PURE STORAGE, INC., 10-K filed on 3/26/2019
Annual Report
v3.19.1
Document and Entity Information - USD ($)
$ in Billions
12 Months Ended
Jan. 31, 2019
Mar. 18, 2019
Jul. 31, 2018
Document And Entity Information [Line Items]      
Document Type 10-K    
Amendment Flag false    
Document Period End Date Jan. 31, 2019    
Document Fiscal Year Focus 2019    
Document Fiscal Period Focus FY    
Trading Symbol PSTG    
Entity Registrant Name Pure Storage, Inc.    
Entity Central Index Key 0001474432    
Current Fiscal Year End Date --01-31    
Entity Filer Category Large Accelerated Filer    
Entity Well-Known Seasoned Issuer Yes    
Entity Voluntary Filers No    
Entity Current Reporting Status Yes    
Entity Public Float     $ 4.6
Entity Small Business false    
Entity Emerging Growth Company false    
Entity Shell Company false    
Class A common stock      
Document And Entity Information [Line Items]      
Entity Common Stock, Shares Outstanding (in shares)   244,930,555.00  
Class B common stock      
Document And Entity Information [Line Items]      
Entity Common Stock, Shares Outstanding (in shares)   0  
v3.19.1
Consolidated Balance Sheets - USD ($)
$ in Thousands
Jan. 31, 2019
Jan. 31, 2018
[2]
Current assets:    
Cash and cash equivalents $ 447,990 $ 244,057 [1]
Marketable securities 749,482 353,289
Accounts receivable, net of allowance of $1,062 and $660 as of January 31, 2018 and 2019 378,729 243,001
Inventory 44,687 34,497
Deferred commissions, current 29,244 21,088
Prepaid expenses and other current assets 51,695 47,552
Total current assets 1,701,827 943,484
Property and equipment, net 125,353 89,142
Deferred commissions, non-current 85,729 66,225
Intangible assets, net 20,118 5,057
Goodwill 10,997 0
Deferred income taxes, non-current 1,060 1,060
Restricted cash 15,823 14,763 [1]
Other assets, non-current 12,118 4,264
Total assets 1,973,025 1,123,995
Current liabilities:    
Accounts payable 103,462 84,420
Accrued compensation and benefits 99,910 59,898
Accrued expenses and other liabilities 39,860 27,149
Deferred revenue, current 266,584 191,229
Total current liabilities 509,816 362,696
Convertible senior notes, net 449,828 0
Deferred revenue, non-current 269,336 182,873
Other liabilities, non-current 6,265 4,025
Total liabilities 1,235,245 549,594
Commitments and contingencies (Note 7)
Stockholders’ equity:    
Preferred stock, par value of $0.0001 per share— 20,000 shares authorized as of January 31, 2018 and 2019; no shares issued and outstanding as of January 31, 2018 and 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, 2018 and 2019; 220,979 (Class A 129,502, Class B 91,477) and 243,524 Class A shares issued and outstanding as of January 31, 2018 and 2019 24 22
Additional paid-in capital 1,820,043 1,479,883
Accumulated other comprehensive loss (338) (1,917)
Accumulated deficit (1,081,949) (903,587)
Total stockholders’ equity 737,780 574,401
Total liabilities and stockholders’ equity $ 1,973,025 $ 1,123,995
[1] * As adjusted to reflect the impact of ASU 2016-18 and the full retrospective adoption of
[2] * As adjusted to reflect the impact of the full retrospective adoption of ASC 606
v3.19.1
Consolidated Balance Sheets (Parenthetical) - USD ($)
$ in Thousands
Jan. 31, 2019
Jan. 31, 2018
Accounts receivable, allowance $ 660 $ 1,062
Preferred stock, par value (in dollars per share) $ 0.0001 $ 0.0001
Preferred stock, shares authorized (in shares) 20,000,000 20,000,000
Preferred stock, shares issued (in shares) 0 0
Preferred stock, shares outstanding (in shares) 0 0
Common stock, shares authorized (in shares) 2,250,000,000 2,250,000,000
Common stock, shares issued (in shares) 220,979,000 204,364,000
Common stock, shares outstanding (in shares) 220,979,000 204,364,000
Class A common stock    
Common stock, shares authorized (in shares) 2,000,000,000 2,000,000,000
Common stock, par value per share (in dollars per share) $ 0.0001 $ 0.0001
Common stock, shares issued (in shares) 243,523,831 129,502,000
Common stock, shares outstanding (in shares) 243,524,000 129,502,000
Class B common stock    
Common stock, shares authorized (in shares) 250,000,000 250,000,000
Common stock, par value per share (in dollars per share) $ 0.0001 $ 0.0001
Common stock, shares issued (in shares) 0 91,477,000
Common stock, shares outstanding (in shares) 0 91,477,000
v3.19.1
Consolidated Statements of Operations - USD ($)
shares in Thousands, $ in Thousands
12 Months Ended
Jan. 31, 2019
Jan. 31, 2018
[1]
Jan. 31, 2017
[1]
Revenue:      
Revenue: $ 1,359,824 $ 1,024,762 $ 739,171
Cost of revenue:      
Total cost of revenue 457,528 353,781 252,279
Gross profit 902,296 670,981 486,892
Operating expenses:      
Research and development 349,936 279,196 245,817
Sales and marketing 584,111 464,049 347,695
General and administrative 137,506 95,170 84,652
Legal settlement 0 0 30,000
Total operating expenses 1,071,553 838,415 708,164
Loss from operations (169,257) (167,434) (221,272)
Other income (expense), net (8,016) 11,445 1,627
Loss before provision for income taxes (177,273) (155,989) (219,645)
Provision for income taxes 1,089 3,889 1,887
Net loss $ (178,362) $ (159,878) [2],[3] $ (221,532) [2],[3]
Net loss per share attributable to common stockholders, basic and diluted (in dollars per share) $ (0.77) $ (0.76) $ (1.14)
Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted (in shares) 232,042 211,609 194,714
Product      
Revenue:      
Revenue: $ 1,075,586 $ 834,454 $ 614,458
Cost of revenue:      
Cost of revenue: 352,054 275,242 194,150
Support subscription      
Revenue:      
Revenue: 284,238 190,308 124,713
Cost of revenue:      
Cost of revenue: $ 105,474 $ 78,539 $ 58,129
[1] *As adjusted to reflect the impact of the full retrospective adoption of ASC 606 - see Note 2.
[2] * As adjusted to reflect the impact of ASU 2016-18 and the full retrospective adoption of
[3] * As adjusted to reflect the impact of the full retrospective adoption of ASC 606 - see Note 2.
v3.19.1
Consolidated Statements of Comprehensive Loss - USD ($)
$ in Thousands
12 Months Ended
Jan. 31, 2019
Jan. 31, 2018
[2]
Jan. 31, 2017
[2]
Statement of Comprehensive Income [Abstract]      
