Fiscal 2021 Annual Report
and Proxy Statement
120 Holger Way
San Jose, CA 95134
Zscaler™ and the other trademarks listed at https://www.zscaler.com/legal/trademarks are either (i) registered trademarks or service marks or (ii) trademarks
or service marks of Zscaler, Inc. in the United States and/or other countries. Any other trademarks are the properties of their respective owners.
Corporate Information
Corporate Executives
Board of Directors
Corporate Information
Jay Chaudhry
Jay Chaudhry
Corporate Auditors
President, Chief Executive Officer and
Chairman of the Board of Directors
President, Chief Executive Officer and
Zscaler Inc
Chairman of the Board of Directors
120 Holger Way
San Jose, California 95134, USA
Remo Canessa
Chief Financial Officer
Amit Sinha
President of Research and Development,
Operations and Customer Service,
Chief Technology Officer
Dali Rajic
President Go-To-Market and
Chief Revenue Officer
Robert Schlossman
Chief Legal Officer and Secretary
Karen Blasing
Former Chief Financial Officer,
Guidewire Software
Chief Executive Officer and Co-Founder,
Andrew Brown
Sand Hill East
Scott Darling
Charles Giancarlo
Chief Executive Officer, Pure Storage
Eileen Naughton
Former Chief People Officer, Google
David Schneider
General Partner, Coatue Management
Amit Sinha
President of Research and Development,
Operations and Customer Service,
Chief Technology Officer
President, Dell Technologies Capital
Wednesday, January 5, 2022, at 1 p.m. PST
T: +1.408.533.0288
F: +1 408.868.4089
www.zscaler.com
Common Stock Listing
Nasdaq
Ticker Symbol: ZS
Annual Meeting
Virtual Meeting
Registrar and Transfer Agent
For questions regarding your account,
changes of address or consolidation of
accounts, please contact the Company’s
transfer agent:
America Stock Transfer & Trust Company,
6201 15th Avenue
Brooklyn, NY 11219
T: (800) 937.5449 or +1 708.921.8124
Legal Counsel
Wilson Sonsini Goodrich & Rosati
Professional Corporation
Palo Alto, California
Independent Auditors
PricewaterhouseCoopers
San Jose, California
Investor Relations
Zscaler, Inc.
Investor Relations
120 Holger Way
San Jose, California 95134
ir@zscaler.com
120 Holger Way, San Jose, CA 95134
Dear Stockholder:
I am pleased to invite you to attend the 2021 Annual Meeting of Stockholders (the “Annual Meeting”) of Zscaler, Inc. (“Zscaler”
or the “Company”), to be held on Wednesday, January 5, 2022 at 1:00 p.m. Pacific Time. The Annual Meeting will be conducted
virtually via live webcast. You will be able to vote and submit your questions during the meeting by visiting
www.virtualshareholdermeeting.com/ZS2021 (please have your notice or proxy card in hand when you visit the website).
The attached Notice of Annual Meeting of Stockholders and Proxy Statement contain details of the business to be conducted at
the Annual Meeting.
Whether or not you attend the virtual Annual Meeting, it is important that your shares be represented and voted at the meeting.
Therefore, I urge you to promptly vote and submit your proxy via the internet, by phone or by mail.
On behalf of the Board of Directors, I would like to express our appreciation for your support of and interest in Zscaler.
Sincerely,
Jay Chaudhry
President, Chief Executive Officer and
Chairman of the Board
Notice of Annual Meeting
of Stockholders
Date and Time
Record Date and Who Can Vote
January 5, 2022
1:00 p.m. Pacific Time
Virtual Meeting Site
November 10, 2021 (the “Record Date”). Only stockholders of record at the close of business on the
Record Date are entitled to receive notice of, and to vote at, the Annual Meeting.
The Annual Meeting will be a completely virtual meeting of stockholders, to be conducted via live audio webcast. You will be able to attend the virtual
Annual Meeting and submit your questions during the meeting by visiting www.virtualshareholdermeeting.com/ZS2021.
Items of Business
1
2
3
4
To elect three Class I directors from the nominees described in this Proxy Statement to hold office until the 2024 annual meeting of
stockholders or until their successors are elected and qualified, subject to their earlier death, resignation or removal.
To ratify the selection of PricewaterhouseCoopers LLP as our independent registered public accounting firm for our fiscal year
ending July 31, 2022.
To approve, on a non-binding advisory basis, the compensation of our Named Executive Officers.
To transact other business that may properly come before the Annual Meeting.
Your vote is important.
Your vote is important.
To vote your shares,
please follow the
instructions in the
Notice of Internet
Availability of Proxy
Materials, which is being
mailed to you on or about
November 24, 2021.
Whether or not you plan to attend the virtual Annual Meeting, we urge you to submit your vote via the
internet, telephone or mail as soon as possible to ensure your shares are represented. For additional
instructions for each of these voting options, please refer to the proxy card. Returning the proxy does not
deprive you of your right to attend the virtual Annual Meeting and to vote your shares at the virtual Annual
Meeting. The Proxy Statement explains proxy voting and the matters to be voted on in more detail.
Important Notice Regarding the Availability of Proxy Materials for the Virtual Annual Meeting to be
Held on January 5, 2022. Our proxy materials, including the Proxy Statement and Annual Report to
Stockholders, are being made available on or about November 24, 2021 at the following website: http://
www.proxyvote.com, as well as on our website at http://ir.zscaler.com in the Financials section of our
Investor Relations webpage. We are providing access to our proxy materials over the internet under the
rules adopted by the U.S. Securities and Exchange Commission.
By Order of the Board of Directors,
Robert Schlossman
Chief Legal Officer and Secretary
San Jose, CA
November 24, 2021
Table of Contents
PROXY SUMMARY
QUESTIONS AND ANSWERS ABOUT THE ANNUAL MEETING
BOARD OF DIRECTORS AND CORPORATE GOVERNANCE
Our Directors
Board Meetings and Committees
Communications with the Board of Directors
Corporate Governance Guidelines and Code of Conduct
Role of the Board of Directors in Risk Oversight
Director Compensation
Environment, Social and Governance
PROPOSAL ONE – ELECTION OF DIRECTORS
PROPOSAL TWO – RATIFICATION OF APPOINTMENT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
PROPOSAL THREE – ADVISORY VOTE ON THE COMPENSATION OF OUR NAMED
EXECUTIVE OFFICERS
EXECUTIVE OFFICERS
EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
Summary Compensation Table
CEO PAY RATIO DISCLOSURE
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
RELATED PERSON TRANSACTIONS
OTHER MATTERS
Section 16(a) Beneficial Ownership Reporting Compliance
PROPOSALS OF STOCKHOLDERS FOR THE FISCAL 2022 ANNUAL MEETING
APPENDIX A
2
6
13
14
20
24
25
25
25
28
30
31
34
35
36
36
58
65
66
68
70
70
71
A-1
1
2021 Proxy Statement
PROXY SUMMARY
This Proxy Statement and form of proxy are furnished in connection with the solicitation of proxies by our board of directors for use at
our 2021 Annual Meeting of Stockholders (the “Annual Meeting”), and any postponements, adjournments or continuations thereof.
The Annual Meeting will be held on January 5, 2022 at 1:00 p.m. Pacific Time, via live audio webcast at
www.virtualshareholdermeeting.com/ZS2021. The Notice of Internet Availability of Proxy Materials (the “Notice”) containing
instructions on how to access this Proxy Statement and our Annual Report on Form 10-K for the fiscal year ended July 31, 2021 is first
being mailed on or about November 24, 2021 to all stockholders entitled to vote at the Annual Meeting. If you receive a Notice by mail,
you will not receive a printed copy of the proxy materials in the mail unless you specifically request these materials.
Ways to Vote
Via the Internet
By Telephone
By Mail
At the Annual Meeting
See page 6 for more details
See page 7 for more details
See page 7 for more details
See page 7 for more details
Voting Matters
Voting Recommendations
1
2
3
To elect three Class I directors from the nominees described
in this Proxy Statement to hold office until the 2024 annual
meeting of stockholders or until their successors are elected
and qualified, subject to their earlier death, resignation or
removal.
Proposal 1
"FOR"
The board of directors recommends a vote
"FOR" the election of each of the three director
nominees nominated by our board of directors
and named in this Proxy Statement as Class I
directors to serve for a three-year term.
To ratify the selection of PricewaterhouseCoopers LLP as
our independent registered public accounting firm for our
fiscal year ending July 31, 2022.
To approve, on a non-binding advisory basis, the
To approve, on a non-binding advisory basis, the
compensation of our Named Executive Officers
Proposal 2
Proposal 2
"FOR"
The board of directors recommends a vote
The board of directors recommends a vote
"FOR" the ratification of the appointment of
PwC as our independent registered public
accounting firm for our fiscal year ending July
31, 2022.
Proposal 3
Proposal 3
"FOR"
The board of directors recommends a vote
The board of directors recommends a vote
"FOR" the approval, on an advisory non-binding
basis, of the compensation of our Named
Executive Officers, as disclosed in this Proxy
Statement.
4
To transact other business that may properly come before
the Annual Meeting.
2
2021 Proxy Statement
PROXY SUMMARY
Board of Directors
Director Nominees
Class Age
Position
Director
Since
Current Term
Expires
Expiration of Term for
Which Nominated
Karen Blasing
Charles Giancarlo
Eileen Naughton
I
I
I
65
Director
2017
2021
63
Director
2016
2021
64
Director
2021
2021
2024
2024
2024
Continuing Directors
Class Age
Position
Director
Since
Current Term
Expires
Expiration of Term for
Which Nominated
Andrew Brown
Scott Darling
David Schneider
II
II
II
58
Director
2015
2022
65
Director
2016
2022
53
Director
2019
2022
Jay Chaudhry
III
63
President, Chief Executive Officer
and Chairman of the Board
2007
2023
Amit Sinha, Ph.D.
III
45
President of Research and
Development, Operations and
Customer Service, Chief Technology
Officer and Director
2017
2023
—
—
—
—
—
Board Diversity
Independence
Tenure
Age
Gender
3
2021 Proxy Statement
62IndependentNon-Independent431<5 years5-10 years>10 years125<50 years50-60 years>60 years26FemaleMale PROXY SUMMARY
Executive Compensation Highlights
Our pay practices align with our pay-for-performance philosophy and underscore our commitment to sound compensation and
governance practices. We believe that organizations are still in the early stages of embracing cloud-based business solutions and adopting
the security and networking solutions, including our products, that are necessary to secure and manage cloud-based operations. To be
successful in this emerging market, we believe that delivering growth and capturing market share are paramount. To that end, we focus
our compensation program on performance metrics that are key to achieving growth. We strongly believe that establishing and meeting
aggressive growth targets in the short term is the best way to deliver long-term stockholder value in a highly competitive and emerging
market.
Fiscal 2021 Financial Performance
Fiscal 2021 was a strong year for us marked by significant achievement and growth across all of our key metrics. Fiscal 2021 highlights
were as follows:
FY21 Revenue Growth
56% Y/Y
$673M Revenue
FY21 Calculated Billings Growth*
70% Y/Y
$934M Billings*
Broader Platform Adoption
Growth in Large Customers
128%
Net $ Retention Rate†
87% Y/Y
200+ Enterprises (>$1M ARR)
* Calculated billings is a non-GAAP financial measure that we believe is a key metric to measure our periodic performance. Calculated billings represents our total revenue plus
the change in deferred revenue in a period. See Appendix A for the calculation of calculated billings.
† Our dollar-based net retention rate compares the recurring revenue from a set of customers against the same metric for the prior 12-month period on a trailing basis.
4
2021 Proxy Statement
PROXY SUMMARY
Environmental, Social, and Governance (ESG) Approach
We believe that transformation happens when people with big ideas come together to drive
change.
From Zscaler’s inception, we have recognized the importance of values, ethics, and doing the right thing for our customers and our
business. To further these efforts, we formally established our ESG program in 2021 with oversight provided by the nominating and
corporate governance committee. We believe a carefully considered and deliberate ESG program will drive sustained value creation for
our stakeholders. While our program continues to evolve and grow, our current priorities include:
▪
▪
▪
Reducing environmental impact and lowering greenhouse gas emissions
Hiring and retaining diverse talent to support rapid and sustainable growth
Respecting privacy and protecting our customers’ sensitive data
▪ Maintaining robust and effective governance and risk oversight practices
ESG HIGHLIGHTS
Enabling Green Security
Investing in People
Building Trust
• Achieved 100% renewable
energy for global data
centers and offices for
calendar year 2021
• Named a "Best Place to
Work" by Glassdoor in
2021
• 96% of our employees
are aligned to Zscaler's
strategic direction
• ISO 27001, 27701, 27017 &
27018 information security
management certified
• ZIA FedRAMP Moderate
Authorized and High Ready
• ZPA FedRAMP High JAB
authorized and IL5 P-ATO
5
2021 Proxy Statement
QUESTIONS AND ANSWERS
Questions and Answers
About the Annual Meeting
The information provided in the “question and answer” format below addresses certain frequently asked questions but is not intended to
be a summary of all matters contained in this Proxy Statement. Please read the entire Proxy Statement carefully before voting your shares.
Why am I receiving these materials?
Our board of directors is providing these proxy materials to you in connection with our board of directors’ solicitation of proxies for use at
Zscaler’s virtual Annual Meeting, which will take place on January 5, 2022. Stockholders are invited to attend the virtual Annual Meeting
and are requested to vote on the proposals described in this Proxy Statement.
All stockholders will have the ability to access the proxy materials via the internet, including this Proxy Statement and our Annual Report
on Form 10-K for the fiscal year ended July 31, 2021 (the “Annual Report”), as filed with the U.S. Securities and Exchange Commission
(the “SEC”) on September 16, 2021. This Proxy Statement and the Annual Report are available at http://www.proxyvote.com, as well
as on our website at http://ir.zscaler.com in the Financials section of our Investor Relations webpage. The Notice of Annual Meeting of
Stockholders includes information on how to access the proxy materials, how to submit your vote over the internet, by phone or how to
request a paper copy of the proxy materials.
What proposals will be voted on at the Annual Meeting?
There are three proposals scheduled to be voted on at the Annual Meeting:
• The election of three Class I directors to hold office until the 2024 annual meeting of stockholders or until their successors are
elected and qualified, subject to their earlier death, resignation or removal;
• The ratification of the appointment of PricewaterhouseCoopers LLP ("PwC") as our independent registered public accounting
firm for our fiscal year ending July 31, 2022; and
• A proposal to approve, on a non-binding advisory basis, the compensation of our Named Executive Officers.
At the time this Proxy Statement was mailed, our management and board of directors were not aware of any other matters to be
presented at the Annual Meeting.
How does our board of directors recommend that I vote?
Our board of directors recommends that you vote:
• FOR the election of each of the three director nominees nominated by our board of directors and named in this Proxy Statement
as Class I directors to serve for a three-year term;
• FOR the ratification of the appointment of PwC as our independent registered public accounting firm for our fiscal year ending
July 31, 2022; and
• FOR the approval, on an advisory non-binding basis, of the compensation of our Named Executive Officers, as disclosed in this
Proxy Statement.
6
2021 Proxy Statement
QUESTIONS AND ANSWERS
Who is entitled to vote at the Annual Meeting?
Holders of our common stock at the close of business on November 10, 2021, the record date for the Annual Meeting (the “Record Date”),
are entitled to notice of and to vote at the Annual Meeting. Each stockholder is entitled to one vote for each share of our common stock
held as of the Record Date. As of the Record Date, there were 140,052,835 shares of common stock outstanding and entitled to vote.
Stockholders are not permitted to cumulate votes with respect to the election of directors. The shares you are entitled to vote include
shares that are (1) held of record directly in your name and (2) held for you as the beneficial owner through a stockbroker, bank or other
nominee.
What is the difference between holding shares as a stockholder of record and as a
beneficial owner?
Stockholder of Record: Shares Registered in Your Name. If, at the close of business on the Record Date, your shares were registered
directly in your name with American Stock Transfer & Trust Company, LLC, our transfer agent, then you are considered the stockholder
of record with respect to those shares. As the stockholder of record, you have the right to grant your voting proxy directly to the
individuals listed on the proxy card or to vote on your own behalf at the Annual Meeting.
Beneficial Owners: Shares Registered in the Name of a Broker, Bank or Other Nominee. If, at the close of business on the Record Date, your
shares were held, not in your name, but rather in a stock brokerage account or by a bank or other nominee on your behalf, then you are
considered the beneficial owner of shares held in “street name.” As the beneficial owner, you have the right to direct your broker, bank or
other nominee how to vote your shares by following the voting instructions your broker, bank or other nominee provides. If you do not
provide your broker, bank or other nominee with instructions on how to vote your shares, your broker, bank or other nominee may, in its
discretion, vote your shares with respect to routine matters but may not vote your shares with respect to any non-routine matters. For
additional information, see “What if I do not specify how my shares are to be voted?” below.
Do I have to do anything in advance if I plan to attend the Annual Meeting?
The Annual Meeting will be a completely virtual meeting , which will be conducted via live audio webcast. You are entitled to participate in
the annual meeting only if you were a holder of our common stock as of the close of business on November 10, 2021 or if you hold a valid
proxy for the Annual Meeting.
You will be able to attend the Annual Meeting and submit your questions during the Annual Meeting by visiting
www.virtualshareholdermeeting.com/ZS2021. You also will be able to vote your shares electronically at the Annual Meeting.
To participate in the Annual Meeting, you will need the control number included on your Notice or proxy card. The live audio webcast
will begin promptly at 1:00 p.m. Pacific Time on January 5, 2022. We encourage you to access the meeting prior to the start time. Online
check-in will begin at 12:45 p.m. Pacific Time, and you should allow ample time for the check-in procedures.
How can I get help if I have trouble checking in or listening to the meeting online?
If you encounter any difficulties accessing the Annual Meeting during the check-in or meeting time, please call the technical support
number that will be posted on the Annual Meeting log-in page.
How do I vote and what are the voting deadlines?
Stockholder of Record: Shares Registered in Your Name. If you are a stockholder of record, you can vote in one of the following ways:
• You may vote via the Internet. To vote via the internet, go to http://www.proxyvote.com to complete an electronic proxy card.
You will be asked to provide the control number from the proxy card you receive. Your vote must be received by 11:59 p.m.
Eastern Time on January 4, 2022 to be counted. If you vote via the internet, you do not need to return a proxy card by mail.
7
2021 Proxy Statement
QUESTIONS AND ANSWERS
• You may vote by telephone. To vote by telephone, dial toll-free 1-800-690-6903 in the United States and Canada or
1-800-454-8683 from countries outside the United States and Canada and follow the recorded instructions. You will be asked
to provide the control number from the proxy card. Your vote must be received by 11:59 p.m. Eastern Time on January 4, 2022
to be counted. If you vote by telephone, you do not need to return a proxy card by mail.
• You may vote by mail. To vote by mail using the proxy card (if you requested paper copies of the proxy materials to be mailed to
you), complete, date and sign the proxy card and return it promptly by mail in the envelope to be provided so that it is received no
later than January 4, 2022. The persons named in the proxy card will vote the shares you own in accordance with your instructions
on the proxy card you mail. If you return the proxy card, but do not give any instructions on a particular matter to be voted on at
the Annual Meeting, the persons named in the proxy card will vote the shares in accordance with the recommendations of our
board of directors.
• You may vote at the Annual Meeting. To vote at the meeting, following the instructions at
www.virtualshareholdermeeting.com/ZS2021 (have your Notice or proxy card in hand when you visit the website).
Beneficial Owners: Shares Registered in the Name of a Broker, Bank or Other Nominee. If you are the beneficial owner of shares held of
record by a broker, bank or other nominee, you will receive voting instructions from your broker, bank or other nominee. You must follow
the voting instructions provided by your broker, bank or other nominee in order to instruct your broker, bank or other nominee how to
vote your shares. The availability of internet and telephone voting options will depend on the voting process of your broker, bank or
other nominee.
Can I change my vote or revoke my proxy?
Stockholder of Record: Shares Registered in Your Name. If you are a stockholder of record, you may revoke your proxy or change your
proxy instructions at any time before your proxy is voted at the Annual Meeting by:
• entering a new vote by internet or telephone;
• signing and returning a new proxy card with a later date;
• delivering a written revocation to our Secretary at Zscaler, Inc., 120 Holger Way, San Jose, California 95134, by 11:59 p.m.
Eastern Time on January 4, 2022; or
• following the instructions at www.virtualshareholdermeeting.com/ZS2021.
Beneficial Owners: Shares Registered in the Name of a Broker, Bank or Other Nominee. If you are the beneficial owner of your shares, you
must contact the broker, bank or other nominee holding your shares and follow their instructions to change your vote or revoke your
proxy.
What is the effect of giving a proxy?
Proxies are solicited by and on behalf of our board of directors. The persons named in the proxy have been designated as proxy holders by
our board of directors. When a proxy is properly dated, executed and returned, the shares represented by the proxy will be voted at the
Annual Meeting in accordance with the instructions of the stockholder. If no specific instructions are given; however, the shares will be
voted in accordance with the recommendations of our board of directors. If any matters not described in this Proxy Statement are
properly presented at the Annual Meeting, the proxy holders will use their own judgment to determine how to vote your shares. If the
Annual Meeting is postponed or adjourned, the proxy holders can vote your shares on the new meeting date, unless you have properly
revoked your proxy, as described above.
8
2021 Proxy Statement
QUESTIONS AND ANSWERS
What if I do not specify how my shares are to be voted?
Stockholder of Record: Shares Registered in Your Name. If you are a stockholder of record and you submit a proxy but you do not provide
voting instructions, your shares will be voted:
• FOR the election of each of the two directors nominated by our board of directors and named in this Proxy Statement as Class I
directors to serve for a three-year term (Proposal No. 1);
• FOR the ratification of the appointment of PwC as our independent registered public accounting firm for our fiscal year ending
July 31, 2022 (Proposal No. 2);
• FOR the approval, on an advisory non-binding basis, of the compensation of our Named Executive Officers, as disclosed in this
Proxy Statement (Proposal No. 3); and
• in the discretion of the named proxy holders regarding any other matters properly presented for a vote at the Annual Meeting.
Beneficial Owners: Shares Registered in the Name of a Broker, Bank or Other Nominee. If you are a beneficial owner and you do not provide
your broker, bank or other nominee that holds your shares with voting instructions, then your broker, bank or other nominee will
determine if it has discretion to vote on each matter. Brokers do not have discretion to vote on non-routine matters. In the absence of
timely directions, your broker will have discretion to vote your shares on our sole “routine” matter: the proposal to ratify the appointment
of PwC as our independent registered public accounting firm for our fiscal year ending July 31, 2022. For additional information regarding
broker non-votes, see “What are the effects of abstentions and broker non-votes?” below.
What are the effects of abstentions and broker non-votes?
An abstention represents a stockholder’s affirmative choice to decline to vote on a proposal. If a stockholder indicates on its proxy card
that it wishes to abstain from voting its shares, or if a broker, bank or other nominee holding its customers’ shares of record causes
abstentions to be recorded for shares, these shares will be considered present and entitled to vote at the Annual Meeting. As a result,
abstentions will be counted for purposes of determining the presence or absence of a quorum and will also count as votes against a
proposal in cases where approval of the proposal requires the affirmative vote of a majority of the voting power of the issued and
outstanding shares of common stock present in person or represented by proxy and entitled to vote at the Annual Meeting (e.g., Proposal
No. 2). Abstentions will have no impact on the outcome of Proposal No. 1 as long as a quorum exists.
A broker non-vote occurs when a broker, bank or other nominee holding shares for a beneficial owner does not vote on a particular
proposal because the broker, bank or other nominee does not have discretionary voting power with respect to such proposal and has not
received voting instructions from the beneficial owner of the shares. Broker non-votes will be counted for purposes of calculating whether
a quorum is present at the Annual Meeting but will not be counted for purposes of determining the number of votes cast. Therefore, a
broker non-vote will make a quorum more readily attainable but will not otherwise affect the outcome of the vote on any proposal.
What is a quorum?
A quorum is the minimum number of shares required to be present at the Annual Meeting for the meeting to be properly held under our
bylaws and Delaware law. The presence (including by proxy) of a majority of the voting power of our common stock issued and
outstanding and entitled to vote at the Annual Meeting will constitute a quorum at the Annual Meeting. As noted above, as of the Record
Date, there were a total of 140,052,835 shares of common stock outstanding, which means that 70,026,418 shares of common stock
must be represented at the Annual Meeting to have a quorum. If there is no quorum, the chairperson of the meeting or a majority of the
voting power of our common stock present at the Annual Meeting may adjourn the meeting to a later date.
9
2021 Proxy Statement
QUESTIONS AND ANSWERS
How many votes are needed for approval of each proposal?
• Proposal No. 1: The election of Class I directors requires a plurality of the voting power of the shares present in person or
represented by proxy at the meeting and entitled to vote on the election of directors to be approved. Plurality means that the three
nominees who receive the most FOR votes will be elected. You may (i) vote FOR all nominees, (ii) WITHHOLD your vote as to all
nominees, or (iii) vote FOR all nominees except for those specific nominees from whom you WITHHOLD your vote. Any shares not
voted FOR a particular nominee (whether as a result of voting withheld or a broker non-vote) will not be counted in such nominee’s
favor and will have no effect on the outcome of the election. A vote withheld with respect to the election of any or all nominees will
be counted for purposes of determining whether there is a quorum.
• Proposal No. 2: The ratification of the appointment of PwC requires the affirmative vote of a majority of the voting power of the
shares present in person or represented by proxy at the meeting and entitled to vote thereon to be approved. You may vote FOR,
AGAINST or ABSTAIN. If you ABSTAIN from voting on Proposal No. 2, the abstention will have the same effect as a vote AGAINST
the proposal.
• Proposal No. 3: The approval, on an advisory basis, of the compensation of our Named Executive Officers requires the affirmative
vote of a majority of the voting power of the shares present in person or represented by proxy at the meeting and entitled to vote
thereon to be approved. You may vote FOR, AGAINST or ABSTAIN. If you ABSTAIN from voting on Proposal No. 3, the abstention
will have the same effect as a vote AGAINST the proposal. Because this proposal is an advisory vote, the result will not be binding
on our board of directors or our company. However, our board of directors values our stockholders’ opinions, and our board of
directors and our compensation committee will consider the outcome of the vote when determining the compensation of our
Named Executive Officers.
How are proxies solicited for the Annual Meeting and who is paying for such solicitation?
Our board of directors is soliciting proxies for use at the Annual Meeting by means of the proxy materials. We will bear the entire cost of
proxy solicitation, including the preparation, assembly, printing, mailing and distribution of the proxy materials. Copies of solicitation
materials will also be made available upon request to brokers, banks and other nominees to forward to the beneficial owners of the shares
held of record by such brokers, banks or other nominees. The original solicitation of proxies may be supplemented by solicitation by
telephone, electronic communication, or other means by our directors, officers, employees or agents. No additional compensation will be
paid to these individuals for any such services, although we may reimburse such individuals for their reasonable out-of-pocket expenses
in connection with such solicitation. We do not plan to retain a proxy solicitor to assist in the solicitation of proxies.
If you choose to access the proxy materials and/or vote over the internet, you are responsible for internet access charges you may incur.
If you choose to vote by telephone, you are responsible for telephone charges you may incur.
What does it mean if I received more than one Notice?
If you receive more than one Notice, your shares may be registered in more than one name or in different accounts. Please follow the
voting instructions on each Notice to ensure that all of your shares are voted.
Is my vote confidential?
Proxy instructions, ballots and voting tabulations that identify individual stockholders are handled in a manner that protects your voting
privacy. Your vote will not be disclosed either within Zscaler or to third parties, except as necessary to meet applicable legal and
administrative requirements, to allow for the tabulation of votes and certification of the vote, or to facilitate a successful proxy solicitation.
10
2021 Proxy Statement
QUESTIONS AND ANSWERS
I share an address with another stockholder, and we received only one paper copy of the proxy
materials. How may I obtain an additional copy of the proxy materials?
We have adopted an SEC-approved procedure called “householding.” Under this procedure, we will deliver only one copy of our Notice of
Internet Availability of Proxy Materials (and for those stockholders that received a paper copy of proxy materials in the mail, one copy of
our Annual Report to stockholders and this Proxy Statement) to multiple stockholders who share the same address (if they appear to be
members of the same family), unless we have received contrary instructions from an affected stockholder. Stockholders who participate in
householding will continue to receive separate proxy cards if they received a paper copy of proxy materials in the mail. This procedure
reduces our printing and mailing costs. Upon written or oral request, we will promptly deliver a separate copy of the proxy materials and
Annual Report to any stockholder at a shared address to which we delivered a single copy of any of these documents.
To receive a separate copy, or, if you are receiving multiple copies, to request that we only send a single copy of next year’s proxy materials
and Annual Report, you may contact us as follows:
Zscaler, Inc.
Attention: Secretary
120 Holger Way
San Jose, California 95134
(408) 533-0288
Stockholders who hold shares in street name may contact their broker, bank or other nominee to request information about householding.
How can I find out the results of the voting at the Annual Meeting?
Preliminary voting results will be announced at the Annual Meeting. In addition, final voting results will be published in a current report
on Form 8-K that we expect to file within four business days after the Annual Meeting. If final voting results are not available to us at that
time, we intend to file a Form 8-K to publish preliminary results and, within four business days after the final results are known to us, file
an amendment to the Form 8-K to publish the final results.
What is the deadline to propose actions for consideration at next year’s annual meeting of
stockholders or to nominate individuals to serve as directors?
STOCKHOLDER PROPOSALS
Stockholders may present proper proposals for inclusion in our Proxy Statement and for consideration at the next annual meeting of
stockholders by submitting their proposals in writing to our Secretary in a timely manner. For a stockholder proposal to be considered for
inclusion in our Proxy Statement for our fiscal 2022 annual meeting of stockholders, our Secretary must receive the written proposal at
our principal executive offices not later than July 27, 2022. In addition, stockholder proposals must comply with the requirements of
Rule 14a-8 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), regarding the inclusion of stockholder proposals
in company-sponsored proxy materials. Stockholder proposals should be addressed to:
Zscaler, Inc.
Attention: Secretary
120 Holger Way
San Jose, California 95134
(408) 533-0288
11
2021 Proxy Statement
QUESTIONS AND ANSWERS
Our bylaws also establish an advance notice procedure for stockholders who wish to present a proposal before an annual meeting of
stockholders but do not intend for the proposal to be included in our Proxy Statement. Our bylaws provide that the only business that may
be conducted at an annual meeting is business that is (i) specified in our proxy materials with respect to such meeting, (ii) otherwise
properly brought before the annual meeting by or at the direction of our board of directors, or (iii) properly brought before the annual
meeting by a stockholder of record entitled to vote at the annual meeting who has delivered timely written notice to our Secretary, which
notice must contain the information specified in our bylaws. To be timely for our fiscal 2022 annual meeting of stockholders, our Secretary
must receive the written notice at our principal executive offices:
• not earlier than September 10, 2022; and
• not later than October 10, 2022.
In the event that we hold our fiscal 2022 annual meeting of stockholders more than 30 days before or more than 60 days after the first
anniversary of the date of the Annual Meeting, then notice of a stockholder proposal that is not intended to be included in our Proxy
Statement must be received no earlier than the close of business on the 120th day before the fiscal 2021 Annual Meeting and no later
than the close of business on the later of the following two dates:
• the 90th day prior to such annual meeting; or
• the 10th day following the day on which public announcement of the date of such annual meeting is first made.
If a stockholder who has notified us of his, her or its intention to present a proposal at an annual meeting does not appear to present his,
her or its proposal at such annual meeting, we are not required to present the proposal for a vote at such annual meeting.
NOMINATION OF DIRECTOR CANDIDATES
You may propose director candidates for consideration by our nominating and corporate governance committee. Any such
recommendations should include the nominee’s name and qualifications for membership on our board of directors and should be directed
to our Secretary at the address set forth above. For additional information regarding stockholder recommendations for director
candidates, see “Board of Directors and Corporate Governance—Stockholder Recommendations for Nominations to the Board of Directors.”
In addition, our bylaws permit stockholders to nominate directors for election at an annual meeting of stockholders. To nominate a
director, the stockholder must provide the information required by our bylaws. In addition, the stockholder must give timely notice to our
Secretary in accordance with our bylaws, which, in general, require that the notice be received by our Secretary within the time period
described above under “Stockholder Proposals” for stockholder proposals that are not intended to be included in a proxy statement.
AVAILABILITY OF BYLAWS
A copy of our bylaws may be obtained by accessing our public filings on the SEC’s website at www.sec.gov. You may also contact our
Secretary at our principal executive office for a copy of the relevant bylaw provisions regarding the requirements for making stockholder
proposals and nominating director candidates.
12
2021 Proxy Statement
BOARD OF DIRECTORS AND CORPORATE GOVERNANCE
Board of Directors and
Corporate Governance
Our business affairs are managed under the direction of our board of directors, which is currently comprised of eight members. Six of our
eight directors are independent within the meaning of the independent director requirements of the Nasdaq Stock Market LLC
(“Nasdaq”). Our board of directors is divided into three classes with staggered three-year terms. At each annual meeting of stockholders,
a class of directors will be elected for a three-year term to succeed the same class whose term is then expiring.
Upon the recommendation of our nominating and corporate governance committee, we are nominating Karen Blasing, Charles Giancarlo
and Eileen Naughton as Class I directors at the Annual Meeting. If elected, Ms. Blasing, Mr. Giancarlo and Ms. Naughton will each hold
office for a three-year term until the 2024 annual meeting of stockholders or until their successors are elected and qualified.
The following table sets forth the names, ages as of November 1, 2021 and certain other information for each of the directors with terms
expiring at the Annual Meeting (who are also nominees for election as a director at the Annual Meeting) and for each of the continuing
directors:
Director Nominees
Class Age
Position
Director
Since
Current Term
Expires
Expiration of Term for
Which Nominated
Karen Blasing(1)(2)
Charles Giancarlo(2)(3)
Eileen Naughton
I
I
I
65
Director
2017
2021
63
Director
2016
2021
64
Director
2021
2021
2024
2024
2024
Continuing Directors
Class Age
Position
Director
Since
Current Term
Expires
Expiration of Term for
Which Nominated
Andrew Brown(1)(2)
Scott Darling(1)(3)
David Schneider(3)
II
II
II
58
Director
2015
2022
65
Director
2016
2022
53
Director
2019
2022
Jay Chaudhry
III
63
President, Chief Executive Officer
and Chairman of the Board
2007
2023
Amit Sinha, Ph.D.
III
45
President of Research and
Development, Operations and
Customer Service, Chief Technology
Officer and Director
2017
2023
—
—
—
—
—
(1) Member of our audit committee
(2) Member of our compensation committee
(3) Member of our nominating and corporate governance committee
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2021 Proxy Statement
BOARD OF DIRECTORS AND CORPORATE GOVERNANCE
Director Nominees
Karen Blasing
Age | 65
Director Since | 2017
We believe Ms. Blasing is qualified to serve
as a member of our board of directors
based on her extensive financial leadership
and management experience at numerous
SaaS and enterprise software companies.
Karen Blasing served as the chief financial officer of Guidewire Software, Inc., a back-
end systems software company, from July 2009 to March 2015. Prior to 2009, Ms.
Blasing served as the chief financial officer for Force10 Networks, Inc. and as the
senior vice president of finance for Salesforce.com, Inc., and she also served as chief
financial officer for Nuance Communications, Inc. and Counterpane Internet Security,
Inc. and held senior finance roles for Informix Corporation (now IBM Informix) and
Oracle Corporation. She currently serves as a director of Autodesk, Inc., a multinational
software corporation, where she serves as a member of the audit committee, and
GitLab Inc., a devops platform company, where she serves as a chair of the audit
committee. Ms. Blasing previously served as a director of Ellie Mae, Inc. Ms. Blasing
holds a B.A. in economics and business administration from the University of Montana
and an M.B.A. from the University of Washington.
Charles
Giancarlo
Age | 63
Director Since | 2016
We believe Mr. Giancarlo is qualified to
serve as a member of our board of directors
based on his extensive business expertise,
including his prior executive level
leadership, and his experience on the
boards of publicly traded technology
companies.
Giancarlo has served as chief executive officer of Pure Storage, Inc., a data storage and
management company, since August 2017. From January 2008 until October 2015,
Mr. Giancarlo was a managing director and then strategic advisor of Silver Lake
Partners, a private investment firm that focuses on technology-enabled and related
growth industries. From May 1993 to December 2007, Mr. Giancarlo served in
numerous senior executive roles at Cisco Systems, Inc., a provider of communications
and networking products and services, ultimately as the executive vice president and
chief development officer from May 2004 to December 2007. Mr. Giancarlo currently
serves on the boards of directors of Arista Networks, Inc., a manufacturer of
networking products, where he serves as a member of the compensation committee
and the nominating and corporate governance committee, and Pure Storage. He
previously served on the boards of directors of Accenture plc, Avaya, Inc., Imperva, Inc.,
ServiceNow, Inc., Netflix, Inc. and Tintri, Inc. Mr. Giancarlo holds a B.S. in electrical
engineering from Brown University, an M.S. in electrical engineering from the
University of California, Berkeley and an M.B.A. from Harvard Business School.
14
2021 Proxy Statement
BOARD OF DIRECTORS AND CORPORATE GOVERNANCE
Eileen Naughton served as the Chief People Officer and Vice President of People
Operations at Google, Inc. from September 2016 to January 2021. Prior to September
2016, Ms. Naughton served in a variety of senior roles at Google dating back to 2006,
including as Vice President and Managing Director for Google UK & Ireland and Vice
President of Global Sales. Prior to joining Google in 2006, Ms. Naughton held a number
of executive positions at Time Warner, including president of TIME Magazine. Ms.
Naughton previously served on the boards of directors of L’Oreal S.A. and The XO
Group. Ms. Naughton holds a Bachelor of Arts in international relations from the
University of Pennsylvania, a Master of Arts from the Lauder Institute and a Master of
Business Administration from the University of Pennsylvania.
Eileen
Naughton
Age | 64
Director Since | 2021
We believe Ms. Naughton is qualified to
serve on our board of directors because of
her knowledge and experience in
operations and management at multiple
sophisticated companies and her
experience as a director of various other
companies.
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2021 Proxy Statement
BOARD OF DIRECTORS AND CORPORATE GOVERNANCE
Continuing Directors
Andrew Brown
Andrew Brown has served as chief executive officer of Sand Hill East LLC, a strategic
management, investment and marketing services firm, since February 2014. Since
Age | 58
Director Since | 2015
We believe Mr. Brown is qualified to serve
as a member of our board of directors
based on his extensive experience as chief
technology officer of multiple Fortune 500
companies, as well as his service on the
board of directors of other publicly held
companies.
2006, he has also been the chief executive officer and co-owner of Biz Tectonics LLC, a
privately held consulting company. From September 2010 to October 2013, Mr.
Brown served as group chief technology officer of UBS Securities LLC, an investment
bank. From 2008 to 2010, he served as head of strategy, architecture and optimization
at Bank of America Merrill Lynch, the corporate and investment banking division of
Bank of America. From 2006 to 2008, Mr. Brown served as chief technology officer of
infrastructure at Credit Suisse Securities (USA) LLC, an investment bank. He currently
sits on the board of directors of Guidewire Software, Inc., a provider of software
products for property and casualty insurers, where he serves as a member of the
compensation committee, and Pure Storage, where he serves as a member of the
compensation committee. Mr. Brown holds a B.S. (Honors) in chemical physics from
University College London.
Scott Darling
Age | 65
Director Since | 2016
We believe Mr. Darling is qualified to serve
as a member of our board of directors
based on his experience as a director of
and as an investor in multiple technology
companies.
Scott Darling has served as president of Dell Technologies Capital, the corporate
development and venture capital arm of Dell Technologies Inc., since September 2016.
Prior to joining Dell Technologies upon its acquisition of EMC Corp., Mr. Darling was
president of EMC Corporate Development and Ventures from March 2012 to
September 2016, and in such role he was responsible for EMC’s business development
and venture capital investment activity. Prior to joining EMC, Mr. Darling was a general
partner at Frazier Technology Ventures II, L.P., which he joined in 2007, and was vice
president and managing director at Intel Capital Corp., the venture capital arm of Intel
Corporation, from 2000 to 2007. Mr. Darling previously served on the board of
directors of DocuSign Inc., a provider of electronic signature technology and digital
transaction management services. Mr. Darling holds a B.A. in economics from the
University of California at Santa Cruz and an M.B.A. from the Stanford University
Graduate School of Business.
16
2021 Proxy Statement
BOARD OF DIRECTORS AND CORPORATE GOVERNANCE
David
Schneider
Age | 53
Director Since | 2019
We believe Mr. Schneider is qualified to
serve on our board of directors because of
his knowledge and experience in
operations and management at various
technology companies.
David Schneider has served as General Partner of Coatue Management, an investment
firm focusing on technology companies, since February 2021. Mr. Schneider previously
served as president, emeritus of ServiceNow, Inc., a cloud computing company, from
July 2020 to December 2021, as president, global customer operations from January
2019 to July 2020, as chief revenue officer from June 2014 to January 2019 and as
senior vice president of worldwide sales and services from June 2011 to May 2014.
From July 2009 to March 2011, Mr. Schneider served as senior vice president of
worldwide sales of the backup recovery systems division of EMC Corporation, a
computer storage company acquired by Dell Technologies Inc. From January 2004 to
July 2009, Mr. Schneider held senior positions at Data Domain, Inc., a data archiving
and deduplication company acquired by EMC, most recently as Senior Vice President
of Worldwide Sales. Mr. Schneider holds a B.A. in political science from the University
of California, Irvine.
Jay Chaudhry is our co-founder and has served as our President, Chief Executive
Officer and as Chairman of our board of directors since September 2007. Mr.
Chaudhry holds an M.B.A. and an M.S. in electrical engineering and industrial
engineering from the University of Cincinnati and a B. Tech in electronics engineering
from the Indian Institute of Technology (Banaras Hindu University) Varanasi
Jagtar (Jay)
Chaudhry
Age | 63
Director Since | 2007
We believe Mr. Chaudhry is qualified to
serve as a member of our board of directors
because he is a security industry pioneer
and an accomplished entrepreneur, having
founded and built several companies, and
based on the perspective, operational
insight and expertise he has accumulated
as our co-founder and our Chief Executive
Officer.
17
2021 Proxy Statement
BOARD OF DIRECTORS AND CORPORATE GOVERNANCE
Amit
Sinha, Ph.D.
Age | 45
Director Since | 2017
Amit Sinha, Ph.D. has served as our President of Research and Development,
Operations and Customer Service since July 2019 and as our Chief Technology Officer
since December 2010. He previously served as our Executive Vice President of
Engineering and Cloud Operations from October 2013 to July 2019. Dr. Sinha holds a
Ph.D. and an M.S. in electrical engineering and computer science from the
Massachusetts Institute of Technology, and a B. Tech in electrical engineering from the
Indian Institute of Technology, Delhi.
We believe Dr. Sinha is qualified to serve as
a member of our board of directors because
he has more than 15 years of experience as
an architect and technical manager in the
networking and security industries and
because of the operational insight and
expertise he has accumulated as our Chief
Technology Officer.
Diversity Board Matrix (as of November 1, 2021)
Total number of Directors
8
Gender Identity
Male
Female
Non-Binary
Not Disclosed
Number of Directors based on Gender Identity
Number of Directors who identify in any categories below:
African American or Black
Alaskan Native or American Indian
Asian
Hispanic of Latinx
Native Hawaiian or Pacific Islander
White
Two or More Races or Ethnicities
LGBTQ+
Not Disclosed
6
—
—
2
—
—
4
—
—
—
2
—
—
—
—
—
2
—
—
—
0
—
—
—
—
—
—
—
—
—
0
—
—
—
—
—
—
—
—
—
18
2021 Proxy Statement
BOARD OF DIRECTORS AND CORPORATE GOVERNANCE
Director Independence
Our common stock is listed on the Nasdaq Global Select Market. Under the rules of Nasdaq, independent directors must comprise a
majority of a listed company’s board of directors within a specified period after the completion of our initial public offering. In addition, the
rules of Nasdaq require that, subject to specified exceptions, each member of a listed company’s audit, compensation and nominating and
governance committees be independent. Audit committee members and compensation committee members must also satisfy the
independence criteria set forth in Rule 10A-3 and Rule 10C-1, respectively, under the Exchange Act. Under the rules of Nasdaq, a director
will only qualify as an “independent director” if, in the opinion of that company’s board of directors, that person does not have a
relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.
To be considered independent for purposes of Rule 10A-3 and under the rules of Nasdaq, a member of an audit committee of a listed
company may not, other than in his or her capacity as a member of our audit committee, our board of directors, or any other board
committee: (1) accept, directly or indirectly, any consulting, advisory, or other compensatory fee from the listed company or any of its
subsidiaries; or (2) be an affiliated person of the listed company or any of its subsidiaries.
To be considered independent for purposes of Rule 10C-1 and under the rules of Nasdaq, the board of directors must affirmatively
determine that the member of the compensation committee is independent, including a consideration of all factors specifically relevant to
determining whether the director has a relationship to the company which is material to that director’s ability to be independent from
management in connection with the duties of a compensation committee member, including, but not limited to: (i) the source of
compensation of such director, including any consulting, advisory or other compensatory fee paid by the company to such director; and
(ii) whether such director is affiliated with the company, a subsidiary of the company or an affiliate of a subsidiary of the company.
Our board of directors has undertaken a review of its composition, the composition of its committees and the independence of our
directors and considered whether any director has a material relationship with us that could compromise his or her ability to exercise
independent judgment in carrying out his or her responsibilities. Based upon information requested from and provided by each director
concerning his or her background, employment and affiliations, including family relationships, our board of directors has determined that
none of (i) Mmes. Blasing and Naughton and Messrs. Brown, Darling, Giancarlo and Schneider, representing six of our eight directors has a
relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and (ii) that
each of these directors is “independent” as that term is defined under the rules of Nasdaq. Mr. Chaudhry and Dr. Sinha are not
independent under Nasdaq’s independence standards. Our board of directors also determined that Ms. Blasing (chair) and Messrs. Brown
and Darling, who comprise our audit committee, and Messrs. Brown (chair) and Giancarlo and Ms. Blasing, who comprise our
compensation committee, satisfy the independence standards for committee members established by applicable SEC rules and the listing
standards of Nasdaq.
In making these determinations, our board of directors considered the current and prior relationships that each non-employee director
has with the Company and all other facts and circumstances our board of directors deemed relevant in determining their independence,
including the beneficial ownership of our capital stock by each non-employee director, and the transactions involving them described in
the section titled “Related Person Transactions.”
There are no family relationships among any of our directors or executive officers.
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2021 Proxy Statement
BOARD OF DIRECTORS AND CORPORATE GOVERNANCE
Board Leadership Structure
Mr. Chaudhry currently serves as our President, Chief Executive Officers and Chairman of the Board. Our board of directors believes that
the current board leadership structure, coupled with a strong emphasis on board independence, provides effective independent oversight
of management while allowing the board and management to benefit from Mr. Chaudhry’s leadership, Company-specific experience and
years of experience as an executive in the network security industry. Serving on our board of directors and as Chief Executive Officer
since our founding in 2007, Mr. Chaudhry is best positioned to identify strategic priorities, lead critical discussion and execute our
strategy and business plans. Mr. Chaudhry possesses detailed in-depth knowledge of the issues, opportunities and challenges facing us.
The board of directors believes that Mr. Chaudhry’s combined role enables strong leadership, creates clear accountability and enhances
our ability to communicate our message and strategy clearly and consistently to stockholders. The board of directors has not appointed a
“lead independent director.” We believe that our board leadership structure is appropriate for our company, particularly where we have a
majority of independent directors who are all actively involved in board meetings.
Executive Sessions of Non-Employee Directors
In order to encourage and enhance communication among non-employee directors, and as required under the applicable rules of Nasdaq,
our corporate governance guidelines provide that the non-employee directors of our board of directors will meet in executive sessions
without management directors or Company management present on a periodic basis, but no less than twice a year.
Board Meetings and Committees
During the fiscal year ended July 31, 2021, our board of directors held eight meetings (including regularly scheduled and special
meetings), and each director attended at least 75% of the aggregate of (i) the total number of meetings of our board of directors held
during the period for which he or she served as a director and (ii) the total number of meetings held by all committees of our board of
directors on which he or she served during the periods that he or she served.
Although we do not have a formal policy regarding attendance by members of our board of directors at annual meetings of stockholders,
we encourage, but do not require, our directors to attend. All of our then current serving directors attended our last year's annual meeting
of stockholders.
We have established an audit committee, a compensation committee and a nominating and corporate governance committee with the
composition and responsibilities described below. We believe that the composition and the operation of these committees comply with
the requirements of the Sarbanes-Oxley Act of 2002, the rules of Nasdaq and SEC rules and regulations.
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2021 Proxy Statement
BOARD OF DIRECTORS AND CORPORATE GOVERNANCE
Audit Committee
Members
Responsibilities
Ms. Blasing (Chair)
Mr. Brown
Mr. Darling
Our board of directors has determined
that all members of our audit
committee meet the requirements for
independence and financial literacy of
audit committee members under
current Nasdaq listing standards and
SEC rules and regulations. Our audit
committee chairperson, Ms. Blasing, is
our audit committee financial expert,
as that term is defined under the SEC
• selecting and hiring our registered public accounting firm;
• evaluating the performance and independence of our registered public accounting
firm;
• approving the audit and pre-approving any non-audit services to be performed by
our registered public accounting firm;
• reviewing our financial statements and related disclosures and reviewing our critical
accounting policies and practices;
• reviewing the adequacy and effectiveness of our internal control policies and
procedures and our disclosure controls and procedures;
• overseeing procedures for the treatment of complaints on accounting, internal
accounting controls or audit matters;
rules implementing Section 407 of the
• reviewing and discussing with management and the independent registered public
Sarbanes-Oxley Act of 2002, and
accounting firm the results of our annual audit, our quarterly financial statements
possesses financial sophistication, as
and our publicly filed reports;
defined under Nasdaq listing
standards.
• risk assessment and management, including privacy and cybersecurity risk;
• reviewing and approving in advance any proposed related-person transactions; and
• preparing the audit committee report that the SEC will require in our annual proxy
statement.
Our audit committee operates under a written charter that satisfies the applicable rules and regulations of the SEC and the listing
requirements of Nasdaq. A copy of the charter of our audit committee is available on our website at http://ir.zscaler.com in the
Governance section of our Investor Relations webpage. During the fiscal year ended July 31, 2021, our audit committee held
five meetings.
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2021 Proxy Statement
BOARD OF DIRECTORS AND CORPORATE GOVERNANCE
Compensation Committee
Members
Responsibilities
Mr. Brown (Chair)
Ms. Blasing
Mr. Giancarlo
• reviewing and approving our chief executive officer’s and other executive officers’
annual base salaries, incentive compensation plans, including the specific goals and
amounts, equity compensation, employment agreements, severance arrangements
and change in control agreements and any other benefits, compensation or
Our board of directors has determined
arrangements;
that each member of our compensation
• administering our equity compensation plans;
committee meets the requirements for
independence under the rules of
Nasdaq and the SEC and is a “non-
employee director” within the meaning
of Rule 16b-3 under the Exchange Act.
The compensation committee is
responsible for, among other things:
• overseeing our overall compensation philosophy, compensation plans and benefits
programs; and
• preparing the compensation committee report t in our annual proxy statement.
Our compensation committee operates under a written charter that satisfies the listing standards of Nasdaq. A copy of the charter of our
compensation committee is available on our website at http://ir.zscaler.com in the Governance section of our Investor Relations
webpage. During the fiscal year ended July 31, 2021, our compensation committee held five meetings.
Nominating and Corporate Governance Committee
Members
Responsibilities
Mr. Giancarlo (Chair)
Mr. Darling
Mr. Schneider
Our board of directors has determined
that all members of our nominating and
corporate governance committee meet
the requirements for independence
under the rules of Nasdaq. The
nominating and corporate governance
committee is responsible for, among
other things:
• evaluating and making recommendations regarding the composition, organization
and governance of our board of directors and its committees;
• evaluating and making recommendations regarding the creation of additional
committees or the change in mandate or dissolution of committees;
• reviewing and making recommendations with regard to our Corporate Governance
Guidelines and compliance with laws and regulations, including ESG issues and
disclosures; and
• reviewing and approving conflicts of interest of our directors and corporate officers,
other than related person transactions reviewed by the audit committee.
Our nominating and corporate governance committee operates under a written charter that satisfies the listing standards of Nasdaq. A
copy of the charter of our nominating and corporate governance committee is available on our website at http://ir.zscaler.com in the
Governance section of our Investor Relations webpage. During the fiscal year ended July 31, 2021, our nominating and corporate
governance committee held three meetings.
22
2021 Proxy Statement
BOARD OF DIRECTORS AND CORPORATE GOVERNANCE
Compensation Committee Interlocks and Insider Participation
None of the members of our compensation committee is or has been an officer or employee of the Company. None of our executive
officers currently serves, or in the past year has served, as a member of the compensation committee or director (or other board
committee performing equivalent functions or, in the absence of any such committee, the entire board of directors) of any entity that has
one or more executive officers serving on our compensation committee or our board of directors.
Considerations in Evaluating Director Nominees
It is the policy of the nominating and corporate governance committee of our board of directors to consider recommendations for
candidates to our board of directors from stockholders holding no less than one percent (1%) of the outstanding shares of the Company’s
common stock continuously for at least 12 months prior to the date of the submission of the recommendation or nomination.
The nominating and corporate governance committee will use the following procedures to identify and evaluate any individual
recommended or offered for nomination to our board of directors:
• The nominating and corporate governance committee will consider candidates recommended by stockholders in the same manner
as candidates recommended to the nominating and corporate governance committee from other sources.
• In its evaluation of director candidates, including the members of our board of directors eligible for re-election, the nominating and
corporate governance committee will consider factors such as:
◦ business expertise;
◦ diversity, including differences in professional background, gender, race, ethnicity, education, skill, and other individual
qualities and attributes that contribute to the total mix of viewpoints and experience represented on the board of directors;
◦ past attendance at meetings, and participation in and contributions to the activities of our board of directors; and
◦ other factors that the nominating and corporate governance committee deems appropriate.
• The nominating and corporate governance committee requires the following minimum qualifications to be satisfied by any nominee
for a position on our board of directors:
◦ the highest personal and professional ethics and integrity;
◦ proven achievement and competence in the nominee’s field and the ability to exercise sound business judgment;
◦ skills that are complementary to those of the existing board of directors;
◦ the ability to assist and support management and make significant contributions to the Company’s success; and
◦ an understanding of the fiduciary responsibilities that is required of a member of our board of directors and the commitment
of time and energy necessary to diligently carry out those responsibilities.
If the nominating and corporate governance committee determines that an additional or replacement director is required, the nominating
and corporate governance committee may take such measures that it considers appropriate in connection with its evaluation of a director
candidate, including candidate interviews, inquiry of the person or persons making the recommendation or nomination, engagement of an
outside search firm to gather additional information, or reliance on the knowledge of the members of the nominating and corporate
governance committee, our board directors or management.
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2021 Proxy Statement
BOARD OF DIRECTORS AND CORPORATE GOVERNANCE
The nominating and corporate governance committee may propose to our board of directors a candidate recommended or offered for
nomination by a stockholder as a nominee for election to our board of directors. The nominating and corporate governance committee has
in the past and may in the future pay fees to third parties to assist in identifying or evaluating director candidates.
Stockholder Recommendations for Nominations to the Board of Directors
A stockholder that wants to recommend a candidate for election to our board of directors should direct the recommendation in writing by
letter to the Company, attention of the Secretary, at Zscaler, Inc., 120 Holger Way, San Jose, California 95134. The recommendation must
include the candidate’s name, home and business contact information, detailed biographical data, relevant qualifications, a signed letter
from the candidate confirming willingness to serve, information regarding any relationships between the candidate and the Company and
evidence of the recommending stockholder’s ownership of Company stock. Such recommendations must also include a statement from
the recommending stockholder in support of the candidate, particularly within the context of the criteria for board membership, including
issues of character, integrity, judgment, diversity of experience, independence, area of expertise, corporate experience, length of service,
potential conflicts of interest, other commitments and the like and personal references.
A stockholder that instead desires to nominate a person directly for election to our board of directors at an annual meeting of the
stockholders must meet the deadlines and other requirements set forth in Section 2.4 of the Company’s bylaws and the rules and
regulations of the Securities and Exchange Commission. Section 2.4 of the Company’s bylaws requires that a stockholder who seeks to
nominate a candidate for director must provide a written notice to the Secretary of the Company not later than the 45th day nor earlier
than the 75th day before the one-year anniversary of the date on which the corporation first mailed its proxy materials or a notice of
availability of proxy materials (whichever is earlier) for the preceding year’s annual meeting; provided, however, that in the event that no
annual meeting was held in the previous year or if the date of the annual meeting is advanced by more than 30 days prior to or delayed by
more than 60 days after the one-year anniversary of the date of the previous year’s annual meeting, then, for notice by the stockholder to
be timely, it must be so received by the secretary not earlier than the close of business on the 120th day prior to such annual meeting and
not later than the close of business on the later of (i) the 90th day prior to such annual meeting, or (ii) the 10th day following the day on
which Public Announcement (as defined below) of the date of such annual meeting is first made. In no event shall any adjournment or
postponement of an annual meeting or the announcement thereof commence a new time period for the giving of a stockholder’s notice.
“Public Announcement” shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or a
comparable national news service or in a document publicly filed by the corporation with the Securities and Exchange Commission
pursuant to Section 13, 14 or 15(d) of the Exchange Act, or any successor thereto.
Communications with the Board of Directors
Our board of directors believes that management speaks for Zscaler, Inc. Individual board members may, from time to time, communicate
with various constituencies that are involved with the Company, but it is expected that board members would do this with knowledge of
management and, in most instances, only at the request of management.
In cases where stockholders and other interested parties wish to communicate directly with our non-management directors, messages
can be sent to our Secretary, at Zscaler, Inc., 120 Holger Way, San Jose, California 95134. Our Secretary monitors these communications
and will provide a summary of all received messages to the board of directors at each regularly scheduled meeting of the board of
directors. Our board of directors generally meets on a quarterly basis. Where the nature of a communication warrants, our Secretary may
determine, in his or her judgment, to obtain the more immediate attention of the appropriate committee of the board of directors or non-
management director, of independent advisors or of Company management, as our Secretary considers appropriate.
Our Secretary may decide in the exercise of his or her judgment whether a response to any stockholder or interested party
communication is necessary.
This procedure for stockholder and other interested party communications with the non-management directors is administered by the
Company’s nominating and corporate governance committee. This procedure does not apply to (a) communications to non-management
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2021 Proxy Statement
BOARD OF DIRECTORS AND CORPORATE GOVERNANCE
directors from officers or directors of the Company who are stockholders, (b) stockholder proposals submitted pursuant to Rule
14a-8 under the Exchange Act or (c) communications to the audit committee pursuant to the Complaint Procedures for Accounting
and Auditing Matters.
Corporate Governance Guidelines and Code of Conduct
Our board of directors has adopted Corporate Governance Guidelines. These guidelines address items such as the qualifications and
responsibilities of our directors and director candidates and corporate governance policies and standards applicable to us in general. In
addition, our board of directors has adopted a Code of Conduct that applies to all of our employees, officers and directors, including our
chief executive officer, chief financial officer, and other executive and senior financial officers. The full text of our Corporate Governance
Guidelines and our Code of Conduct is posted on our website at http://ir.zscaler.com in the Governance section of our Investor Relations
webpage. We intend to post any amendments to our Code of Conduct, and any waivers of our Code of Conduct for directors and
executive officers, on the same website.
Role of the Board of Directors in Risk Oversight
One of the key functions of our board of directors is informed oversight of our risk management process which risks include, among
others, strategic, financial, business and operational, cybersecurity, legal and regulatory compliance, and reputational risks. Our board of
directors does not have a standing risk management committee, but rather administers this oversight function directly through the board
of directors as a whole, as well as through its standing committees that address risks inherent in their respective areas of oversight. In
particular, our board of directors is responsible for monitoring and assessing strategic risk exposure. Our audit committee is responsible
for reviewing and discussing our major financial risk exposures and the steps our management has taken to monitor and control these
exposures, including guidelines and policies with respect to risk assessment and risk management, including oversight of the performance
of our internal audit function. In addition to oversight of the performance of our external and internal audit functions, our audit committee
also monitors compliance with legal and regulatory requirements and reviews related party transactions. Our audit committee
responsibilities also include oversight of cybersecurity risk management, and, to that end, members of the audit committee meet
frequently with management and company leadership responsible for cybersecurity risk management and receives periodic reports from
management, as well as incremental reports as matters arise. Our nominating and corporate governance committee monitors the
effectiveness of our corporate governance guidelines and oversees our ESG programs. Our compensation committee assesses and
monitors whether any of our compensation policies and programs has the potential to encourage excessive risk-taking.
Director Compensation
Each non-employee director is eligible to receive compensation for his or her service consisting of annual cash retainers and equity awards
under our outside director compensation policy. Our outside director compensation policy was crafted in consultation with Compensia,
Inc. ("Compensia"), an independent compensation consulting firm engaged by our compensation committee. Compensia provided us with
competitive data, analysis and recommendations regarding non-employee director compensation, which includes a mix of cash and equity-
based compensation. After careful consideration of this information and the scope of the duties and responsibilities of our non-employee
directors, our board of directors approved our outside director compensation policy. We believe this policy provides reasonable
compensation to our non-employee directors that is commensurate with their contributions and appropriately aligned with our peers.
