PURE STORAGE, INC., 10-Q filed on 8/30/2019
Quarterly Report
v3.19.2
Cover - shares
6 Months Ended
Jul. 31, 2019
Aug. 26, 2019
Cover page.    
Document Type 10-Q  
Document Quarterly Report true  
Document Period End Date Jul. 31, 2019  
Document Transition Report false  
Entity File Number 001-37570  
City Area Code 800  
Local Phone Number 379-7873  
Entity Registrant Name Pure Storage, Inc.  
Entity Incorporation, State or Country Code DE  
Entity Tax Identification Number 27-1069557  
Entity Current Reporting Status Yes  
Entity Interactive Data Current Yes  
Entity Filer Category Large Accelerated Filer  
Entity Small Business false  
Entity Emerging Growth Company false  
Entity Shell Company false  
Title of 12(b) Security Class A Common Stock, $0.0001 par value per share  
Trading Symbol PSTG  
Security Exchange Name NYSE  
Entity Common Stock, Shares Outstanding (in shares)   256,179,043
Amendment Flag false  
Document Fiscal Year Focus 2020  
Document Fiscal Period Focus Q2  
Entity Central Index Key 0001474432  
Current Fiscal Year End Date --01-31  
Entity Address, Address Line One 650 Castro Street, Suite 400  
Entity Address, City or Town Mountain View  
Entity Address, State or Province CA  
Entity Address, Postal Zip Code 94041  
v3.19.2
Condensed Consolidated Balance Sheets - USD ($)
$ in Thousands
Jul. 31, 2019
Jan. 31, 2019
Current assets:    
Cash and cash equivalents $ 268,938 $ 447,990
Marketable Securities 913,521 749,482
Accounts receivable, net of allowance of $660 and $614 as of January 31, 2019 and July 31, 2019 352,617 378,729
Inventory 35,820 44,687
Deferred commissions, current 31,273 29,244
Prepaid expenses and other current assets 47,776 51,695
Total current assets 1,649,945 1,701,827
Property and equipment, net 131,048 125,353
Operating lease right-of-use assets 114,339 0
Deferred commissions, non-current 87,295 85,729
Intangible assets, net 63,659 20,118
Goodwill 36,420 10,997
Deferred income taxes, non-current 939 1,060
Restricted cash 15,425 15,823
Other assets, non-current 16,904 12,118
Total assets 2,115,974 1,973,025
Current liabilities:    
Accounts payable 64,582 103,462
Accrued compensation and benefits 70,753 99,910
Accrued expenses and other liabilities 44,690 39,860
Operating lease liabilities, current 26,005 0
Deferred revenue, current 308,523 266,584
Total current liabilities 514,553 509,816
Convertible senior notes, net 463,118 449,828
Operating lease liabilities, non-current 94,941 0
Deferred revenue, non-current 298,740 269,336
Deferred tax liabilities, non-current 5,697 0
Other liabilities, non-current 1,386 6,265
Total liabilities 1,378,435 1,235,245
Commitments and contingencies (Note 7)
Stockholders’ equity:    
Preferred stock, par value of $0.0001 per share— 20,000 shares authorized as of January 31, 2019 and July 31, 2019; no shares issued and outstanding as of January 31, 2019 and July 31, 2019 0 0
Class A and Class B common stock, par value of $0.0001 per share— 2,250,000 (Class A 2,000,000, Class B 250,000) shares authorized as of January 31, 2019 and July 31, 2019; 243,524 and 255,752 Class A shares issued and outstanding as of January 31, 2019 and July 31, 2019 26 24
Additional paid-in capital 1,982,407 1,820,043
Accumulated other comprehensive income (loss) 3,409 (338)
Accumulated deficit (1,248,303) (1,081,949)
Total stockholders’ equity 737,539 737,780
Total liabilities and stockholders’ equity $ 2,115,974 $ 1,973,025
v3.19.2
Condensed Consolidated Balance Sheets (Parenthetical) - USD ($)
$ in Thousands
Jul. 31, 2019
Jan. 31, 2019
Accounts receivable, allowance $ 614 $ 660
Preferred stock, par value (in dollars per share) $ 0.0001 $ 0.0001
Shares authorized (in shares) 20,000,000 20,000,000
Shares issued (in shares) 0 0
Shares outstanding (in shares) 0 0
Par value per share (in dollars per share) $ 0.0001 $ 0.0001
Shares authorized (in shares) 2,250,000,000 2,250,000,000
Shares issued (in shares) 241,359,000 220,979,000
Shares outstanding (in shares) 241,359,000 220,979,000
Class A    
Par value per share (in dollars per share) $ 0.0001 $ 0.0001
Shares authorized (in shares) 2,000,000,000 2,000,000,000
Shares issued (in shares) 255,751,711 243,524,000
Shares outstanding (in shares) 255,752,000 243,524,000
Class B    
Par value per share (in dollars per share) $ 0.0001 $ 0.0001
Shares authorized (in shares) 250,000,000 250,000,000
Shares issued (in shares) 0 0
Shares outstanding (in shares) 0 0
v3.19.2
Condensed Consolidated Statements of Operations - USD ($)
shares in Thousands, $ in Thousands
3 Months Ended 6 Months Ended
Jul. 31, 2019
Jul. 31, 2018
Jul. 31, 2019
Jul. 31, 2018
Revenue $ 396,327 $ 308,884 $ 723,027 $ 564,829
Cost of revenue 128,008 102,719 238,321 192,349
Gross profit 268,319 206,165 484,706 372,480
Operating expenses:        
Research and development 107,020 84,031 212,095 162,523
Sales and marketing 186,188 143,749 352,814 266,116
General and administrative 40,016 33,591 82,126 60,921
Total operating expenses 333,224 261,371 647,035 489,560
Loss from operations (64,905) (55,206) (162,329) (117,080)
Other income (expense), net (652) (4,032) (2,468) (5,031)
Loss before provision for income taxes (65,557) (59,238) (164,797) (122,111)
Income tax provision 461 885 1,557 2,316
Net loss $ (66,018) $ (60,123) $ (166,354) $ (124,427)
Net loss per share attributable to common stockholders, basic and diluted (in dollars per share) $ (0.26) $ (0.26) $ (0.67) $ (0.55)
Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted (in shares) 251,298 229,359 248,366 226,609
Product        
Revenue $ 300,128 $ 241,137 $ 538,869 $ 436,586
Cost of revenue 92,870 78,262 169,462 144,682
Support subscription        
Revenue 96,199 67,747 184,158 128,243
Cost of revenue $ 35,138 $ 24,457 $ 68,859 $ 47,667
v3.19.2
Condensed Consolidated Statements of Comprehensive Loss - USD ($)
$ in Thousands
3 Months Ended 6 Months Ended
Jul. 31, 2019
Jul. 31, 2018
Jul. 31, 2019
Jul. 31, 2018
Statement of Comprehensive Income [Abstract]        
Net loss $ (66,018) $ (60,123) $ (166,354) $ (124,427)
Other comprehensive income (loss) net of tax:        
Change in unrealized net gain (loss) on available-for-sale securities 2,120 (193) 3,747 (909)
Comprehensive loss $ (63,898) $ (60,316) $ (162,607) $ (125,336)
v3.19.2
Condensed Consolidated Statements of Stockholders’ Equity (Deficit) - USD ($)
shares in Thousands, $ in Thousands
Total
Common Stock
Additional Paid-In Capital
Accumulated Other Comprehensive Income (Loss)
Accumulated Deficit
Restricted Stock Units
Common Stock
Restricted Stock
Common Stock
Beginning balance (in shares) at Jan. 31, 2018   220,979          
Beginning balance at Jan. 31, 2018 $ 574,401 $ 22 $ 1,479,883 $ (1,917) $ (903,587)    
Increase (Decrease) in Stockholders' Equity [Roll Forward]              
Issuance of common stock upon exercise of stock options (in shares)   5,884          
Issuance of common stock upon exercise of stock options 29,066 $ 1 29,065        
Stock-based compensation expense 97,609   97,609        
Vesting of restricted stock units (in shares)           4,117  
Vesting of restricted stock units 0 $ 0 0        
Vesting of early exercised stock options 320   320        
Common stock issued under employee stock purchase plan (in shares)   2,111          
Common stock issued under employee stock purchase plan 19,698   19,698        
Issuance of restricted stock awards (in shares)             3,330
Issuance of restricted stock 1           $ 1
Repurchase of common stock (in shares)   (1,009)          
Repurchase of common stock (20,000)   (20,000)        
Purchase of capped calls (64,630)   (64,630)        
Equity component of convertible senior notes, net 133,265   133,265        
Other comprehensive loss (909)     (909)      
Net loss (124,427)       (124,427)    
Ending balance (in shares) at Jul. 31, 2018   235,412          
Ending balance at Jul. 31, 2018 644,394 $ 24 1,675,210 (2,826) (1,028,014)    
Beginning balance (in shares) at Apr. 30, 2018   229,596          
Beginning balance at Apr. 30, 2018 631,620 $ 23 1,602,121 (2,633) (967,891)    
Increase (Decrease) in Stockholders' Equity [Roll Forward]              
Issuance of common stock upon exercise of stock options (in shares)   3,691          
Issuance of common stock upon exercise of stock options 19,436 $ 1 19,435        
Stock-based compensation expense 53,654   53,654        
Vesting of restricted stock units (in shares)           2,104  
Vesting of restricted stock units 0 $ 0 0        
Issuance of restricted stock awards (in shares)             21
Issuance of restricted stock 0           $ 0
Other comprehensive loss (193)     (193)      
Net loss (60,123)       (60,123)    
Ending balance (in shares) at Jul. 31, 2018   235,412          
Ending balance at Jul. 31, 2018 644,394 $ 24 1,675,210 (2,826) (1,028,014)    
Beginning balance (in shares) at Jan. 31, 2019   243,524          
Beginning balance at Jan. 31, 2019 737,780 $ 24 1,820,043 (338) (1,081,949)    
Increase (Decrease) in Stockholders' Equity [Roll Forward]              
Issuance of common stock upon exercise of stock options (in shares)   3,863          
Issuance of common stock upon exercise of stock options 19,291 $ 1 19,290        
Stock-based compensation expense 118,206   118,206        
Vesting of restricted stock units (in shares)           4,327  
Vesting of restricted stock units 0 $ 1 (1)        
Tax withholding on vesting of restricted stock (7,173)   (7,173)        
Common stock issued under employee stock purchase plan (in shares)   2,973          
Common stock issued under employee stock purchase plan 32,042   32,042        
Issuance of restricted stock awards (in shares)             1,065
Other comprehensive loss 3,747     3,747      
Net loss (166,354)       (166,354)    
Ending balance (in shares) at Jul. 31, 2019   255,752          
Ending balance at Jul. 31, 2019 737,539 $ 26 1,982,407 3,409 (1,248,303)    
Beginning balance (in shares) at Apr. 30, 2019   252,853          
Beginning balance at Apr. 30, 2019 743,976 $ 25 1,924,947 1,289 (1,182,285)    
Increase (Decrease) in Stockholders' Equity [Roll Forward]              
Issuance of common stock upon exercise of stock options (in shares)   655          
Issuance of common stock upon exercise of stock options 2,502 $ 0 2,502        
Stock-based compensation expense 56,460   56,460        
Vesting of restricted stock units (in shares)           2,277  
Vesting of restricted stock units 0 $ 1 (1)        
Tax withholding on vesting of restricted stock (1,501)   (1,501)        
Issuance of restricted stock awards (in shares)             (33)
Issuance of restricted stock 0            
Other comprehensive loss 2,120     2,120      
Net loss (66,018)       (66,018)    
Ending balance (in shares) at Jul. 31, 2019   255,752          
Ending balance at Jul. 31, 2019 $ 737,539 $ 26 $ 1,982,407 $ 3,409 $ (1,248,303)    
v3.19.2
Condensed Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
6 Months Ended
Jul. 31, 2019
Jul. 31, 2018
CASH FLOWS FROM OPERATING ACTIVITIES    
Net loss $ (166,354) $ (124,427)
Adjustments to reconcile net loss to net cash provided by operating activities:    
Depreciation and amortization 43,591 33,590
Amortization of debt discount and debt issuance costs 13,290 7,889
Stock-based compensation expense 120,561 97,609
Other 327 82
Changes in operating assets and liabilities, net of effects of acquisition:    
Accounts receivable, net 26,553 707
Inventory 6,852 (8,900)
Deferred commissions (3,595) (4,155)
Prepaid expenses and other assets (635) 11,134
Operating lease right-of-use assets 13,438 0
Accounts payable (30,827) (18,135)
Accrued compensation and other liabilities (25,704) (7,458)
Operating lease liabilities (13,083) 0
Deferred revenue 71,045 39,144
Net cash provided by operating activities 55,459 27,080
CASH FLOWS FROM INVESTING ACTIVITIES    
Purchases of property and equipment (53,229) (42,733)
Acquisition, net of cash acquired (47,881) 0
Purchase of intangible assets (9,000) 0
Purchases of marketable securities (488,497) (494,507)
Sales of marketable securities 60,368 13,585
Maturities of marketable securities 270,756 97,793
Net cash used in investing activities (267,483) (425,862)
CASH FLOWS FROM FINANCING ACTIVITIES    
Net proceeds from exercise of stock options 19,260 29,067
Proceeds from issuance of common stock under employee stock purchase plan 32,042 19,698
Proceeds from issuance of convertible senior notes, net of issuance costs 0 562,062
Payment for purchase of capped calls 0 (64,630)
Repayment of debt assumed from acquisition (11,555) 0
Tax withholding on vesting of restricted stock (7,173) 0
Repurchase of common stock 0 (20,000)
Net cash provided by financing activities 32,574 526,197
Net increase (decrease) in cash, cash equivalents and restricted cash (179,450) 127,415
Cash, cash equivalents and restricted cash, beginning of period 463,813 258,820
Cash, cash equivalents and restricted cash, end of period 284,363 386,235
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD:    
Cash, cash equivalents and restricted cash, end of period 463,813 258,820
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION    
Cash paid for income taxes 2,716 3,023
Cash paid for interest 359 0
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING INFORMATION    
Property and equipment purchased but not yet paid 5,717 11,949
Vesting of early exercised stock options $ 0 $ 320
v3.19.2
Business Overview
6 Months Ended
Jul. 31, 2019
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Business Overview Business Overview
Organization and Description of Business
Pure Storage, Inc. (the Company, we, us, or other similar pronouns) was originally incorporated in the state of Delaware in October 2009 under the name OS76, Inc. In January 2010, we changed our name to Pure Storage, Inc. We are headquartered in Mountain View, California and have wholly owned subsidiaries throughout the world.

