PURE STORAGE, INC., 10-K filed on 3/26/2018
Annual Report
v3.8.0.1
Document and Entity Information - USD ($)
$ in Billions
12 Months Ended
Jan. 31, 2018
Mar. 20, 2018
Jul. 31, 2017
Document And Entity Information [Line Items]      
Document Type 10-K    
Amendment Flag false    
Document Period End Date Jan. 31, 2018    
Document Fiscal Year Focus 2018    
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     $ 1.6
Class A common stock      
Document And Entity Information [Line Items]      
Entity Common Stock, Shares Outstanding (in shares)   162,727,090  
Class B common stock      
Document And Entity Information [Line Items]      
Entity Common Stock, Shares Outstanding (in shares)   66,511,236  
v3.8.0.1
Consolidated Balance Sheets - USD ($)
$ in Thousands
Jan. 31, 2018
Jan. 31, 2017
Current assets:    
Cash and cash equivalents $ 244,057 $ 183,675
Marketable securities 353,289 362,986
Accounts receivable, net of allowance of $2,000 and $1,062 as of January 31, 2017 and 2018 243,001 168,978
Inventory 34,497 23,498
Deferred commissions, current 22,437 15,787
Prepaid expenses and other current assets 47,552 25,157
Total current assets 944,833 780,081
Property and equipment, net 89,142 81,695
Intangible assets, net 5,057 6,560
Deferred income taxes, non-current 1,060 844
Other assets, non-current 39,315 30,565
Total assets 1,079,407 899,745
Current liabilities:    
Accounts payable 84,420 52,719
Accrued compensation and benefits 59,898 39,252
Accrued expenses and other liabilities 26,829 21,697
Deferred revenue, current 209,377 158,095
Liability related to early exercised stock options 320 1,362
Total current liabilities 380,844 273,125
Deferred revenue, non-current 196,632 145,031
Other liabilities, non-current 4,025 3,159
Total liabilities 581,501 421,315
Commitments and contingencies (Note 5)
Stockholders’ equity:    
Preferred stock, par value of $0.0001 per share— 20,000 shares authorized as of January 31, 2017 and 2018; no shares issued and outstanding as of January 31, 2017 and 2018 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, 2017 and 2018; 204,364 (Class A 87,027, Class B 117,337) and 220,979 (Class A 129,502, Class B 91,477) shares issued and outstanding as of January 31, 2017 and 2018 22 20
Additional paid-in capital 1,479,883 1,281,452
Accumulated other comprehensive loss (1,917) (562)
Accumulated deficit (980,082) (802,480)
Total stockholders’ equity 497,906 478,430
Total liabilities and stockholders’ equity $ 1,079,407 $ 899,745
v3.8.0.1
Consolidated Balance Sheets (Parenthetical) - USD ($)
$ in Thousands
Jan. 31, 2018
Jan. 31, 2017
Accounts receivable, allowance $ 1,062 $ 2,000
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, par value per share (in dollars per share) $ 0.0001 $ 0.0001
Common stock, shares authorized (in shares) 2,000,000,000 2,000,000,000
Common stock, shares issued (in shares) 129,502,242 87,027,000
Common stock, shares outstanding (in shares) 129,502,000 87,027,000
Class B common stock    
Common stock, par value per share (in dollars per share) $ 0.0001 $ 0.0001
Common stock, shares authorized (in shares) 250,000,000 250,000,000
Common stock, shares issued (in shares) 91,476,735 117,337,000
Common stock, shares outstanding (in shares) 91,477,000 117,337,000
v3.8.0.1
Consolidated Statements of Operations - USD ($)
shares in Thousands, $ in Thousands
12 Months Ended
Jan. 31, 2018
Jan. 31, 2017
Jan. 31, 2016
Revenue:      
Product $ 813,985 $ 590,001 $ 375,733
Support 209,034 137,976 64,600
Total revenue 1,023,019 727,977 440,333
Cost of revenue:      
Product 275,242 194,150 132,870
Support 78,539 58,129 35,023
Total cost of revenue 353,781 252,279 167,893
Gross profit 669,238 475,698 272,440
Operating expenses:      
Research and development 279,196 245,817 166,645
Sales and marketing 480,030 360,035 240,574
General and administrative 95,170 84,652 75,402
Legal settlement 0 30,000 0
Total operating expenses 854,396 720,504 482,621
Loss from operations (185,158) (244,806) (210,181)
Other income (expense), net 11,445 1,627 (2,002)
Loss before provision for income taxes (173,713) (243,179) (212,183)
Provision for income taxes 3,889 1,887 1,569
Net loss $ (177,602) $ (245,066) $ (213,752)
Net loss per share attributable to common stockholders, basic and diluted (in dollars per share) $ (0.84) $ (1.26) $ (2.59)
Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted (in shares) 211,609 194,714 82,460
v3.8.0.1
Consolidated Statements of Comprehensive Loss - USD ($)
$ in Thousands
12 Months Ended
Jan. 31, 2018
Jan. 31, 2017
Jan. 31, 2016
Statement of Comprehensive Income [Abstract]      
Net loss $ (177,602) $ (245,066) $ (213,752)
Other comprehensive loss:      
Change in unrealized net loss on available-for-sale securities (1,355) (562) 0
Comprehensive loss $ (178,957) $ (245,628) $ (213,752)
v3.8.0.1
Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit) - USD ($)
shares in Thousands, $ in Thousands
Total
Common Stock
Additional Paid-In Capital
Accumulated Other Comprehensive Income (Loss)
Accumulated Deficit
Beginning balance (in shares) at Jan. 31, 2015 122,281        
Beginning balance at Jan. 31, 2015 $ 543,940        
Increase (Decrease) in Temporary Equity [Roll Forward]          
Conversion of convertible preferred stock to common stock upon initial public offering (in shares) (122,281)        
Conversion of convertible preferred stock to common stock upon initial public offering $ (543,940)        
Ending balance (in shares) at Jan. 31, 2016 0        
Ending balance at Jan. 31, 2016 $ 0        
Beginning balance (in shares) at Jan. 31, 2015   36,465      
Beginning balance at Jan. 31, 2015 (299,830) $ 4 $ 41,749 $ 0 $ (341,583)
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
Conversion of convertible preferred stock to common stock upon initial public offering (in shares)   122,281      
Conversion of convertible preferred stock to common stock upon initial public offering 543,940 $ 12 543,928    
Issuance of common stock upon initial public offering, net of offering costs of $4,539 (in shares)   28,750      
Issuance of common stock upon initial public offering, net of offering costs of $4,539 455,138 $ 3 455,135    
Issuance of common stock to Pure Good Foundation (in shares)   700      
Issuance of common stock to Pure Good Foundation 11,900   11,900    
Issuance of common stock upon exercise of stock options, net of repurchases (in shares)   2,313      
Issuance of common stock upon exercise of stock options, net of repurchases 6,008 $ 0 6,008    
