured at fair value
 
$
—

 
$
5.6

 
$
—

 
$
5.6

 
$
—

 
$
6.9

 
$
—

 
$
6.9

Refer to Note 9. Debt for the carrying amount and estimated fair value of our convertible senior notes as of January 31, 2019 and July 31, 2018.

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4. Cash Equivalents and Investments
Available-for-sale Securities
The following tables summarize the amortized cost, unrealized gains and losses, and fair value of our available-for-sale securities as of January 31, 2019 and July 31, 2018 (in millions):
 
January 31, 2019
 
Amortized Cost 
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
Cash equivalents:
 
 
 
 
 
 
 
Commercial paper
$
39.4

 
$
—

 
$
—

 
$
39.4

U.S. government and agency securities
279.4

 
—

 
—

 
279.4

Total available-for-sale cash equivalents
$
318.8

 
$
—

 
$
—

 
$
318.8

Investments:
 
 
 
 
 
 
 
Commercial paper
$
50.2

 
$
—

 
$
—

 
$
50.2

Corporate debt securities
495.9

 
0.9

 
(1.4
)
 
495.4

U.S. government and agency securities
1,968.0

 
1.1

 
(3.9
)
 
1,965.2

Total available-for-sale investments
$
2,514.1

 
$
2.0

 
$
(5.3
)
 
$
2,510.8

 
July 31, 2018
 
Amortized Cost 
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
Cash equivalents:
 
 
 
 
 
 
 
Commercial paper
$
52.0

 
$
—

 
$
—

 
$
52.0

U.S. government and agency securities
397.3

 
—

 
—

 
397.3

Total available-for-sale cash equivalents
$
449.3

 
$
—

 
$
—

 
$
449.3

Investments:
 
 
 
 
 
 
 
Certificates of deposit
$
5.4

 
$
—

 
$
—

 
$
5.4

Non-U.S. government securities
20.0

 
—

 
—

 
20.0

Commercial paper
22.3

 
—

 
—

 
22.3

Corporate debt securities
295.9

 
—

 
(2.5
)
 
293.4

U.S. government and agency securities
1,110.6

 
—

 
(7.7
)
 
1,102.9

Total available-for-sale investments
$
1,454.2

 
$
—

 
$
(10.2
)
 
$
1,444.0

Unrealized losses related to these securities are due to interest rate fluctuations as opposed to credit quality. In addition, we do not intend to sell and it is not likely that we would be required to sell these securities before recovery of their amortized cost basis, which may be at maturity. As a result, there were no other-than-temporary impairments for these securities at January 31, 2019 and July 31, 2018.
The following table summarizes the amortized cost and fair value of our available-for-sale securities as of January 31, 2019, by contractual years-to-maturity (in millions):
 
Amortized Cost
 
Fair Value
Due within one year
$
2,023.2

 
$
2,021.0

Due between one and three years
809.7

 
808.6

Total
$
2,832.9

 
$
2,829.6

Marketable Equity Securities
Marketable equity securities consist of money market funds and are included in cash and cash equivalents in our condensed consolidated balance sheets. As of January 31, 2019 and July 31, 2018, the carrying value of our marketable equity securities were $430.6 million and $1.5 billion, respectively. During the three and six months ended January 31, 2019 and 2018, there were no unrealized gains or losses recognized for these securities.