We help innovators to build a better world with data. Our innovative data platform replaces storage systems designed for mechanical disk with all-flash systems optimized for end-to-end for solid-state memory. Our cloud-based management and support platform helps predictively resolve potential issues and simplify storage administration. We provide a customer first business model that replaces the traditional forklift upgrade cycle with a subscription model built to keep customers on the cutting edge without downtime or performance impact.
v3.19.2
Basis of Presentation and Summary of Significant Accounting Policies
6 Months Ended
Jul. 31, 2019
Accounting Policies [Abstract]  
Basis of Presentation and Summary of Significant Accounting Policies Basis of Presentation and Summary of Significant Accounting Policies
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and our wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Unaudited Interim Consolidated Financial Information
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (U.S. GAAP) and applicable rules and regulations of the Securities and Exchange Commission (the SEC) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended January 31, 2019.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, comprehensive loss and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full fiscal year 2020 or any future period.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and accompanying notes. Actual results could differ from these estimates. Such estimates include, but are not limited to, the determination of standalone selling price for revenue arrangements with multiple performance obligations, useful lives of intangible assets, property and equipment, the period of benefit for deferred contract costs for commissions, stock-based compensation, provision for income taxes including related reserves, valuation of intangible assets and goodwill, the incremental borrowing rate we use to determine our operating lease liabilities, and contingent liabilities. Management bases its estimates on historical experience and on various other assumptions which management believes to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.
Restricted Cash
Restricted cash is comprised of cash collateral for letters of credit related to our leases and for a vendor credit card program. As of January 31, 2019 and July 31, 2019, we had restricted cash of $15.8 million and $15.4 million.
Marketable Securities
We classify our marketable securities as available-for-sale at the time of purchase and reevaluate such classification at each balance sheet date. We may sell these securities at any time for use in current operations even if they have not yet reached maturity. As a result, we classify our securities, including those with maturities beyond twelve months, as current assets in the accompanying condensed consolidated balance sheets. We carry these securities at fair value and record unrealized gains and losses, in accumulated other comprehensive income (loss), which is reflected as a component of stockholders’ equity. We evaluate our securities to assess whether those with unrealized loss positions are other than temporarily impaired. We consider impairments to be other than temporary if they are related to deterioration in credit risk or if it is likely we will sell the securities before the recovery of their cost basis. Realized gains and losses from the sale of marketable securities and declines in value deemed to be other than temporary are determined on the specific identification method. To date, there have been no declines in value deemed to be other than temporary in any of our securities. Realized gains and losses are reported in other income (expense), net in the condensed consolidated statements of operations.
Business Combinations
We allocate the purchase price to the assets acquired and liabilities assumed based on their estimated fair values. The excess of the purchase price over the fair values of the assets acquired and liabilities assumed is recorded as goodwill. During the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the estimated fair value of the assets acquired and liabilities assumed, with the corresponding offset to goodwill. The results of operations of an acquired business is included in our condensed consolidated financial statements from the date of acquisition. Acquisition-related expenses are expensed as incurred. 
Deferred Commissions
Deferred commissions consist of incremental costs paid to our sales force to obtain customer contracts. Deferred commissions related to product revenue are recognized upon transfer of control to customers and deferred commissions related to support subscription revenue are amortized over an expected useful life of six years. We determine the expected useful life based on an estimated benefit period by evaluating our technology development life cycle, expected customer relationship period and other factors. We classify deferred commissions as current and non-current on our condensed consolidated balance sheets based on the timing of when we expect to recognize the expense. Amortization of deferred commissions is included in sales and marketing expense in the condensed consolidated statements of operations.
Changes in total deferred commissions during the periods presented are as follows (in thousands):
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2018
 