Stock-based compensation expense 58,225   58,225    
Vesting of early exercised stock options 1,725   1,725    
Net loss (213,752)       (213,752)
Ending balance (in shares) at Jan. 31, 2016   190,509      
Ending balance at Jan. 31, 2016 $ 563,354 $ 19 1,118,670 0 (555,335)
Ending balance (in shares) at Jan. 31, 2017 0        
Ending balance at Jan. 31, 2017 $ 0        
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
Cumulative-effect adjustment from adoption of ASU 2016-09 | Accounting Standards Update 2016-09 0   2,079   (2,079)
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, net of repurchases 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 income (loss) (562)     (562)  
Net loss (245,066)       (245,066)
Ending balance (in shares) at Jan. 31, 2017   204,364      
Ending balance at Jan. 31, 2017 $ 478,430 $ 20 1,281,452 (562) (802,480)
Ending balance (in shares) at Jan. 31, 2018 0        
Ending balance at Jan. 31, 2018 $ 0        
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, net of repurchases 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 income (loss) (1,355)     (1,355)  
Net loss (177,602)       (177,602)
Ending balance (in shares) at Jan. 31, 2018   220,979      
Ending balance at Jan. 31, 2018 $ 497,906 $ 22 $ 1,479,883 $ (1,917) $ (980,082)
v3.8.0.1
Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit) (Parenthetical)
$ in Thousands
12 Months Ended
Jan. 31, 2017
USD ($)
Common Stock  
Offering costs $ 4,539
v3.8.0.1
Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
12 Months Ended
Jan. 31, 2018
Jan. 31, 2017
Jan. 31, 2016
CASH FLOWS FROM OPERATING ACTIVITIES      
Net loss $ (177,602) $ (245,066) $ (213,752)
Adjustments to reconcile net loss to net cash used in operating activities:      
Depreciation and amortization 61,744 50,203 32,254
Stock-based compensation expense 150,673 116,668 58,225
Contribution of common stock to the Pure Good Foundation 0 0 11,900
Other 2,054 1,584 (1,093)
Changes in operating assets and liabilities:      
Accounts receivable, net (74,505) (44,049) (67,292)
Inventory (12,595) (3,776) 1,481
Deferred commissions (11,997) (740) (13,021)
Prepaid expenses and other assets (23,799) (6,133) (8,704)
Accounts payable 29,278 10,644 24,901
Accrued compensation and other liabilities 26,622 19,381 24,710
Deferred revenue 102,883 86,922 142,535
Net cash provided by (used in) operating activities 72,756 (14,362) (7,856)
CASH FLOWS FROM INVESTING ACTIVITIES      
Purchases of property and equipment (65,060) (76,773) (39,355)
Purchase of intangible assets 0 (1,000) 0
Purchases of marketable securities (202,656) (526,717) 0
Sales of marketable securities 66,489 114,354 0
Maturities of marketable securities 144,068 48,513 0
Net increase in restricted cash (2,029) (5,600) (2,485)
Net cash used in investing activities (59,188) (447,223) (41,840)
CASH FLOWS FROM FINANCING ACTIVITIES      
Proceeds from initial public offering, net of issuance costs 0 0 459,425
Net proceeds from exercise of stock options 24,677 14,912 6,008
Proceeds from issuance of common stock under employee stock purchase plan 22,137 25,606 0
Payments of deferred offering costs 0 0 (3,702)
Net cash provided by financing activities 46,814 40,518 461,731
Net increase (decrease) in cash and cash equivalents 60,382 (421,067) 412,035
Cash and cash equivalents, beginning of period 183,675 604,742 192,707
Cash and cash equivalents, end of period 244,057 183,675 604,742
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION      
Cash paid for income taxes 3,090 2,866 1,118
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING INFORMATION      
Conversion of convertible preferred stock to common stock upon initial public offering 0 0 543,940
Property and equipment purchased but not yet paid 9,940 7,414 6,212
Vesting of early exercised stock options 1,042 3,399 1,725
Unpaid deferred offering costs $ 0 $ 0 $ 546
v3.8.0.1
Business Overview
12 Months Ended
Jan. 31, 2018
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 building a data platform that transforms business through a dramatic increase in performance and reduction in complexity and costs. We are headquartered in Mountain View, California and have wholly owned subsidiaries throughout the world.
Initial Public Offering
In October 2015, we completed our initial public offering (IPO) of Class A common stock, in which we sold 28,750,000 shares. The shares were sold at an IPO price of $17.00 per share for net proceeds of $459.4 million, after deducting underwriting discounts and commissions of $29.3 million but before deducting offering costs of $4.5 million. Upon the closing of our IPO, all outstanding shares of our convertible preferred stock automatically converted into 122,280,679 shares of Class B common stock. Following the IPO, we have two classes of authorized common stock – Class A common stock and Class B common stock.
v3.8.0.1
Basis of Presentation and Summary of Significant Accounting Policies
12 Months Ended
Jan. 31, 2018
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. For the years ended January 31, 2016, 2017 and 2018, we recorded net foreign currency transaction losses of $2.3 million, $2.6 million, and a net foreign currency transaction gain of $6.0 million, respectively.
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 best estimate of selling price included in multiple-deliverable revenue arrangements, sales commissions, useful lives of intangible assets and property and equipment, fair values of stock-based awards, provision for income taxes, including related reserves, and contingent liabilities, among others. 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 and accounts receivable. As of January 31, 2017 and 2018, substantially all 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. Our revenue and accounts receivable are derived substantially from the United States across a multitude of industries. We perform ongoing evaluations to determine customer credit. As of January 31, 2017, we had one channel partner that represented 10% or more 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 single channel partner represented 10% or more of revenue for the years ended January 31, 2016 and 2018. One channel partner represented 11% of revenue for the year ended January 31, 2017. No end customer represented 10% or more of revenue for the years ended January 31, 2016, 2017 and 2018. 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,
 