We also reimburse our directors for expenses associated with attending meetings of our board of directors and board committees.
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2021 Proxy Statement
BOARD OF DIRECTORS AND CORPORATE GOVERNANCE
For fiscal 2021, non-employee directors were entitled to receive the following cash compensation for service in the following positions:
Position
Board member
Audit committee chair
Audit committee member
Compensation committee chair
Compensation committee member
Nominating and corporate governance committee chair
Nominating and corporate governance committee member
Annual Retainer ($)
30,000
20,000
8,000
12,000
5,000
7,500
4,000
In addition, non-employee directors were eligible to receive the following equity awards for board service:
(1) Annual restricted stock unit ("RSU") grant with target value of $200,000 (automatically granted at the Annual Meeting). These
RSUs vest in four equal quarterly installments over a one-year period; and
(2) Initial RSU grant with a target value equal to two-and one-half times the value of the then effective annual RSU grant, pursuant to
which one-third of the RSUs will vest on the one-year anniversary of the effective date of appointment and the remaining RSUs
will vest in eight equal quarterly installments thereafter. Any director elected at the Annual Meeting for a given year will receive
both the initial RSU grant and the annual RSU grant.
The number of RSUs for each of the initial and annual RSU grant will be determined by dividing the annual equity value by the average
closing price of Zscaler common stock on the Nasdaq Global Select Market for the 30 trading days ending on the date that is five days
prior to the grant date, rounded up to the nearest share.
All cash payments to non-employee directors who served in the relevant capacity at any point during the immediately preceding prior
fiscal quarter will be paid quarterly in arrears on a prorated basis. A non-employee director who served in the relevant capacity during
only a portion of the prior fiscal quarter will receive a pro-rated payment of the quarterly payment of the applicable cash retainer.
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2021 Proxy Statement
BOARD OF DIRECTORS AND CORPORATE GOVERNANCE
The following table sets forth information regarding compensation earned by or paid to our non-employee directors during the fiscal year
ended July 31, 2021:
Name(1)
Karen Blasing
Andrew Brown
Scott Darling
Charles Giancarlo
David Schneider
Eileen Naughton(2)
Fees Earned or Paid in Cash
($)
55,000
50,000
42,000
42,500
34,000
—
Stock Awards
($)(1)
Total
($)
215,403
270,403
215,403
265,403
215,403
257,403
215,403
257,903
215,403
249,403
—
—
(1) Amounts represent the grant date fair market value of RSUs granted to serving directors following our 2020 annual meeting of stockholders.
(2) Ms. Naughton was appointed to the board following the end of fiscal 2021 and did not receive any compensation for the fiscal year.
The following table lists all outstanding equity awards held by our non-employee directors as of July 31, 2021.
Name
Karen Blasing
Andrew Brown
Scott Darling
Charles Giancarlo
David Schneider
Eileen Naughton(1)
Aggregate Number of Stock Awards
Outstanding as of July 31, 2021
(#)
Aggregate Number of Stock Options
Outstanding as of July 31, 2021
(#)
584
584
584
584
6,662
—
133,334
68,333
—
—
—
—
(1) Ms. Naughton was appointed to the board following the end of fiscal 2021 and did not hold any equity as of the end of the fiscal year.
For information about the compensation of directors who are also our employees, see “Executive Compensation.”
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2021 Proxy Statement
BOARD OF DIRECTORS AND CORPORATE GOVERNANCE
Environmental, Social, and Governance (ESG) Program
We believe a deliberate and well-thought-out ESG program will drive sustained value creation for our stakeholders. Our ESG program
was launched in 2021, with a focus on transparency and as a natural extension of our well-established company culture. From Zscaler’s
inception, we have recognized the importance of values, ethics, and doing the right thing for our customers and our business. We
established a Code of Conduct, guided by strong ethical principles, to communicate our expectations to employees. We strive to always
comply with applicable laws and regulations, and fully address all compliance requirements. We constantly evaluate our operations to seek
opportunities for improvement and address risks as they may arise.
Our customers entrust us with secure and fast access to applications and safeguarding their sensitive and critical information, so fostering
partnerships built on trust, transparency, and accountability is central to our success. We are customer obsessed and understand that our
success depends on our ability to continue to deliver innovative solutions while being open to feedback and acting on it.
ENABLING GREEN SECURITY
Efficient Architecture
Zscaler’s cloud-based architecture is an efficient alternative to legacy solutions, which require numerous appliances and servers to be
deployed across the organization. We enable our customers to lower their environmental impact by adopting our platform which is
purpose-built for efficiency, speed, and scalability. When customers switch to Zscaler, they improve their security and user experience all
while reducing the need to purchase and run their own security appliances. This allows them to shrink their IT footprint and associated
energy needs.
Data Centers
We stay close to our users to provide them with the best experience possible, which means building our cloud platform in data centers
across the world in regions where our customers are located. The energy used to power our cloud platform is our largest source of
greenhouse gas emissions and represents an opportunity to reduce our environmental footprint. Wherever feasible, we select data
centers that are designed to be highly efficient and use renewable energy.
100% Renewable Energy
In November 2021, we engaged a third-party to validate our greenhouse gas inventory methodology and determined the projected non-
renewable energy used by our leased offices and data centers globally for calendar year 2021. We then procured high-quality renewable
energy credits (RECs) from country-specific projects such as wind and solar farms to match the balance, eliminating the carbon emissions
associated with our anticipated energy use.
We are committed to fully understanding and measuring our impacts on the planet, including scope 3 emissions, and will develop a path to
net zero greenhouse gas emissions.
INVESTING IN PEOPLE
Our Culture
The Zscaler difference comes from a global team that is technically skilled, forward thinking, and aligned to our mission. We are a diverse
group of visionaries who are passionate about creating a safer future. Guided by our values, we invest in building our workplace culture,
which allows our team to execute and contribute to our customers’ and our own success. We were recognized for these efforts by being
named as a “Best Place to Work” by Glassdoor in 2021.
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2021 Proxy Statement
BOARD OF DIRECTORS AND CORPORATE GOVERNANCE
Talent Development
We support our growth by attracting and retaining a diverse and highly skilled workforce. We offer many resources for employees to
develop and advance their careers. We invest in leadership, individual contributor training, and continuing education for our employees.
By providing learning and advancement opportunities, we keep employees engaged, which is evidenced by our consistently high results
from our employee surveys.
Diversity and Inclusion
We believe that a diversity of backgrounds, experiences, and thinking creates a culture that enables innovation, execution, and
performance. We are committed to attracting and supporting a diverse workforce. When seeking external candidates for open positions,
our recruiting teams provide hiring managers with 50% diverse hiring slates whenever possible. We encourage support for employee
resource groups which provide spaces where underrepresented groups feel supported and are encouraged to advance their careers. We
are also committed to treating all employees fairly and providing equitable compensation based on performance and ability.
Community
We understand that Zscaler is a part of the communities where we operate. Our community efforts include organized volunteer activities
and employee-driven community giving.
BUILDING TRUST
Governance, Risk and ESG Oversight
Our corporate governance structure enables the executive team and our board to effectively guide our business while we continue to
rapidly grow. Our internal audit team reviews our corporate practices annually to ensure they are in line with best practices and to
monitor compliance throughout our organization. Accountability for overseeing risk extends to the board level with ESG risk and
oversight managed by our nominating and corporate governance committee and with privacy and cybersecurity risks and oversight being
managed by the audit committee.
Platform and Certifications
Our Zero Trust Exchange cloud is distributed over more than 150 data centers on six continents and processes over 200 billion requests
per day from users across 185 countries. We work to ensure our platform and protocols meet the rigorous requirements of our customers
around the globe. We are certified to numerous government and commercial standards and strive to provide secure, compliant services
regardless of a user’s physical location.
We constantly evaluate our performance and strengthen the security of our products as the threat landscape evolves. We are also
committed to providing real-time status updates through our Trust Portal to inform customers of any potential issues with our services.
Finally, all Zscaler employees complete annual information security training to protect our company’s assets and to build a more
resilient workforce.
User Privacy
Our customers’ data belongs to them. Keeping our customers’ data secure and private while providing smooth and continuous service
is a top priority. Zscaler is committed to assisting our customers' efforts to comply with privacy laws and, with this goal in mind, we
implement technical and organizational measures for customer data that passes through our Zero Trust Exchange. Regardless of where
users are located, customers can choose to have logs stored in the United States or the European Union / Switzerland. Customer data
is isolated as part of our multi-tenant architecture.
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2021 Proxy Statement
ELECTION OF DIRECTORS
Our board of directors is currently composed of eight members. In accordance with our certificate of incorporation, our board of directors
is divided into three classes with staggered three-year terms. One class is elected each year at the annual meeting of stockholders for a
term of three years. At the Annual Meeting, three Class I directors will be elected for a three-year term to succeed the same class whose
term is then expiring.
Each director’s term continues until the election and qualification of such director’s successor, or such director’s earlier death, resignation,
or removal. Any increase or decrease in the number of directors will be distributed among the three classes so that, as nearly as possible,
each class will consist of one-third of our directors. This classification of our board of directors may have the effect of delaying or
preventing changes in control of the Company.
Nominees
Our board of directors has nominated Karen Blasing, Charles Giancarlo and Eileen Naughton for election as Class I directors at the Annual
Meeting. If elected, each of Ms. Blasing, Mr. Giancarlo and Ms. Naughton will serve as Class I directors until the 2024 annual meeting of
stockholders or until their successors are elected and qualified, or their earlier death, resignation or removal. All three nominees are
currently directors of the Company. For information concerning the nominees, see “Board of Directors and Corporate Governance.”
If you are a stockholder of record and you sign your proxy card or vote over the internet or by telephone but do not give instructions with
respect to the voting of directors, your shares will be voted FOR the election of Ms. Blasing, Mr. Giancarlo and Ms. Naughton. We expect
that Ms. Blasing, Mr. Giancarlo and Ms. Naughton will accept such nomination; however, in the event that a director nominee is unable or
declines to serve as a director at the time of the Annual Meeting, the proxies will be voted for any nominee who shall be designated by our
board of directors to fill such vacancy. If you are a beneficial owner of shares of our common stock and you do not give voting instructions
to your broker, bank or other nominee, then your broker, bank or other nominee will leave your shares unvoted on this matter.
Vote Required
The election of Class I directors requires a plurality of the voting power of the shares of our common stock present in person or
represented by proxy at the Annual Meeting and entitled to vote thereon. Accordingly, the three nominees receiving the highest number
of “FOR” votes will be elected. Abstentions and broker non-votes will have no effect on this proposal.
The Board of Directors recommends a vote “FOR” the election of each of the three directors
nominated by our Board of Directors and named in this proxy statement as Class I Directors
to serve for a three-year term.
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2021 Proxy Statement
RATIFICATION OF APPOINTMENT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Our audit committee has appointed PwC, as our independent registered public accounting firm to audit our consolidated financial
statements for our fiscal year ending July 31, 2022. PwC has served as our independent registered public accounting firm since
May 2015.
At the Annual Meeting, stockholders are being asked to ratify the appointment of PwC as our independent registered public accounting
firm for our fiscal year ending July 31, 2022. Stockholder ratification of the appointment of PwC is not required by our bylaws or other
applicable legal requirements. However, our board of directors is submitting the appointment of PwC to our stockholders for ratification
as a matter of good corporate governance. In the event that this appointment is not ratified by the affirmative vote of a majority of the
voting power of the shares of our common stock present in person or represented by proxy at the Annual Meeting and entitled to vote,
such appointment will be reconsidered by our audit committee. Even if the appointment is ratified, our audit committee, in its sole
discretion, may appoint another independent registered public accounting firm at any time during our fiscal year ending July 31, 2022 if
our audit committee believes that such a change would be in the best interests of Zscaler and its stockholders. If the appointment is not
ratified by our stockholders, the audit committee may reconsider whether it should appoint another independent registered public
accounting firm. A representative of PwC is expected to be present at the Annual Meeting, will have an opportunity to make a statement
if he or she wishes to do so, and is expected to be available to respond to appropriate questions from stockholders.
Fees Paid to the Independent Registered Public Accounting Firm
The following table presents fees for professional audit services and other services rendered to us by PwC for our fiscal years ended
July 31, 2021 and 2020.
Fees
Audit Fees(1)
Audit-Related Fees(2)
Tax Fees
All Other Fees(3)
Total Fees Paid
2021
($)
2020
($)
2,367,883
2,429,123
2,895
—
2,700
5,749
—
2,700
2,373,478
2,437,572
(1) Audit Fees consist of fees for professional services rendered in connection with the audit of our annual consolidated financial statements, the review of our quarterly
condensed consolidated financial statements, statutory audit fees, and audit services that are normally provided by the independent registered public accounting firm in
connection with regulatory filings. This category also includes fees for professional services related to our convertible senior notes due 2025.
(2) Audit-Related Fees consist primarily of fees for assurance and related services that are reasonably related to the performance of the audit or review of our consolidated
financial statements and not reported under “Audit Fees.”
(3) All Other Fees consist of aggregate fees billed for products and services provided by the independent registered public accounting firm other than those disclosed above.
These services specifically relate to subscription fees paid for access to online accounting research software and regulatory applications.
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2021 Proxy Statement
PROPOSAL TWO
Auditor Independence
In the fiscal year ended July 31, 2021, there were no other professional services provided by PwC that would have required our audit
committee to consider their compatibility with maintaining the independence of PwC.
Audit Committee Policy on Pre-Approval of Audit and Permissible Non-Audit Services of
Independent Registered Public Accounting Firm
Our audit committee has established a policy governing our use of the services of our independent registered public accounting firm.
Under the policy, our audit committee is required to pre-approve all audit and permissible non-audit services performed by our
independent registered public accounting firm in order to ensure that the provision of such services does not impair such accounting
firm’s independence. All fees paid to PwC for our fiscal years ended July 31, 2021 and 2020 were pre-approved by our audit committee.
Vote Required
The ratification of the appointment of PwC requires the affirmative vote of a majority of the voting power of the shares present in person
or represented by proxy at the Annual Meeting and entitled to vote thereon. Abstentions will have the effect of a vote AGAINST the
proposal.
The Board of Directors recommends a vote “FOR” the ratification of the appointment of
PRICEWATERHOUSECOOPERS LLP as our independent registered public accounting firm
for our fiscal year ending July 31, 2022.
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2021 Proxy Statement
PROPOSAL TWO
Audit Committee Report
The information contained in the following Audit Committee Report shall not be deemed to be soliciting material or to be filed with the Securities
and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended, except to the extent that Zscaler, Inc. specifically incorporates it by reference in
such filing.
The audit committee serves as the representative of our board of directors with respect to its oversight of:
• our accounting and financial reporting processes and the audit of our financial statements;
• the integrity of our financial statements;
• our compliance with legal and regulatory requirements;
• inquiring about significant risks, reviewing our policies for risk assessment and risk management, including privacy and
cybersecurity risk, and assessing the steps management has taken to control these risks; and
• the independent registered public accounting firm’s appointment, qualifications and independence.
The audit committee also reviews the performance of our independent registered public accounting firm, PwC, in the annual audit of our
financial statements and in assignments unrelated to the audit, and reviews the independent registered public accounting firm’s fees.
The audit committee is currently composed of three non-employee directors. Our board of directors has determined that each current
member of the audit committee is independent, and that Ms. Blasing qualifies as an “audit committee financial expert” under the SEC rules.
The audit committee provides our board of directors such information and materials as it may deem necessary to make our board of
directors aware of financial matters requiring the attention of our board of directors. The audit committee reviews our financial
disclosures and meets privately, outside the presence of our management, with our independent registered public accounting firm. In
fulfilling its oversight responsibilities, the audit committee reviewed and discussed the audited financial statements in our fiscal year
ended July 31, 2020 Annual Report with management, including a discussion of the quality and substance of the accounting principles,
the reasonableness of significant judgments made in connection with the audited financial statements, and the clarity of disclosures in
the financial statements. The audit committee reports on these meetings to our board of directors.
The audit committee has reviewed and discussed with Zscaler’s management and PwC the audited consolidated financial statements of
Zscaler contained in Zscaler’s Annual Report on Form 10-K for fiscal year 2021. The audit committee has also discussed with PwC the
applicable requirements of the Public Company Accounting Oversight Board (“PCAOB”) and the SEC.
The audit committee has received and reviewed the written disclosures and the letter from PwC required by applicable requirements
of the PCAOB regarding PwC’s communications with the audit committee concerning independence, and has discussed with PwC its
independence from Zscaler.
Based on the review and discussions referred to above, the audit committee recommended to the board of directors that the audited
consolidated financial statements be included in Zscaler’s Annual Report on Form 10-K for its fiscal year 2021 for filing with the SEC. The
audit committee also has selected PwC as the independent registered public accounting firm for fiscal year 2022. Our board of directors
recommends that stockholders ratify this selection at the Annual Meeting.
Respectfully submitted by the members of the audit committee of the board of directors:
Karen Blasing (Chair)
Andrew Brown
Scott Darling
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2021 Proxy Statement
ADVISORY VOTE ON THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and Section 14A of the Exchange Act enables stockholders to
approve, on an advisory or non-binding basis, the compensation of our Named Executive Officers as disclosed in this Proxy Statement in
accordance with the rules of the SEC. This proposal, commonly known as a “Say-on-Pay” proposal, gives our stockholders the opportunity
to express their views on our Named Executive Officers’ compensation as a whole. This vote is not intended to address any specific item
of compensation or any specific Named Executive Officer, but rather the overall compensation of all of our Named Executive Officers and
the philosophy, policies and practices described in this Proxy Statement.
The Say-on-Pay vote is advisory, and therefore is not binding on us, our compensation committee or our board of directors. The Say-on-
Pay vote will, however, provide information to us regarding investor sentiment about our executive compensation philosophy, policies and
practices, which our compensation committee will be able to consider when determining executive compensation for the remainder of the
current fiscal year and beyond. Our board of directors and our compensation committee value the opinions of our stockholders. To the
extent there is any significant vote against the compensation of our Named Executive Officer as disclosed in this Proxy Statement, we will
endeavor to communicate with stockholders to better understand the concerns that influenced the vote and consider our stockholders’
concerns. Our compensation committee will evaluate whether any actions are necessary to address those concerns.
We believe that the information provided in the section titled “Executive Compensation,” and in particular the information discussed in
the section titled “Executive Compensation—Compensation Discussion and Analysis—Compensation Philosophy,” demonstrates that our
executive compensation program was designed appropriately and is working to ensure management’s interests are aligned with our
stockholders’ interests to support long-term value creation. Accordingly, we ask our stockholders to vote “For” the following resolution
at the Annual Meeting:
“RESOLVED, that the stockholders approve, on an advisory basis, the compensation paid to the Named Executive Officers, as disclosed in
the Proxy Statement for the Annual Meeting pursuant to the compensation disclosure rules of the SEC, including the compensation
discussion and analysis, compensation tables and narrative discussion, and other related disclosure.”
Vote Required
The advisory vote on the compensation of our Named Executive Officers requires the affirmative vote of a majority of the voting power
of the shares of our common stock present in person or represented by proxy at the Annual Meeting and entitled to vote thereon.
Abstentions will have the effect of a vote AGAINST the proposal. Broker non-votes will have no effect on the outcome of the vote.
The Board of Directors recommends a vote “FOR” the approval, on an advisory basis, of the
compensation of our Named Executive Officers.
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2021 Proxy Statement
EXECUTIVE OFFICERS
Executive Officers
The following table sets forth certain information about our executive officers and their respective ages as of November 1, 2021. Officers
are elected by the board of directors to hold office until their successors are elected and qualified.
Name
Age
Position
Jay Chaudhry
63
President, Chief Executive Officer and Chairman of the Board
Remo Canessa
64
Chief Financial Officer
Amit Sinha, Ph.D.
45
President of Research and Development, Operations and Customer Service, Chief Technology
Officer and Director
Dali Rajic
48
President Go-To-Market and Chief Revenue Officer
Robert Schlossman
53
Chief Legal Officer and Secretary
For the biographies of Mr. Chaudhry and Dr. Sinha, see “Board of Directors and Corporate Governance—Continuing Directors.”
Remo E. Canessa has served as our chief financial officer since February 2017. Prior to joining us, he served as chief financial officer of
Illumio Inc., a private cybersecurity company, from July 2016 to February 2017. Mr. Canessa is a certified public accountant (inactive), and
he holds a B.A. in economics from the University of California, Berkeley and an M.B.A. from Santa Clara University. Mr. Canessa previously
served on the board of directors of Aerohive Networks, Inc., a cloud-managed mobile networking platform provider, where he was
chairman of the audit committee and a member of the compensation committee.
Dali Rajic has served as our president go-to-market and chief revenue officer since September 2019. Prior to joining us, he served as
chief customer officer from February 2018 and as chief revenue officer from August 2016 to September 2019 at AppDynamics, Inc., an
application performance management company and subsidiary of Cisco Systems, Inc. From April 2012 to August 2016, Mr. Rajic served
in multiple sales executive roles at AppDynamics. Mr. Rajic holds a B.S. in international marketing from California State Polytechnic
University, Pomona and an M.B.A. from the Kellogg Graduate School of Management at Northwestern University.
Robert Schlossman has served as our chief legal officer and our secretary since February 2016. Mr. Schlossman holds a J.D. from the
University of California, Berkeley School of Law, as well as an M.A. and B.A. in English from Stanford University.
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2021 Proxy Statement
EXECUTIVE COMPENSATION
Executive Compensation
Compensation Discussion and Analysis
Introduction
This Compensation Discussion and Analysis provides information regarding the fiscal 2021 compensation program for our principal
executive officer, our principal financial officer, and our three other executive officers at fiscal year-end who were our most highly-
compensated executive officers (our “Named Executive Officers”). For fiscal 2021, our Named Executive Officers were:
• Jay Chaudhry, our President, Chief Executive Officer and Chairman of the Board (our “CEO”);
• Remo E. Canessa, our Chief Financial Officer;
• Amit Sinha, Ph.D., our President of Research & Development, Operations & Customer Service, Chief Technology Officer
and Director;
• Dali Rajic, our President Go-To-Market and Chief Revenue Officer (our "CRO"); and
• Robert Schlossman, our Chief Legal Officer and Secretary.
This Compensation Discussion and Analysis describes the material elements of our executive compensation program during fiscal 2021. It
also provides an overview of our executive compensation philosophy, including our principal compensation policies and practices. Finally,
it analyzes how and why the compensation committee of our board of directors (the “compensation committee”) arrived at the specific
compensation decisions for our Named Executive Officers in fiscal 2021 and discusses the key factors that the compensation committee
considered in determining their compensation.
EXECUTIVE SUMMARY
Who We Are
We anticipate, secure, and simplify the experience of doing business, transforming today and tomorrow. We were incorporated in 2007,
during the early stages of cloud adoption and mobility, based on a vision that the internet would become the new corporate network as the
cloud becomes the new data center. We predicted that with rapid cloud adoption and increasing workforce mobility, traditional perimeter
security approaches would provide inadequate protection for users and data and an increasingly poor user experience. We pioneered a
cloud platform, the Zscaler Zero Trust Exchange, that represents a fundamental shift in the architectural design and approach to
networking and security. Many of the largest enterprises and government agencies in the world rely on our solutions to help them
accelerate their move to the cloud.
Focus on Growth
We believe that organizations are still in the early stages of embracing cloud-based business solutions and adopting the security and
networking solutions, including our products, that are necessary to secure and manage cloud-based operations. To be successful in this
emerging market, we believe that delivering growth and capturing market share are paramount. We want all our employees and
executives, particularly our CEO and CRO, who have the most influence over sales activities, to be highly focused on maximizing growth.
To that end, we focus our compensation program on performance metrics that are key to achieving growth, specifically revenue and
calculated billings. We strongly believe that establishing and meeting aggressive growth targets in the short term is the best way to deliver
long-term stockholder value in a highly competitive and emerging market.
Given our belief that growth and capturing market share are paramount to our success, we believe that recruiting and retaining talented
executives is critical to delivering long-term stockholder value. The labor market is extremely competitive for skilled executives with
experience leading high-growth companies. A historically large number of well financed private enterprises, companies pursuing initial
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public offerings, recently public companies, and large established organizations with plans to enter new technology markets are
aggressively pursuing executives, like ours, who have demonstrated the ability to dramatically scale a business, develop and sell new
technology, disrupt legacy industries, produce strong financial results and deliver sustained value to stockholders. In order to retain our
existing executives and recruit new leaders, the compensation committee believes that the Company must provide executives with
attractive compensation packages which provide a compelling incentive to join the Company and remain employed for an extended
period of time.
Business Highlights
Our focus on growth in compensating and incentivizing our employees, including our executives, has succeeded in delivering both robust
financial performance and also near-term and long-term value to our stockholders.
Fiscal 2021 Financial Performance
Fiscal 2021 was a strong year for us marked by significant achievement and growth across all of our key metrics. Fiscal 2021 highlights
were as follows:
Revenue
56% Y/Y
Calculated Billings*
70% Y/Y
Stock Price
82% Y/Y
$673M Revenue
$934M Billings*
$235.91 Per Share
Total revenue was $673 million, an increase
of 56% year-over-year
Calculated billings was $934 million, an
increase of 70% year-over-year
The closing market price of our common
stock on the last trading day of fiscal 2021
was 235.91, per share, an increase of 82%
year-over-year from the closing market
price on July 31, 2020, the last day of fiscal
2020
* Calculated billings is a non-GAAP financial measure that we believe is a key metric to measure our periodic performance. Calculated billings represents our total revenue plus
the change in deferred revenue in a period. See Appendix A for the calculation of calculated billings.
Long-Term Financial Performance
Since fiscal 2018, the fiscal year of our initial public offering, we have achieved substantial growth across all of our key metrics:
Revenue
254%
$190M à $673M
Calculated Billings*
262%
$258M à $934M
Revenue Increased from $190 million
for fiscal 2018 to $673 million in fiscal
2021, an increase of 254%
Calculated billings increased from $258
million for fiscal 2018 to $934 million in
fiscal 2021, an increase of 262%
Stock Price
1374%
$16 à $235.91
The closing market price of our common
stock on July 30, 2021, the last trading
day of fiscal 2021 was $235.91 per share,
compared to our initial public offering
price of $16 per share. This reflects an
increase of 1,374%.
* Calculated billings is a non-GAAP financial measure that we believe is a key metric to measure our periodic performance. Calculated billings represents our total revenue plus
the change in deferred revenue in a period. See Appendix A for the calculation of calculated billings.
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Executive Compensation Highlights
During and for fiscal 2021, the compensation committee took the following key actions with respect to the compensation of our Named
Executive Officers:
• Base Salaries – The compensation committee determined to increase the annual base salaries of our Named Executive Officers
(other than our CEO) to bring their base salaries to levels that were comparable to those of similarly-situated executives in the
competitive marketplace and to maintain the annual base salary of our CEO at its fiscal 2020 level of $23,660.
• Cash Bonuses – Based on our strong performance during fiscal 2021, the compensation committee made cash bonus payments
to our Named Executive Officers under our Employee Incentive Compensation Plan, which, in the aggregate, represented
approximately 140% of their target annual cash bonus award opportunities based on performance. As in prior fiscal years, our
CEO declined to participate in our Employee Incentive Compensation Plan.
• Long-Term Incentive Compensation – The compensation committee approved long-term incentive compensation opportunities
in the form of time-based restricted stock unit (“RSU”) awards to our Named Executive Officers (other than our CEO). RSU awards
are subject to time-based vesting that requires continued service with us through each vesting date. The vesting period is typically
four years with shares vesting ratably over the period. However, the RSU awards approved during fiscal 2021 were designed to
provide extended long-term retention and were structured to vest over an almost six-and-a-half-year period from the date of grant
with vesting heavily weighted into the later years of the vesting period.
• Metrics for Performance-Based Compensation – The compensation committee determined the metrics and related target levels
for performance-based executive compensation in September 2020. The compensation committee selected revenue and
calculated billings as the appropriate corporate performance metrics for both cash and equity performance programs because, in
its view, these metrics were the key indicators of both periodic performance and our progress in executing on our business strategy
of focusing on growth and gaining market share. The metric thresholds required for 100% attainment were aggressive with
targeted growth over fiscal 2020 results of 53.4% in revenue and 46.4% in calculated billings required for 100% attainment.
• CEO and CRO Compensation –The total compensation for Messrs. Chaudhry and Rajic for fiscal 2021 includes the value of
performance stock unit ("PSU") awards granted in prior years, which awards significantly increased in value since the grant
approval dates. The closing market price of our common stock was $37.04 per share with respect to the awards approved in fiscal
2019 for Mr. Chaudhry and $43.98 per share for the awards approved in fiscal 2020 for Mr. Rajic. Due in large part to the
performance of Messrs. Chaudhry and Rajic, the Company produced strong growth and financial performance in each of fiscal
2019 and fiscal 2020, resulting in accelerated stock price appreciation for our stockholders. As a result, the closing market price of
our common stock was $133.17 per share in fiscal 2021 when the performance metrics for the earlier granted PSU awards were
established, and the respective value of the awards for fiscal 2021 compensation purposes was determined.
Pay-for-Performance
We believe our executive compensation program is reasonable, competitive, and appropriately balances the goals of attracting,
motivating, rewarding, and, most importantly, retaining our Named Executive Officers with the goal of aligning their interests with those
of our stockholders. To ensure this alignment and to motivate and reward individual initiative and effort, a substantial portion of our
Named Executive Officers’ target annual compensation opportunity is both variable in nature and “at-risk.”
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We emphasize variable compensation that appropriately rewards our Named Executive Officers through two separate compensation
elements:
• First, we provide our Named Executive Officers (other than our CEO) the opportunity to participate in our cash bonus plan which
provides cash payments if they produce results that meet or exceed the financial, operational, and strategic objectives set by our
compensation committee, as evaluated by our CEO and approved by the compensation committee.
• In addition, we grant RSU and PSU awards that will reward recipients over a multi-year period, with the PSU awards only being
earned for achieving performance objectives established by our compensation committee. The RSU awards and, if earned, PSU
awards comprise a majority of our Named Executive Officers’ target total compensation opportunities. The future value of which
depends significantly on the value of our common stock, thereby incentivizing them to build sustainable long-term value for the
benefit of our stockholders.
These variable pay elements ensure that, each year, a substantial portion of our Named Executive Officers’ target total direct
compensation is contingent (rather than fixed) in nature, with the amounts ultimately payable subject to variability above or below target
levels commensurate with our actual performance.
Executive Compensation Policies and Practices
We endeavor to maintain sound governance standards consistent with our executive compensation policies and practices. The
compensation committee evaluates our executive compensation program on a regular basis to ensure that it is consistent with our
short-term and long-term goals given the dynamic nature of our business and the market in which we compete for executive talent.
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The following summarizes our executive compensation and related policies and practices:
What We Do
What We Don't Do
MAINTAIN AN INDEPENDENT
COMPENSATION COMMITTEE
The compensation committee consists solely of independent directors
who establish our compensation policies and practices.
RETAIN AN INDEPENDENT COMPENSATION ADVISOR
The compensation committee has engaged its own compensation
consultant to provide information, analysis, and other advice on executive
compensation independent of management. This consultant performed
no other consulting or other services for us in fiscal 2021.
NO EXECUTIVE RETIREMENT PLANS
We do not currently offer, nor do we have plans to offer, defined benefit
pension plans or any non-qualified deferred compensation plans or
arrangements to our Named Executive Officers other than the plans and
arrangements that are available to all employees. Our Named Executive
Officers are eligible to participate in our Section 401(k) retirement plan
on the same basis as our other employees.
LIMITED PERQUISITES
Perquisites or other personal benefits are not a material part of our
compensation program for our Named Executive Officers.
NO EXCISE TAX PAYMENTS ON FUTURE POST-
EMPLOYMENT COMPENSATION ARRANGEMENTS
We do not provide any excise tax reimbursement payments
(including “gross-ups”) on payments or benefits contingent
upon a change in control of the Company.
NO SPECIAL HEALTH OR WELFARE BENEFITS
We do not provide our Named Executive Officers with any
health or welfare benefit programs, other than participation in
our broad-based employee programs on the same basis as
our other full-time, salaried employees.
NO HEDGING OR PLEDGING OF OUR EQUITY SECURITIES
We prohibit our employees, including our Named Executive Officers
and the members of our board of directors, from hedging or
pledging our equity securities.
ANNUAL EXECUTIVE COMPENSATION REVIEW
The compensation committee conducts an annual review and approval
of our compensation strategy, including a review and determination of
our compensation peer group used for comparative purposes and a
review of our compensation-related risk profile to ensure that our
compensation programs do not encourage excessive or inappropriate
risk-taking and that the level of risk that they do encourage is not
reasonably likely to have a material adverse effect on us.
AT-RISK COMPENSATION
Our executive compensation program is designed so that a significant
portion of our Named Executive Officers’ compensation is “at risk” based
on corporate performance, as well as equity-based, to align the interests
of our Named Executive Officers and stockholders.
USE PAY-FOR-PERFORMANCE PHILOSOPHY
Most of our Named Executive Officers’ compensation is directly
linked to corporate performance; we also structure their target
total compensation opportunities with a significant long-term
equity component, thereby making a substantial portion of each
Named Executive Officer’s target total compensation dependent
upon the long-term growth of our stock price.
NOMINAL BASE SALARY AND ZERO
BONUS POTENTIAL FOR OUR CEO
Our CEO receives only a nominal base salary and is not
eligible for a cash bonus.
SUCCESSION PLANNING
We review the risks associated with our key executive officer
positions to ensure adequate succession plans are in place.
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Stockholder Advisory Vote on Named Executive Officer Compensation
At our 2020 Annual Meeting of Stockholders, we conducted our initial non-binding stockholder advisory vote on the compensation of
our Named Executive Officers (commonly known as a “Say-on-Pay” vote). Approximately 81.0% of the votes cast were cast “FOR” the
approval of our Named Executive Officer compensation for fiscal 2020. After considering this result and following our annual review of
our executive compensation philosophy, the compensation committee decided to retain our overall approach to executive compensation.
We value the opinions of our stockholders. Our board of directors and the compensation committee will continue to monitor stockholder
opinions, including the outcome of future advisory votes on the compensation of our Named Executive Officers, as well as feedback
received throughout the year, when making compensation decisions for our executive officers.
COMPENSATION-SETTING PROCESS
Role of Compensation Committee
The compensation committee discharges the responsibilities of our board of directors relating to the compensation of our Named
Executive Officers and the non-employee members of our board of directors. The compensation committee has overall responsibility
for overseeing our compensation and benefits policies generally, and overseeing and evaluating the compensation plans, policies, and
practices applicable to our CEO and other Named Executive Officers.
In carrying out its responsibilities, the compensation committee evaluates our compensation policies and practices with a focus on the
degree to which these policies and practices reflect our executive compensation philosophy, develops strategies and makes decisions
that it believes further our philosophy or align with developments in best compensation practices, and reviews the performance of our
Named Executive Officers when making decisions with respect to their compensation.
The compensation committee’s authority, duties, and responsibilities are further described in its charter, which is reviewed annually and
revised and updated as warranted. The charter is available at http://ir.zscaler.com.
The compensation committee retains a compensation consultant (as described below) to provide support in its review and assessment
of our executive compensation program.
Setting Target Total Compensation
The compensation committee reviews the base salary levels, annual cash bonus opportunities, and long-term incentive compensation
opportunities of our Named Executive Officers and all related performance criteria at the beginning of each year, or more frequently
as warranted. Adjustments to cash compensation are generally effective at the beginning of the fiscal year.
The compensation committee does not establish a specific target for formulating the target total direct compensation opportunities
of our Named Executive Officers. In making decisions about the compensation of our Named Executive Officers, the members of the
compensation committee rely primarily on their general experience and subjective considerations of various factors, including the
following:
• our executive compensation program objectives;
• our performance against the financial, operational, and strategic objectives established by the compensation committee and
our board of directors;
• each individual Named Executive Officer’s knowledge, skills, experience, qualifications, and tenure relative to other similarly-
situated executives at the companies in our compensation peer group and/or Compensia’s proprietary compensation database;
• the scope of each Named Executive Officer’s role and responsibilities compared to other similarly-situated executives at the
companies in our compensation peer group and/or Compensia’s proprietary compensation database;
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• the prior performance of each individual Named Executive Officer, based on a subjective assessment of his or her contributions
to our overall performance, ability to lead his or her business unit or function, and work as part of a team, all of which reflect our
core values;
• the potential of each individual Named Executive Officer to contribute to our long-term financial, operational, and strategic
objectives;
• our CEO’s compensation relative to that of our Named Executive Officers, and compensation parity among our Named
Executive Officers;
• our financial performance relative to our compensation and performance peers;
• the compensation practices of our compensation peer group and/or the companies in Compensia’s proprietary compensation
database and the positioning of each Named Executive Officer’s compensation in a ranking of peer company compensation levels
based on an analysis of competitive market data; and
• the recommendations of our CEO with respect to the compensation of our Named Executive Officers (except with respect to
his own compensation).
These factors provide the framework for compensation decision-making and final decisions regarding the compensation opportunity for
each Named Executive Officer. No single factor is determinative in setting compensation levels, nor is the impact of any individual factor
on the determination of pay levels quantifiable.
The compensation committee does not weight these factors in any predetermined manner, nor does it apply any formulas in developing its
compensation recommendations. The members of the compensation committee consider all of this information in light of their individual
experience, knowledge of the Company, knowledge of the competitive market, knowledge of each Named Executive Officer, and business
judgment in making their decisions.
Role of Management
In discharging its responsibilities, the compensation committee works with members of our management, including our CEO. Our
management assists the compensation committee by providing information on corporate and individual performance, market
compensation data, and management’s perspective on compensation matters. The compensation committee solicits and reviews our
CEO’s proposals with respect to program structures, as well as his recommendations for adjustments to annual cash compensation,
long-term incentive compensation opportunities, and other compensation-related matters for our Named Executive Officers (except
with respect to his own compensation) based on his evaluation of their performance for the prior year.
At the beginning of each year, our CEO reviews the performance of our other Named Executive Officers based on such individual’s level
of success in accomplishing the business objectives established for him or her for the prior year and his or her overall performance during
that year and then shares these evaluations with, and makes recommendations to, the compensation committee for each element of
compensation as described above.
The compensation committee reviews and discusses our CEO’s proposals and recommendations with our CEO and considers them as
one factor in determining and approving the compensation of our Named Executive Officers, including our CEO. Our CEO also attends
meetings of our board of directors and the compensation committee at which executive compensation matters are addressed, except
with respect to discussions involving his own compensation.
Role of Compensation Consultant
The compensation committee engages an external compensation consultant to assist it by providing information, analysis, and other
advice relating to our executive compensation program and the decisions resulting from its annual executive compensation review. The
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compensation consultant reports directly to the compensation committee and its chair and serves at the discretion of the compensation
committee, which reviews the engagement annually.
In fiscal 2021, the compensation committee engaged Compensia to serve as its compensation consultant to advise on executive
compensation matters, including competitive market pay practices for our Named Executive Officers and with the data analysis and
selection of the compensation peer group.
During fiscal 2021, Compensia attended the meetings of the compensation committee (both with and without management present) as
requested and provided the following services:
• consultation with the compensation committee chair and other members between compensation committee meetings;
• review, research, and updating of our compensation peer group;
• an analysis of competitive market data based on the compensation peer group for our Named Executive Officers’ positions and an
evaluation of how the compensation we pay our Named Executive Officers compares both to our performance and to how the
companies in our compensation peer group compensate their executives;
• review and analysis of the base salary levels, annual incentive bonus opportunities, and long-term incentive compensation
opportunities of our Named Executive Officers;
• review and analysis of the metrics used by the companies in our compensation peer group in their short-term incentive
compensation plans;
• assessment of executive compensation trends within our industry, and updating on corporate governance and regulatory issues
and developments;
• review and analysis of director compensation levels; and
• support on other ad hoc matters throughout the year.
The terms of Compensia’s engagement includes reporting directly to the compensation committee chair. Compensia also coordinated
with management for data collection and job matching for our Named Executive Officers. In fiscal 2021, Compensia did not provide any
other services to us.
The compensation committee has evaluated its relationship with Compensia to ensure that it believes that such firm is independent from
management. This review process included a review of the services that Compensia provided, the quality of those services, and the fees
associated with the services provided during fiscal 2021. Based on this review, as well as consideration of the factors affecting
independence set forth in Exchange Act Rule 10C-1(b)(4), Rule 5605(d)(3)(D) of the Nasdaq Marketplace Rules, and such other factors
as were deemed relevant under the circumstances, the compensation committee has determined that no conflict of interest was raised
as a result of the work performed by Compensia and that Compensia is independent.
Competitive Positioning
For purposes of assessing our executive compensation against the competitive market, the compensation committee reviews and
considers the compensation levels and practices of a select group of peer companies. This compensation peer group consists of
technology companies that are similar to us in terms of revenue, market capitalization, and industry focus. The competitive data drawn
from this compensation peer group is only one of several factors that the compensation committee considers in making its decisions
with respect to the compensation of our Named Executive Officers.
The compensation peer group for fiscal 2021 was originally established in March 2020 and revised in March of 2021 and was comprised
of publicly-traded technology companies against which we compete for executive talent, as well as, in some instances, business
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opportunities. In evaluating the companies comprising the compensation peer group, Compensia considered the following criteria in
March 2020:
• publicly-traded companies headquartered in the United States and traded on a major United States stock exchange with a
preference for California-based companies;
• companies in the application software and systems software industries;
• similar revenues – within a range of ~0.5x to ~2.0x our then-current trailing four quarters revenue of approximately $333 million
(approximately $165 million to approximately $670 million); and
• similar market capitalization – within a range of ~0.33x to 3.0x our then-current 30-day average market capitalization of
approximately $7.0 billion (approximately $2.3 billion to approximately $20.9 billion).
This compensation peer group for the first portion of fiscal 2021 consisted of the following companies:
Alteryx
Anaplan
Blackline
Box
Coupa Software
New Relic
Qualys
CrowdStrike Holdings
Okta
Tenable Holdings
Elastic
MongoDB
Paycom Software
The Trade Desk
Proofpoint
Zendesk
This compensation peer group was used by the compensation committee through March 2021 as a reference for understanding the
competitive market for executive positions in our industry.
In March 2021, the compensation committee, with the assistance of Compensia, reviewed and updated our compensation peer group to
reflect changes in our market capitalization and to recognize our evolving business focus. In evaluating the companies comprising the
compensation peer group at that time, Compensia considered the following criteria:
• publicly-traded companies headquartered in the United States and traded on a major United States stock exchange with a
preference for California-based companies;
• companies in the application software and systems software industries;
• similar revenues – within a range of ~0.5x to ~2.0x our then-current trailing four quarters revenue of approximately $480 million
(approximately $240 million to approximately $960 million); and
• similar market capitalization – within a range of ~0.33x to 3.0x our then-current 30-day average market capitalization of
approximately $27.2 billion (approximately $9.0 billion to approximately $81.6 billion).
Based on a review of the analysis prepared by Compensia, the compensation committee approved a revised compensation peer group in
March 2021 for the remainder of fiscal 2021 consisting of the following companies:
Anaplan
Avalara
Cloudflare
Coupa Software
CrowdStrike Holdings
Datadog
DocuSign
Elastic N.V.
Fastly
Five9
MongoDB
Okta
Paycom Software
Paylocity Holding
RingCentral
The Trade Desk
Zendesk
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The compensation committee reviews our compensation peer group at least annually and makes adjustments to its composition if
warranted, taking into account changes in both our business and the businesses of the companies in the peer group.
COMPENSATION ELEMENTS
In fiscal 2021, the principal elements of our executive compensation program, and the purposes for each element, were as follows:
Element
Type of Element
Compensation Element
Objective
Base Salary
Fixed
Cash
Designed to attract and retain highly talented executives by
providing fixed compensation amounts that are competitive
in the market
Annual Cash
Bonuses
Variable
Cash
Designed to motivate our executives to achieve semi-
annual (and, in the case of Mr. Rajic, quarterly) financial
objectives and provide financial incentives
Long Term Incentive
Compensation
Variable
Equity awards in the form of PSU
awards and RSU awards that may be
settled for shares of our common stock
Designed to align the interests of our executives and our
stockholders by motivating them to create sustainable long-
term stockholder value
Base Salary
Base salary represents the fixed portion of the compensation of our Named Executive Officers and is an important element of
compensation intended to attract and retain highly talented individuals. Generally, we use base salary to provide each Named Executive
Officer with a specified level of cash compensation during the year with the expectation that he or she will perform his or her
responsibilities to the best of his or her ability and in our best interests.
Generally, we establish the initial base salaries of our Named Executive Officers through arm’s-length negotiation at the time we hire the
individual, taking into account his or her position, qualifications, experience, prior salary level, and the base salaries of our other executive
officers. Thereafter, the compensation committee reviews the base salaries of our Named Executive Officers each year as part of its
annual compensation review, with input from our CEO (except with respect to his own base salary) and makes adjustments as it
determines to be reasonable and necessary to reflect the scope of a Named Executive Officer’s performance, individual contributions
and responsibilities, position in the case of a promotion, and market conditions.
In September 2020, the compensation committee reviewed the base salaries of our Named Executive Officers, taking into consideration
a competitive market analysis and the recommendations of our CEO (except with respect to his own base salary), as well as the other
factors described in “Compensation-Setting Process – Setting Target Total Direct Compensation” above. Following this review, the
compensation committee determined to maintain the base salary of our CEO and Mr. Rajic at their fiscal 2020 levels and to increase the
base salaries of our other Named Executive Officers to levels that were comparable to those of similarly-situated executives in the
competitive marketplace. The base salary adjustments were effective August 1, 2020.
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The base salaries of our Named Executive Officers for fiscal 2021 were as follows:
Named Executive Officer
Mr. Chaudhry
Mr. Canessa
Mr. Rajic
Dr. Sinha
Mr. Schlossman
Fiscal 2020
Base Salary
($)
Fiscal 2021
Base Salary
($)
Percentage
Adjustment
23,660
350,000
400,000
350,000
315,000
23,660
375,000
400,000
375,000
325,000
0%
7.1%
0%
7.1%
3.2%
The base salaries actually paid to our Named Executive Officers during fiscal 2021 are set forth in the “Fiscal 2021 Summary
Compensation Table” below.
Annual Cash Bonuses
We use our Employee Incentive Compensation Plan, a cash bonus plan, to motivate employees selected by the compensation committee,
including our Named Executive Officers (except for our CEO), to achieve our annual business goals. Pursuant to the Employee Incentive
Compensation Plan, our compensation committee, in its sole discretion, establishes a target award for each executive and a bonus pool for
the executives as a group, with actual awards payable from the bonus pool, with respect to the applicable performance period. For fiscal
2021, the Employee Incentive Compensation Plan included semi-annual performance periods with semi-annual award payouts after the
end of the first six-month period (the period from August 1, 2020 through January 31, 2021), and, then again, after the end of the fiscal
year (the period from February 1, 2021 through July 31, 2021). Pursuant to the terms of his Employment Offer Letter, Mr. Rajic was
eligible to receive quarterly award payouts under the Employee Incentive Compensation Plan.
The compensation committee administered the Employee Incentive Compensation Plan. As the administrator of the plan, the
compensation committee may, in its sole discretion and at any time, increase, reduce, or eliminate a participant’s actual award, and/or
increase, reduce, or eliminate the amount allocated to the bonus pool for a particular performance period. The actual award may be
below, at or above a participant’s target annual cash bonus award, in the discretion of the administrator. Further, the administrator
may determine the amount of any increase, reduction, or elimination on the basis of such factors as it deems relevant, and it is not
required to establish any allocation or weighting with respect to the factors it considers.
Actual awards under the Employee Incentive Compensation Plan are to be paid in cash (or its equivalent) in a single lump sum only after
they are earned, which requires continued employment through the date the actual award is paid. The compensation committee reserved
the right to settle an actual award with a grant of an equity award under our then-current equity compensation plan, which equity award
may have such terms and conditions, as the compensation committee determines. Payment of awards is to occur as soon as
administratively practicable after they are earned, but no later than the dates set forth in the Employee Incentive Compensation Plan.
Our board of directors and the compensation committee have the authority to amend, alter, suspend, or terminate the plan, provided
such action does not impair the existing rights of any participant with respect to any earned awards.
Fiscal 2021 Target Annual Cash Bonus Award Opportunities
For purposes of the Employee Incentive Compensation Plan, cash bonus awards were based upon target annual cash bonus award
opportunities as determined by the compensation committee. In September 2020, the compensation committee reviewed the target
annual cash bonus award opportunities of our Named Executive Officers. Following this review and after taking into consideration the
factors described in “Compensation-Setting Process – Setting Target Total Direct Compensation” above, the compensation committee
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determined not to adjust the target annual cash bonus opportunities of any of our Named Executive Officers, with the exception of
Mr. Schlossman. Based on a review of his target total cash compensation positioning relative to individuals in similar positions in the
competitive market and an evaluation of his performance, the compensation committee determined that an increase to the target annual
cash bonus opportunity for Mr. Schlossman from $150,000 to $165,000 was appropriate to set his target annual cash opportunity for
fiscal 2021 at a level that was comparable to those of similarly-situated executives in the competitive marketplace. As in prior fiscal years,
our CEO declined to participate in the Employee Incentive Compensation Plan.
The target annual cash bonus award opportunities of our Named Executive Officers for fiscal 2021 were as follows:
Named Executive Officer
Mr. Chaudhry
Mr. Canessa
Mr. Rajic
Dr. Sinha
Mr. Schlossman
Fiscal 2020 Target
Annual Cash Bonus
Award Opportunity
Fiscal 2021 Target
Annual Cash Bonus
Award Opportunity
($)
—
250,000
400,000
250,000
150,000
($)
—
250,000
400,000
250,000
165,000
Percentage
Adjustment
—
—
—
—
10%
Potential annual cash bonus awards for our Named Executive Officers under the Employee Incentive Compensation Plan could range
from zero to 150% of their target annual cash bonus award opportunity.
Incentive Plan Performance Metrics
Under the Employee Incentive Compensation Plan, the compensation committee determined the performance metrics and related target
levels for the fiscal 2021 annual cash bonus awards. In September 2020, the compensation committee determined that, in the case of our
CEO’s executive staff, which included our other Named Executive Officers (the “Senior Executives”), 50% of the bonus pool to be used to
make cash bonus awards would be reserved for distribution in the discretion of our CEO (subject to final approval by the compensation
committee) based on his evaluation of each Senior Executive’s individual performance and our performance against various corporate
metrics. The remaining 50% of the bonus pool to be used to make cash bonus awards would be distributed based on two equally weighted
corporate performance metrics: revenue and calculated billings.
The compensation committee selected revenue and calculated billings as the appropriate corporate performance metrics for the Senior
Executives because, in its view, these metrics were key indicators of our periodic performance and our progress in executing on our
business strategy of focusing on growth and gaining market share.
For purposes of the Senior Executives’ cash bonus awards:
• “revenue” represented total revenue calculated in accordance with generally accepted accounting principles, or GAAP, as
reported in our audited financial statements; and
• “calculated billings” represented our total revenue plus the change in deferred revenue in a given fiscal period. Calculated billings
in any particular fiscal period aims to reflect amounts invoiced for subscriptions to access our cloud platform, together with related
support services for our new and existing customers.
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EXECUTIVE COMPENSATION
As reflected in our annual operating plan presented to and approved by our board of directors, the target levels established for revenue
and calculated billings for the full year of fiscal 2021 by the compensation committee were as follows:
Performance Metric
Revenue
Calculated Billings
Full Year Fiscal 2021
($)
661,600,000
805,000,000
For fiscal 2021, the revenue and calculated billing targets for the Employee Incentive Compensation Plan were significantly greater than
the amount achieved in the comparable period for the prior fiscal year and represented a very aggressive target for fiscal 2021.
In addition, the compensation committee determined that our Senior Executives were eligible to earn cash bonus awards to the extent
that we achieved the minimum thresholds for revenue and calculated billings for each performance period in fiscal 2021 as set forth in the
following schedule:
Metric Achievement
Payment
Bonus Attainment
Less than 80%
0%
No payout below 80% achievement
80% - 90%
90% - 95%
0% to 70% linear
80% attainment pays 0% and 90% pays 70%
70% to 90% linear
90% attainment pays 70% and 95% pays 90%
95% - 100%
90% to 100% linear
95% attainment pays 90% and 100% pays 100%
100% - 105%
100% to 125% linear
100% attainment pays 100% and 105% pays 125%
105% - 110%
125% to 150% linear
105% attainment pays 125% and 110% pays 150%
>110%
TBD
Payout over 150%, determined in the discretion of the board of directors
The compensation committee also determined that the 50% of the bonus pool reserved for distributions in the discretion of our CEO was
to be funded based on achievement of the revenue and calculated billings targets. If the average level of achievement for the applicable
performance period for revenue and calculated billings was less than 90%, the discretionary bonus pool would not be funded. If the
average level of achievement was equal to or greater than 90% but less than 100%, the discretionary pool would be funded at 100%. If
the average level of achievement was equal to or greater than 100%, the discretionary pool would be funded at 150%.
Cash Bonus Payments (Other than Mr. Rajic
As previously described, our Senior Executives (other than Mr. Rajic) were eligible for cash bonus awards only in an amount, if any,
determined by the extent that we met or exceeded the applicable minimum threshold for revenue and calculated billings for each half of
fiscal 2021. In March 2021, the compensation committee determined that we had achieved 100.7% of our revenue target and 109.2% of
our calculated billing target for the first half of fiscal 2021, resulting in cash payments equal to 103.5% and 146.0%, respectively. In
addition, because the average level of achievement for these metrics for the first half of fiscal 2021 was greater than 100%, the
discretionary portion of the bonus pool reserved for our CEO was funded at 150%. Our CEO determined (with compensation committee
approval) that, because we had fully achieved our target performance levels for the two corporate performance metrics and factoring in
our performance with respect to other key metrics that we use internally to monitor our financial progress against our annual operating
plan, it was appropriate to award 150% of the discretionary bonus pool to each of our Senior Executives.
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As a result, the cash bonus payments to our eligible Named Executive Officers (other than Mr. Rajic) for the first half of the year were
equal to 137.4% of their target semi-annual cash bonus opportunities for that period as follows:
Named Executive Officer
First Half Target Bonus Opportunity
($)
First Half Bonus Payment
($)
Mr. Canessa
Mr. Sinha
Mr. Schlossman
125,000
125,000
82,500
171,719
171,719
113,334
In September 2021, the compensation committee determined that we had achieved 102.6% of our revenue target and 121.7% of our
calculated billing target for the second half of fiscal 2021, resulting in cash payments equal to 113.0% and 150.0%, respectively. In
addition, because the average level of achievement for these metrics for second half of fiscal 2021 was greater than 100%, the
discretionary portion of the bonus pool reserved for our CEO was funded at 150%. Our CEO determined (with compensation committee
approval) that, because we had significantly exceeded our calculated billings target for the second half of the fiscal year and factoring in
our performance with respect to other key metrics that we use internally to monitor our financial progress against our annual operating
plan, it was appropriate to award 150% of the discretionary bonus pool to each of our Senior Executives. As a result, the cash bonus
payments to our eligible Named Executive Officers for the second half of the year were equal to 140.8% of their target annual cash bonus
award opportunities for that period.
As a result, the cash bonus payments to our eligible Named Executive Officers (other than Mr. Rajic) for the second half of the year were
as follows:
Named Executive Officer
Second Half Target Bonus Opportunity
($)
Second Half Bonus Payment
($)
Mr. Canessa
Mr. Sinha
Mr. Schlossman
Cash Bonus Payments for Mr. Rajic
125,000
125,000
82,500
175,938
175,938
116,119
As provided pursuant to his Employment Offer Letter, Mr. Rajic was eligible to participate in the Employee Incentive Compensation Plan
on the same terms and conditions, described above for our other Senior Executives, subject to determination and receipt of his cash bonus
payments on a quarterly, rather than a semi-annual, basis.
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Based on our corporate performance and the exercise of our CEO’s discretion, the cash bonus payments to Mr. Rajic for fiscal 2021 were
as follows:
Fiscal Period
First Fiscal Quarter
Second Fiscal Quarter
Third Fiscal Quarter
Fourth Fiscal Quarter
Quarterly Target Bonus Opportunity
($)
Quarterly Bonus Payment
($)
100,000
100,000
100,000
100,000
105,325
138,375
141,375
141,375
The total cash bonuses paid to our Named Executive Officers for fiscal 2021 are set forth in the “Fiscal 2021 Summary Compensation
Table” below.
Long-Term Incentive Compensation
We view long-term incentive compensation in the form of equity awards as a critical element of our executive compensation program. We
use equity awards to incentivize and reward our Named Executive Officers for long-term corporate performance based on the value of
our common stock and, thereby, to align the interests of our Named Executive Officers with those of our stockholders.
Currently, we use RSU awards and PSU awards to retain, motivate, and reward our Named Executive Officers for long-term increases in
the value of our common stock and, thereby, to align their interests with those of our stockholders. Our PSU awards provide that our
Named Executive Officers may earn shares of our common stock based on our achievement of pre-established target levels for one or
more financial or operational performance measures as well as continued service. We also grant RSU awards with solely time-based
vesting requirements to our Named Executive Officers other than our CEO. Because RSU awards have value to the recipient even in the
absence of stock price appreciation, we are able to incentivize and retain our Named Executive Officers using fewer shares of our common
stock than would be necessary if we regularly used stock options to provide equity to our executive officers. In addition, because the value
of these RSU and PSU awards increases with any increase in the value of the underlying shares, RSU and PSU awards also provide
incentives to our Named Executive Officers that are aligned with the interests of our stockholders.
To date, the compensation committee has not applied a rigid formula in determining the size and form of the equity awards to be granted
to our Named Executive Officers. Instead, in making these decisions, the compensation committee has exercised its judgment as to the
amount and form of the awards. The compensation committee considers the retention value of the equity compensation held by the
Named Executive Officer, the cash compensation received by the Named Executive Officer, a competitive market analysis performed by
its compensation consultant, the recommendations of our CEO (except with respect to his own equity awards), the amount of equity
compensation held by the Named Executive Officer (including the current economic value of his or her unvested equity and the ability
of these unvested holdings to satisfy our retention objectives), and the other factors described in “Compensation-Setting Process –
Setting Target Total Direct Compensation” above. Based upon these factors, the compensation committee has determined the size of
each award at levels it considered appropriate to create a meaningful opportunity for reward predicated on the creation of long-term
stockholder value.
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Fiscal 2021 Equity Awards
In April 2021, the compensation committee approved long-term incentive compensation opportunities in the form of RSU awards to our
Named Executive Officers (other than our CEO) in amounts that it considered to be consistent with our compensation philosophy, its
desired market positioning, and its retention objectives. The number of shares of our common stock subject to the RSU awards was
determined by the compensation committee based on its consideration of the factors described above. The equity awards approved for
grant to our Named Executive Officers in April 2021 were as follows:
Named Executive Officers
Restricted Stock Unit Award
(Number of shares)
Restricted Stock Unit Award
(Target Value)($)
Mr. Chaudhry
Mr. Canessa
Dr. Sinha
Mr. Rajic
Mr. Schlossman
—
13,830
27,659
27,659
11,064
—
2.5 million
5 million
5 million
2 million
The effective grant date of the RSU awards was April 13, 2021. The RSU awards were designed to provide long-term retention and were
structured to vest over an almost six-and-a-half-year period from the date of grant with an initial vesting date of December 15, 2022.
The awards will vest as follows: 2.5% of the shares of common stock subject to the award vest on December 15, 2022, the first quarterly
vesting date following the vesting commencement date of September 15, 2022. Thereafter, the shares of our common stock subject to
the award will vest over the next 45 months as follows: (i) 2.5% of the shares will vest on each of the next three quarterly vesting dates,
(ii) 5% of the shares will vest on each of the next eight quarterly vesting dates, and (iii) 6.25% of the shares will vest on each quarterly
vesting dates until the awards vested in full, subject to the Named Executive Officer continuing to be a service provider to us through
each vesting date.
Fiscal 2021 Performance Period PSU Awards
In September 2020, the compensation committee approved the performance metrics for the Fiscal 2021 PSU Awards. These awards
were previously granted to Messrs. Chaudhry in fiscal 2019 and Rajic in fiscal 2020. The compensation committee determined that the
Fiscal 2021 PSU awards were to be earned based on our level of attainment of two equally weighted performance metrics: revenue and
calculated billings. The compensation committee selected revenue and calculated billings as the appropriate corporate performance
metrics for the Fiscal 2021 PSU Award period because, in its view, these metrics were the key indicators of our progress in executing our
business strategy of pursuing growth to capture significant market share.
For purposes of the Fiscal 2021 PSU Awards, “revenue” and “calculated billings” had the same meanings as under the Employee Incentive
Compensation Plan for our senior executives. For fiscal 2021, the revenue and calculated billing levels for the Fiscal 2021 PSU Awards
were significantly greater than the amount achieved in the comparable period for the prior fiscal year and represented a very aggressive
target for fiscal 2021.