2019
 
2018
 
2019
Beginning balance (1)
$
86,044

 
$
113,257

 
$
87,313

 
$
114,973

Additions
24,582

 
30,074

 
40,003

 
48,310

Recognition of deferred commissions
(19,157
)
 
(24,763
)
 
(35,847
)
 
(44,715
)
Ending balance
$
91,469

 
$
118,568

 
$
91,469

 
$
118,568

____________________________________
 
(1) Balance as of January 31, 2018 was adjusted to reflect the adoption of ASC 606.

Of the $118.6 million total deferred commissions balance as of July 31, 2019, we expect to recognize approximately 26% as commission expense over the next 12 months and the remainder thereafter.
There was no impairment related to capitalized commissions for the three and six months ended July 31, 2018 and 2019.
Operating Leases

We determine if an arrangement contains a lease at inception. Lease liabilities are recognized at the present value of the future lease payments at commencement date. The interest rate implicit in our operating leases is not readily determinable, and therefore an incremental borrowing rate is estimated to determine the present value of future payments. The estimated incremental borrowing rate factors in a hypothetical interest rate on a collateralized basis with similar terms, payments, and economic environments. The operating lease right-of-use (ROU) asset is determined based on the lease liability initially established and reduced for any prepaid lease payments and any lease incentives. We combine lease and non-lease components for our leases.

Certain of the operating lease agreements contain rent concession, rent escalation, and option to renew provisions. Rent concession and rent escalation provisions are considered in determining the straight-line lease cost to be recorded over the lease term. Lease cost is recognized on a straight-line basis over the lease term commencing on the date we have the right to use the leased property. We generally use the base, non-cancelable, lease term when recognizing the lease assets and liabilities, unless it is reasonably certain that an extension or termination option will be exercised.

In addition, certain of our operating lease agreements contain tenant improvement allowances from our landlords. These allowances are accounted for as lease incentives and decrease our ROU asset and reduce single lease cost over the lease term.

For short-term leases which have a lease term of less than twelve months and do not include an option to purchase the underlying asset that we are reasonably certain to exercise, we recognize rent expense in our condensed consolidated statements of operations on a straight-line basis over the lease term and record variable lease payments as incurred.
Deferred Revenue
Deferred revenue primarily consists of amounts that have been invoiced but that have not yet been recognized as revenue and performance obligations pertaining to support subscription services. 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 dates.
Changes in total deferred revenue during the periods presented are as follows (in thousands):
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2018
 
2019
 
2018
 
2019
Beginning balance (1)
$
388,614

 
$
564,230

 
$
374,102

 
$
535,920

Additions
92,511

 
140,548

 
167,782

 
258,441

Recognition of deferred revenue
(67,878
)
 
(97,515
)
 
(128,637
)
 
(187,098
)
Ending balance
$
413,247

 
$
607,263

 
$
413,247

 
$
607,263

____________________________________
 
(1) Balance as of January 31, 2018 was adjusted to reflect the adoption of ASC 606.
During the three and six months ended July 31, 2018, we recognized $60.9 million and $106.2 million in revenue pertaining to deferred revenue as of the beginning of each period. During the three and six months ended July 31, 2019, we recognized $88.2 million and $150.2 million in revenue pertaining to deferred revenue as of the beginning of each period.
Total contracted but not recognized revenue was $770.1 million as of July 31, 2019. Contracted but not recognized revenue consists of both deferred revenue and non-cancelable amounts that will be invoiced and recognized as revenue in future periods. Of the $770.1 million contracted but not recognized revenue as of July 31, 2019, we expect to recognize approximately 41% over the next 12 months, and the remainder thereafter.
Revenue Recognition
We derive revenue from two sources: (1) product revenue which includes hardware and embedded software and (2) support subscription revenue which includes customer support, hardware maintenance, and software upgrades on a when-and-if-available basis. Support subscription revenue also includes our Evergreen Storage Service (ES2) offering.
Our product revenue is derived from the sale of storage hardware and operating system software that is integrated into the hardware. We typically recognize product revenue upon transfer of control to our customers. Products are typically shipped directly by us to customers, and our channel partners do not stock our inventory.
Our support subscription revenue is derived from the sale of support subscription, which includes the right to receive unspecified software upgrades and enhancements on a when-and-if-available basis, bug fixes, parts replacement services related to the hardware, as well as access to our cloud-based management and support platform. Support subscription revenue is also derived from the sale of our ES2 offering. Revenue related to support revenue is recognized ratably over the contractual term, which generally ranges from one to six years and represents our performance obligations period. The vast majority of our products are sold with support subscription agreements, which typically commence upon transfer of control of the corresponding products to our customers. Costs to service the support subscription are expensed as incurred. In addition, our Evergreen Storage program provides our customers who continually maintain active support subscription agreements for three years with an included controller refresh with each additional three year support subscription renewal. In accordance with revenue recognition guidance, the controller refresh represents an additional performance obligation and the allocated revenue is recognized in the period in which these controllers are shipped.
We recognize revenue upon the transfer of promised goods or services to customers in an amount that reflects the consideration we expect to be entitled in exchange for those goods or services. This is achieved through applying the following five-step approach:
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
When applying this five-step approach, we apply judgment in determining the customer's ability and intention to pay, which is based on a variety of factors including the customer's historical payment experience and/or published credit and financial information pertaining to the customer. To the extent a customer contract includes multiple promised goods or services, we determine whether promised goods or services are capable of being distinct in the context of the contract to be accounted for as a separate performance obligation. The transaction price is determined based on the consideration which we will be entitled to in exchange for transferring goods or services to the customer. We allocate transaction price to each performance obligation for contracts that contain multiple performance obligations based on a relative standalone selling price which is determined based on the price at which the performance obligation is sold separately, or if not observable through past transactions, is estimated taking into account available information such as market conditions and internally approved pricing guidelines related to performance obligations.
Recently Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2016-02, Leases (ASC 842) and subsequent amendments to the initial guidance (collectively, Topic 842). ASC 842 requires lessees to generally recognize on its balance sheet operating and financing lease liabilities and corresponding ROU assets at the commencement date, and to recognize the associated lease expenses in the condensed consolidated statement of operations in a manner similar to that required under historical accounting rules.