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5. Derivative Instruments
As a global business, we are exposed to currency exchange rate risk. Substantially all of our revenue is transacted in U.S. dollars, however, a portion of our 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. We enter into foreign currency derivative contracts with maturities of 12 months or less which we designate as cash flow hedges to manage the foreign currency exchange rate risk associated with these expenditures.
These derivative contracts expose us to credit risk to the extent that the counterparties may be unable to meet the terms of the arrangement. We mitigate this credit risk by transacting with major financial institutions with high credit ratings and also enter into master netting arrangements, which permit net settlement of transactions with the same counterparty. 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.
Our derivative financial instruments are recorded at fair value, on a gross basis, as either assets or liabilities in our condensed consolidated balance sheets. Gains or losses related to our cash flow hedges are recorded as a component of accumulated other comprehensive income (loss) (“AOCI”) in our condensed consolidated balance sheets and are reclassified into the financial statement line item associated with the underlying hedged transaction in our condensed consolidated statements of operations when the underlying hedged transaction is recognized in earnings. If it becomes probable that the hedged transaction will not occur, the cumulative unrealized gain or loss is reclassified immediately from AOCI into the financial statement line item associated with the underlying hedged transaction in our condensed consolidated statements of operations. Gains or losses related to non-designated derivative instruments are recognized in other income (expense), net in our condensed consolidated statements of operations for each period until the instrument matures, is terminated, is re-designated as a qualified cash flow hedge, or is sold. Derivatives designated as cash flow hedges are classified in our condensed consolidated statements of cash flows in the same manner as the underlying hedged transaction, primarily within cash flows from operating activities.
As of January 31, 2019 and July 31, 2018, the total notional amount of our outstanding foreign currency forward contracts was $205.1 million and $288.5 million, respectively. Refer to Note 3. Fair Value Measurements for the fair value of our derivative instruments as reported in our condensed consolidated balance sheets as of January 31, 2019.
During the three and six months ended January 31, 2019 and 2018, both unrealized gains and losses recognized in AOCI related to our cash flow hedges and amounts reclassified into earnings were not material. Unrealized losses in AOCI related to our cash flow hedges as of January 31, 2019 and 2018 were not material.
6. Acquisitions
RedLock Inc.
On October 12, 2018, we completed our acquisition of 100% of the voting equity interest of RedLock Inc. (“RedLock”), a privately-held cloud security company. The acquisition expands our security capabilities for the public cloud with the addition of RedLock’s cloud security analytics technology. Total purchase consideration for the acquisition of RedLock was $158.2 million, which consisted of $155.0 million in cash paid upon closing and $3.2 million in fair value of unvested equity awards attributable to services performed prior to the acquisition date.
As part of the acquisition, we assumed RedLock equity awards with a total fair value of $57.4 million. Of the total fair value, a portion was allocated to the purchase consideration and the remainder was allocated to future services and will be expensed over the remaining service periods as share-based compensation.
We have accounted for this transaction as a business combination and allocated the purchase consideration to assets acquired and liabilities assumed based on preliminary estimated fair values, as presented in the following table (in millions):
 
Amount
Goodwill
$
113.6

Identified intangible assets
54.8

Net liabilities assumed
(10.2
)
Total
$
158.2

Goodwill generated from this business combination is primarily attributable to the assembled workforce and expected post-acquisition synergies from integrating RedLock’s technology into our platform. The goodwill is not deductible for income tax purposes.

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The following table presents details of the identified intangible assets acquired (in millions, except years):
 
Fair Value
 
Estimated Useful Life
Developed technology
$
48.6

 
4 years
Customer relationships
5.3

 
8 years
Trade name and trademarks
0.9

 
6 months
Total
$
54.8

 
 
RedLock’s operating results are included in our condensed consolidated statements of operations from the date of acquisition. Pro forma results of operations have not been presented because the effect of the acquisition was not material to our condensed consolidated statements of operations.
Additional information, such as that related to income tax and other contingencies, existing as of the acquisition date but unknown to us may become known during the remainder of the measurement period, not to exceed 12 months from the acquisition date, which may result in changes to the amounts and allocations recorded.
7. Goodwill and Intangible Assets
Goodwill
The following table presents details of our goodwill during the six months ended January 31, 2019 (in millions):
 
Amount
Balance as of July 31, 2018
$
522.8

Goodwill acquired
113.6

Balance as of January 31, 2019
$
636.4

Purchased Intangible Assets
The following table presents details of our purchased intangible assets as of January 31, 2019 and July 31, 2018 (in millions):
 
January 31, 2019
 
July 31, 2018
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Intangible assets subject to amortization:
 
 
 
 
 
 
 
 
 
 
 
Developed technology
$
203.3

 
$
(54.5
)
 
$
148.8

 
$
154.7

 
$
(38.2
)
 
$
116.5

Customer relationships
17.5

 
(2.3
)
 
15.2

 
12.2

 
(1.2
)
 
11.0

Acquired intellectual property
8.9

 
(4.9
)
 
4.0

 
8.9

 
(4.5
)
 
4.4

Trade name and trademarks
9.4

 
(6.4
)
 
3.0

 
8.5

 
(0.4
)
 
8.1

Other
2.2

 
(2.2
)
 
—

 
2.2

 
(2.2
)
 
—

Total intangible assets subject to amortization
241.3

 
(70.3
)
 
171.0

 
186.5

 
(46.5
)
 
140.0

Intangible assets not subject to amortization:
 
 
 
 
 
 
 
 
 
 
 
In-process research and development
0.8

 
—

 
0.8

 
0.8

 
—

 
0.8

Total purchased intangible assets
$
242.1

 
$
(70.3
)
 
$
171.8

 
$
187.3

 
$
(46.5
)
 
$
140.8

We recognized amortization expense of $14.4 million and $23.8 million for the three and six months ended January 31, 2019, respectively, and $2.7 million and $5.4 million for the three and six months ended January 31, 2018, respectively.