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For the fiscal 2021 performance year, the total number of units that could be earned scaled from 0% to 150% of the target number of
units, based on actual achievement of the fiscal 2021 performance metrics as follows:
Metric Achievement
Less than 80%
80% - 90%
90% - 95%
95% - 100%
100% - 105%
105% - 110%
Payment
0%
PSU Award Attainment
No attainment below 80% achievement
0% to 70% linear
80% attainment pays 0% and 90% pays 70%
70% to 90% linear
90% attainment pays 70%, and 95% pays 90%
90% to 100% linear
95% attainment pays 90% and 100% pays 100%
100% to 125% linear
100% attainment pays 100%, and 105% pays 125%
125% to 150% linear
105% attainment pays 125%, and 110% pays 150%
In September 2021, our revenue and calculated billings results for fiscal 2021 were presented to the compensation committee for review.
After reviewing and analyzing these results, the compensation committee certified that, for the annual performance period ended July 31,
2021, our calculated billings were achieved at 116.0% of the target performance level and our revenue was achieved at 101.7% of the
target performance level, resulting in 150% of the calculated billings attainment and 108.5% of the revenue attainment and corresponding
to the following attainment:
Named Executive Officer
(Target number of units)
(Units Earned)
(Units Earned)
(Total Units awarded)
Performance Stock
Calculated Billings
Revenue
Performance Stock
Unit Award
Performance Measure
Performance Measure
Unit Award
Mr. Chaudhry
Mr. Rajic
150,000
23,182
112,500
17,386
81,375
12,576
193,875
29,962
Following certification of our achievement against the applicable performance metrics, 100% of the units earned by Messrs. Chaudhry
and Rajic vested on September 15, 2021. Each unit earned pursuant to a Fiscal 2021 PSU Award was to be settled for one share of our
common stock.
The equity awards granted to our Named Executive Officers in fiscal 2021 are set forth in the “Fiscal 2021 Summary Compensation
Table” and the “Fiscal 2021 Grants of Plan-Based Awards Table” below.
Health and Welfare Benefits
Our Named Executive Officers are eligible to receive the same employee benefits that are generally available to all employees, subject to
the satisfaction of certain eligibility requirements. These benefits include medical, dental, and vision insurance, business travel insurance,
an employee assistance program, health and dependent care flexible spending accounts, basic life insurance, accidental death and
dismemberment insurance, short-term and long-term disability insurance and reimbursement for mobile phone coverage.
We maintain a tax-qualified retirement plan, or the 401(k) plan, that provides eligible employees, including our Named Executive Officers,
with an opportunity to save for retirement on a tax-advantaged basis. Eligible employees are able to participate in the 401(k) Plan as of the
first day of the month following the date they meet the plan’s eligibility requirements, and participants are able to defer up to 100% of
their eligible compensation subject to applicable annual limits as set under the Internal Revenue Code. All participants’ interests in their
deferrals are 100% vested when contributed. During fiscal 2020, we began making employer matching contributions to the 401(k) plan in
an amount of up to $2,000 annually on a dollar for dollar basis.
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The 401(k) Plan is intended to be qualified under Section 401(a) of the Internal Revenue Code with the plan’s related trust intended to be
tax-exempt under Section 501(a) of the Internal Revenue Code. As a tax-qualified retirement plan, contributions to our 401(k) Plan and
earnings on those contributions are not taxable to our employees until distributed from the plan.
We design our employee benefits programs to be affordable and competitive in relation to the market as well as compliant with applicable
laws and practices. We adjust our employee benefits programs as needed based upon regular monitoring of applicable laws and practices
and the competitive market.
Perquisites and Other Personal Benefits
Currently, we do not view perquisites or other personal benefits as a significant component of our executive compensation program.
Accordingly, we do not provide significant perquisites or other personal benefits to our Named Executive Officers, except as generally
made available to our employees or in situations where we believe it is appropriate to assist an individual in the performance of his or her
duties, to make him or her more efficient and effective, and for recruitment and retention purposes. During fiscal 2021, none of our
Named Executive Officers received perquisites or other personal benefits that were, in the aggregate, $10,000 or more for any individual.
We have in the past and may in the future, we may provide perquisites or other personal benefits in limited circumstances, such as those
described in the preceding paragraph. All future practices with respect to perquisites or other personal benefits will be approved and
subject to periodic review by the compensation committee.
EMPLOYMENT ARRANGEMENTS
We entered into written employment agreement with our CEO and employment offer letters with our other Named Executive Officers
in connection with their employment with us. We believe that these arrangements were necessary to induce these individuals to
forego other employment opportunities or leave their then-current employer for the uncertainty of a demanding position in a new
and unfamiliar organization.
In filling each of our executive positions, our board of directors or the compensation committee, as applicable, recognized that it would
need to develop competitive compensation packages to attract qualified candidates in a dynamic labor market. At the same time, our
board of directors and the compensation committee were sensitive to the need to integrate new executive officers into the executive
compensation structure that we were seeking to develop, balancing both competitive and internal equity considerations.
Each of these arrangements provides for “at will” employment (meaning that either we or the executive officer may terminate the
employment relationship at any time without cause) and sets forth the initial compensation arrangements for the executive officer,
including their base salary, target annual cash bonus opportunity (expressed as fixed amount or as a percentage of his or her base salary),
participation in our employee benefit programs, eligibility for future equity awards, and reimbursement for all reasonable and necessary
business expenses.
In addition, in the case of our Named Executive Officers, their employment offer letters and other agreements provide that the executive
officer will be eligible to receive certain severance payments and benefits in connection with certain terminations of employment. These
post-employment compensation arrangements are discussed in “Post-Employment Compensation” below.
For detailed descriptions of the employment arrangements with our Named Executive Officers, see “Potential Payments upon Termination
or Change in Control” below.
POST-EMPLOYMENT COMPENSATION
The employment offer letters with certain of our Named Executive Officers provide them with certain protection in the event of their
termination of employment other than for “cause,” death, or “disability” (as such terms are defined in the employment offer letters). In
addition, our Named Executive Officers, are participants in our Change of Control and Severance Policy, or the Change in Control Policy,
which provides for certain protections in the event of a termination of employment in connection with a change in control of the Company.
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We believe that these protections were necessary to induce these individuals to leave their former employment for the uncertainty of a
demanding position in a new and unfamiliar organization and help from a retention standpoint and to retain their services on an ongoing
basis. We also believe that these arrangements provided by the Change in Control Policy help maintain the continued focus and
dedication of our Named Executive Officers to their assigned duties to maximize stockholder value if there is a potential transaction that
could involve a change in control of the Company.
These arrangements provide reasonable compensation to a Named Executive Officer if he or she leaves our employ under certain
circumstances to facilitate his or her transition to new employment. Further, in some instances we seek to mitigate any potential employer
liability and avoid future disputes or litigation by conditioning post-employment compensation and benefits on a departing Named
Executive Officer signing a separation and release agreement acceptable to us.
Under the Change in Control Policy, all payments and benefits in the event of a change in control of the Company are payable only if
there is a subsequent loss of employment by a Named Executive Officer (a so-called “double-trigger” arrangement). In the case of the
acceleration of vesting of outstanding equity awards, we use this double-trigger arrangement to protect against the loss of retention value
following a change in control of the Company and to avoid windfalls, both of which could occur if vesting of either equity or cash-based
awards accelerated automatically as a result of the transaction.
In the event of a change in control of the Company, to the extent Section 280G or 4999 of the Internal Revenue Code is applicable to a
Named Executive Officer, such individual is entitled to receive either:
• payment of the full amounts specified in the policy to which he or she is entitled; or
• payment of such lesser amount that does not trigger the excise tax imposed by Section 4999, whichever results in him or her
receiving a higher amount after taking into account all federal, state, and local income, excise and employment taxes.
We do not use excise tax payments (or “gross-ups”) relating to a change in control of the Company and have no such obligations in place
with respect to any of our Named Executive Officers.
We believe that having in place reasonable and competitive post-employment compensation arrangements, including in the event
of a change in control of the Company, are essential to attracting and retaining highly-qualified executive officers. The compensation
committee does not consider the specific amounts payable under the post-employment compensation arrangements when determining
the annual compensation for our Named Executive Officers. We do believe, however, that these arrangements are necessary to offer
compensation packages that are competitive.
For detailed descriptions of the post-employment compensation arrangements with our Named Executive Officers, as well as an
estimate of the potential payments and benefits payable under these arrangements, see “Potential Payments upon Termination or Change
in Control” below.
OTHER COMPENSATION POLICIES
Hedging and Pledging Prohibitions
Under our Insider Trading Policy, our employees (including officers) and members of our board of directors are prohibited from making
short-sales and engaging in transactions in publicly-traded options, such as puts and calls, and other derivative securities with respect to
our securities. This latter prohibition extends to any hedging or similar transaction designed to decrease the risks associated with holding
our securities. In addition, under our Insider Trading Policy, our employees and members of our board of directors are prohibited from
using our securities as collateral for a loan or holding our securities in a margin account.
TAX AND ACCOUNTING CONSIDERATIONS
The compensation committee takes the applicable tax and accounting requirements into consideration in designing and overseeing our
executive compensation program.
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Deductibility of Executive Compensation
Section 162(m) of the Internal Revenue Code generally places a $1 million limit on the amount of compensation a public company can
deduct in any one year for certain executive officers. While our compensation committee considers tax deductibility as one factor in
determining executive compensation, our compensation committee also looks at other factors in making its decisions, as noted above, and
retains the flexibility to award compensation that it determines to be consistent with the goals of our executive compensation program
even if the awards are not deductible by us for tax purposes.
Taxation of “Parachute” Payments
Sections 280G and 4999 of the Internal Revenue Code provide that executive officers and directors who hold significant equity interests
and certain other service providers may be subject to significant additional taxes if they receive payments or benefits in connection with a
change in control of the company that exceeds certain prescribed limits, and that the company (or a successor) may forfeit a deduction on
the amounts subject to this additional tax. We have not agreed to provide any executive officer, including any Named Executive Officer,
with a “gross-up” or other reimbursement payment for any tax liability that the executive officer might owe as a result of the application of
Sections 280G or 4999 of the Internal Revenue Code.
Section 409A of the Internal Revenue Code
Section 409A of the Internal Revenue Code imposes additional significant taxes in the event that an executive officer, director or service
provider receives “deferred compensation” that does not satisfy the requirements of Section 409A of the Internal Revenue Code.
Although we do not maintain a traditional nonqualified deferred compensation plan for our executive officers, Section 409A of the
Internal Revenue Code does apply to certain severance arrangements, bonus arrangements and equity awards, and we have structured
all such arrangements and awards in a manner to either avoid or comply with the applicable requirements of Section 409A of the Internal
Revenue Code.
Accounting for Stock-Based Compensation
The compensation committee takes accounting considerations into account in designing compensation plans and arrangements for our
executive officers and other employees. Chief among these is Financial Accounting Standards Board Accounting Standards Codification
Topic 718 (“ASC Topic 718”), the standard which governs the accounting treatment of certain stock-based compensation. Among other
things, ASC Topic 718 requires us to record a compensation expense in our income statement for all equity awards granted to our
executive officers and other employees. This compensation expense is based on the grant date “fair value” of the equity award and, in
most cases, will be recognized ratably over the award’s requisite service period (which, generally, will correspond to the award’s vesting
schedule). This compensation expense is also reported in the compensation tables below, even though recipients may never realize any
value from their equity awards.
EMPLOYMENT OFFER LETTER WITH REMO CANESSA
Under Mr. Canessa’s employment offer letter, if we terminate Mr. Canessa’s employment with us other than for “cause,” death or
“disability” outside of the period beginning on a “change of control” (as such terms are defined in the Severance Policy) and ending 12
months following the change of control, he will be entitled to receive (i) accelerated vesting as to the number of unvested shares subject
to equity awards that otherwise would have vested during the 6 months following the date his employment with us terminates had he
remained employed with us through such time; (2) extension of the period of time in which he has to exercise his vested options until the
date that is 12 months following his termination date, subject to earlier termination on a change in control (or similar transaction)
pursuant to the terms of the equity plan under which the options are granted; and (3) severance pay at a rate equal to 100% of his
base salary, as then in effect, for a period of 6 months following the date of such termination, payable in accordance with our normal
payroll practices.
To receive the severance benefits upon a qualifying termination, Mr. Canessa must sign and not revoke a release of claims within the time
specified in his employment offer letter.
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EMPLOYMENT OFFER LETTER WITH DALI RAJIC
Under Mr. Rajic's employment offer letter, if we terminate Mr. Rajic's employment with us other than for “cause” or he resigns for “good
reason”, outside of the “change of control period" (as such terms are defined in the employment offer letter), he will be entitled to receive
(i) severance pay at a rate equal to 100% of his base salary, as then in effect (less applicable withholding) for a period of six months
following the date of such termination; (ii) extension of the period of time in which he will have to exercise his vested options to purchase
our common stock subject to the Option until the date that is 12 months following his termination date, subject to earlier termination on
a change in control (or similar transaction) pursuant to the terms of the equity plan under which the options were granted; (iii) any
unvested Buyout RSU Grant 1 shares will vest; and (iv) if such termination occurs prior to the two year anniversary of his employment
hire date, the Buyout RSU Grant 2, the New Hire RSU Grant and the Option will vest as to shares that would have vested had Mr. Rajic
remained employed for six months after his termination date. Further, If Mr. Rajic is subject to a "qualifying termination" (as defined in the
employment offer letter), he will be entitled to an extension of the period of time in which he will have to exercise his vested options to
purchase our common stock subject to the Option until the date that is 12 months following his termination date, subject to earlier
termination on a change in control (or similar transaction) pursuant to the terms of the equity plan under which the options were granted.
To receive the severance benefits upon a qualifying termination, Mr. Rajic must sign and not revoke a release of claims within the time
specified in his employment offer letter
EMPLOYMENT OFFER LETTER WITH ROBERT SCHLOSSMAN
Under Mr. Schlossman’s employment offer letter, if we terminate Mr. Schlossman’s employment with us other than for “cause” or he
resigns for “good reason”, without a “change of control” (as such terms are defined in the employment offer letter), he will be entitled to
receive continuing severance pay at a rate equal to 100% of his base salary, as then in effect, for a period of 3 months from the date of
such termination, to be paid periodically in accordance with the Company’s normal payroll practices.
To receive the severance benefits upon a qualifying termination, Mr. Schlossman must sign and not revoke a release of claims within the
time specified in his employment offer letter.
Change of Control and Severance Policy
Our board of directors adopted a Change of Control and Severance Policy, or the Severance Policy. Each of our current executive officers
is a participant in the Severance Policy. Under the Severance Policy, if we terminate a participant other than for “cause,” death or
“disability” or the Named Executive Officer resigns for “good reason” during the period beginning on a “change of control” (as such terms
are defined in the Severance Policy) and ending 12 months following the change of control (which we refer to as the change of control
period), such Named Executive Officer will be eligible to receive the following severance benefits:
• 100% of the then-unvested shares subject to his then-outstanding equity awards will become vested and exercisable, and in the
case of equity awards with performance-based vesting, all performance goals and other vesting criteria will be deemed achieved
at the specified percentage of target levels;
• a lump-sum payment equal to 100% of the greatest of (i) a participant's annual base salary as in effect immediately prior to his
termination, (ii) if the termination is a resignation for good reason based on a material reduction in base salary, a participant's
annual base salary as in effect immediately prior to such reduction, or (iii) a participant's annual base salary as in effect immediately
prior to the change of control;
• a lump-sum payment equal to (i) 100% of a participant's target annual bonus for the fiscal year in which the termination occurs plus
(ii) a pro-rated portion of such target annual bonus reduced by any bonus payments made during such fiscal year; and
• a lump-sum health benefit severance payment of $36,000.
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To receive the severance benefits upon a qualifying termination, a Named Executive Officer must sign and not revoke a release of claims
within the time specified in the Severance Policy. If we discover after a Named Executive Officer receives severance benefits that grounds
for terminating him for cause existed, such Named Executive Officer will not receive any further severance benefits under the Severance
Policy, and to the extent permitted by law, the Named Executive Officer will be required to repay to us any severance payments and
benefits (or gain derived from such payments and benefits) he received under the Severance Policy.
Fiscal Year 2018 Equity Incentive Plan and 2007 Stock Plan
Our Fiscal Year 2018 Equity Incentive Plan (the “2018 Plan”) provides that in the event of a merger or change in control, as defined under
our 2018 Plan, each outstanding award will be treated as the administrator determines, without a participant’s consent. The administrator
is not required to treat all awards or participants similarly.
In the event that a successor corporation or its parent or subsidiary does not assume or substitute an equivalent award for any
outstanding award, then such award will fully vest, all restrictions on such award will lapse, all performance goals or other vesting criteria
applicable to such award will be deemed achieved at 100% of target levels and all other terms and conditions met and such award will
become fully exercisable, if applicable. If an option or stock appreciation right is not assumed or substituted, the administrator will notify
the participant in writing or electronically that such option or stock appreciation right will be exercisable for a period of time determined
by the administrator in its sole discretion and the option or stock appreciation right will terminate upon the expiration of such period.
In the event of a change in control, with respect to awards granted to an outside director, his or her options and stock appreciation rights,
if any, will vest fully and become immediately exercisable, all restrictions on his or her restricted stock and restricted stock units will lapse
and all performance goals or other vesting requirements for his or her performance shares and units will be deemed achieved at 100% of
target levels, and all other terms and conditions met.
Our 2007 Plan provides that, in the event of a merger or change in control, as defined under our 2007 Plan, each outstanding award may
be assumed or substituted for an equivalent award. In the event that awards are not assumed or substituted for, then the vesting of
outstanding awards will be accelerated, and stock options will become exercisable in full prior to such transaction. In addition, if an option
is not assumed or substituted in the event of a merger or change in control, the administrator will notify the participant that such award
will be fully vested and exercisable for a specified period prior to the transaction, and such award will terminate upon the expiration of
such period for no consideration, unless otherwise determined by the administrator.
57
2021 Proxy Statement
EXECUTIVE COMPENSATION
Fiscal 2021 Summary Compensation Table
The following table presents information regarding the compensation awarded to, earned by and paid to each individual who served as
one of our Named Executive Officers during fiscal 2021, fiscal 2020 and fiscal 2019.
Name and Principal
Position
Year
Salary
($)
Bonus
($)
Stock
Awards
($)(1)
Option
Awards
($)(5)
Non-Equity
Incentive Plan
Compensation
($)
All Other
Compensation
($)
Total
($)
2021
23,660
— 19,975,500(2)
Jay Chaudhry
President and Chief
Executive Officer
Remo Canessa
Chief Financial Officer
Amit Sinha. Ph.D.
President of Research and
Development, Chief
Technology Officer
2020
23,660
2019
23,660
2021
375,000
2020
350,000
2019
300,000
2021
375,000
2020
350,000
2019
300,000
Dali Rajic(6)
2021
400,000
—
—
—
—
—
—
—
—
—
6,597,000(3)
5,556,000(4)
2,719,670(2)
7,397,664(3)
3,125,250(4)
5,439,142(2)
9,936,247(3)
6,945,000(4)
8,526,289(2)
—
—
—
—
—
—
—
—
—
—
—
—
—
347,117
289,156
—
347,117
289,156
—
525,075
— 19,999,160
—
—
—
—
—
—
6,620,660
5,579,660
3,441,786
8,036,820
3,425,250
6,161,259
— 10,575,403
—
—
7,245,000
9,451,364
President Go-To-Market
and Chief Revenue Officer
Robert Schlossman
Chief Legal Officer
2020
356,667
— 19,625,876(3)
3,414,630
368,308
— 23,765,481
2021
325,000
2020
315,000
2019
275,000
—
—
—
2,175,736(2)
4,454,791(3)
3,472,500(4)
—
—
—
229,453
173,494
—
—
—
—
2,730,189
4,943,285
3,747,500
(1) The amounts reported represent the grant date fair value of the awards granted to the Named Executive Officers during the respective fiscal years as computed in
accordance with FASB ASC Topic 718. The assumptions used in calculating the grant date fair value of the awards reported in this column are set forth in Note 13 to our
audited consolidated financial statements included in our Annual Report on Form 10-K for our fiscal year ended July 31, 2021.
(2) The awards for fiscal 2021 are comprised of (i) time-based RSU and (ii) PSU awards. The amounts shown in respect of the PSUs represent the grant date fair value based on
the probable outcome of the fiscal year 2021 performance condition as of the grant date. The grant date fair value of the PSU awards granted in fiscal 2021 assuming
achievement of the maximum level of performance are: Mr. Chaudhry, $29,963,250; and Mr. Rajic $4,630,720. These amounts do not necessarily correspond to the actual
value recognized by the Named Executive Officers. For example, PSUs were earned at 129.25% of target for fiscal 2021.
(3) The awards for fiscal 2020 are comprised of (i) time-based RSU and (ii) PSU awards. The amounts shown in respect of the PSUs represent the grant date fair value of the
second tranche of the PSU award that was granted in October 2018 based upon the probable outcome of the fiscal 2021 performance conditions as of the grant date. The
grant date fair value of the PSU awards granted in fiscal year 2020 assuming achievement of the maximum level of performance are: Mr. Chaudhry, $9,895,500; Mr.
Canessa, $1,855,428; Dr. Sinha $4,123,125; Mr. Rajic $1,529,317; and Mr. Schlossman $2,061,563. These amounts do not necessarily correspond to the actual value
recognized by the Named Executive Officers.. For example, PSUs were earned at 105.2% of target for fiscal 2020.
(4) The awards for fiscal year 2019 are comprised of (i) time-based RSU and (ii) PSU awards. The amounts shown in respect of the PSUs represent the grant date fair value of the
first of multiple tranches of the PSU award that was granted in October 2018 based upon the probable outcome of the fiscal year 2019 performance condition as of the
grant date. The grant date fair value of the PSU awards granted in fiscal 2019 assuming achievement of the maximum level of performance are: Mr. Chaudhry, $8,334,000;
Mr. Canessa $1,562,625; Dr. Sinha $3,472,500; and Mr. Schlossman $1,736,250. These amounts do not necessarily correspond to the actual value recognized by the
Named Executive Officers. For example, no PSUs were earned for fiscal 2019.
(5) The amounts reported represent the aggregate grant date fair value of the stock options granted to our Named Executive Officers, calculated in accordance with ASC Topic
718. The assumptions used in calculating the grant date fair value of the awards reported in this column are set forth in Note 13 to our audited consolidated financial
statements included in our Annual Report on Form 10-K for our fiscal year ended July 31, 2020. These amounts do not necessarily correspond to the actual value recognized
by the Named Executive Officers.
(6) Mr. Rajic was hired as an executive officer in fiscal 2020.
58
2021 Proxy Statement
EXECUTIVE COMPENSATION
Fiscal 2021 Grants of Plan-Based Awards Table
The following table sets forth certain information with respect to all plan-based awards granted to our Named Executive Officers during
fiscal 2021.
Estimated Possible Payouts under
Non-Equity Incentive Plan Awards(1)
Estimated Possible Payouts under
Equity Incentive Plan Awards(2)
Name
Grant Date
Threshold
($)
Target
($)
Maximum
($)
Threshold
(#)
Target
(#)
Maximum
(#)
Jay
Chaudhry
Remo
Canessa
Amit Sinha,
Ph.D.
Dalibor
Rajic
Robert
Schlossman
09/08/2020
—
—
—
09/08/2020
—
250,000
375,000
04/13/2021
—
—
—
09/08/2020
—
250,000
375,000
04/13/2021
—
—
—
09/08/2020
—
400,000
600,000
09/08/2020
04/13/2021
—
—
—
—
—
—
09/08/2020
—
165,000
247,500
04/13/2021
—
—
—
—
—
—
—
—
—
—
—
—
—
All Other
Stock
Awards:
Number of
shares of
Stock or
Units
(#)
—
—
Grant
Date Fair
Value of
Stock and
Options
Awards
($)(3)
Exercise
Price of
Option
Awards
($)
—
19,975,500
—
—
13,830(4)
—
2,719,670
—
—
—
27,659(4)
—
5,439,142
—
—
—
150,000
225,000
—
—
—
—
—
—
—
—
—
—
23,182
34,773
—
3,087,147
—
—
—
—
—
—
27,659(4)
—
5,439,142
—
—
—
11,064(4)
—
2,175,736
(1) These amounts reflect the fiscal 2021 target cash bonus amounts for each of our Named Executive Officers under our Incentive Compensation Plan. Mr. Chaudhry did not
participate in the Incentive Compensation Plan. There are no threshold bonus amounts under the Incentive Compensation Plan. As set forth in the Summary Compensation
Table, bonuses were earned for fiscal 2021 at a combined 139% of target. . As such, the amounts set forth do not represent actual compensation earned or earnable by the
Named Executive Officers for fiscal 2021. For a description of the Incentive Compensation Plan, see “Compensation Discussion and Analysis –Annual Cash Bonuses” above.
(2) These amounts reflect PSUs for the 2021 fiscal year performance period for which performance metrics were established during the 2021 fiscal year under our 2018 Equity
Incentive Plan. The PSUs were eligible to be earned based on the achievement of 2021 fiscal year revenue and calculated billing targets established by the compensation
committee. There were no threshold amounts for the 2021 fiscal year performance period. The amounts set forth do not represent actual compensation earned or earnable
by the Named Executive Officers for fiscal 2021. For a description of the fiscal 2021 PSU program, see “Compensation Discussion and Analysis –Long-Term Incentive
Compensation” above.
(3) The amounts reported represent the aggregate grant date fair value of the stock awards granted to our Named Executive Officers in fiscal 2021, calculated in accordance
with ASC Topic 718. The assumptions used in calculating the grant date fair value are set forth in the notes to our consolidated financial statements included in the Annual
Report. These amounts do not necessarily correspond to the actual value recognized by the Named Executive Officers.
(4) The RSUs vest as follows: (i) 10% of the RSUs vest in four equal quarterly installments beginning on December 15, 2022, (ii) 40% of the RSUs vest in eight equal installments
beginning on December 15, 2023 and (iii) 50% of the RSUs vest in eight equal installments beginning on December 15, 2025.
59
2021 Proxy Statement
EXECUTIVE COMPENSATION
Fiscal 2021 Outstanding Equity Awards at Fiscal Year End Table
The following table provides information regarding outstanding equity awards held by our Named Executive Officers as of July 31, 2021.
Option Awards
Stock Awards
04/06/2017 (7)
50,558
27,775
5.93
4/6/2024
—
—
Number of
Securities
Underlying
Unexercised
Options
Exercisable
(#)
Number of
Securities
Underlying
Unexercised
Options
Unexercisable
(#)
Option
Exercise
Price
($)
Option
Expiration
Date
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Name
Grant Date
Jay
Chaudhry
10/05/2018 (2)
09/08/2020 (3)
Remo
Canessa
10/05/2018 (4)
10/31/2019 (4)
06/02/2020 (4)
06/02/2020 (5)
04/13/2021 (6)
10/05/2018 (8)
Amit Sinha,
10/31/2019 (4)
Ph.D.
06/02/2020 (4)
06/02/2020 (5)
04/13/2021 (6)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
09/12/2019 (9)
36,776
81,250
49.59
9/12/2029
Dalibor
Rajic
10/31/2019 (2)
10/31/2019 (10)
10/31/2019 (11)
06/02/2020 (4)
06/02/2020 (5)
09/08/2020 (3)
04/13/2021 (6)
—
—
—
—
—
—
—
01/15/2016 (12)
32,000
10/05/2018 (8)
Robert
10/31/2019 (4)
Schlossman
06/02/2020 (4)
06/02/2020 (5)
04/13/2021 (6)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
60
Number
of Shares
or Units
of Stock
That
Have Not
Vested
(#)
Market
Value of
Shares or
Units of
Stock That
Have Not
Vested
($)(1)
Equity
Incentive Plan
Awards:
Number of
Unearned
Shares or
Units That
Have Not
Vested
(#)
Equity
Incentive Plan
Awards:
Market Value
of Unearned
Shares or
Units or That
Have Not
Vested
($)
—
—
150,000
35,386,500
150,000
35,386,500
45,704
10,782,031
24,041
5,671,512
47,147
11,122,449
—
—
—
—
—
—
—
—
—
—
38,685
9,126,178
13,830
3,262,635
85,939
20,273,870
53,424
12,603,256
55,005
12,976,230
—
—
—
—
—
—
—
—
—
—
—
—
67,698
15,970,635
27,659
6,525,035
—
—
—
—
—
—
121,705
28,711,427
55,005
12,976,230
—
—
23,182
23,182
—
—
—
—
5,468,866
5,468,866
—
—
—
—
67,698
15,970,635
23,182
5,468,866
27,659
6,525,035
42,970
10,137,053
26,713
6,301,864
23,574
5,561,342
—
—
—
—
—
—
—
—
—
—
—
—
—
—
29,014
6,844,693
11,064
2,610,108
—
—
2021 Proxy Statement
4.40
1/15/2023
—
—
EXECUTIVE COMPENSATION
(1)
This column represents the market value of the shares underlying the RSUs or PSUs, as applicable, as of July 31, 2021, based on the closing price of our common stock, as
reported on NASDAQ, of $235.91 per share on July 30, 2021.
(2) Upon achievement of specified performance metrics, earned PSUs vest on September 15, 2022, or the first quarterly vesting date after achievement has been certified.
Because the performance metrics for this award had not been determined in FY 2021 (and hence, no grant date fair value could be determined), it was not included in the
summary compensation table or grants of plan-based awards table above. Amounts reported are at 100% target level of achievement, with maximum achievement paying
out at 150%
(3) Upon achievement of specified performance metrics, earned PSUs vest on September 15, 2021, or the first quarterly vesting date after achievement has been certified.
Amounts reported reflect achievement at target. PSUs were achieved at 129.25% of target in fiscal 2021.
(4)
The remaining RSUs vest in 13 equal quarterly installments through September 15, 2024.
(5) Upon achievement of specified performance metrics, earned PSUs vest 25% on September 15, 2022 or the first quarterly vesting date after achievement has been certified
and the remaining 75% vest in 12 equal quarterly installments beginning on December 15, 2022. Because the performance metrics for this award had not been determined
in fiscal 2021 (and hence, no grant date fair value could be determined), it was not included in the summary compensation table or grants of plan-based awards table above.
Amounts reported are at 100% target level of achievement, with maximum achievement paying out at 125%.
(6)
The RSUs vest as follows: (i) 10% of the RSUs vest in four equal quarterly installments beginning on December 15, 2022, (ii) 40% of the RSUs vest in eight equal
installments beginning on December 15, 2023 and (iii) 50% of the RSUs vest in eight equal installments beginning on December 15, 2025.
(7) One-fourth of the shares subject to the option vested on November 1, 2018 and 1/48 of the shares vest monthly thereafter.
(8)
The remaining RSUs vest as follows: (i) 41% of RSUs vest in 9 equal quarterly installments through September 15, 2023 and (ii) 59% of RSUs vest in 13 equal quarterly
installments through September 15, 2024.
(9) One-fourth of the shares subject to the option vested on September 10, 2020 and 1/48th of the shares vest monthly thereafter.
(10) Upon achievement of specified performance metrics, earned PSUs vest on September 15, 2023, or the first quarterly vesting date after achievement has been certified.
Because the performance metrics for this award had not been determined in fiscal 2021 (and hence, no grant date fair value could be determined), it was not included in the
summary compensation table or grants of plan-based awards table above. Amounts reported are at 100% target level of achievement, with maximum achievement paying
out at 150%.
(11) The RSUs vest as follows: (i) 23,182 RSUs vest on September 15, 2021, (ii) 46,364 RSUs vest in two equal biannual installments beginning on March 15, 2022, (iii) 52,159
vest in 9 equal quarterly installments through September 15, 2023.
(12) One-fourth of the shares subject to the option vested on January 14, 2017 and 1/48 of the shares vest monthly thereafter.
61
2021 Proxy Statement
EXECUTIVE COMPENSATION
Fiscal 2021 Option Exercises and Stock Vested Table
The following table presents, for each of our Named Executive Officers, the shares of our common stock that were acquired upon the
exercise of stock options and the related value realized upon exercise during fiscal 2021.
Option Awards
Stock Awards
Number of Shares
Acquired on Exercise
(#)
Value Realized
on Exercise
($)(1)
Number of Shares
Acquired on Vesting
(#)
—
200,000
105,000
31,974
61,000
—
157,810
31,070,055
20,408,535
26,975
52,366
5,048,055
119,378
8,135,965
25,276
Value Realized
on Vesting
($)(2)
20,931,918
5,151,339
9,772,278
18,785,609
4,712,978
Name
Jay Chaudhry
Remo Canessa
Amit Sinha, Ph.D.
Dalibor Rajic
Robert Schlossman
(1)
The value realized on exercise is pre-tax and represents the difference between the market price of our common stock on the date of exercise less the option exercise price
paid for those shares, multiplied by the number of shares for which the option was exercised.
(2)
The value realized on vesting is calculated as the number of vested shares multiplied by the closing market price of our common stock on the vesting date.
Potential Payments Upon Termination or Change in Control
The tables below quantify (i) the potential payments to Messrs. Canessa, Rajic and Schlossman under the terms of the Severance Policy in
the event of a qualifying termination of employment that is not in connection with a change in control of the Company and (ii) the potential
payments to our Named Executive Officers under the terms of the Severance Policy in the event of a qualifying termination of
employment in connection with a change in control of the Company. The amounts shown assume that the change in control and/or
termination of employment occurred on July 31, 2021, the last business day of fiscal 2021. The values reflected also assume that the
payments and benefits to our Named Executive Officers are not reduced by virtue of the provision in the Severance Policy relating to
Sections 280G and 4999 of the Code.
Potential Payments Upon Termination Not in Connection with a Change in Control
Named Executive Officer
Mr. Canessa
Mr. Rajic
Mr. Schlossman
Value of Accelerated Equity Awards
Salary
Severance
($)
Restricted
Stock Units
($)(1)
Options
($)(2)
Total
($)
187,500
3,369,267
—
3,556,767
200,000
8,203,063
3,493,500
11,896,563
81,250
—
—
81,250
(1)
(2)
These amounts reflect the aggregate market value of the unvested shares of our common stock underlying outstanding restricted stock unit awards. The aggregate market
value is equal to the product obtained by multiplying (i) the number of unvested shares of our common stock subject to outstanding restricted stock unit awards as of
July 31, 2021, by (ii) $235.91 (the closing market price of our common stock on Nasdaq on July 30, 2021, the last trading day in the fiscal year ended July 31, 2021).
These amounts reflect the aggregate market value of the unvested shares of our common stock underlying outstanding options. The aggregate market value is equal to
(i) the product obtained by multiplying (x) the number of unvested shares of our common stock subject to vesting of outstanding options as of July 31, 2021, by (y) $235.91
(the closing market price of our common stock on Nasdaq on July 30, 2021, the last trading day in the fiscal year ended July 31, 2021), minus (ii) the aggregate exercise
price for such unvested shares.
62
2021 Proxy Statement
EXECUTIVE COMPENSATION
Potential Payments Upon Termination in Connection with a Change in Control
Value of Accelerated
Equity Awards
Named Executive Officer
Mr. Chaudhry
Mr. Canessa
Dr. Sinha
Mr. Rajic
Salary
Severance
($)
Bonus
Severance
($)
Restricted
Stock Units
($)(1)
23,660
—
70,773,000
375,000
328,280
39,964,805
Health Benefit
Severance
Payments
($)
Total
($)
36,000
70,832,660
36,000
40,704,086
Options
($)(2)
—
—
375,000
328,281
68,349,025
6,387,833
36,000
75,476,139
400,000
414,925
80,589,923
15,138,500
36,000
96,579,348
Mr. Schlossman
325,000
216,666
31,455,060
—
36,000
32,032,726
(1)
(2)
These amounts reflect the aggregate market value of the unvested shares of our common stock underlying outstanding restricted stock unit awards. The aggregate market
value is equal to the product obtained by multiplying (i) the number of unvested shares of our common stock subject to outstanding restricted stock unit awards as of
July 31, 2021, by (ii) $235.91 (the closing market price of our common stock on the Nasdaq Global Select Market on July 30, 2021, the last trading day in the fiscal year
ended July 31, 2021). For performance-based restricted stock unit awards, the assumed number of unvested shares is equal to the target number of shares subject to such
award.
These amounts reflect the aggregate market value of the unvested shares of our common stock underlying outstanding options. The aggregate market value is equal to
(i) the product obtained by multiplying (x) the number of unvested shares of our common stock subject to outstanding options as of July 31, 2021, by (y) $235.91 (the
closing market price of our common stock on the Nasdaq Global Select Market on July 30, 2021, the last trading day in the fiscal year ended July 31, 2021), minus (ii) the
aggregate exercise price for such unvested shares.
63
2021 Proxy Statement
EXECUTIVE COMPENSATION
Equity Compensation Plan Information
The following table provides information as of July 31, 2021 with respect to shares of our common stock that may be issued under our
existing equity compensation plans.
Number of Securities to be
Issued upon Exercise of
Outstanding Options, Restricted
Stock Units and Rights
(#)
Weighted Average
Exercise Price of
Outstanding Options
and Rights
($)
Number of Securities Remaining
Available for Future Issuance
Under Equity Compensation
Plans (Excluding Securities
Reflected in the First Column)
(#)
—
2,475,911
7,890,272
—
—
—
8.46
—
—
49.35
21,669,107
—
—
3,711,355
—
Plan Category
Equity compensation plans
approved by security holders
2007 Stock Plan(1)
Fiscal Year 2018 Equity
Incentive Plan(2)(3)
Fiscal Year 2018 Employee
Stock Purchase Plan(4)
Equity compensation plans not
approved by security holders
Total
10,366,183
10.87
25,380,462
(1)
As a result of the adoption of the 2018 Plan, we no longer grant awards under the 2007 Plan; however, all outstanding options issued pursuant to the 2007 Plan continue to
be governed by their existing terms. To the extent that any such awards are forfeited or lapse unexercised or are repurchased, the shares of common stock subject to such
awards will become available for issuance under the 2018 Plan.
(2) Our 2018 Plan provides that the number of shares available for issuance under the 2018 Plan will be increased on the first day of each fiscal year, in an amount equal to the
least of (i) 12,700,000 shares, (ii) five percent (5%) of the outstanding shares of common stock on the last day of the immediately preceding fiscal year or (iii) such other
amount as our board of directors may determine.
(3)
Includes (i) all remaining PSUs granted in fiscal 2019 which consists of (x) fiscal 2021 PSUs at the maximum payout (PSUs were paid out for fiscal 2021 at 129.25%
resulting in 50,655 above target) and (y) fiscal 2022 PSUs at target (100%), as no metrics had been determined as of fiscal 2021 year-end, and (ii) all remaining PSUs
granted in fiscal 2020 which consists of fiscal 2022 and fiscal 2023 PSUs at target (100%), as no metrics had been determined as of fiscal 2021 year-end.
(4) Our Fiscal Year 2018 Employee Stock Purchase Plan (the "ESPP") provides that the number of shares available for issuance under the ESPP will be increased on the first
day of each fiscal year, in an amount equal to the least of (i) 2,200,000 shares, (ii) one percent (1%) of the outstanding shares of common stock on the last day of the
immediately preceding fiscal year or (iii) such other amount as may be determined by the administrator of the ESPP.
Compensation Committee Report
The compensation committee has reviewed and discussed the section titled “Executive Compensation” with management. Based on such
review and discussion, the compensation committee has recommended to the board of directors that the section titled “Executive
Compensation” be included in this Proxy Statement.
Respectfully submitted by the members of the compensation committee of the board of directors:
Andrew Brown (Chair)
Karen Blasing
Charles Giancarlo
64
2021 Proxy Statement
CEO PAY RATIO DISCLOSURE
CEO Pay Ratio Disclosure
As required by SEC rules, we are providing the following information about the relationship between the annual total compensation of
our Chief Executive Officer and President, Jay Chaudhry (our CEO), and the annual total compensation of our median employee (our
“CEO pay ratio”).
For fiscal 2021, the median of the annual total compensation of all employees of our company (other than our CEO) was $159,900 and
the annual total compensation of our CEO was $19,999,160. Accordingly, the ratio of the annual total compensation of our CEO to the
median of the annual total compensation of all employees was approximately 125 to 1. This ratio is higher than the corresponding pay
ratio for fiscal 2020 because our CEO’s annual total compensation for fiscal 2021 was higher than in the previous fiscal year, as explained
below. This pay ratio is a reasonable estimate calculated in a manner consistent with SEC rules.
We selected July 31, 2021, the last day of our fiscal year, as the determination date for identifying our median employee. As of July 31,
2021, our employee population consisted of approximately 3,153 individuals (other than our CEO) working at our parent company and
consolidated subsidiaries both within and outside the United States, which included all employees whether employed on a full-time,
part-time, temporary or seasonal basis. We did not include any contractors or other non-employee workers in our employee population.
To identify our median employee, we used a consistently applied compensation measure consisting of the target base salary of our
employees for the 12-month period from August 1, 2020 through July 31, 2021. We selected the foregoing compensation element
because it represented our principal broad-based compensation element. Payments not made in U.S. dollars were converted to U.S.
dollars using the applicable currency exchange rate in effect as of July 31, 2021. We did not make any cost-of-living adjustment.
Using this approach, we selected the individual at the median of our employee population, who was a full-time employee based in the
United States. We then calculated annual total compensation for this individual using the same methodology we use for our Named
Executive Officers as set forth in our Fiscal 2021 Summary Compensation Table.
With respect to the annual total compensation of our CEO, we used the amount reported in the “Total” column (column (j)) of our Fiscal
2021 Summary Compensation Table in this Proxy Statement. While his base salary remained unchanged at $23,660, our CEO’s annual
total compensation for fiscal 2021 was significantly higher than his annual total compensation for fiscal 2020 because the value of the
fiscal 2021 tranche of the performance stock units awarded him in fiscal 2019 increased considerably as a result of our increased stock
price. For more information on his Fiscal 2021 PSU Award, see “Compensation Discussion and Analysis – Long-Term Incentive Compensation -
Fiscal 2021 Performance Period PSU Awards".
Because SEC rules for identifying the median of the annual total compensation of all employees allow companies to adopt a variety of
methodologies, apply certain exclusions, and make reasonable estimates and assumptions that reflect their employee population and
compensation practices, the pay ratio reported by other companies may not be comparable to our pay ratio, as other companies have
different employee populations and compensation practices and may have used different methodologies, exclusions, estimates and
assumptions in calculating their pay ratios. As explained by the SEC when it adopted these rules, the rule was not designed to facilitate
comparisons of pay ratios among different companies, even companies within the same industry, but rather to allow stockholders to
better understand and assess each particular company’s compensation practices and pay ratio disclosures.
65
2021 Proxy Statement
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain
Beneficial Owners and Management
The following table sets forth certain information with respect to the beneficial ownership of our common stock as of November 10, 2021
for:
• each person, or group of affiliated persons, who beneficially owned more than 5% of our common stock;
• each of our Named Executive Officers;
• each of our directors and nominees for director; and
• all of our current executive officers and directors as a group.
We have determined beneficial ownership in accordance with the rules of the SEC and the information is not necessarily indicative of
beneficial ownership for any other purpose. Unless otherwise indicated below, to our knowledge, the persons and entities named in the
table have sole voting and sole investment power with respect to all shares that they beneficially owned, subject to community property
laws where applicable.
We have based our calculation of the percentage of beneficial ownership on 140,052,835 shares of our common stock outstanding as of
November 10, 2021. We have deemed shares of our common stock subject to stock options that are currently exercisable or exercisable
within 60 days of November 10, 2021, to be outstanding and to be beneficially owned by the person holding the stock option for the
purpose of computing the percentage ownership of that person. We did not deem these shares outstanding, however, for the purpose
of computing the percentage ownership of any other person.
Unless otherwise indicated, the address of each beneficial owner listed in the table below is c/o Zscaler, Inc., 120 Holger Way, San Jose,
California 95134.
Name of Beneficial Owner
5% Stockholders:
Ajay Mangal, as trustee(1)
Named Executive Officers and Directors:
Jay Chaudhry(2)
Remo Canessa(3)
Amit Sinha, Ph.D.(4)
Dali Rajic(5)
Robert Schlossman(6)
Karen Blasing(7)
Andrew Brown(8)
Scott Darling(9)
Charles Giancarlo(10)
Number of Shares
Beneficially Owned
Percentage of Shares
Beneficially Owned
29,449,532
21%
26,886,396
19.2%
174,848
521,318
151,201
35,806
142,721
65,965
72,430
368,263
*
*
*
*
*
*
*
*
66
2021 Proxy Statement
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Eileen Naughton(11)
David Schneider(12)
—
13,742
*
*
All current executive officers and directors as a group (11 persons)(13)
28,432,690
20.3%
*
Represents beneficial ownership of less than one percent (1%) of the outstanding shares of our common stock.
(1) Consists of (i) 21,566,041 shares held of record by The CJCP Trust for which Mr. Mangal serves as trustee, (ii) 2,627,830 shares held of record by The CKS Trust for the
benefit of YPC dated 12/30/2017 for which Mr. Mangal serves as trustee, (iii) 2,627,831 shares held of record by The CKS Trust for the benefit of SRC dated 12/30/2017
for which Mr. Mangal serves as trustee, and (iv) 2,627,830 shares held of record by The CKS Trust for the benefit of SDC dated 12/30/2017 for which Mr. Mangal serves
as trustee. The beneficiaries of The CJCP Trust and each of The CKS Trusts are members of Jay Chaudhry’s family. The address for The CJCP Trust and The CKS Trust is
c/o The Goldman Sachs Trust Company, 200 Bellevue Parkway, Suite 250, Wilmington, Delaware 19809. This information is derived from a Form 4 filed by Ajay Mangal
with the SEC on September 15, 2021.
(2) Consists of (i) 203,745 shares held of record by Mr. Chaudhry, (ii) 2,177,994 shares held of record by Jagtar S Chaudhry TTEE The RSJ Trust U/A DTD 06/07/2017,
(iii) 24,497,991 shares held of record by Jyoti Chaudhry TTEE The RSP Trust U/A DTD 06/07/2017 and (iv) 6,666 shares held of record by P. Jyoti Chaudhry Family Trust
dated March 1, 2000 for which Surjit Kaur serves as trustee.
(3) Consists of (i) 165,855 shares held of record by Mr. Canessa, and (ii) 8,993 shares issuable upon vesting of RSUs within 60 days of November 10, 2021.
(4) Consists of (i) 48,381 shares held of record by Dr. Sinha, (ii) 131,702 shares held of record by the Sinha Revocable Trust dated September 24, 2011 for which Dr. Sinha
serves as trustee, (iii) 144,749 shares held of record in trusts for Dr. Sinha's minor children for which Neha and Piyush Kumar serve as co-trustees, (iv) 66,000 shares held
of record by the Amit & Deepali Sinha Foundation for which Dr. Sinha and Deepali Sinha serve as trustees, (v) 46,000 shares held of record by the South Dakota Trust Co.
LLC TTEE Sinha Family Incentive Trust, (vi) 46,000 shares held of record by the South Dakota Trust Co. LLC TTEE Sinha Education Excellence Trust, (vii) 22,333
shares subject to options exercisable within 60 days of November 10, 2021, all of which are fully vested and (viii) 16,153 shares issuable upon vesting of RSUs within 60
days of November 10, 2021.
(5) Consists of (i) 88,773 shares held of record by Mr. Rajic, (ii) 52,401 shares subject to options exercisable within 60 days of November 10, 2021, all of which are fully vested
and (iii) 10,027 shares issuable upon vesting of RSUs within 60 days of November 10, 2021.
(6) Consists of (i) 27,966 shares held of record by Mr. Schlossman, (ii) 66 shares held of record by Mr. Schlossman's spouse, and (iii) 7,774 shares issuable upon vesting of RSUs
within 60 days of November 10, 2021.
(7) Consists of (i) 1,471 shares held of record by Ms. Blasing, (ii) 25,624 shares held of record by The Blasing Family Revocable Trust U/A dtd 12/22/2005 for which Ms.
Blasing serves as trustee and (iii) 115,334 shares subject to options exercisable within 60 days of November 10, 2021, all of which are fully vested and (iv) 292 shares
issuable upon vesting of RSUs within 60 days of November 10, 2021.
(8) Consists of (i) 17,340 shares held of record by Mr. Brown, (ii) 48,333 shares subject to options exercisable within 60 days of November 10, 2021, all of which are fully
vested and (iii) 292 shares issuable upon vesting of RSUs within 60 days of November 10, 2021.
(9) Consists of (i) 72,138 shares held of record by Mr. Darling and (ii) 292 shares issuable upon vesting of RSUs within 60 days of November 10, 2021.
(10) Consists of (i) 189,499 shares held of record by Mr. Giancarlo, (ii) 125,000 shares are held of record by The Charles H. & Dianne G. Giancarlo Family Trust U/D/T 11/2/98
for which Mr. Giancarlo serves as trustee, (iii) 26,736 shares held of record by The 2012 Marielle Christina Giancarlo Trust UAD 12/26/12 for which Mr. Giancarlo serves
as a trustee, (iv) 26,736 shares held of record by The 2012 Gianna Marie Giancarlo Trust UAD 12/26/12 for which Mr. Giancarlo serves as a trustee and (v) 292 shares
issuable upon vesting of RSUs within 60 days of November 10, 2021.
(11) Ms. Naughton does not hold any shares as of November 10, 2021.
(12) Consists of (i) 12,582 shares held of record by Mr. Schneider and (ii) 1,160 shares issuable upon vesting of RSUs within 60 days of November 10, 2021.
(13) Consists of (i) 28,149,014 shares beneficially owned by our current executive officers and directors, (ii) 238,401 shares subject to options exercisable within 60 days of
November 10, 2021, and (iii) 45,275 shares issuable upon vesting of RSUs within 60 days of November 10, 2021.
67
2021 Proxy Statement
RELATED PERSON TRANSACTIONS
Related Person Transactions
We describe below transactions and series of similar transactions, since the beginning of our last fiscal year, to which we were a party or
will be a party, in which:
• the amounts involved exceeded or will exceed $120,000; and
• any of our directors, nominees for director, executive officers or beneficial holders of more than 5% of our outstanding capital
stock, or any immediate family member of, or person sharing the household with, any of these individuals or entities (each, a related
person), had or will have a direct or indirect material interest.
Investors’ Rights Agreement
We are party to an amended and restated investors’ rights agreement dated July 24, 2015 which provides, among other things, that
certain holders of our capital stock, including entities affiliated with Mr. Chaudhry and his immediate family have the right to demand that
we file a registration statement or request that their shares of our capital stock be covered by a registration statement that we are
otherwise filing.
Transactions with Stockholders
From time to time, stockholders, including those that may beneficially own more than 5% of our outstanding capital stock subscribe to,
license or otherwise purchase, in the normal course of business, certain of our products and services. These transactions are negotiated
on an arm’s-length basis and are subject to review under the Company’s policies and procedures for related person transactions described
below.
Other Agreements
In addition to the indemnification required in our amended and restated certificate of incorporation and amended and restated bylaws,
we have entered into an indemnification agreement with each member of our board of directors and each of our officers. These
agreements provide for the indemnification of our directors and officers for certain expenses and liabilities incurred in connection
with any action, suit, proceeding or alternative dispute resolution mechanism, or hearing, inquiry or investigation that may lead to the
foregoing, to which they are a party, or are threatened to be made a party, by reason of the fact that they are or were a director, officer,
employee, agent or fiduciary of the Company, or any of our subsidiaries, by reason of any action or inaction by them while serving as an
officer, director, agent or fiduciary, or by reason of the fact that they were serving at our request as a director, officer, employee, agent
or fiduciary of another entity. In the case of an action or proceeding by or in the right of the Company or any of our subsidiaries, no
indemnification will be provided for any claim where a court determines that the indemnified party is prohibited from receiving
indemnification. We believe that these charter and bylaw provisions and indemnification agreements are necessary to attract and retain
qualified persons as directors and officers.
We have entered into employment agreements with certain of our executive officers that, among other things, provide for certain
severance and change of control benefits. For a description of employment agreements with our Named Executive Officers, see “Executive
Compensation—Executive Employment Agreements.”
We have granted stock options to our Named Executive Officers, other executive officers and certain of our directors. See “Executive
Compensation—Executive Employment Agreements.”
Other than as described above, since August 1, 2020, we have not entered into any transactions, nor are there any currently proposed
transactions, between us and a related party where the amount involved exceeds, or would exceed, $120,000, and in which any related
person had or will have a direct or indirect material interest.
68
2021 Proxy Statement
RELATED PERSON TRANSACTIONS
We believe the terms of the transactions described above were comparable to terms we could have obtained in arm’s-length dealings with
unrelated third parties.
Policies and Procedures for Related Party Transactions
We have adopted a formal written policy providing that our executive officers, directors, nominees for election as directors, beneficial
owners of more than 5% of any class of our common stock and any member of the immediate family of any of the foregoing persons, is not
permitted to enter into a related-party transaction with us without the consent of our audit committee, subject to the exceptions
described below.
In approving or rejecting any such proposal, our audit committee is to consider the relevant facts and circumstances available and
deemed relevant to our audit committee, including, whether the transaction is on terms no less favorable than terms generally available
to an unaffiliated third party under the same or similar circumstances, and the extent of the related party’s interest in the transaction.
Our audit committee has determined that certain transactions will not require audit committee approval, including certain employment
arrangements of executive officers, director compensation, transactions with another company at which a related party’s only relationship
is as a non-executive employee, director or beneficial owner of less than 10% of that company’s shares and the aggregate amount involved
does not exceed $120,000 in any fiscal year, transactions where a related party’s interest arises solely from the ownership of our
common stock and all holders of our common stock received the same benefit on a pro rata basis and transactions available to all
employees generally.
69
2021 Proxy Statement
OTHER MATTERS
Other Matters
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires that our executive officers and directors, and persons who own more than 10% of our common
stock, file reports of ownership and changes of ownership with the SEC. Such directors, executive officers and 10% stockholders are
required by SEC regulation to furnish us with copies of all Section 16(a) forms they file.
SEC regulations require us to identify in this Proxy Statement anyone who filed a required report late during the most recent fiscal
year. Based on our review of forms we received, or written representations from reporting persons stating that they were not required
to file these forms, we believe that during our fiscal year ended July 31, 2021, all Section 16(a) filing requirements were satisfied on
a timely basis.
Fiscal Year 2021 Annual Report and SEC Filings
Our financial statements for our fiscal year ended July 31, 2021 are included in our Annual Report on Form 10-K filed with the SEC on
September 16, 2021 (File No. 001-38413). This Proxy Statement and our Annual Report are posted in the Financial Information section
of the Investor Relations webpage at http://ir.zscaler.com and are available from the SEC at its website at www.sec.gov. You may also
obtain a copy of our Annual Report without charge by sending a written request to Zscaler, Inc., Attention: Investor Relations, 120 Holger
Way, San Jose, California 95134.
Company Website
We maintain a website at www.zscaler.com. Information contained on, or that can be accessed through, our website is not intended to be
incorporated by reference into this Proxy Statement, and references to our website address in this Proxy Statement are inactive textual
references only.
70
2021 Proxy Statement
PROPOSALS OF STOCKHOLDERS FOR FISCAL 2022 ANNUAL MEETING
Proposals of Stockholders for Fiscal
2022 Annual Meeting
Stockholders who wish to present proposals for inclusion in the proxy materials to be distributed in connection with next year’s annual
meeting must submit their proposals so that they are received at Zscaler’s principal executive offices no later than July 27, 2022.
Pursuant to the rules promulgated by the SEC, simply submitting a proposal does not guarantee that it will be included.
In order to be properly brought before the fiscal 2022 annual meeting of stockholders, a stockholder’s notice of a matter the stockholder
wishes to present, or the person or persons the stockholder wishes to nominate as a director, must be delivered to the Secretary of
Zscaler at its principal executive offices not less than 45 nor more than 75 days before the first anniversary of the date on which Zscaler
first mailed its proxy materials or a notice of availability of proxy materials (whichever is earlier) for the preceding year’s annual meeting.
As a result, any notice given by a stockholder pursuant to these provisions of our bylaws must be received no earlier than September 10,
2022, and no later than October 10, 2022, unless our annual meeting date occurs more than 30 days before or 60 days after January 5,
2023. In that case, we must receive proposals not earlier than the close of business on the 120th day prior to the date of the fiscal 2022
annual meeting and not later than the close of business on the later of the 90th day prior to the date of the annual meeting or the 10th day
following the day on which we first make a public announcement of the date of the meeting.
To be in proper form, a stockholder’s notice must include the specified information concerning the proposal or nominee as described in
our bylaws. A stockholder who wishes to submit a proposal or nomination is encouraged to seek independent counsel about our bylaws
and SEC requirements. Zscaler will not consider any proposal or nomination that is not timely or otherwise does not meet the bylaws and
SEC requirements for submitting a proposal or nomination.
Notices of intention to present proposals at the fiscal 2021 annual meeting of stockholders must be addressed to: Secretary, Zscaler, Inc.,
120 Holger Way, San Jose, California 95134. We reserve the right to reject, rule out of order, or take other appropriate action with
respect to any proposal that does not comply with these and other applicable requirements.
The board of directors does not know of any other matters to be presented at the Annual Meeting. If any additional matters are properly
presented at the Annual Meeting, the persons named on the enclosed proxy card will have discretion to vote the shares of common stock
they represent in accordance with their own judgment on such matters.
It is important that your shares of common stock be represented at the Annual Meeting, regardless of the number of shares that you hold.
You are, therefore, urged to vote by telephone, by using the internet or by mail at your earliest convenience, as instructed on the Notice
of Internet Availability of Proxy Materials.
THE BOARD OF DIRECTORS
San Jose, California
November 24, 2021
71
2021 Proxy Statement
APPENDIX A
Appendix A
Calculation of Calculated Billings
Calculated Billings
Revenue
Add: Total Deferred Revenue, End of Period
Fiscal 2021
($)
Fiscal 2020
($)
Fiscal 2019
($)
Fiscal 2018
($)
673,100
630,601
431,269
369,767
302,836
251,202
190,174
164,023
(96,619)
257,578
Less: Total Deferred Revenue, Beginning of Period
(369,767)
(251,202)
(164,023)
Calculated Billings
933,934
549,834
390,015
Non-GAAP Financial Measures and Other Key Metrics
We have provided in this Proxy Statement financial information that has not been prepared in accordance with generally accepted
accounting principles in the United States (GAAP). We use non-GAAP financial information to evaluate the performance of our ongoing
operations, including to set targets for our employee compensation programs, and for internal planning and forecasting purposes. We
believe that non-GAAP financial information, when taken collectively, may be helpful to investors because it provides consistency and
comparability with past financial performance. However, non-GAAP financial information is presented for supplemental informational
purposes only, has limitations as an analytical tool and should not be considered in isolation or as a substitute for financial information
presented in accordance with GAAP.
Calculated billings is a non-GAAP financial measure that we believe is a key metric to measure our periodic performance. Calculated
billings represents our total revenue plus the change in deferred revenue in a period. Calculated billings in any particular period aims to
reflect amounts invoiced for subscriptions to access our cloud platform, together with related support services for our new and existing
customers. We typically invoice our customers annually in advance, and to a lesser extent quarterly in advance, monthly in advance or
multi-year in advance. As calculated billings continues to grow in absolute terms, we expect our calculated billings growth rate to trend
down over time. We also expect that calculated billings will be affected by seasonality in terms of when we enter into agreements with
customers; and the mix of billings in each reporting period as we typically invoice customers annually in advance, and to a lesser extent
quarterly in advance, monthly in advance or multi-year in advance. Investors are encouraged to review the related GAAP financial
measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures,
and not to rely on any single financial measure to evaluate our business.
A-1
2021 Proxy Statement
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________________________
FORM 10-K
_____________________________________
(Mark One)
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 2021
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _ to _
Commission File Number: 001-38413
_____________________________________
ZSCALER, INC.
(Exact Name of Registrant as Specified in Its Charter)
_____________________________________
Delaware
(State or other jurisdiction of
incorporation or organization)
26-1173892
(I.R.S. Employer
Identification Number)
120 Holger Way
San Jose, California 95134
(Address of principal executive offices)
Registrant’s telephone number, including area code: (408) 533-0288
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s) Name of each exchange on which
registered
The Nasdaq Stock Market LLC
Common Stock, $0.001 Par
Value
ZS
Securities registered pursuant to Section 12(g) of the Act:
___________________________________________________
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act
of 1933, as amended. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be
submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit such files) Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a
smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer,"
"accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
☒
☐
Accelerated filer
Smaller reporting company
Emerging growth company
☐
☐
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition
period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the
Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of
the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15
U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
☐ No ☒
The aggregate market value of the common stock held by non-affiliates of the registrant, based on the closing price of
a share of the registrant's common stock on January 31, 2021 (the last business day of the registrant’s most recently
completed second fiscal quarter) as reported by the Nasdaq Global Select Market on such date was approximately
$20.4 billion.
As of August 31, 2021, the number of shares of registrant’s common stock outstanding was 138,735,981.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement relating to its fiscal year 2021 Annual Meeting of Stockholders
are incorporated by reference into Part III of this Form 10-K where indicated. Such Proxy Statement will be filed with
the United States Securities and Exchange Commission within 120 days after the end of the fiscal year to which this
Annual Report on Form 10-K relates.
Business
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Properties
Legal Proceedings
Mine Safety Disclosures
ZSCALER, INC.
TABLE OF CONTENTS
PART I
PART II
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 6.
Item 7.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Item 16.