2016
 
2017
 
2018
 
(in thousands) 
Allowance for doubtful accounts, beginning balance
$
210

 
$
944

 
$
2,000

Provision, net
918

 
1,394

 
482

Writeoffs
(184
)
 
(338
)
 
(1,420
)
Allowance for doubtful accounts, ending balance
$
944

 
$
2,000

 
$
1,062


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, 2017 and 2018, we had restricted cash of $12.7 million and $14.8 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, 2018, we did not record any liability related to the above. Inventory write-offs were insignificant for the years ended January 31, 2016, 2017 and 2018.
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.
Intangible Assets
Intangible assets 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. During the year ended January 31, 2017, we acquired certain technology patents for $1.0 million, which are amortized on a straight-line basis over an estimated useful life of five 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.
Deferred Commissions
Deferred commissions consist of direct and incremental costs paid to our sales force related to customer contracts. The deferred commission amounts are recoverable through the revenue streams that will be recognized under the related customer contracts. Direct sales commissions are deferred when earned and amortized over the same period that revenue is recognized from the related customer contract. Amortization of deferred commissions is included in sales and marketing expense in the consolidated statements of operations.
As of January 31, 2017 and 2018, we recorded deferred commissions, current, of $15.8 million and $22.4 million, and deferred commissions, non-current, of $14.9 million and $20.3 million, within other assets, non-current in the consolidated balance sheets. During the years ended January 31, 2016, 2017 and 2018, we recognized sales commission expenses of $47.2 million, $84.8 million, and $119.8 million, respectively.
Revenue Recognition
We derive revenue from two sources: (1) product revenue which includes hardware and embedded software and (2) support revenue which includes customer support, hardware maintenance and software upgrades on a when-and-if-available basis.
We recognize revenue when:
Persuasive evidence of an arrangement exists—We rely upon sales agreements and/or purchase orders to determine the existence of an arrangement.
Delivery has occurred—We typically recognize product revenue upon shipment, as title and risk of loss are transferred to our channel partners at that time. Products are typically shipped directly by us to customers, and our channel partners do not stock our inventory.
The fee is fixed or determinable—We assess whether the fee is fixed or determinable based on the payment terms associated with the transaction.
Collection is reasonably assured—We assess collectability based on credit analysis and payment history.
Our product revenue is derived from the sale of hardware and operating system software that is integrated into the hardware and therefore deemed essential to its functionality. The hardware and the operating system software essential to the functionality of the hardware are considered non-software deliverables and, therefore, are not subject to industry-specific software revenue recognition guidance.
Support revenue is derived from the sale of maintenance and support agreements. Maintenance and support agreements include 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. Revenue related to maintenance and support agreements are recognized ratably over the contractual term, which generally range from one to five years. Costs related to maintenance and support agreements are expensed as incurred. In addition, our Evergreen Storage program provides our customers who continually maintain active maintenance and support for three years with an included controller refresh with each additional three year maintenance and support renewal. In accordance with multiple-element arrangement accounting guidance, the controller refresh represents an additional deliverable that is a separate unit of accounting and the allocated revenue is recognized in the period in which these controllers are shipped.
Most of our arrangements, other than stand-alone renewals of maintenance and support agreements, are multiple-element arrangements with a combination of product and support related deliverables (as defined above). Under multiple-element arrangements, we allocate consideration at the inception of an arrangement to all deliverables based on the relative selling price method in accordance with the hierarchy provided by the multiple-element arrangement accounting guidance, which includes (i) vendor-specific objective evidence (VSOE), of selling price, if available; (ii) third-party evidence (TPE), of selling price, if VSOE is not available; and (iii) best estimate of selling price (BESP), if neither VSOE nor TPE is available. We allocate consideration to support related deliverables based on VSOE and to all other deliverables based on BESP as TPE typically cannot be obtained.
VSOE—We determine VSOE based on our historical pricing and discounting practices for the specific products and services when sold separately. In determining VSOE, we require that a substantial majority of the stand-alone selling prices fall within a reasonably narrow pricing range.
TPE—When VSOE cannot be established for deliverables in multiple-element arrangements, we apply judgment with respect to whether we can establish a selling price based on TPE. TPE is determined based on competitor prices for interchangeable products or services when sold separately to similarly situated customers. However, because our products contain a significant element of proprietary technology and our solutions offer substantially different features and functionality, the comparable pricing of products with similar functionality typically cannot be obtained.
BESP—When neither VSOE nor TPE can be established, we utilize BESP to allocate consideration to deliverables in a multiple-element arrangement. Our process to determine BESP for products and support is based on qualitative and quantitative considerations of multiple factors, which primarily include historical sales, margin objectives and discount behavior. Additional considerations are given to other factors such as customer demographics, costs to manufacture products or provide support, pricing practices and market conditions.
Deferred Revenue
Deferred revenue primarily consists of amounts that have been invoiced but that have not yet been recognized as revenue and primarily consists of support. 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 date.
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, 2016, 2017 and 2018.
Advertising Expenses
Advertising costs are expensed as incurred. Advertising expenses were $6.2 million, $10.7 million and $10.3 million for the years ended January 31, 2016, 2017 and 2018, respectively.
Stock-Based Compensation
Stock-based compensation includes expenses related to restricted stock units (RSUs), stock options and purchase rights issued to employees under our 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 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). Subsequent to the adoption of Accounting Standards Update (ASU) No. 2016-09 (ASU 2016-09) on February 1, 2016, 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.
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09 or 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 will supersede nearly all existing revenue recognition guidance under U.S. GAAP when it becomes effective. The standard permits two methods of adoptions: 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 have 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 will be restated to conform to the new standard. The impact on our consolidated financial statements upon the adoption of the standard is primarily as follows:

An increase in total revenue of $11.2 million and $1.8 million for the years ended January 31, 2017 and 2018 (an increase in product revenue of $24.5 million and $20.5 million for the years ended January 31, 2017 and 2018 and a decrease in support revenue of $13.3 million and $18.7 million for the years ended January 31, 2017 and 2018), and a decrease in deferred revenue of $30.1 million and $31.9 million as of January 31, 2017 and 2018, due to the removal of limitation on contingent revenue;
A decrease in commission expense of $12.3 million and $16.0 million for the years ended January 31, 2017 and 2018, and an increase in deferred commissions of $28.2 million and $44.2 million as of January 31, 2017 and 2018, due to a change in amortization period from contract term (typically ranging from one to five years) to an expected useful life of six years;
A decrease in loss from operations of $23.5 million and $17.8 million for the years ended January 31, 2017 and 2018, due to the changes above.
In addition, the adoption of the standard does not have a significant impact to the provision for income taxes on our consolidated statements of operations, nor does it impact net cash provided by or used in operating, investing, or financing activities on our consolidated statements of cash flows.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (ASU 2016-02). ASU 2016-02 requires lessees to recognize all leases with terms in excess of one year on their balance sheet as a right-of-use asset and a lease liability at the commencement date. The new standard also simplifies the accounting for sale and leaseback transactions. The amendments in this update will be effective for us beginning on February 1, 2019 and must be adopted using a modified retrospective method for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Early adoption is permitted. We are currently evaluating adoption methods and the impact of this standard on our 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 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 consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15 (Topic 230) Statement of Cash Flow: Classification of Certain Cash Receipts and Cash Payments, which clarifies how companies present and classify certain cash receipts and cash payments in the statement of cash flows. This standard is effective for us beginning on February 1, 2018 and will be applied on a retrospective basis. We do not expect the adoption of this standard will have a significant impact on 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 (ASU 2016-16), which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. ASU 2016-16 will be effective for us beginning on February 1, 2018 and will be applied on a modified retrospective basis. Early adoption is permitted. We do not expect the adoption of this standard will have a material impact our consolidated financial statements.
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 amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 will be effective for us beginning on February 1, 2018 and will be applied on a retrospective basis. We do not expect the adoption of this standard will have a significant impact on our cash flow activity presented on our consolidated statements of cash flows.
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. This standard will be effective for us beginning February 1, 2018 and will be applied on a prospective basis. We do not expect the adoption of this standard will have a significant impact on our consolidated financial statements.
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 and requires certain disclosures about stranded tax effects. This standard will be effective for us beginning February 1, 2019 and should be applied either in the period of adoption or retrospectively. Early adoption is permitted. We are currently evaluating the impact of this standard on 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 ("ASU 2018-05"). 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. 18, 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 are currently evaluating the impact of this standard on our consolidated financial statements.
Reclassifications
Certain amounts in prior periods have been reclassified to conform with current period presentation.
v3.8.0.1
Financial Instruments
12 Months Ended
Jan. 31, 2018
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 I—Observable inputs are unadjusted quoted prices in active markets for identical assets or liabilities;
Level II—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 III—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 and quoted market prices for similar instruments.
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, 2017 and 2018 (in thousands):
 