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The following table summarizes estimated future amortization expense of our intangible assets as of January 31, 2019 (in millions):
 
Amount
Fiscal years ending July 31:
 
Remaining 2019
$
22.7

2020
39.4

2021
37.4

2022
32.9

2023
20.4

2024 and thereafter
18.2

Total future amortization expense
$
171.0

8. Deferred Contract Costs
We defer contract costs that are recoverable and incremental to obtaining customer sales contracts. Contract costs, which primarily consist of sales commissions, are amortized on a systematic basis that is consistent with the transfer to the customer of the goods or services to which the asset relates. Sales commissions paid for initial contracts are generally not commensurate with the commissions paid for renewal contracts, given the substantive difference in commission rates in proportion to their respective contract values. Sales commissions for initial contracts that are not commensurate are amortized over a benefit period of five years, consistent with the revenue recognition pattern of the performance obligations in the related contracts including expected renewals. The benefit period is determined by taking into consideration contract length, technology life, and other quantitative and qualitative factors. The expected renewals are estimated based on historical renewal trends. Sales commissions for initial contracts that are commensurate and sales commissions for renewal contracts are amortized over the related contractual period in proportion to the revenue recognized.
We classify deferred contract costs as short-term or long-term based on when we expect to recognize the expense. Short-term deferred contract costs are included in prepaid expenses and other current assets and long-term deferred contract costs are included in other assets in our condensed consolidated balance sheets. Deferred contract costs are periodically reviewed for impairment. The amortization of deferred contract costs is included in sales and marketing expense in our condensed consolidated statements of operations.
The following table presents details of our short-term and long-term deferred contract costs as of January 31, 2019 and July 31, 2018 (in millions):
 
January 31, 2019
 
July 31, 2018
Short-term deferred contract costs
$
117.6

 
$
113.2

Long-term deferred contract costs
230.7

 
224.8

Total deferred contract costs
$
348.3

 
$
338.0

We recognized amortization expense for our deferred contract costs of $41.9 million and $83.0 million during the three and six months ended January 31, 2019, respectively, and $29.2 million and $57.3 million during the three and six months ended January 31, 2018, respectively. We did not recognize any impairment losses on our deferred contract costs during the three and six months ended January 31, 2019 or 2018.
9. Debt
Convertible Senior Notes
In June 2014, we issued $575.0 million aggregate principal amount of 0.0% Convertible Senior Notes due 2019 (the “2019 Notes”) and in July 2018, we issued $1.7 billion aggregate principal amount of 0.75% Convertible Senior Notes due 2023 (the “2023 Notes” and, together with the 2019 Notes, the “Notes”). The 2023 Notes bear interest at a fixed rate of 0.75% per year, payable semi-annually in arrears on January 1 and July 1 of each year, beginning on January 1, 2019. Each series of Notes is governed by an indenture between us, as the issuer, and U.S. Bank National Association, as Trustee (individually, each an “Indenture,” and together, the “Indentures”). The Notes of each series are unsecured, unsubordinated obligations and the applicable Indenture governing each series of Notes does not contain any financial covenants or restrictions on the payments of dividends, the incurrence of indebtedness, or the issuance or repurchase of securities by us or any of our subsidiaries. The 2019 Notes and 2023 Notes mature on July 1, 2019 and July 1, 2023, respectively. We cannot redeem either series of Notes prior to the applicable maturity date.

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Table of Contents

The following table presents details of the Notes (number of shares in millions):
 