Directors, Executive Officers and Corporate Governance
PART III
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Certain Relationships and Related Transactions and Director Independence
Principal Accountant Fees and Services
PART IV
Exhibits, Financial Statement Schedules
Form 10-K Summary
Signatures
Page
3
17
54
54
54
54
55
57
60
88
90
143
143
144
145
145
145
145
145
146
146
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, including but not limited to, statements regarding our financial outlook and market
positioning. These forward-looking statements are made as of the date they were first issued and were based on current
expectations, estimates, forecasts and projections as well as the beliefs and assumptions of management. The words
"believe," "may," "will," "potentially," "estimate," "continue," "anticipate," "intend," "could," "would," "project," "plan,"
"expect," and similar expressions that convey uncertainty of future events or outcomes are intended to identify forward-
looking statements.
These forward-looking statements include, but are not limited to, statements concerning the following:
•
•
the potential impact on our business of the ongoing COVID-19 pandemic;
our future financial performance, including our expectations regarding our revenue, cost of revenue, gross profit
or gross margin, operating expenses (including changes in sales and marketing, research and development and
general and administrative expenses), and our ability to achieve, and maintain, future profitability;
• market acceptance of our cloud platform;
•
•
•
•
the effects of increased competition in our markets and our ability to compete effectively;
our ability to maintain the security and availability of our cloud platform;
our ability to maintain and expand our customer base, including by attracting new customers;
our ability to develop new solutions, or enhancements to our existing solutions, and bring them to market in a
timely manner;
• market acceptance of any new solutions or enhancements to our existing solutions;
•
•
•
•
•
•
•
•
•
•
•
anticipated trends, growth rates and challenges in our business and in the markets in which we operate;
our business plan and our ability to effectively manage our growth and associated investments;
beliefs about and objectives for future operations;
beliefs about and objectives for future acquisitions, strategic investments, partnerships and alliances and our
ability to successfully integrate completed acquisitions;
our relationships with third parties, including channel partners;
our ability to maintain, protect and enhance our intellectual property rights;
our ability to successfully defend litigation brought against us;
our ability to successfully expand in our existing markets and into new markets;
sufficiency of cash to meet cash needs for at least the next 12 months and service our outstanding debt;
our need and ability to raise additional capital in future debt or equity financings;
our expectations regarding settlement of our Notes (defined below);
1
•
•
•
•
our ability to comply with laws and regulations that currently apply or become applicable to our business both
in the United States and internationally;
beliefs about the impacts of legal and geopolitical developments upon our business;
the attraction and retention of qualified employees and key personnel; and
the future trading prices of our common stock.
These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those
described in "Risk Factors" elsewhere in this Annual Report on Form 10-K. Moreover, we operate in a very competitive and
rapidly changing environment, and new risks emerge from time to time. It is not possible for our management to predict all
risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors,
may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light
of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Annual Report
on Form 10-K may not occur and actual results could differ materially and adversely from those anticipated or implied in the
forward-looking statements and you should not place undue reliance on our forward-looking statements.
The forward-looking statements made in this Annual Report on Form 10-K relate only to events as of the date on
which the statements are made. We undertake no obligation to update any forward-looking statements made in this Annual
Report on Form 10-K to reflect events or circumstances after the date of this Annual Report on Form 10-K or to reflect new
information or the occurrence of unanticipated events, except as required by law.
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Item 1. Business
Overview
PART I
We anticipate, secure, and simplify the experience of doing business, transforming today and tomorrow.. We deliver
four integrated and comprehensive solutions to our customers using our cloud platform, the Zscaler Zero Trust Exchange:
• Secure access to the internet and SaaS with Zscaler Internet Access or ZIA;
• Secure access to internal applications with Zscaler Private Access or ZPA;
• Management and enhancement of the user-to-application experience with Zscaler Digital Experience or ZDX; and
• Protection for public cloud workloads, servers and internet of things, or IoT, devices with Zscaler Cloud Protection
or ZCP.
We were incorporated in 2007, during the early stages of cloud adoption and mobility, based on a vision that the internet
would become the new corporate network as the cloud becomes the new data center. We predicted that with rapid cloud
adoption and increasing workforce mobility, traditional perimeter security approaches would provide inadequate protection
for users and data and an increasingly poor user experience. We pioneered a cloud platform, the Zscaler Zero Trust Exchange,
that represents a fundamental shift in the architectural design and approach to networking and security.
Enterprise applications are rapidly moving to the cloud to achieve greater IT agility, a faster pace of innovation and
lower costs. Organizations are increasingly relying on internet destinations for a range of business activities, adopting new
external SaaS applications for critical business functions and moving their internally managed applications to the public
cloud, IaaS or PaaS. Enterprise users now expect to be able to seamlessly access applications and data, wherever they are
hosted, from any device, anywhere in the world. We believe these trends are indicative of the broader digital transformation
agenda, as businesses increasingly succeed or fail based on their IT outcomes.
We believe that securing the on-premises corporate network to protect users and data is becoming increasingly
irrelevant in a cloud and mobile-first world where organizations depend on the internet, a network they do not control and
cannot secure, to access critical applications that power their businesses. We pioneered a new approach that securely connects
users, devices, and applications using business policies, regardless of the network. Our Zero Trust Exchange eliminates the
need for traditional on-premises security appliances that are difficult to maintain and require compromises between security,
cost and user experience. Our purpose-built, multi-tenant, distributed cloud platform incorporates the security functionality
needed to enable users, applications, and devices to safely and efficiently utilize authorized applications and services based
on an organization’s business policies.
Before our Zero Trust Exchange, the corporate data center served as the central hub of IT security, with a physical
network perimeter used to separate corporate users, devices and applications from the internet. Today, the network perimeter
consists of appliances that have become fundamentally less effective as applications, data, users and devices rapidly move off
the corporate network, making the notion of a corporate perimeter obsolete. In a world where more companies are shifting
their most critical IT assets to the cloud, a zero trust architecture is required. Our architecture is vastly different from the
traditional “hub-and-spoke” corporate network, where traffic from branch offices is routed to centralized data centers for
security scanning and policy enforcement before reaching its destination. In contrast, our Zero Trust Exchange, which is
distributed across more than 150 data centers worldwide, acts as an intelligent switchboard that uses business policies to
securely connect users, devices, and applications over any network. We provide all of these solutions at scale, processing well
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over 160 billion internet requests per day. Our Zero Trust Exchange eliminates the need for organizations to buy and manage
a variety of high cost appliances that need to be maintained by a large number of highly skilled security personnel, who are
expensive and in increasingly short supply.
Our cloud native, multitenant architecture is distributed across more than 150 data centers globally to bring security and
business policy close to users and devices in 185 countries to provide fast, secure, and reliable access. Each day, we block
over 150 million threats and perform over 200,000 unique security updates. Our customers benefit from the cloud security
effect of our ever-expanding ecosystem because once a new threat is detected, it can be blocked across our entire customer
base within minutes.
Many of the largest enterprises and government agencies in the world rely on our solutions to help them accelerate their
move to the cloud. We have over 5,600 customers across all major geographies, with an emphasis on larger organizations,
and we currently count over 500 of the Forbes Global 2000 as customers. Our customers span every major industry, including
financial services, healthcare, manufacturing, airlines and transportation, conglomerates, consumer goods and retail, media
and communications, public sector and education, technology and telecommunications services.
We have experienced significant growth, with revenue increasing from $302.8 million in fiscal 2019 to $431.3 million
in fiscal 2020 to $673.1 million in fiscal 2021, representing year-over-year revenue growth of 42% and 56%, respectively. We
experienced net losses of $28.7 million, $115.1 million and $262.0 million in fiscal 2019, fiscal 2020 and fiscal 2021,
respectively. We expect we will continue to incur net losses for the foreseeable future.
Our Solutions and Zero Trust Exchange Platform
Our Zero Trust Exchange cloud security platform delivers four comprehensive and integrated solutions built natively in
the cloud to power digital transformation.
Secure Internet and SaaS Access - Zscaler Internet Access
Zscaler Internet Access, or ZIA, was designed to provide users, servers, operational technology, or OT, and IoT devices
secure access to externally managed applications, including SaaS applications and internet destinations regardless of device,
location or network. ZIA provides inline content inspection and firewall access controls across all ports and protocols to
protect organizations and users from external threats as well as protecting an organization’s data while at rest and preventing
data from leaking out to unauthorized sites. Policies follow the user to provide identical protection on any device, regardless
of location; any policy changes are enforced for users worldwide. Our cloud security platform provides full inline content
inspection to assess and correlate the risk of the content to protect against sophisticated attacks, including ransomware and
phishing. The cloud platform applies machine learning across our well over 160 billion daily transactions to identify and
block unknown threats quickly.
ZIA enables four primary use cases:
Cyberthreat Protection – Our threat prevention functionality enables protection against threats using a range of
approaches and techniques. Our threat prevention capabilities provide multiple layers of protection to prevent sophisticated
ransomware, phishing, and zero-day cyberattacks. We provide functionality that traditionally has been offered by disparate,
stand-alone products. Core cloud platform threat prevention services include:
• Advanced Threat Protection: Our advanced threat protection functionality delivers real-time protection from
malicious internet content like browser exploits, scripts, zero-pixel iFrames, malware and botnet callbacks. Over
200,000 unique security updates are performed every day to the Zscaler cloud to keep users protected. Once we
detect a new threat to a user, we block it for all users. We call this the “cloud security effect.”
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• Sandbox: Our cloud sandbox enables enterprises to block zero-day exploits and advanced persistent threats, or
APTs, by analyzing unknown files for malicious behavior, and it can scale to every user regardless of location. Our
cloud sandbox was designed and built to be multi-tenant and allows customers to determine which traffic should be
sent for detonation. As an integrated cloud security platform, customers can set policies by users and destinations to
prevent patient-zero scenarios by holding, detonating and analyzing suspicious files in the cloud sandbox before
they are sent to the user.
• Browser Isolation: Our cloud browser isolation functionality creates an isolated browsing session that enables users
to access any webpage on the internet without downloading any of the web content served by the webpage onto a
local device or the corporate network. With cloud browser isolation, users are not directly accessing active web
content; instead, only a safe rendering of pixels is delivered to the user. Malicious code that may be hidden in the
web content is kept at bay.
Data Protection- Our data protection functionality enables enterprises to prevent unauthorized sharing or exfiltration of
confidential information for users, devices, and servers, reducing our customers’ business and compliance risk. Core cloud
platform data protection services include:
• Data Loss Prevention: Our data loss prevention, or DLP, functionality enables enterprises to use predefined or
custom dictionaries using efficient pattern-matching algorithms to easily scale to all users and traffic, including
compressed or encrypted traffic, to prevent, monitor or block unauthorized or sensitive data exfiltration. Our exact
data match, or EDM, and Index Document Match, or IDM, functionalities augment the accuracy and efficacy of our
data loss prevention solution by enabling our customers to populate a custom database scaling to billions of unique
fields, as well as unstructured documents. Our DLP policies can be enforced for inline data in motion and out-of-
band for data at rest.
• Cloud Access Security Brokerage: Our Cloud Access Security Broker, or CASB, functionality and cloud
application controls enable enterprises to discover and granularly control user access to known and unknown cloud
applications. By doing Secure Sockets Layer, or SSL, inspection at scale, we provide malware protection, data loss
prevention and CASB functions that can be performed both inline and out-of-band, for specific sanctioned and
unsanctioned applications. Business policies can be defined with granular access control for specified cloud
applications, such as the ability to upload or download files or post comments on videos based on different user or
group identity.
• File Type Controls: Our file type control functionality allows policies to be defined that control which file types are
allowed to be downloaded and uploaded based on application, user, location and destination.
• Browser Isolation: With cloud browser isolation, users are not directly accessing active web content; instead, only a
safe rendering of pixels is delivered to the user. This approach prevents sensitive data from being downloaded to
unauthorized devices in bring your own device environments or on shared public computers.
Secure Local Internet Breakouts – Our local internet breakout capability means traffic destined for the cloud no
longer needs to be routed over a private Multiprotocol Label Switching, or MPLS, network to the data center. Traffic can now
be routed locally over the internet and directly to the cloud, which provides for a faster experience and a significant reduction
in MPLS network costs. Our core cloud platform services for local internet breakouts include:
• Firewall: Our cloud firewall was designed to protect users by inspecting internet traffic on all ports and protocols,
and it offers user level policies, application identification with deep packet inspection and intrusion prevention.
• Bandwidth Control: Our bandwidth control and traffic shaping capabilities ensure that business critical
applications are prioritized over non-business critical applications, improving productivity and user experience. By
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enforcing quality of service in the cloud, our platform enables the optimization of “last-mile” utilization of a
customer’s network, providing significant value.
• DNS: Our Domain Name System, or DNS, filtering solution provides a local DNS resolver and enforces acceptable
use policies.
Secure Private Application Access - Zscaler Private Access
Zscaler Private Access, or ZPA, was designed to provide secure access to internally managed applications, either hosted
internally in data centers or hosted in private or public clouds. ZPA was designed around four key tenets that fundamentally
change the way users access internal applications:
• connect users to applications without bringing users on the network;
• never expose applications to the internet;
• segment access to applications without relying on the traditional approach of network segmentation; and
• provide remote access over the internet without virtual private networks, or VPNs.
ZPA enforces a global policy engine that manages access to internally managed applications regardless of location. If
access is granted to a user, our ZPA solution connects the user’s device only to the authorized application without exposing
the identity or location of the application. Hence applications are not exposed to the internet, further limiting the external
attack surface. This results in reduced cost and complexity, while offering better security and an improved user experience.
Our ZPA solution includes broad functionality, which we categorize by the following areas:
• Secure Application Access: Our ZPA solution delivers seamless connectivity to internally managed applications
and assets whether they are in the cloud, enterprise data center, or both. Administrators can set global policies from a
single console, enabling policy-driven access that is agnostic to the network the users are on. By creating seamless
access to applications regardless of a user’s network, our ZPA solution eliminates the need for traditional remote
access VPNs, SSL, reverse proxies and other similar products.
• Application Discovery: Similar to CASB application discovery reports for internet applications, our ZPA solution
provides granular discovery of internally managed applications to aid in the creation of segmentation policies.
Because our ZPA solution sits on the application layer and is name-based or domain-based, organizations can
quickly and seamlessly identify their internally-managed applications and then easily provision appropriate policies.
• Application Segmentation: Our architecture provides capabilities that enable user and application level
segmentation, a vast improvement over traditional network segmentation. As each user-to-application connection is
segmented with microtunnels, each of which is a temporary session between a specific user and a specific
application, lateral movement across the network is prevented, significantly reducing security risk. Since users are
granted access only to applications for which they have permission and are not granted full access to the network,
microtunnels eliminate the need for internal firewall.
• Application Protection: Our ZPA solution initiates and connects outbound-only links between authenticated users
and internally managed applications using microtunnels. Access is provided to users without bringing them onto the
corporate network and without exposing applications to the internet. Internally managed applications are not
discoverable or identifiable. With no inbound connections and no public IP addresses, there is no inbound attack
surface and therefore no threat of distributed denial-of-service, or DDoS, attacks. With our innovative approach, we
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eliminate the need for a next-generation firewall. Similarly, by completely removing the need for an exposed IP
address or DNS to the internet, we eliminate the need for DDoS mitigation systems.
• Browser Isolation: Our cloud browser isolation is used with ZPA to provide isolated sessions to internal web
applications without allowing data to transfer down to unmanaged devices or active content to be uploaded into
sensitive internal applications.
• Smokescreen: Our Smokescreen deception solution augments our customers' ability to detect the presence of an
adversary in their network by deploying decoys and lures. These decoys can be leveraged to disrupt the adversary by
detecting their presence in the network and initiating mitigation using automatic orchestration via the Zscaler
platform and other third party solutions. Our customers can quickly deploy these capabilities by leveraging a diverse
library of built-in decoys including various types of applications, network components and IoT services. The high-
fidelity low-volume alerts allow customers to implement meaningful automation workflows to prevent lateral
spread.
The primary use cases for our ZPA solution include:
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remote workforce access to private applications without legacy VPN, providing zero trust from office to data center;
• providing non-employees with secure access to internal applications;
• securely connecting business-to-business, or B2B, customers, service providers and supplier access to applications
typically deployed as business to business portals in an extranet;
• direct-to-cloud access to internally managed applications hosted in public cloud environments, such as Microsoft
Azure, Amazon Web Services, or AWS, and Google Cloud Platform, or GCP; and
• access to applications following a merger or acquisition by providing named users with access to named
applications, without the need to merge networks.
Experience Management - Zscaler Digital Experience
Zscaler Digital Experience, or ZDX, is designed to measure end-to-end user experience across key business
applications, providing an easy to understand digital experience score for each user, application and location within an
enterprise. As users have become mobile and applications have moved to the cloud, traditional network performance
monitoring tools have become increasingly irrelevant. Enterprises can no longer collect performance metrics or indicators
along the traditional network path as they could when they owned the network and the applications ran in their own data
centers. When a user's experience is suffering or an event is negatively impacting user experience, ZDX allows an
organization to isolate where in the network path an issue is occurring and whether it is caused by a user’s device, the WiFi
connection, the local internet connection, a service provider in the path or the destination application itself. With ZDX,
enterprises can quickly determine if an issue is associated with a single user, application or location or indicates a broader
issue potentially impacting other users, applications or locations all via a simple visual workflow without a need for
additional hardware or software.
Public Cloud Security - Zscaler Cloud Protection
Zscaler Cloud Protection, or ZCP, minimizes the risk of moving to the cloud while reducing operational complexity.
The core elements of ZCP address the key security and operations challenges that must be overcome in order to secure
deployment of public cloud platforms such as Azure, AWS and GCP.
Our ZCP solution includes broad functionality, which we categorize by the following areas:
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• Workload Posture: Our Workload Posture solutions automatically identify and remediate cloud service,
application, and identity misconfigurations by deploying three distinct functionalities Cloud Security Posture
Management, or CSPM, Cloud Infrastructure Entitlement Management, or CIEM, and DLP.
◦ CSPM, automatically identifies and remediates application misconfigurations in SaaS, IaaS, and PaaS to
reduce risk and ensure compliance with industry and organizational benchmarks.
◦ CIEM detects and remediates excessive or unused cloud permissions and enforces least privileged access
without disrupting productivity.
◦ DLP leverages the same DLP technology offered with ZIA to identify and protect sensitive or exposed data
in public cloud storage services, such as AWS S3.
Our Workload Posture solutions provide visibility into risk posture, enforces set standards via remediation guidance
and auto-remediation, enables governance of security policies and compliance frameworks via exceptions and
private benchmark compliance dashboards. In addition, reporting is available for multiple regulatory schemes,
including CIS, CSA, NIST, ISO, FFIEC, RBI, PCI, HIPAA, GDPR, SOC 2, UK NCSC and GxP Life sciences.
• Workload Communications: Our Workload Communication solutions extend Zscaler’s Zero Trust Exchange to
public cloud workloads using a cloud-native zero trust access service that provides fast and secure app-to-internet
(via ZIA) and app-to-app (via ZPA) connectivity across multi- and hybrid cloud environments. Connecting the
quickly growing number of workloads, servers, and OT/IoT devices to the internet across different networks is
difficult and opens up new attack vectors for cybercriminals. Using legacy technologies such as VPNs, transit
gateways, transit hubs, and firewalls to solve this problem is complex, costly, and does not adapt to the dynamic
integrated, automated connectivity and security, Workload
nature of modern cloud workloads. With
Communications provides a faster, smarter, simpler, lower cost, and more secure alternative to legacy network
solutions.
• Workload Segmentation: Our Workload Segmentation solution secures application-to-application communications
inside public clouds and data centers to stop lateral threat movement, preventing application compromise and
reducing the risk of data breaches. Workload Segmentation utilizes an innovative approach that makes it
significantly simpler to deploy and operate than traditional segmentation solutions. Workload Segmentation
improves the security of east-west communication by verifying the identity of the communicating application
software, services and processes to achieve a zero trust environment. This reduces the attack surface, resulting in
lower risk of application compromise and data breaches.
Our Technology and Architecture
We are driven by technology and innovation. We developed a highly scalable, multi-tenant, globally distributed cloud
capable of providing inline inspection of internet and SasS traffic, securing access to private applications, protecting cloud
applications and managing digital experience. We designed a purpose-built three-tier architecture starting with our core
operating system and adding layers of security and networking innovations over time. Our cloud platform is protected by
more than 275 issued and pending patents. Our cloud is distributed across more than 150 data centers on five continents and
processes approximately over 160 billion requests per day from users across 185 countries.
Our platform is designed to be resilient, redundant and high-performing. It is built as software modules that run on
standard x86 platforms without any dependency on custom hardware. The platform modules are split into the control plane
(Zscaler Central Authority), the enforcement plane (Zscaler Enforcement Nodes) and the logging and statistics plane (Zscaler
Log Servers) as described below:
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• Zscaler Central Authority: The Zscaler Central Authority monitors our entire security cloud and provides a central
location for software and database updates, policy and configuration settings and threat intelligence. The collection
of Zscaler Central Authority instances together act like the brain of the cloud, and they are geographically
distributed for redundancy and performance.
• Zscaler Enforcement Nodes: Customer traffic is directed to the nearest Zscaler Enforcement Node, where security,
management and compliance policies served by the Zscaler Central Authority are enforced. The Zscaler
Enforcement Node also incorporates our differentiated authentication and policy distribution mechanism that
enables any user to connect to any Zscaler Enforcement Node at any time to ensure full policy enforcement. The
Zscaler Enforcement Node utilizes a full proxy architecture and is built to ensure data is not written to disk to
maintain the highest level of data security. Data is scanned in RAM only and then erased. Logs are continuously
created in memory and forwarded to our logging module.
• Zscaler Log Servers: Our technology is built into the Zscaler Enforcement Node to perform lossless compression of
logs, enabling our platform to collect over 130 terabytes of unique raw log data every day. We do not collect
customer data other than logs, and those logs are encrypted and transmitted to our log server at a destination of
choice without ever writing to disk at the enforcement nodes. Logs are transmitted to our logging servers over secure
connections and multicast to multiple servers for redundancy. Our dashboards provide our customers visibility into
their traffic to enable troubleshooting, policy changes and other administrative actions. Our analytics capabilities
allow customers to interactively mine billions of transaction logs to generate reports that provide insight on network
utilization and traffic. We do not rely on batch reporting; we continuously update our dashboards and reporting and
can stream logs to a third-party Security Information and Event Management, or SIEM, service as they arrive.
Regardless of where users are located, customers can choose to have logs stored in the United States or the
European Union/Switzerland. Customer data is isolated as part of our multi-tenant architecture.
Our platform is a critical integration point positioned in the data path providing secure access to the internet, cloud and
internal applications. We complement and interoperate with key technology and cloud vendors across major market
segments, including software-defined wide area network, or SD-WAN, identity and access management, or IAM, device and
endpoint management, as well as SIEM for reporting and analytics. Many of these vendors, like us, were developed in the
cloud and together provide a foundation for a modern access and security architecture.
Growth Strategies
The growing use of the internet and the increasing adoption of the cloud and mobility are driving network and
application transformation. As a provider of a fully integrated, multi-tenant cloud security solution, we enable our customers
to accelerate this secure transformation to the cloud and believe we are uniquely positioned to maximize value as they
undertake these transitions. Key elements of our growth strategy include:
• Continue to win new customers. We believe that we have a significant opportunity to expand our customer base,
both in the United States and internationally. We have invested significantly in our sales and marketing organization
to execute against this opportunity.
• Expand in existing customers. We leverage a land-and-expand approach with our existing customers to sell
subscriptions for additional users, additional a la carte solutions and premium solution bundles that contain more
functionality.
• Leverage channel partners to participate in cloud transformation initiatives. We have invested in establishing
long-standing relationships with global telecommunications service providers and are expanding our network of
global system integrators and regional telecommunications service providers and cloud-centric value-added
resellers.
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• Expansion and innovation of services. We continue to invest in research and development and acquire new
technologies and products in order to add new and differentiated solutions to our existing product portfolio and to
improve the overall functionality, reliability, availability and scalability of our cloud security platform.
• Expansion into additional market segments. We are primarily targeting the expansion of our immediate
addressable market, emphasizing U.S. federal government agencies in the near- to medium-term as well as
additional international markets in the Asia Pacific region.
We sell to enterprises of all sizes. As of July 31, 2021, we had over 5,600 customers, including over 500 of the Forbes
Global 2000. Many of our customers include major global enterprises that send virtually all of their internet traffic through
our cloud security platform. Our customers operate in a variety of industries, including airlines and transportation,
conglomerates, consumer goods and retail, financial services, healthcare, manufacturing, media and communications, public
sector and education, technology and telecommunications services. Approximately 51% of our revenue was from customers
outside the United States for all periods presented. No end customer contributed more than 10% of our revenue in fiscal
2021, fiscal 2020 or fiscal 2019.
Sales and Marketing
Although we have a channel sales model, we use a joint sales approach in which our sales force develops relationships
directly with our customers, and together with our channel account teams, works with our channel partners on account
penetration, account coordination, sales and overall market development. Our customer care and success teams maintain
high-touch relationships with our customers to deploy and manage our cloud platform, identify, analyze and resolve
performance issues and respond to security threats. We believe customer service touchpoints are opportunities to further
develop our relationship with our customers and potentially generate incremental revenue through the addition of new users
and services.
Our channel partners consist of global telecommunications service providers, system integrators and value-added
reseller partners, and we leverage their relationships to expand our reach, improve procurement and accelerate customer
fulfillment.
We enter into agreements with our channel partners in the ordinary course of business. The contracts typically have a
one-year term and renew automatically, subject to cancellation by either party upon 90 days’ notice. These agreements
contain standard commercial terms and conditions, including payment terms, billing frequency, warranties and
indemnification. Our channel partners generally place purchase orders with us after receiving orders from customers. We
generally maintain privity of contract with customers through end user subscription agreements.
We expect to continue investing in our channel partners as we provide them with education, training and programs,
including supporting their independent sales of our solutions. We believe that such investment, and investments in our sales
force, will lead to significant expansion in our customer base, which will materially impact our business and results of
operations.
Our marketing strategy is focused on platform and brand awareness, which drives our opportunity pipeline and
customer demand. This strategy is account-based, enabling us to pursue targeted marketing activities across both digital and
non-digital channels. We anticipate increasing our marketing team headcount and are investing in programs designed to
elevate our brand in the market and engage new enterprise accounts. We also participate in a number of cloud and security
industry events. In addition, we have a deeply integrated ecosystem of channel partners, with whom we engage in joint
marketing activities.
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Data Center Operations
We operate our services across more than 150 data centers around the world, which are built to be highly resilient, have
multiple levels of redundancy and provide failover to other data centers in our network. Our data centers are co-located
within top-tier internet interconnection hubs that have direct connectivity, known as peering, to major telecommunication
service providers, SaaS providers, public cloud providers, internet content providers and popular internet destinations. A
number of our data centers are also located with our service provider partners.
Our platform has received ISO 27001 certification since 2014. In addition, since 2017 we received and currently
maintain ISO 27701, 27018 and 27017 certifications. We are also SOC2, SOC 3 and CSA-STAR compliant. We also built a
leading U.S. and international government compliance portfolio. We are authorized at the FedRAMP High level for ZPA and
“in Process” for Impact Level 5 with the DOD. In addition, we are authorized at the FedRAMP Moderate level for ZIA today
and “In Process” status at the High Impact level for ZIA. We also added ITAR, DFARS, FIPS, CJIS and VPAT 508 to our
government portfolio. Internationally, we are IRAP Protected and OAPRA in Australia, Cyber Essentials in the UK, and “in
process” for ITSG-33 Prob B in Canada.
Research and Development
Our research and development organization is responsible for the design, architecture, operation and quality of our
cloud platform. In addition to improving on our features, functionality and scalability, this organization works closely with
our cloud operations team to ensure that our platform is reliable, available and scalable. ThreatLabZ, our internal team of
security experts, researchers and network engineers, analyzes the global threat landscape, works to eliminate threats across
our cloud platform and reports on emerging security issues.
Research and development expense was $174.7 million, $97.9 million and $62.0 million for fiscal 2021, fiscal 2020
and fiscal 2019, respectively. Our research and development leadership team is based in San Jose, California, and we also
maintain research and development centers in India, Canada, Israel and Spain.
Competition
The market for security solutions is defined by changing technologies, an evolving threat landscape and complex
enterprise needs. Our competitors and potential competitors include legacy on-premises appliance vendors across a number
of categories:
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independent IT security vendors, such as Check Point Software Technologies Ltd., Fortinet, Inc., Palo Alto
Networks, Inc. and Broadcom, which offer a broad mix of network and endpoint security products;
large networking vendors, such as Cisco Systems, Inc. and Juniper Networks, Inc., which offer security appliances
and incorporate security capabilities in their networking products;
companies such as FireEye, Inc., Forcepoint Inc. (previously, Websense, Inc.), Netskope, Inc. and Pulse Secure,
LLC with point solutions that compete with some of the features of our cloud platform, such as proxy, firewall,
sandboxing and advanced threat protection, data loss prevention, encryption, load balancing and VPN; and
other providers of IT security services that offer, or may leverage related technologies to introduce, products that
compete with or are alternatives to our cloud platform.
The principal competitive factors in the markets in which we operate include:
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delivering security from the cloud regardless of location of the user;
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platform features, effectiveness and extensibility;
platform reliability, availability and scalability;
rapid development and delivery of new capabilities and services;
ability to integrate with other participants in the security and networking ecosystem;
price, total cost of ownership and network cost savings;
brand awareness, reputation and trust in the provider’s services;
strength of sales, marketing and channel partner relationships; and
quality of customer support.
We believe we are positioned favorably against our competitors based on these factors. Our cloud platform integrates
many of the point products offered by our competitors and potential competitors, which is a key differentiator. However,
many of our competitors have substantially greater financial, technical and other resources, greater brand recognition, larger
sales forces and marketing budgets, broader distribution networks, more diverse product and services offerings and larger and
more mature intellectual property portfolios. They may be able to leverage these resources to gain business in a manner that
discourages users from purchasing our services, including through selling at zero or negative margins, offering concessions,
product bundling or maintaining closed technology platforms. Further, many organizations have invested substantial
personnel and financial resources to design and operate their appliance-based network security architecture and may not be
willing or ready to abandon those historical investments. As our market grows and rapidly changes, we expect it will continue
to attract new companies, including smaller emerging companies, which could introduce new products and services. In
addition, we may expand into new markets and encounter additional competitors in such markets.
Intellectual Property
Our success depends in part upon our ability to protect and use our core technology and intellectual property rights. We
rely on a combination of patents, copyrights, trademarks, trade secret laws, contractual provisions and confidentiality
procedures to protect our intellectual property rights. As of July 31, 2021, we had more than 275 issued patents and pending
patent applications, including in excess of 130 issued patents, in the United States and other countries. Our issued patents
expire between 2028 and 2040 and cover various aspects of our cloud platform. In addition, we have registered “Zscaler” as a
trademark in the United States and other jurisdictions, and we have registered other trademarks and filed other trademark
applications in the United States. We are also the registered holder of a variety of domestic and international domain names
that include “Zscaler” and similar variations. In addition to the protection provided by our intellectual property rights, we
enter into confidentiality and invention assignment or similar agreements with our employees, consultants and contractors.
We further control the use of our proprietary technology and intellectual property rights through provisions in our
subscription and license agreements. Despite our efforts to protect our trade secrets and proprietary rights through intellectual
property rights, licenses and confidentiality agreements, unauthorized parties may still copy or otherwise obtain and use our
software and technology. In addition to our internally developed technology, we also license software, including open source
software, from third parties that we integrate into or bundle with our cloud platform.
Our industry is characterized by the existence of a large number of patents and frequent claims and related litigation
based on allegations of patent infringement or other violations of intellectual property rights. We believe that competitors will
try to develop products and services that are similar to ours and that may infringe our intellectual property rights. Our
competitors or other third-parties may also claim that our platform infringes their intellectual property rights. In particular,
leading companies in our industry have extensive patent portfolios. From time to time, third parties, including certain of these
leading companies and non-practicing entities, have in the past and may in the future assert claims of infringement,
12
misappropriation and other violations of intellectual property rights against us or our customers or channel partners, with
whom our license or other agreements may obligate us to indemnify against these claims. Successful claims of infringement
by a third-party could prevent us from offering certain services or features, require us to develop alternate, non-infringing
technology, which could require significant time and during which we could be unable to continue to offer our affected
subscriptions or services, require us to obtain a license, which may not be available on reasonable terms or at all, or force us
to pay substantial damages, royalties or other fees. As we face increasing competition and gain an increasingly higher profile,
the possibility of intellectual property rights claims against us grows. We cannot assure you that we do not currently infringe,
or that we will not in the future infringe, upon any third-party patents or other proprietary rights. See “Risk Factors-Claims by
others that we infringe their proprietary technology or other rights, or other lawsuits asserted against us, could result in
significant costs and substantially harm our business, financial condition, results of operations and prospects” for additional
information.
Government Regulation
Our business activities are subject to various federal, state, local, and foreign laws, rules, and regulations. Compliance
with these laws, rules, and regulations has not had, and is not expected to have, a material effect on our capital expenditures,
results of operations and competitive position as compared to prior periods. Nevertheless, compliance with existing or future
governmental regulations, including, but not limited to, those pertaining to global trade, business acquisitions, consumer and
data protection, data privacy and employment and labor and taxes, could have a material impact on our business in
subsequent periods. For more information on the potential impacts of government regulations affecting our business, see
“Item 1A - Risk Factors.”
Human Capital
As of July 31, 2021, we had a total of 3,153 employees, including 1,698 employees located outside the United States,
with the majority of non-US based employees located in India. None of our U.S. based employees are represented by a labor
union or covered by a collective bargaining agreement. We have not experienced any work stoppages and we consider our
relations with our employees to be positive and collaborative.
We believe that people and a corporate culture that is aligned with our vision to create a world in which the exchange
of information is always secure and seamless, are critical to our growth. In order to continue to innovate and to execute our
business strategy, we must attract, develop, and retain skilled employees, particularly in the areas of product development,
engineering, sales and customer success. Our position as a market leader enables us to be a destination for cybersecurity
talent looking to innovate and contribute to enabling digital transformation, and while hiring and retaining employees with
expertise in cybersecurity has become increasingly difficult due to increased demand, we have added 1,124 new employees
over the past 12 months in response to growing customer interest in and demand for our products.
We understand the importance of human capital and prioritize building our culture, talent development, compensation
and benefits, and diversity and inclusion.
Our Culture
Our commitment to culture creates an environment where a global and diverse workforce can contribute their best
work to help our customers and our business succeed. We believe that our journey to be the best starts by creating a culture
where the most talented people share our values and seek the opportunity to make a difference by providing better
cybersecurity to individuals and organizations around the world. Our cultural values are the following:
13
• Teamwork - We respect people for their diverse perspectives and backgrounds and are able to disagree while
remaining respectful. We remain open minded and work towards the best solution. This mindset leads us to put the
team’s needs before personal needs; we win when the team wins.
• Open Communication - We are approachable and transparent and have integrity in everything we do. We say what
we mean and mean what we say. We confront and resolve issues; at Zscaler we find the courage to have the hard
conversations.
• Passion - We are ambitious and driven to be the best while staying humble and grounded. We find our purpose and
continue to master our craft. We strive to show conviction and be resilient and persistent for the right reasons.
•
Innovation - We are creative and solve complicated problems by inventing something new. We think beyond the
conventional and predictable because we believe no outcome is impossible. We are willing to take risks and fail fast
to learn.
• Customer Obsession - We go above and beyond what is expected and delight our customers. We seek to connect
and understand our customers’ challenges to better solve them. We build lasting relationships with our customers
because our interactions are strategic rather than transactional.
We receive feedback on our culture from our employees through multiple surveys throughout the year, including our
annual Employee Engagement Survey, where 82% of our employees responded in fiscal 2021. We found that 85% of
responding employees are highly engaged and 96% of responding employees are aligned with our strategic direction. We also
monitor feedback through external sources, such as Glassdoor, where we were named on Glassdoor’s 2021 list of “Best
Places to Work”. We ultimately view and measure the success of our culture by our ability to execute.
Talent Development
We invest in our employees through a suite of programs to develop their talent and skills as our business grows. Over
the past year, this intentional approach to talent development has led to us being able to promote 16% of our global
workforce. We have implemented “Leading at Z,” our leadership development program aligned to our core leadership
principles through four pillars-building great teams, driving for results, demonstrating ownership and role modeling the
Zscaler values. In addition, new employees in our customer care and success teams are enrolled in structured sales training to
complete internal certifications. Our technical teams have access to live and online training resources and participate in
frequent company tech talks where trainings on best practices and latest developments are shared. In 2021, we launched
“Zscaler Elevate,” our mentorship program to connect employees at all levels with leaders to guide their career and personal
growth.
To supplement our internal resources, we have established partnerships with Coursera, ExecOnline and BTS Rapid
Learning for additional development offerings. We curate external training material to provide guided learning paths to help
our employees succeed within our work environment. We offer tuition reimbursement for eligible employees to further invest
in their career growth through higher education.
We have also formed a new partnership with New York University's Tandon School of Engineering and their Master of
Science in Cybersecurity Risk and Strategy program to provide training to enrolled students and to help address the global
shortage of cybersecurity professionals.
14
Compensation and Benefits
We provide competitive compensation and benefits packages to attract and retain our talent. In addition to base pay,
employees may be eligible for annual bonuses that are tied to our financial performance and long-term equity incentives that
vest subject to continued service. Certain employees may also need to achieve defined performance metrics for their long-
term incentives to vest. We offer an Employee Stock Purchase Plan which allows employees to contribute a percentage of
their wages to purchase our stock at a discount. In addition to cash and equity compensation, we offer our employees a
collection of benefits, such as health, wellbeing and retirement programs, to meet their individual needs.
Diversity, Equity and Inclusion
We believe that a diversity of backgrounds, experiences and thinking contributes to creating a culture that enables
innovation, execution and performance. At the end of our fiscal year 2021, women represented 22% of our global workforce
in 26 countries and underrepresented racial and ethnic minorities represented 8% of our U.S. based employees.
We have taken steps to address the diversity challenges that we face in the cybersecurity industry. We initiated a hiring
practice where our recruiters build a talent pipeline that is diverse at the top of the hiring funnel, connecting with candidates
from under-represented groups for 50% of the recruiter’s outreach for open positions to the extent possible. We are seeing
early indications of positive results with over a 100% year-over-year increase in the number of new hires from certain
minority groups.
Our Diversity, Equity & Inclusion Committee is comprised of leaders across the organization that acknowledge, value,
encourage and support a diverse and inclusive workforce for all our employees. Our company supports the following
employee resource groups (ERGs): Women in Zscaler Engage (WiZE), Black Employees at Zscaler (B@Z) and Asian
American Pacific Islander Employees at Zscaler (AAPI@Z). In addition to running company wide events and programs to
share perspectives, these groups provide safe places for employees to connect with colleagues facing similar professional and
personal challenges.
To further support our efforts, we offer courses for diversity awareness and training on topics such as managing bias.
Our leadership trainings emphasize the role of diversity in building high performing teams. We have also hosted external
diversity events, for example, bringing together accomplished women technology leaders to share their experiences to the
broader community.
Health, Safety and Well-Being
With the ongoing COVID-19 pandemic, the health and safety of our employees is our top priority. Since March 2020
we have asked our global workforce to work from home, limited employee travel and transitioned in-person events to virtual
platforms. We have taken steps to look after employee well-being by enhancing our Employee Assistance Program to provide
counseling for employees and their family members and hosting webinars to help employees navigate the challenges of
working from home. In response to employee requests for additional resources to manage wellness, we launched a “Thrive at
Zscaler” speaker series to provide employees with practical tips on how to manage multiple facets that contribute to their
well-being.
We took further steps to support our large employee population in India through the severe impact of the COVID-19
pandemic in that country during the spring of 2021. We helped with medical equipment, COVID-19 vaccines, financial
support and provided additional flexibility to our employees while resources throughout India were strained.
15
We continue to monitor guidelines from the Centers for Disease Control and the World Health Organization and adhere
to applicable federal, state and local government requirements. We are taking a cautious approach with regard to the timing of
return to work in our offices.
Corporate Information
We were incorporated in the state of Delaware in September 2007 as SafeChannel, Inc., and in August 2008, we
changed our name to Zscaler, Inc. Our principal executive offices are located at 120 Holger Way, San Jose, CA 95134, and
our telephone number is (408) 533-0288. Our website address is www.zscaler.com. Information contained on, or that can be
accessed through, our website does not constitute part of this Annual Report on Form 10-K.
Available Information
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statement,
and all amendments
relations website
(https://ir.zscaler.com/financial-information/sec-filings) as soon as reasonably practicable following our filing with or
furnishing to the SEC of any of these reports. The SEC’s website (https://www.sec.gov) contains reports, proxy and
information statements, and other information regarding issuers that file electronically with the SEC.
filings, are available
free of charge
from our
investor
these
to
Zscaler investors and others should note that we announce material information to the public about our company,
products and services and other issues through a variety of means, including our website (https://www.zscaler.com/), our
investor relations website (https://ir.zscaler.com), our blogs (https://www.zscaler.com/blogs), press releases, SEC filings,
public conference calls and social media, in order to achieve broad, non-exclusionary distribution of information to the
public. We encourage our investors and others to review the information we make public in these locations as such
information could be deemed to be material information. Please note that this list may be updated from time to time.
The contents of any website referred to in this Form 10-K are not intended to be incorporated into this Annual Report
on Form 10-K or in any other report or document we file.
16
Item 1A. Risk Factors
A description of the risks and uncertainties associated with our business is set forth below. You should carefully
consider the risks and uncertainties described below, as well as the other information in this Annual Report on Form 10-K,
including the consolidated financial statements and the related notes and "Management’s Discussion and Analysis of
Financial Condition and Results of Operations." The occurrence of any of the events or developments described below, or of
additional risks and uncertainties not presently known to us or that we currently deem immaterial, could materially and
adversely affect our business, results of operations, financial condition and growth prospects. In such an event, the market
price of our common stock could decline, and you could lose all or part of your investment.
Summary of Risk Factors
Investing in our common stock involves a high degree of risk because our business is subject to numerous risks and
uncertainties, as fully described below. The principal factors and uncertainties that make investing in our common stock risky
include, among others:
•
the impact of the ongoing COVID-19 pandemic is highly uncertain and may adversely impact our business,
particularly in India and other regions where we have significant operations and personnel;
• we have a history of losses and may not be able to achieve or sustain profitability in the future;
•
•
if organizations do not adopt our cloud platform, our ability to grow our business and operating results may be
adversely affected;
if we are unable to attract new customers or our customers do not renew their subscriptions for our services and add
additional users and services to their subscriptions, our future results of operations could be harmed;
• we face intense and increasing competition and could lose market share to our competitors;
• we have experienced rapid revenue and other growth in recent periods, which may not be indicative of our future
performance;
•
•
•
•
•
our operating results may fluctuate significantly, which could make our future results difficult to predict and could
cause our operating results to fall below expectations:
if the delivery of our services to our customers is interrupted or delayed for any reason, our business could suffer;
the actual or perceived failure of our cloud platform to block malware or prevent a security breach or incident could
harm our reputation and adversely impact our business;
our business and growth depend in part on the success of our relationships with our channel partners;
if our cloud platform or internal networks, systems or data are or are perceived to have been breached, our solution
may be perceived as insecure, our reputation may be damaged and our financial results may be negatively impacted;
• we rely on our key technical, sales and management personnel to grow our business, and the loss of one or more key
employees or the inability to attract and retain qualified personnel could harm our business;
•
•
claims by others that we infringe their proprietary technology or other rights, or other lawsuits asserted against us,
could result in significant costs and substantially harm our business; and
servicing our debt may require a significant amount of cash, and we may not have sufficient cash flow from our
business or the ability to raise funds to pay our substantial debt.
17
Risks Related to Our Business
The impact of the ongoing COVID-19 pandemic, including the resulting global economic uncertainty, is highly
uncertain, very unclear and difficult to predict at this time, but it may have a material adverse impact on our business,
results of operations, financial condition, liquidity and cash flows.
In March 2020, the World Health Organization categorized COVID-19 as a pandemic, and the government of the United
States declared the COVID-19 outbreak a national emergency. Despite the availability of vaccines in some geographies,
COVID-19 continues to spread throughout the United States and globally, particularly in India and other regions where we
have significant operations and personnel, and uncertainties exist as to the efficacy of vaccines against new variants or
mutations of COVID-19. Therefore, the duration, severity of its effects and ultimate impact to the world’s population and the
global economy are unknown. To attempt to mitigate the spread of the pandemic, many state, local, and foreign governments
put in place travel restrictions, quarantines, shelter-in-place orders, and other government orders and restrictions. These
restrictions and orders resulted in business closures, work stoppages, slowdowns and delays, work-from-home policies, and
cancellation or postponement of events, among other effects that could adversely impact our operations, as well as the
operations of our customers, partners and vendors. In response to these government actions and mandates, we have modified
and may continue to modify our business practices, including, among others, directing all employees to work from home,
restricting employee travel, transitioning our employee onboarding and training to remote or online programs, holding virtual
sales calls and meetings, and cancelling physical participation in events and conferences. Although there has been an easing
of restrictions in certain jurisdictions, some or all of those restrictions have been and could be reinstated in the future to
manage a resurgence or new outbreak of the COVID-19 pandemic, including in connection with new variants and mutations
of the virus. These new variants and mutations and the logistics of vaccine distribution may lead to other restrictions being
implemented in response to efforts to reduce the spread of COVID-19. In addition, the reopening of businesses and
economies in certain countries is creating a variety of new challenges, including, for example, higher prices for goods and
services, limited availability of products, and disruptions to supply chains. There is no certainty that the measures we have
taken will be sufficient to mitigate the risks posed by the pandemic.
The impact of the COVID-19 pandemic is fluid and uncertain. We are unable to predict the impact that the COVID-19
pandemic will have on our results of operations, financial condition, liquidity and cash flows due to numerous uncertainties,
including the duration and severity of the pandemic, the impact of the various mitigation efforts, vaccine administration rates
and efficacy and other factors that may not be foreseeable. The COVID-19 pandemic has caused a global economic downturn
and extreme volatility in financial markets, which could materially and adversely affect demand for our products and services
as well as our results of operations and financial condition even after the pandemic is contained and global economic activity
stabilizes. The COVID-19 pandemic, as well as restrictive measures undertaken to contain the spread of COVID-19, could
decrease the spending of our existing and potential customers; cause our customers to fail to renew, reduce, shorten,
terminate, or renegotiate their subscriptions for our services; and lengthen collection periods of accounts receivable. Any of
these developments could adversely affect our business, results of operations, and financial condition. Additionally, concerns
over the economic impact of the COVID-19 pandemic have caused extreme volatility in financial and other capital markets
which may adversely impact our stock price.
While we have not to date experienced a significant impact to our business, operations or financial results as a result of
the pandemic, there can be no assurance that these events will not have a material adverse impact on our business, operations
or financial results in subsequent quarters or fiscal years.
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We have a history of losses and may not be able to achieve or sustain profitability in the future.
We have incurred net losses in all periods since our inception, and we expect we will continue to incur net losses for the
foreseeable future. We experienced net losses of $262.0 million, $115.1 million, and $28.7 million for fiscal 2021, fiscal 2020
and fiscal 2019, respectively. As of July 31, 2021, we had an accumulated deficit of $601.6 million. Because the market for
our cloud platform is rapidly evolving and cloud security solutions have not yet reached widespread adoption, it is difficult
for us to predict our future results of operations. We expect our operating expenses to increase significantly over the next
several years as we continue to hire additional personnel, particularly in sales and marketing, expand our operations and
infrastructure, both domestically and internationally, and continue to develop our platform. If we fail to increase our revenue
to offset the increases in our operating expenses, we may not achieve or sustain profitability in the future.
If organizations do not adopt our cloud platform, our ability to grow our business and operating results may be
adversely affected.
Cloud technologies are still evolving, and it is difficult to predict customer demand and adoption rates for our solutions
or cloud-based offerings generally. We believe that our cloud platform offers superior protection to our customers, who are
becoming increasingly dependent on the internet as they move their applications and data to the cloud. We also believe that
our cloud platform represents a major shift from on-premises appliance-based security solutions. However, traditional on-
premises security appliances are entrenched in the infrastructure of many of our potential customers, particularly large
enterprises, because of their prior investment in and the familiarity of their IT personnel with on-premises appliance-based
solutions. As a result, our sales process often involves extensive efforts to educate our customers on the benefits and
capabilities of our cloud platform, particularly as we continue to pursue customer relationships with large organizations. Even
with these efforts, we cannot predict market acceptance of our cloud platform, or the development of competing products or
services based on other technologies. If we fail to achieve market acceptance of our cloud platform or are unable to keep pace
with industry changes, our ability to grow our business and our operating results will be materially and adversely affected.
If we are unable to attract new customers, our future results of operations could be harmed.
To increase our revenue and achieve and maintain profitability, we must add new customers. To do so, we must
successfully convince IT decision makers that, as they adopt SaaS applications and the public cloud, security delivered
through the cloud provides significant advantages over legacy on-premises appliance-based security products. Additionally,
many of our customers broadly deploy our products, which requires a significant commitment of resources. These factors
significantly impact our ability to add new customers and increase the time, resources and sophistication required to do so. In
addition, numerous other factors, many of which are out of our control, may now or in the future impact our ability to add
new customers, including potential customers’ commitments to legacy IT security vendors and products, real or perceived
switching costs, our failure to expand, retain and motivate our sales and marketing personnel, our failure to develop or
expand relationships with our channel partners or to attract new channel partners, failure by us to help our customers to
successfully deploy our cloud platform, negative media or industry or financial analyst commentary regarding us or our
solutions, litigation and deteriorating general economic conditions, including as a result of the COVID-19 pandemic, which
has disproportionately affected certain of the industries and markets which we serve, such as transportation, hospitality,
leisure and retail. If our efforts to attract new customers are not successful, our revenue and rate of revenue growth may
decline, we may not achieve profitability and our future results of operations could be materially harmed.
19
If our customers do not renew their subscriptions for our services and add additional users and services to their
subscriptions, our future results of operations could be harmed.
In order for us to maintain or improve our results of operations, it is important that our customers renew their
subscriptions for our services when existing contract terms expire, and that we expand our commercial relationships with our
existing customers. Our customers have no obligation to renew their subscriptions for our services after the expiration of their
contractual subscription period, which is typically one to three years, and in the normal course of business, some customers
have elected not to renew. In addition, in certain cases, customers may cancel their subscriptions without cause either at any
time or upon advance written notice (typically ranging from 30 days to 60 days), typically subject to an early termination
penalty for unused services. In addition, our customers may renew for fewer users, renew for shorter contract lengths or
switch to a lower-cost suite. These risks may increase due to the COVID-19 pandemic, as our customers may be financially
constrained in their IT spending. If our customers do not renew their subscription services, we could incur impairment losses
related to our deferred contract acquisition costs. It is difficult to accurately predict long-term customer retention because of
our varied customer base and given the length of our subscription contracts. Our customer retention and expansion may
decline or fluctuate as a result of a number of factors, including our customers’ satisfaction with our services, our prices and
pricing plans, our customers’ spending levels, decreases in the number of users to which our customers deploy our solutions,
mergers and acquisitions involving our customers, competition and deteriorating general economic conditions.
Our future success also depends in part on the rate at which our current customers add additional users or services to
their subscriptions, which is driven by a number of factors, including customer satisfaction with our services, customer
security and networking issues and requirements, general economic conditions and customer reaction to the price per
additional user or of additional services. If our efforts to expand our relationship with our existing customers are not
successful, our business may materially suffer.
We face intense and increasing competition and could lose market share to our competitors, which could adversely
affect our business, financial condition and results of operations.
The market for network security solutions is intensely competitive and characterized by rapid changes in technology,
customer requirements, industry standards and frequent introductions of new and improvements of existing products and
services. Our business model of delivering security through the cloud rather than legacy on-premises appliances is still
relatively new and has not yet gained widespread market traction. Moreover, we compete with many established network and
security vendors who are aggressively competing against us with their legacy appliance-based solutions and are also seeking
to introduce cloud-based services that have functionality similar to our cloud platform. We expect competition to increase as
other established and emerging companies enter the security solutions market, in particular with respect to cloud-based
security solutions, as customer requirements evolve and as new products, services and technologies are introduced. If we are
unable to anticipate or effectively react to these competitive challenges, our competitive position could weaken, and we could
experience a decline in revenue or our growth rate that could materially and adversely affect our business and results of
operations.
Our competitors and potential competitors include:
•
•
independent IT security vendors, such as Check Point Software Technologies Ltd., Fortinet, Inc., Palo Alto
Networks, Inc. and Broadcom, which offer a broad mix of network and endpoint security products;
large networking vendors, such as Cisco Systems, Inc. and Juniper Networks, Inc., which offer security appliances
and incorporate security capabilities in their networking products;
20
•
•
companies such as FireEye, Inc., Forcepoint Inc. (previously, Websense, Inc.), Netskope, Inc. and Pulse Secure,
LLC with point solutions that compete with some of the features of our cloud platform, such as proxy, firewall,
sandboxing and advanced threat protection, data loss prevention, encryption, load balancing and VPN; and
other providers of IT security services that offer, or may leverage related technologies to introduce, products that
compete with or are alternatives to our cloud platform.
Many of our existing competitors have, and some of our potential competitors could have, substantial competitive
advantages such as:
•
•
•
•
•
•
•
•
greater name recognition, longer operating histories and larger customer bases;
larger sales and marketing budgets and resources;
broader distribution and established relationships with channel partners and customers;
greater customer support resources;
greater resources to make acquisitions and enter into strategic partnerships;
lower labor and research and development costs;
larger and more mature intellectual property rights portfolios; and
substantially greater financial, technical and other resources.
Our competitors may be successful in convincing IT decision makers that legacy appliance-based security products or
hybrid security cloud solutions based on legacy appliances are sufficient to meet their security needs and provide security
performance that competes with our cloud platform. In addition, our competitors may develop cloud-based solutions with
architectures similar to our products. Further, many organizations have invested substantial personnel and financial resources
to design and operate their appliance-based networks and have established deep relationships with appliance vendors. As a
result, these organizations may prefer to purchase from their existing suppliers rather than add or switch to a new supplier.
Our larger competitors have substantially broader and more diverse product and services offerings, which may allow
them to leverage their relationships based on other products or incorporate functionality into existing products to gain
business in a manner that discourages users from purchasing our services, including through selling at zero or negative
margins, offering concessions, bundling products or maintaining closed technology platforms. Many competitors that
specialize in providing protection from a single type of security threat may be able to deliver these targeted security products
to the market more quickly than we can or to convince organizations that these limited products meet their needs.
Conditions in our market could change rapidly and significantly as a result of technological advancements, partnering or
acquisitions by our competitors or continuing market consolidation. New start-up companies that innovate and large
competitors that are making significant investments in research and development may invent similar or superior products,
services and technologies that compete with our cloud platform. In addition, large companies with substantial
communications infrastructure, such as global telecommunications services provider partners or public cloud providers, could
choose to enter the security solutions market. Some of our current or potential competitors have made or could make
acquisitions of businesses or establish cooperative relationships that may allow them to offer more directly competitive and
comprehensive solutions than were previously offered and adapt more quickly to new technologies and customer needs.
These competitive pressures in our market or our failure to compete effectively may result in price reductions, fewer orders,
reduced revenue and gross margins, increased net losses and loss of market share. Any failure to meet and address these
factors could materially harm our business and operating results.
21
We have experienced rapid revenue and other growth in recent periods, which may not be indicative of our future
performance.
We have experienced rapid growth in revenue, operations and employee headcount in recent periods. In addition, the
number of customers, users and internet traffic on our cloud platform has increased rapidly in recent years. You should not
consider our recent growth in these areas as indicative of our future performance. While we expect to continue to expand our
operations and to increase our headcount significantly in the future, both domestically and internationally, our growth may
not be sustainable. In particular, our recent revenue growth rates may decline in the future and may not be sufficient to
achieve and sustain profitability, as we also expect our costs to increase in future periods. We believe that historical
comparisons of our revenue may not be meaningful and should not be relied upon as an indication of future performance.
Accordingly, you should not rely on our revenue and other growth for any prior quarter or fiscal year as an indication of our
future revenue or revenue growth.
If we fail to effectively manage our growth, we may be unable to execute our business plan, maintain high levels of
service, adequately address competitive challenges or maintain our corporate culture, and our business, financial
condition and results of operations would be harmed.
Our growth has placed, and future growth will continue to place, a significant strain on our management and our
administrative, operational and financial infrastructure. Our success will depend in part on our ability to manage this growth
effectively, which will require that we continue to improve our administrative, operational, financial and management
systems and controls by, among other things:
•
•
•
effectively attracting, training and integrating, including collaborating with, a large number of new employees, and
in the short term, to do so remotely during the COVID-19 pandemic;
further improving our key business applications, processes and IT infrastructure, including our data centers, to
support our business needs;
enhancing our information and communication systems to ensure that our employees and offices around the world
are well coordinated and can effectively communicate with each other and our growing base of channel partners,
customers and users; and
•
appropriately documenting and testing our IT systems and business processes.
These and other improvements in our systems and controls will require significant capital expenditures and the allocation
of valuable management and employee resources. If we fail to implement these improvements effectively, our ability to
manage our expected growth, ensure uninterrupted operation of our cloud platform and key business systems and comply
with the rules and regulations applicable to public companies could be impaired, the quality of our platform and services
could suffer and we may not be able to adequately address competitive challenges.
In addition, we believe that our corporate culture has been a contributor to our success, which we believe fosters
innovation, teamwork and an emphasis on customer-focused results. We also believe that our culture creates an environment
that drives and perpetuates our strategy and cost-effective distribution approach. As we grow, we may find it difficult to
maintain our corporate culture. Preservation of our corporate culture is also made more difficult as our work force has been
working from home in connection with restrictions placed upon businesses due to the COVID-19 pandemic. A long-term
continuation of these restrictions could, among other things, negatively impact employee morale and productivity. Any failure
to preserve our culture could harm our future success, including our ability to retain and recruit personnel, innovate and
operate effectively and execute on our business strategy. If we experience any of these effects in connection with future
growth, it could materially impair our ability to attract new customers, retain existing customers and expand their use of our
platform, all of which would materially and adversely affect our business, financial condition and results of operations.
22
Our relatively limited operating history makes it difficult to evaluate our current business and prospects and may
increase the risk that we will not be successful.
Our relatively limited operating history makes it difficult to evaluate our current business and prospects and plan for our
future growth. We were incorporated in 2007, with much of our sales and revenue growth occurring in recent years. As a
result, our business model has not been fully proven, which subjects us to a number of uncertainties, including our ability to
plan for and model future growth. While we have continued to develop our solutions to incorporate multiple security and
compliance applications into a single purpose-built, multi-tenant, distributed cloud platform, we have encountered and will
continue to encounter risks and uncertainties frequently experienced by rapidly growing companies in developing markets,
including our ability to achieve broad market acceptance of our cloud platform, attract additional customers, grow
partnerships, withstand increasing competition and manage increasing expenses as we continue to grow our business. If our
assumptions regarding these risks and uncertainties are incorrect or change in response to changes in the market for network
security solutions, our operating and financial results could differ materially from our expectations and our business could
suffer.
Our operating results may fluctuate significantly, which could make our future results difficult to predict and could
cause our operating results to fall below expectations.
Our operating results may fluctuate from quarter to quarter as a result of a number of factors, many of which are outside
of our control and may be difficult to predict. Some of the factors that may cause our results of operations to fluctuate from
quarter to quarter include:
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broad market acceptance and the level of demand for our cloud platform;
our ability to attract new customers, particularly large enterprises;
our ability to retain customers and expand their usage of our platform, particularly our largest customers;
our ability to successfully expand internationally and penetrate key markets;
the effectiveness of our sales and marketing programs;
the length of our sales cycle, including the timing of renewals;
technological changes and the timing and success of new service introductions by us or our competitors or any other
change in the competitive landscape of our market;
increases in and timing of operating expenses that we may incur to grow and expand our operations and to remain
competitive;
pricing pressure as a result of competition or otherwise;
seasonal buying patterns for IT spending, including the possible slowdown in IT spending due to the recent global
economic downturn;
the quality and level of our execution of our business strategy and operating plan;
adverse litigation judgments, settlements or other litigation-related costs;
changes in the legislative or regulatory environment;
the impact and costs related to the acquisition of businesses, talent, technologies or intellectual property rights;
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fluctuations in currency exchange rates and changes in the proportion of our revenue and expenses denominated in
foreign currencies;
changes in U.S. generally accepted accounting principles; and
general economic conditions in either domestic or international markets, including geopolitical uncertainty and
instability and global health crises and pandemics, such as COVID-19, and governmental responses thereto.
Any one or more of the factors above may result in significant fluctuations in our results of operations. We also intend to
continue to invest significantly to grow our business in the near future rather than optimizing for profitability or cash flows.
In addition, we generally experience seasonality in terms of when we enter into agreements with customers. We typically
enter into a higher percentage of agreements with new customers, as well as renewal agreements with existing customers, in
the second and fourth quarters of our fiscal year. This seasonality is reflected to a much lesser extent, and sometimes is not
immediately apparent, in revenue, due to the fact that we recognize subscription revenue ratably over the term of the
subscription, which is generally one to three years. We expect that seasonality will continue to affect our operating results in
the future and may reduce our ability to predict cash flow and optimize the timing of our operating expenses.
The variability and unpredictability of our quarterly results of operations or other operating metrics could result in our
failure to meet our expectations or those of industry or financial analysts. If we fail to meet or exceed such expectations for
these or any other reasons, the market price of our common stock could fall substantially, and we could face costly lawsuits,
including securities class action suits.
If the delivery of our services to our customers is interrupted or delayed for any reason, our business could suffer.