 
January 31, 2017
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Cash Equivalents
 
Marketable Securities
 
Restricted Cash
Level 1
 

 
 

 
 

 
 

 
 
 
 
 
 
Money market accounts
$

 
$

 
$

 
$
12,734

 
$

 
$

 
$
12,734

Level 2
 

 
 

 
 

 
 

 
 
 
 
 
 
U.S. government treasury notes
148,298

 
22

 
(289
)
 
148,031

 
13,226

 
134,805

 

U.S. government agencies
40,398

 
2

 
(159
)
 
40,241

 

 
40,241

 

Corporate debt securities
185,701

 
242

 
(379
)
 
185,564

 

 
185,564

 

Foreign government bonds
2,377

 
2

 
(3
)
 
2,376

 

 
2,376

 

       Total
$
376,774

 
$
268

 
$
(830
)
 
$
388,946

 
$
13,226

 
$
362,986

 
$
12,734

 
 
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


The amortized cost and estimated fair value of our marketable securities are shown below by contractual maturity (in thousands):
 
January 31, 2018
 
Amortized Cost
 
Fair Value
Due within one year
$
173,537

 
$
173,278

Due in one to five years
181,669

 
180,011

  Total
$
355,206

 
$
353,289



Based on our evaluation of available evidence, we concluded that the gross unrealized losses on our marketable securities as of January 31, 2018 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, 2018, 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
$
68,212

 
$
(219
)
 
$
52,607

 
$
(432
)
 
$
120,819

 
$
(651
)
U.S. government agencies
23,004

 
(156
)
 
23,892

 
(177
)
 
46,896

 
(333
)
Corporate debt securities
117,165

 
(732
)
 
33,132

 
(317
)
 
150,297

 
(1,049
)
     Total
$
208,381

 
$
(1,107
)
 
$
109,631

 
$
(926
)
 
$
318,012

 
$
(2,033
)


Gross realized gains and losses on sale of marketable securities were immaterial for the years ended January 31, 2017 and 2018.
v3.8.0.1
Balance Sheet Components
12 Months Ended
Jan. 31, 2018
Balance Sheet Components Disclosure [Abstract]  
Balance Sheet Components
Balance Sheet Components
Inventory
Inventory consists of the following (in thousands):
 
January 31,
 
2017
 
2018
Raw materials
$
3,003

 
$
1,181

Finished goods
20,495

 
33,316

Inventory
$
23,498

 
$
34,497



Property and Equipment, Net
Property and equipment, net consists of the following (in thousands):
 
January 31,
 
2017
 
2018
Test equipment
$
105,955

 
$
142,311

Computer equipment and software
54,521

 
72,329

Furniture and fixtures
4,494

 
5,363

Leasehold improvements
10,332

 
15,032

Total property and equipment
175,302

 
235,035

Less: accumulated depreciation and amortization
(93,607
)
 
(145,893
)
Property and equipment, net
$
81,695

 
$
89,142


 
Depreciation and amortization expense related to property and equipment was $31.0 million, $48.8 million and $60.2 million for the years ended January 31, 2016, 2017 and 2018, respectively.
Intangible Assets, Net
Intangible assets, net consist of the following (in thousands):
 
 
January 31,
 
2017
 
2018
Technology patents
$
10,125

 
$
10,125

Accumulated amortization
(3,565
)
 
(5,068
)
Intangible assets, net
$
6,560

 
$
5,057


 
Intangible assets amortization expense was $1.3 million, $1.4 million and $1.5 million for the years ended January 31, 2016, 2017 and 2018, respectively. The weighted-average remaining useful life of the technology patents is 3.4 years. Due to the defensive nature of these patents, the amortization is included in general and administrative expenses in the consolidated statements of operations.
As of January 31, 2018, expected future amortization expense for intangible assets is as follows (in thousands):
 
Year Ending January 31,
Estimated Future
Amortization
Expense
2019
$
1,504

2020
1,504

2021
1,504

2022
545

Total
$
5,057


Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consist of the following (in thousands):
 
 
January 31,
 
2017
 
2018
Taxes payable
$
1,675

 
$
4,052

Accrued marketing
6,718

 
5,928

Accrued travel and entertainment expenses
2,235

 
4,386

Other accrued liabilities
11,069

 
12,463

Total accrued expenses and other liabilities
$
21,697

 
$
26,829

v3.8.0.1
Commitments and Contingencies
12 Months Ended
Jan. 31, 2018
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies
Commitments and Contingencies
 
Operating Leases
 
We lease our office facilities under operating lease agreements expiring through April 2026. 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.
 
In August 2017, we entered into a seven-year operating lease for approximately 45,831 square feet of office space in Mountain View, California with a total rent obligation and management fees of $32.2 million.
In March 2018, we amended our Mountain View, California lease signed in August 2017 to add a ten-year lease for additional 31,571 square feet of office space for a total rent obligation and management fees of approximately $34.8 million, which are excluded from the table below. In connection with this lease amendment, we issued a letter of credit of $1.5 million.

As of January 31, 2018, the aggregate future minimum payments under non-cancelable operating leases consist of the following (in thousands):
 
Year Ending January 31,
Operating Leases
2019
$
19,321

2020
18,627

2021
20,083

2022
17,250

2023
13,991

Thereafter
23,727

Total
$
112,999


 

Rent expense recognized under our operating leases were $11.0 million, $16.6 million and $19.4 million for the years ended January 31, 2016, 2017 and 2018, respectively.
 
Purchase Obligations
As of January 31, 2017 and 2018, we had $4.1 million and $26.8 million of non-cancelable contractual purchase obligations related to certain software service and other contracts.