Net loss $ (178,362) $ (159,878) [1],[3] $ (221,532) [1],[3]
Other comprehensive loss:      
Change in unrealized net gain (loss) on available-for-sale securities 1,579 (1,355) (562)
Comprehensive loss $ (176,783) $ (161,233) $ (222,094)
[1] * As adjusted to reflect the impact of ASU 2016-18 and the full retrospective adoption of
[2] * As adjusted to reflect the impact of the full retrospective adoption of ASC 606 - see Note 2.
[3] *As adjusted to reflect the impact of the full retrospective adoption of ASC 606 - see Note 2.
v3.19.1
Consolidated Statements of Stockholders’ Equity (Deficit) - USD ($)
shares in Thousands, $ in Thousands
Total
Common Stock
Additional Paid-In Capital
Accumulated Other Comprehensive Loss
Accumulated Deficit
Restricted Stock
Common Stock
Unvested restricted stock units
Common Stock
Beginning balance (in shares) at Jan. 31, 2016   190,509          
Beginning balance at Jan. 31, 2016 $ 563,354 $ 19 $ 1,118,670 $ 0 $ (555,335)    
Increase (Decrease) in Stockholders' Equity [Roll Forward]              
Cumulative effect adjustment from adoption of ASC 606 | Accounting Standards Update 2016-09 0   2,079   (2,079)    
Cumulative effect adjustment from adoption of ASC 606 | Accounting Standards Update 2014-09 35,237   0   35,237    
Issuance of common stock upon exercise of stock options, net of repurchases (in shares)   10,180          
Issuance of common stock upon exercise of stock options 15,031 $ 1 15,030        
Stock-based compensation expense 116,668   116,668        
Vesting of early exercised stock options 3,399   3,399        
Vesting of restricted stock units ( in shares)             1,238
Vesting of restricted stock units 0 $ 0 0        
Common stock issued under employee stock purchase plan (in shares)   2,437          
Common stock issued under employee stock purchase plan 25,606   25,606        
Other comprehensive loss (562)     (562)      
Net loss (221,532) [1],[2],[3]       (221,532)    
Ending balance (in shares) at Jan. 31, 2017   204,364          
Ending balance at Jan. 31, 2017 537,201 $ 20 1,281,452 (562) (743,709)    
Increase (Decrease) in Stockholders' Equity [Roll Forward]              
Issuance of common stock upon exercise of stock options, net of repurchases (in shares)   8,814          
Issuance of common stock upon exercise of stock options 24,581 $ 1 24,580        
Stock-based compensation expense 150,673   150,673        
Vesting of early exercised stock options 1,042   1,042        
Vesting of restricted stock units ( in shares)             5,278
Vesting of restricted stock units 0 $ 1 (1)        
Common stock issued under employee stock purchase plan (in shares)   2,523          
Common stock issued under employee stock purchase plan 22,137   22,137        
Other comprehensive loss (1,355)     (1,355)      
Net loss (159,878) [1],[2],[3]       (159,878)    
Ending balance (in shares) at Jan. 31, 2018   220,979          
Ending balance at Jan. 31, 2018 574,401 [4] $ 22 1,479,883 (1,917) (903,587)    
Increase (Decrease) in Stockholders' Equity [Roll Forward]              
Issuance of common stock upon exercise of stock options, net of repurchases (in shares)   9,397          
Issuance of common stock upon exercise of stock options 47,750 $ 1 47,749        
Stock-based compensation expense 210,645   210,645        
Vesting of early exercised stock options 320   320        
Vesting of restricted stock units ( in shares)           2,398 8,378
Vesting of restricted stock units 0 $ 1 (1)        
Tax withholding on vesting of restricted stock (632)   (632)        
Common stock issued under employee stock purchase plan (in shares)   3,381          
Common stock issued under employee stock purchase plan 33,444   33,444        
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 1,579     1,579      
Net loss (178,362)       (178,362)    
Ending balance (in shares) at Jan. 31, 2019   243,524          
Ending balance at Jan. 31, 2019 $ 737,780 $ 24 $ 1,820,043 $ (338) $ (1,081,949)    
[1] * As adjusted to reflect the impact of ASU 2016-18 and the full retrospective adoption of
[2] * As adjusted to reflect the impact of the full retrospective adoption of ASC 606 - see Note 2.
[3] *As adjusted to reflect the impact of the full retrospective adoption of ASC 606 - see Note 2.
[4] * As adjusted to reflect the impact of the full retrospective adoption of ASC 606
v3.19.1
Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
12 Months Ended
Jan. 31, 2019
Jan. 31, 2018
Jan. 31, 2017
CASH FLOWS FROM OPERATING ACTIVITIES      
Net loss $ (178,362) $ (159,878) [1],[2],[3] $ (221,532) [1],[2],[3]
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:      
Depreciation and amortization 70,878 61,744 [1] 50,203 [1]
Amortization of debt discount and debt issuance costs 21,031 0 [1] 0 [1]
Stock-based compensation expense 210,645 150,673 [1] 116,668 [1]
Deferred income tax (3,696) (216) [1] (308) [1]
Other (1,343) 2,270 [1] 1,892 [1]
Changes in operating assets and liabilities, net of effects of acquisition:      
Accounts receivable, net (135,649) (74,505) [1] (44,049) [1]
Inventory (12,289) (12,595) [1] (3,776) [1]
Deferred commissions (27,660) (27,978) [1] (13,080) [1]
Prepaid expenses and other assets (6,972) (23,799) [1] (6,133) [1]
Accounts payable 14,293 29,278 [1] 10,644 [1]
Accrued compensation and other liabilities 51,810 26,622 [1] 19,381 [1]
Deferred revenue 161,737 101,140 [1] 75,728 [1]
Net cash provided by (used in) operating activities 164,423 72,756 [1] (14,362) [1]
CASH FLOWS FROM INVESTING ACTIVITIES      
Purchases of property and equipment (100,246) (65,060) [1] (76,773) [1]
Acquisition, net of cash acquired (13,899) 0 [1] 0 [1]
Purchase of other investment (5,000) 0 [1] 0 [1]
Purchase of intangible assets 0 0 [1] (1,000) [1]
Purchases of marketable securities (665,357) (202,656) [1] (526,717) [1]
Sales of marketable securities 19,878 66,489 [1] 114,354 [1]
Maturities of marketable securities 253,280 144,068 [1] 48,513 [1]
Net cash used in investing activities (511,344) (57,159) [1] (441,623) [1]
CASH FLOWS FROM FINANCING ACTIVITIES      
Net proceeds from exercise of stock options 47,771 24,677 [1] 14,912 [1]