Any interruption or delay in the delivery of our services will negatively impact our customers. Our solutions are
deployed via the internet, and our customers’ internet traffic is routed through our cloud platform. Our customers depend on
the continuous availability of our cloud platform to access the internet, and our services are designed to operate without
interruption in accordance with our service level commitments. If our entire platform were to fail, customers and users could
lose access to the internet until such disruption is resolved or customers deploy disaster recovery options that allow them to
bypass our cloud platform to access the internet. The adverse effects of any service interruptions on our reputation and
financial condition may be disproportionately heightened due to the nature of our business and the fact that our customers
expect continuous and uninterrupted internet access and have a low tolerance for interruptions of any duration. While we do
not consider them to have been material, we have experienced, and may in the future experience, service disruptions and
other performance problems due to a variety of factors.
The following factors, many of which are beyond our control, can affect the delivery and availability of our services and
the performance of our cloud:
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the development and maintenance of the infrastructure of the internet;
the performance and availability of third-party telecommunications services with the necessary speed, data capacity
and security for providing reliable internet access and services;
decisions by the owners and operators of the data centers where our cloud infrastructure is deployed or by global
telecommunications service provider partners who provide us with network bandwidth to terminate our contracts,
discontinue services to us, shut down operations or facilities, increase prices, change service levels, limit bandwidth,
declare bankruptcy or prioritize the traffic of other parties;
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the occurrence of earthquakes, floods, fires, pandemics, power loss, system failures, physical or electronic break-ins,
acts of war or terrorism, human error or interference (including by disgruntled employees, former employees or
contractors) and other catastrophic events;
cyberattacks, including denial of service attacks, targeted at us, our data centers, our global telecommunications
service provider partners or the infrastructure of the internet;
failure by us to maintain and update our cloud infrastructure to meet our traffic capacity requirements;
errors, defects or performance problems in our software, including third-party software incorporated in our software,
which we use to operate our cloud platform;
improper classification of websites by our vendors who provide us with lists of malicious websites;
improper deployment or configuration of our services;
the failure of our redundancy systems, in the event of a service disruption at one of our data centers, to provide
failover to other data centers in our data center network; and
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the failure of our disaster recovery and business continuity arrangements.
The occurrence of any of these factors, or if we are unable to efficiently and cost-effectively fix such errors or other
problems that may be identified, could damage our reputation, negatively impact our relationship with our customers or
otherwise materially harm our business, results of operations and financial condition.
In addition, we provide our services through a cloud-based inline proxy, and some governments, third-party products,
websites or services may block proxy-based traffic under certain circumstances. For example, vendors may attempt to block
traffic from our cloud platform or blacklist our IP addresses because they cannot identify the source of the proxy-based
traffic. Our competitors may use this as an excuse to block traffic from their solutions or blacklist our IP addresses, which
may result in our customers’ traffic being blocked from our platform. If our customers experience significant instances of
traffic blockages, they will experience reduced functionality or other inefficiencies, which would reduce customer satisfaction
with our services and likelihood of renewal.
The actual or perceived failure of our cloud platform to block malware or prevent a security breach or incident could
harm our reputation and adversely impact our business, financial condition and results of operations.
Our cloud platform may fail to detect or prevent security breaches or incidents for any number of reasons. Our cloud
platform is complex and may contain performance issues that are not detected until after its deployment. We also provide
frequent solution updates and fundamental enhancements, which increase the possibility of errors, and our reporting,
tracking, monitoring and quality assurance procedures may not be sufficient to ensure we detect any such defects in a timely
manner. The performance of our cloud platform can be negatively impacted by our failure to enhance, expand or update our
cloud platform, bugs, errors or defects in our software, improper classification of websites by our vendors who provide us
with lists of malicious websites, improper deployment or configuration of our services and many other factors.
In addition, because the techniques used by computer hackers to access or sabotage networks and other systems change
frequently and generally are not recognized until launched against a target, there is a risk that a cyber threat could emerge that
our services are unable to detect or prevent until after some of our customers are impacted. Moreover, as our services are
adopted by an increasing number of enterprises, it is possible that the individuals and organizations behind cyber threats will
focus on finding ways to defeat our services. If this happens, our cloud platform could be targeted by attacks specifically
designed to disrupt our business and create the perception that our cloud platform is not capable of providing superior
security, which, in turn, could have a serious impact on our reputation as a provider of security solutions. Further, if a high
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profile security breach or incident occurs with respect to another cloud services provider, our customers and potential
customers may lose trust in cloud solutions generally, and with respect to security in particular, which could materially and
adversely impact our ability to retain existing customers or attract new customers.
Increasingly, companies are subject to a wide variety of attacks on their networks and systems, including traditional
computer hackers, malicious code (such as viruses and worms), distributed denial-of-service attacks, sophisticated attacks
conducted or sponsored by nation-states, advanced persistent threat intrusions, ransomware and other malware, and theft or
misuse of intellectual property or business or personal data, including by disgruntled employees, former employees or
contractors. No security solution, including our cloud platform, can address all possible security threats or block all methods
of penetrating a network or otherwise perpetrating a security breach or incident. Our customers must rely on complex
network and security infrastructures, which include products and services from multiple vendors, to secure their networks. If
any of our customers becomes infected with malware or experiences a security breach or incident, they could be disappointed
with our services, regardless of whether our services are intended to block the attack or would have blocked the attack if the
customer had properly configured our cloud platform. Additionally, if any enterprises that are publicly known to use our
services are the subject of a cyberattack that becomes publicized, our current or potential customers may look to our
competitors for alternatives to our services.
From time to time, industry or financial analysts and research firms test our solutions against other security products.
Our services may fail to detect or prevent threats in any particular test for a number of reasons, including misconfiguration.
To the extent potential customers, industry or financial analysts or testing firms believe that the occurrence of a failure to
detect or prevent any particular threat is a flaw or indicates that our services do not provide significant value, our reputation
and business could be materially harmed.
Any real or perceived flaws in our cloud platform or any real or perceived security breaches or other security incidents of
our customers could result in:
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a loss of existing or potential customers or channel partners;
delayed or lost sales and harm to our financial condition and results of operations;
a delay in attaining, or the failure to attain, market acceptance;
the expenditure of significant financial resources in efforts to analyze, correct, eliminate, remediate or work around
errors or defects, to address and eliminate vulnerabilities and to address any applicable legal or contractual
obligations relating to any actual or perceived security breach or incident;
negative publicity and damage to our reputation and brand; and
legal claims and demands (including for stolen assets or information, repair of system damages, and compensation
to customers and business partners), litigation, regulatory inquiries or investigations and other liability.
Any of the above results could materially and adversely affect our business, financial condition and results of operations.
Additionally, with data security a critical competitive factor in our industry, we make public statements in our privacy
policies, on our website, and elsewhere describing the security of our platform and the performance of our solutions. As a
result, we may face claims, including claims of unfair or deceptive trade practices, brought by the U.S. Federal Trade
Commission, state, local, or foreign regulators, and private litigants.
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If our global network of data centers which deliver our services was damaged or otherwise failed to meet the
requirement of our business, our ability to provide services to our customers and maintain the performance of our cloud
platform could be negatively impacted, which could cause our business to suffer.
We currently host our cloud platform and serve our customers from a global network of over 150 data centers. While we
have electronic access to the components and infrastructure of our cloud platform that are hosted by third parties, we do not
control the operation of these facilities. Consequently, we may be subject to service disruptions as well as failures to provide
adequate support for reasons that are outside of our direct control. Our data centers are vulnerable to damage or interruption
from a variety of sources, including earthquakes, floods, fires, power loss, system failures, computer viruses, physical or
electronic break-ins, human error or interference (including by disgruntled employees, former employees or contractors), and
other catastrophic events, including those exacerbated by the effects of climate change. Our data centers may also be subject
to local administrative actions, changes to legal or permitting requirements and litigation to stop, limit or delay operations.
Despite precautions taken at these facilities, such as disaster recovery and business continuity arrangements, the occurrence
of a natural disaster or an act of terrorism, a decision to close the facilities without adequate notice or other unanticipated
problems at these facilities could result in interruptions or delays in our services, impede our ability to scale our operations or
have other adverse impacts upon our business. In addition, if we do not accurately plan for our infrastructure capacity
requirements or experience significant strains on our data center capacity, we may experience delays and additional expenses
in arranging new data centers, and our customers could experience performance degradation or service outages that may
subject us to financial liabilities, result in customer losses and materially harm our business. For example, to manage a
dramatic increase in ZPA traffic resulting from our customers' employees working from home in response to the COVID-19
pandemic, we temporarily increased our use of public cloud infrastructure which is substantially more expensive than our
own data centers. If we must again increase our use of public cloud infrastructure in the future, our results of operations could
be negatively impacted.
Our business and growth depend in part on the success of our relationships with our channel partners.
We currently derive most of our revenue from sales through our channel partner network, and we expect for the
foreseeable future most of our future revenue growth will also be driven through this network. Not only does our joint sales
approach require additional investment to grow and train our sales force, but we believe that continued growth in our
business is dependent upon identifying, developing and maintaining strategic relationships with our existing and potential
channel partners, including global systems integrators and regional telecommunications service providers that will in turn
drive substantial revenue and provide additional value-added services to our customers. Our agreements with our channel
partners are generally non-exclusive, meaning our channel partners may offer customers the products of several different
companies, including products that compete with our cloud platform. In general, our channel partners may also cease
marketing or reselling our platform with limited or no notice and without penalty. If our channel partners do not effectively
market and sell subscriptions to our cloud platform, choose to promote our competitors’ products or fail to meet the needs of
our customers, our ability to grow our business and sell subscriptions to our cloud platform may be adversely affected. For
example, sales through our top five channel partners and their affiliates, in aggregate, represented 34% of our revenue for
fiscal 2021, 40% of our revenue for fiscal 2020 and 42% of our revenue for fiscal 2019. In addition, our channel partner
structure could subject us to lawsuits or reputational harm if, for example, a channel partner misrepresents the functionality of
our cloud platform to customers or violates applicable laws or our corporate policies. In addition, our channel partners’
operations may be negatively impacted by the effects that the COVID-19 pandemic is having on the global economy, such as
increased credit risk of end customers and the uncertain credit markets. Our ability to achieve revenue growth in the future
will depend in large part on our success in maintaining successful relationships with our channel partners, identifying
additional channel partners and training our channel partners to independently sell and deploy our platform. If we are unable
to maintain our relationships with our existing channel partners or develop successful relationships with new channel partners
or if our channel partners fail to perform, our business, financial position and results of operations could be materially and
adversely affected.
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If we are not able to maintain and enhance our brand, our business and results of operations may be adversely
affected.
We believe that maintaining and enhancing our reputation as a provider of high-quality security solutions is critical to
our relationship with our existing customers and channel partners and our ability to attract new customers and channel
partners. The successful promotion of our brand will depend on a number of factors, including our marketing efforts, our
ability to continue to develop high-quality features and solutions for our cloud platform and our ability to successfully
differentiate our platform from competitive products and services. Our brand promotion activities may not be successful or
yield increased revenue. In addition, independent industry or financial analysts often provide reviews of our platform, as well
as products and services of our competitors, and perception of our platform in the marketplace may be significantly
influenced by these reviews. If these reviews are negative, or less positive as compared to those of our competitors’ products
and services, our brand may be adversely affected. Additionally, the performance of our channel partners may affect our
brand and reputation if customers do not have a positive experience with our channel partners’ services. The promotion of our
brand requires us to make substantial expenditures, and we anticipate that the expenditures will increase as our market
becomes more competitive, we expand into new markets and more sales are generated through our channel partners. To the
extent that these activities yield increased revenue, this revenue may not offset the increased expenses we incur. If we do not
successfully maintain and enhance our brand, our business may not grow, we may have reduced pricing power relative to
competitors and we could lose customers or fail to attract potential customers, all of which would materially and adversely
affect our business, results of operations and financial condition.
If we do not effectively develop and expand our sales and marketing capabilities, we may be unable to add new
customers or increase sales to our existing customers, and our business will be adversely affected.
To increase the number of customers and increase the market acceptance of our platform, we will need to expand our
sales and marketing operations, including our domestic and international sales force. Although we have a channel sales
model, our sales representatives typically engage in direct interaction with our prospective customers. Therefore, we continue
to be substantially dependent on our sales force to obtain new customers. Increasing our customer base and achieving broader
market acceptance of our cloud platform will depend, to a significant extent, on our ability to expand and further invest in our
sales and marketing operations and activities. There is significant competition for sales personnel with the advanced sales
skills and technical knowledge we need. We believe that selling a cloud-based security solution requires particularly talented
sales personnel with the ability to communicate the transformative potential of our cloud platform. Our ability to achieve
significant growth in revenue in the future will depend, in large part, on our success in recruiting, training and retaining
sufficient numbers of these talented sales personnel in both the U.S. and international markets. In particular, in the near term,
we expect to expand our sales and marketing organization significantly and there is no guarantee that we can effectively
transition our employee onboarding and training processes to remote or online programs during the COVID-19 pandemic and
efficiently integrate these new hires into our organization.
New hires require significant training and may take significant time before they achieve full productivity. As a result, our
new hires and planned hires may not become as productive as we would like, and we may be unable to hire or retain
sufficient numbers of qualified individuals in the future. As a result of our rapid growth, a large percentage of our sales and
marketing team is new to our company and selling our solutions, and therefore this team may be less effective than our more
seasoned employees. Furthermore, hiring sales personnel in new countries, or expanding our existing presence, requires
upfront and ongoing expenditures that we may not recover if the sales personnel fail to achieve full productivity. We cannot
predict whether, or to what extent, our sales will increase as we expand our sales force or how long it will take for sales
personnel to become productive. The effectiveness of our sales and marketing has also varied over time and, together with the
effectiveness of any partners or resellers we may engage, may vary in the future. Our business and operating results may be
harmed if our efforts do not generate a correspondingly significant increase in revenue. We may not achieve anticipated
revenue growth from expanding our sales force if we are unable to hire, develop and retain talented sales personnel, if our
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new sales personnel are unable to achieve desired productivity levels in a reasonable period of time, or if our sales and
marketing programs are not effective.
Our sales cycles can be long and unpredictable, and our sales efforts require considerable time and expense.
The timing of our sales and related revenue recognition is difficult to predict because of the length and unpredictability
of the sales cycle for our cloud platform, particularly with respect to large organizations. Our sales efforts typically involve
educating our prospective customers about the uses, benefits and the value proposition of our cloud platform. Customers
often view the subscription to our cloud platform as a significant decision as part of a strategic transformation initiative and,
as a result, frequently require considerable time to evaluate, test and qualify our platform prior to entering into or expanding a
relationship with us. Large enterprises and government entities in particular often undertake a significant evaluation process
that further lengthens the sales cycle. The ongoing COVID-19 pandemic may further extend sales cycles for some of our
products and services.
Our sales force develops relationships directly with our customers, and together with our channel account teams, works
with our channel partners on account penetration, account coordination, sales and overall market development. We spend
substantial time and resources on our sales efforts without any assurance that our efforts will produce a sale. Platform
purchases are frequently subject to budget constraints, multiple approvals and unanticipated administrative, processing and
other delays. As a result, it is difficult to predict whether and when a sale will be completed and when revenue from a sale
will be recognized.
Sales to larger customers involve risks that may not be present, or that are present to a lesser extent, with sales to smaller
customers, which can act as a disincentive to our sales team to pursue these larger customers. These risks include:
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competition from companies that traditionally target larger enterprises and that may have pre-existing relationships
or purchase commitments from such customers;
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increased purchasing power and leverage held by larger customers in negotiating contractual arrangements with us;
• more stringent requirements in our support obligations; and
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longer sales cycles and the associated risk that substantial time and resources may be spent on a potential customer
that elects not to purchase our solutions.
The failure of our efforts to secure sales after investing resources in a lengthy sales process could materially and
adversely affect our business and operating results.
If we fail to develop or introduce new enhancements to our cloud platform on a timely basis, our ability to attract and
retain customers, remain competitive and grow our business could be impaired.
The industry in which we compete is characterized by rapid technological change, frequent introductions of new
products and services, evolving industry standards and changing regulations, as well as changing customer needs,
requirements and preferences. Our ability to attract new customers and increase revenue from existing customers will depend
in significant part on our ability to anticipate and respond effectively to these changes on a timely basis and continue to
introduce enhancements to our cloud platform. The success of our cloud platform depends on our continued investment in our
research and development organization to increase the reliability, availability and scalability of our existing solutions. The
success of any enhancement depends on several factors, including the timely completion and market acceptance of the
enhancement. Any new service that we develop might not be introduced in a timely or cost-effective manner and might not
achieve the broad market acceptance necessary to generate significant revenue. If new technologies emerge that deliver
competitive products and services at lower prices, more efficiently, more conveniently or more securely, these technologies
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could adversely impact our ability to compete effectively. Any delay or failure in the introduction of enhancements could
materially harm our business, results of operations and financial condition.
Because we recognize revenue from subscriptions for our services over the term of the subscription, downturns or
upturns in new business may not be immediately reflected in our operating results and may be difficult to discern.
We generally recognize revenue from customers ratably over the terms of their subscriptions, which are typically one to
three years. As a result, a substantial portion of the revenue we report in each period is attributable to the recognition of
deferred revenue relating to agreements that we entered into during previous periods. Consequently, any increase or decline
in new sales or renewals in any one period may not be immediately reflected in our revenue for that period. Any such change,
however, may affect our revenue in future periods. Additionally, subscriptions that are invoiced annually in advance or multi-
year in advance contribute significantly to our short-term and long-term deferred revenue in comparison to our invoices
issued quarterly and monthly in advance, which will also affect our financial position in any given period. Accordingly, the
effect of downturns or upturns in new sales and potential changes in our rate of renewals may not be fully reflected in our
results of operations until future periods. We may also be unable to reduce our cost structure in line with a significant
deterioration in sales or renewals. Our subscription model also makes it difficult for us to rapidly increase our revenue
through additional sales in any period, as revenue from new customers must be recognized over the applicable subscription
term.
If our cloud platform or internal networks, systems or data are or are perceived to have been breached, our solution
may be perceived as insecure, our reputation may be damaged and our financial results may be negatively impacted.
It is virtually impossible for us to entirely mitigate the risk of breaches of our cloud platform or other security incidents
affecting our internal systems, networks or data. In addition, the functionality of our platform may be disrupted, either
intentionally or due to negligence, by third parties, including disgruntled employees or contractors and other current or
former employees or contractors. The security measures we use internally and have integrated into our cloud platform, which
are designed to detect unauthorized activity and prevent or minimize security breaches, may not function as expected or may
not be sufficient to identify or protect against certain attacks. Companies are subject to a wide variety of attacks on their
networks and systems, and techniques used to sabotage or to obtain unauthorized access to networks in which data is stored
or through which data is transmitted change frequently and generally are not recognized until launched against a target. As a
result, we may be unable to anticipate these techniques or implement adequate measures to prevent an electronic intrusion
into our customers through our cloud platform or to prevent breaches and other security incidents affecting our cloud
platform, internal networks, systems or data. Further, once identified, we may be unable to remediate or otherwise respond to
a breach or other incident in a timely manner. Actual or perceived security breaches of our cloud platform could result in
actual or perceived breaches of our customers’ networks and system.
Our internal systems are exposed to the same cybersecurity risks and consequences of a breach as our customers and
other enterprises. However, since our business is focused on providing reliable security services to our customers, we believe
that an actual or perceived breach of, or security incident affecting, our internal networks, systems or data, could be
especially detrimental to our reputation, customer confidence in our solution and our business. Additionally, due to the
COVID 19 pandemic, many of our personnel continue to work remotely, which may pose additional data security risks.
Any real or perceived security breaches or other security incidents that we suffer with regard to our systems, networks or
data, including any such actual or perceived security breaches or security incidents that result, or are believed to result, in
actual or perceived breaches of our customers’ networks or systems, could result in:
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the expenditure of significant financial resources in efforts to analyze, correct, eliminate, remediate or work around
errors or defects, to address and eliminate vulnerabilities and to address any applicable legal or contractual
obligations relating to any actual or perceived security breach or other security incident;
negative publicity and damage to our reputation, brand, and market position;
harm to our relationships with, and a loss of, existing or potential customers or channel partners;
delayed or lost sales and harm to our financial condition and results of operations;
a delay in attaining, or the failure to attain, market acceptance; and
legal claims and demands (including for stolen assets or information, repair of system damages and compensation to
customers and business partners), litigation, regulatory inquiries or investigations and other liability.
Any of the above could materially and adversely affect our business, financial condition and results of operations.
While we maintain insurance, our insurance may be insufficient to cover all liabilities incurred in relation to actual or
perceived security breaches or other security incidents. We also cannot be certain that our insurance coverage will be
adequate for liabilities actually incurred, that insurance will continue to be available to us on economically reasonable terms,
or at all, or that any insurer will not deny coverage as to any future claim. The successful assertion of one or more large
claims against us that exceed available insurance coverage, or the occurrence of changes in our insurance policies, including
premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on
our business, including our financial condition, operating results, and reputation.
If our cloud platform does not interoperate with our customers’ network and security infrastructure or with third-
party products, websites or services, our cloud platform may become less competitive and our results of operations may be
harmed.
Our cloud platform must interoperate with our customers’ existing network and security infrastructure. These complex
systems are developed, delivered and maintained by the customer and a myriad of vendors and service providers. As a result,
the components of our customers’ infrastructure have different specifications, rapidly evolve, utilize multiple protocol
standards, include multiple versions and generations of products and may be highly customized. We must be able to
interoperate and provide our security services to customers with highly complex and customized networks, which requires
careful planning and execution between our customers, our customer support teams and our channel partners. Further, when
new or updated elements of our customers’ infrastructure or new industry standards or protocols are introduced, we may have
to update or enhance our cloud platform to allow us to continue to provide service to customers. Our competitors or other
vendors may refuse to work with us to allow their products to interoperate with our solutions, which could make it difficult
for our cloud platform to function properly in customer networks that include these third-party products.
We may not deliver or maintain interoperability quickly or cost-effectively, or at all. These efforts require capital
investment and engineering resources. If we fail to maintain compatibility of our cloud platform with our customers’ network
and security infrastructures, our customers may not be able to fully utilize our solutions, and we may, among other
consequences, lose or fail to increase our market share and experience reduced demand for our services, which would
materially harm our business, operating results and financial condition.
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We provide service level commitments under our customer contracts. If we fail to meet these contractual
commitments, we could be obligated to provide credits for future service and our business could suffer.
Our customer agreements contain service level commitments, which contain specifications regarding the availability and
performance of our cloud platform. Any failure of or disruption to our infrastructure could impact the performance of our
platform and the availability of services to customers. If we are unable to meet our stated service level commitments or if we
suffer extended periods of poor performance or unavailability of our platform, we may be contractually obligated to provide
affected customers with service credits for future subscriptions, and, in certain cases, refunds. To date, there has not been a
material failure to meet our service level commitments, and we do not currently have any material liabilities accrued on our
balance sheet for such commitments. Our revenue, other results of operations and financial condition could be harmed if we
suffer performance issues or downtime that exceeds the service level commitments under our agreements with our customers.
Our ability to maintain customer satisfaction depends in part on the quality of our customer support, including the
quality of the support provided on our behalf by certain channel partners. Failure to maintain high-quality customer
support could have an adverse effect on our business, financial condition and results of operations.
If we do not provide superior support to our customers, our ability to renew subscriptions, increase the number of users
and sell additional services to customers will be adversely affected. We believe that successfully delivering our cloud solution
requires a particularly high level of customer support and engagement. We or our channel partners must successfully assist
our customers in deploying our cloud platform, resolving performance issues, addressing interoperability challenges with a
customer’s existing network and security infrastructure and responding to security threats and cyberattacks. Many
enterprises, particularly large organizations, have very complex networks and require high levels of focused support,
including premium support offerings, to fully realize the benefits of our cloud platform. Any failure by us to maintain the
expected level of support could reduce customer satisfaction and hurt our customer retention, particularly with respect to our
large enterprise customers. Additionally, if our channel partners do not provide support to the satisfaction of our customers,
we may be required to provide this level of support to those customers, which would require us to hire additional personnel
and to invest in additional resources. We may not be able to hire such resources fast enough to keep up with demand,
particularly if the sales of our platform exceed our internal forecasts. We may also not be successful in our efforts to fully
onboard new hires and provide adequate training to our employees, who are working remotely as a result of the COVID-19
pandemic. To the extent that we or our channel partners are unsuccessful in hiring, training and retaining adequate support
resources, our ability and the ability of our channel partners to provide adequate and timely support to our customers will be
negatively impacted, and our customers’ satisfaction with our cloud platform could be adversely affected. We currently rely
in part on contractors provided by third-party service providers internationally to provide support services to our customers,
and we expect to expand our international customer service support team to other countries. Any failure to properly train or
oversee such contractors could result in a poor customer experience and an adverse impact on our reputation and ability to
renew subscriptions or engage new customers. Furthermore, as we sell our solutions internationally, our support organization
faces additional challenges, including those associated with delivering support, training and documentation in languages
other than English. Any failure to maintain high-quality customer support, or a market perception that we do not maintain
high-quality support, could materially harm our reputation, adversely affect our ability to sell our solutions to existing and
prospective customers and could harm our business, financial condition and results of operations.
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We rely on our key technical, sales and management personnel to grow our business, and the loss of one or more key
employees or the inability to attract and retain qualified personnel could harm our business.
Our future success is substantially dependent on our ability to attract, retain and motivate the members of our
management team and other key employees throughout our organization. In particular, we are highly dependent on the
services of Jay Chaudhry, our president, chief executive officer and chairman of our board of directors, who is critical to our
future vision and strategic direction. We rely on our leadership team in the areas of operations, security, marketing, sales,
support and general and administrative functions, and on individual contributors on our research and development team.
Although we have entered into employment agreements with our key personnel, these agreements have no specific duration
and constitute at-will employment. We do not maintain key person life insurance policies on any of our employees. The loss
of one or more of our executive officers or key employees could seriously harm our business.
To execute our growth plan, we must attract and retain highly qualified personnel. Competition for these personnel in the
San Francisco Bay Area, where our headquarters are located, and in other locations where we maintain offices, is intense,
especially for experienced sales professionals and for engineers experienced in designing and developing cloud applications
and security software. We have from time to time experienced, and we expect to continue to experience, difficulty in hiring
and retaining employees with appropriate qualifications. For example, in recent years, recruiting, hiring and retaining
employees with expertise in the cybersecurity industry has become increasingly difficult as the demand for cybersecurity
professionals has increased as a result of the recent cybersecurity attacks on global corporations and governments. Many of
the companies with which we compete for experienced personnel have greater resources than we have. Further, with
restrictions on activities imposed by governments across the world as a result of the COVID-19 pandemic, it has become
more difficult to hire new employees into our business. If these restrictions persist or if attrition increases for an extended
period, we may be unable to fully address our hiring needs. In addition, job candidates and existing employees often consider
the value of the equity awards they receive in connection with their employment. Volatility or lack of performance in our
stock price may also affect our ability to attract and retain our key employees. Also, many of our employees have become, or
will soon become, vested in a substantial amount of equity awards, which may give them a substantial amount of personal
wealth. This may make it more difficult for us to retain and motivate these employees, and this wealth could affect their
decision about whether or not they continue to work for us. Any failure to successfully attract, integrate or retain qualified
personnel to fulfill our current or future needs could materially and adversely affect our business, operating results and
financial condition.
We incorporate technology from third parties into our cloud platform, and our inability to obtain or maintain rights to
the technology could harm our business.
We license software and other technology from third parties that we incorporate into or integrate with, our cloud
platform. We cannot be certain that our licensors are not infringing the intellectual property rights of third parties or that our
licensors have sufficient rights to the licensed intellectual property in all jurisdictions in which we may sell our services. In
addition, many licenses are non-exclusive, and therefore our competitors may have access to the same technology licensed to
us. Some of our agreements with our licensors may be terminated for convenience by them, or otherwise provide for a limited
term. If we are unable to continue to license any of this technology for any reason, our ability to develop and sell our services
containing such technology could be harmed. Similarly, if we are unable to license necessary technology from third parties
now or in the future, we may be forced to acquire or develop alternative technology, which we may be unable to do in a
commercially feasible manner or at all, and we may be required to use alternative technology of lower quality or performance
standards. This could limit and delay our ability to offer new or competitive products and services and increase our costs of
production. As a result, our business and results of operations could be significantly harmed. Additionally, as part of our
longer-term strategy, we plan to open our cloud platform to third-party developers and applications to further extend its
functionality. We cannot be certain that such efforts to grow our business will be successful.
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Some of our technology incorporates "open source" software, and we license some of our software through open
source projects, which could negatively affect our ability to sell our platform and subject us to possible litigation.
Our solutions incorporate software licensed by third parties under open source licenses, including open source software
included in software we receive from third-party commercial software vendors. Use of open source software may entail
greater risks than use of third-party commercial software, as open source licensors generally do not provide support, updates
or warranties or other contractual protections regarding infringement claims or the quality of the code. In addition, the wide
availability of open source software used in our solutions could expose us to security vulnerabilities. Furthermore, the terms
of many open source licenses have not been interpreted by U.S. courts, and there is a risk that such licenses could be
construed in a manner that imposes unanticipated conditions or restrictions on our ability to market or commercialize our
solutions. As a result, we could be subject to lawsuits by parties claiming ownership of what we believe to be open source
software. Litigation could be costly for us to defend, have a negative effect on our results of operations and financial
condition or require us to devote additional research and development resources to change our solutions. In addition, by the
terms of some open source licenses, under certain conditions we could be required to release the source code of our
proprietary software, and to make our proprietary software available under open source licenses, including authorizing further
modification and redistribution. In the event that portions of our proprietary software are determined to be subject to such
requirements by an open source license, we could be required to publicly release the affected portions of our source code, re-
engineer all or a portion of our platform or otherwise be limited in the licensing of our services, each of which provide an
advantage to our competitors or other entrants to the market, create security vulnerabilities in our solutions and could reduce
or eliminate the value of our services. Further, if we are held to have breached or otherwise failed to comply with the terms of
an open source software license, we could be required to release certain of our proprietary source code under open source
licenses, pay monetary damages, seek licenses from third parties to continue offering our services on terms that are not
economically feasible or be subject to injunctions that could require us to discontinue the sale of our services if re-
engineering could not be accomplished on a timely basis. Many of the risks associated with use of open source software
cannot be eliminated and could negatively affect our business. Moreover, we cannot assure you that our processes for
controlling our use of open source software in our platform will be effective. Responding to any infringement or
noncompliance claim by an open source vendor, regardless of its validity, or discovering open source software code in our
platform could harm our business, operating results and financial condition by, among other things:
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resulting in time-consuming and costly litigation;
diverting management’s time and attention from developing our business;
requiring us to pay monetary damages or enter into royalty and licensing agreements that we would not normally
find acceptable;
causing delays in the deployment of our platform or service offerings to our customers;
requiring us to stop offering certain services on or features of our platform;
requiring us to redesign certain components of our platform using alternative non-infringing or non-open source
technology, which could require significant effort and expense;
requiring us to disclose our software source code and the detailed program commands for our software; and
requiring us to satisfy indemnification obligations to our customers.
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We rely on a limited number of suppliers for certain components of the equipment we use to operate our cloud
platform, and any disruption in the availability of these components could delay our ability to expand or increase the
capacity of our global data center network or replace defective equipment in our existing data centers.
We rely on a limited number of suppliers for several components of the equipment we use to operate our cloud platform
and provide services to our customers. Our reliance on these suppliers exposes us to risks, including reduced control over
production costs and constraints based on the then current availability, terms and pricing of these components. For example,
we generally purchase these components on a purchase order basis, and do not have long-term contracts guaranteeing supply.
In addition, the technology industry has experienced component shortages and delivery delays in the past, and we may
experience shortages or delays, including as a result of natural disasters, increased demand in the industry or if our suppliers
do not have sufficient rights to supply the components in all jurisdictions in which we may host our services. For example,
though the COVID-19 pandemic has not yet had a material impact on our supply chain, the pandemic could result in
disruptions and delays for these components. If our supply of certain components is disrupted or delayed, there can be no
assurance that additional supplies or components can serve as adequate replacements for the existing components or that
supplies will be available on terms that are favorable to us, if at all. Any disruption or delay in the supply of our components
may delay opening new data centers, delay increasing capacity or replacing defective equipment at existing data centers or
cause other constraints on our operations that could damage our channel partner or customer relationships.
Claims by others that we infringe their proprietary technology or other rights, or other lawsuits asserted against us,
could result in significant costs and substantially harm our business, financial condition, results of operations and
prospects.
A number of companies in our industry hold a large number of patents and also protect their copyright, trade secret and
other intellectual property rights, and companies in the networking and security industry frequently enter into litigation based
on allegations of patent infringement or other violations of intellectual property rights. In addition, patent holding companies
seek to monetize patents they previously developed, have purchased or otherwise obtained. Many companies, including our
competitors, may now, and in the future, have significantly larger and more mature patent, copyright, trademark and trade
secret portfolios than we have, which they may use to assert claims of infringement, misappropriation and other violations of
intellectual property rights against us. In addition, future litigation may involve non-practicing entities or other patent owners
who have no relevant product offerings or revenue and against whom our own patents may therefore provide little or no
deterrence or protection. As we face increasing competition and gain an increasingly higher profile the possibility of
intellectual property rights claims against us grows. Third parties have asserted in the past and may in the future assert claims
of infringement of intellectual property rights against us and these claims, even without merit, could harm our business,
including by increasing our costs, reducing our revenue, creating customer concerns that result in delayed or reduced sales,
distracting our management from the running of our business and requiring us to cease use of important intellectual property.
In addition, because patent applications can take years to issue and are often afforded confidentiality for some period of time,
there may currently be pending applications, unknown to us, that later result in issued patents that could cover one or more of
our services. Moreover, in a patent infringement claim against us, we may assert, as a defense, that we do not infringe the
relevant patent claims, that the patent is invalid or both. The strength of our defenses will depend on the patents asserted, the
interpretation of these patents, and our ability to invalidate the asserted patents. However, we could be unsuccessful in
advancing non-infringement and/or invalidity arguments in our defense. In the United States, issued patents enjoy a
presumption of validity, and the party challenging the validity of a patent claim must present clear and convincing evidence
of invalidity, which is a high burden of proof. Conversely, the patent owner need only prove infringement by a preponderance
of the evidence, which is a lower burden of proof. Furthermore, because of the substantial amount of discovery required in
connection with patent and other intellectual property rights litigation, there is a risk that some of our confidential
information could be compromised by the discovery process.
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As the number of products and competitors in our market increases and overlaps occur, claims of infringement,
misappropriation and other violations of intellectual property rights may increase. Our insurance may not cover intellectual
property rights infringement claims. Third parties have in the past and may in the future also assert infringement claims
against our customers or channel partners, with whom our agreements may obligate us to indemnify against these claims. In
addition, to the extent we hire personnel from competitors, we may be subject to allegations that such employees have
divulged proprietary or other confidential information to us.
From time to time, the U.S. Supreme Court, other U.S. federal courts and the U.S. Patent and Trademark Appeals Board,
and their foreign counterparts, have made and may continue to make changes to the interpretation of patent laws in their
respective jurisdictions. We cannot predict future changes to the interpretation of existing patent laws or whether U.S. or
foreign legislative bodies will amend such laws in the future. Any changes may lead to uncertainties or increased costs and
risks surrounding the outcome of third-party infringement claims brought against us and the actual or enhanced damages,
including treble damages, that may be awarded in connection with any such current or future claims and could have a
material adverse effect on our business and financial condition.
We are unable to predict the likelihood of success in defending against future infringement claims. In the event that we
fail to successfully defend ourselves against an infringement claim, a successful claimant could secure a judgment or
otherwise require payment of legal fees, settlement payments, ongoing royalties or other costs or damages; or we may agree
to a settlement that prevents us from offering certain services or features; or we may be required to obtain a license, which
may not be available on reasonable terms, or at all, to use the relevant technology. If we are prevented from using certain
technology or intellectual property, we may be required to develop alternative, non-infringing technology, which could
require significant time, during which we could be unable to continue to offer our affected services or features, effort and
expense and may ultimately not be successful. Any of these outcomes could result in a material adverse effect on our
business. Even if we were to prevail, third-party infringement lawsuits could be costly and time-consuming, divert the
attention of our management and key personnel from our business operations, deter channel partners from selling or licensing
our services and dissuade potential customers from purchasing our services, which would also materially harm our business.
In addition, any public announcements of the results of any proceedings in third-party infringement lawsuits could be
negatively perceived by industry or financial analysts and investors and could cause our stock price to experience volatility or
decline. Further, the expense of litigation and the timing of this expense from period to period are difficult to estimate, subject
to change and could adversely affect our results of operations.
Any of these events could materially and adversely harm our business, financial condition and results of operations.
The success of our business depends in part on our ability to protect and enforce our intellectual property rights.
We believe our intellectual property is an essential asset of our business, and our success and ability to compete depend
in part upon protection of our intellectual property rights. We rely on a combination of patent, copyright, trademark and trade
secret laws, as well as confidentiality procedures and contractual provisions, to establish and protect our intellectual property
rights, all of which provide only limited protection. The efforts we have taken to protect our intellectual property rights may
not be sufficient or effective, and our patents, trademarks and copyrights may be held invalid or unenforceable. Moreover, we
cannot assure you that any patents will be issued with respect to our currently pending patent applications in a manner that
gives us adequate defensive protection or competitive advantages, or that any patents issued to us will not be challenged,
invalidated or circumvented. We have filed for patents in the United States and in certain non-U.S. jurisdictions, but such
protections may not be available in all countries in which we operate or in which we seek to enforce our intellectual property
rights, or may be difficult to enforce in practice. For example, many foreign countries have compulsory licensing laws under
which a patent owner must grant licenses to third parties. In addition, many countries limit the enforceability of patents
against certain third parties, including government agencies or government contractors. In these countries, patents may
provide limited or no benefit. Moreover, we may need to expend additional resources to defend our intellectual property
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rights in these countries, and our inability to do so could impair our business or adversely affect our international expansion.
Our currently issued patents and any patents that may be issued in the future with respect to pending or future patent
applications may not provide sufficiently broad protection or they may not prove to be enforceable in actions against alleged
infringers. Additionally, the U.S. Patent and Trademark Office and various foreign governmental patent agencies require
compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent
application process and to maintain issued patents. There are situations in which noncompliance can result in abandonment or
lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. If this
occurs, it could materially harm our business, operating results, financial condition and prospects.
We may not be effective in policing unauthorized use of our intellectual property rights, and even if we do detect
violations, litigation may be necessary to enforce our intellectual property rights. In addition, our intellectual property may be
stolen, including by cybercrimes, and we may not be able to identify the perpetrators or prevent the exploitation of our
intellectual property by our competitors or others. Protecting against the unauthorized use of our intellectual property rights,
technology and other proprietary rights is expensive and difficult, particularly outside of the United States. Any enforcement
efforts we undertake, including litigation, could be time-consuming and expensive and could divert management’s attention,
either of which could harm our business, operating results and financial condition. Further, attempts to enforce our rights
against third parties could also provoke these third parties to assert their own intellectual property or other rights against us,
or result in a holding that invalidates or narrows the scope of our rights, in whole or in part. The inability to adequately
protect and enforce our intellectual property and other proprietary rights could seriously harm our business, operating results,
financial condition and prospects. Even if we are able to secure our intellectual property rights, we cannot assure you that
such rights will provide us with competitive advantages or distinguish our services from those of our competitors or that our
competitors will not independently develop similar technology, duplicate any of our technology, or design around our patents.
Our business depends, in part, on sales to government organizations, and significant changes in the contracting or
fiscal policies of such government organizations could have an adverse effect on our business and operating results.
We derive a portion of our revenue from contracts with government organizations, and we believe the success and
growth of our business will in part depend on our successful procurement of additional public sector customers. However,
demand from government organizations is often unpredictable, and we cannot assure you that we will be able to maintain or
grow our revenue from the public sector. Sales to government entities are subject to substantial risks, including the following:
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selling to government agencies can be highly competitive, expensive and time-consuming, often requiring
significant upfront time and expense without any assurance that such efforts will generate a sale;
• U.S. or other government certification requirements applicable to our cloud platform, including the Federal Risk and
Authorization Management Program, are often difficult and costly to obtain and maintain and failure to do so will
restrict our ability to sell to government customers;
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government demand and payment for our services may be impacted by public sector budgetary cycles and funding
authorizations; and
governments routinely investigate and audit government contractors’ administrative processes and any unfavorable
audit could result in fines, civil or criminal liability, further investigations, damage to our reputation and debarment
from further government business.
The occurrence of any of the foregoing could cause governments and governmental agencies to delay or refrain from
purchasing our solutions in the future or otherwise have an adverse effect on our business and operating results.
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Failure to comply with laws and regulations applicable to our business could subject us to fines and penalties and
could also cause us to lose customers in the public sector or negatively impact our ability to contract with the public sector.
Our business is subject to regulation by various federal, state, local and foreign governmental agencies, including
agencies responsible for monitoring and enforcing laws and regulations relating to privacy, data protection and cybersecurity,,
employment and labor laws, workplace safety, product safety, environmental laws, consumer protection laws, anti-bribery
laws, import and export controls, federal securities laws and tax laws and regulations. In certain jurisdictions, these
regulatory requirements may be more stringent than in the United States. These laws and regulations impose added costs on
our business. Noncompliance with applicable regulations or requirements could subject us to:
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disgorgement of profits, fines and damages;
civil and criminal penalties or injunctions;
claims for damages by our customers or channel partners;
termination of contracts;
loss of intellectual property rights; and
temporary or permanent debarment from sales to government organizations.
If any governmental sanctions are imposed, or if we do not prevail in any possible civil or criminal litigation, our
business, operating results and financial condition could be adversely affected. In addition, responding to any action will
likely result in a significant diversion of management’s attention and resources and an increase in professional fees.
Enforcement actions and sanctions could materially harm our business, operating results and financial condition.
We endeavor to properly classify employees as exempt versus non-exempt under applicable law. Although there are no
pending or threatened material claims or investigations against us asserting that some employees are improperly classified as
exempt, the possibility exists that some of our current or former employees could have been incorrectly classified as exempt
employees.
In addition, we must comply with laws and regulations relating to the formation, administration and performance of
contracts with the public sector, including U.S. federal, state and local governmental organizations, which affect how we and
our channel partners do business with governmental agencies. Selling our solutions to the U.S. government, whether directly
or through channel partners, also subjects us to certain regulatory and contractual requirements. Failure to comply with these
requirements by either us or our channel partners could subject us to investigations, fines and other penalties, which could
have an adverse effect on our business, operating results, financial condition and prospects. As an example, the U.S.
Department of Justice, or DOJ, and the General Services Administration, or GSA, have in the past pursued claims against and
financial settlements with IT vendors under the False Claims Act and other statutes related to pricing and discount practices
and compliance with certain provisions of GSA contracts for sales to the federal government. The DOJ and GSA continue to
actively pursue such claims. Violations of certain regulatory and contractual requirements could also result in us being
suspended or debarred from future government contracting. Any of these outcomes could have a material adverse effect on
our revenue, operating results, financial condition and prospects.
These laws and regulations impose added costs on our business, and failure to comply with these or other applicable
regulations and requirements could lead to claims for damages from our channel partners or customers, penalties, termination
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of contracts, loss of exclusive rights in our intellectual property and temporary suspension or permanent debarment from
government contracting. Any such damages, penalties, disruptions or limitations in our ability to do business with the public
sector could have a material adverse effect on our business and operating results.
If we were not able to satisfy data protection, security, privacy and other government- and industry-specific
requirements or regulations, our business, results of operations and financial condition could be harmed.
The regulatory framework for privacy, data protection and security matters are rapidly evolving and are likely to remain
volatile for the foreseeable future. Our handling of personal data is subject to various data protection, information security
and other telecommunications regulations where we offer our solutions around the world. We also may find it necessary or
desirable to join industry or other self-regulatory bodies or other information security or data protection-related organizations
that require us to comply with rules pertaining to data protection and information security. Further, we may be bound by
additional, more stringent contractual obligations and other actual and asserted obligations, such as industry standards,
relating to our collection, use and disclosure of personal, financial and other data. Changes in laws or regulations that
adversely affect the use of the internet, including laws impacting net neutrality, could also impact our business.
The U.S. federal government, and various state and foreign governments, have adopted or proposed regulations on the
collection, distribution, use and storage of information relating to individuals. Such laws and regulations may require
companies to implement privacy and security policies, permit customers to access, correct and delete information stored or
maintained by such companies, inform individuals of security breaches that affect their information, and, in some cases,
obtain individuals’ consent to use information for certain purposes. For example, the European Union, or the EU,
implemented the General Data Protection Regulation, or GDPR, which imposes stringent data protection requirements and
provides for significant penalties for noncompliance. Similarly, California has adopted the California Consumer Privacy Act,
or CCPA, which seeks to provide California consumers with privacy rights and protections regarding their personal
information, and the California Privacy Rights Act, which amends and expands the CCPA. Other states have enacted or
proposed similar legislation. Further, China and Russia, countries in which we offer our solutions, have enacted legislation
regulating certain technologies and with respect to data processing, and it is not clear how broadly such legislation will be
applied in relation to our business. We expect that there will continue to be new proposed laws, regulations and industry
standards concerning data protection, information security, and telecommunications services in the United States, EU, and
other jurisdictions in which we operate or may operate, and we cannot yet determine the impact such future laws, regulations
and standards may have on our business. Further, existing privacy laws, regulations and industry standards are being
interpreted or invalidated by courts and regulators in ways that could impact our business. For example, the EU-U.S. Privacy
Shield and the Swiss-U.S. Privacy Shield frameworks which provided a safe harbor for the cross-border transfer of certain
personal data have been invalidated. In addition. the exit of the United Kingdom, or the UK, from the EU, commonly referred
to as Brexit, has created additional uncertainty with regard to data protection regulation in the UK generally and specifically
to transfers of personal data to and from the UK. The European Commission has announced a decision of “adequacy”
concluding that the UK’s data protection regime, which includes legislation substantially similar to the GDPR and provides
for substantial penalties for noncompliance, ensures an equivalent level of data protection to the GDPR. Some uncertainty
remains, however, as this adequacy determination must be renewed after four years and may be modified or revoked in the
interim. As a result of these or other developments, we may need to implement different or additional measures, including
contractual and technical safeguards and other measures, to establish or maintain legitimate means for the transfer and receipt
of personal data from the EU, the UK or Switzerland to other jurisdictions. This may increase compliance costs, lead to
increased regulatory scrutiny or liability, may require additional contractual negotiations, and may adversely impact our
business, financial condition and operating results. More generally, addressing new and evolving laws, regulations, standards
and other obligations, and changes in the interpretation of existing laws, regulations, standards and other obligations relating
to privacy, data protection or security could require us to modify our solutions, restrict our business operations, increase our
costs and impair our ability to maintain and grow our customer base and increase our revenue.
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Although we work to comply with applicable laws and regulations, industry standards, contractual obligations and other
legal obligations, those laws, regulations, standards and obligations are evolving and may be modified, interpreted and
applied in an inconsistent manner from one jurisdiction to another, and may conflict with one another. In addition, they may
conflict with other requirements or legal obligations that apply to our business or the security features and services that our
customers expect from our solutions, and may require us to make changes to our solutions or other practices in an effort to
comply with them. As such, we cannot assure ongoing compliance with all such laws, regulations, standards and obligations.
Any failure or perceived failure by us to comply with applicable laws, regulations, standards or actual or asserted obligations,
or any actual or suspected security breach or other security incident, whether or not resulting in unauthorized access to, or
acquisition, release or transfer of information relating to individuals or other data, may result in governmental investigations,
enforcement actions and other proceedings, private claims and litigation, fines and penalties or adverse publicity, and could
cause our customers to lose trust in us, which could have an adverse effect on our reputation and business. Any inability to
adequately address privacy and security concerns, even if unfounded, or comply with applicable laws, regulations, standards
and obligations, could result in additional cost and liability to us, damage our reputation, inhibit sales, and materially and
adversely affect our business and operating results.
We are subject to governmental export and import controls that could impair our ability to compete in international
markets and subject us to liability if we are not in full compliance with applicable laws.
Our business activities are subject to various restrictions under U.S. export and similar laws and regulations, including
the U.S. Department of Commerce’s Export Administration Regulations and various economic and trade sanctions
regulations administered by the U.S. Treasury Department’s Office of Foreign Assets Control. The U.S. export control laws
and U.S. economic sanctions laws include restrictions or prohibitions on the sale or supply of certain products and services to
U.S. embargoed or sanctioned countries, governments, persons and entities. In addition, various countries regulate the import
of certain technology and have enacted or could enact laws that could limit our ability to provide our services and operate our
cloud platform or could limit our customers’ ability to access or use our services in those countries.
Although we take precautions to prevent our services from being provided in violation of such laws, our services may
have been in the past, and could in the future be, provided inadvertently in violation of such laws, despite the precautions we
take. If we fail to comply with these laws and regulations, we and certain of our employees could be subject to civil or
criminal penalties, including the possible loss of export privileges and fines. We may also be materially and adversely
affected through penalties, reputational harm, loss of access to certain markets, or otherwise. Obtaining the necessary
authorizations, including any required license, for a particular transaction may be time-consuming, is not guaranteed and may
result in the delay or loss of sales opportunities. In addition, changes in our platform, or changes in export, sanctions and
import laws, could delay the introduction and sale of subscriptions to our platform in international markets, prevent users in
certain countries from accessing our services or, in some cases, prevent the provision of our services to certain countries,
governments, persons or entities altogether. Any change in export or import regulations, economic sanctions or related laws,
shift in the enforcement or scope of existing regulations or change in the countries, governments, persons or technologies
targeted by such regulations could decrease our ability to sell subscriptions to our platform to existing customers or potential
new customers with international operations. Any decrease in our ability to sell subscriptions to our platform could materially
and adversely affect our business, results of operations and financial condition.
Our international operations expose us to significant risks, and failure to manage those risks could materially and
adversely impact our business.
Historically, we have derived a significant portion of our revenue from outside the United States. We derived
approximately 51%, 51% and 51% of our revenue from our international customers in fiscal 2021, fiscal 2020 and fiscal
2019, respectively. As of July 31, 2021, approximately 54% of our full-time employees were located outside of the United
States. We are continuing to adapt to and develop strategies to address international markets and our growth strategy includes
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continued expansion into target geographies, such as Japan and the Asia-Pacific region, Latin America and the Middle East,
but there is no guarantee that such efforts will be successful. We expect that our international activities will continue to grow
in the future, as we continue to pursue opportunities in international markets. These international operations will require
significant management attention and financial resources and are subject to substantial risks, including:
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political, economic and social uncertainty;
unexpected costs for the localization of our services, including translation into foreign languages and adaptation for
local practices and regulatory requirements;
greater difficulty in enforcing contracts and accounts receivable collection, and longer collection periods, which may
be further lengthened by the COVID-19 pandemic and governmental responses thereto;
reduced or uncertain protection for intellectual property rights in some countries;
greater risk of unexpected changes in regulatory practices, tariffs and tax laws and treaties;
greater risk of a failure of foreign employees, partners, distributors and resellers to comply with both U.S. and
foreign laws, including antitrust regulations, anti-bribery laws, export and import control laws, and any applicable
trade regulations ensuring fair trade practices;
requirements to comply with foreign privacy, data protection and information security laws and regulations and the
risks and costs of noncompliance;
increased expenses incurred in establishing and maintaining office space and equipment for our international
operations;
greater difficulty in identifying, attracting and retaining local qualified personnel, and the costs and expenses
associated with such activities;
differing employment practices and labor relations issues;
difficulties in managing and staffing international offices and increased travel, infrastructure and legal compliance
costs associated with multiple international locations;
fluctuations in exchange rates between the U.S. dollar and foreign currencies in markets where we do business,
including the British Pound, Indian Rupee and Euro, and related impact on sales cycles;
the impact of natural disasters and public health pandemics and epidemics, such as the COVID-19 pandemic, on
customers, partners, suppliers, employees, travel and the global economy; and
the legal uncertainty in Europe as a result of Brexit.
As we continue to develop and grow our business globally, our success will depend, in large part, on our ability to
anticipate and effectively manage these risks. The expansion of our existing international operations and entry into additional
international markets will require significant management attention and financial resources. Our failure to successfully
manage our international operations and the associated risks could limit the future growth of our business.
Servicing our debt may require a significant amount of cash, and we may not have sufficient cash flow from our
business or the ability to raise funds to pay our substantial debt.
On June 25, 2020, we issued $1,150 million in aggregate principal amount of our 0.125% Convertible Senior Notes due
2025, referred to herein as the Notes. We may be required to use a substantial portion of our cash flows from operations to
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pay interest and principal on our indebtedness. Our ability to make scheduled payments of the principal, to pay interest on or
to refinance our indebtedness, including the Notes, depends on our future performance, which is subject to economic,
financial, competitive and other factors beyond our control. Such payments will reduce the funds available to us for working
capital, capital expenditures, and other corporate purposes and may limit our ability to obtain additional financing for
working capital, capital expenditures, expansion plans, and other investments. Our business may not continue to generate
cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are
unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring
debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. If we are unable to engage in any
of these activities or engage in these activities on desirable terms, it could result in a default on our debt obligations, which
would adversely affect our financial condition.
Our failure to raise additional capital necessary to expand our operations and invest in new solutions could reduce
our ability to compete and could harm our business.
We expect that our existing cash, cash equivalents and short-term investments will be sufficient to meet our anticipated
cash needs for working capital and capital expenditures for at least the next 12 months. We may, however, need to raise
additional funds in the future to fund our operating expenses, make capital purchases and acquire or invest in business or
technology, and we may not be able to obtain those funds on favorable terms, or at all. If we raise additional equity financing,
our stockholders may experience significant dilution of their ownership interests and the per share value of our common
stock could decline. Furthermore, if we engage in additional debt financing, the holders of our debt would have priority over
the holders of our common stock, and we may be required to accept terms that restrict our ability to incur additional
indebtedness or our ability to pay any dividends on our common stock, though we do not intend to pay dividends in the
foreseeable future. We may also be required to take other actions, any of which could harm our business and operating
results. In addition, the actions taken by federal, state, local, and foreign governments in in response to the COVID-19
pandemic have significantly disrupted economic activity in the jurisdictions in which we operate and have caused volatility in
capital markets. If we need to access the capital markets, there can be no assurance that financing may be available on
attractive terms, if at all. If we are unable to obtain adequate financing, or financing on terms satisfactory to us, when we
require it, our ability to continue to support our business growth and to respond to business challenges could be significantly
limited, and our business, operating results, financial condition and prospects could be materially and adversely affected.
Adverse economic conditions or reduced IT security spending may adversely impact our revenue and profitability.
Our operations and performance depend in part on worldwide economic conditions and the impact these conditions have
on levels of spending on IT networking and security solutions. Our business depends on the overall demand for these
solutions and on the economic health and general willingness of our current and prospective customers to purchase our
security services. Weak economic conditions, including the downturn in the global and U.S. economies due to the COVID-19
pandemic, or a reduction in IT security spending, could materially and adversely affect our business, operating results and
financial condition in a number of ways, including by reducing sales, lengthening sales cycles and lowering prices for our
services.
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We believe our long-term value as a company will be greater if we focus on growth, which may negatively impact our
profitability in the near term.
Part of our business strategy is to primarily focus on our long-term growth. As a result, our profitability may be lower in
the near term than it would be if our strategy were to maximize short-term profitability. Significant expenditures on sales and
marketing efforts, and expenditures on growing our cloud platform and expanding our research and development, each of
which we intend to continue to invest in, may not ultimately grow our business or cause long-term profitability. If we are
ultimately unable to achieve profitability at the level anticipated by industry or financial analysts and our stockholders, our
stock price may decline.
We are exposed to fluctuations in currency exchange rates, which could negatively affect our operating results.
The vast majority of our sales contracts are denominated in U.S. dollars, and therefore, substantially all of our revenue is
not subject to foreign currency risk. However, a strengthening of the U.S. dollar could increase the real cost of our solutions
to our customers outside of the United States, which could adversely affect our financial condition and operating results. In
addition, an increasing portion of our operating expenses is incurred outside the United States, is denominated in foreign
currencies, such as the British Pound, Indian Rupee, Euro, Canadian Dollar and Australian Dollar, and is subject to
fluctuations due to changes in foreign currency exchange rates. We are also exposed to the impact of currency fluctuations on
certain assets and liabilities denominated in nonfunctional currencies.
During fiscal 2021, we implemented a foreign currency risk management program and entered into foreign currency
forward contracts which we designated as cash flow hedges. The use of these hedging activities may not be successful in
effectively mitigating the potentially adverse impact on our financial statements due to unfavorable movements in foreign
currency exchange rates.
If we become more exposed to currency fluctuations and are not able to successfully hedge against the risks associated
with currency fluctuations, our operating results could be materially and adversely affected. Further, unanticipated changes in
currency exchange rates may result in poorer overall financial performance than if we had not engaged in any such hedging
transactions.
Taxing authorities may successfully assert that we should have collected or in the future should collect sales and use,
value added or similar taxes, and we could be subject to liability with respect to past or future sales, which could adversely
affect our operating results.
We do not collect sales and use, value added or similar taxes in all jurisdictions in which we have sales because we have
been advised that such taxes are not applicable to our services in certain jurisdictions. Sales and use, value added and similar
tax laws and rates vary greatly by jurisdiction. Certain jurisdictions in which we do not collect such taxes may assert that
such taxes are applicable, which could result in tax assessments, penalties and interest, to us or our customers for the past
amounts, and we may be required to collect such taxes in the future. If we are unsuccessful in collecting such taxes from our
customers, we could be held liable for such costs, which may materially and adversely affect our operating results.
Our corporate structure and intercompany arrangements are subject to the tax laws of various jurisdictions, and we
could be obligated to pay additional taxes, which would harm our results of operations.
We are expanding our international operations and staff to support our business in international markets. Our corporate
structure and associated transfer pricing policies contemplate the business flows and future growth into the international
markets, and consider the functions, risks and assets of the various entities involved in the intercompany transactions. The
amount of taxes we pay in different jurisdictions may depend on the application of the tax laws of the various jurisdictions,
including the United States, to our international business activities, changes in tax rates, new or revised tax laws or
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interpretations of existing tax laws and policies, and our ability to operate our business in a manner consistent with our
corporate structure and intercompany arrangements. For example, certain jurisdictions have recently introduced a digital
services tax, which is generally a tax on gross revenue generated from users or customers located in those jurisdictions, and
other jurisdictions are considering enacting similar laws. The taxing authorities of the jurisdictions in which we operate may
challenge our methodologies for pricing intercompany transactions pursuant to the intercompany arrangements or disagree
with our determinations as to the income and expenses attributable to specific jurisdictions. If such a challenge or
disagreement were to occur, and our position was not sustained, or if there are changes in tax laws or the way existing tax
laws are interpreted or applied, we could be required to pay additional taxes, interest and penalties, which could result in one-
time tax charges, higher effective tax rates, reduced cash flows and lower overall profitability of our operations. Our financial
statements could fail to reflect adequate reserves to cover such a contingency.
Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
As of July 31, 2021, we had net operating loss carryforwards for U.S. federal income tax purposes and state income tax
purposes of approximately $1,421.0 million and $396.3 million, respectively, available to offset future taxable income.
Beginning in 2027, $177.7 million of the federal net operating losses will begin to expire. The remaining $1,243.3 million of
the federal net operating losses will carry forward indefinitely. Beginning in 2024, $300.1 million of state net operating losses
will begin to expire at different periods. The remaining $96.3 million of state net operating losses will carry forward
indefinitely. As of July 31, 2021 and 2020, we had foreign net operating loss carryforward of $54.6 million and $19.5 million,
respectively, all of which may be carried forward indefinitely. Beginning in 2027, $0.9 million of foreign net operating losses
will begin to expire. The remaining $53.7 million of foreign net operating losses will carry forward indefinitely.
As of July 31, 2021, we also had U.S. federal and California research and development tax credits of $34.7 million and
$26.1 million, respectively. If not utilized, the federal research and development tax credit carryforwards will begin expiring
at different periods beginning in 2033. Our California research and development tax credits may be carried forward
indefinitely. Realization of these net operating loss and research and development tax credit carryforwards depends on future
income, and there is a risk that a portion of our existing carryforwards could expire unused and be unavailable to offset future
income tax liabilities, which could materially and adversely affect our results of operations.
In addition, under Section 382 and 383 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an
"ownership change," generally defined as a greater than 50% change (by value) in its equity ownership by "5% shareholders"
over a three-year period, the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change
tax attributes, such as research and development tax credits, to offset its post-change income may be limited. As a result, in
the event that it is determined that we have in the past experienced an ownership change, or if we experience one or more
ownership changes in the future as a result of subsequent shifts in our stock ownership, our ability to use our pre-change net
operating loss carry-forwards and other pre-change tax attributes to offset U.S. federal taxable liability may be subject to
limitations, which could potentially result in increased future tax liability to us. Furthermore, our state carryforwards may be
subject to similar and additional limitations. For example, California recently enacted legislation limiting our ability to use
our state net operating loss carryforwards and credits for taxable years through fiscal 2023.
Future acquisitions, strategic investments, partnerships or alliances could be difficult to identify and integrate, divert
the attention of key management personnel, disrupt our business, dilute stockholder value and adversely affect our
operating results, financial condition and prospects.