Letters of Credit
In connection with the lease executed in August 2017, we issued a letter of credit of $2.6 million. As of January 31, 2017 and 2018, we had letters of credit in the aggregate amount of $7.7 million and $9.6 million, in connection with our facility leases. The letters of credit are collateralized by restricted cash and mature at various dates through August 2026.
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 may have a material adverse effect on our business, financial position, results of operations or cash flows. Accordingly, we have not recorded any material loss contingency on our consolidated balance sheet as of January 31, 2018.
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.
v3.8.0.1
Stockholders' Equity
12 Months Ended
Jan. 31, 2018
Equity [Abstract]  
Stockholders’ Equity
Stockholders’ Equity
Preferred Stock
Upon the closing of our IPO in October 2015, we filed an Amended and Restated Certificate of Incorporation, which authorized 20,000,000 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, 2018, 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, 2018, we had 2,000,000,000 shares of Class A common stock authorized with a par value of $0.0001 per share and 250,000,000 shares of Class B common stock authorized with a par value of $0.0001 per share. As of January 31, 2018129,502,242 shares of Class A common stock were issued and outstanding and 91,476,735 shares of Class B common stock were issued and outstanding.
The rights of the holders of Class A and Class B common stock are identical, except with respect to voting. Each share of Class A common stock is entitled to one vote per share. Each share of Class B common stock is entitled to 10 votes per share. Shares of Class B common stock may be converted to Class A common stock at any time at the option of the stockholder. Shares of Class B common stock automatically convert to Class A common stock upon the following: (i) sale or transfer of such share of Class B common stock; (ii) the death of the Class B common stockholder (or nine months after the date of death if the stockholder is one of our founders); and (iii) on the final conversion date, defined as the earlier of (a) the first trading day on or after the date on which the outstanding shares of Class B common stock represent less than 10% of the then outstanding Class A and Class B common stock; (b) the tenth anniversary of the IPO; or (c) the date specified by vote of the holders of a majority of the outstanding shares of Class B common stock, voting as a single class.
Class A and Class B common stock are referred to as common stock throughout the notes to the consolidated financial statements, unless otherwise noted.
In August 2015, we established the Pure Good Foundation as a non-profit organization, and in September 2015 we issued 700,000 shares of our Class B common stock to this foundation. As a result, we incurred a one-time general and administrative expense of $11.9 million during the year ended January 31, 2016, the amount of which was equal to the fair value of the shares of Class B common stock issued. 
Common Stock Reserved for Issuance
As of January 31, 2018, we had reserved shares of common stock for future issuance as follows:
 
January 31, 2018
Shares underlying outstanding stock options
46,359,949

Shares underlying outstanding restricted stock units
17,682,646

Shares reserved for future equity awards
19,684,916

Shares reserved for future employee stock purchase plan awards
2,489,767

Total
86,217,278

v3.8.0.1
Equity Incentive Plans
12 Months Ended
Jan. 31, 2018
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). In August 2015, our board of directors adopted, and in September 2015 our stockholders approved, the 2015 Plan, which became effective in connection with our IPO in October 2015 and serves as the successor to our 2009 Plan. Our 2015 Plan provides for the issuance of incentive stock options to our employees and non-statutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance stock awards, performance cash awards, and other forms of stock awards to our employees, directors and consultants. No new awards are 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.
We have 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
In August 2015, our board of directors adopted and our stockholders approved, the 2015 Employee Stock Purchase Plan (2015 ESPP), which 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). Except for the initial offering period, the 2015 ESPP provides for 24 month offering periods beginning March 16th and September 16th of each year, and each offering period will consist 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 had two ESPP resets. The first ESPP reset occurred when our closing stock price on March 16, 2016 was below the closing stock price on October 7, 2015, which triggered a new 24-month offering period through March 15, 2018, resulting in a modification charge of approximately $10.6 million to be recognized over the new offering period. The second ESPP reset occurred when our closing stock price on March 16, 2017 was below the closing stock prices on March 16, 2016 and September 16, 2016, which triggered a new 24-month offering period through March 15, 2019, resulting in another modification charge of approximately $9.0 million. This amount along with the remaining unamortized expense from the first reset, is being recognized over the new offering period ending March 15, 2019.
During the years ended January 31, 2016, 2017 and 2018, we recognized $4.4 million, $18.3 million and $18.3 million, respectively, of stock-based compensation expense related to our 2015 ESPP. As of January 31, 2018, there was $26.4 million of unrecognized stock-based compensation expense related to our 2015 ESPP which is expected to be recognized over a weighted-average period of approximately 1.1 years.
Early Exercise of Stock Options
Certain employees and directors have exercised options granted under the 2009 Plan prior to vesting. The unvested shares are subject to a repurchase right held by us at the original purchase price. The proceeds initially are recorded as liability related to early exercised stock options and reclassified to additional paid-in capital as the repurchase right lapses. No unvested stock options were exercised during the years ended January 31, 2016, 2017 and 2018. In the year ended January 31, 2016, we repurchased 15,000 shares of unvested common stock related to early exercised stock options at the original purchase price due to the termination of an employee. No shares were repurchased during the years ended January 31, 2017 and 2018. As of January 31, 2017 and 2018, 494,117 and 85,262 shares held by employees and directors were subject to repurchase at an aggregate price of $1.4 million and $0.3 million.
Stock Options
A summary of 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 (Years)
 
Aggregate
Intrinsic
Value
 
 
 
 
 
 
 
(in thousands) 
Balance as of January 31, 2017
56,840,189

 
$
7.15

 
7.0
 
$
315,502

Options granted
1,000,000

 
14.92

 
 
 
 

Options exercised
(8,814,019
)
 
2.79

 
 
 
 

Options cancelled/forfeited
(2,666,221
)
 
13.91

 
 
 
 

Balance as of January 31, 2018
46,359,949

 
$
7.75

 
6.3
 
$
574,224

Vested and exercisable as of January 31, 2018
28,990,955

 
$
5.30

 
5.7
 
$
430,325


 
The aggregate intrinsic value of options vested and exercisable as of January 31, 2018 is calculated based on the difference between the exercise price and the closing price of $20.14 of our Class A common stock on January 31, 2018. The aggregate intrinsic value of options exercised for the years ended January 31, 2016, 2017 and 2018 was $29.5 million, $114.2 million and $104.9 million, respectively.
The weighted-average grant date fair value of options granted was $8.38, $5.57 and $5.57 per share for the years ended January 31, 2016, 2017 and 2018, respectively. The total grant date fair value of options vested for the years ended January 31, 2016, 2017 and 2018 was $35.4 million, $61.8 million and $42.5 million, respectively.
As of January 31, 2018, total unamortized stock-based compensation expense related to our employee stock options was $74.4 million, which is expected to be recognized over a weighted-average period of approximately 2.6 years.
During the year ended January 31, 2016, we granted options to purchase 238,000 shares of common stock, net of cancellations, that vest upon satisfaction of performance and service conditions. For those options that management determined that the performance condition was satisfied, stock-based compensation expense of $2.5 million, $3.3 million and $0.6 million was recognized during the years ended January 31, 2016, 2017 and 2018, respectively. As of January 31, 2017 and 2018, there were no outstanding stock options subject to performance vesting conditions.
In November 2016, we modified employee stock option awards to purchase 800,000 shares of our common stock. The modification included an immediate acceleration of performance-based options to purchase 360,000 shares of common stock and an acceleration of time-based options to purchase 440,000 shares of common stock contingent on continued employment through January 31, 2017. This modification resulted in stock-based compensation expense of $5.9 million that was recognized during the year ended January 31, 2017.
Determination of Fair Value
The fair value of stock options granted to employees and to be purchased under ESPP is estimated on the grant date using the Black-Scholes option pricing model. This valuation model for stock-based compensation expense requires us to make assumptions and judgments about the variables used in the calculation including the fair value of the underlying common stock, expected term, the expected volatility of the common stock, a risk-free interest rate and expected dividend yield.
We estimate the fair value of employee stock options and ESPP purchase rights using a Black-Scholes option pricing model with the following assumptions:
 