Proceeds from issuance of common stock under employee stock purchase plan 33,444 22,137 [1] 25,606 [1]
Proceeds from issuance of convertible senior notes, net of issuance costs 562,062 0 [1] 0 [1]
Payment for purchase of capped calls (64,630) 0 [1] 0 [1]
Repayment of debt assumed from acquisition (6,101) 0 [1] 0 [1]
Tax withholding on vesting of restricted stock (632) 0 0
Repurchase of common stock (20,000) 0 [1] 0 [1]
Net cash provided by financing activities 551,914 46,814 [1] 40,518 [1]
Net increase (decrease) in cash, cash equivalents and restricted cash 204,993 62,411 [1] (415,467) [1]
Cash, cash equivalents and restricted cash, beginning of year 463,813 258,820 [1] 196,409 [1]
Cash, cash equivalents and restricted cash, end of year 463,813 258,820 [1] 196,409 [1]
Cash and cash equivalents [1] 244,057 [4] 183,675  
Cash, cash equivalents and restricted cash, end of year 447,990 244,057 [1],[4] 183,675 [1]
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION      
Cash paid for interest 371 0 0
Cash paid for income taxes 4,696 3,090 [1] 2,866 [1]
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING INFORMATION      
Property and equipment purchased but not yet paid 13,873 9,940 [1] 7,414 [1]
Acquisition consideration held back to satisfy potential indemnification claims 3,725 0 [1] 0 [1]
Vesting of early exercised stock options $ 320 $ 1,042 [1] $ 3,399 [1]
[1] * As adjusted to reflect the impact of ASU 2016-18 and the full retrospective adoption of
[2] * As adjusted to reflect the impact of the full retrospective adoption of ASC 606 - see Note 2.
[3] *As adjusted to reflect the impact of the full retrospective adoption of ASC 606 - see Note 2.
[4] * As adjusted to reflect the impact of the full retrospective adoption of ASC 606
v3.19.1
Basis of Presentation and Summary of Significant Accounting Policies
12 Months Ended
Jan. 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 consolidated financial statements include the accounts of the Company and our wholly owned subsidiaries and have been prepared in conformity with accounting principles generally accepted in the United States (U.S. GAAP). All intercompany balances and transactions have been eliminated in consolidation.
Foreign Currency
The functional currency of our foreign subsidiaries is the U.S. dollar. Transactions denominated in currencies other than the functional currency are remeasured to the functional currency at the average exchange rate in effect during the period. At the end of each reporting period, monetary assets and liabilities are remeasured using exchange rates in effect at the balance sheet date. Non-monetary assets and liabilities are remeasured at historical exchange rates. Foreign currency transaction gains and losses are recorded in other income (expense), net in the consolidated statements of operations.
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, 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.
Concentration Risk
Financial instruments that are exposed to concentration of credit risk consist primarily of cash and cash equivalents, marketable securities, and accounts receivable. As of January 31, 2018 and 2019, the majority of our cash and cash equivalents have been invested with three financial institutions and such deposits exceed federally insured limits. Management believes that the financial institutions that hold our investments are financially sound and, accordingly, are subject to minimal credit risk. We define a customer as an end user that purchases our products and services from one of our channel partners or from us directly. The majority of our revenue and accounts receivable are derived from the United States across a multitude of industries. We perform ongoing evaluations to determine customer credit. As of January 31, 2019, we had one channel partner that represented 10% of total accounts receivable on that date. As of January 31, 2018, no channel partner represented 10% or more of total accounts receivable on that date. No channel partner represented 10% or more of revenue for the year ended January 31, 2018. One channel partner represented 11% of revenue for the years ended January 31, 2017 and 2019. No end user customer represented 10% or more of revenue for the years ended January 31, 2017, 2018 and 2019. We rely on a limited number of suppliers for our contract manufacturing and certain raw material components. In instances where suppliers fail to perform their obligations, we may be unable to find alternative suppliers or satisfactorily deliver our products to our customers on time.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash in banks and highly liquid investments, primarily money market accounts, purchased with an original maturity of three months or less.
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 consolidated balance sheets. We carry these securities at fair value and record unrealized gains and losses in 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 based on the specific identification method. Realized gains and losses are reported in other income (expense), net in the consolidated statements of operations.
Fair Value of Financial Instruments
The carrying value of our financial instruments, including cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximates fair value.
Accounts Receivable and Allowance
Accounts receivable are recorded at the invoiced amount, and stated at realizable value, net of an allowance for doubtful accounts. Credit is extended to customers based on an evaluation of their financial condition and other factors. We generally do not require collateral or other security to support accounts receivable. We perform ongoing credit evaluations of our customers and maintain an allowance for doubtful accounts.
We assess the collectability of the accounts by taking into consideration the aging of our trade receivables, historical experience, and management judgment. We write off trade receivables against the allowance when management determines a balance is uncollectible and no longer actively pursues collection of the receivable.
The following table presents the changes in the allowance for doubtful accounts:
 