Our business strategy includes acquiring other complementary solutions, technologies or businesses. We have in the past
acquired, and expect in the future to acquire, businesses that we believe will complement or augment our existing business. In
order to expand our security offerings and features, we also may enter into relationships with other businesses, which could
involve preferred or exclusive licenses, additional channels of distribution or investments in other companies. Negotiating
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these transactions can be time-consuming, difficult and costly, and our ability to close these transactions may be subject to
third-party approvals, such as government regulatory approvals, which are beyond our control. Consequently, we cannot
assure you that these transactions, once undertaken and announced, will close.
These kinds of acquisitions or investments may result in unforeseen operating difficulties and expenditures. In particular,
we may encounter difficulties assimilating or integrating the businesses, technologies, products and services, personnel or
operations of companies that we may acquire, particularly if the key personnel of an acquired business choose not to work for
us. We may have difficulty retaining the customers of any acquired business or using or continuing the development of the
acquired technologies. Acquisitions may also disrupt our ongoing business, divert our resources and require significant
management attention that would otherwise be available for development of our business. We may not successfully evaluate
or utilize the acquired technology or personnel, or accurately forecast the financial impact of an acquisition transaction,
including accounting charges. Any acquisition or investment could expose us to unknown liabilities. Moreover, we cannot
assure you that the anticipated benefits of any acquisition or investment would be realized or that we would not be exposed to
unknown liabilities. In connection with these types of transactions, we may:
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use cash that we may need in the future to operate our business;
incur debt on terms unfavorable to us or that we are unable to repay;
incur large charges or substantial liabilities;
encounter difficulties integrating diverse business cultures; and
become subject to adverse tax consequences, substantial depreciation or deferred compensation charges.
These challenges related to acquisitions or investments could adversely affect our business, operating results, financial
condition and prospects.
Risks Related to the Ownership of Our Common Stock
The concentration of our stock ownership with insiders will likely limit your ability to influence corporate matters,
including the ability to influence the outcome of director elections and other matters requiring stockholder approval.
As of July 31, 2021, our executive officers, directors, current 5% or greater stockholders and affiliated entities together
beneficially owned approximately 41.9% of our common stock outstanding with Jay Chaudhry, our president, chief executive
officer and chairman of our board of directors, and his affiliates beneficially owning approximately 19.4% of our common
stock. As a result, these stockholders, acting together, will have significant control over most matters that require approval by
our stockholders, including the election of directors and approval of significant corporate transactions. Corporate action
might be taken even if other stockholders oppose them. This concentration of ownership might also have the effect of
delaying or preventing a change of control of us that other stockholders may view as beneficial.
Certain provisions in our charter documents and under Delaware law could make an acquisition of our company
more difficult, limit attempts by our stockholders to replace or remove members of our board of directors or current
management and may adversely affect the market price of our common stock.
Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that could
delay or prevent a change in control of our company. These provisions could also make it difficult for stockholders to elect
directors that are not nominated by the current members of our board of directors or take other corporate actions, including
effecting changes in our management. These provisions include:
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a classified board of directors with three-year staggered terms, which could delay the ability of stockholders to
change the membership of a majority of our board of directors;
the ability of our board of directors to issue shares of preferred stock and to determine the price and other terms of
those shares, including preferences and voting rights, without stockholder approval, which could be used to
significantly dilute the ownership of a hostile acquirer;
the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of our board
of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill
vacancies on our board of directors;
a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or
special meeting of our stockholders;
the requirement that a special meeting of stockholders may be called only by the chairperson of our board of
directors, chief executive officer or president (in the absence of a chief executive officer) or a majority vote of our
board of directors, which could delay the ability of our stockholders to force consideration of a proposal or to take
action, including the removal of directors;
the requirement for the affirmative vote of holders of at least 66 2⁄3% of the voting power of all of the then
outstanding shares of the voting stock, voting together as a single class, to amend the provisions of our amended and
restated certificate of incorporation relating to the issuance of preferred stock and management of our business or
our amended and restated bylaws, which may inhibit the ability of an acquirer to affect such amendments to
facilitate an unsolicited takeover attempt;
the ability of our board of directors, by majority vote, to amend our amended and restated bylaws, which may allow
our board of directors to take additional actions to prevent an unsolicited takeover and inhibit the ability of an
acquirer to amend our amended and restated bylaws to facilitate an unsolicited takeover attempt; and
advance notice procedures with which stockholders must comply to nominate candidates to our board of directors or
to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer
from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to
obtain control of us.
These provisions may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting
stock, from merging or combining with us for a certain period of time.
The market price of our common stock may be volatile, and you could lose all or part of your investment.
The market price of our common stock has fluctuated substantially and may fluctuate significantly in the future in
response to a number of factors, including those described in this "Risk Factors" section, many of which are beyond our
control and may not be related to our operating performance. These fluctuations could cause you to lose all or part of your
investment in our common stock. Factors that could cause fluctuations in the market price of our common stock include the
following:
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actual or anticipated changes or fluctuations in our operating results;
the financial projections we may provide to the public, any changes in these projections or our failure to meet these
projections;
announcements by us or our competitors of new products or new or terminated significant contracts, commercial
relationships or capital commitments;
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industry or financial analyst or investor reaction to our press releases, other public announcements and filings with
the SEC;
rumors and market speculation involving us or other companies in our industry;
price and volume fluctuations in the overall stock market from time to time;
volume fluctuations in the trading of our common stock from time to time;
changes in operating performance and stock market valuations of other technology companies generally, or those in
our industry in particular;
the sales of shares of our common stock by us or our stockholders;
failure of industry or financial analysts to maintain coverage of us, changes in financial estimates by any analysts
who follow our company, or our failure to meet these estimates or the expectations of investors;
actual or anticipated developments in our business or our competitors’ businesses or the competitive landscape
generally;
litigation involving us, our industry or both, or investigations by regulators into our operations or those of our
competitors;
developments or disputes concerning our intellectual property rights or our solutions, or third-party proprietary
rights;
announced or completed acquisitions of businesses or technologies by us or our competitors;
actual or perceived privacy, data protection, or information security incidents or breaches;
new laws or regulations or new interpretations of existing laws or regulations applicable to our business and our
responses thereto;
any major changes in our management or our board of directors, particularly with respect to Mr. Chaudhry;
general economic conditions and slow or negative growth of our markets; and
other events or factors, including those resulting from war, incidents of terrorism, global pandemics or responses to
these events.
In addition, the stock market in general, and the market for technology companies in particular, has experienced extreme
price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those
companies. Broad market and industry factors may seriously affect the market price of our common stock, regardless of our
actual operating performance. In addition, in the past, following periods of volatility in the overall market and the market
prices of a particular company’s securities, securities class action litigation has often been instituted against that company.
Securities litigation, if instituted against us, could result in substantial costs and divert our management’s attention and
resources from our business. This could have an adverse effect on our business, operating results and financial condition.
Sales of substantial amounts of our common stock in the public markets, or the perception that they might occur,
could reduce the price that our common stock might otherwise attain and may dilute your voting power and your
ownership interest in us.
Sales of a substantial number of shares of our common stock in the public market, particularly sales by our directors,
executive officers and significant stockholders, or the perception that these sales could occur, could adversely affect the
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market price of our common stock and may make it more difficult for you to sell your common stock at a time and price that
you deem appropriate.
We may also issue our shares of common stock or securities convertible into shares of our common stock from time to
time in connection with a financing, acquisition, investments or otherwise. Any such issuance could result in substantial
dilution to our existing stockholders and cause the market price of our common stock to decline.
We do not intend to pay dividends in the foreseeable future. As a result, your ability to achieve a return on your
investment will depend on appreciation in the price of our common stock.
We have never declared or paid any cash dividends on our common stock. We currently intend to retain all available
funds and any future earnings for use in the operation of our business and do not anticipate paying any dividends on our
common stock in the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our
board of directors. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never
occur, as the only way to realize any future gains on their investments.
If industry or financial analysts issue inaccurate or unfavorable research regarding our common stock, our stock
price and trading volume could decline.
The trading market for our common stock is influenced by the research and reports that industry or financial analysts
publish about us or our business. We do not control these analysts or the content and opinions included in their reports. As a
relatively new public company, the analysts who publish information about our common stock have had limited experience
with our company, which could affect their ability to accurately forecast our results and make it more likely that we fail to
meet their estimates. If any of the analysts who cover us issues an inaccurate or unfavorable opinion regarding our stock
price, our stock price would likely decline. In addition, the stock prices of many companies in the technology industry have
declined significantly after those companies have failed to meet, or significantly exceed, the financial guidance publicly
announced by the companies or the expectations of analysts. If our financial results fail to meet, or significantly exceed, our
announced guidance or the expectations of analysts or public investors, analysts could downgrade our common stock or
publish unfavorable research about us. If one or more of these analysts cease coverage of our company or fail to publish
reports on us regularly, our visibility in the financial markets could decrease, which in turn could cause our stock price or
trading volume to decline.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware
and the federal district courts of the United States are the exclusive forums for substantially all disputes between us and
our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or
our directors, officers or employees.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the
exclusive forum for:
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any derivative action or proceeding brought on our behalf;
any action asserting a breach of fiduciary duty;
any action asserting a claim against us arising under the Delaware General Corporation Law, our amended and
restated certificate of incorporation or our amended and restated bylaws;
any action to interpret, apply, enforce or determine the validity of our amended and restated certificate of
incorporation or our amended and restated bylaws; and
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any action asserting a claim against us that is governed by the internal-affairs doctrine.
Our amended and restated certificate of incorporation further provides that the federal district courts of the United States
are the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act.
Each of these exclusive-forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it
finds favorable for disputes with us or our directors, officers or other employees, which may discourage lawsuits against us
and our directors, officers and other employees.
Risks Related to Our Notes
The conditional conversion feature of the Notes, when triggered, may adversely affect our financial condition and
operating results.
During any period the conditional conversion feature of the Notes is triggered, holders will be entitled to convert the
Notes at any time during specified periods at their option. For instance, because the conditions for conversion were met
during the three months ended July 31, 2021, holders of the Notes are entitled to convert their Notes in whole or in part, at
any time from August 1, 2021 through October 31, 2021. If one or more holders elect to convert their Notes, unless we elect
to satisfy our conversion obligation by delivering solely shares of our common stock (other than paying cash in lieu of
delivering any fractional share), we would be required to settle a portion or all of our conversion obligation through the
payment of cash, which could adversely affect our liquidity. In addition, even if holders do not elect to convert their Notes,
we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Notes
as a current rather than long-term liability, which would result in a material reduction of our net working capital.
The accounting method for convertible debt securities that may be settled in cash, such as the Notes, could have a
material effect on our reported financial results.
Under Financial Accounting Standards Board Accounting Standards Codification 470-20, Debt with Conversion and
Other Options, or ASC 470-20, an entity must separately account for the liability and equity components of convertible debt
instruments (such as the Notes) that may be settled entirely or partially in cash upon conversion, in a manner that reflects the
issuer’s non-convertible debt interest cost. ASC 470-20 requires the value of the conversion option of the Notes, representing
the equity component, to be recorded as additional paid-in capital within stockholders’ equity in the consolidated balance
sheet and as a discount to the Notes, which reduces their initial carrying value. The carrying value, net of the discount
recorded, of the Notes is accreted up to the principal amount of the Notes, as applicable, from the issuance date until maturity,
which results in non-cash charges to interest expense in the consolidated statement of operations. Accordingly, we report
lower net income or higher net loss in our financial results because ASC 470-20 requires interest to include both the current
period’s accretion of the debt discount and the instrument’s coupon interest, which could adversely affect our reported or
future financial results, the trading price of our common stock and the trading price of the Notes.
In addition, under certain circumstances, convertible debt instruments (such as the Notes) that may be settled entirely or
partly in cash are accounted for utilizing the treasury stock method for earnings per share purposes, the effect of which is that
the shares issuable upon conversion of the Notes are not included in the calculation of diluted earnings per share except to the
extent that the conversion value of the Notes exceeds their principal amount. Under the treasury stock method, for diluted
earnings per share purposes, the transaction is accounted for as if the number of shares of common stock that would be
necessary to settle such excess, if we elected to settle such excess in shares, are issued.
In August 2020, the Financial Accounting Standard Board issued Accounting Standard Update No. 2020-06, Debt with
Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic
815-40), which simplifies the accounting for certain financial instruments with characteristics of liability and equity. This
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new standard affects entities that issue convertible instruments and/or contracts indexed to and potentially settled in an
entity's own equity. Among the main amendments, this standard eliminates the treasury stock method for convertible
instruments (such as the Notes) and instead requires the application of the “if-converted” method. Under the if-converted
method, diluted earnings per share would generally be calculated assuming that all the Notes were converted into shares of
common stock at the beginning of the reporting period, unless the result would be antidilutive. Accordingly, the if-converted
method is typically more dilutive than the treasury stock method and, therefore, our diluted earnings per share may be
adversely affected. This new standard is effective for us beginning August 1, 2022, although early adoption is permitted for
fiscal periods beginning February 1, 2021. We are currently evaluating the potential impact of this standard on the
consolidated financial statements.
The capped call transactions may affect the value of our common stock.
In connection with the pricing of the Notes, we entered into privately negotiated capped call transactions with certain of
the initial purchasers and/or their respective affiliates and other financial institutions (the “Option Counterparties”). The
capped call transactions are expected generally to reduce the potential dilution upon conversion of the Notes and/or offset any
cash payments we are required to make in excess of the principal amount of converted Notes, as the case may be, with such
reduction and/or offset subject to a cap.
We have been advised that, in connection with establishing their initial hedges of the capped call transactions, the Option
Counterparties purchased shares of our common stock and/or entered into various derivative transactions with respect to our
common stock concurrently with or shortly after the pricing of the Notes.
In addition, the Option Counterparties or their respective affiliates may modify their hedge positions by entering into or
unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock or other
securities of ours in secondary market transactions prior to the maturity of the Notes (and are likely to do so following any
conversion, repurchase, or redemption of the Notes, to the extent we exercise the relevant election under the capped call
transactions). This activity could also cause or avoid an increase or a decrease in the market price of our common stock.
We are subject to counterparty risk with respect to the capped call transactions.
The Option Counterparties are financial institutions, and we will be subject to the risk that any or all of them might
default under the capped call transactions. Our exposure to the credit risk of the Option Counterparties will not be secured by
any collateral. Past global economic conditions have resulted in the actual or perceived failure or financial difficulties of
many financial institutions. If an Option Counterparty becomes subject to insolvency proceedings, we will become an
unsecured creditor in those proceedings with a claim equal to our exposure at that time under the capped call transactions
with such Option Counterparty. Our exposure will depend on many factors but, generally, an increase in our exposure will be
correlated to an increase in the market price and in the volatility of our common stock. In addition, upon a default by an
Option Counterparty, we may suffer more dilution than we currently anticipate with respect to our common stock. We can
provide no assurance as to the financial stability or viability of the Option Counterparties.
General Risks
Our business is subject to the risks of earthquakes, fire, floods and other natural catastrophic events, and to
interruption by man-made problems such as power disruptions, computer viruses, terrorism, and data security breaches or
incidents.
Our corporate headquarters are located in the San Francisco Bay Area, a region known for seismic activity. A significant
natural disaster, such as an earthquake, fire, flood or public health emergency, occurring at our headquarters, at one of our
other facilities or where a key channel partner or data center is located could adversely affect our business, results of
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operations and financial condition. Further, if a natural disaster or man-made problem were to affect our component suppliers
or other third-party providers, including our network bandwidth providers, this could materially and adversely affect our
ability to provide services in a timely or cost-effective manner. In addition, natural disasters, acts of terrorism and other geo-
political unrest or health issues, such as outbreak of pandemic or epidemic disease, such as COVID-19, or fear of such
events, could cause disruptions in our or our customers’ businesses, national economies or the world economy as a whole. In
addition, computer malware, viruses and computer hacking, fraudulent use attempts and phishing attacks have become more
prevalent in our industry, and our internal systems may be victimized by such attacks. Although we maintain incident
management and disaster response plans, in the event of a major disruption caused by a natural disaster or man-made
problem, we may be unable to continue our operations and may endure system interruptions, reputational harm, delays in our
development activities, lengthy interruptions in service, data security breaches and incidents and loss of critical data. Though
it is difficult to determine what, if any, harm may directly result from any specific interruption or attack, any failure to
maintain performance, reliability, security and availability of our platform to the satisfaction of our users may materially
harm our reputation and our ability to retain existing customers and attract new customers.
We rely on third parties for certain essential financial and operational services, and a failure or disruption in these
services could materially and adversely affect our ability to manage our business effectively.
We rely on third parties to provide many essential financial and operational services to support our business. Many of
these vendors are less established and have shorter operating histories than traditional software vendors. Moreover, these
vendors provide their services to us via a cloud-based model instead of software that is installed on our premises. As a result,
we depend upon these vendors to provide us with services that are always available and are free of errors or defects that could
cause disruptions in our business processes. Any failure by these vendors to do so, or any disruption in our ability to access
the internet, would materially and adversely affect our ability to manage our operations.
We may become involved in litigation that may materially adversely affect us.
From time to time, we may become involved in various legal proceedings relating to matters incidental to the ordinary
course of our business, including patent, commercial, product liability, employment, class action, whistleblower and other
litigation and claims, and governmental and other regulatory investigations and proceedings. Such matters can be time-
consuming, divert management’s attention and resources, cause us to incur significant expenses or liability and/or require us
to change our business practices. In addition, the expense of litigation and the timing of this expense from period to period
are difficult to estimate, subject to change and could adversely affect our results of operations. Because of the potential risks,
expenses and uncertainties of litigation, we may, from time to time, settle disputes, even where we have meritorious claims or
defenses, by agreeing to settlement agreements. Because litigation is inherently unpredictable, we cannot assure you that the
results of any of these actions will not have a material adverse effect on our business, financial condition, results of
operations and prospects.
We are subject to anti-corruption, anti-bribery and similar laws, and noncompliance with such laws can subject us to
criminal penalties or significant fines and harm our business and reputation.
We are subject to the U.S. Foreign Corrupt Practices Act of 1977, the U.K. Bribery Act 2010 and other anti-corruption,
anti-bribery, anti-money laundering and similar laws in the United States and other countries in which we conduct activities.
Anti-corruption and anti-bribery laws, which have been enforced aggressively and are interpreted broadly, prohibit
companies and their employees and agents from promising, authorizing, making or offering improper payments or other
benefits to government officials and others in the private sector. We leverage third parties, including channel partners, to sell
subscriptions to our platform and conduct our business abroad. We and these third-party intermediaries may have direct or
indirect interactions with officials and employees of government agencies or state-owned or affiliated entities and we may be
held liable for the corrupt or other illegal activities of these third-party business partners and intermediaries, our employees,
51
representatives, contractors, channel partners and agents, even if we do not explicitly authorize such activities. While we have
policies and procedures to address compliance with such laws, we cannot assure you that all of our employees and agents will
not take actions in violation of our policies and applicable law, for which we may be ultimately held responsible. As we
increase our international sales and business, our risks under these laws may increase. Noncompliance with these laws could
subject us to investigations, severe criminal or civil sanctions, settlements, prosecution, loss of export privileges, suspension
or debarment from U.S. government contracts, other enforcement actions, disgorgement of profits, significant fines, damages,
other civil and criminal penalties or injunctions, whistleblower complaints, adverse media coverage and other consequences.
Any investigations, actions or sanctions could materially harm our reputation, business, results of operations and financial
condition.
If we fail to maintain an effective system of internal controls, our ability to produce timely and accurate financial
statements or comply with applicable regulations could be impaired.
As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended,
or the Exchange Act, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and the rules and regulations of The
Nasdaq Global Select Market, or Nasdaq. The requirements of these rules and regulations will increase our legal, accounting
and financial compliance costs; make some activities more difficult, time-consuming and costly; and place significant strain
on our personnel, systems and resources.
The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and
internal control over financial reporting. We have developed our disclosure controls, internal control over financial reporting
and other procedures to ensure information required to be disclosed by us in the reports that we will file with the SEC is
recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and information
required to be disclosed in reports under the Exchange Act is accumulated and communicated to our principal executive and
financial officers.
Our current controls and any new controls we develop may become inadequate because of changes in conditions in our
business. Further, weaknesses in our internal controls may be discovered in the future. Any failure to develop or maintain
effective controls, or any difficulties encountered in their implementation or improvement, could harm our operating results
or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior
periods. Any failure to implement and maintain effective internal controls also could adversely affect the results of periodic
management evaluations and annual independent registered public accounting firm attestation reports regarding the
effectiveness of our internal control over financial reporting that we are required to include in our periodic reports we will file
with the SEC under Section 404 of the Sarbanes-Oxley Act. Ineffective disclosure controls and procedures and internal
control over financial reporting could also cause investors to lose confidence in our reported financial and other information,
which would likely have a negative effect on the market price of our common stock.
In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over
financial reporting, we have expended and anticipate we will continue to expend significant resources, including accounting-
related costs, and provide significant management oversight. Any failure to maintain the adequacy of our internal controls, or
consequent inability to produce accurate financial statements on a timely basis, could increase our operating costs and could
materially impair our ability to operate our business. If our internal controls are perceived as inadequate or we are unable to
produce timely or accurate financial statements, investors may lose confidence in our operating results and our stock price
could decline. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on
Nasdaq.
Pursuant to Section 404 of the Sarbanes-Oxley Act, we are required to have our independent registered public accounting
firm attest to the effectiveness of our internal control over financial reporting. This assessment includes disclosure of any
52
material weaknesses identified by our management in our internal control over financial reporting. We are also required to
have our independent registered public accounting firm issue an opinion on the effectiveness of our internal control over
financial reporting. During the evaluation and testing process, if we identify one or more material weaknesses in our internal
control over financial reporting, we will be unable to assert that our internal controls are effective.
If we are unable to assert that our internal control over financial reporting is effective, or if, when required, our
independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal control over
financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, which would
cause the price of our common stock to decline, and we may be subject to investigation or sanctions by the SEC.
If our estimates or judgments relating to our critical accounting policies prove to be incorrect or financial reporting
standards or interpretations change, our results of operations could be adversely affected.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our
estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances,
as provided in the section titled "Management’s Discussion and Analysis of Financial Condition and Results of Operations."
The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities and equity,
and the amount of revenue and expenses that are not readily apparent from other sources. Significant assumptions and
estimates used in preparing the consolidated financial statements include those related to determination of revenue
recognition, deferred revenue and deferred contract acquisition costs, allowance for doubtful accounts, valuation of common
stock options, valuation of intangible assets and goodwill, useful lives of property and equipment and definite-lived
intangible assets, the period of benefit generated from our deferred contract acquisition costs, loss contingencies related to
litigation, and valuation of deferred tax assets. Due to the COVID-19 pandemic, there is ongoing uncertainty and significant
disruption in the global economy and financial markets; and while we are not aware of any specific event or circumstance
that would require an update to our estimates, judgments or assumptions, they may change in the future. Our results of
operations may be adversely affected if our assumptions change or if actual circumstances differ from those in our
assumptions, which could cause our results of operations to fall below the expectations of industry or financial analysts and
investors, resulting in a decline in the trading price of our common stock.
Additionally, we regularly monitor our compliance with applicable financial reporting standards and review new
pronouncements and drafts thereof that are relevant to us. As a result of new standards, changes to existing standards and
changes in their interpretation, we might be required to change our accounting policies, alter our operational policies and
implement new or enhance existing systems so that they reflect new or amended financial reporting standards, or we may be
required to restate our published financial statements. Such changes to existing standards or changes in their interpretation
may have an adverse effect on our reputation, business, financial position and profit, or cause an adverse deviation from our
revenue and operating profit target, which may negatively impact our financial results.
53
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our corporate headquarters are located in San Jose, California, where we currently lease approximately 172,000 square
feet of space (the "leased premises") under a sublease agreement that expires in 2026. We initially occupied approximately
69,000 square feet with the remainder of the leased premises to be occupied in phases over the initial term of the lease, with
full occupancy expected to occur by October 2025. We also maintain offices elsewhere in the United States, including in
Atlanta, Georgia; New York, New York; Raleigh, North Carolina; and Tysons, Virginia, as well as multiple locations
internationally, including in Australia, Canada, France, Germany, India, Japan, Singapore, Spain, Israel and the United
Kingdom. We lease all of our facilities and do not own any real property. If necessary, we expect to add facilities as we grow
our employee base and expand geographically.
While we believe that our facilities are adequate to meet our needs for the immediate future, we continue to evaluate our
real estate needs in light of the COVID-19 pandemic and believe, should it be needed, suitable additional space will be
available to accommodate our operations.
Item 3. Legal Proceedings
The information called for by this Item is incorporated herein by reference to Item 8. "Financial Statements and
Supplementary Data," Note 11, Commitments and Contingencies, of the consolidated financial statements included elsewhere
in this Annual Report on Form 10-K.
Item 4. Mine Safety Disclosures
Not applicable.
54
PART II
Item 5. Markets Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information for Common Stock
Our common stock has been listed on The Nasdaq Global Select Market under the ticker symbol "ZS" since March 16,
2018. Prior to that time, there was no public market for our common stock.
Holders of Record
As of July 31, 2021, we had 62 holders of record of our common stock. The actual number of stockholders is greater
than this number of record holders and includes stockholders who are beneficial owners but whose shares are held in street
name by brokers and other nominees.
Dividend Policy
We have never declared or paid cash dividends on our common stock. We currently intend to retain all available funds
and any future earnings for use in the operation of our business and do not anticipate paying any dividends in the foreseeable
future. Any future determination to declare dividends will be made at the discretion of our board of directors, subject to
applicable laws, and will depend on our financial condition, operating results, capital requirements, general business
conditions and other factors that our board of directors may deem relevant.
Securities Authorized for Issuance under Equity Compensation Plans
The information required by this item with respect to our equity compensation plans is incorporated by reference to our
Proxy Statement for the 2021 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission
within 120 days of the fiscal year ended July 31, 2021.
Recent Sales of Unregistered Equity Securities and Use of Proceeds
(a) Sale of Unregistered Equity Securities
None
(b) Issuer Purchases of Equity Securities
None
Stock Performance Graph
This performance graph shall not be deemed "soliciting material" or to be "filed" with the SEC for purposes of Section
18 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or otherwise subject to the liabilities under that
Section, and shall not be deemed to be incorporated by reference into any filing of Zscaler, Inc. under the Securities Act or
the Exchange Act.
We have presented below the cumulative total return to our stockholders between March 16, 2018 (the date our common
stock commenced trading on the Nasdaq) through July 31, 2021 in comparison to the Standard & Poor's 500 Index and
Standard & Poor Information Technology Index. All values assume a $100 initial investment and data for the Standard &
Poor's 500 Index and Standard & Poor Information Technology Index assume reinvestment of dividends. The comparisons
are based on historical data and are not indicative of, nor intended to forecast, the future performance of our common stock.
55
Company/Index
Zscaler, Inc.
S&P 500 Index
S&P 500 Information Technology Index
_____
(*) Base period.
March 16,
2018 (*)
July 31,
2018
July 31,
2019
July 31,
2020
July 31,
2021
$
$
$
100.00 $
107.00 $
255.36 $
393.48 $
714.88
100.00 $
104.56 $
112.91 $
126.41 $
172.48
100.00 $
105.06 $
121.58 $
168.89 $
236.49
56
Item 6. Selected Financial Data
The selected consolidated statements of operations data presented below for fiscal 2021, fiscal 2020 and fiscal 2019 and
the consolidated balance sheet data as of July 31, 2021 and 2020 are derived from our audited consolidated financial
statements that are included elsewhere in this Annual Report on Form 10-K. The selected consolidated statements of
operations data for fiscal 2018 and fiscal 2017 and the consolidated balance sheet data as of July 31, 2019, 2018 and 2017
have been derived from our audited consolidated financial statements not included in this Annual Report on Form 10-K. Our
historical results are not necessarily indicative of the results that may be expected in the future. The selected consolidated
financial data and other data set forth below should be read in conjunction with the section entitled "Management’s
Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and
related notes included elsewhere in this Annual Report on Form 10-K.
2021
Year Ended July 31,
2020
2018
2019
(in thousands, except per share data)
2017
$
673,100 $
150,317
522,783
431,269 $
95,733
335,536
302,836 $
59,669
243,167
190,174 $
37,875
152,299
125,717
27,472
98,245
459,407
174,653
96,535
730,595
(207,812)
2,812
(53,364)
1,186
(257,178)
4,851
(262,029) $
277,981
97,879
73,632
449,492
(113,956)
6,477
(5,025)
(224)
(112,728)
2,388
(115,116) $
169,913
61,969
46,598
278,480
(35,313)
7,730
—
(329)
(27,912)
743
(28,655) $
116,409
39,379
31,135
186,923
(34,624)
2,236
—
79
(32,309)
1,337
(33,646) $
—
—
(262,029) $
(115,116) $
—
(28,655) $
(6,332)
(39,978) $
79,236
33,561
20,521
133,318
(35,073)
597
—
(107)
(34,583)
877
(35,460)
(9,570)
(45,030)
(1.93) $
(0.89) $
(0.23) $
(0.63) $
(1.54)
$
$
$
135,654
129,323
123,566
63,881
29,221
Consolidated Statements of Operations Data:
Revenue
Cost of revenue(1)(2)
Gross profit
Operating expenses:
Sales and marketing(1)(2)
Research and development(1)(2)
General and administrative(1)(3)(4)
Total operating expenses
Loss from operations
Interest income
Interest expense(5)
Other income (expense), net
Loss before income taxes
Provision for income taxes
Net loss
Accretion of Series C and D redeemable
convertible preferred stock
Net loss attributable to common stockholders
Net loss per share attributable to common
stockholders, basic and diluted(6)
Weighted-average shares used in computing net
loss per share attributable to common
stockholders, basic and diluted(6)
_____
57
(1) Includes stock-based compensation expense and related payroll taxes as follows:
Cost of revenue
Sales and marketing
Research and development
General and administrative
$
15,272 $
144,273
73,238
45,779
278,562 $
7,851 $
71,468
31,937
18,380
129,636 $
Total
$
3,453 $
29,211
15,565
5,928
54,157 $
757 $
5,044
3,045
2,378
11,224 $
348
2,794
5,574
1,203
9,919
512 $
10
386
908 $
— $
—
—
— $
—
—
—
—
(2) Includes amortization expense of acquired intangible assets as follows:
Cost of revenue
Sales and marketing
Research and development
$
6,468 $
327
—
6,795 $
2,030 $
74
1,280
3,384 $
Total
(3) Includes asset impairment related to facility
exit as follows:
(4) Includes litigation-related expenses as follows:
(5) Includes amortization of debt discount and
issuance costs as follows:
$
$
$
$
416 $
746 $
— $
— $
—
— $
18,356 $
13,079 $
8,039 $
5,827
51,923 $
4,885 $
— $
— $
—
(6) See Note 15, Net Loss Per Share, of the consolidated financial statements included elsewhere in this Annual Report on
Form 10-K for an explanation of the method used to calculate our basic and diluted net loss per share attributable to common
stockholders and the weighted-average number of shares used in the computation of the per share amounts.
58
Consolidated Balance Sheet Data:
Cash and cash equivalents
Short-term investments
Working capital(2)
Total assets
Deferred revenue, current and noncurrent
Convertible senior notes
Redeemable convertible preferred stock
Accumulated deficit
Total stockholders’ equity (deficit)
_____
2021(1)
2020(1)
July 31,
2019
(in thousands)
2018
2017
275,898 $
141,851 $
$
$ 1,226,654 $ 1,228,722 $
$ 1,128,098 $ 1,157,892 $
$ 2,257,631 $ 1,833,458 $
369,767 $
$
861,615 $
— $
(339,571) $
484,829 $
630,601 $
913,538 $
— $
(601,600) $
528,895 $
$
$
$
$
78,484 $
286,162 $
234,137 $
604,162 $
251,202 $
— $
— $
135,579 $
162,960 $
204,332 $
447,781 $
164,023 $
— $
— $
(224,455) $ (196,100) $
240,236 $
308,558 $
87,978
—
22,450
182,902
96,619
—
200,977
(162,016)
(151,142)
(1) On August 1, 2019, the beginning of fiscal 2020, we adopted the new lease accounting standard ASU No. 2016-02,
Leases (Topic 842) on a modified retrospective basis at the beginning of the fiscal year of adoption.
(2) Working capital is defined as current assets less current liabilities.
Non-GAAP Financial Measures and Key Business Metrics
The following table shows certain non-GAAP financial measures. A reconciliation for each non-GAAP measure is
contained in the "Non-GAAP Financial Measures" section of Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations" of this Annual Report on Form 10-K.
$
$
Gross profit
Non-GAAP gross profit
Gross margin
Non-GAAP gross margin
Loss from operations
$
Non-GAAP income (loss) from operations $
Operating margin
Non-GAAP operating margin
Net cash provided by (used in) operating
activities
Net cash used in investing activities
$
Net cash provided by financing activities $
Free cash flow
$
Net cash provided by operating activities
as a percentage of revenue
Free cash flow margin
$
2021
2020
Year Ended July 31,
2019
(in thousands)
2018
2017
522,783 $
544,523 $
78 %
81 %
(207,812) $
77,961 $
(31) %
12 %
335,536 $
345,417 $
78 %
80 %
(113,956) $
38,166 $
(26) %
9 %
243,167 $
247,132 $
80 %
82 %
(35,313) $
32,831 $
(12) %
11 %
152,299 $
153,056 $
80 %
80 %
(34,624) $
(15,361) $
(18) %
(8) %
202,040 $
79,317 $
(109,668) $ (1,038,162) $
41,675 $ 1,022,212 $
27,508 $
143,743 $
58,027 $
(162,074) $
46,384 $
29,345 $
17,307 $
(178,103) $
208,397 $
2,137 $
30 %
21 %
18 %
6 %
19 %
10 %
9 %
1 %
98,245
98,593
78 %
78 %
(35,073)
(19,327)
(28) %
(15) %
(6,019)
(8,174)
9,497
(14,193)
(5) %
(11) %
59
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction
with the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. As
discussed in the section titled "Special Note Regarding Forward-Looking Statements," the following discussion contains
forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those
discussed below. Factors that could cause or contribute to such difference include, but are not limited to, those identified
below and those discussed in the section titled "Risk Factors" and elsewhere in this Annual Report on Form 10-K. Our fiscal
year end is July 31, and our fiscal quarters end on October 31, January 31, April 30 and July 31. Our fiscal years ended July
31, 2021, July 31, 2020 and July 31, 2019 are referred to as fiscal 2021, fiscal 2020 and fiscal 2019, respectively.
Overview
Zscaler was incorporated in 2007, during the early stages of cloud adoption and mobility, based on a vision that the
internet would become the new corporate network as the cloud becomes the new data center. We predicted that with rapid
cloud adoption and increasing workforce mobility, traditional perimeter security approaches would provide inadequate
protection for users and data and an increasingly poor user experience. We pioneered a cloud platform, the Zscaler Zero Trust
Exchange, that represents a fundamental shift in the architectural design and approach to networking and security.
We generate revenue primarily from sales of subscriptions to access our cloud platform, together with related support
services. We also generate an immaterial amount of revenue from professional and other services, which consist primarily of
fees associated with mapping, implementation, network design and training. Our subscription pricing is primarily calculated
on a per-user basis. We recognize subscription and support revenue ratably over the life of the contract, which is generally
one to three years. As of July 31, 2021, we had expanded our operations to over 5,600 customers across major industries,
with users in 185 countries. Government agencies and some of the largest enterprises in the world rely on us to support their
digital transformation, including more than 500 of the Forbes Global 2000 as of July 31, 2021.
We operate our business as one reportable segment. Our revenue has experienced significant growth in recent periods.
For fiscal 2021, fiscal 2020 and fiscal 2019, our revenue was $673.1 million, $431.3 million and $302.8 million, respectively.
We have incurred net losses in all periods since our inception. For fiscal 2021, fiscal 2020 and fiscal 2019, our net loss was
$262.0 million, $115.1 million and $28.7 million, respectively. We expect we will continue to incur net losses for the
foreseeable future, as we continue to invest in our sales and marketing organization to take advantage of our market
opportunity, to invest in research and development efforts to enhance the functionality of our cloud platform, to incur
additional compliance and other related costs as we operate as a public company, and to address any legal matters and related
accruals, as further described in Note 11, Commitments and Contingencies, of the consolidated financial statements included
elsewhere in this Annual Report on Form 10-K.
Impacts of COVID-19
In March 2020, the World Health Organization declared the COVID-19 outbreak to be a pandemic. As a result of the
COVID-19 pandemic, we have modified certain aspects of our business, including restricting employee travel, requiring
employees to work from home, transitioning our employee onboarding and training processes to remote or online programs,
and canceling certain events and meetings, among other modifications. We will continue to actively monitor and evaluate the
situation and may take further actions that alter our business operations as may be required by federal, state or local
authorities or that we determine are in the best interests of our employees, customers, partners, suppliers and stockholders.
The effects of these operational modifications are unknown and may not be known until future reporting periods. While we
have not experienced significant disruptions to our operations or financial performance from the COVID-19 pandemic to
date, we are unable to accurately predict the full impact that COVID-19 will have due to numerous uncertainties, including
the duration of the outbreak, the current or a future resurgence of the outbreak in connection with new variants and mutations,
60
the widespread distribution and long-term efficacy of vaccines, the efficacy of vaccines against new variants or mutations,
actions that may be taken by governmental authorities, the impact on our business including our sales cycle, sales execution
and marketing efforts, and the impact to the business of our customers, vendors and partners. For further discussion of the
challenges and risks we confront related to the COVID-19 pandemic, please refer to Part I, Item 1A Risk Factors of this
Annual Report on Form 10-K.
Certain Factors Affecting Our Performance
Increased Internet Traffic and Adoption of Cloud-Based Software and Security
The adoption of cloud applications and infrastructure, explosion of internet traffic volumes and shift to mobile-first
computing generally, and the pace at which enterprises adopt the internet as their corporate network in particular, impact our
ability to drive market adoption of our cloud platform. We believe that most enterprises are in the early stages of a broad
transformation to the cloud. Organizations are increasingly relying on the internet to operate their businesses, deploying new
SaaS applications and migrating internally managed line-of-business applications to the cloud. However, the growing
dependence on the internet has increased exposure to malicious or compromised websites, and sophisticated hackers are
exploiting the gaps left by legacy network security appliances. To securely access the internet and transform their networks,
organizations must also make fundamental changes in their network and security architectures. We believe that most
organizations have yet to fully make these investments. Since we enable organizations to securely embrace digital
transformation, we believe that the imperative for organizations to securely move to the cloud will increase demand for our
cloud platform and broaden our customer base.
New Customer Acquisition
We believe that our ability to increase the number of customers, and more significantly customers in the Forbes Global
2000, on our cloud platform is an indicator of our market penetration and our future business opportunities. As of July 31,
2021, 2020 and 2019, we had over 5,600, 4,500 and over 3,900 customers, respectively, across all major geographies. As of
July 31, 2021, we had over 500 of the Forbes Global 2000 as customers. Our ability to continue to grow these numbers will
increase our future opportunities for renewals and follow-on sales. We believe that we have significant room to capture
additional market share and intend to continue to invest significantly in sales and marketing to engage our prospective
customers, increase brand awareness, further leverage our channel partnerships and drive adoption of our solution.
Follow-On Sales
We typically expand our relationship with our customers over time. While most of our new customers route all of their
internet-bound web traffic through our cloud platform, some of our customers initially use our services for specific users or
specific security functionality. We leverage our land-and-expand model with the goal of generating incremental revenue,
often within the term of the initial subscription, by increasing sales to our existing customers in one of three ways:
•
•
•
expanding deployment of our cloud platform to cover additional users;
upgrading to a more advanced Business or Transformation edition; and
selling a subscription to a new solution or product, for example selling a ZPA subscription to a ZIA customer or a
ZIA subscription to a ZPA customer.
These purchases increase the Annual Recurring Revenue ("ARR") attributable to our customers over time. To establish
ARR for a customer, we use the total amount of each order booked to compute the annual recurring value of revenue that we
would recognize if the customer continues to renew all contractual subscriptions. For example, a contract for $3.0 million
with a contractual term of three years would have ARR of $1.0 million as long as our customer uses our cloud platform.
61
Investing in Business Growth
Since our founding, we have invested significantly in growing our business. We intend to continue (i) investing in our
research and development organization and our development efforts to offer new solutions on our cloud platform and (ii)
dedicating resources to update and upgrade our existing solutions. In addition, we expect our general and administrative
expenses to increase in absolute dollars in the foreseeable future, as we continue to operate as a public company and address
any legal matters and related accruals, as further described in Note 11, Commitments and Contingencies, of the consolidated
financial statements included elsewhere in this Annual Report on Form 10-K.
We also intend to continue to invest significantly in sales and marketing to grow and train our sales force, broaden our
brand awareness and expand and deepen our channel partner relationships. While these planned investments will increase our
operating expenses in the short term, we believe that over the long term these investments will help us to expand our
customer base and grow our business. We also are investing in programs to increase recognition of our brand and solutions,
including joint marketing activities with our channel partners and strategic partners.
While we expect our operating expenses to increase in absolute dollars in the foreseeable future, as a result of these
activities, we intend to balance these investments in future growth with a continued focus on managing our results of
operations and investing judiciously. In the long term we anticipate that these investments will positively impact our business
and results of operations.
Key Business Metrics and Other Financial Measures
We review a number of operating and financial metrics, including the following key metrics, to measure our
performance, identify trends, formulate business plans and make strategic decisions.
Dollar-Based Net Retention Rate
We believe that dollar-based net retention rate is a key metric to measure the long-term value of our customer
relationships because it is driven by our ability to retain and expand the recurring revenue generated from our existing
customers. Our dollar-based net retention rate compares the recurring revenue from a set of customers against the same
metric for the prior 12-month period on a trailing basis. Because our customers have repeat buying patterns and the average
term of our contracts is more than 12 months, we measure this metric over a set of customers who were with us as of the last
day of the same reporting period in the prior fiscal year. Our dollar-based net retention rate includes customer attrition. We
have not experienced a material increase in customer attrition rates in recent periods.
We calculate our dollar-based net retention rate as follows:
• Denominator: To calculate our dollar-based net retention rate as of the end of a reporting period, we first establish
the ARR from all active subscriptions as of the last day of the same reporting period in the prior fiscal year. This
effectively represents recurring dollars that we expect in the next 12-month period from the cohort of customers that
existed on the last day of the same reporting period in the prior fiscal year.
• Numerator: We measure the ARR for that same cohort of customers representing all subscriptions based on
confirmed customer orders booked by us as of the end of the reporting period.
Dollar-based net retention rate is obtained by dividing the numerator by the denominator. Our dollar-based net retention
rate may fluctuate due to a number of factors, including the performance of our cloud platform, our success in selling bigger
deals, including deals for all employees with our higher-end bundles, selling multiple-pillars from the start of our contract
62
with new customers, faster upsells within a year, the timing and the rate of ARR expansion of our existing customers,
potential changes in our rate of renewals and other risk factors described elsewhere in this Annual Report on Form 10-K.
Dollar-based net retention rate
Non-GAAP Financial Measures
Trailing 12 Months Ended July 31,
2020
120%
2021
128%
2019
118%
In addition to our results determined in accordance with U.S. GAAP, we believe the following non-GAAP measures are
useful in evaluating our operating performance. We use the following non-GAAP financial information to evaluate our
ongoing operations and for internal planning and forecasting purposes. We believe that non-GAAP financial information,
when taken collectively, may be helpful to investors because it provides consistency and comparability with past financial
performance. However, non-GAAP financial information is presented for supplemental informational purposes only, has
limitations as an analytical tool and should not be considered in isolation or as a substitute for financial information presented
in accordance with U.S. GAAP. In particular, free cash flow is not a substitute for cash provided by operating activities.
Additionally, the utility of free cash flow as a measure of our liquidity is further limited as it does not represent the total
increase or decrease in our cash balance for a given period. In addition, other companies, including companies in our
industry, may calculate similarly-titled non-GAAP measures differently or may use other measures to evaluate their
performance, all of which could reduce the usefulness of our non-GAAP financial measures as tools for comparison. A
reconciliation is provided below for each non-GAAP financial measure to the most directly comparable financial measure
stated in accordance with U.S. GAAP. Investors are encouraged to review the related U.S. GAAP financial measures and the
reconciliation of these non-GAAP financial measures to their most directly comparable U.S. GAAP financial measures, and
not to rely on any single financial measure to evaluate our business.
Non-GAAP Gross Profit and Non-GAAP Gross Margin
We define non-GAAP gross profit as U.S. GAAP gross profit excluding stock-based compensation expense and related
payroll taxes and amortization expense of acquired intangible assets. We define non-GAAP gross margin as non-GAAP gross
profit as a percentage of revenue.
Gross profit
Add:
Stock-based compensation expense and related payroll taxes
Amortization expense of acquired intangible assets
Non-GAAP gross profit
Gross margin
Non-GAAP gross margin
2021
Year Ended July 31,
2020
(in thousands)
2019
$
522,783 $
335,536 $
243,167
$
15,272
6,468
544,523 $
78 %
81 %
7,851
2,030
345,417 $
78 %
80 %
3,453
512
247,132
80 %
82 %
63
Non-GAAP Income from Operations and Non-GAAP Operating Margin
We define non-GAAP income from operations as U.S. GAAP loss from operations excluding stock-based compensation
expense and related payroll taxes, certain litigation-related expenses, amortization expense of acquired intangible assets and
asset impairment related to facility exit. We define non-GAAP operating margin as non-GAAP income from operations as a
percentage of revenue. The excluded litigation-related expenses are professional fees and related costs incurred by us in
defending or settling against significant claims that we deem not to be in the ordinary course of our business and, if
applicable, accruals related to estimated losses in connection with these claims. There are many uncertainties and potential
outcomes associated with any litigation, including the expense of litigation, timing of such expenses, court rulings,
unforeseen developments, complications and delays, each of which may affect our results of operations from period to
period, as well as the unknown magnitude of the potential loss relating to any lawsuit, all of which are inherently subject to
change, difficult to estimate and could adversely affect our results of operations.
Loss from operations
Add:
Stock-based compensation expense and related payroll taxes
Litigation-related expenses
Amortization expense of acquired intangible assets
Asset impairment related to facility exit(1)
Non-GAAP income from operations
Operating margin
Non-GAAP operating margin
2021
Year Ended July 31,
2020
(in thousands)
2019
$
(207,812) $
(113,956) $
(35,313)
278,562
—
6,795
416
77,961 $
(31) %
12 %
129,636
18,356
3,384
746
38,166 $
(26) %
9 %
54,157
13,079
908
—
32,831
(12) %
11 %
$
(1) Consists of asset impairment charges related to the relocation of our corporate headquarters.
Change in Non-GAAP Measures Presentation
Effective August 1, 2020, the beginning of our fiscal year ending July 31, 2021, we began to present employer payroll
taxes related to employee equity award transactions, which is a cash expense, as part of stock-based compensation expense in
our non-GAAP results. These payroll taxes have been excluded from our non-GAAP results as they are tied to the timing and
size of the exercise or vesting of the underlying equity awards and the price of our common stock at the time of vesting or
exercise, which may vary from period to period independent of the operating performance of our business. Prior period
amounts have been recast to conform to this presentation.
Free Cash Flow and Free Cash Flow Margin
Free cash flow is a non-GAAP financial measure that we calculate as net cash provided by operating activities less
purchases of property, equipment and other assets and capitalized internal-use software. Free cash flow margin is calculated
as free cash flow divided by revenue. We believe that free cash flow and free cash flow margin are useful indicators of
liquidity that provide information to management and investors about the amount of cash generated from our operations that,
after the investments in property, equipment and other assets and capitalized internal-use software, can be used for strategic
initiatives, including investing in our business, and strengthening our financial position.
64
Free cash flow includes the cyclical impact of inflows and outflows resulting from contributions to our employee stock
purchase plan, for which the purchase period of approximately six months ends in each of our second and fourth fiscal
quarter. As of July 31, 2021, the accrued employee payroll contributions to our ESPP was $5.2 million, which will be used to
purchase shares at the end of the current purchase period ending on December 15, 2022. Payroll contributions ultimately used
to purchase shares will be reclassified to stockholders' equity upon issuance of the shares during our second quarter of fiscal
2022.
Net cash provided by operating activities
Less:
Purchases of property, equipment and other assets
Capitalized internal-use software
Free cash flow
As a percentage of revenue:
Net cash provided by operating activities
Less:
Purchases of property, equipment and other assets
Capitalized internal-use software
Free cash flow margin
Calculated Billings
2021
Year Ended July 31,
2020
(in thousands)
2019
$
202,040 $
79,317 $
58,027
(48,165)
(10,132)
143,743 $
(43,072)
(8,737)
27,508 $
(25,520)
(3,162)
29,345
$
30 %
(7)
(2)
21 %
18 %
(10)
(2)
6 %
19 %
(8)
(1)
10 %
Calculated billings is a non-GAAP financial measure that we believe is a key metric to measure our periodic
performance. Calculated billings represents our total revenue plus the change in deferred revenue in a period. Calculated
billings in any particular period aims to reflect amounts invoiced for subscriptions to access our cloud platform, together with
related support services for our new and existing customers. We typically invoice our customers annually in advance, and to a
lesser extent quarterly in advance, monthly in advance or multi-year in advance. Calculated billings increased $384.1 million,
or 70%, in fiscal 2021 over fiscal 2020, and $159.8 million, or 41%, in fiscal 2020 over fiscal 2019. As calculated billings
continues to grow in absolute terms, we expect our calculated billings growth rate to trend down over time. We also expect
that calculated billings will be affected by seasonality in terms of when we enter into agreements with customers; and the mix
of billings in each reporting period as we typically invoice customers annually in advance, and to a lesser extent quarterly in
advance, monthly in advance or multi-year in advance.
Revenue
Add: Total deferred revenue, end of period
Less: Total deferred revenue, beginning of period
Calculated billings
2021
Year Ended July 31,
2020
(in thousands)
2019
$
$
673,100 $
630,601
(369,767)
933,934 $
431,269 $
369,767
(251,202)
549,834 $
302,836
251,202
(164,023)
390,015
65
Components of Results of Operations
Revenue
We generate revenue primarily from sales of subscriptions to access our cloud platform, together with related support
services. These subscription and related support services accounted for approximately 97%, 98% and 99% of our revenue for
fiscal 2021, fiscal 2020 and fiscal 2019, respectively. Our contracts with our customers do not at any time provide the
customer with the right to take possession of the software that runs our cloud platform. Our customers may also purchase
professional services, such as mapping, implementation, network design and training. Professional services account for an
immaterial portion of our revenue.
We generate revenue from contracts with typical durations ranging from one to three years. We typically invoice our
customers annually in advance, and to a lesser extent quarterly in advance, monthly in advance or multi-year in advance. We
recognize revenue ratably over the life of the contract. Amounts that have been invoiced are recorded in deferred revenue, or
they are recorded in revenue if the revenue recognition criteria have been met. Subscriptions that are invoiced annually in
advance or multi-year in advance represent a significant portion of our short-term and long-term deferred revenue in
comparison to invoices issued quarterly in advance or monthly in advance. Accordingly, we cannot predict the mix of
invoicing schedules in any given period.
We generally experience seasonality in terms of when we enter into agreements with our customers. We typically enter
into a higher percentage of agreements with new customers, as well as renewal agreements with existing customers, in our
second and fourth fiscal quarters. However, because we recognize revenue ratably over the terms of our subscription
contracts, a substantial portion of the revenue that we report in each period is attributable to the recognition of deferred
revenue relating to agreements that we entered into during previous periods. Consequently, increases or decreases in new
sales or renewals in any one period may not be immediately reflected as revenue for that period. Accordingly, the effect of
downturns in sales and market acceptance of our platform, and potential changes in our rate of renewals, may not be fully
reflected in our results of operations until future periods.
Cost of Revenue
Cost of revenue includes expenses related to operating our cloud platform in data centers, depreciation of our data center
equipment, related overhead costs and the amortization of our capitalized internal-use software. Cost of revenue also includes
employee-related costs, including salaries, bonuses, stock-based compensation expense and employee benefit costs
associated with our customer support and cloud operations organizations. Cost of revenue also includes overhead costs for
facilities, IT, amortization and depreciation expense.
As our customers expand and increase the use of our cloud platform driven by additional applications and connected
devices, our cost of revenue will increase due to higher bandwidth and data center expenses. However, we expect to continue
to benefit from economies of scale as our customers increase the use of our cloud platform. We intend to continue to invest
additional resources in our cloud platform and our customer support organizations as we grow our business. The level and
timing of investment in these areas could affect our cost of revenue in the future.
Gross Profit and Gross Margin
Gross profit, or revenue less cost of revenue, and gross margin, or gross profit as a percentage of revenue, have been and
will continue to be affected by various factors, including the timing of our acquisition of new customers and our renewals of
and follow-on sales to existing customers, the average sales price of our services, mix of services offered in our solutions,
66
including new product introductions, the data center and bandwidth costs associated with operating our cloud platform, the
extent to which we expand our customer support and cloud operations organizations and the extent to which we can increase
the efficiency of our technology, infrastructure and data centers through technological improvements. We expect our gross
profit to increase in absolute dollars and our gross margin to increase slightly over the long term, although our gross profit
and gross margin could fluctuate from period to period depending on the interplay of all of the above factors.
Operating Expenses
Our operating expenses consist of sales and marketing, research and development and general and administrative
expenses. Personnel costs are the most significant component of operating expenses and consist of salaries, benefits, bonuses,
stock-based compensation expense and, with respect to sales and marketing expenses, sales commissions that are recognized
as expenses over the period of benefit. Operating expenses also include overhead costs for facilities, IT, depreciation expense
and amortization expense.
Sales and Marketing
Sales and marketing expenses consist primarily of employee compensation and related expenses, including salaries,
bonuses and benefits for our sales and marketing employees, sales commissions that are recognized as expenses over the
period of benefit, stock-based compensation expense, marketing programs, travel and entertainment expenses, expenses for
conferences and events and allocated overhead costs. We capitalize our sales commissions and associated payroll taxes and
recognize them as expenses over the estimated period of benefit. The amount recognized in our sales and marketing expenses
reflects the amortization of costs previously deferred as attributable to each period presented in this Annual Report on Form
10-K, as described below under "Critical Accounting Policies and Estimates."
We intend to continue to make significant investments in our sales and marketing organization to drive additional
revenue, further penetrate the market and expand our global customer base. As a result, we expect our sales and marketing
expenses to continue to increase in absolute dollars and to be our largest operating expense category for the foreseeable
future. In particular, we will continue to invest in growing and training our sales force, broadening our brand awareness and
expanding and deepening our channel partner relationships. However, we expect our sales and marketing expenses to
decrease as a percentage of our revenue over the long term, although our sales and marketing expenses may fluctuate as a
percentage of our revenue from period to period due to the timing and extent of these expenses.
Research and Development
Our research and development expenses support our efforts to add new features to our existing offerings and to ensure
the reliability, availability and scalability of our solutions. Our cloud platform is software-driven, and our research and
development teams employ software engineers in the design, and the related development, testing, certification and support,
of these solutions. Accordingly, a majority of our research and development expenses result from employee-related costs,
including salaries, bonuses and benefits, stock-based compensation expense and costs associated with technology tools used
by our engineers. We expect our research and development expenses to continue to increase in absolute dollars for the
foreseeable future, as we continue to invest in research and development efforts to enhance the functionality of our cloud
platform, improve the reliability, availability and scalability of our platform and access new customer markets. However, we
expect our research and development expenses to decrease as a percentage of our revenue over the long term, although our
research and development expenses may fluctuate as a percentage of our revenue from period to period due to the timing and
extent of these expenses.
67
General and Administrative
General and administrative expenses consist primarily of employee-related costs, including salaries and bonuses, stock-
based compensation expense and employee benefit costs for our finance, legal, human resources and administrative
personnel, as well as professional fees for external legal services (including certain litigation-related expenses), accounting
and other related consulting services. The litigation-related expenses include professional fees and related costs incurred by
us in defending or settling significant claims that we deem not to be in the ordinary course of our business and, if applicable,
accruals related to estimated losses in connection with these claims. We expect our general and administrative expenses to
increase in absolute dollars for the foreseeable future, as we continue to incur compliance costs and other related costs
necessary to operate as a public company, and due to any legal matters and related accruals, as further described in Note 11,
Commitments and Contingencies to, the consolidated financial statements included elsewhere in this Annual Report on Form
10-K. However, we expect our general and administrative expenses to decrease as a percentage of our revenue over the long
term, although our general and administrative expenses may fluctuate as a percentage of our revenue from period to period
due to the timing and extent of these expenses. In particular, litigation-related expenses related to significant litigation claims
may result in significant fluctuations from period to period as they are inherently subject to change and difficult to estimate.
Interest Expense
Interest expense consists primarily of amortization of debt discount and issuance costs and recognition of contractual
interest expense related to our Notes issued in June 2020. See Note 9, Convertible Senior Notes, of the consolidated financial
statements included elsewhere in this Annual Report on Form 10-K.
Interest Income
Interest income consists primarily of income earned on our cash equivalents and short-term investments.
Other Income (Expense), Net
Other income (expense), net consists primarily of foreign currency transaction gains and losses.
Provision for Income Taxes
Our provision for income taxes consists primarily of income and withholding taxes in the foreign jurisdictions in which
we conduct business, offset by the tax benefit for excess stock-based compensation deduction. We have not recorded any U.S.
federal income tax expense. In the United States, we have recorded deferred tax assets for which we provide a full valuation
allowance, which includes net operating loss carryforwards and research and development tax credits. We expect to maintain
this full valuation allowance for the foreseeable future as it is more likely than not that some or all of those deferred tax assets
may not be realized based on our history of losses. Additionally, in the U.K., we have recorded deferred tax assets for which
we provide a full valuation allowance, which includes net operating loss carryforwards. We expect to maintain this full
valuation allowance for the foreseeable future as it is more likely than not that some or all of those deferred tax assets may
not be realized based on our history of losses.
68
Results of Operations
The following table sets forth our results of operations for the periods presented:
Revenue
Cost of revenue(1)(2)
Gross profit
Operating expenses:
Sales and marketing(1)(2)
Research and development(1)(2)
General and administrative(1)(3)(4)
Total operating expenses
Loss from operations
Interest income
Interest expense(5)
Other income (expense), net
Loss before income taxes
Provision for income taxes
Net loss
_____
2021
Year Ended July 31,
2020
(in thousands)
2019
$
673,100 $
150,317
522,783
431,269 $
95,733
335,536
459,407
174,653
96,535
730,595
(207,812)
2,812
(53,364)
1,186
(257,178)
4,851
(262,029) $
277,981
97,879
73,632
449,492
(113,956)
6,477
(5,025)
(224)
(112,728)
2,388
(115,116) $
$
302,836
59,669
243,167
169,913
61,969
46,598
278,480
(35,313)
7,730
—
(329)
(27,912)
743
(28,655)
(1) Includes stock-based compensation expense and related payroll taxes as follows:
Cost of revenue
Sales and marketing
Research and development
General and administrative
$
Total
(2) Includes amortization expense of acquired intangible assets as follows:
Cost of revenue
Sales and marketing
Research and development
Total
(3) Includes asset impairment related to facility exit as follows:
(4) Includes litigation-related expenses as follows:
(5) Includes amortization of debt discount and issuance costs as follows:
$
$
$
$
$
$
69
15,272 $
144,273
73,238
45,779
278,562 $
7,851 $
71,468
31,937
18,380
129,636 $
3,453
29,211
15,565
5,928
54,157
6,468 $
327
—
6,795 $
2,030 $
74
1,280
3,384 $
512
10
386
908
416 $
746 $
—
— $
18,356 $
13,079
51,923 $
4,885 $
—
The following table sets forth our results of operations for the periods presented as a percentage of our revenue:
Revenue
Cost of revenue
Gross margin
Operating expenses
Sales and marketing
Research and development
General and administrative
Total operating expenses
Operating margin
Interest income
Interest expense
Other income (expense), net
Loss before income taxes
Provision for income taxes
Net loss
Comparison of Fiscal 2021 and Fiscal 2020
Revenue
2021
100%
22
78
68
26
15
109
(31)
1
(8)
—
(38)
1
(39)%
Year Ended July 31,
2020
100%
22
78
64
23
17
104
(26)
1
(1)
—
(26)
1
(27)%
2019
100%
20
80
56
21
15
92
(12)
3
—
—
(9)
—
(9)%
Year Ended July 31,
2020
2021
(in thousands)
Change
$
%
Revenue
$
673,100 $
431,269 $
241,831
56 %
Revenue increased by $241.8 million, or 56%, in fiscal 2021, compared to fiscal 2020. The increase in revenue was
driven by an increase in users and sales of additional subscriptions to existing customers, which contributed $179.5 million in
revenue, as reflected by our dollar-based net retention rate of 128% for the trailing 12 months ended July 31, 2021. The
remainder of the increase was attributable to the addition of new customers, as we increased our customer base by 23% from
July 31, 2020 to July 31, 2021.
Cost of Revenue and Gross Margin
Cost of revenue
Gross margin
Year Ended July 31,
2021
2020
(in thousands)
$
150,317 $
78 %
95,733 $
78 %
Change
$
%
54,584
57 %
70
Cost of revenue increased by $54.6 million, or 57%, in fiscal 2021, compared to fiscal 2020. The overall increase in cost
of revenue was driven primarily by the expanded use of our cloud platform by existing and new customers, which led to an
increase of $37.2 million for data center and equipment related costs for hosting and operating our cloud platform.