On February 1, 2019, we adopted ASC 842 using the modified retrospective approach by electing to use the optional transition method which allows us to continue to apply the guidance of ASC 840, including disclosure requirements, in the comparative periods presented. We elected the package of transition expedients, which allowed us to carry forward our historical lease classifications, our assessment of whether any existing leases as of the date of adoption are or contain leases, and our assessment of indirect costs for any leases that existed prior to adoption of the new standard. We elected to take the practical expedient to keep leases with an initial term of 12 months or less off the condensed consolidated balance sheet and recognize the associated lease payments in the consolidated statements of operations on a straight-line basis over the lease term. We recognized operating ROU assets of $124.5 million and lease liabilities of $130.6 million on our condensed consolidated balance sheet as of February 1, 2019, which included reclassifying prepaid rent and deferred rent as a component of the ROU asset. Topic 842 did not have a material impact on our condensed consolidated statements of operations and cash flows. Refer to Note 8 for additional disclosures.
In February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220) - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This standard allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 and requires certain disclosures about stranded tax effects. We adopted this standard on February 1, 2019 and the adoption had no impact on our condensed consolidated financial statements.
Recent Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13). ASU 2016-13 amends guidance on reporting credit losses for assets held at amortized cost basis and available-for-sale debt securities to require that credit losses on available-for-sale debt securities be presented as an allowance rather than as a write-down. The measurement of credit losses for newly recognized financial assets and subsequent changes in the allowance for credit losses are recorded in the statements of operations. The amendments in this update will be effective for us beginning on February 1, 2020 with early adoption permitted on or after February 1, 2019. We are currently evaluating the impact of this standard on our condensed consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13) which amended its conceptual framework to improve the effectiveness of disclosures in notes to financial statements. ASU 2018-13 eliminates such disclosures around the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy. The guidance also adds new disclosure requirements for Level 3 measurements. ASU 2018-13 is effective for us beginning February 1, 2020. Early adoption is permitted. We are currently evaluating the impact of this standard on our condensed consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40) - Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (ASU 2018-15). ASC 2018-15 aligns the requirements for capitalizing implementation costs in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This standard will be effective for us beginning February 1, 2020 and will be applied either retrospectively or prospectively. Early adoption is permitted. We are currently evaluating the impact of this standard on our condensed consolidated financial statements.
v3.19.2
Financial Instruments
6 Months Ended
Jul. 31, 2019
Investments, Debt and Equity Securities [Abstract]  
Financial Instruments Financial Instruments 
Fair Value Measurements
We measure our cash equivalents, marketable securities, and restricted cash at fair value on a recurring basis. We define fair value as the exchange price that would be received from sale of an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. 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. Three levels of inputs may be used to measure fair value:

Level 1 - Observable inputs are unadjusted quoted prices in active markets for identical assets or liabilities;

Level 2 - Observable inputs are quoted prices for similar assets and liabilities in active markets or inputs other than quoted prices that are observable for the assets or liabilities, either directly or indirectly through market corroboration, for substantially the full term of the financial instruments; and

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. These inputs are based on our own assumptions used to measure assets and liabilities at fair value and require significant management judgment or estimation.
We classify our cash equivalents, marketable securities and restricted cash within Level 1 or Level 2 because they are valued using either quoted market prices or inputs other than quoted prices which are directly or indirectly observable in the market, including readily-available pricing sources for the identical underlying security which may not be actively traded. Our fixed income available-for-sale securities consist of high quality, investment grade securities from diverse issuers. The valuation techniques used to measure the fair value of our marketable securities were derived from non-binding market consensus prices that are corroborated by observable market data or quoted market prices for similar instruments.
In addition to our cash equivalents, marketable securities and restricted cash, we measure the fair value of our convertible senior notes (the Notes) on a quarterly basis for disclosure purposes. We consider the fair value of the Notes at July 31, 2019 to be a Level 2 measurement due to its limited trading activity. Refer to Note 6 for the carrying amount and estimated fair value of our Notes as of July 31, 2019.
Cash Equivalents, Marketable Securities and Restricted Cash
The following tables summarize our cash equivalents, marketable securities and restricted cash by significant investment categories as of January 31, 2019 and July 31, 2019 (in thousands):
 
 
As of January 31, 2019
 
Amortized
Cost
 
Gross Unrealized
Gains
 
Gross Unrealized
Losses
 
Fair
Value
 
Cash Equivalents
 
Marketable Securities
 
Restricted Cash
Level 1
 

 
 

 
 

 
 

 
 

 
 
 
 

Money market accounts
$

 
$

 
$

 
$
43,038

 
$
27,215

 
$

 
$
15,823

Level 2
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government treasury notes
315,329

 
208

 
(315
)
 
315,222

 
34,129

 
281,093

 

U.S. government agencies
69,114

 
17

 
(154
)
 
68,977

 
9,983

 
58,994

 

Corporate debt securities
363,860

 
534

 
(757
)
 
363,637

 

 
363,637

 

Foreign government bonds
7,965

 
36

 

 
8,001

 

 
8,001

 

Asset-backed securities
37,664

 
105

 
(12
)
 
37,757

 

 
37,757

 

Total
$
793,932

 
$
900

 
$
(1,238
)
 
$
836,632

 
$
71,327

 
$
749,482

 
$
15,823


 
As of July 31, 2019
 
Amortized
Cost
 
Gross Unrealized
Gains
 
Gross Unrealized
Losses
 
Fair
Value
 
Cash Equivalents
 
Marketable
Securities
 
Restricted Cash
Level 1
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market accounts
$

 
$

 
$

 
$
36,659

 
$
21,234

 
$

 
$
15,425

Level 2
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government treasury notes
348,463

 
1,454

 
(58
)
 
349,859

 

 
349,859

 

U.S. government agencies
66,153

 
222

 
(22
)
 
66,353

 

 
66,353

 

Corporate debt securities
427,362

 
2,685

 
(111
)
 
429,936

 
1,029

 
428,907

 

Foreign government bonds
8,480

 
100

 

 
8,580

 

 
8,580

 

Asset-backed securities
59,504

 
329

 
(11
)
 
59,822

 

 
59,822

 

Total
$
909,962

 
$
4,790

 
$
(202
)
 
$
951,209

 
$
22,263

 
$
913,521

 
$
15,425


 
The amortized cost and estimated fair value of our marketable securities are shown below by contractual maturity (in thousands):
 
 
As of July 31, 2019
 
Amortized Cost
 
Fair Value
Due within one year
$
336,156

 
$
336,736

Due in one to five years
572,777

 
576,785

Total
$
908,933

 
$
913,521


 
Based on our evaluation of available evidence, we concluded that the gross unrealized losses on our investments as of July 31, 2019 were temporary in nature. The following table presents gross unrealized losses and fair values for those investments that were in a continuous unrealized loss position as of July 31, 2019, aggregated by investment category (in thousands):
 
 
Less than 12 months
 
Greater than 12 months
 
Total
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
U.S. government treasury notes
$
27,887

 
$
(30
)
 
$
9,737

 
$
(28
)
 
$
37,624

 
$
(58
)
U.S. government agencies
5,215

 
(7
)
 
9,183

 
(15
)
 
14,398

 
(22
)
Corporate debt securities
38,856

 
(28
)
 
43,245

 
(83
)
 
82,101

 
(111
)
Asset-backed securities
9,399

 
(11
)
 

 

 
9,399

 
(11
)
Total
$
81,357

 
$
(76
)
 
$
62,165

 
$
(126
)
 
$
143,522

 
$
(202
)

 
Realized gains or losses on sale of marketable securities were not significant for all periods presented.
v3.19.2
Business Combination
6 Months Ended
Jul. 31, 2019
Business Combinations [Abstract]  
Business Combination Business Combination