 
Year Ended January 31,
 
2017
 
2018
 
2019
 
(in thousands) 
Allowance for doubtful accounts, beginning balance
$
944

 
$
2,000

 
$
1,062

Provision, net
1,394

 
482

 
(79
)
Writeoffs
(338
)
 
(1,420
)
 
(323
)
Allowance for doubtful accounts, ending balance
$
2,000

 
$
1,062

 
$
660


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, 2018 and 2019, we had restricted cash of $14.8 million and $15.8 million, which was included in other assets, non-current in the consolidated balance sheets.
Inventory
Inventory consists of finished goods and component parts, which are purchased from contract manufacturers. Product demonstration units, which we regularly sell, are the primary component of our inventories. Inventories are stated at the lower of cost or net realizable value. Cost is determined using the specific identification method for finished goods and weighted-average method for component parts. We account for excess and obsolete inventory by reducing the carrying value to the estimated net realizable value of the inventory based upon management’s assumptions about future demand and market conditions. In addition, we record a liability for firm, non-cancelable and unconditional purchase commitments with contract manufacturers and suppliers for quantities in excess of future demand forecasts consistent with excess and obsolete inventory valuations. As of January 31, 2019, we did not record any liability related to the above. Inventory write-offs were insignificant for the years ended January 31, 2017, 2018 and 2019.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the respective assets (test equipment—2 years, computer equipment and software—2 to 3 years, furniture and fixtures—7 years). Leasehold improvements are amortized over the shorter of their estimated useful lives or the remaining lease term. Depreciation commences once the asset is placed in service.
Business Combination
    
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 consolidated financial statements from the date of acquisition.  Acquisition-related expenses are expensed as incurred.
Goodwill
Goodwill represents the excess of the purchase price consideration over the estimated fair value of the tangible and intangible assets acquired and liabilities assumed in a business combination. Goodwill is evaluated for impairment annually in the fourth quarter of our fiscal year as a single reporting unit, and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. We may elect to qualitatively assess whether it is more likely than not that the fair value of our reporting unit is less than its carrying value. If we opt not to qualitatively assess, a two step goodwill impairment test is performed. The first step compares our reporting unit's carrying value, including goodwill, to its fair value calculated based on our enterprise value. If the carrying value exceeds its fair value, the second step compares the carrying value of the goodwill to its implied fair value. If the carrying value exceeds the implied fair value, an impairment loss is recognized for the excess. We did not recognize any impairment of goodwill in the year ended January 31, 2019.
Purchased Intangible Assets
Purchased intangible assets with finite lives are stated at cost, net of accumulated amortization. We amortize our intangible assets on a straight-line basis over an estimated useful life of five to seven years.
Impairment of Long-Lived Assets
We review our long-lived assets, including property and equipment, and finite-lived intangible assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. We measure the recoverability of these assets by comparing the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If the total of the future undiscounted cash flows is less than the carrying amount of an asset, we record an impairment charge for the amount by which the carrying amount of the asset exceeds its fair market value. There have been no impairment charges recorded in any of the periods presented in the consolidated financial statements. 
Convertible Senior Notes
In accounting for the issuance of our convertible senior notes (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 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 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 consolidated balance sheets and are being amortized to interest expense in the 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 consolidated balance sheets.
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 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 consolidated statements of operations.
Changes in total deferred commissions during the periods presented are as follows (in thousands):
 
Year Ended January 31, 2018
 
Year Ended January 31, 2019
Beginning balance (1)
$
59,394

 
$
87,313

Additions
121,752

 
131,084

Recognition of deferred commissions
(93,833
)
 
(103,424
)
Ending balance
$
87,313

 
$
114,973

____________________ 
(1) Balance as of January 31, 2018 was adjusted to reflect the full retrospective adoption of ASC 606.
During the years ended January 31, 2017, 2018 and 2019, we recognized sales commission expenses of $71.3 million, $102.9 million, and $118.4 million. Of the $115.0 million total deferred commissions balance as of January 2019, we expect to recognize approximately 25% as commission expense over the next 12 months and the remainder thereafter.
There was no impairment related to capitalized commissions for the years ended January 31, 2017, 2018 and 2019.
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 consolidated balance sheet dates.
Changes in total deferred revenue during the periods presented are as follows (in thousands):
 
Year Ended January 31, 2018
 
Year Ended January 31, 2019
Beginning balance (1)
$
272,963

 
$
374,102

Additions
298,686

 
448,471

Recognition of deferred revenue
(197,547
)
 