Additionally, our employee-related expenses increased by $17.2 million, inclusive of an increase of $6.7 million in stock-
based compensation expense, driven primarily by a 48% increase in headcount in our customer support and cloud operations
organizations from July 31, 2020 to July 31, 2021.
Operating Expenses
Sales and Marketing Expenses
Year Ended July 31,
2020
2021
(in thousands)
Change
$
%
Sales and marketing
$
459,407 $
277,981 $
181,426
65 %
Sales and marketing expenses increased by $181.4 million, or 65%, for fiscal 2021, compared to fiscal 2020. The
increase was primarily due to a 59% increase in headcount from July 31, 2020 to July 31, 2021, resulting in an increase of
$176.9 million in employee-related expenses, inclusive of an increase of $66.6 million in stock-based compensation expense,
and an increase of $20.8 million in sales commissions expense. The remainder of the increase was primarily attributable to
increased expenses of $6.6 million for facility and IT services and $4.6 million for professional services and $1.8 million in
marketing and advertising expenses. Expense increases were partially offset by the decrease of $9.4 million in travel
expenses due to the COVID-19 pandemic.
Research and Development Expenses
Year Ended July 31,
2020
2021
(in thousands)
Change
$
%
Research and development
$
174,653 $
97,879 $
76,774
78 %
Research and development expenses increased by $76.8 million, or 78%, for fiscal 2021, compared to fiscal 2020 as we
continued to develop and enhance the functionality of our cloud platform. The increase was primarily driven by an increase
of $71.4 million in employee-related expenses, inclusive of an increase of $37.6 million in stock-based compensation
expense, driven by a 59% increase in headcount from July 31, 2020 to July 31, 2021. The remainder of the increase was
primarily attributable to increased expenses of $5.1 million in facility, software and equipment related expenses to support
our growth and $2.2 million for professional services. This increase was partially offset by higher capitalized internal-use
software development costs of $1.4 million to support the enhancement and growth of our cloud platform.
General and Administrative Expenses
Year Ended July 31,
2020
2021
(in thousands)
Change
$
%
General and administrative
$
96,535 $
73,632 $
22,903
31 %
General and administrative expenses increased by $22.9 million, or 31%, for fiscal 2021, compared to fiscal 2020. The
overall increase was primarily due to an increase of $37.1 million in employee-related expenses, inclusive of an increase of
$26.2 million in stock-based compensation expense, driven in part by a 46% increase in headcount from July 31, 2020 to July
31, 2021. The remainder of the increase was primarily attributable to increased expenses of $2.7 million in professional
services. This increase is partially offset by a decrease of $18.0 million in legal expenses, primarily attributable to a $15.0
71
million litigation settlement payment to Broadcom during fiscal 2020. For further information on the Broadcom settlement
refer to Note 11, Commitments and Contingencies, of the consolidated financial statements included elsewhere in this Annual
Report Form 10-K.
Interest Expense
Year Ended July 31,
2020
2021
(in thousands)
Change
$
%
Interest expense
$
(53,364) $
(5,025) $
(48,339)
962 %
Interest expense increased by $48.3 million for fiscal 2021, compared to fiscal 2020 as a result of amortization of debt
discount and recognition of contractual interest expense related to our Notes issued in June 2020. For further information on
the Notes, refer to Note 9, Convertible Senior Notes, of the consolidated financial statements included elsewhere in this
Annual Report on Form 10-K.
Interest Income
Year Ended July 31,
2020
2021
(in thousands)
Change
$
%
Interest income
$
2,812 $
6,477 $
(3,665)
(57) %
Interest income decreased by $3.7 million, or 57%, for fiscal 2021, compared to fiscal 2020. The decrease was primarily
driven by lower market interest rates earned on cash equivalents and short-term investments.
Other Income (expense), net
Year Ended July 31,
2020
2021
(in thousands)
Change
$
%
Other income (expense), net
$
1,186 $
(224) $
1,410
(629) %
Other income (expense), net increased by $1.4 million for fiscal 2021, compared to fiscal 2020. The increase was
primarily driven by fluctuations in foreign currency transaction gains and losses.
Provision for Income Taxes
Year Ended July 31,
2020
2021
(in thousands)
Change
$
%
Provision for income taxes
$
4,851 $
2,388 $
2,463
103 %
Our provision for income taxes increased by $2.5 million, or 103%, for fiscal 2021, compared to fiscal 2020, primarily
related to income and withholding taxes in the foreign jurisdictions in which we operate. In fiscal 2020, we recognized a non-
recurring income tax benefit associated with the acquisition of intangible assets from Cloudneeti Corporation ("Cloudneeti")
and Edgewise Networks Inc. ("Edgewise") which reduced our income tax expense as compared to 2021. For further
information, refer to Note 14, Income Taxes, of the consolidated financial statements included elsewhere in this Annual
Report on Form 10-K. Our effective tax rate of (1.9)% and (2.1)% in fiscal 2021 and fiscal 2020, respectively, differs from
72
the applicable U.S. statutory federal income tax rate due to our valuation allowance against our U.S. federal, state, and U.K.
deferred tax assets as well as our foreign income being taxed at different rates than the U.S. statutory rate.
While we believe our current valuation allowance is sufficient, we assess the need for an adjustment to the valuation
allowance on a quarterly basis. The assessment is based on our estimates of future sources of taxable income for the
jurisdictions in which we operate and the periods over which our deferred tax assets will be realizable. In the event we
determine that we will be able to realize all or part of our net deferred tax assets in the future, the valuation allowance will be
reversed in the period in which we make such determination. The release of a valuation allowance against deferred tax assets
may cause greater volatility in the effective tax rate in the periods in which it is reversed.
Comparison of Fiscal 2020 and Fiscal 2019
Revenue
Year Ended July 31,
2019
2020
(in thousands)
Change
$
%
Revenue
$
431,269 $
302,836 $
128,433
42 %
Revenue increased by $128.4 million, or 42%, in fiscal 2020, compared to fiscal 2019. The increase in revenue was
driven by an increase in users and sales of additional subscriptions to existing customers, which contributed $98.6 million in
revenue, as reflected by our dollar-based net retention rate of 120% for the trailing 12 months ended July 31, 2020. The
remainder of the increase was attributable to the addition of new customers, as we increased our customer base by 17% from
July 31, 2019 to July 31, 2020.
Cost of Revenue and Gross Margin
Cost of revenue
Gross margin
Year Ended July 31,
2019
2020
(in thousands)
$
95,733 $
78 %
59,669 $
80 %
Change
$
%
36,064
60 %
Cost of revenue increased by $36.1 million, or 60%, for fiscal 2020, compared to fiscal 2019. The overall increase in
cost of revenue was driven primarily by the expanded use of our cloud platform by existing and new customers, which led to
an increase of $24.8 million for data center and equipment related costs for hosting and operating our cloud platform.
Additionally, our employee-related expenses increased by $10.0 million, inclusive of an increase of $4.4 million in stock-
based compensation expense, driven primarily by a 6% increase in headcount in our customer support and cloud operations
organizations from July 31, 2019 to July 31, 2020 and by the shift from granting stock options to restricted stock units.
Gross margin decreased from 80% to 78% in fiscal 2020 as compared to fiscal 2019. The decline in gross margin is
primarily due to the cost incurred for our increased use of public cloud infrastructure to manage the increased ZPA traffic
which resulted from our customers' employees working from home beginning March 2020. While the public cloud allows us
to quickly meet increases in customer demand, using public cloud infrastructure to manage traffic is significantly more
expensive compared to using our data centers.
73
Operating Expenses
Sales and Marketing Expenses
Year Ended July 31,
2019
2020
(in thousands)
Change
$
%
Sales and marketing
$
277,981 $
169,913 $
108,068
64 %
Sales and marketing expenses increased by $108.1 million, or 64%, for fiscal 2020, compared to fiscal 2019. The
increase was primarily due to a 54% increase in headcount from July 31, 2019 to July 31, 2020, resulting in an increase of
$92.6 million in employee-related expenses, inclusive of an increase of $43.4 million in stock-based compensation expense,
and an increase of $9.7 million in sales commissions expense. Additionally, our sales and marketing expenses increased by
$7.0 million primarily due to growth of certain major sales and marketing events held during fiscal 2020, including our
Zenith Live events. The remainder of the increase was primarily attributable to increased expenses of $2.2 million in costs
related to in-person and virtual events and $3.9 million for facility and IT services.
Research and Development Expenses
Year Ended July 31,
2019
2020
(in thousands)
Change
$
%
Research and development
$
97,879 $
61,969 $
35,910
58 %
Research and development expenses increased by $35.9 million, or 58%, for fiscal 2020, compared to fiscal 2019 as we
continued to develop and enhance the functionality of our cloud platform. The increase was primarily driven by an increase
of $34.7 million in employee-related expenses, inclusive of an increase of $15.1 million in stock-based compensation
expense, driven by a 38% increase in headcount from July 31, 2019 to July 31, 2020 and by our shift from granting stock
options to granting restricted stock units. The remainder of the increase was primarily attributable to increased expenses of
$4.4 million for facility, software and equipment related expenses to support our growth. Expense increases were partially
offset by higher capitalized internal-use software development costs of $5.6 million to support the enhancement and growth
of our cloud platform.
General and Administrative Expenses
General and administrative
$
73,632 $
46,598 $
27,034
58 %
Year Ended July 31,
2019
2020
(in thousands)
Change
$
%
74
General and administrative expenses increased by $27.0 million, or 58%, for fiscal 2020, compared to fiscal 2019. The
overall increase was primarily due to an increase of $16.4 million in employee-related expenses, inclusive of a net increase of
$12.1 million in stock-based compensation expense, driven by a 29% increase in headcount from July 31, 2019 to July 31,
2020, and also by our shift from granting stock options to granting restricted stock units. Additionally, we recognized an
increase of $5.2 million in legal expenses, which is primarily attributable to a $15.0 million litigation settlement payment to
Broadcom in fiscal 2020, partially offset by lower legal fees in fiscal 2020. For further information on litigation settlements,
refer to Note 11, Commitments and Contingencies, of the consolidated financial statements included elsewhere in this Annual
Report on Form 10-K. The remainder of the increase was primarily attributable to $1.9 million in professional services and
$1.2 million for insurance premiums.
Interest Expense
Year Ended July 31,
2019
2020
(in thousands)
Change
$
%
Interest expense
$
(5,025) $
— $
(5,025)
100 %
Interest expense increased by $5.0 million or 100% for fiscal 2020, compared to fiscal 2019. The increase is due to
amortization of debt discount and contractual interest expense for our Notes issued in June 2020. For further information on
the Notes, refer to Note 9, Convertible Senior Notes, of the consolidated financial statements included elsewhere in this
Annual Report on Form 10-K.
Interest Income
Year Ended July 31,
2019
2020
(in thousands)
Change
$
%
Interest income
$
6,477 $
7,730 $
(1,253)
(16) %
Interest income decreased by $1.3 million, or 16%, for fiscal 2020, compared to fiscal 2019. The decrease was primarily
driven by lower market interest rates earned on cash equivalents and short-term investments.
Other Income (Expense), net
Year Ended July 31,
2019
2020
(in thousands)
Change
$
%
Other income (expense), net
$
(224) $
(329) $
105
(32) %
Other income (expense), net increased by $0.1 million, or 32%, for fiscal 2020, compared to fiscal 2019. The increase
was primarily driven by fluctuations in foreign currency transaction gains and losses for fiscal 2020, compared to fiscal 2019.
Provision for Income Taxes
Provision for income taxes
$
2,388 $
743 $
1,645
221 %
Year Ended July 31,
2019
2020
(in thousands)
Change
$
%
75
Our provision for income taxes increased by $1.6 million, or 221%, for fiscal 2020, compared to fiscal 2019, primarily
related to income and withholding taxes in the foreign jurisdictions in which we operate. The overall income tax expense
recorded for fiscal 2020 was driven by income taxes for the foreign countries in which we operate partially offset by the tax
benefit associated with the acquisition of intangible assets from Cloudneeti Corporation ("Cloudneeti") and Edgewise
Networks Inc. ("Edgewise") which reduced our deferred tax asset and the related valuation allowance. For further
information, refer to Note 14, Income Taxes, of the consolidated financial statements included elsewhere in this Annual
Report on Form 10-K. Our effective tax rate of (2.1)% and (2.7)% in fiscal 2020 and fiscal 2019, respectively, differs from
the applicable U.S. statutory federal income tax rate due to our valuation allowance against our U.S. federal, state, and U.K.
deferred tax assets as well as our foreign income being taxed at different rates than the U.S. statutory rate.
While we believe our valuation allowance is sufficient, we assess the need for an adjustment to the valuation allowance
on a quarterly basis. The assessment is based on our estimates of future sources of taxable income for the jurisdictions in
which we operate and the periods over which our deferred tax assets will be realizable. In the event we determine that we will
be able to realize all or part of our net deferred tax assets in the future, the valuation allowance will be reversed in the period
in which we make such determination. The release of a valuation allowance against deferred tax assets may cause greater
volatility in the effective tax rate in the periods in which it is reversed.
76
Quarterly Results of Operations and Other Data
The following sets forth selected unaudited quarterly consolidated statements of operations data for each of the eight
quarters in the period ended July 31, 2021. The unaudited quarterly statements of operations data set forth below have been
prepared on the same basis as our audited consolidated financial statements and, in the opinion of management, reflect all
adjustments, consisting only of normal recurring adjustments, that are necessary for the fair statement of such data. The
following quarterly financial data should be read in conjunction with the consolidated financial statements and the related
notes included elsewhere in this Annual Report on Form 10-K. Our historical results are not necessarily indicative of the
results that may be expected in the future, and the results for any quarter are not necessarily indicative of results to be
expected for a full year or any other period.
Consolidated Statements of Operations
Oct. 31
2019
Jan. 31 Apr. 30
2020
Three Months Ended
Jul. 31 Oct. 31
2020
2020
(in thousands)
$ 93,590 $ 101,268 $ 110,524 $ 125,887 $ 142,578 $ 157,044 $ 176,404 $ 197,074
45,478
151,596
Apr. 30
2021
38,977
137,427
34,135
122,909
31,727
110,851
24,579
85,945
19,558
74,032
31,358
94,529
20,238
81,030
Jan. 31
2021
Jul. 31
2021
2020
61,621
20,706
28,983
111,310
(30,280)
1,855
—
(13)
(28,438)
716
59,411
20,271
12,625
92,307
(18,275)
2,022
—
(29)
(16,282)
794
136,385
56,180
26,428
218,993
(67,397)
524
(13,634)
329
(80,178)
845
$ (17,076) $ (29,154) $ (19,337) $ (49,549) $ (55,006) $ (67,541) $ (58,459) $ (81,023)
(0.59)
$
89,222
32,785
17,409
139,416
(44,887)
1,072
(5,025)
(252)
(49,092)
457
115,730
40,952
24,595
181,277
(43,850)
593
(13,436)
71
(56,622)
1,837
67,727
24,117
14,615
106,459
(20,514)
1,528
—
70
(18,916)
421
96,889
35,770
20,859
153,518
(42,667)
940
(13,049)
268
(54,508)
498
110,403
41,751
24,653
176,807
(53,898)
755
(13,245)
518
(65,870)
1,671
(0.50) $
(0.41) $
(0.43) $
(0.13) $
(0.23) $
(0.15) $
(0.38) $
Revenue
Cost of revenue(1)(2)
Gross profit
Operating expenses:
Sales and marketing(1)(2)
Research and development(1)(2)
General and administrative(1)(3)(4)
Total operating expenses
Loss from operations
Interest income
Interest expense(5)
Other income (expense), net
Loss before income taxes
Provision for income taxes(6)
Net loss
Net loss per share, basic and diluted
_____
(1) Includes stock-based compensation expense and related payroll taxes as follows:
3,117 $
Cost of revenue
32,054
Sales and marketing
13,458
Research and development
7,351
General and administrative
5,033
42,957
25,558
12,395
$ 19,221 $ 25,353 $ 29,082 $ 55,980 $ 60,329 $ 67,113 $ 65,177 $ 85,943
1,414 $
10,586
5,054
2,167
1,672 $
15,795
7,145
4,470
1,648 $
13,033
6,280
4,392
3,308 $
33,864
17,747
12,194
3,266 $
32,654
14,900
9,509
3,665 $
34,798
15,033
11,681
$
Total
_____
77
(2) Includes amortization expense of acquired intangible assets as follows:
Oct. 31
2019
Jan. 31 Apr. 30
2020
2020
Three Months Ended
Jul. 31 Oct. 31
2020
2020
(in thousands)
Jan. 31
2021
Apr. 30
2021
Jul. 31
2021
Cost of revenue
Sales and marketing
Research and development
Total
$
$
205 $
8
566
779 $
205 $
8
429
642 $
348 $ 1,272 $ 1,504 $ 1,503 $ 1,503 $ 1,958
108
8
285
—
641 $ 1,322 $ 1,577 $ 1,576 $ 1,576 $ 2,066
73
—
73
—
73
—
50
—
(3) Includes asset impairment related to
facility exit as follows :
$
— $
316 $
430 $
— $
416 $
— $
— $
—
(4) Includes litigation-related expenses as
follows:
$
2,007 $ 16,334 $
12 $
3 $
— $
— $
— $
—
(5) Includes amortization of debt discount
and issuance costs as follows:
$
— $
— $
— $
4,885 $ 12,690 $ 12,882 $ 13,077 $ 13,274
(6) In the fiscal quarter ended April 30, 2020 and July 31, 2020, we recorded a tax benefit of $0.5 million and $0.6 million,
respectively, associated with intangible assets recognized as a result of our acquisitions of Cloudneeti and Edgewise,
respectively. For further information, refer to Note 6, Business Combinations, of the consolidated financial statements
included elsewhere in this Annual Report on Form 10-K.
Consolidated Statements of Operations as a Percentage of Revenue
Revenue
Cost of revenue
Gross profit
Operating expenses:
Sales and marketing
Research and development
General and administrative
Total operating expenses
Loss from operations
Interest income
Interest expense
Other income (expense), net
Loss before income taxes
Provision for income taxes
Net loss
Oct. 31
2019
Jan. 31 Apr. 30
2020
2020
Jul. 31
2020
Oct. 31
2020
Jan. 31 Apr. 30
2021
2021
Jul. 31
2021
Three Months Ended
100 %
21
79
63
22
14
99
(20)
3
—
—
(17)
1
(18) %
100 %
20
80
61
20
29
110
(30)
2
—
—
(28)
1
(29) %
100 %
22
78
62
22
13
97
(19)
1
—
1
(17)
—
(17) %
100 %
25
75
71
26
14
111
(36)
1
(4)
—
(39)
—
(39) %
100 %
22
78
68
25
15
108
(30)
1
(9)
—
(38)
1
(39) %
100 %
22
78
70
26
16
112
(34)
—
(8)
—
(42)
1
(43) %
100 %
22
78
66
23
14
103
(25)
—
(7)
—
(32)
1
(33) %
100 %
23
77
69
29
13
111
(34)
—
(7)
—
(41)
—
(41) %
78
Quarterly Trends
The sequential increase in the net loss for the fiscal quarter ended January 31, 2020 was primarily due to a $15.0 million
payment to Broadcom in January 2020 in connection with the legal settlement of the Symantec Cases. For further
information refer to Note 11, Commitments and Contingencies, of the consolidated financial statements included elsewhere
in this Annual Report Form 10-K.
The sequential increase in the net loss for the fiscal quarter ended July 31, 2020 was primarily due to an increase in
stock-based compensation expense as a result of attainment of performance related equity awards and higher overall
compensation expense as a result of an increase in headcount, primarily in sales and marketing and research and development
organizations.
Liquidity and Capital Resources
As of July 31, 2021, our principal sources of liquidity were cash, cash equivalents and short-term investments totaling
$1,502.6 million, which were held for working capital and general corporate purposes. Our cash equivalents and investments
consist of highly liquid investments in money market funds, U.S. treasury securities, U.S. government agency securities and
corporate debt securities.
In June 2020, we completed the private offering of our Notes with an aggregate principal amount of $1,150.0 million.
The total net proceeds from the offering, after deducting initial purchase discount and issuance costs, was $1,130.5 million. In
connection with the Notes, we entered into capped call transactions which are expected to reduce the potential dilution of our
common stock upon any conversion of the Notes and/or offset any cash payments we could be required to make in excess of
the principal amount of converted Notes. We used an aggregate amount of $145.2 million of the net proceeds of the Notes to
purchase the capped calls.
We have generated significant losses from operations, as reflected in our accumulated deficit of $601.6 million as of July
31, 2021. We expect to continue to incur operating losses and have in the past and may in the future generate negative cash
flows due to expected investments to grow our business, including potential business acquisitions and other strategic
transactions.
We believe that our existing cash, cash equivalents and short-term investments will be sufficient to fund our operating
and capital needs for at least the next 12 months from the issuance of our financial statements. Our foreseeable cash needs, in
addition to our recurring operating costs, include our expected capital expenditures to support expansion of our infrastructure
and workforce, lease obligations, purchase commitments, potential business acquisitions and other strategic transactions. Our
assessment of the period of time through which our financial resources will be adequate to support our operations is a
forward-looking statement and involves risks and uncertainties. Our actual results could vary as a result of, and our future
capital requirements, both near-term and long-term, will depend on, many factors, including our growth rate, the timing and
extent of spending to support our research and development efforts, the expansion of sales and marketing and international
operating activities, the timing of new introductions of solutions or features, and the continuing market acceptance of our
services, and the impact of COVID-19 pandemic to our and our customers', vendors' and partners' businesses. We have and
may in the future enter into arrangements to acquire or invest in complementary businesses, services and technologies,
including intellectual property rights. We have based this estimate on assumptions that may prove to be wrong, and we could
use our available capital resources sooner than we currently expect. Additionally, some of the factors that may influence our
operations are not within our control, such as general economic conditions and the length and severity of the COVID-19
pandemic. We may be required to seek additional equity or debt financing. In the event that additional financing is required
from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional
capital when desired, or if we cannot expand our operations or otherwise capitalize on our business opportunities because we
lack sufficient capital, our business, operating results and financial condition would be adversely affected.
79
We typically invoice our customers annually in advance, and to a lesser extent quarterly in advance, monthly in advance
or multi-year in advance. Therefore, a substantial source of our cash is from such prepayments, which are included on the
consolidated balance sheets as a contract liability. Deferred revenue consists of the unearned portion of billed fees for our
subscriptions, which is subsequently recognized as revenue in accordance with our revenue recognition policy. As of July 31,
2021, we had deferred revenue of $630.6 million, of which $571.3 million was recorded as a current liability and is expected
to be recorded as revenue in the next 12 months, provided all other revenue recognition criteria have been met. Subscriptions
that are invoiced annually in advance or multi-year in advance contribute significantly to our short-term and long-term
deferred revenue in comparison to our invoices issued quarterly in advance or monthly in advance. Accordingly, we cannot
predict the mix of invoicing schedules in any given period.
The following table summarizes our cash flows for the periods presented:
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by financing activities
Operating Activities
2021
Year Ended July 31,
2020
(in thousands)
2019
$
$
$
79,317 $
202,040 $
(109,668) $ (1,038,162) $
41,675 $ 1,022,212 $
58,027
(162,074)
46,384
Net cash provided by operating activities during fiscal 2021 was $202.0 million, which resulted from a net loss of $262.0
million, adjusted for non-cash charges of $418.5 million and net cash inflows of $45.6 million from changes in operating
assets and liabilities. Non-cash charges primarily consisted of $258.5 million for stock-based compensation expense, $51.9
million for amortization of debt discount and issuance costs, $40.6 million for amortization of deferred contract acquisition
costs, $29.7 million for depreciation and amortization expense, $21.0 million for non-cash operating lease costs, $11.7
million for amortization (accretion) of investments purchased at a premium (discount), $6.8 million for amortization expense
of acquired intangible assets, partially offset by deferred income taxes of $2.4 million.
Net cash inflows from changes in operating assets and liabilities were primarily the result of an increase of $262.4
million in deferred revenue from advance invoicing in accordance with our subscription contracts, an increase of $43.9
million in accrued compensation, an increase of $7.5 million in accounts payable and an increase of $6.5 million in accrued
expenses, other current and noncurrent liabilities. Net cash inflows were partially offset by cash outflows resulting from an
increase of $137.7 million in deferred contract acquisition costs, as our sales commission payments increased due to the
addition of new customers and expansion of our existing customer subscriptions, an increase of $111.6 million in accounts
receivable primarily due to timing of billings and collections, a decrease of $22.1 million in operating lease liabilities
primarily due to lease payments, net of tenant incentives received and an increase of $3.4 million in prepaid expenses, other
current and noncurrent assets.
Net cash provided by operating activities during fiscal 2020 was $79.3 million, which resulted from a net loss of $115.1
million, adjusted for non-cash charges of $185.8 million and net cash inflows of $8.6 million from changes in operating
assets and liabilities. Non-cash charges primarily consisted of $121.4 million for stock-based compensation expense, $24.9
million for amortization of deferred contract acquisition costs, $17.7 million for depreciation and amortization expense, $13.6
million for non-cash operating lease costs, $4.9 million for amortization of debt discount and issuance costs, $3.4 million for
amortization expense of acquired intangible assets, partially offset by deferred income taxes of $1.2 million.
Net cash inflows from changes in operating assets and liabilities were primarily the result of an increase of $118.0
million in deferred revenue from advance invoicing in accordance with our subscription contracts, an increase of $27.9
80
million in accrued compensation, an increase of $2.3 million in accrued expenses, other current and noncurrent liabilities and
an increase of $0.9 million in accounts payable. Net cash inflows were partially offset by cash outflows resulting from an
increase of $65.1 million in deferred contract acquisition costs, as our sales commission payments increased due to the
addition of new customers and expansion of our existing customer subscriptions, an increase of $54.2 million in accounts
receivable primarily due to timing of billings and collections, an increase of $13.6 million in prepaid expenses, other current
and noncurrent assets and a decrease of $7.6 million in operating lease liabilities primarily due to lease payments, net of
tenant incentives received.
Net cash provided by operating activities during fiscal 2019 was $58.0 million, which resulted from a net loss of $28.7
million, adjusted for non-cash charges of $73.1 million and net cash inflows of $13.6 million from changes in operating
assets and liabilities. Non-cash charges primarily consisted of $46.4 million for stock-based compensation expense, $18.7
million for amortization of deferred contract acquisition costs, $10.4 million for depreciation and amortization expense and
$0.9 million for amortization expense of acquired intangible assets, partially offset by accretion of purchased discounts, net
of amortization of investment premiums of $2.2 million and deferred income taxes of $1.4 million.
Net cash inflows from changes in operating assets and liabilities were primarily the result of an increase of $87.2 million
in deferred revenue from advance invoicing in accordance with our subscription contracts and an increase of $0.5 million in
accounts payable. Net cash inflows were partially offset by cash outflows resulting from an increase of $32.5 million in
deferred contract acquisition costs, as our sales commission payments increased due to the addition of new customers and
expansion of our existing customer subscriptions, an increase of $31.7 million in accounts receivable primarily due to
customer growth, an increase of $7.6 million in prepaid expenses, other current and noncurrent assets, a decrease of $1.8
million in accrued compensation.
Investing Activities
Net cash used in investing activities during fiscal 2021 of $109.7 million was primarily attributable to the purchases of
short-term investments of $815.5 million, capital expenditures of $58.3 million to support the growth of our cloud platform,
$40.5 million for payments for business acquisitions, net of cash acquired, in connection with our acquisition of Trustdome
and Smokescreen and $3.1 million for strategic investments. These activities were partially offset by proceeds from the
maturities and sales of short-term investments of $807.7 million.
Net cash used in investing activities during fiscal 2020 of $1,038.2 million was primarily attributable to the purchases of
short-term investments of $1,255.6 million, capital expenditures of $51.8 million to support the growth of our cloud platform,
$39.6 million for payments for business acquisitions, net of cash acquired, in connection with our acquisition of Cloudneeti
and Edgewise and $2.0 million for strategic investments. These activities were partially offset by proceeds from the
maturities and sales of short-term investments of $310.9 million.
Net cash used in investing activities during fiscal 2019 of $162.1 million was primarily attributable to the purchases of
short-term investments of $335.2 million, capital expenditures to support the growth of our cloud platform and increased
headcount, including increased office space needs of $28.7 million, payments for business acquisitions, net of cash acquired,
of $11.4 million and payments for acquired intangible assets of $1.5 million. These transactions were partially offset by
proceeds from the maturities of short-term investments of $214.7 million.
81
Financing Activities
Net cash provided by financing activities of $41.7 million during fiscal 2021 was attributable to $25.7 million in
proceeds from issuance of common stock under the employee stock purchase plan and $18.2 million in proceeds from the
exercise of stock options. These transactions were partially offset by a payment of deferred merger consideration related to a
business acquisition for $2.3 million.
Net cash provided by financing activities of $1,022.2 million during fiscal 2020 was attributable to $1,130.5 million in
proceeds from the issuance of our Notes, net of debt discount and issuance costs, $21.6 million in proceeds from the exercise
of stock options and $15.3 million in proceeds from issuance of common stock under the employee stock purchase plan.
These transactions were partially offset by purchases of capped calls for $145.2 million related to issuance of the Notes.
Net cash provided by financing activities of $46.4 million during fiscal 2019 was attributable to $29.9 million in
proceeds from the exercise of stock options, driven mainly by the end of our initial public offering lock-up period in
September 2018, $16.4 million in proceeds from issuance of common stock under the employee stock purchase plan and $1.9
million in proceeds from repayments of notes receivable for early exercised stock options. Proceeds were partially offset by
$1.8 million in payments for offering costs related to our IPO.
Contractual Obligations and Commitments
The following table summarizes our contractual obligations as July 31, 2021:
Total
Less Than 1
Year
Payments Due by Period
1 to 3
Years
(in thousands)
3 to 5
Years
More Than
5 Years
$
37,746 $
7,501 $
14,142 $
14,703 $
1,400
40,440
1,155,515
58,317
250
$ 1,292,268 $
24,557
1,318
43,191
250
76,817 $
15,860
2,875
15,126
—
23
1,151,322
—
—
48,003 $ 1,166,048 $
—
—
—
—
1,400
Real estate arrangements
Co-location and bandwidth
arrangements
Convertible senior notes(1)
Non-cancelable purchase arrangements
Other current liabilities(2)
Total
_____
(1) Includes the principal and future interest payments related to our Notes. For additional information refer to Note 9,
Convertible Senior Notes, of the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
(2) Includes holdback amounts associated with business acquisitions, which are payable upon the lapse of the
contractual indemnification period.
The contractual commitment amounts in the table above are associated with agreements that are enforceable and legally
binding. Obligations under contracts, including purchase orders, that can be cancelled without a significant penalty are not
included in the table above.
82
Off-Balance Sheet Arrangements
As of July 31, 2021, we did not have any relationships with unconsolidated organizations or financial partnerships, such
as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance
sheet arrangements or other contractually narrow or limited purposes.
As of July 31, 2021, we had outstanding irrevocable standby unsecured letters of credits for an aggregate value of $3.0
million with a bank, which serve as security under certain real estate leases included in Note 10, Operating Leases to the
consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with U.S. GAAP. The preparation of these financial statements
requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, as
well as related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on
historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual
results could differ from these estimates.
The critical accounting policies, estimates, assumptions and judgments that we believe have the most significant impact
on the consolidated financial statements are described below.
Revenue Recognition
In accordance with Accounting Standards Codification ("ASC") Topic 606, Revenue From Contracts With Customers
("ASC 606"), revenue is recognized when a customer obtains control of promised services. The amount of revenue
recognized reflects the consideration that we expect to be entitled to receive in exchange for these services. To achieve the
core principle of this standard, we apply the following five steps:
1) Identify the contract with a customer
We consider the terms and conditions of the contracts and our customary business practices in identifying our contracts
under ASC 606. We determine we have a contract with a customer when the contract is approved, we can identify each
party’s rights regarding the services to be transferred, we can identify the payment terms for the services, we have determined
the customer to have the ability and intent to pay, and the contract has commercial substance. We apply judgment in
determining the customer’s ability and intent to pay, which is based on a variety of factors, including the customer’s historical
payment experience or, in the case of a new customer, credit and financial information pertaining to the customer.
2) Identify the performance obligations in the contract
Performance obligations promised in a contract are identified based on the services that will be transferred to the
customer that are both capable of being distinct, whereby the customer can benefit from the service either on its own or
together with other resources that are readily available from third parties or from us, and are distinct in the context of the
contract, whereby the transfer of the services is separately identifiable from other promises in the contract. Our performance
obligations consist of (i) our subscription and support services and (ii) professional and other services.
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3) Determine the transaction price
The transaction price is determined based on the consideration to which we expect to be entitled in exchange for
transferring services to the customer. Variable consideration is included in the transaction price if, in our judgment, it is
probable that a significant future reversal of cumulative revenue under the contract will not occur. None of our contracts
contain a significant financing component.
4) Allocate the transaction price to performance obligations in the contract
If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance
obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each
performance obligation based on a relative standalone selling price, or SSP.
5) Recognize revenue when or as we satisfy a performance obligation
Revenue is recognized at the time the related performance obligation is satisfied by transferring the promised service to a
customer. Revenue is recognized when control of the services is transferred to our customers, in an amount that reflects the
consideration that we expect to receive in exchange for those services. We generate all our revenue from contracts with
customers and apply judgment in identifying and evaluating any terms and conditions in contracts which may impact revenue
recognition.
Subscription and Support Revenue
We generate revenue primarily from sales of subscriptions to access our cloud platform, together with related support
services to our customers. Arrangements with customers do not provide the customer with the right to take possession of our
software operating our cloud platform at any time. Instead, customers are granted continuous access to our cloud platform
over the contractual period. A time-elapsed output method is used to measure progress because we transfer control evenly
over the contractual period. Accordingly, the fixed consideration related to subscription and support revenue is generally
recognized on a straight-line basis over the contract term beginning on the date that our service is made available to the
customer.
The typical subscription and support term is one to three years. Most of our contracts are non-cancelable over the
contractual term. Customers typically have the right to terminate their contracts for cause if we fail to perform in accordance
with the contractual terms. Some of our customers have the option to purchase additional subscription and support services at
a stated price. These options generally do not provide a material right as they are priced at our SSP.
Professional and Other Services Revenue
Professional and other services revenue consists of fees associated with providing deployment advisory services that
educate and assist our customers on the best use of our solutions, as well as advise customers on best practices as they deploy
our solution. These services are distinct from subscription and support services. Professional services do not result in
significant customization of the subscription service. Revenue from professional services provided on a time and materials
basis is recognized as the services are performed. Total professional and other services revenue has historically been
insignificant.
Contracts with Multiple Performance Obligations
Most of our contracts with customers contain multiple promised services consisting of (i) our subscription and support
services and (ii) professional and other services that are distinct and accounted for separately. The transaction price is
allocated to the separate performance obligations on a relative SSP basis. We determine SSP based on our overall pricing
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objectives, taking into consideration the type of subscription and support services and professional and other services, the
geographical region of the customer and the number of users.
Variable Consideration
Revenue from sales is recorded at the net sales price, which is the transaction price, and includes estimates of variable
consideration. The amount of variable consideration that is included in the transaction price is constrained, and is included in
the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue will
not occur when the uncertainty is resolved.
If our services do not meet certain service level commitments, our customers are entitled to receive service credits, and
in certain cases, refunds, each representing a form of variable consideration. We have not historically experienced any
significant incidents affecting the defined levels of reliability and performance as required by our subscription contracts.
Accordingly, any estimated refunds related to these agreements in the consolidated financial statements were not material
during the periods presented.
We provide rebates and other credits within our contracts with certain customers which are estimated based on the most
likely amounts expected to be earned or claimed on the related sales transaction. Overall, the transaction price is reduced to
reflect our estimate of the amount of consideration to which we are entitled based on the terms of the contract. Estimated
rebates and other credits were not material during the periods presented.
Contract Balances
Contract liabilities consist of deferred revenue and include payments received in advance of performance under the
contract. Such amounts are recognized as revenue over the contractual period.
We receive payments from customers based upon contractual billing schedules; accounts receivable are recorded when
the right to consideration becomes unconditional. Payment terms on invoiced amounts are typically 30 days. Contract assets
include amounts related to our contractual right to consideration for both completed and partially completed performance
obligations that may not have been invoiced and such amounts have been insignificant to date.
Costs to Obtain and Fulfill a Contract
We capitalize sales commissions and associated payroll taxes paid to internal sales personnel that are incremental to the
acquisition of channel partner and direct customer contracts. These costs are recorded as deferred contract acquisition costs
on the consolidated balance sheets. We determine whether costs should be deferred based on our sales compensation plans, if
the commissions are in fact incremental and would not have occurred absent the customer contract.
Sales commissions for renewal of a contract are not considered commensurate with the commissions paid for the
acquisition of the initial contract given the substantive difference in commission rates in proportion to their respective
contract values. Commissions paid upon the initial acquisition of a contract are amortized over an estimated period of benefit
of five years while commissions paid for renewal contracts are amortized over the contractual term of the renewals.
Amortization is recognized on a straight-line basis commensurate with the pattern of revenue recognition. We determine the
period of benefit for commissions paid for the acquisition of the initial contract by taking into consideration the expected
subscription term and expected renewals of our customer contracts, the duration of our relationships with customers,
customer retention data, our technology development life cycle and other factors. Management exercises judgment to
determine the period of benefit to amortize contract acquisition costs by considering factors such as expected renewals of
customer contracts, duration of customer relationships and our technology development life cycle. Although we believe that
the historical assumptions and estimates we have made are reasonable and appropriate, different assumptions and estimates
could materially impact our reported financial results. Amortization of deferred contract acquisition costs is included in sales
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and marketing expense in the consolidated statements of operations. We periodically review these deferred costs to determine
whether events or changes in circumstances have occurred that could impact the period of benefit of these deferred contract
acquisition costs.
Business Combinations
We account for our business combinations using the acquisition method of accounting, which requires, among other
things, allocation of the fair value of purchase consideration to the tangible and intangible assets acquired and liabilities
assumed at their estimated fair values on the acquisition date. The excess of the fair value of purchase consideration over the
values of these identifiable assets and liabilities is recorded as goodwill. When determining the fair value of assets acquired
and liabilities assumed, we make estimates and assumptions, especially with respect to intangible assets. Our estimates of fair
value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a
result, actual results may differ from estimates. During the measurement period, not to exceed one year from the date of
acquisition, we may record adjustments to the assets acquired and liabilities assumed, with a corresponding offset to goodwill
if new information is obtained related to facts and circumstances that existed as of the acquisition date. After the
measurement period, any subsequent adjustments are reflected in the consolidated statements of operations. Acquisition
costs, such as legal and consulting fees, are expensed as incurred.
Derivative Instruments
We enter into foreign currency forward contracts, a portion of which we designate as cash flow hedges, in order to
manage the volatility of cash flows that relate to our cost of revenues and operating expenses denominated in foreign
currencies.
Gains or losses related to our cash flow hedges are recorded as a component of accumulated other comprehensive
income (loss) (“AOCI”) on the consolidated statements of stockholders' equity until the forecasted transaction occurs in
earnings. When the forecasted transaction occurs, the related gains and losses are reclassified into earnings within the
financial statement line item associated with the underlying hedged transaction. If the underlying hedged transaction does not
occur, or it becomes probable that the hedged transaction will not occur, the cumulative unrealized gain or loss is reclassified
immediately from AOCI into earnings within the financial statement line item associated with the underlying hedged
transaction. We measure hedge effectiveness using regression analysis at hedge inception and periodically thereafter. We
include time value in our effectiveness assessment.
We recognize changes in the fair value of non-designated derivative instruments within other income (expense), net in
the consolidated statements of operations in the same period that the fair value measurement occurs.
All of our derivative instruments are measured at fair value and reported on a gross basis on the consolidated balance
sheets. Derivative instruments are classified in the consolidated statements of cash flows as cash from operating activities,
which reflect the classification of the underlying hedged transactions.
Operating Leases
We enter into operating lease arrangements for real estate assets related to office space and co-location assets related to
space and racks at data center facilities. We determine if an arrangement contains a lease at its inception by assessing whether
there is an identified asset and whether the arrangement conveys the right to control the use of the identified asset in
exchange for consideration. Operating leases related balances are included in "operating lease right-of-use assets," "operating
lease liabilities," and "operating lease liabilities, noncurrent" in the consolidated balance sheets. Right-of-use assets represent
our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make payments arising
from the lease. Operating lease right-of-use assets and lease liabilities are recognized at the lease commencement date based
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on the present value of lease payments over the lease term. Lease payments consist of the fixed payments under the
arrangement. The operating lease liabilities are adjusted for any unpaid lease incentives, such as tenant improvement
allowances. Variable costs, such as maintenance and utilities based on actual usage, are not included in the measurement of
right-to-use assets and lease liabilities but are expensed when the event determining the amount of variable consideration to
be paid occurs. As the implicit rate of our leases is not determinable, we use an incremental borrowing rate ("IBR") based on
the information available at the lease commencement date in determining the present value of lease payments. The lease
expense is recognized on a straight-line basis over the lease term.
We generally use the base, non-cancelable lease term when recognizing the right-of-use assets and lease liabilities,
unless it is reasonably certain that a renewal or termination option will be exercised. We account for lease components and
non-lease components as a single lease component.
Leases with a term of twelve months or less are not recognized on the consolidated balance sheets. We recognize lease
expense for these leases on a straight-line basis over the term of the lease.
Stock-Based Compensation
Compensation expense related to stock-based awards granted to employees and non-employees is calculated based on
the fair value of stock-based awards on the date of grant. We recognize stock-based compensation expense over an award’s
requisite service period based on the award’s fair value.
Stock-based compensation for common stock options is recognized based on the fair value of the awards granted,
determined using the Black-Scholes option pricing model. Stock-based compensation expense is recognized on a straight-line
basis over the requisite service period, generally four years.
Stock-based compensation for purchase rights granted under the employee stock purchase plan is based on the Black-
Scholes option pricing model fair value of the number of awards estimated as of the beginning of the offering period. Stock-
based compensation expense is recognized following the straight-line attribution method over the offering period.
Stock-based compensation for restricted stock units is measured based on the market closing price of our common
stock on the grant date. Stock-based compensation expense is recognized on a straight-line basis over the requisite service
period, generally four years.
Stock-based compensation for performance stock awards (“PSAs”) which have the same grant date and service
inception date, is based on the probable number of shares to be attained and the market closing price of our common stock at
the grant date. For PSAs where the service inception date of the awards precedes the grant date, stock-based compensation
expense is recognized based on the number of PSAs for which it is probable that the performance condition will be met,
using the accelerated attribution method and the market closing price of our common stock at each reporting date up to the
grant date. The number of these PSAs for which it is probable that the performance condition will be met is determined using
management’s best estimate at the end of each reporting period. At the completion of the performance period for these PSAs,
any earned PSAs are granted upon approval of the compensation committee of our board of directors.
Convertible Senior Notes
In accounting for the issuance of our Notes, we separated the Notes into liability and equity components. The carrying
amounts of the liability component was calculated by measuring the fair value of similar liabilities that do not have
associated convertible features. The carrying amount of the equity component representing the conversion option was
determined by deducting the fair value of the liability component from the par value of the Notes as a whole. This difference
represents the debt discount that is amortized to interest expense over the respective terms of the Notes using the effective
interest rate method. The equity component was recorded in additional paid-in capital and is not remeasured as long as it
continues to meet the conditions for equity classification.
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In accounting for the related debt issuance costs, we allocated the total amount incurred to the liability and equity
components of the Notes based on their relative values. Issuance costs attributable to the liability component are being
amortized to interest expense over the contractual term of the Notes. The issuance costs attributable to the equity component
were netted against the equity component representing the conversion option in additional paid-in capital.
To the extent that we receive the Notes conversion requests prior to the maturity of the Notes, a portion of the equity
component is classified as temporary equity, which is measured as the difference between the principal and net carrying
amount of the Notes requested for conversion. Upon settlement of the conversion requests, the difference between the fair
value and the amortized book value of the liability component of the Notes requested for conversion is recorded as a gain or
loss on early note conversion. The fair value of the Notes is measured based on a similar liability that does not have an
associated convertible feature based on the remaining term of the Notes.
Income Taxes
We are subject to federal, state and local taxes in the United States as well as in other tax jurisdictions or countries in
which we conduct business. Earnings generated by our non-U.S. activities are related to applicable transfer pricing
requirements under local country income tax laws. We account for uncertain tax positions based on those positions taken or
expected to be taken in a tax return. We determine if the amount of available support indicates that it is more likely than not
that the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. We then
measure the tax benefit as the largest amount that is more than 50% likely to be realized upon settlement.
We have a full valuation allowance for our net deferred tax assets generated from our U.S. and U.K. operations. We will
continue to assess the need for such valuation allowance on our deferred tax assets by evaluating both positive and negative
evidence that may exist. Any adjustment to the deferred tax asset valuation allowance would be recorded in the periods in
which the adjustment is determined to be required.
Recently Issued Accounting Pronouncements
Refer to Note 1, Business and Summary of Significant Accounting Policies, to the consolidated financial statements
included elsewhere in this Annual Report on Form 10-K for more information regarding recently issued accounting
pronouncements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We have operations in the United States and internationally, and we are exposed to market risk in the ordinary course of
our business.
Interest Rate Risk
As of July 31, 2021, we had cash, cash equivalents and short-term investments totaling $1,502.6 million, which were
held for working capital purposes. Our cash equivalents and investments consist of highly liquid investments in money
market funds, U.S. treasury securities, U.S. government agency securities and corporate debt securities. The primary
objectives of our investment activities are the preservation of capital, the fulfillment of liquidity needs and the fiduciary
control of cash and investments. We do not enter into investments for trading or speculative purposes. The carrying amount of
our cash equivalents reasonably approximates fair value, due to the short maturities of these instruments. Our investments are
exposed to market risk due to a fluctuation in interest rates, which may affect our interest income and the fair market value of
our investments. As of July 31, 2021, the effect of a hypothetical 100 basis point change in interest rates would have changed
the fair value of our investments in available-for-sale securities by $6.2 million. Fluctuations in the fair value of our
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investments in available-for-sale securities caused by a change in interest rates (gains or losses on the carrying amount) are
recorded in other comprehensive income (loss), and are realized only if we sell the underlying securities prior to maturity.
Convertible Senior Notes
In June 2020, we issued our Notes with an aggregate principal amount of $1,150.0 million. In connection with the
issuance of the Notes, we entered into privately negotiated capped call transactions with certain counterparties (the "Capped
Calls"). The Capped Calls are expected generally to offset the potential dilution to our common stock as a result of any
conversion of the Notes.
The Notes have a fixed annual interest rate of 0.125%, accordingly, we do not have economic interest rate exposure on
the Notes. However, the fair value of the Notes is exposed to interest rate risk. Generally, the fair value of the Notes will
increase as interest rates fall and decrease as interest rates rise. We carry the Notes at face value less unamortized discount
and issuance costs on our balance sheet, and we present the fair value for required disclosure purposes only. In addition, the
fair value of the Notes also fluctuates when the market price of our common stock fluctuates. The fair value was determined
based on the quoted bid price of the Notes in an over-the-counter market on the last trading day of the reporting period. For
further information refer to Note 9, Convertible Senior Notes, to the consolidated financial statements included elsewhere in
this Annual Report on Form 10-K.
Foreign Currency Risk
The vast majority of our sales contracts are denominated in U.S. dollars, with a small number of contracts denominated
in foreign currencies. A portion of our operating expenses are incurred outside the United States, denominated in foreign
currencies and subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the British
Pound, Indian Rupee, Euro, Canadian dollar and Australian dollar. Additionally, fluctuations in foreign currency exchange
rates may cause us to recognize transaction gains and losses in the consolidated statements of operations. The effect of a
hypothetical 10% change in foreign currency exchange rates applicable to our business would not have a material impact on
the consolidated financial statements for fiscal 2021, fiscal 2020 and fiscal 2019.
During the fiscal 2021, we implemented a foreign currency risk management program and entered into foreign
currency forward contracts to hedge a portion of our forecasted foreign currency-denominated expenses. These foreign
currency derivative contracts have a maturity up to 18 months or less and are designated as cash flow hedges to protect our
earnings subjected to foreign currency risk.
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Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements:
Consolidated Balance Sheets as of July 31, 2021 and 2020
Consolidated Statements of Operations for the years ended July 31, 2021, 2020 and 2019
Consolidated Statements of Comprehensive Loss for the years ended July 31, 2021, 2020 and 2019
Consolidated Statements of Stockholders' Equity for the years ended July 31, 2021, 2020 and 2019
Consolidated Statements of Cash Flows for the years ended July 31, 2021, 2020 and 2019
Notes to Consolidated Financial Statements
The supplementary financial information required by this Item 8, is included in Part II, Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations, under the caption "Quarterly
Results of Operations and Other Data," which is incorporated herein by reference.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Zscaler, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Zscaler, Inc. and its subsidiaries (the "Company") as of
July 31, 2021 and 2020, and the related consolidated statements of operations, of comprehensive loss, of stockholders’ equity
and of cash flows for each of the three years in the period ended July 31, 2021, including the related notes (collectively
referred to as the "consolidated financial statements"). We also have audited the Company's internal control over financial
reporting as of July 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of the Company as of July 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three
years in the period ended July 31, 2021 in conformity with accounting principles generally accepted in the United States of
America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of July 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the
COSO.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for
leases effective August 1, 2019.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting,
included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility
is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over
financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting
Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance
with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material
misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in
all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material
misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond
to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
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consolidated financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our
audit of internal control over financial reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial
statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or
disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective,
or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated
financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate
opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue recognition – Identifying and evaluating terms and conditions in contracts
As described in Note 1 to the consolidated financial statements, management applies the following steps in their
determination of revenue to be recognized: 1) identification of the contract with a customer; 2) identification of the
performance obligations in the contract; 3) determination of the transaction price; 4) allocation of the transaction price to the
performance obligations in the contract; and 5) recognition of revenue when, or as, the Company satisfies a performance
obligation. Management applies judgment in identifying and evaluating any terms and conditions in contracts which may
impact revenue recognition. For the fiscal year ended July 31, 2021, the Company’s revenue was $673.1 million.
The principal considerations for our determination that performing procedures relating to revenue recognition, specifically
the identification and evaluation of terms and conditions in contracts, is a critical audit matter are the significant amount of
effort and judgment required by management in identifying and evaluating terms and conditions in contracts that impact
revenue recognition. This in turn led to a high degree of auditor judgment, subjectivity and significant audit effort in
performing our audit procedures to evaluate whether terms and conditions in contracts were appropriately identified and
evaluated by management.
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Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall
opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to
the revenue recognition process, including controls related to the identification and evaluation of terms and conditions in
contracts that impact revenue recognition. These procedures also included, among others, testing the completeness and
accuracy of management’s identification and evaluation of the terms and conditions in contracts by examining revenue
arrangements on a test basis and testing management’s process of identifying and evaluating the terms and conditions in
contracts, including management’s determination of the impact of those terms and conditions on revenue recognition.
/s/ PricewaterhouseCoopers LLP
San Jose, California
September 16, 2021
We have served as the Company's auditor since 2015.
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ZSCALER, INC.
Consolidated Balance Sheets
(in thousands, except per share amounts)
Assets
Current assets:
Cash and cash equivalents
Short-term investments
Accounts receivable, net
Deferred contract acquisition costs
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Operating lease right-of-use assets
Deferred contract acquisition costs, noncurrent
Acquired intangible assets, net
Goodwill
Other noncurrent assets
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
Accrued expenses and other current liabilities
Accrued compensation
Deferred revenue
Operating lease liabilities
Total current liabilities
Convertible senior notes, net
Deferred revenue, noncurrent
Operating lease liabilities, noncurrent
Other noncurrent liabilities
Total liabilities
Commitments and contingencies (Note 11)
Stockholders’ Equity
Preferred stock; $0.001 par value; 200,000 shares authorized as of July 31, 2021 and 2020,
respectively; no shares issued and outstanding as of July 31, 2021 and 2020
Common stock; $0.001 par value; 1,000,000 shares authorized as of July 31, 2021 and 2020,
respectively; 138,662 and 132,817 shares issued and outstanding as of July 31, 2021 and 2020,
respectively
Additional paid-in capital
Accumulated other comprehensive income (loss)
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
$
$
July 31,
2021
2020
275,898 $
1,226,654
257,109
57,373
31,269
1,848,303
108,576
44,339
149,657
32,129
58,977
15,650
2,257,631 $
12,547 $
22,908
93,622
571,286
19,842
720,205
913,538
59,315
31,225
4,453
1,728,736
141,851
1,228,722
147,584
32,240
31,396
1,581,793
75,734
36,119
77,675
24,024
30,059
8,054
1,833,458
5,233
16,361
49,444
337,263
15,600
423,901
861,615
32,504
28,023
2,586
1,348,629
—
—
139
1,131,006
(650)
(601,600)
528,895
2,257,631 $
133
823,804
463
(339,571)
484,829
1,833,458
$
The accompanying notes are an integral part of these consolidated financial statements.
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Revenue
Cost of revenue
Gross profit
Operating expenses:
Sales and marketing
Research and development
General and administrative
Total operating expenses
Loss from operations
Interest income
Interest expense
Other income (expense), net
Loss before income taxes
Provision for income taxes
Net loss
ZSCALER, INC.
Consolidated Statements of Operations
(in thousands, except per share amounts)
$
Year Ended July 31,
2020
431,269 $
95,733
335,536
2021
673,100 $
150,317
522,783
459,407
174,653
96,535
730,595
(207,812)
2,812
(53,364)
1,186
(257,178)
4,851
(262,029) $
(1.93) $
277,981
97,879
73,632
449,492
(113,956)
6,477
(5,025)
(224)
(112,728)
2,388
(115,116) $
(0.89) $
$
$
2019
302,836
59,669
243,167
169,913
61,969
46,598
278,480
(35,313)
7,730
—
(329)
(27,912)
743
(28,655)
(0.23)
123,566
Net loss per share, basic and diluted
Weighted-average shares used in computing net loss per share, basic and
diluted
129,323
The accompanying notes are an integral part of these consolidated financial statements.
135,654
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ZSCALER, INC.
Consolidated Statements of Comprehensive Loss
(in thousands)
Net loss
Available-for-sale securities:
Change in net unrealized gains (losses) on available-for-sale securities
Cash flow hedging instruments:
Change in net unrealized gains and (losses)
Net realized losses (gains) reclassified into net loss
Net change on cash flow hedges
Other comprehensive income (loss)
Comprehensive loss
Year Ended July 31,
2020
(115,116) $
2021
(262,029) $
$
2019
(28,655)
(486)
(228)
(399)
(627)
(1,113)
(263,142) $
$
195
—
392
—
—
—
195
(114,921) $
—
—
392
(28,263)
The accompanying notes are an integral part of these consolidated financial statements.
96
ZSCALER, INC.
Consolidated Statements of Stockholders’ Equity
(in thousands)
Common Stock
Shares
Amount
Additional
Paid-In
Capital
119,764
$
119
$ 438,392
Notes
Receivable
From
Stockholders
(2,051)
$
Accumulated
Other
Comprehensive
Income (Loss)
(124)
$
Accumulated
Deficit
(196,100)
$
Total
Stockholders’
Equity
240,236
$
Balance as of July 31, 2018
Cumulative effect of accounting change
Issuance of common stock upon exercise of stock options
Issuance of common stock under the employee stock
purchase plan
Vesting of restricted units
Repurchases of unvested common stock
Repayments of principal amount on notes receivable from
stockholders
Accrued interest on notes receivable from stockholders, net
of repayments
Adjustment to initial public offering costs
Vesting of early exercised stock options
Stock-based compensation
Other comprehensive income
Net loss
Balance as of July 31, 2019
Issuance of common stock upon exercise of stock options
Issuance of common stock under the employee stock
purchase plan
Vesting of restricted stock units
Vesting of early exercised stock options
Stock-based compensation
Equity component of convertible senior notes, net of deferred
tax
Purchases of capped calls related to convertible senior notes
Other comprehensive income
Net loss
Balance as of July 31, 2020
—
6,277
1,131
89
(8)
—
—
—
—
—
—
—
127,253
3,450
817
1,297
—
—
—
—
—
—
—
7
1
—
—
—
—
—
—
—
—
—
127
4
1
1
—
—
—
—
—
—
(300)
29,855
16,435
—
—
—
—
300
983
46,953
—
—
532,618
21,598
15,332
(1)
463
125,675
273,364
(145,245)
—
—
132,817
133
823,804
Issuance of common stock upon exercise of stock options
2,466
Issuance of common stock under the employee stock
purchase plan
Vesting of restricted stock units
Vesting of early exercised stock options
Stock-based compensation
Other comprehensive loss
Net loss
338
3,041
—
—
—
—
3
—
3
—
—
—
—
18,218
25,704
(3)
93
263,190
—
—
Balance as of July 31, 2021
138,662
$
139
$ 1,131,006
$
—
—
—
—
—
1,905
146
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
392
—
268
—
—
—
—
—
—
—
195
—
463
—
—
—
—
—
(1,113)
—
300
—
—
—
—
—
—
—
—
—
—
(28,655)
(224,455)
—
—
—
—
—
—
—
—
(115,116)
(339,571)
—
—
—
—
—
—
(262,029)
—
29,862
16,436
—
—
1,905
146
300
983
46,953
392
(28,655)
308,558
21,602
15,333
—
463
125,675
273,364
(145,245)
195
(115,116)
484,829
18,221
25,704
—
93
263,190
(1,113)
(262,029)
$
(650)
$
(601,600)
$
528,895
The accompanying notes are an integral part of these consolidated financial statements.
97
ZSCALER, INC.
Consolidated Statements of Cash Flows
(in thousands)
2021
Year Ended July 31,
2020
2019
$
(262,029) $
(115,116) $
(28,655)
Cash Flows From Operating Activities
Net loss
Adjustments to reconcile net loss to cash provided by operating activities:
Depreciation and amortization expense
Amortization expense of acquired intangible assets
Amortization of deferred contract acquisition costs
Amortization of debt discount and issuance costs
Non-cash operating lease costs
Stock-based compensation expense
Amortization (accretion) of investments purchased at a premium (discount)
Deferred income taxes
Impairment of assets
Other
Changes in operating assets and liabilities, net of effects of business acquisitions
Accounts receivable
Deferred contract acquisition costs
Prepaid expenses, other current and noncurrent assets
Accounts payable
Accrued expenses, other current and noncurrent liabilities
Accrued compensation
Deferred revenue
Operating lease liabilities
Net cash provided by operating activities
Cash Flows From Investing Activities
Purchases of property, equipment and other assets
Capitalized internal-use software
Acquired intangible assets
Payments for business acquisitions, net of cash acquired
Purchases of strategic investments
Purchases of short-term investments
Proceeds from maturities of short-term investments
Proceeds from sale of short-term investments
Net cash used in investing activities
Cash Flows From Financing Activities
Payments of offering costs related to initial public offering
Proceeds from issuance of common stock upon exercise of stock options
Proceeds from issuance of common stock under the employee stock purchase plan
Payment of deferred consideration related to a business acquisition
Proceeds from issuance of convertible senior notes, net of issuance costs
Purchases of capped calls related to convertible senior notes
Repurchases of unvested common stock
Repayments of notes receivable from stockholders
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents(1)
Cash and cash equivalents at beginning of period(1)
Cash and cash equivalents at end of period(1)
$
98
29,663
6,795
40,558
51,923
20,995
258,535
11,715
(2,406)
416
307
(111,605)
(137,673)
(3,388)
7,451
6,532
43,877
262,425
(22,051)
202,040
(48,165)
(10,132)
—
(40,530)
(3,077)
(815,480)
785,217
22,499
(109,668)
—
18,221
25,704
(2,250)
—
—
—
—
41,675
134,047
141,851
275,898 $
17,734
3,384
24,922
4,885
13,555
121,395
50
(1,172)
746
321
(54,222)
(65,052)
(13,580)
862
2,292
27,900
118,017
(7,604)
79,317
(43,072)
(8,737)
—
(39,601)
(2,000)
(1,255,629)
289,785
21,092
(1,038,162)
—
21,602
15,333
—
1,130,522
(145,245)
—
—
1,022,212
63,367
78,484
141,851 $
10,398
908
18,651
—
—
46,423
(2,181)
(1,392)
—
284
(31,730)
(32,526)
(7,642)
495
(336)
(1,849)
87,179
—
58,027
(25,520)
(3,162)
(1,480)
(11,432)
—
(335,186)
199,716
14,990
(162,074)
(1,797)
29,862
16,436
—
—
—
(22)
1,905
46,384
(57,663)
136,147
78,484
Supplemental Disclosure of Cash Flow Information:
Cash paid for income taxes, net of tax refunds
Cash paid for interest expense
Non-cash activities
Net change in purchased equipment included in accounts payable and accrued expenses
Operating lease right-of-use assets obtained in exchange for operating lease obligations, net of
terminations
Vesting of early exercised common stock options
Net change in deferred offering costs accrued
(1) We did not hold restricted cash for any periods presented.
Year Ended July 31,
$
$
$
$
$
$
4,144 $
1,462 $
14 $
27,627 $
93 $
— $
2,525 $
— $
(1,486) $
31,673 $
463 $
— $
1,770
—
2,911
—
983
(2,097)
The accompanying notes are an integral part of these consolidated financial statements.
99
ZSCALER, INC.