 
Year Ended January 31,
 
2016
 
2017
 
2018
Employee Stock Options
 
 
 
 
 
Expected term (in years)
6.0 - 7.4

 
6.1

 
6.1

Expected volatility
48% - 52%

 
44
%
 
47
%
Risk-free interest rate
1.5% - 1.9%

 
1.3% - 1.5%

 
1.9
%
Dividend rate

 

 

Fair value of common stock
$13.94 - $19.68

 
$10.37 - $14.52

 
$12.84
Employee Stock Purchase Plan
 

 
 

 
 

Expected term (in years)
0.4 - 1.9

 
0.5 - 2.0

 
0.5 - 2.0

Expected volatility
49
%
 
41
%
 
35% - 39%

Risk-free interest rate
0.1% - 0.7%

 
0.5% - 0.9%

 
0.9% - 1.4%

Dividend rate

 

 


 
The assumptions used in the Black-Scholes option pricing model were determined as follows.
Fair Value of Common Stock—Prior to our IPO in October 2015, our board of directors considered numerous objective and subjective factors to determine the fair value of our common stock at each grant date, including (i) contemporaneous third-party valuations of common stock; (ii) the prices for our convertible preferred stock sold to outside investors; (iii) the rights and preferences of convertible preferred stock relative to common stock; (iv) the lack of marketability of our common stock; (v) developments in the business; and (vi) the likelihood of achieving a liquidity event, such as an IPO or sale of Pure Storage, given prevailing market conditions. Subsequent to our IPO, we use the market closing price of our Class A common stock as reported on the New York Stock Exchange to determine the fair value of our common stock at each grant date.
Expected Term—The expected term represents the period that our stock-based awards are expected to be outstanding. The expected term assumptions were determined based on the vesting terms, exercise terms and contractual lives of the options and ESPP purchase rights.
Expected Volatility—Since we have limited trading history of our common stock, the expected volatility was derived from the average historical stock volatilities of several public companies within the same industry that we consider to be comparable to our business over a period equivalent to the expected term of the stock option grants and ESPP purchase rights.
Risk-Free Interest Rate—The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for zero-coupon U.S. Treasury notes with maturities approximately equal to the expected term of the stock option grants and ESPP purchase rights.
Dividend Rate—We have never declared or paid any cash dividends and do not plan to pay cash dividends in the foreseeable future, and, therefore, use an expected dividend yield of zero.
Restricted Stock Units
A summary of the restricted stock unit activity under our 2015 Plan and related information is as follows:
 
Number of Restricted Stock Units Outstanding
 
Weighted-Average Grant Date Fair Value
 
Aggregate Intrinsic Value
 
 
 
 
 
(in thousands) 
Unvested balance as of January 31, 2017
8,783,024
 
$
13.06

 
$
99,863

Granted
15,779,364
 
12.16

 
 
Vested
(5,277,679)
 
12.30

 
 
Forfeited
(1,602,063)
 
11.88

 
 
Unvested balance of January 31, 2018
17,682,646
 
$
12.60

 
$
356,117




In March 2017, we granted 750,000 performance stock units (net of 77,000 canceled units) with both performance and service vesting conditions payable in common shares from 0% to 150% of the target number granted, contingent upon the degree to which the performance condition is met. At January 31, 2018, the performance condition was satisfied. Stock-based compensation expense for these performance stock units was $4.2 million for the year ended January 31, 2018 and total unamortized stock-based compensation expense was $3.3 million as of January 31, 2018, which is expected to be recognized over 2.2 years.

In August 2017, we granted 464,744 performance stock units with both performance and service vesting conditions payable in common shares from 0% to 150% of the target number granted, contingent upon the degree to which the performance condition is met. Because the performance condition for these stock units was not established as of January 31, 2018, there was no grant date from an accounting perspective and no stock-based compensation expense was recognized. Also, no grant date fair value was considered in the calculation of weighted-average grant date fair value in the table above. In March 2018, the performance condition for these performance stock units was established and the grant date fair value of these stock units was $21.13 per share. Stock-based compensation expense will be recognized under the accelerated attribution method over the vesting period through December 2020.

In March 2018, we converted 1,375,210 performance stock units and restricted stock units to 1,375,210 shares of restricted stock. The conversion did not change the fair value or vesting conditions and therefore no modification is required.

The aggregate fair value of restricted stock units that vested during the year ended January 31, 2018 was $75.5 million.

As of January 31, 2018, total unamortized stock-based compensation expense related to outstanding restricted stock units was $187.2 million, which is expected to be recognized over a weighted-average period of approximately 2.6 years.
Stock-Based Compensation Expense
The following table summarizes the components of stock-based compensation expense recognized in the consolidated statements of operations (in thousands):
 
 
Year Ended January 31,
 
2016
 
2017
 
2018
Cost of revenue—product
$
276

 
$
601

 
$
1,630

Cost of revenue—support
2,388

 
5,639

 
9,050

Research and development
31,135

 
63,495

 
71,229

Sales and marketing
16,966

 
34,317

 
47,687

General and administrative
7,460

 
12,616

 
21,077

Total stock-based compensation expense
$
58,225

 
$
116,668

 
$
150,673

v3.8.0.1
Net Loss per Share Attributable to Common Stockholders
12 Months Ended
Jan. 31, 2018
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 by the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase. The diluted net loss per share attributable to common stockholders is computed by giving effect to all potential dilutive common stock equivalents outstanding for the period. For purposes of this calculation, convertible preferred stock, stock options, unvested restricted stock units, repurchasable shares from early exercised stock options and shares subject to ESPP withholding are considered to be common stock equivalents but have been excluded from the calculation of diluted net loss per share attributable to common stockholders as their effect is anti-dilutive.
The rights, including the liquidation and dividend rights, of the holders of our Class A and Class B common stock are identical, except with respect to voting. As the liquidation and dividend rights are identical, the undistributed earnings are allocated on a proportionate basis and the resulting net loss per share attributed to common stockholders will, therefore, be the same for both Class A and Class B common stock on an individual or combined basis. We did not present dilutive net loss per share on an if-converted basis because the impact was not 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):
 