(286,653
)
Ending balance
$
374,102

 
$
535,920

____________________ 
(1) Balance as of January 31, 2018 was adjusted to reflect the full retrospective adoption of ASC 606.
During the years ended January 31, 2018 and 2019, we recognized $136.6 million and $191.1 million in revenue pertaining to deferred revenue as of the beginning of each period.
Total contracted but not recognized revenue was $558.2 million as of January 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 $558.2 million contracted but not recognized revenue as of January 31, 2019, we expect to recognize approximately 49% 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 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 subscription 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 to 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 the 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 the performance obligations.
Warranty Costs
We generally provide a three-year warranty on hardware and a 90-day warranty on our software embedded in the hardware. Our hardware warranty provides for parts replacement for defective components and our software warranty provides for bug fixes. Our maintenance and support agreement provides for the same parts replacement that customers are entitled to under our warranty program, except that replacement parts are delivered according to targeted response times to minimize disruption to our customers’ critical business applications. Substantially all customers purchase maintenance and support agreements.
Therefore, given that substantially all our products sales are sold together with maintenance and support agreements, we generally do not have exposure related to warranty costs and no warranty reserve has been recorded.
Research and Development
Research and development costs are expensed as incurred. Research and development costs consist primarily of personnel costs including stock-based compensation expense, expensed prototype, to the extent there is no alternative use for that equipment, consulting services, depreciation of equipment used in research and development and allocated overhead costs.
Software Development Costs
We expense software development costs before technological feasibility is reached. We have determined that technological feasibility is reached shortly before the release of our products and as a result, the development costs incurred after the establishment of technological feasibility and before the release of those products have not been significant and accordingly, all software development costs have been expensed as incurred.
Software development costs also include costs incurred related to our hosted applications used to deliver our support services. Capitalization begins when the preliminary project stage is complete, management with the relevant authority authorizes and commits to the funding of the software project, and it is probable the project will be completed and the software will be used to perform the intended function. Total costs related to our hosted applications incurred to date have been insignificant and as a result no software development costs were capitalized during the years ended January 31, 2017, 2018 and 2019.
Advertising Expenses
Advertising costs are expensed as incurred. Advertising expenses were $10.7 million, $10.3 million and $10.7 million for the years ended January 31, 2017, 2018 and 2019, respectively.
Stock-Based Compensation
Stock-based compensation includes expenses related to restricted stock units (RSUs), restricted stock, stock options and purchase rights issued to employees under our employee stock purchase plan (ESPP). We determine the fair value of our stock options under our equity plans and purchase rights issued to employees under our ESPP on the date of grant utilizing the Black-Scholes option pricing model, which is impacted by the fair value of our common stock, as well as changes in assumptions regarding a number of subjective variables. These variables include the expected common stock price volatility over the term of the awards, the expected term of the awards, risk-free interest rates and expected dividend yield. RSUs and restricted stock are measured at the fair market value of the underlying stock at the grant date. 
We recognize stock-based compensation expense for stock-based awards on a straight-line basis over the period during which an employee is required to provide services in exchange for the award (generally the vesting period of the award). We account for forfeitures as they occur. For stock-based awards granted to employees with a performance condition, we recognize stock-based compensation expense for these awards under the accelerated attribution method over the requisite service period when management determines it is probable that the performance condition will be satisfied.
Income Taxes
We account for income taxes using the asset and liability method. Deferred income taxes are recognized by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance to amounts that are more likely than not to be realized.
We recognize tax benefits from uncertain tax positions only if we believe that it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement.
New Accounting Pronouncements Adopted in Fiscal 2019
In May 2014, the Financial Accounting Standards Board (FASB), issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (ASC 606), requiring an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASC 606 supersedes nearly all existing revenue recognition guidance under U.S. GAAP upon its effective date. The standard permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of applying the standard recognized at the date of application (cumulative catch-up transition method).
We adopted the standard using the full retrospective method beginning February 1, 2018, for the year ending January 31, 2019, and our historical financial information for the years ended January 31, 2017 and 2018 has been adjusted to conform to the new standard.
The most significant impact of the standard related to the removal of limitation on contingent revenue, resulting in an increase in product revenue and a decrease in support subscription revenue. In addition, the adoption of ASC 606 also resulted in differences in the timing of recognition of sales commissions. While the adoption of the standard changes certain line items within the net cash flow from operating activities, it had no impact on the net cash provided by or used in operating, investing, or financing activities on our consolidated statements of cash flows.
The following line items on our consolidated balance sheet as of January 31, 2018 have been adjusted to reflect the adoption of ASC 606 (in thousands):
 
As of January 31, 2018
 
As Previously Reported
 
Adjustment
 
As Adjusted
Assets:
 
 
 
 
 
Deferred commissions, current
$
22,437

 
$
(1,349
)
 
$
21,088

Deferred commissions, non-current
20,288

 
45,937

 
66,225

Total deferred commissions
$
42,725

 
$
44,588

 
$
87,313

Liabilities:
 
 
 
 
 
Deferred revenue, current
$
209,377

 
$
(18,148
)
 
$
191,229

Deferred revenue, non-current
196,632

 
(13,759
)
 
182,873

Total deferred revenue
$
406,009

 
$
(31,907
)
 
$
374,102

Stockholders' equity:
 
 
 
 
 
Accumulated deficit
$
(980,082
)
 
$
76,495

 
$
(903,587
)

The following line items on our consolidated statements of operations for the years ended January 31, 2017 and 2018 have been adjusted to reflect the adoption of ASC 606 (in thousands, except per share data):
 
January 31, 2017
 
January 31, 2018
 
As Previously Reported
 
Adjustment
 
As Adjusted
 
As Previously Reported
 
Adjustment
 
As Adjusted
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Product
$
590,001

 
$
24,457

 
$
614,458

 
$
813,985

 
$
20,469

 
$
834,454

Support subscription
137,976

 
(13,263
)
 
124,713

 
209,034

 
(18,726
)
 
190,308

Total revenue
$
727,977

 
$
11,194

 
$
739,171

 
$
1,023,019

 
$
1,743

 
$
1,024,762

 
 
 
 
 
 
 
 
 
 
 
 
Gross profit
$
475,698

 
$
11,194

 
$
486,892

 
$
669,238

 
$
1,743

 
$
670,981

Sales and marketing
$
360,035

 
$
(12,340
)
 
$
347,695

 
$
480,030

 
$
(15,981
)
 
$
464,049

Total operating expenses
$
720,504

 
$
(12,340
)
 
$
708,164

 
$
854,396

 
$
(15,981
)
 
$
838,415

Loss from operations
$
(244,806
)
 
$
23,534

 
$
(221,272
)
 
$
(185,158
)
 
$
17,724

 
$
(167,434
)
Loss before provision for income taxes
$
(243,179
)
 
$
23,534

 
$
(219,645
)
 
$
(173,713
)
 
$
17,724

 
$
(155,989
)
Net loss
$
(245,066
)
 
$
23,534

 
$
(221,532
)
 
$
(177,602
)
 
$
17,724

 
$
(159,878
)
Net loss per share attributable to common stockholders, basic and diluted
$
(1.26
)
 
$
0.12

 
$
(1.14
)
 
$
(0.84
)
 
$
0.08

 
$
(0.76
)

Revenue by geographic location based on bill-to location, which reflects the adoption impact of ASC 606, are as follows (in thousands):
 
Year Ended January 31, 2017
 
Year Ended January 31, 2018
 
As Previously Reported
 
Adjustment
 
As Adjusted
 
As Previously Reported
 
Adjustment
 
As Adjusted
Revenue:
 
 
 
 
 
 
 
 
 
 
 