Conversion Rate per $1,000 Principal
 
Initial Conversion Price
 
Convertible Date
 
Initial Number of Shares
2019 Notes
9.0680

 
$
110.28

 
January 1, 2019
 
5.2

2023 Notes
3.7545

 
$
266.35

 
April 1, 2023
 
6.4

Holders of the Notes may surrender their Notes for conversion at their option at any time prior to the close of business on the business day immediately preceding their respective convertible dates only under the following circumstances:
•
during any fiscal quarter commencing after the fiscal quarters ending on October 31, 2014 and October 31, 2018, for the 2019 Notes and 2023 Notes, respectively (and only during such fiscal quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the applicable conversion price for the respective Notes on each applicable trading day (the “sale price condition”);
•
during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of the applicable series of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the applicable conversion rate for the respective Notes on each such trading day; or
•
upon the occurrence of specified corporate events.
On or after the respective convertible date, holders may surrender all or any portion of their Notes for conversion at any time prior to the close of business on the second scheduled trading day immediately preceding the applicable maturity date regardless of the foregoing conditions, and such conversions will be settled upon the applicable maturity date. Upon conversion, holders of the Notes of a series will receive cash equal to the aggregate principal amount of the Notes of such series to be converted, and, at our election, cash and/or shares of our common stock for any amounts in excess of the aggregate principal amount of the Notes of such series being converted.
The conversion price will be subject to adjustment in some events. Holders of the Notes of a series who convert their Notes of such series in connection with certain corporate events that constitute a “make-whole fundamental change” under the applicable Indenture are, under certain circumstances, entitled to an increase in the conversion rate for such series of Notes. Additionally, upon the occurrence of a corporate event that constitutes a “fundamental change” under the applicable Indenture, holders of the Notes of such series may require us to repurchase for cash all or a portion of the Notes of such series at a repurchase price equal to 100% of the principal amount of the Notes of such series plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
The sale price condition was met for the 2019 Notes during the fiscal quarters ended July 31, 2018 and October 31, 2018. As a result, holders were able to convert their 2019 Notes at any time during the fiscal quarter ended October 31, 2018 and up to January 1, 2019. On or after January 1, 2019, holders may surrender their 2019 Notes for conversion at any time prior to maturity, in accordance with the terms described above. Such conversion requests will settle upon maturity of the 2019 Notes. Accordingly, the net carrying amount of the 2019 Notes was classified as a current liability and the portion of the equity component representing the conversion option was classified as temporary equity in our condensed consolidated balance sheets as of January 31, 2019. As of January 31, 2019, $159.4 million in aggregate principal amount of the 2019 Notes remained outstanding.

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The following table presents details of conversions of the 2019 Notes during the reporting period (in millions):
 
Three Months Ended
 
Six Months Ended
 
January 31, 2019
 
January 31, 2019
2019 Notes principal converted and repaid in cash:
 
 
 
Allocated to liability component(1)
$
86.3

 
$
403.4

Allocated to equity component(2)
2.0

 
12.2

Total principal converted and repaid in cash
$
88.3

 
$
415.6

Loss on conversions of convertible senior notes(3)
$
0.4

 
$
2.6

Shares of common stock issued in connection with conversion of convertible senior notes(4)
0.3

 
1.7

______________
(1)
Recorded as a reduction to convertible senior notes, net in our condensed consolidated balance sheets and calculated by measuring the fair value of a similar liability that did not have an associated convertible feature.
(2)
Recorded as a reduction to additional paid-in capital in our condensed consolidated balance sheets.
(3)
Represents the difference between the cash consideration allocated to the liability component and the net carrying amount of the liability component on the respective settlement dates. The amount is included in other income, net in our condensed consolidated statement of operations.
(4)
Shares of common stock issued to the holders for the conversion value in excess of the principal amount. These shares were fully offset by shares received from the corresponding exercise of the associated note hedges.
The sale price condition was not met for the 2023 Notes during the fiscal quarters ended January 31, 2019 or July 31, 2018. Since the 2023 Notes were not convertible, the net carrying amount of the 2023 Notes was classified as a long-term liability and the equity component was included in additional paid-in capital in our condensed consolidated balance sheets as of January 31, 2019 and July 31, 2018. As of January 31, 2019, all of the 2023 Notes remained outstanding.
The following table sets forth the components of the Notes as of January 31, 2019 and July 31, 2018 (in millions):
 
January 31, 2019
 
July 31, 2018
 
2019 Notes
 
2023 Notes
 
Total
 
2019 Notes
 
2023 Notes
 
Total
Liability component:
 
 
 
 
 
 
 
 
 
 
 
Principal
$
159.4

 
$
1,693.0

 
$
1,852.4

 
$
575.0

 
$
1,693.0

 
$
2,268.0

Less: debt discount and debt issuance costs, net of amortization
3.1

 
293.5

 
296.6

 
24.6

 
323.3

 
347.9

Net carrying amount
$
156.3

 
$
1,399.5

 
$
1,555.8

 
$
550.4

 
$
1,369.7

 
$
1,920.1

 
 
 
 
 
 
 
 
 
 
 
 