 
Year Ended January 31,
 
2016
 
2017
 
2018
Net loss
$
(213,752
)
 
$
(245,066
)
 
$
(177,602
)
Weighted-average shares used in computing net loss
   per share attributable to common stockholders, basic and diluted
82,460

 
194,714

 
211,609

Net loss per share attributable to common stockholders,
basic and diluted
$
(2.59
)
 
$
(1.26
)
 
$
(0.84
)

 
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):
 
 
Year Ended January 31,
 
2016
 
2017
 
2018
Stock options to purchase common stock
61,795

 
63,984

 
52,424

Restricted stock units

 
5,216

 
15,496

Employee stock purchase plan
170

 
1,310

 
1,544

Early exercised stock options
3,618

 
2,106

 
246

Total
65,583

 
72,616

 
69,710

v3.8.0.1
Income Taxes
12 Months Ended
Jan. 31, 2018
Income Tax Disclosure [Abstract]  
Income Taxes
Income Taxes
The geographical breakdown of loss before provision for income taxes is as follows (in thousands):

 
Year Ended January 31,
 
2016
 
2017
 
2018
Domestic
$
(195,019
)
 
$
(200,355
)
 
$
(135,115
)
International
(17,164
)
 
(42,824
)
 
(38,598
)
Total
$
(212,183
)
 
$
(243,179
)
 
$
(173,713
)

 
The components of the provision for income taxes are as follows (in thousands):
 
Year Ended January 31,
 
2016
 
2017
 
2018
Current:
 

 
 

 
 

State
$
210

 
$
389

 
$
525

Foreign
2,198

 
1,806

 
3,580

Total
$
2,408

 
$
2,195

 
$
4,105

Deferred:
 

 
 

 
 

Foreign
(839
)
 
(308
)
 
(216
)
Provision for income taxes
$
1,569

 
$
1,887

 
$
3,889


 
The reconciliation of the federal statutory income tax rate and effective income tax rate is as follows (in thousands):
 
Year Ended January 31,
 
2016
 
2017
 
2018
Tax at federal statutory rate
$
(72,142
)
 
$
(82,682
)
 
$
(57,144
)
State tax, net of federal benefit
152

 
276

 
351

Stock-based compensation expense
10,866

 
(5,242
)
 
(9,953
)
Research and development tax credits
(3,832
)
 
(1,570
)
 
(7,629
)
Foreign rate differential
7,106

 
15,878

 
18,667

Change in valuation allowance
58,979

 
73,863

 
(48,703
)
Remeasurement of deferred tax assets and liabilities

 

 
107,029

Other
440

 
1,364

 
1,271

Provision for income taxes
$
1,569

 
$
1,887

 
$
3,889



Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of our deferred tax assets and liabilities were as follows (in thousands):

 
January 31,
 
2017
 
2018
Deferred tax assets:
 

 
 

Net operating loss carryforwards
$
173,942

 
$
127,621

Tax credit carryover
15,319

 
33,105

Accruals and reserves
3,112

 
1,809

Deferred revenue
53,424

 
46,570

Stock-based compensation expense
26,401

 
24,133

Depreciation and amortization
7,302

 
15,367

Charitable contribution carryforwards
4,345

 
2,892

Other

 
465

Total deferred tax assets
283,845

 
251,962

Valuation allowance
(271,779
)
 
(240,519
)
Total deferred tax assets, net of valuation allowance
12,066

 
11,443

Deferred tax liabilities:
 

 
 

Deferred commissions
(11,222
)
 
(10,383
)
Total deferred tax liabilities
(11,222
)
 
(10,383
)
Net deferred tax assets
$
844

 
$
1,060

 
The Tax Act was signed into law on December 22, 2017. The new legislation decreases the U.S. corporate federal income tax rate from 35% to 21% effective January 1, 2018. As a result, our U.S. federal and state deferred tax assets and valuation allowance each decreased by approximately $98 million, and accordingly there is no impact to our provision for income taxes. Since we have a January 31 fiscal year end, we have a federal blended tax rate of 32.9% for the year ended January 31, 2018 and 21% thereafter on any current U.S. federal taxes payable.

The Tax Act also includes a number of other provisions including the elimination of loss carrybacks and limitations on the use of future losses, limitations on the deductibility of executive compensation, limitation or modification on the deductibility of certain business expenses, the transition of U.S. international taxation from a worldwide tax system to a territorial system, and the introduction of a base erosion and anti-abuse tax. We will continue to assess the impact of the Tax Act during the one-year measurement period from the Tax Act enactment date as allowed by Staff Accounting Bulletin No. 118 (SAB 118) issued in connection with the Tax Act. We expect to complete the accounting for the tax effects of the Tax Act in calendar year 2018.

As of January 31, 2018, the undistributed earnings of $20.8 million from non-U.S. operations held by our foreign subsidiaries are designated as permanently reinvested outside the U.S. Accordingly, no additional U.S. income taxes or additional foreign withholding taxes have been provided thereon. Determination of the amount of unrecognized deferred tax liability related to these earnings is not practicable.
 
As of January 31, 2018, we had net operating loss carryforwards for federal income tax purposes of approximately $508.9 million and state income tax purposes of approximately $331.9 million. These net operating loss carryforwards will expire, if not utilized, beginning in 2028 for federal and state income tax purposes.
We had federal and state research and development tax credit carryforwards of approximately $26.6 million and $22.2 million as of January 31, 2018. The federal research and development tax credit carryforwards will expire commencing in 2028, while the state research and development tax credit carryforwards have no expiration date.
Realization of deferred tax assets is dependent on future taxable income, the existence and timing of which is uncertain. Based on our history of losses, management has determined that it is more likely than not that the U.S. deferred tax assets will not be realized, and accordingly has placed a full valuation allowance on the net U.S. deferred tax assets. The valuation allowance increased by $68.0 million, $90.9 million, and decreased by $31.3 million, respectively, during the years ended January 31, 2016, 2017 and 2018.
Utilization of the net operating loss carryforwards and credits may be subject to substantial annual limitation due to the ownership change limitations provided by Section 382 of the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization. In February 2018, we completed an analysis through January 2018 to evaluate whether there are any limitations of our net operating loss carryforwards and concluded no limitations currently exist.
Uncertain Tax Positions
The activity related to the unrecognized tax benefits is as follows (in thousands):
 
Year Ended January 31,
 
2016
 
2017
 
2018
Gross unrecognized tax benefits—beginning balance
$
13,874

 
$
15,470

 
$
6,375

Decreases related to tax positions taken during
   prior years
(3,969
)
 
(11,286
)
 