United States
$
561,352

 
$
8,632

 
$
569,984

 
$
762,391

 
$
1,328

 
$
763,719

Rest of the world
166,625

 
2,562

 
169,187

 
260,628

 
415

 
261,043

Total revenue
$
727,977

 
$
11,194

 
$
739,171

 
$
1,023,019

 
$
1,743

 
$
1,024,762



In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (ASU 2016-18), which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and restricted cash. We adopted ASU 2016-18 effective February 1, 2018 on a retrospective basis. Upon adoption, restricted cash is 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. The adoption of this standard increased our previously reported net cash flow from investing activities for the periods in which there were changes in restricted cash but did not impact our net cash flow from operating activities or financing activities presented on our consolidated statements of cash flows.
The following line items in our consolidated statements of cash flows for the years ended January 31, 2017 and 2018 have been adjusted to reflect the adoption of ASU 2016-18 and ASC 606 (in thousands):
 
Year Ended January 31, 2017
 
Year Ended January 31, 2018
 
As Previously Reported
 
Adjustment
 
As Adjusted
 
As Previously Reported
 
Adjustment
 
As Adjusted
Net loss (1)
$
(245,066
)
 
$
23,534

 
$
(221,532
)
 
$
(177,602
)
 
$
17,724

 
$
(159,878
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
 
 
 
 
 
 
 
 
Deferred commissions (1)
$
(740
)
 
$
(12,340
)
 
$
(13,080
)
 
$
(11,997
)
 
$
(15,981
)
 
$
(27,978
)
Deferred revenue (1)
$
86,922

 
$
(11,194
)
 
$
75,728

 
$
102,883

 
$
(1,743
)
 
$
101,140

Cash provided by (used in) operating activities
$
(14,362
)
 
$

 
$
(14,362
)
 
$
72,756

 
$

 
$
72,756

Net increase in restricted cash (2)
$
(5,600
)
 
$
5,600

 
$

 
$
(2,029
)
 
$
2,029

 
$

Net cash used in investing activities (2)
$
(447,223
)
 
$
5,600

 
$
(441,623
)
 
$
(59,188
)
 
$
2,029

 
$
(57,159
)
Net increase (decrease) in cash, cash equivalents and restricted cash (2)
$
(421,067
)
 
$
5,600

 
$
(415,467
)
 
$
60,382

 
$
2,029

 
$
62,411

Cash, cash equivalents and restricted cash, beginning of period (2)
$
604,742

 
$
7,134

 
$
611,876

 
$
183,675

 
$
12,734

 
$
196,409

Cash, cash equivalents and restricted cash, end of period (2)
$
183,675

 
$
12,734

 
$
196,409

 
$
244,057

 
$
14,763

 
$
258,820

_____________________________________________________
(1) Adjustment pertaining to the adoption of ASC 606.
(2) Adjustment pertaining to the adoption of ASU 2016-18.
In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718) (ASU 2018-07). ASU 2018-07 aligns the accounting for share-based awards to employees and non-employees to follow the same model. The new standard is effective for fiscal years beginning after December 15, 2018 using a modified retrospective transition approach and early adoption is permitted. We early adopted this new standard effective February 1, 2018 and the adoption of this standard did not materially impact our consolidated financial statements.

In May 2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718)-Scope of Modification Accounting, to clarify when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new standard, modification is required only if the fair value, the vesting conditions, or the classification of an award as equity or liability changes as a result of the change in terms or conditions. We adopted this new standard effective February 1, 2018 and the adoption of this standard did not materially impact our consolidated financial statements.

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. We adopted this new standard as of February 1, 2018 and the adoption of this standard did not materially impact our consolidated financial statements.

In March 2018, the FASB issued ASU No. 2018-05, Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. This standard amends Accounting Standards Codification 740, Income Taxes (ASC 740) to provide guidance on accounting for the tax effects of the Tax Cuts and Jobs Act (the Tax Act) pursuant to Staff Accounting Bulletin No. 118, which allows companies to complete the accounting under ASC 740 within a one-year measurement period from the Tax Act enactment date. This standard is effective upon issuance. We have elected to record taxes associated with our global intangible low-taxed income (GILTI) as period costs if and when incurred.
Recent Accounting Pronouncements Not Yet Effective

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (ASC 842). ASC 842 requires lessees to generally recognize on its balance sheet operating and financing lease liabilities and corresponding right-of-use assets at the commencement date, and to recognize the associated lease expenses on the income statement in a manner similar to that required under current accounting rules. We will adopt ASC 842 on February 1, 2019 in accordance with the transition option permitted by ASU No. 2018-11, Targeted Improvements to ASC 842, that allows us not to restate the comparative periods in our financial statements in the year of adoption and record a cumulative effect adjustment as of February 1, 2019. We will elect the package of transition expedients, which allows us to keep our historical lease classifications and not have to reassess whether any existing leases as of the date of adoption are or contain leases. In addition, we will also elect to combine lease and non-lease components for our office facility leases and to take the practical expedient to keep leases with an initial term of 12 months or less off the balance sheet and recognize the associated lease payments in the consolidated statements of operations on a straight-line basis over the lease term. As a result of adopting ASC 842, we expect to recognize on our consolidated balance sheet right-of-use assets of approximately $125 million and lease liabilities of approximately $131 million. These are preliminary estimates that are subject to change as we finalize our adoption. We do not anticipate that the new standard will have a material impact on our other consolidated financial statements.
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 February 1, 2020 with early adoption permitted on or after February 1, 2019. We are currently evaluating the impact of this standard on our 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 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 should be applied either retrospectively or prospectively. Early adoption is permitted. We are currently evaluating the impact of this standard on our consolidated financial statements.
In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders' equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders' equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. This final rule was effective on November 5, 2018. We will adopt this guidance in the first quarter of fiscal 2020.
Reclassifications
Certain amounts in prior periods have been reclassified to conform with current period presentation.
v3.19.1
Business Overview
12 Months Ended
Jan. 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 end-to-end for solid-state memory. Our Pure1 cloud-based support and management platform simplifies storage administration, while real-time scanning enables us to find and fix issues before they have an impact. Our innovative business model replaces the traditional forklift upgrade cycle with an Evergreen Storage subscription model to hardware and software innovation, support and maintenance.
v3.19.1
Financial Instruments
12 Months Ended
Jan. 31, 2019
Fair Value Disclosures [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 Notes on a quarterly basis for disclosure purposes. We consider the fair value of the Notes at January 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 January 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, 2018 and 2019 (in thousands):
 