In April 2019, we acquired Compuverde AB (Compuverde), a privately-held developer of file software solutions for enterprises and cloud providers based in Sweden. Acquisition-related costs were $0.5 million and expensed as incurred.
The purchase consideration was $47.9 million in cash (net of cash acquired) after repayment of $11.6 million of debt assumed. The purchase price was allocated as follows: $38.4 million in developed technology which will be amortized over seven years, $25.4 million of goodwill, $10.2 million in net liabilities assumed, and $5.7 million in deferred tax liability. The deferred tax liability was primarily a result of the difference in the book basis and tax basis related to the developed technology. Goodwill is primarily attributable to the assembled workforce and synergies from integrating Compuverde's technology with our data platform to expand our file capabilities and is not expected to be deductible for tax purposes.
In addition, we will make payments to founders of Compuverde totaling $15.9 million in cash payable over a two-year period, subject to continuous employment. As a result, these contingent payments are considered post-acquisition consideration to be recognized over the two-year period as compensation.
Restricted stock units in the amount of $3.0 million were issued to Compuverde employees in June 2019, subject to continuous employment and will be recognized as stock-based compensation over the related vesting period.
The results of Compuverde are included in our condensed consolidated statements of operations since the acquisition date, including revenue and net loss, and are not material. Pro forma results of operations have not been presented because the acquisition is not material to our results of operations.
v3.19.2
Balance Sheet Components
6 Months Ended
Jul. 31, 2019
Balance Sheet Components Disclosure [Abstract]  
Balance Sheet Components Balance Sheet Components
Inventory
Inventory consists of the following (in thousands):
 
As of
January 31, 2019
 
As of
July 31, 2019
Raw materials
$
3,349

 
$
2,623

Finished goods
41,338

 
33,197

Inventory
$
44,687

 
$
35,820


Property and Equipment, Net
Property and equipment, net consists of the following (in thousands):
 
 
As of
January 31, 2019
 
As of
July 31, 2019
Test equipment
$
170,930

 
$
191,846

Computer equipment and software
117,330

 
135,178

Furniture and fixtures
6,980

 
7,732

Leasehold improvements
34,286

 
37,866

Total property and equipment
329,526

 
372,622

Less: accumulated depreciation and amortization
(204,173
)
 
(241,574
)
Property and equipment, net
$
125,353

 
$
131,048


 
Depreciation and amortization expense was $16.8 million and $19.9 million for the three months ended July 31, 2018 and 2019, and $32.8 million and $39.7 million for the six months ended July 31, 2018 and 2019.
Intangible Assets, Net
Intangible assets, net consist of the following (in thousands):
 
 
As of
January 31, 2019
 
As of
July 31, 2019
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Amount
Technology patents
$
10,125

 
$
(6,572
)
 
$
3,553

 
$
19,125

 
$
(7,538
)
 
$
11,587

Developed technology
17,700

 
(1,135
)
 
16,565

 
56,100

 
(4,028
)
 
52,072

Intangible assets, net
$
27,825

 
$
(7,707
)
 
$
20,118

 
$
75,225

 
$
(11,566
)
 
$
63,659


 
Intangible assets amortization expense was $0.4 million and $2.6 million for the three months ended July 31, 2018 and 2019, and $0.8 million and $3.9 million for the six months ended July 31, 2018 and 2019. As of July 31, 2019, the weighted-average remaining amortization period was 4.2 years for technology patents and 6.5 years for developed technology. Amortization of the technology patents is included in general and administrative expenses due to their defensive nature and amortization of developed technology is included in cost of product revenue in the condensed consolidated statements of operations. During the three months ended July 31, 2019, we acquired a portfolio of technology patents for $9.0 million with a useful life of 7.0 years.
As of July 31, 2019, future expected amortization expense for intangible assets is as follows (in thousands):
 
Fiscal Years Ending January 31,
Estimated 
Future
Amortization
Expense
Remainder of 2020
$
5,402

2021
10,804

2022
9,846

2023
9,300

2024
9,300

Thereafter
19,007

Total
$
63,659


Goodwill
The change in the carrying amount of goodwill is as follows (in thousands):
 
Amount
Balance as of January 31, 2019
$
10,997

Goodwill acquired
25,423

Balance as of July 31, 2019
$
36,420


Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consist of the following (in thousands):
 
 
As of
January 31, 2019
 
As of
July 31, 2019
Taxes payable
$
7,146

 
$
4,967

Accrued marketing
6,173

 
11,005

Accrued travel and entertainment expenses
3,570

 
3,055

Acquisition consideration held back
3,725

 
3,725

Other accrued liabilities
19,246

 
21,938

Total accrued expenses and other liabilities
$
39,860

 
$
44,690


v3.19.2
Convertible Senior Notes
6 Months Ended
Jul. 31, 2019
Debt Disclosure [Abstract]  
Convertible Senior Notes Convertible Senior Notes

In April 2018, we issued $575.0 million in principal amount of 0.125% convertible senior notes due 2023, in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act and received proceeds of $562.1 million, after deducting the underwriters’ discounts and commissions. The Notes are governed by an indenture (the Indenture) between us, as the issuer, and U.S. Bank National Association, as trustee. The Notes are our senior unsecured obligations. The Indenture 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 Notes mature on April 15, 2023 unless repurchased or redeemed by us or converted in accordance with their terms prior to the maturity date. Interest is payable semi-annually in arrears on April 15 and October 15 of each year, beginning on October 15, 2018.
    
The Notes are convertible for up to 21,884,155 shares of our common stock at an initial conversion rate of approximately 38.0594 shares of Class A common stock per $1,000 principal amount, which is equal to an initial conversion price of approximately $26.27 per share of Class A common stock, subject to adjustment. 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 October 15, 2022, only under the following circumstances:

during any fiscal quarter commencing after the fiscal quarter ended on July 31, 2018 (and only during such fiscal quarter), if the last reported sale price of our Class A common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price for the Notes on each applicable trading day;

during the five business day period after any five consecutive trading day period (the measurement period), in which the trading price per $1,000 principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our Class A common stock and the conversion rate for the Notes on each such trading day;

if we call any or all of the Notes for redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; or

upon the occurrence of specified corporate events.

On or after October 15, 2022 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their Notes at any time regardless of the foregoing circumstances. Upon conversion, holders will receive cash, shares of our Class A common stock, or a combination of cash and shares of our Class A common stock, at our election. We intend to settle the principal of the Notes in cash.

The conversion price will be subject to adjustment in some events. Following certain corporate events that occur prior to the maturity date or following our issuance of a notice of redemption, we will increase the conversion rate for a holder who elects to convert its Notes in connection with such corporate event or during the related redemption period in certain circumstances. Additionally, upon the occurrence of a corporate event that constitutes a “fundamental change” per the Indenture, holders of the Notes may require us to repurchase for cash all or a portion of the Notes at a purchase price equal to 100% of the principal amount of the Notes plus accrued and unpaid contingent interest.

We may not redeem the Notes prior to April 20, 2021. We may redeem for cash all or any portion of the Notes, at our option, on or after April 20, 2021 if the last reported sale price of our Class A common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending not more than two trading days immediately preceding the date on which we provide notice of redemption at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the Notes.

In accounting for the issuance of the Notes, we separated the Notes into liability and equity components. The carrying amount of the liability component was determined by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was calculated by deducting the fair value of the liability component from the principal amount of the Notes as a whole. The difference between the principal amount of the Notes and the liability component (the debt discount) is amortized to interest expense in the condensed consolidated statements of operations using the effective interest method over the term of the Notes. The equity component of the Notes is included in additional paid-in capital in the condensed consolidated balance sheets and is not remeasured as long as it continues to meet the conditions for equity classification.

In accounting for the transaction costs related to the issuance of the Notes, we allocated the total amount incurred to the liability and equity components using the same proportions as the initial carrying value of the Notes. Transaction costs attributable to the liability component were netted with the principal amount of the Notes in the condensed consolidated balance sheets and are being amortized to interest expense in the condensed consolidated statements of operations using the effective interest method over the term of the Notes. Transaction costs attributable to the equity component were netted with the equity component of the Notes in additional paid-in capital in the condensed
consolidated balance sheets. Upon the issuance of the Notes, we recorded total debt issuance costs of $12.9 million, of which $9.8 million was allocated to the Notes and $3.1 million was allocated to additional paid-in capital.