Equity component (including amounts classified as temporary equity)
$
30.4

 
$
315.0

 
$
345.4

 
$
109.8

 
$
315.0

 
$
424.8

The total estimated fair value of the Notes was $2.1 billion and $2.7 billion at January 31, 2019 and July 31, 2018, respectively. The fair value was determined based on the closing trading price per $100 of the Notes as of the last day of trading for the period. We consider the fair value of the Notes at January 31, 2019 and July 31, 2018 to be a Level 2 measurement. The fair value of the Notes is primarily affected by the trading price of our common stock and market interest rates. As of January 31, 2019, the if-converted value of the 2019 Notes exceeded its principal amount by $119.1 million. Based on the closing price of our common stock on January 31, 2019, the if-converted value of the 2023 Notes was less than its principal amount.

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The following table sets forth interest expense recognized related to the Notes (dollars in millions):
 
Three Months Ended January 31,
 
Six Months Ended January 31,
 
2019
 
2018
 
2019
 
2018
 
2019 Notes
 
2023 Notes
 
Total
 
2019 Notes
 
2023 Notes
 
Total
 
2019 Notes
 
2023 Notes
 
Total
 
2019 Notes
 
2023 Notes
 
Total
Contractual interest expense
$
—

 
$
3.1

 
$
3.1

 
$
—

 
$
—

 
$
—

 
$
—

 
$
6.3

 
$
6.3

 
$
—

 
$
—

 
$
—

Amortization of debt discount
2.0

 
14.5

 
16.5

 
5.8

 
—

 
5.8

 
6.0

 
28.9

 
34.9

 
11.4

 
—

 
11.4

Amortization of debt issuance costs
0.2

 
0.4

 
0.6

 
0.6

 
—

 
0.6

 
0.7

 
0.9

 
1.6

 
1.3

 
—

 
1.3

Total interest expense recognized
$
2.2

 
$
18.0

 
$
20.2

 
$
6.4

 
$
—

 
$
6.4

 
$
6.7

 
$
36.1

 
$
42.8

 
$
12.7

 
$
—

 
$
12.7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Effective interest rate of the liability component
4.8
%
 
5.2
%
 
 
 
4.8
%
 
—
%
 
 
 
4.8
%
 
5.2
%
 
 
 
4.8
%
 
—
%
 
 
Note Hedges
To minimize the impact of potential economic dilution upon conversion of the Notes, we entered into separate convertible note hedge transactions (the “2019 Note Hedges,” with respect to the 2019 Notes, and the “2023 Note Hedges,” with respect to the 2023 Notes, and collectively, the “Note Hedges”) with respect to our common stock concurrent with the issuance of each series of Notes.
The following table presents details of the Note Hedges (in millions):
 
Initial Number of Shares
 
Aggregate Purchase
2019 Note Hedges
5.2

 
$
111.0

2023 Note Hedges
6.4

 
$
332.0

The Note Hedges cover shares of our common stock at a strike price per share that corresponds to the initial applicable conversion price of the applicable series of Notes, which are also subject to adjustment, and are exercisable upon conversion of the applicable series of Notes. The Note Hedges will expire upon maturity of the applicable series of Notes. The Note Hedges are separate transactions and are not part of the terms of the applicable series of the Notes. Holders of the Notes of either series will not have any rights with respect to the Note Hedges. Any shares of our common stock receivable by us under the Note Hedges are excluded from the calculation of diluted earnings per share as they are antidilutive. The aggregate amounts paid for the Note Hedges are included in additional paid-in capital in our consolidated balance sheets.
As a result of the conversions of the 2019 Notes settled during the three and six months ended January 31, 2019, we exercised the corresponding portion of our 2019 Note Hedges and received 0.3 million and 1.7 million shares of common stock during the respective periods.
Warrants
Separately, but concurrently with the issuance of each series of Notes, we entered into transactions whereby we sold warrants (the “2019 Warrants,” with respect to the 2019 Notes, and the “2023 Warrants,” with respect to the 2023 Notes, and collectively, the “Warrants”) to acquire shares of our common stock, subject to anti-dilution adjustments. The 2019 Warrants and 2023 Warrants are exercisable beginning October 2019 and October 2023, respectively.
The following table presents details of the Warrants (in millions, except per share data):
 
Initial Number of Shares
 
Strike Price per Share
 
Aggregate Proceeds
2019 Warrants
5.2

 
$
137.85

 
$
78.3

2023 Warrants
6.4

 
$
417.80

 
$
145.4