 
January 31, 2018
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Cash Equivalents
 
Marketable Securities
 
Restricted Cash
Level 1
 

 
 

 
 

 
 

 
 
 
 
 
 
Money market accounts
$

 
$

 
$

 
$
32,057

 
$
17,294

 
$

 
$
14,763

Level 2
 

 
 

 
 

 
 

 
 
 
 
 
 
U.S. government treasury notes
131,643

 

 
(651
)
 
130,992

 
10,172

 
120,820

 

U.S. government agencies
47,229

 

 
(333
)
 
46,896

 

 
46,896

 

Corporate debt securities
186,506

 
116

 
(1,049
)
 
185,573

 

 
185,573

 

       Total
$
365,378

 
$
116

 
$
(2,033
)
 
$
395,518

 
$
27,466

 
$
353,289

 
$
14,763

 
 
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


The amortized cost and estimated fair value of our marketable securities are shown below by contractual maturity (in thousands):
 
January 31, 2019
 
Amortized Cost
 
Fair Value
Due within one year
$
342,739

 
$
342,256

Due in one to five years
407,081

 
407,226

  Total
$
749,820

 
$
749,482



Based on our evaluation of available evidence, we concluded that the gross unrealized losses on our investments as of January 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 January 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
$
156,529

 
$
(98
)
 
$
40,413

 
$
(217
)
 
$
196,942

 
$
(315
)
U.S. government agencies
24,892

 
(20
)
 
23,600

 
(134
)
 
48,492

 
(154
)
Corporate debt securities
83,577

 
(152
)
 
96,914

 
(605
)
 
180,491

 
(757
)
Asset-backed securities
11,194

 
(12
)
 

 

 
11,194

 
(12
)
     Total
$
276,192

 
$
(282
)
 
$
160,927

 
$
(956
)
 
$
437,119

 
$
(1,238
)


Realized gains and losses on sale of marketable securities were not significant for all periods presented.
v3.19.1
Business Combination
12 Months Ended
Jan. 31, 2019
Business Combinations [Abstract]  
Business Combination
Business Combination

In August 2018, we completed the acquisition of StorReduce, Inc. (StorReduce), a privately-held, cloud-first software-defined storage solution for managing large-scale unstructured data. Acquisition-related costs were immaterial and were expensed as incurred.
The purchase consideration was $20.5 million in cash (net of cash acquired) after repayment of $6.1 million of debt assumed and payment of $1.1 million in transaction fees on behalf of StorReduce.
The purchase price was allocated as follows: $17.7 million in developed technology which will be amortized over seven years, $11.0 million of goodwill, $4.5 million in net liabilities assumed, and $3.7 million in deferred tax liabilities. 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 StorReduce's technology with our storage portfolio and is not deductible for income tax purposes. We held back approximately $3.7 million in cash to satisfy potential indemnification claims through August 2019.
In addition, we granted 622,482 RSUs to former StorReduce employees with a total grant date fair value of $13.6 million, subject to continuous employment. These awards are recognized as stock-based compensation over the related vesting period.
The results of StorReduce are included in our 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.
v3.19.1
Balance Sheet Components
12 Months Ended
Jan. 31, 2019
Balance Sheet Components Disclosure [Abstract]  
Balance Sheet Components
Balance Sheet Components
Inventory
Inventory consists of the following (in thousands):
 
January 31,
 
2018
 
2019
Raw materials
$
1,181

 
$
3,349

Finished goods
33,316

 
41,338

Inventory
$
34,497

 
$
44,687



Property and Equipment, Net
Property and equipment, net consists of the following (in thousands):
 
January 31,
 
2018
 
2019
Test equipment
$
142,311

 
$
170,930

Computer equipment and software
72,329

 
117,330

Furniture and fixtures
5,363

 
6,980

Leasehold improvements
15,032

 
34,286

Total property and equipment
235,035

 
329,526

Less: accumulated depreciation and amortization
(145,893
)
 
(204,173
)
Property and equipment, net
$
89,142

 
$
125,353


 
Depreciation and amortization expense related to property and equipment was $48.8 million, $60.2 million and $68.3 million for the years ended January 31, 2017, 2018 and 2019, respectively.
Intangible Assets, Net
Intangible assets, net consist of the following (in thousands):
 
 
As of January 31, 2018
 
As of January 31, 2019
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Amount
Technology patents
$
10,125

 
$
(5,068
)
 
$
5,057

 
$
10,125

 
$
(6,572
)
 
$
3,553

Developed technology

 

 

 
17,700

 
(1,135
)
 
16,565

Intangible assets, net
$
10,125

 
$
(5,068
)
 
$
5,057

 
$
27,825

 
$
(7,707
)
 
$
20,118


 
Intangible assets amortization expense was $1.4 million, $1.5 million and $2.6 million for the years ended January 31, 2017, 2018 and 2019, respectively. As of January 31, 2019, the weighted-average remaining amortization period was 2.4 years for technology patents and 6.6 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 consolidated statements of operations.
As of January 31, 2019, future expected amortization expense for intangible assets is as follows (in thousands):
 
Fiscal Years Ending January 31,
Estimated Future
Amortization
Expense
2020
$
4,032

2021
4,032

2022
3,074

2023
2,529

2024
2,529

Thereafter
3,922

Total
$
20,118


Goodwill

The change in the carrying amount of goodwill is as follows (in thousands):

 
Amount
Balance as of January 31, 2018
$

Goodwill acquired
10,997

Balance as of January 31, 2019
$
10,997



Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consist of the following (in thousands):
 
 
January 31,
 
2018
 
2019
Taxes payable
$
4,052

 
$
7,146

Accrued marketing
5,928

 
6,173

Accrued travel and entertainment expenses
4,386

 
3,570

Acquisition consideration held back

 
3,725

Other accrued liabilities
12,783

 
19,246

Total accrued expenses and other liabilities
$
27,149

 
$
39,860

v3.19.1
Commitments and Contingencies
12 Months Ended
Jan. 31, 2019
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies
Commitments and Contingencies
 
Operating Leases and Other Contractual Commitments
 
We lease our office facilities under operating lease agreements expiring through October 2028. Certain of these lease agreements have escalating rent payments. We recognize rent expense under such agreements on a straight-line basis over the lease term, and the difference between the rent paid and the straight-line rent is recorded in accrued expenses and other liabilities and other long-term liabilities in the accompanying consolidated balance sheets.