The Notes consisted of the following (in thousands):
 
As of
July 31, 2019
Liability:
 
Principal
$
575,000

Less: debt discount, net of amortization
(104,329
)
Less: debt issuance costs, net of amortization
(7,553
)
Net carrying amount of the Notes
$
463,118

 
 
Stockholders' equity:
 
Allocated value of the conversion feature
$
136,333

Less: debt issuance costs
(3,068
)
Additional paid-in capital
$
133,265



The total estimated fair value of the Notes as of July 31, 2019 was $558.7 million. 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. The fair value of the Notes is primarily affected by the trading price of our common stock and market interest rates. Based on the closing price of our Class A common stock of $15.14 on July 31, 2019, the if-converted value of the Notes of $331.3 million was less than its principal amount.

The following table sets forth total interest expense recognized related to the Notes for three and six months ended July 31, 2018 and 2019 (in thousands):
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2018
 
2019
 
2018
 
2019
Amortization of debt discount
$
6,000

 
$
6,341

 
$
7,357

 
$
12,393

Amortization of debt issuance costs
434

 
459

 
532

 
897

Total amortization of debt discount and debt issuance costs
6,434

 
6,800

 
7,889

 
13,290

Contractual interest expense
181

 
181

 
224

 
358

Total interest expense related to the Notes
$
6,615

 
$
6,981

 
$
8,113

 
$
13,648

 
 
 
 
 
 
 
 
Effective interest rate of the liability component
5.6
%
 
5.6
%
 
5.6
%
 
5.6
%


In connection with the offering of the Notes, we paid $64.6 million to enter into capped call transactions with certain of the underwriters and their affiliates (the Capped Calls), whereby we have the option to purchase a total of 21,884,155 shares of our Class A common stock upon any conversion of Notes and/or offset any cash payments we are required to make in excess of the principal amount of the Notes, as the case may be, with such reduction or offset subject to a cap initially equal to $39.66 per share (which represents a premium of 100% over the last reported sales price of our Class A common stock on April 4, 2018), subject to certain adjustments (the Cap Price). The cost of the Capped Calls was accounted for as a reduction to additional paid-in capital on the condensed consolidated balance sheet. The Capped Calls are intended to reduce or offset potential dilution of our common stock upon any conversion of the Notes, subject to a cap based on the Cap Price.


Impact on Earnings Per Share
The Notes will not impact our diluted earnings per share until the average market price of our Class A common stock exceeds the conversion price of $26.27 per share, as we intend to settle the principal amount of the Notes in cash upon conversion. We are required under the treasury stock method to compute the potentially dilutive shares of common stock related to the Notes for periods we report net income. However, upon conversion, there will be no economic dilution from the Notes until the average market price of our Class A common stock exceeds the Cap Price of $39.66 per share, as exercise of the Capped Calls offsets any dilution from the Notes from the conversion price up to the Cap Price. Capped Calls are excluded from the calculation of diluted earnings per share, as they would be anti-dilutive under the treasury stock method.
v3.19.2
Commitments and Contingencies
6 Months Ended
Jul. 31, 2019
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies Commitments and Contingencies
Operating Leases

As of July 31, 2019, we have various non-cancelable operating lease commitments for office facilities which as a result of the adoption of ASC 842, have been recorded as operating lease liabilities on our condensed consolidated balance sheet. Refer to Note 8—Leases for additional information regarding lease commitments.

Convertible Notes

The repayment of our Notes with an aggregate principal amount of $575.0 million is due on April 15, 2023. Refer to Note 6 for further information regarding our Notes.
Letters of Credit
In connection with a lease executed in January 2019, we issued a letter of credit of $0.5 million. As of January 31, 2019 and July 31, 2019, we had outstanding letters of credit in the aggregate amount of $10.8 million and $11.6 million, in connection with our facility leases. The letters of credit are collateralized by restricted cash and mature on various dates through August 2029.
Legal Matters
From time to time, we have become involved in claims and other legal matters arising in the normal course of business. We investigate these claims as they arise. Although claims are inherently unpredictable, we currently are not aware of any matters that we expect to have a material adverse effect on our business, financial position, results of operations or cash flows. Accordingly, we have not recorded any loss contingency on our condensed consolidated balance sheet as of July 31, 2019.
Indemnification
Our arrangements generally include certain provisions for indemnifying customers against liabilities if our products or services infringe a third party’s intellectual property rights. Other guarantees or indemnification arrangements include guarantees of product and service performance and standby letters of credit for lease facilities. It is not possible to determine the maximum potential amount under these indemnification obligations due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. To date, we have not incurred any material costs as a result of such obligations and have not accrued any liabilities related to such obligations in the condensed consolidated financial statements. In addition, we indemnify our officers, directors and certain key employees while they are serving in good faith in their respective capacities. To date, there have been no claims under any indemnification provisions.
v3.19.2
Leases
6 Months Ended
Jul. 31, 2019
Leases [Abstract]  
Leases Leases

We lease office facilities under non-cancelable operating lease agreements expiring through October 2028. Our lease agreements do not contain any material residual value guarantees or restrictive covenants. The components of lease costs were as follows (in thousands):
 
Three Months Ended
 
Six Months Ended
 
July 31, 2019
 
July 31, 2019
Fixed operating lease cost
$
8,228

 
$
16,711

Variable lease cost (1)
2,242

 
4,342

Short-term lease cost (12 months or less)
1,484

 
2,345

Total lease cost
$
11,954

 
$
23,398

——————————
(1) Variable lease cost for the three and six months ended July 31, 2019 predominantly includes common area maintenance charges.

Future lease payments under our non-cancelable operating leases as of July 31, 2019 were as follows (in thousands):
Fiscal Years Ending January 31,
Operating Leases
The remainder of 2020
$
16,579

2021
33,269

2022
26,781

2023
21,478

2024
15,434

Thereafter
31,236

Total future lease payments
144,777

Less: imputed interest
(23,831
)
Present value of lease liabilities
$
120,946



Supplemental cash flow information related to our operating leases for the six months ended July 31, 2019 as well as the weighted-average remaining lease term and weighted-average discount rate as of July 31, 2019 were as follows:
Cash paid for amounts included in the measurement of lease liabilities (in thousands)
$
16,167

Operating lease right-of-use assets obtained in exchange for operating lease liabilities
$
3,449

Weighted-average remaining lease term (years)
5.28

Weighted-average discount rate
6.46
%


As previously disclosed in our Annual Report on Form 10-K for the year ended January 31, 2019 and under the previous lease accounting standard, ASC 840, Leases, the following table summarizes the future minimum lease payments due under operating leases as of January 31, 2019 (in thousands):
Year Ending January 31,
Operating Leases
2020
$
31,297

2021
28,573

2022
24,381

2023
20,440

2024
14,780

Thereafter
30,096

Total
$
149,567


v3.19.2
Stockholders' Equity
6 Months Ended
Jul. 31, 2019
Equity [Abstract]  
Stockholders' Equity Stockholders’ Equity
Preferred Stock
We have 20,000,000 authorized shares of undesignated preferred stock, the rights, preferences and privileges of which may be designated from time to time by our board of directors. As of July 31, 2019, there were no shares of preferred stock issued or outstanding.
Class A and Class B Common Stock
We have two classes of authorized common stock, Class A common stock and Class B common stock. As of July 31, 2019, we had 2,000,000,000 authorized shares of Class A common stock and 250,000,000 authorized shares of Class B common stock, with each class having a par value of $0.0001 per share. As of July 31, 2019255,751,711 shares of Class A common stock were issued and outstanding.
Common Stock Repurchase Program
In August 2019, our board of directors approved the repurchase of up to $150.0 million of our Class A common stock. The authorization allows us to repurchase shares of our Class A common stock opportunistically and will be funded from available working capital. Repurchases may be made at management’s discretion from time to time on the open market through privately negotiated transactions, transactions structured through investment banking institutions, block purchase techniques, 10b5-1 trading plans, or a combination of the foregoing. The repurchase program does not obligate us to acquire any of our common stock, has no end date, and may be suspended or discontinued by us at any time without prior notice.
Repurchase of Common Stock
Concurrent with the issuance of the Notes (see Note 6), we repurchased and retired 1,008,573 shares, or $20.0 million, of our Class A common stock at $19.83 per share, which was equal to the closing price per share of our Class A common stock on April 4, 2018, the date of the pricing of the offering of the Notes. The repurchased shares were recorded as a reduction of additional paid-in capital on the condensed consolidated balance sheet.
v3.19.2
Equity Incentive Plans
6 Months Ended
Jul. 31, 2019
Share-based Payment Arrangement [Abstract]  
Equity Incentive Plans Equity Incentive Plans
Equity Incentive Plans
We maintain two equity incentive plans: the 2009 Equity Incentive Plan (the 2009 Plan) and the 2015 Equity Incentive Plan (the 2015 Plan). The 2015 Plan became effective in connection with our initial public offering (IPO) in October 2015 and serves as the successor to our 2009 Plan. The 2015 Plan provides for grants of incentive stock options to our employees and non-statutory stock options, stock appreciation rights, restricted stock, restricted stock unit awards (RSUs), performance stock awards, performance cash awards, and other forms of stock awards to our employees, directors and consultants. No new awards have been issued under our 2009 Plan after the effective date of our 2015 Plan. Outstanding awards granted under our 2009 Plan will remain subject to the terms of our 2009 Plan and applicable award agreements, until such outstanding awards that are stock options are exercised, terminated or expired by their terms.