(24
)
Increases related to tax positions taken during
   prior years
35

 

 
619

Increases related to tax positions taken during
   current year
5,530

 
2,191

 
5,431

Gross unrecognized tax benefits—ending balance
$
15,470

 
$
6,375

 
$
12,401


 
As of January 31, 2018, our gross unrecognized tax benefit was approximately $12.4 million, none of which if recognized, would have an impact on the effective tax rate because it would be offset by the reversal of deferred tax assets which are subject to a full valuation allowance.
As of January 31, 2018, we had no current or cumulative interest and penalties related to uncertain tax positions.
It is difficult to predict the final timing and resolution of any particular uncertain tax position. Based on our assessment, including experience and complex judgments about future events, we do not expect that changes in the liability for unrecognized tax benefits during the next twelve months will have a significant impact on our consolidated financial position or results of operations.
We file income tax returns in the U.S. federal jurisdiction as well as many U.S. states and foreign jurisdictions. Our fiscal year 2014 federal income tax return examination by the Internal Revenue Service was concluded with no adjustments. The tax returns for fiscal years 2013 and forward remain open to examination by the major jurisdictions in which we are subject to tax. The tax returns for fiscal years outside the normal statutes of limitation remain open to audit by tax authorities due to tax attributes generated in those early years, which have been carried forward and may be audited in subsequent years when utilized.
v3.8.0.1
Segment Information
12 Months Ended
Jan. 31, 2018
Segment Reporting [Abstract]  
Segment Information
Segment Information
Our chief operating decision maker is a group which is 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.
The following table sets forth revenue by geographic area based on the billing address of our customers (in thousands):
 
 
Year Ended January 31,
 
2016
 
2017
 
2018
United States
$
343,625

 
$
561,352

 
$
762,391

Rest of the world
96,708

 
166,625

 
260,628

Total revenue
$
440,333

 
$
727,977

 
$
1,023,019



Long-lived assets by geographic area are summarized as follows (in thousands):

 
January 31,
 
2017
 
2018
United States
$
78,692

 
$
85,430

Rest of the world
3,003

 
3,712

Total long-lived assets
$
81,695

 
$
89,142

v3.8.0.1
401(k) Plan
12 Months Ended
Jan. 31, 2018
Compensation Related Costs [Abstract]  
401(k) Plan
401(k) Plan
We have a 401(k) savings plan (the 401(k) plan) which qualifies as a deferred salary arrangement under section 401(k) of the Internal Revenue Code. Under the 401(k) plan, participating employees may elect to contribute up to 100% of their eligible compensation, subject to certain limitations. We have not made any matching contributions to date.
v3.8.0.1
Basis of Presentation and Summary of Significant Accounting Policies (Policies)
12 Months Ended
Jan. 31, 2018
Accounting Policies [Abstract]  
Principles of Consolidation
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
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
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 best estimate of selling price included in multiple-deliverable revenue arrangements, sales commissions, useful lives of intangible assets and property and equipment, fair values of stock-based awards, provision for income taxes, including related reserves, and contingent liabilities, among others. 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
Concentration Risk
Financial instruments that are exposed to concentration of credit risk consist primarily of cash and cash equivalents and accounts receivable. As of January 31, 2017 and 2018, substantially all 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. Our revenue and accounts receivable are derived substantially from the United States across a multitude of industries. We perform ongoing evaluations to determine customer credit. As of January 31, 2017, we had one channel partner that represented 10% or more 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 single channel partner represented 10% or more of revenue for the years ended January 31, 2016 and 2018. One channel partner represented 11% of revenue for the year ended January 31, 2017. No end customer represented 10% or more of revenue for the years ended January 31, 2016, 2017 and 2018. 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
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
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
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 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.
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.
Inventory
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.
Property and Equipment
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.
Intangible Assets
Intangible Assets
Intangible assets 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. During the year ended January 31, 2017, we acquired certain technology patents for $1.0 million, which are amortized on a straight-line basis over an estimated useful life of five years.
Impairment of Long-Lived Assets
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.
Deferred Commissions
Deferred Commissions
Deferred commissions consist of direct and incremental costs paid to our sales force related to customer contracts. The deferred commission amounts are recoverable through the revenue streams that will be recognized under the related customer contracts. Direct sales commissions are deferred when earned and amortized over the same period that revenue is recognized from the related customer contract. Amortization of deferred commissions is included in sales and marketing expense in the consolidated statements of operations.
Revenue Recognition
Revenue Recognition
We derive revenue from two sources: (1) product revenue which includes hardware and embedded software and (2) support revenue which includes customer support, hardware maintenance and software upgrades on a when-and-if-available basis.
We recognize revenue when:
Persuasive evidence of an arrangement exists—We rely upon sales agreements and/or purchase orders to determine the existence of an arrangement.
Delivery has occurred—We typically recognize product revenue upon shipment, as title and risk of loss are transferred to our channel partners at that time. Products are typically shipped directly by us to customers, and our channel partners do not stock our inventory.
The fee is fixed or determinable—We assess whether the fee is fixed or determinable based on the payment terms associated with the transaction.
Collection is reasonably assured—We assess collectability based on credit analysis and payment history.
Our product revenue is derived from the sale of hardware and operating system software that is integrated into the hardware and therefore deemed essential to its functionality. The hardware and the operating system software essential to the functionality of the hardware are considered non-software deliverables and, therefore, are not subject to industry-specific software revenue recognition guidance.
Support revenue is derived from the sale of maintenance and support agreements. Maintenance and support agreements include 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. Revenue related to maintenance and support agreements are recognized ratably over the contractual term, which generally range from one to five years. Costs related to maintenance and support agreements are expensed as incurred. In addition, our Evergreen Storage program provides our customers who continually maintain active maintenance and support for three years with an included controller refresh with each additional three year maintenance and support renewal. In accordance with multiple-element arrangement accounting guidance, the controller refresh represents an additional deliverable that is a separate unit of accounting and the allocated revenue is recognized in the period in which these controllers are shipped.
Most of our arrangements, other than stand-alone renewals of maintenance and support agreements, are multiple-element arrangements with a combination of product and support related deliverables (as defined above). Under multiple-element arrangements, we allocate consideration at the inception of an arrangement to all deliverables based on the relative selling price method in accordance with the hierarchy provided by the multiple-element arrangement accounting guidance, which includes (i) vendor-specific objective evidence (VSOE), of selling price, if available; (ii) third-party evidence (TPE), of selling price, if VSOE is not available; and (iii) best estimate of selling price (BESP), if neither VSOE nor TPE is available. We allocate consideration to support related deliverables based on VSOE and to all other deliverables based on BESP as TPE typically cannot be obtained.
VSOE—We determine VSOE based on our historical pricing and discounting practices for the specific products and services when sold separately. In determining VSOE, we require that a substantial majority of the stand-alone selling prices fall within a reasonably narrow pricing range.
TPE—When VSOE cann