As of January 31, 2019, the aggregate future minimum payments under non-cancelable operating leases consist of the following (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


 

Rent expense recognized under our operating leases were $16.6 million, $19.4 million and $25.6 million for the years ended January 31, 2017, 2018 and 2019, respectively.
 
As of January 31, 2018 and 2019, we had $26.8 million and $21.4 million of non-cancelable contractual purchase obligations related to certain software service and other contracts.

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 convertible senior notes.

Letters of Credit
In connection with the amendment of our Mountain View, California lease in March 2018, we issued a letter of credit of $1.5 million. As of January 31, 2018 and 2019, we had outstanding letters of credit in the aggregate amount of $9.6 million and $10.8 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

On October 18, 2016, we entered into an agreement with Dell Inc. (Dell), as successor-in-interest to EMC to settle all litigation between EMC and us. The terms of the settlement include a payment to Dell, the dismissal of all litigation between the parties, mutual releases, and a license to the disputed patent. Accordingly, we paid Dell a one-time settlement amount of $30.0 million, and all litigation between EMC and us was dismissed prior to October 31, 2016. We evaluated the settlement as a multiple-element arrangement, which requires us to allocate the one-time payment to the identifiable elements based on their relative fair values. Based on our estimates of fair value, we determined that the sole benefit of the settlement is to avoid further litigation costs with no value attributable to future use or benefit. Accordingly, we recorded the $30.0 million as a legal settlement charge in general and administrative expenses during the three months ended October 31, 2016.
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 consolidated balance sheet as of January 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 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.
v3.19.1
Convertible Senior Notes
12 Months Ended
Jan. 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 the 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.

Upon the issuance of the Notes, we recorded total debt issuance costs of $12.9 million, of which approximately $9.8 million was allocated to the Notes and approximately $3.1 million was allocated to additional paid-in capital.

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

Less: debt discount, net of amortization
(116,722
)
Less: debt issuance costs, net of amortization
(8,450
)
Net carrying amount of the Notes
$
449,828

 
 
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 January 31, 2019 was approximately $558.2 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 $17.91 on January 31, 2019, the if-converted value of the Notes of $391.9 million was less than its principal amount.     

The following table sets forth total interest expense recognized related to the Notes (in thousands):
 
 
Year Ended January 31, 2019
Amortization of debt discount
 
$
19,611

Amortization of debt issuance costs
 
1,420

Total amortization of debt discount and debt issuance costs
 
21,031

Contractual interest expense
 
584

Total interest expense related to the Notes
 
$
21,615

 
 
 
Effective interest rate of the liability component
 
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 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 net loss per share, as they would be anti-dilutive under the treasury stock method.
v3.19.1
Stockholders' Equity
12 Months Ended
Jan. 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 January 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 January 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.
In December 2018, all outstanding shares of our Class B common stock automatically converted into the same number of shares of our Class A common stock pursuant to the terms of our amended and restated certificate of incorporation, which provided that each share of our Class B common stock would convert automatically into Class A common stock when the outstanding shares of Class B common stock represent less than 10% of the aggregate number of shares of the then outstanding Class A common stock and Class B common stock. No additional Class B shares will be issued following such conversion. As of January 31, 2019243,523,831 shares of Class A common stock were issued and outstanding.
Prior to the conversion, the rights of the holders of Class A and Class B common stock were identical, except with respect to voting. Each share of Class A common stock was entitled to one vote per share while each share of Class B common stock was entitled to 10 votes per share.
Class A and Class B common stock are referred to as common stock throughout the notes to the consolidated financial statements, unless otherwise noted.
Common Stock Reserved for Issuance
As of January 31, 2019, we had reserved shares of Class A common stock for future issuance as follows:
 
January 31, 2019
Shares underlying outstanding stock options
35,465,543

Shares underlying outstanding restricted stock units
21,917,550

Shares reserved for future equity awards
15,792,845

Shares reserved for future employee stock purchase plan awards
1,318,558

Total
74,494,496


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 our offering of the Notes. The repurchased shares were recorded as a reduction of additional paid-in capital on the consolidated balance sheet.
v3.19.1
Equity Incentive Plans
12 Months Ended
Jan. 31, 2019
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
Equity Incentive Plans
Equity Incentive Plans
Equity Incentive Plans
We maintain two equity incentive plans: the 2009 Equity Incentive Plan (our 2009 Plan) and the 2015 Equity Incentive Plan (our 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. Our 2015 Plan provides for grants of incentive stock options to our employees and non-statutory stock options, stock appreciation rights, restricted stock, 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 consolidated statements of cash flows.
We initially reserved 27,000,000 shares of our Class A common stock for issuance under our 2015 Plan. The number of shares reserved for issuance under our 2015 Plan increases automatically on the first day of February of each of 2016 through 2025, in an amount equal to 5% of the total number of shares of our capital stock outstanding as of the immediately preceding January 31.
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. A total of 3,500,000 shares of Class A common stock was initially reserved for issuance under the 2015 ESPP. The number of shares reserved for issuance under our 2015 ESPP increases automatically on the first day of February of each of 2016 through 2025, in an amount equal to the lesser of (i) 1% of the total number of shares of our capital stock outstanding as of the immediately preceding January 31, and (ii) 3,500,000 shares of Class A common stock.
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 to include, on a prospective basis, a dollar cap of $7,500 per purchase period. The 2015 ESPP provides for 24 month offering periods beginning March 16th and September 16th of each year, and each offering period consists of four six-month 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). 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.
Since inception, we have had two ESPP resets that have resulted in modificati