Starting in December 2018, we net-share settle equity awards held by certain employees by withholding shares upon vesting to satisfy tax withholding obligations. The shares withheld to satisfy employee tax withholding obligations are returned to our 2015 Plan and will be available for future issuance. Payments for employees’ tax obligations to the tax authorities are recognized as a reduction to additional paid-in capital and reflected as a financing activity in our condensed consolidated statements of cash flows.
The exercise price of stock options will generally not be less than 100% of the fair market value of our common stock on the date of grant, as determined by our board of directors. Our equity awards generally vest over a two to four year period and expire no later than ten years from the date of grant.  

2015 Employee Stock Purchase Plan
Our 2015 Employee Stock Purchase Plan (2015 ESPP) became effective in connection with our IPO.
The 2015 ESPP allows eligible employees to purchase shares of our Class A common stock at a discount through payroll deductions of up to 30% of their eligible compensation, subject to a cap of 3,000 shares on any purchase date or $25,000 in any calendar year (as determined under applicable tax rules). In February 2019, we amended the ESPP on a prospective basis, to include an additional dollar cap of $7,500 per purchase period. The 2015 ESPP provides for a 24-month offering period beginning March 16th and September 16th of each year, and each offering period consists of four 6 months purchase periods, subject to a reset provision. If the closing stock price on the offering date of a new offering falls below the closing stock price on the offering date of an ongoing offering, the ongoing offering would terminate immediately following the purchase of ESPP shares on the purchase date immediately preceding the new offering and participants in the terminated ongoing offering would automatically be enrolled in the new offering (ESPP reset), resulting in a modification. On each purchase date, eligible employees will purchase our Class A common stock at a price per share equal to 85% of the lesser of the fair market value of our Class A common stock (1) on the first trading day of the applicable offering period or (2) the purchase date. There was an ESPP reset in the three months ended April 30, 2019 that resulted in a total modification charge of $2.2 million, which is recognized over the new offering period ending March 15, 2021.
We recognized stock-based compensation expense related to our 2015 ESPP of $7.9 million and $4.2 million during the three months ended July 31, 2018 and 2019 and $14.6 million and $15.7 million during the six months ended July 31, 2018 and 2019. As of July 31, 2019, there was $19.4 million of unrecognized stock-based compensation expense related to our 2015 ESPP, which is expected to be recognized over a weighted-average period of 1.5 years.
Stock Options
A summary of stock option activity under our equity incentive plans and related information is as follows:
 
 
Options Outstanding
 
Number of
Shares
 
Weighted-
Average
Exercise Price
 
Weighted-
Average
Remaining
Contractual Life (In Years)
 
Aggregate
Intrinsic
Value (in thousands)
Balance as of January 31, 2019
35,465,543

 
$
8.34

 
5.4
 
$
339,591

Options exercised
(3,862,965
)
 
4.99

 
 
 
 

Options forfeited/canceled
(343,662
)
 
15.49

 
 
 
 

Balance as of July 31, 2019
31,258,916

 
$
8.67

 
3.9
 
$
218,450

Vested and exercisable as of July 31, 2019
25,407,263

 
$
7.54

 
4.8
 
$
203,215

 
 
The aggregate intrinsic value of options vested and exercisable as of July 31, 2019 is calculated based on the difference between the exercise price and the closing price of $15.14 of our Class A common stock on July 31, 2019.
As of July 31, 2019, total unrecognized employee compensation cost related to outstanding options was $20.6 million, which is expected to be recognized over a weighted-average period of 1.6 years.

RSUs
A summary of the RSU activity under our 2015 Plan and related information is as follows:
 
Number of RSUs Outstanding
 
Weighted-
Average
Grant Date
Fair Value
 
Aggregate
Intrinsic
Value (in thousands)
Unvested balance as of January 31, 2019
21,917,550

 
$
17.94

 
$
392,515

Granted
8,792,982

 
19.81

 


Vested
(4,352,885
)
 
16.38

 


Forfeited
(1,324,694
)
 
18.47

 


Unvested balance as of July 31, 2019
25,032,953

 
$
18.84

 
$
378,999


During the three months ended July 31, 2018 and 2019, we recognized, $29.5 million and $40.4 million in stock-based compensation expense relating to RSUs. During the six months ended July 31, 2018 and 2019, we recognized $55.9 million and $77.7 million in stock-based compensation expense relating to RSUs. As of July 31, 2019, total unrecognized employee compensation cost related to unvested RSUs was $427.8 million, which is expected to be recognized over a weighted-average period of 3.0 years.
Restricted Stock
In January 2019, we issued 183,902 shares of performance restricted stock, at a target percentage of 100%, with both performance and service vesting conditions payable in common shares, from 0% to 160%, of the target number granted, contingent upon the degree to which the performance condition is met. The grant date for these shares was subsequently established when the performance condition was determined in March 2019. Any portion of shares that are not earned will be canceled.
During the three and six months ended July 31, 2019, we issued 60,716 and 1,291,194 shares of performance restricted stock, at a target percentage of 100%, with both performance and service vesting conditions payable in common shares, from 0% to 160%, of the target number granted, contingent upon the degree to which the performance condition is met. Any portion of shares that are not earned will be canceled. During the six months ended July 31, 2019, we also issued 108,494 shares of additional restricted stock earned based on the actual attainment of previously issued performance restricted stock awards.

A summary of the restricted stock activity under our 2015 Plan and related information is as follows:
 
Number of Restricted Stock Outstanding
 
Weighted-
Average
Grant Date
Fair Value
 
Aggregate
Intrinsic
Value (in thousands)
Unvested balance as of January 31, 2019
2,267,569

 
$
18.70

 
$
40,612

Granted
1,399,688

 
20.30

 
 
Vested
(843,321
)
 
19.85

 
 
Unvested balance as of July 31, 2019
2,823,936

 
$
19.25

 
$
42,754


All unvested restricted shares are subject to cancellation to the extent vesting conditions are not met. During the three months ended July 31, 2018 and 2019, we recognized $6.7 million and $7.4 million in stock-based compensation expense relating to restricted stock. During the six months ended July 31, 2018 and 2019, we recognized $10.2 million and $14.8 million in stock-based compensation expense relating to restricted stock. As of July 31, 2019,
total unrecognized employee compensation cost related to unvested restricted stock was $30.6 million, which is expected to be recognized over a weighted-average period of 2.3 years.
Stock-Based Compensation Expense
The following table summarizes the components of stock-based compensation expense recognized in the condensed consolidated statements of operations (in thousands):
 
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2018
 
2019
 
2018
 
2019
Cost of revenue—product
$
720

 
$
954

 
$
1,328

 
$
1,931

Cost of revenue—support subscription
2,929

 
3,633

 
5,613

 
7,584

Research and development
22,232

 
29,108

 
43,322

 
57,353

Sales and marketing
17,269

 
16,055

 
31,209

 
34,369

General and administrative
10,504

 
8,654

 
16,137

 
19,324

Total stock-based compensation expense
$
53,654

 
$
58,404

 
$
97,609

 
$
120,561


    
The tax benefit related to stock-based compensation expense for all periods presented was not material.
v3.19.2
Net Loss per Share Attributable to Common Stockholders
6 Months Ended
Jul. 31, 2019
Earnings Per Share [Abstract]  
Net Loss per Share Attributable to Common Stockholders Net Loss per Share Attributable to Common Stockholders
Basic and diluted net loss per share attributable to common stockholders is presented in conformity with the two-class method required for participating securities.
Basic net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase. Diluted net loss per share attributable to common stockholders is computed by giving effect to all potentially dilutive common stock equivalents, including our outstanding stock options, common stock related to unvested RSUs, repurchasable shares from early exercised stock options and restricted stock, our Notes to the extent dilutive, and common stock issuable pursuant to the ESPP. These potentially dilutive common stock equivalents have been excluded from the calculation of diluted net loss per share attributable to common stockholders as their effect is anti-dilutive.
The following table sets forth the computation of basic and diluted net loss per share attributable to common stockholders (in thousands, except per share data):
 
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2018
 
2019
 
2018
 
2019
 
 
 
 
 
 
 
 
Net loss
$
(60,123
)
 
$
(66,018
)
 
$
(124,427
)
 
$
(166,354
)
Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted
229,359

 
251,298

 
226,609

 
248,366

Net loss per share attributable to common stockholders, basic and diluted
$
(0.26
)
 
$
(0.26
)
 
$
(0.55
)
 
$
(0.67
)


The following weighted-average outstanding shares of common stock equivalents were excluded from the computation of diluted net loss per share attributable to common stockholders for the periods presented because including them would have been anti-dilutive (in thousands):
 
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2018
 
2019
 
2018
 
2019
Stock options to purchase common stock
40,920

 
31,739

 
42,923

 
32,852

Unvested RSUs
19,957

 
25,513

 
19,486

 
24,743

Restricted stock and early exercised stock options subject to repurchase
3,327

 
2,917

 
2,585

 
2,777

Shares related to Notes
21,884

 
21,884

 
13,783

 
21,884

Shares issuable pursuant to ESPP
1,154

 
720

 
1,127

 
720

Total
87,242

 
82,773

 
79,904

 
82,976


v3.19.2
Other Income (Expense), Net
6 Months Ended
Jul. 31, 2019
Other Income and Expenses [Abstract]  
Other Income (Expense), Net Other Income (Expense), Net

Other income (expense), net consists of the following (in thousands):
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2018
 
2019
 
2018
 
2019
Interest income (1)
$
4,783

 
$
6,772

 
$
6,654

 
$
13,606

Interest expense (2)
(6,615
)
 
(6,981
)
 
(8,113
)
 
(13,648
)
Foreign currency transactions losses
(2,273
)
 
(443
)
 
(4,407
)
 
(2,426
)
Other income
73

 

 
835

 

Total other income (expense), net
$
(4,032
)
 
$
(652
)
 
$
(5,031
)
 
$
(2,468
)
____________________________________

(1) Interest income includes interest income related to our cash, cash equivalents and marketable securities and non-cash interest income related to accretion (amortization) of the discount (premium) on marketable securities.

(2) Interest expense includes non-cash interest expense related to amortization of the debt discount and debt issuance costs and the contractual interest expense related to the Notes for the three and six months ended July 31, 2018 and 2019.
v3.19.2
Income Taxes
6 Months Ended
Jul. 31, 2019
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
Our income tax provision was primarily due to taxes on international operations and state income taxes. The difference between the income tax provision that would be derived by applying the statutory rate to our loss before income taxes and the income tax provision recorded was primarily attributable to changes in our valuation allowance, non-deductible stock-based compensation expense and the tax rate differential between the U.S. and foreign countries.
As of July 31, 2019, there were no material changes to either the nature or the amounts of the uncertain tax positions previously determined for the year ended January 31, 2019.
v3.19.2
Segment Information
6 Months Ended
Jul. 31, 2019
Segment Reporting [Abstract]  
Segment Information Segment Information
Our chief operating decision maker is a group comprised of our Chief Executive Officer, our Chief Financial Officer, and our President. This group reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. We have one business activity and there are no segment managers who are held accountable for operations or operating results. Accordingly, we have a single reportable segment.

Disaggregation of Revenue
The following table depicts the disaggregation of revenue by geographic area based on the billing address of our customers and is consistent with how we evaluate our financial performance (in thousands):
 
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2018
 
2019
 
2018
 
2019
 
 
 
 
 
 
 
 
United States
$
229,760

 
$
294,596

 
$
414,678

 
$
523,535

Rest of the world
79,124

 
101,731

 
150,151

 
199,492

Total revenue
$
308,884

 
$
396,327

 
$
564,829

 
$
723,027

Long-lived Assets by Geographic Area
Long-lived assets, which are comprised of property and equipment, net, by geographic area are summarized as follows (in thousands):
 
 
As of
January 31, 2019
 
As of
July 31, 2019
 
 
 
 
United States
$
120,876

 
$
121,454

Rest of the world
4,477

 
9,594

Total long-lived assets
$
125,353

 
$
131,048


v3.19.2
Subsequent Event
6 Months Ended
Jul. 31, 2019
Subsequent Events [Abstract]  
Subsequent Event Subsequent events
Share Repurchase Program
In August 2019, our board of directors approved a share repurchase program. All material terms of this program are disclosed in Note 9 Stockholders’ Equity.
Departure of Officer
In August 2019, we announced that Timothy Riitters, our Chief Financial Officer, will be departing later this year. Mr. Riitters' departure is not related to any issues regarding the integrity of our financial statements, accounting policies and practices.
v3.19.2 <
Basis of Presentation and Summary of Significant Accounting Policies - (Policies)
6 Months Ended
Jul. 31, 2019
Accounting Policies [Abstract]  
Principles of Consolidation
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and our wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Unaudited Interim Consolidated Financial Information
Unaudited Interim Consolidated Financial Information
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (U.S. GAAP) and applicable rules and regulations of the Securities and Exchange Commission (the SEC) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended January 31, 2019.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, comprehensive loss and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full fiscal year 2020 or any future period.
Use of Estimates
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and accompanying notes. Actual results could differ from these estimates. Such estimates include, but are not limited to, the determination of standalone selling price for revenue arrangements with multiple performance obligations, useful lives of intangible assets, property and equipment, the period of benefit for deferred contract costs for commissions, stock-based compensation, provision for income taxes including related reserves, valuation of intangible assets and goodwill, the incremental borrowing rate we use to determine our operating lease liabilities, and contingent liabilities. Management bases its estimates on historical experience and on various other assumptions which management believes to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.
Restricted Cash
Restricted Cash
Restricted cash is comprised of cash collateral for letters of credit related to our leases and for a vendor credit card program.
Marketable Securities
Marketable Securities
We classify our marketable securities as available-for-sale at the time of purchase and reevaluate such classification at each balance sheet date. We may sell these securities at any time for use in current operations even if they have not yet reached maturity. As a result, we classify our securities, including those with maturities beyond twelve months, as current assets in the accompanying condensed consolidated balance sheets. We carry these securities at fair value and record unrealized gains and losses, in accumulated other comprehensive income (loss), which is reflected as a component of stockholders’ equity. We evaluate our securities to assess whether those with unrealized loss positions are other than temporarily impaired. We consider impairments to be other than temporary if they are related to deterioration in credit risk or if it is likely we will sell the securities before the recovery of their cost basis. Realized gains and losses from the sale of marketable securities and declines in value deemed to be other than temporary are determined on the specific identification method. To date, there have been no declines in value deemed to be other than temporary in any of our securities. Realized gains and losses are reported in other income (expense), net in the condensed consolidated statements of operations.
Business Combination
Business Combinations
We allocate the purchase price to the assets acquired and liabilities assumed based on their estimated fair values. The excess of the purchase price over the fair values of the assets acquired and liabilities assumed is recorded as goodwill. During the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the estimated fair value of the assets acquired and liabilities assumed, with the corresponding offset to goodwill. The results of operations of an acquired business is included in our condensed consolidated financial statements from the date of acquisition. Acquisition-related expenses are expensed as incurred. 
Deferred Commissions