Notes to Consolidated Financial Statements
Note 1. Business and Summary of Significant Accounting Policies
Description of the Business
Zscaler, Inc. ("Zscaler," the "Company," "we," "us," or "our") is a cloud security company that developed a platform
incorporating core security functionalities needed to enable fast and secure access to cloud resources based on identity,
context and organization’s policies. Our solution is a purpose-built, multi-tenant, distributed cloud platform that secures user-
to-app, app-to-app, and machine-to-machine communications, over any network and any location. We deliver our solutions
using a software-as-a-service ("SaaS") business model and sell subscriptions to customers to access our cloud platform,
together with related support services. We were incorporated in Delaware in September 2007 and conduct business
worldwide, with presence in North America, Europe and Asia. Our headquarters are in San Jose, California.
Fiscal Year
Our fiscal year ends on July 31. References to fiscal 2021, for example, refer to our fiscal year ended July 31, 2021.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its 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.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make
estimates, judgments and assumptions that affect the amounts reported and disclosed in the financial statements and
accompanying notes. Such estimates include, but are not limited to, the determination of revenue recognition, deferred
revenue, deferred contract acquisition costs, valuation of acquired intangible assets, period of benefit generated from our
deferred contract acquisition costs, allowance for doubtful accounts, valuation of common stock options and stock-based
awards, useful lives of property and equipment, useful lives of acquired intangible assets, recoverability of goodwill,
valuation of deferred tax assets and liabilities, loss contingencies related to litigation, fair value and effective interest rate of
convertible senior notes, valuation of non-marketable equity investments and the discount rate used for operating leases.
Management determines these estimates and assumptions based on historical experience and on various other assumptions
that are believed to be reasonable. Actual results could differ significantly from these estimates, and such differences may be
material to the consolidated financial statements.
Due to the COVID-19 pandemic, there is ongoing uncertainty and significant disruption in the global economy and
financial markets. We are not aware of any specific event or circumstances that would require an update to our estimates,
judgments or assumptions or a revision to the carrying value of our assets or liabilities as of the date of issuance of these
consolidated financial statements. These estimates, judgments and assumptions may change in the future, as new events occur
or additional information is obtained.
Foreign Currency
The functional currency of our foreign subsidiaries is the U.S. dollar. Accordingly, monetary assets and liabilities of our
foreign subsidiaries are re-measured into U.S. dollars at the exchange rates in effect at the reporting date, non-monetary
assets and liabilities are re-measured at historical rates, revenue and expenses are re-measured at average exchange rates in
100
effect during each reporting period. Foreign currency transaction gains and losses are recorded in other income (expense), net
in the consolidated statements of operations. Foreign currency remeasurement gains and losses and foreign currency
transaction gains and losses are not significant to the consolidated financial statements.
Concentration of Risks
We generate revenue primarily from sale of subscriptions to access our cloud platform, together with related support
services. Our sales team, along with our channel partner network of global telecommunications service providers, system
integrators and value-added resellers (collectively "channel partners"), sells our services worldwide to organizations of all
sizes. Due to the nature of our services and the terms and conditions of our contracts with our channel partners, our business
could be affected unfavorably if we are not able to continue our relationships with them.
Our financial instruments that are exposed to concentrations of credit risk consist primarily of cash, cash equivalents,
short-term investments and accounts receivable. Although we deposit our cash with multiple financial institutions, the
deposits, at times, may exceed federally insured limits. Cash equivalents and short-term investments consist of highly liquid
investments in money market funds, U.S. treasury, U.S. agency securities and corporate debt securities, which are invested
through financial institutions in the United States.
We grant credit to our customers in the normal course of business. We monitor the financial condition of our customers
to reduce credit risk. Refer to Note 2, Revenue Recognition, for information regarding customers with concentration of 10%
or more of the total balance of accounts receivable, net.
Segment Information
We operate as one reportable and operating segment. Our chief operating decision maker is our chief executive officer,
who reviews financial information presented on a consolidated basis for purposes of making operating decisions, assessing
financial performance and allocating resources.
Revenue Recognition
In accordance with Accounting Standards Codification ("ASC") Topic 606, Revenue From Contracts With Customers
("ASC 606"), revenue is recognized when a customer obtains control of promised services. The amount of revenue
recognized reflects the consideration that we expect to be entitled to receive in exchange for these services. To achieve the
core principle of this standard, we apply the following five steps:
1) Identify the contract with a customer
We consider the terms and conditions of the contracts and our customary business practices in identifying our contracts
under ASC 606. We determine we have a contract with a customer when the contract is approved, we can identify each
party’s rights regarding the services to be transferred, we can identify the payment terms for the services, we have determined
the customer has the ability and intent to pay and the contract has commercial substance. We apply judgment in determining
the customer’s ability and intent to pay, which is based on a variety of factors, including the customer’s historical payment
experience or, in the case of a new customer, credit and financial information pertaining to the customer.
2) Identify the performance obligations in the contract
Performance obligations promised in a contract are identified based on the services that will be transferred to the
customer that are both capable of being distinct, whereby the customer can benefit from the service either on its own or
together with other resources that are readily available from third parties or from us, and are distinct in the context of the
101
contract, whereby the transfer of the services is separately identifiable from other promises in the contract. Our performance
obligations consist of (i) our subscription and support services and (ii) professional and other services.
3) Determine the transaction price
The transaction price is determined based on the consideration to which we expect to be entitled in exchange for
transferring services to the customer. Variable consideration is included in the transaction price if, in our judgment, it is
probable that a significant future reversal of cumulative revenue under the contract will not occur. None of our contracts
contain a significant financing component.
4) Allocate the transaction price to performance obligations in the contract
If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance
obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each
performance obligation based on a relative standalone selling price ("SSP").
5) Recognize revenue when or as we satisfy a performance obligation
Revenue is recognized at the time the related performance obligation is satisfied by transferring the promised service to a
customer. Revenue is recognized when control of the services is transferred to our customers, in an amount that reflects the
consideration that we expect to receive in exchange for those services. We generate all our revenue from contracts with
customers and apply judgment in identifying and evaluating any terms and conditions in contracts which may impact revenue
recognition.
Subscription and Support Revenue
We generate revenue primarily from sales of subscriptions to access our cloud platform, together with related support
services to our customers. Arrangements with customers do not provide the customer with the right to take possession of our
software operating our cloud platform at any time. Instead, customers are granted continuous access to our cloud platform
over the contractual period. A time-elapsed output method is used to measure progress because we transfer control evenly
over the contractual period. Accordingly, the fixed consideration related to subscription and support revenue is generally
recognized on a straight-line basis over the contract term beginning on the date that our service is made available to the
customer.
The typical subscription and support term is one to three years. Most of our contracts are non-cancelable over the
contractual term. Customers typically have the right to terminate their contracts for cause if we fail to perform in accordance
with the contractual terms. Some of our customers have the option to purchase additional subscription and support services at
a stated price. These options generally do not provide a material right as they are priced at our SSP.
Professional and Other Services Revenue
Professional and other services revenue consists of fees associated with providing deployment advisory services that
educate and assist our customers on the best use of our solutions, as well as advise customers on best practices as they deploy
our solution. These services are distinct from subscription and support services. Professional services do not result in
significant customization of the subscription service. Revenue from professional services provided on a time and materials
basis is recognized as the services are performed. Total professional and other services revenue has historically not been
material.
102
Contracts with Multiple Performance Obligations
Most of our contracts with customers contain multiple promised services consisting of: (i) our subscription and support
services and (ii) professional and other services that are distinct and accounted for separately. The transaction price is
allocated to the separate performance obligations on a relative SSP basis. We determine SSP based on our overall pricing
objectives, taking into consideration the type of subscription and support services and professional and other services, the
geographical region of the customer and the number of users.
Variable Consideration
Revenue from sales is recorded at the net sales price, which is the transaction price, and includes estimates of variable
consideration. The amount of variable consideration that is included in the transaction price is constrained and is included in
the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue will
not occur when the uncertainty is resolved.
If our services do not meet certain service level commitments, our customers are entitled to receive service credits, and
in certain cases, refunds, each representing a form of variable consideration. We have historically not experienced any
significant incidents affecting the defined levels of reliability and performance as required by our subscription contracts.
Accordingly, estimated refunds related to these agreements were not material to the periods presented.
We provide rebates and other credits within our contracts with certain customers, which are estimated based on the value
expected to be earned or claimed on the related sales transaction. Overall, the transaction price is reduced to reflect our
estimate of the amount of consideration to which we are entitled based on the terms of the contract. Estimated rebates and
other credits were not material during the periods presented.
Accounts Receivable and Allowance
Accounts receivable are recorded at the invoiced amount and are non-interest bearing. Accounts receivable are stated at
their net realizable value, net of an allowance for doubtful accounts. We have a well-established collections history from our
customers. Credit is extended to customers based on an evaluation of their financial condition and other factors. In
determining the necessary allowance for doubtful accounts, we estimate the lifetime expected credit losses against the
existing accounts receivable balance. Our estimate is based on certain factors including historical loss rates, current economic
conditions, reasonable and supportable forecasts and customer-specific circumstances. The allowance for doubtful accounts
has historically not been material. There were no material write-offs recognized in the periods presented. Accordingly, the
movements in the allowance for doubtful accounts were not material for any of the periods presented. We do not have any
off-balance-sheet credit exposure related to our customers.
Cash Equivalents and Short-Term Investments
We classify all highly liquid investments purchased with an original maturity of 90 days or less from the date of purchase
as cash equivalents and all highly liquid investments with original maturities beyond 90 days at the time of purchase as short-
term investments. Our cash equivalents and short-term investments consist of highly liquid investments in money market
funds, U.S. treasury securities, U.S. government agency securities and corporate debt securities.
We classify our investments as available-for-sale investments and present them within current assets since these
investments represent funds available for current operations and we have the ability and intent, if necessary, to liquidate any
of these investments in order to meet our liquidity needs or to grow our business, including for potential business acquisitions
or other strategic transactions. Our investments are carried at fair value, with unrealized gains and losses unrelated to credit
loss factors reported in accumulated other comprehensive income (loss) ("AOCI").
103
Our investments are reviewed periodically when there is a decline in a security’s fair value below the amortized cost
basis. We consider our intent to sell and whether it is more likely than not that we will be required to sell the securities before
the recovery of its cost basis. If either of these criteria are triggered, the amortized cost basis of the debt security is written
down to fair value through other income (expense), net. If neither criteria is met, we evaluate whether the decline in fair value
below the amortized cost basis is related to credit-related factors or other factors such as interest rate fluctuations. The factors
considered in this analysis include the extent the fair value is less than the amortized cost basis, whether there were changes
to the rating of the security by a ratings agency, whether the issuer has failed to make scheduled interest payments and other
adverse conditions as applicable. Credit-related impairment losses, limited by the amount that the fair value is less than the
amortized cost basis, are recorded through an allowance for credit losses in other income (expense), net. For purposes of
identifying and measuring credit-related impairments, our policy is to exclude the applicable accrued interest from both the
fair value and amortized cost basis of the related debt security. Accrued interest receivable, net of the allowance for credit
losses, if any, is recorded to prepaid expenses and other current assets. There were no credit-related impairments recognized
on our investments during the periods presented.
Interest income, amortization (accretion) of investments purchased at a premium (discount) and realized gains and losses
are included in interest income in the consolidated statements of operations. We use the specific identification method to
determine the cost in calculating realized gains and losses upon the sale of these investments.
Strategic Investments
Our strategic investments consist of non-marketable equity investments of privately held companies. Investments in non-
marketable equity investments of privately held companies without readily determinable fair values are measured using the
measurement alternative, as we have less than 20% ownership and do not have the ability to exercise significant influence
over their operations. The carrying amount of non-marketable equity investments is adjusted based on observable price
changes from orderly transactions for identical or similar investments of the same issuer and by impairments, when events or
circumstances indicate a decline in value has occurred. Non-marketable equity investments that have been remeasured during
the period due to an observable event or impairment are classified within Level 3 in the fair value hierarchy because we
estimate the value based on valuation methods which may include a combination of the observable transaction price at the
transaction date and other unobservable inputs including volatility, rights, and obligations of the investments we hold. Our
strategic investments are included within other noncurrent assets in the consolidated balance sheets and adjustments to their
carrying amounts are recorded in other income (expense), net in the consolidated statements of operations. There were no
material events or circumstances impacting the carrying amount of our strategic investments during the periods presented.
Fair Value of Financial Instruments
Our financial instruments consist of cash equivalents, short-term investments, accounts receivable, accounts payable,
accrued liabilities and convertible senior notes. Cash equivalents and short-term investments are recorded at fair value.
Accounts receivable, accounts payable and accrued liabilities are stated at their carrying value, which approximates fair value
due to the short-time to the expected receipt or payment date. Assets recorded at fair value on a recurring basis in the
consolidated balance sheets, consisting of cash equivalents and short-term investments, are categorized in accordance with
the fair value hierarchy based upon the level of judgment associated with the inputs used to measure their fair values.
Convertible senior notes are carried at the initially allocated liability value less unamortized debt discount and issuance costs
on the consolidated balance sheets, and the fair value of the convertible senior notes is presented at each reporting period for
disclosure purposes only.
Property and Equipment
Property and equipment, net are stated at historical cost net of accumulated depreciation. Property and equipment,
excluding leasehold improvements, are depreciated using the straight-line method over the estimated useful lives of the
104
respective assets, generally ranging from three to five years. Leasehold improvements are amortized using the straight-line
method over the shorter of the estimated useful lives of the respective assets or the lease term. Expenditures for maintenance
and repairs are expensed as incurred and significant improvements and betterments that substantially enhance the life of an
asset are capitalized.
Capitalized Internal-Use Software Development Costs
We capitalize certain costs incurred during the application development stage in connection with software development
for our cloud security platform. Costs related to preliminary project activities and post-implementation activities are expensed
as incurred. Capitalized costs are recorded as part of property and equipment in the consolidated balance sheets. Maintenance
and training costs are expensed as incurred. Capitalized internal-use software is amortized on a straight-line basis over its
estimated useful life, which is generally three years, and is recorded as cost of revenue in the consolidated statements of
operations. Capitalization of development costs, inclusive of stock-based compensation, of software for internal-use in fiscal
2021, fiscal 2020 and fiscal 2019 was $16.5 million, $13.2 million and $3.7 million, respectively. Amortization expense of
capitalized software for internal-use in fiscal 2021, fiscal 2020 and fiscal 2019 was $5.9 million, $1.4 million and $1.0
million, respectively.
Business Combinations
We account for our business combinations using the acquisition method of accounting, which requires, among other
things, allocation of the fair value of purchase consideration to the tangible and intangible assets acquired and liabilities
assumed at their estimated fair values on the acquisition date. The excess of the fair value of purchase consideration over the
values of these identifiable assets and liabilities is recorded as goodwill. When determining the fair value of assets acquired
and liabilities assumed, we make estimates and assumptions, especially with respect to intangible assets. Our estimates of fair
value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a
result, actual results may differ from estimates. During the measurement period, not to exceed one year from the date of
acquisition, we may record adjustments to the assets acquired and liabilities assumed, with a corresponding offset to goodwill
if new information is obtained related to facts and circumstances that existed as of the acquisition date. After the
measurement period, any subsequent adjustments are reflected in the consolidated statements of operations. Acquisition
costs, such as legal and consulting fees, are expensed as incurred.
Goodwill and Other Long-Lived Assets, including Acquired Intangible Assets
Goodwill represents the excess of the fair value of purchase consideration in a business combination over the fair value
of net tangible and intangible assets acquired. Goodwill amounts are not amortized, but rather tested for impairment at least
annually or more often if circumstances indicate that the carrying value may not be recoverable. No indications of
impairment of goodwill were noted during the periods presented.
Acquired intangible assets consist of identifiable intangible assets, including developed technology and customer
relationships, resulting from business combinations. Acquired finite-lived intangible assets are initially recorded at fair value
and are amortized on a straight-line basis over their estimated useful lives. Amortization expense of developed technology
and customer relationships is recorded primarily within cost of revenues and sales and marketing expenses, respectively, in
the consolidated statements of operations.
105
Long-lived assets, such as property and equipment and acquired intangible assets, are reviewed for impairment whenever
events or changes in circumstances indicate that their carrying amounts may not be recoverable. We measure the
recoverability of these assets by comparing the carrying amounts to the future undiscounted cash flows that these assets are
expected to generate. If the total of the future undiscounted cash flows are 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 the fair value. In fiscal 2021
and fiscal 2020, we recognized asset impairments of $0.4 million and $0.7 million, respectively, in general and administrative
expenses in the consolidated statement of operations related primarily to the abandonment of a leased facility and relocation
of our corporate headquarters.
Derivative Instruments
We enter into foreign currency forward contracts, a portion of which we designate as cash flow hedges, in order to
manage the volatility of cash flows that relate to our cost of revenues and operating expenses denominated in foreign
currencies.
Gains or losses related to our cash flow hedges are recorded as a component of AOCI on the consolidated statements of
stockholders' equity until the forecasted transaction occurs in earnings. When the forecasted transaction occurs, the related
gains and losses are reclassified into earnings within the financial statement line item associated with the underlying hedged
transaction. If the underlying hedged transaction does not occur, or it becomes probable that the hedged transaction will not
occur, the cumulative unrealized gain or loss is reclassified immediately from AOCI into earnings within the financial
statement line item associated with the underlying hedged transaction. We measure hedge effectiveness using regression
analysis at hedge inception and periodically thereafter. We include time value in our effectiveness assessment.
We recognize changes in the fair value of non-designated derivative instruments within other income (expense), net in
the consolidated statements of operations in the same period that the fair value measurement occurs.
106
All of our derivative instruments are measured at fair value. We have elected to present the derivative assets and
derivative liabilities on a gross basis on the consolidated balance sheets. Derivative instruments are classified in the
consolidated statements of cash flows as cash from operating activities, which reflect the classification of the underlying
hedged transactions.
Operating Leases
We enter into operating lease arrangements for real estate assets related to office space and co-location assets related to
space and racks at data center facilities. We determine if an arrangement contains a lease at its inception by assessing whether
there is an identified asset and whether the arrangement conveys the right to control the use of the identified asset in
exchange for consideration. Operating leases related balances are included in "operating lease right-of-use assets," "operating
lease liabilities," and "operating lease liabilities, noncurrent" in the consolidated balance sheets. Right-of-use assets represent
our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make payments arising
from the lease. Operating lease right-of-use assets and lease liabilities are recognized at the lease commencement date based
on the present value of lease payments over the lease term. Lease payments consist of the fixed payments under the
arrangement. The operating lease liabilities are adjusted for any unpaid lease incentives, such as tenant improvement
allowances. Variable costs, such as maintenance and utilities based on actual usage, are not included in the measurement of
right-to-use assets and lease liabilities but are expensed when the event determining the amount of variable consideration to
be paid occurs. As the implicit rate of our leases is not determinable, we use an incremental borrowing rate ("IBR") based on
the information available at the lease commencement date in determining the present value of lease payments. The lease
expense is recognized on a straight-line basis over the lease term.
We generally use the base, non-cancelable lease term when recognizing the right-of-use assets and lease liabilities,
unless it is reasonably certain that a renewal or termination option will be exercised. We account for lease components and
non-lease components as a single lease component.
Leases with a term of twelve months or less are not recognized on the consolidated balance sheets. We recognize lease
expense for these leases on a straight-line basis over the term of the lease.
Stock-Based Compensation
Compensation expense related to stock-based awards granted to employees and non-employees is calculated based on
the fair value of stock-based awards on the date of grant. We recognize stock-based compensation expense over an award’s
requisite service period based on the award’s fair value.
Stock-based compensation for common stock options is recognized based on the fair value of the awards granted,
determined using the Black-Scholes option pricing model. Stock-based compensation expense is recognized on a straight-line
basis over the requisite service period, generally four years.
Stock-based compensation for purchase rights granted under the employee stock purchase plan is based on the Black-
Scholes option pricing model fair value of the number of awards estimated as of the beginning of the offering period. Stock-
based compensation expense is recognized following the straight-line attribution method over the offering period.
Stock-based compensation for restricted stock units is measured based on the market closing price of our common
stock on the grant date. Stock-based compensation expense is recognized on a straight-line basis over the requisite service
period, generally four years.
Stock-based compensation for performance stock awards (“PSAs”) which have the same grant date and service
inception date, is based on the probable number of shares to be attained and the market closing price of our common stock at
the grant date. For PSAs where the service inception date of the awards precedes the grant date, stock-based compensation
expense is recognized based on the number of PSAs for which it is probable that the performance condition will be met,
107
using the accelerated attribution method and the market closing price of our common stock at each reporting date up to the
grant date. The number of these PSAs for which it is probable that the performance condition will be met is determined using
management’s best estimate at the end of each reporting period. At the completion of the performance period for these PSAs,
any earned PSAs are granted upon approval of the compensation committee of our board of directors.
Convertible Senior Notes
In accounting for the issuance of the convertible senior notes, we separated the convertible senior notes into liability
and equity components. The carrying amounts of the liability component was calculated by measuring the fair value of
similar liabilities that do not have associated convertible features. The carrying amount of the equity component representing
the conversion option was determined by deducting the fair value of the liability component from the par value of the
convertible senior notes as a whole. This difference represents the debt discount that is amortized to interest expense over the
respective terms of the convertible senior notes using the effective interest rate method. The equity component was recorded
in additional paid-in capital and is not remeasured as long as it continues to meet the conditions for equity classification.
In accounting for the related debt issuance costs, we allocated the total amount incurred to the liability and equity
components of the convertible senior notes based on their relative values. Issuance costs attributable to the liability
component are being amortized to interest expense over the contractual term of the convertible senior notes. The issuance
costs attributable to the equity component were netted against the equity component representing the conversion option in
additional paid-in capital.
To the extent that we receive the convertible senior notes conversion requests prior to their maturity, a portion of the
equity component is classified as temporary equity, which is measured as the difference between the principal and net
carrying amount of the convertible senior notes requested for conversion. Upon settlement of the conversion requests, the
difference between the fair value and the amortized book value of the liability component of the convertible senior notes
requested for conversion is recorded as a gain or loss on early note conversion. The fair value of the convertible senior notes
is measured based on a similar liability that does not have an associated convertible feature based on the remaining term of
the convertible senior notes.
Research and Development
Our research and development expenses support our efforts to add new features to our existing offerings and to ensure
the reliability, availability and scalability of our solutions. Our cloud platform is software-driven, and our research and
development teams employ software engineers in the design and the related development, testing, certification and support of
our solutions. Accordingly, the majority of our research and development expenses result from employee-related costs,
including salaries, bonuses, benefits, stock-based compensation and costs associated with technology tools used by our
engineers.
Advertising Expenses
Advertising expenses are charged to sales and marketing expenses in the consolidated statements of operations as
incurred. We recognized advertising expense of $11.8 million, $11.8 million and $8.6 million in fiscal 2021, fiscal 2020 and
fiscal 2019, respectively.
108
Warranties and Indemnification
Our cloud platform is generally warranted to be free of defects under normal use and to perform substantially in
accordance with the subscription agreement. Additionally, our contracts generally include provisions for indemnifying
customers and channel partners against liabilities if our services infringe or misappropriate a third party’s intellectual
property rights. Costs and liabilities incurred as a result of warranties and indemnification obligations were not material
during the periods presented.
Legal Contingencies
We may be subject to legal proceedings and litigation arising from time to time. We record a liability when we believe
that it is both probable that a loss has been incurred and the amount can be reasonably estimated. We periodically evaluate
developments in our legal matters that could affect the amount of liability that we accrue, if any, and adjust, as appropriate.
Until the final resolution of any such matter for which we may be required to record a liability, there may be a loss exposure
in excess of the liability recorded and such amount could be significant. We expense legal fees as incurred.
Income Taxes
We account for income taxes using the asset and liability method. Deferred income taxes are recognized by applying the
enacted statutory tax rates applicable to future years to differences between the carrying amounts of existing assets and
liabilities and their respective tax bases and net operating loss and tax credit carryforwards. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized 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.
Comprehensive Loss
Comprehensive loss is comprised of the net loss and other comprehensive income (loss). Our other comprehensive
income (loss) includes unrealized gains and losses on available-for-sale securities and unrealized gains and losses and
realized gains and losses reclassified into net loss on cash flow hedges, as reflected in the consolidated statements of
comprehensive loss.
Net Loss Per Share
Basic net loss per share 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.
Diluted earnings per share adjusts basic earnings per share for all potentially dilutive common stock equivalents
outstanding during the period. Potentially dilutive securities consist primarily of stock options, shares subject to repurchase
from early exercised stock options, share purchase rights under the employee stock purchase plan, unvested restricted stock
units ("RSUs"), unvested performance stock awards ("PSAs") and shares related to convertible senior notes. Since we have
reported net losses for all periods presented, we have excluded all potentially dilutive securities from the calculation of the
diluted net loss per share as their effect is antidilutive and accordingly, basic and diluted net loss per share is the same for all
109
periods presented.
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02"), as amended, which
requires recognition of lease assets and liabilities for leases with terms of more than 12 months. This standard is effective for
fiscal years beginning after December 15, 2018, with early adoption permitted. We adopted this standard effective August 1,
2019 using the transitional provision which allows for the adoption of Topic 842 to be applied on a modified retrospective
basis at the beginning of the fiscal year of adoption in fiscal 2020. The adoption of this new standard resulted in the
recognition of operating lease right-of-use assets of $16.9 million and operating lease liabilities of $18.0 million. We have
elected the package of practical expedients permitted under the transition guidance, which allows us to carryforward our
historical lease classification, our assessment on whether a contract is or contains a lease, and our initial direct costs for any
leases that existed prior to adoption of the new standard. We have also elected to combine lease and non-lease components
for real estate and co-location arrangements. In addition, we elected not to recognize lease liabilities and related right-of-use
assets for leases that, at the lease commencement date, have a lease term of 12 months or less.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740) ("ASU 2019-12"): Simplifying the
Accounting for Income Taxes. The new standard eliminates certain exceptions related to the approach for intraperiod tax
allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities
for outside basis differences related to changes in ownership of equity method investments and foreign subsidiaries. The
guidance also simplifies aspects of accounting for franchise taxes and enacted changes in tax laws or rates, and clarifies the
accounting for transactions that result in a step-up in the tax basis of goodwill. For public business entities, it is effective for
fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is
permitted. We early adopted this standard as of November 1, 2019, and it did not have a material impact to the consolidated
financial statements.
In June 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-13, Financial Instruments-
Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This standard 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. We adopted this standard on August 1, 2020, and it did not have a material impact to the
consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
In June 2020, the FASB issued ASU No. 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and
Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40). This standard eliminates the beneficial
conversion and cash conversion accounting models for convertible instruments. It also amends the accounting for certain
contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. In
addition, the new guidance modifies how particular convertible instruments and certain contracts that may be settled in cash
or shares impact the diluted earnings per share computation. For public business entities, it is effective for fiscal years
beginning after December 15, 2021, including interim periods within those fiscal years using the fully retrospective or
modified retrospective method. The ASU No. 2020-06 is effective for us beginning August 1, 2022, although early adoption
is permitted. We are currently evaluating the potential impact of this standard on the consolidated financial statements.
110
Note 2. Revenue Recognition
Disaggregation of Revenue
Subscription and support revenue is recognized over time and accounted for approximately 97%, 98% and 99% of our
revenue in fiscal 2021, fiscal 2020 and fiscal 2019, respectively.
The following table summarizes the revenue by region based on the shipping address of customers who have
contracted to use our cloud platform:
Amount
2021
% Revenue
Year Ended July 31,
2020
% Revenue
Amount
Amount
2019
% Revenue
$
329,299
(in thousands, except for percentage data)
49 % $
210,288
49 % $
253,138
76,105
14,558
673,100
38
11
2
100 % $
174,497
38,793
7,691
431,269
40
9
2
100 % $
United States
Europe, Middle East
and Africa (*)
Asia Pacific
Other
Total
$
_____
148,807
124,437
23,838
5,754
302,836
49 %
41
8
2
100 %
(*) Revenue from the United Kingdom represented 10% of the total revenue in the periods presented.
The following table summarizes the revenue from contracts by type of customer:
Amount
2021
% Revenue
Year Ended July 31,
2020
% Revenue
Amount
Amount
2019
% Revenue
Channel partners
Direct customers
Total
$
$
632,416
40,684
673,100
Significant Customers
(in thousands, except for percentage data)
96 % $
4
100 % $
414,908
16,361
431,269
94 % $
6
100 % $
289,579
13,257
302,836
96 %
4
100 %
No single customer accounted for 10% or more of the total revenue in the periods presented. The following table
summarizes the concentration of 10% or more of the total balance of accounts receivable, net:
Channel partner A
July 31,
2021
2020
*
11 %
111
* Represents less than 10%.
Contract Balances
Contract liabilities consist of deferred revenue and include payments received in advance of performance under the
contract. Such amounts are recognized as revenue over the contractual period. Deferred revenue, including current and
noncurrent balances as of July 31, 2021 and July 31, 2020 was $630.6 million and $369.8 million, respectively. In fiscal
2021, fiscal 2020 and fiscal 2019 we recognized revenue of $335.5 million, $220.9 million and $143.9 million, respectively,
that was included in the corresponding contract liability balance at the beginning of the related fiscal year.
We receive payments from customers based upon contractual billing schedules and accounts receivable are recorded
when the right to consideration becomes unconditional. Payment terms on invoiced amounts are typically 30 days but may be
up to 90 days for some of our channel partners. Contract assets include amounts related to our contractual right to
consideration for both completed and partially completed performance obligations that may not have been invoiced and such
amounts have historically not been material.
Remaining Performance Obligations
The typical subscription and support term is one to three years. Most of our subscription and support contracts are non-
cancelable over the contractual term. However, customers typically have the right to terminate their contracts for cause, if we
fail to perform. As of July 31, 2021, the aggregate amount of the transaction price allocated to remaining performance
obligations was $1,553.5 million. We expect to recognize 49% of the transaction price over the next 12 months and 97% of
the transaction price over the next three years, with the remainder recognized thereafter.
Costs to Obtain and Fulfill a Contract
We capitalize sales commission and associated payroll taxes paid to internal sales personnel that are incremental to the
acquisition of channel partner and direct customer contracts. These costs are recorded as deferred contract acquisition costs in
the consolidated balance sheets. We determine whether costs should be deferred based on our sales compensation plans, if the
commissions are in fact incremental and would not have occurred absent the customer contract.
Sales commissions for renewal of a contract are not considered commensurate with the commissions paid for the
acquisition of the initial contract given the substantive difference in commission rates in proportion to their respective
contract values. Commissions paid upon the initial acquisition of a contract are amortized over an estimated period of benefit
of five years while commissions paid for renewal contracts are amortized over the contractual term of the renewals.
Amortization of deferred contract acquisition costs is recognized on a straight-line basis commensurate with the pattern of
revenue recognition and included in sales and marketing expense in the consolidated statements of operations. We determine
the period of benefit for commissions paid for the acquisition of the initial contract by taking into consideration the expected
subscription term and expected renewals of our customer contracts, the duration of our relationships with our customers,
customer retention data, our technology development lifecycle and other factors. We periodically review the carrying amount
of deferred contract acquisition costs to determine whether events or changes in circumstances have occurred that could
impact the period of benefit of these deferred costs. We did not recognize any impairment losses of deferred contract
acquisition costs during the periods presented.
The activity of the deferred contract acquisition costs consisted of the following:
112
Beginning balance
Capitalization of contract acquisition costs
Amortization of deferred contract acquisition costs
Ending balance
2021
Year Ended July 31,
2020
(in thousands)
2019
$
$
109,915 $
137,673
(40,558)
207,030 $
69,785 $
65,052
(24,922)
109,915 $
55,910
32,526
(18,651)
69,785
The outstanding balance of the deferred contract acquisition costs consisted of the following:
Deferred contract acquisition costs
Deferred contract acquisition costs, noncurrent
Total deferred contract acquisition costs
July 31,
2021
2020
(in thousands)
$
$
57,373 $
149,657
207,030 $
32,240
77,675
109,915
Sales commissions accrued but not paid as of July 31, 2021 and 2020, totaled $46.7 million and $21.0 million,
respectively, which are included within accrued compensation in the consolidated balance sheets.
Note 3. Cash Equivalents and Short-Term Investments
Cash equivalents and short-term investments consisted of the following as of July 31, 2021:
Cash equivalents:
Money market funds
U.S. government agency securities
Total cash equivalents
Short-term investments:
U.S. treasury securities
U.S. government agency securities
Corporate debt securities
Total short-term investments
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
(in thousands)
$
$
$
167,337 $
10,999
178,336 $
387,428 $
511,622
327,512
$ 1,226,562 $
— $
—
— $
9 $
144
102
255 $
— $
—
— $
167,337
10,999
178,336
387,420
(17) $
511,732
(34)
(112)
327,502
(163) $ 1,226,654
Total cash equivalents and short-term investments
$ 1,404,898 $
255 $
(163) $ 1,404,990
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Cash equivalents and short-term investments consisted of the following as of July 31, 2020:
Cash equivalents:
Money market funds
U.S. treasury securities
U.S. government agency securities
Total cash equivalents
Short-term investments:
U.S. treasury securities
U.S. government agency securities
Corporate debt securities
Total short-term investments
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
(in thousands)
$
$
$
51,690 $
39,997
14,997
106,684 $
415,539 $
595,725
216,879
$ 1,228,143 $
— $
—
—
— $
152 $
186
569
907 $
— $
(1)
—
(1) $
51,690
39,996
14,997
106,683
415,564
(127) $
595,797
(114)
(87)
217,361
(328) $ 1,228,722
Total cash equivalents and short-term investments
$ 1,334,827 $
907 $
(329) $ 1,335,405
The amortized cost and fair value of our short-term investments based on their stated maturities consisted of the
following as of July 31, 2021:
Due within one year
Due between one to three years
Total
Fair Value
Amortized
Cost
(in thousands)
$ 800,659 $ 800,793
425,903 425,861
$ 1,226,562 $ 1,226,654
Short-term investments that were in an unrealized loss position as of July 31, 2021 consisted of the following:
U.S. treasury securities
U.S. government agency securities
Corporate debt securities
Total
Less than 12 Months
Fair
Value
Unrealized
Losses
Greater than 12 Months
Unrealized
Losses
Fair
Value
Total
Fair
Value
Unrealized
Losses
$ 306,908 $
104,782
157,208
$ 568,898 $
(17) $
(34)
(112)
(163) $
(in thousands)
— $
—
—
— $
— $ 306,908 $
— 104,782
— 157,208
— $ 568,898 $
(17)
(34)
(112)
(163)
Short-term investments that were in an unrealized loss position as of July 31, 2020 consisted of the following:
114
Less than 12 Months
Fair
Value
Unrealized
Losses
Greater than 12 Months
Unrealized
Losses
Fair
Value
Total
Fair
Value
Unrealized
Losses
U.S. treasury securities
U.S. government agency securities
Corporate debt securities
Total
$ 347,959 $
340,503
105,953
$ 794,415 $
(in thousands)
— $
(127) $
(113)
(87)
(327) $ 5,502 $
5,502
—
— $ 347,959 $
(1) 346,005
— 105,953
(1) $ 799,917 $
(127)
(114)
(87)
(328)
We review the individual securities that have unrealized losses in our short-term investment portfolio on a regular basis.
We evaluate, among others, whether we have the intention to sell any of these investments and whether it is not more likely
than not that we will be required to sell any of them before recovery of the amortized cost basis. Neither of these criteria were
met in any period presented. We additionally evaluate whether the decline in fair value of the corporate debt securities below
its amortized cost basis is related to credit losses or other factors. Based on this evaluation, we determined that unrealized
losses of the above securities were primarily attributable to changes in interest rates and non credit-related factors.
Accordingly, we determined that an allowance for credit losses was unnecessary for our short-term investments as of July 31,
2021 and 2020.
We recorded $3.9 million and $3.8 million of accrued interest receivable within prepaid expenses and other current assets
in the consolidated balance sheets as of July 31, 2021 and 2020, respectively.
Strategic Investments
During fiscal 2021, we invested an additional $3.1 million in non-marketable equity securities of privately held
companies which do not have a readily determinable fair value. These investments are primarily accounted for under the cost
method as we have less than 20% ownership and do not have the ability to exercise significant influence over their
operations. The carrying amount of our strategic investments was $5.1 million and $2.0 million as of July 31, 2021 and 2020,
respectively, which are included within other noncurrent assets in the consolidated balance sheets. There were no material
events or circumstances impacting the carrying amount of our strategic investments during the periods presented.
Note 4. Fair Value Measurements
Fair value is defined 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.
Our money market funds are classified within Level I due to the highly liquid nature of these assets and have quoted
prices in active markets. Certain of our investments in available-for-sale securities (i.e., U.S. treasury securities, U.S.
115
government agency securities and corporate debt securities), as well as our assets and liabilities arising from our foreign
currency forward contracts, are classified within Level II. The fair value of our Level II financial assets and liabilities is
determined by using inputs based on non-binding market consensus prices that are primarily corroborated by observable
market data or quoted market prices for similar instruments, for substantially the full term of the financial assets and
liabilities.
Assets and liabilities that are measured at fair value on a recurring basis consisted of the following as of July 31, 2021:
Level I
Level II
Level III
Quoted Prices
in Active
Markets for
Identical Assets
Significant
Other
Observable
Inputs
Significant
Unobservable
Inputs
Fair Value
(in thousands)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Cash equivalents:
Money market funds
U.S. treasury securities
Total cash equivalents
Short-term investments:
U.S. treasury securities
U.S. government agency securities
Corporate debt securities
Total short-term investments
$
$
$
167,337 $
10,999
178,336 $
167,337 $
—
167,337 $
— $
10,999
10,999 $
387,420 $
511,732
327,502
$ 1,226,654 $
— $
—
—
— $ 1,226,654 $
387,420 $
511,732
327,502
Total cash equivalents and short-term investments
$ 1,404,990 $
167,337 $ 1,237,653 $
Designated derivative instruments:
Foreign currency contracts assets-current (1)
Foreign currency contracts assets-noncurrent (2)
Foreign currency contracts liabilities-current (3)
Foreign currency contracts liabilities-noncurrent (4)
Non-designated derivative instruments:
Foreign currency contracts assets-current (1)
Foreign currency contracts liabilities-current (3)
$
$
$
$
$
$
459 $
26 $
1,083 $
42 $
— $
— $
— $
— $
459 $
26 $
1,083 $
42 $
83 $
240 $
— $
— $
83 $
240 $
116
(1)Reported as prepaid expenses and other current assets in the consolidated balance sheets.
(2)Reported as other noncurrent assets in the consolidated balance sheets.
(3)Reported as accrued expenses and other current liabilities in the consolidated balance sheets.
(4)Reported as other noncurrent liabilities in the consolidated balance sheets.
Assets that are measured at fair value on a recurring basis consisted of the following as of July 31, 2020:
Level I
Level II
Level III
Quoted Prices
in Active
Markets for
Identical Assets
Significant
Other
Observable
Inputs
Significant
Unobservable
Inputs
Fair Value
(in thousands)
Cash equivalents:
Money market funds
U.S. treasury securities
U.S. government agency securities
Total cash equivalents
Short-term investments:
U.S. treasury securities
U.S. government agency securities
Corporate debt securities
Total short-term investments
$
$
$
51,690 $
39,996
14,997
106,683 $
51,690 $
—
—
51,690 $
— $
39,996
14,997
54,993 $
415,564 $
595,797
217,361
$ 1,228,722 $
— $
—
—
— $ 1,228,722 $
415,564 $
595,797
217,361
Total cash equivalents and short-term investments
$ 1,335,405 $
51,690 $ 1,283,715 $
We did not have transfers between levels of the fair value hierarchy of assets measured at fair value during the periods
presented. Additionally, we did not have derivatives in fiscal 2020.
Refer to Note 9, Convertible Senior Notes, for the carrying amount and estimated fair value of our convertible senior
notes as of July 31, 2021 and 2020.
117
—
—
—
—
—
—
—
—
—
Note 5. Property and Equipment and Purchased Intangible Assets
Property and equipment consisted of the following:
Hosting equipment
Computers and equipment
Purchased software
Capitalized internal-use software
Furniture and fixtures
Leasehold improvements
Total property and equipment, gross
Less: Accumulated depreciation and amortization
Total property and equipment, net
Estimated Useful Life
3-4 years
3-5 years
3 years
3 years
5 years
Shorter of useful life or lease term
July 31,
2021
2020
(in thousands)
$
$
130,981 $
5,599
1,311
39,542
1,021
7,339
185,793
(77,217)
108,576 $
87,418
3,875
1,311
23,081
1,965
8,712
126,362
(50,628)
75,734
Purchased intangible assets consist of internet protocol (IP) addresses, which are amortized on a straight-line basis over
an estimated useful life of 10 years. As of July 31, 2021, the historical cost and accumulated amortization was $3.0 million
and $0.4 million, respectively. As of July 31, 2020, the historical cost and accumulated amortization was $2.5 million and
$0.1 million, respectively. Purchased intangible assets are included within other noncurrent assets in the consolidated balance
sheets.
We recognized depreciation and amortization expense on property and equipment and purchased intangible assets of
$29.7 million, $17.7 million and $10.4 million in fiscal 2021, fiscal 2020 and fiscal 2019, respectively.
Note 6. Business Combinations
Smokescreen Technologies Private Limited
On June 1, 2021, we completed the acquisition of Smokescreen Technologies Private Limited (“Smokescreen”), a
technology company incorporated in India. Smokescreen is a leader in active defense and deception technology.
Smokescreen's cutting-edge capabilities will be integrated into the Zscaler Zero Trust Exchange platform, further building
upon our ability to detect sophisticated, highly targeted attacks, ransomware and lateral movement attempts.
Pursuant to the terms of the stock purchase agreement, the aggregate purchase price was approximately $11.7 million
in cash. In connection with this acquisition, we completed a valuation of the acquired intangible assets as of June 1, 2021, in
order to allocate the purchase price consideration. The purchase price allocation resulted in the recognition of $5.7 million of
goodwill, $5.6 million of developed technology and $2.1 million of customer relationships. The developed technology was
valued using a replacement cost approach, which is based on the cost of a market participant to reconstruct a substitute asset
of comparable utility. The customer relationships were also valued using the replacement cost approach, which is based on
the cost a market participant would incur to generate the acquired portfolio of customers. Goodwill represents the excess of
the purchase price paid over the fair value of the net assets acquired and is primarily attributable to the acquired workforce
and expected operating synergies. Both goodwill and acquired intangible assets will be fully deductible for income tax
purposes. We incurred approximately $0.5 million of acquisition related costs, which were recorded as general and
administrative expenses in fiscal 2021.
118
The acquisition qualified as a stock transaction for tax purposes. As a result, we recognized a deferred tax liability of
approximately $1.6 million, generated primarily from the difference between the tax basis and fair value of the acquired
developed technology, which increased goodwill by the same amount.
The allocation of the purchase price consideration consisted of the following:
Assets acquired:
Cash and other assets
Acquired intangible assets:
Developed technology
Customer relationships
Goodwill
Total
Less liabilities assumed:
Other liabilities
Deferred tax liability
Total
Total purchase price consideration
Trustdome Limited
Amount
(in thousands)
Estimated
Useful Life
5 years
5 years
$
$
$
$
$
1,347
5,600
2,100
5,686
14,733
1,516
1,558
3,074
11,659
On April 15, 2021, we completed the acquisition of Trustdome Limited (“Trustdome”), a technology company
incorporated in Israel. Trustdome is a leading innovator in Cloud Infrastructure Entitlement Management, which we plan to
integrate with our existing Cloud Security Posture Management offering and provide a comprehensive solution for reducing
public cloud attack surfaces and improving security posture. With this acquisition, we also have expanded our global
footprint with our first development center in Israel.
Pursuant to the terms of the purchase agreement, the aggregate purchase price was approximately $31.1 million in
cash. Additionally, certain of Trustdome's employees who became our employees are entitled to receive deferred merger
consideration payable in the form of shares of our authorized common stock and restricted stock units. These awards are
subject to time-based vesting and will be recognized as stock-based compensation expense during the post-combination
period.
In connection with this acquisition, we completed a valuation of the acquired intangible assets as of April 15, 2021, in
order to allocate the purchase price consideration. The purchase price allocation resulted in the recognition of $23.2 million
of goodwill and $7.2 million of developed technology. The developed technology was valued using a replacement cost
approach, which is based on the cost of a market participant to reconstruct a substitute asset of comparable utility. Goodwill
represents the excess of the purchase price paid over the fair value of the net assets acquired and is primarily attributable to
the acquired workforce and expected operating synergies. Both goodwill and acquired developed technology will be fully
deductible for income tax purposes. We incurred approximately $0.4 million of acquisition related costs, which were
recorded as general and administrative expenses in fiscal 2021.
The acquisition qualified as a stock transaction for tax purposes. As a result, we recognized a deferred tax liability for
approximately $0.6 million, generated primarily from the difference between the tax basis and fair value of the acquired
developed technology, which increased goodwill by the same amount.
119
The allocation of the purchase price consideration consisted of the following:
Assets acquired:
Cash and other assets
Acquired intangible assets:
Developed technology
Goodwill
Total
Less Liabilities assumed:
Other liabilities
Deferred tax liability
Total
Total purchase price consideration
Edgewise Networks Inc.
Amount
(in thousands)
Estimated
Useful Life
5 years
$
$
$
$
$
1,611
7,200
23,232
32,043
277
624
901
31,142
On May 22, 2020, we completed the acquisition of Edgewise Networks Inc. ("Edgewise"), a technology company
incorporated in the United States. Edgewise is a pioneer in securing application-to-application communications in public
clouds and data centers. Edgewise customers measurably reduce the attack surface to lower the risk of application
compromise and data breaches by simplifying the security of east-west communications through identity-based segmentation.
With this acquisition, we secure workloads and application-to-application communications for our customers.
Pursuant to the terms of the purchase agreement, the aggregate purchase price consideration was approximately $30.7
million in cash. Additionally, certain of Edgewise's employees who became our employees are entitled to receive additional
consideration in the form of restricted stock units. These awards are subject to time-based vesting and will be recognized as
stock-based compensation expense during the post-combination period.
In connection with this acquisition, we completed a valuation of the acquired intangible assets as of May 22, 2020, in
order to allocate the purchase price consideration. The purchase price allocation resulted in the recognition of $16.7 million
of goodwill, $13.9 million of developed technology and $1.3 million of customer relationships. The developed technology
was valued using a replacement cost approach, which is based on the cost of a market participant to reconstruct a substitute
asset of comparable utility. The customer relationships were also valued using the replacement cost approach, which is based
on the cost a market participant would incur to generate the acquired portfolio of customers. Goodwill represents the excess
of the purchase price paid over the fair value of the net assets acquired and is primarily attributable to the acquired workforce
and expected operating synergies. Goodwill is not expected to be deductible for income tax purposes. We incurred
approximately $0.6 million of acquisition related costs, which were recorded as general and administrative expenses in fiscal
2020.
The acquisition qualified as a stock transaction for tax purposes. As a result, we recognized a deferred tax liability for
approximately $0.6 million, generated primarily from the difference between the tax basis and fair value of the acquired
developed technology and customer relationships, which increased goodwill by the same amount. As we had a full valuation
allowance as of July 31, 2020, we recorded an income tax benefit as a result of the reduction of the valuation allowance due
to establishment of the deferred tax liability in the consolidated statement of operations in fiscal 2020. Refer to Note 14,
Income Taxes, for further information.
120
The allocation of the purchase price consideration consisted of the following:
Assets acquired:
Cash and other assets
Operating lease right-of-use asset
Acquired intangible assets:
Developed technology
Customer relationships
Goodwill
Total
Less liabilities assumed:
Accounts payable and accrued liabilities
Deferred revenue
Operating lease liability
Deferred tax liability
Total
Total purchase price consideration
Cloudneeti Corporation
Amount
(in thousands)
Estimated
Useful Life
5 years
5 years
$
$
$
$
$
294
630
13,900
1,300
16,709
32,833
333
540
630
620
2,123
30,710
On April 16, 2020, we completed the acquisition of Cloudneeti Corporation ("Cloudneeti"), a technology company
incorporated in the United States. Cloudneeti is a cloud security posture management company, which prevents and
remediates application misconfigurations in cloud service models, including SaaS; infrastructure as a service, or IaaS; and
platform as a service, or PaaS. With this acquisition, we further provide our industry-leading data protection coverage for our
customers.
Pursuant to the terms of the purchase agreement, the aggregate purchase price consideration was approximately $8.9
million in cash. Additionally, certain of Cloudneeti's employees who became our employees are entitled to receive additional
consideration payable in the form of restricted stock units. These awards are subject to performance and time-based vesting
and will be recognized as stock-based compensation expense during the post-combination period.
In connection with this acquisition, we completed a valuation of the acquired intangible assets as of April 16, 2020, in
order to allocate the purchase price consideration. The purchase price allocation resulted in the recognition of $5.9 million of
goodwill and $3.5 million of developed technology. The developed technology was valued using a replacement cost
approach, which is based on the cost of a market participant to reconstruct a substitute asset of comparable utility. Goodwill
represents the excess of the purchase price paid over the fair value of the net assets acquired and is primarily attributable to
the acquired workforce and expected operating synergies. Goodwill is not expected to be deductible for income tax purposes.
We incurred approximately $0.5 million of acquisition related costs, which were recorded as general and administrative
expenses in fiscal 2020.
The acquisition qualified as a stock transaction for tax purposes. As a result, we recognized a deferred tax liability for
approximately $0.5 million, generated primarily from the difference between the tax basis and fair value of the acquired
developed technology, which increased goodwill by the same amount. As we have a full valuation allowance as of July 31,
2020, we recorded an income tax benefit as a result of the reduction of the valuation allowance due to establishment of the
121
deferred tax liability in the consolidated statement of operations in fiscal 2020. Refer to Note 14, Income Taxes, for further
information.
The allocation of the purchase price consideration consisted of the following:
Assets acquired:
Cash and other assets
Acquired intangible assets:
Developed technology
Goodwill
Total
Less liabilities assumed:
Deferred tax liability
Other liabilities
Total
Total purchase price consideration
Amount
(in thousands)
Estimated
Useful Life
5 years
$
$
$
$
$
66
3,500
5,871
9,437
490
12
502
8,935
122
Appsulate, Inc.
On May 29, 2019, we completed the acquisition Appsulate, Inc. ("Appsulate"), an early stage technology company
incorporated in the United States. Pursuant to the terms of the purchase agreement, the aggregate purchase price was
approximately $12.9 million in cash.
In connection with this acquisition, we completed a valuation of the acquired intangible assets as of May 29, 2019, in
order to allocate the purchase price consideration. The purchase price allocation resulted in the recognition of $7.3 million of
goodwill and $7.0 million of developed technology. The developed technology was valued using a replacement cost
approach, which is based on the cost a market participant to reconstruct a substitute asset of comparable utility. Goodwill
represents the excess of the purchase price paid over the fair value of the net assets acquired and is primarily attributable to
the acquired workforce and expected operating synergies. Goodwill is not expected to be deductible for income tax purposes.
We incurred approximately $0.3 million of acquisition related costs, which were recorded as general and administrative
expenses in fiscal 2019.
The acquisition qualified as a stock transaction for tax purposes. As a result, we recognized a deferred tax liability for
approximately $1.4 million, generated primarily from the difference between the tax basis and fair value of the acquired
developed technology, which increased goodwill by the same amount. As we have a full valuation allowance as of July 31,
2019, we recorded an income tax benefit as a result of the reduction of the valuation allowance due to establishment of the
deferred tax liability in the consolidated statement of operations in fiscal 2019. Refer to Note 14, Income Taxes, for further
information.
The allocation of the purchase price consideration, consisted of the following:
Assets acquired:
Cash and cash equivalents
Acquired intangible assets:
Developed technology
Goodwill
Total
Less liabilities assumed:
Deferred tax liability
Total purchase price consideration
Amount
(in thousands)
Estimated
Useful Life
$
$
$
$
4 years
13
7,000
7,281
14,294
1,422
12,872
123
Other acquisitions
In fiscal 2019, we also completed the acquisition of a technology company for a purchase price approximately
$1.1 million in cash. The goodwill and acquired intangible assets recorded for this acquisition were not material to the
consolidated financial statements.
Pro forma Financial Information
The pro forma financial information from the above business acquisitions, assuming the acquisition had occurred as of
the beginning of the fiscal year prior to the fiscal year of the acquisition, as well as revenue and earnings generated during the
current fiscal year, were not material for disclosure purposes.
Note 7. Derivative Instruments
We implemented a foreign currency risk management program during the fiscal 2021. As a global business, we are
exposed to foreign currency exchange rate risk. Substantially all of our revenue is transacted in U.S. dollars; however, a
portion of our cost of revenues and operating expenditures are incurred outside of the United States and are denominated in
foreign currencies, making them subject to fluctuations in foreign currency exchange rates. In order to mitigate the impact of
foreign currency fluctuations on our future cash flows and earnings, we enter into foreign currency forward contracts, which
we designate as cash flow hedges. All cash flow hedges were considered effective during fiscal 2021.
As of July 31, 2021, the total notional amount of our outstanding foreign currency forward contracts was $118.9
million for designated and $28.2 million for non-designated foreign currency forward contracts. The maximum length of time
over which forecasted foreign currency denominated operating expenses are hedged is 18 months. Substantially all of the
unrealized gains and losses related to our cash flow hedges are expected to be released into earnings over the next 12 months.
Refer to Note 4, Fair Value Measurements, for the fair value of our derivative instruments as reported on the consolidated
balance sheet as of July 31, 2021.
During the fiscal 2021, the unrealized gains and losses related to our cash flow hedges that were recognized in AOCI
and the gains and losses reclassified into the consolidated statement of operations were not material. During fiscal 2021,
changes in the fair value of our non-designated derivative instruments recorded in other income, net within the consolidated
statement of operations were not material.
Our derivative contracts expose us to credit risk to the extent that the counterparties may be unable to meet the terms of
the underlying contracts. We mitigate this credit risk by transacting with major financial institutions with high credit ratings
and standards. We periodically assess the creditworthiness of our counterparties to ensure they continue to meet our credit
quality requirements. We also enter into master netting arrangements, which permit net settlement of transactions with the
same counterparty. The potential impact of these rights of set-off associated with our derivative instruments was not material
as of July 31, 2021. We are not required to pledge, and are not entitled to receive, cash collateral related to these derivative
instruments. We do not enter into derivative contracts for trading or speculative purposes.
124
Note 8. Goodwill and Acquired Intangible Assets
Goodwill
The changes in the carrying amount of goodwill consisted of the following:
Balance as of July 31, 2020
Goodwill acquired
Balance as of July 31, 2021
Acquired Intangible Assets
Amount
(in thousands)
30,059
$
28,918
58,977
$
Acquired intangible assets consist of developed technology and customer relationships acquired through our business
combinations and asset acquisitions. Acquired intangible assets are amortized using the straight-line method over their useful
lives.
Acquired intangible assets subject to amortization consisted of the following as of July 31, 2021 and 2020:
Gross Carrying Amount
Accumulated Amortization
Net Carrying Amount
July 31, 2020 Additions July 31, 2021 July 31, 2020 Amortization
Expense
July 31, 2021 July 31, 2020 July 31, 2021
(in thousands)
Weighted
Average
Remaining
Useful life
July 31, 2021
(years)
Developed
technology
Customer
relationships
Total
$
$
26,856 $ 12,800 $
1,460
28,316 $ 14,900 $
2,100
39,656 $
3,560
43,216 $
(4,206) $
(86)
(4,292) $
(6,468) $ (10,674) $
(327)
(6,795) $ (11,087) $
(413)
22,650 $
1,374
24,024 $
28,982
3,147
32,129
4.0
4.5
4.0
As of July 31, 2020, the weighted-average useful life for developed technology and customer relationships was 4.2
years and 4.7 years, respectively.
During fiscal 2021, in connection with the acquisitions of Smokescreen and Trustdome, we acquired developed
technology and customer relationships with a fair value of $12.8 million and $2.1 million, respectively, and each of them with
an estimated useful life of 5.0 years. For further information refer to Note 6, Business Combinations.
Amortization expense of acquired intangible assets was $6.8 million, $3.4 million and $0.9 million in fiscal 2021,
fiscal 2020 and fiscal 2019, respectively. Amortization expense of developed technology and customer relationships is
recorded primarily within cost of revenue and sales and marketing expenses, respectively, in the consolidated statements of
operations.
125
Future amortization expense of acquired intangible assets consisted of the following as of July 31, 2021:
Year ending July 31,
2022
2023
2024
2025
2026
Total
Amortization
Expense
(in thousands)
$
$
8,678
8,181
6,741
6,038
2,491
32,129
Note 9. Convertible Senior Notes
On June 25, 2020, we issued $1,150.0 million in aggregate principal amount of 0.125% Convertible Senior Notes due
2025 (the “Notes”), including the exercise in full by the initial purchasers of the Notes of their option to purchase an
additional $150.0 million principal amount of the Notes. The Notes bear interest at a rate of 0.125% per year and interest is
payable semiannually in arrears on January 1 and July 1 of each year, beginning on January 1, 2021. The Notes mature on
July 1, 2025, unless earlier converted, redeemed or repurchased. The total net proceeds from the offering, after deducting
initial purchase discounts and other debt issuance costs, was $1,130.5 million.
The Notes are unsecured obligations and do not contain any financial covenants or restrictions on the payments of
dividends, the incurrence of indebtedness or the issuance or repurchase of securities by us or any of our subsidiaries.
The following table presents details of the Notes:
Notes
Initial Conversion
Rate per $1,000
Principal
Initial Conversion
Price
6.6315 shares
$150.80
Initial Number of
Shares
(in thousands)
7,626
The Notes are convertible at the option of the holders at any time prior to the close of business on the business day
immediately preceding April 1, 2025, only under the following circumstances:
•
•
•
During any fiscal quarter commencing after the fiscal quarter ending on October 31, 2020 (and only during such
fiscal quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not
consecutive) during a period of 30 consecutive trading days ending on and including, the last trading day of the
immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price of the Notes on each
applicable trading day;
During the five-business day period after any five consecutive trading day period (the “measurement period”) in
which the trading price per $1,000 principal amount of the Notes for each trading day of the measurement period
was less than 98% of the product of the last reported sale price of our common stock and the conversion rate of
the Notes on each such trading day;
If we call any or all of the Notes for redemption, the Notes called for redemption (or, at our election all Notes)
may be submitted for conversion at any time prior to the close of business on the second scheduled trading day
immediately preceding the redemption date; or
126
•
upon the occurrence of specified corporate events as set forth within the indenture governing the Notes.
On or after April 1, 2025, until the close of business on the second scheduled trading day immediately preceding the
maturity date, holders may convert, all or any portion of their Notes at any time, in multiples of $1,000 principal amount, at
their option regardless of the foregoing circumstances. Upon conversion, we will satisfy the conversion obligation by paying
or delivering, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common
stock, at our election. It is our current intent to settle the principal amount of the Notes in cash.
During the three months ended July 31, 2021, the conditional conversion feature of the Notes was triggered as the last
reported sale price of our common stock was greater than or equal to 130% of the conversion price of the Notes for at least 20
trading days during the period of 30 consecutive trading days ending on July 30, 2021 (the last trading day of the fiscal
quarter). Accordingly, the Notes are currently convertible, in whole or in part, at the option of the holders from August 1,
2021 through October 31, 2021. Whether the Notes will be convertible following such period will depend on the continued
satisfaction of this condition or another conversion condition in the future. During fiscal 2021 and fiscal 2020, none of the
Notes have been converted. Since we have the election of repaying the Notes in cash, shares of our common stock, or a
combination of both, we continued to classify the Notes as a noncurrent liability in the consolidated balance sheet as of July
31, 2021.
We may not redeem the Notes prior to July 5, 2023. On or after July 5, 2023, and prior to the 21st scheduled trading
day immediately preceding the maturity date, we may redeem for cash all or any portion of the Notes, at our option, if the last
reported sale price of our common stock has been at least 130% of the conversion price then in effect for at least 20 trading
days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such
period) ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption
at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest to,
but excluding, the redemption date. No sinking fund is provided for the Notes. If we redeem less than all the outstanding
Notes, and only Notes called for redemption may be converted in connection with such partial redemption, at least
$100.0 million aggregate principal amount of Notes must be outstanding and not subject to such partial redemption as of the
relevant redemption notice date.
In the event of a corporate event that constitutes a “fundamental change (as defined in the indenture governing the
Notes),” holders of the Notes will have the right, at their option to require us to repurchase for cash all or any portion of the
Notes upon the occurrence of a fundamental change, at a purchase price equal to 100% of the principal amount of the Notes
plus any accrued and unpaid interest, up to but excluding, the date of such repurchase. In addition, following certain
corporate events that occur prior to the maturity date, or if we issue a notice of redemption, we will, in certain circumstances,
increase the conversion rate for a holder who elects to convert its Notes in connection with such corporate event or notice of
redemption, as the case may be.
In accounting for the issuance of the Notes and the related transaction costs, we separated the Notes into liability and
equity components. The carrying amount of the liability component was initially calculated by measuring the fair value of
similar liabilities that do not have associated convertible features utilizing the interest rate of 5.75%. The carrying amount of
the equity component representing the conversion option was $278.5 million and was determined by deducting the fair value
of the liability component from the par value of the Notes. This difference represents the debt discount that is amortized to
interest expense over the term of the Notes using the effective interest rate method. The equity component was recorded in
additional paid-in capital and is not remeasured as long as it continues to meet the conditions for equity classification.
127
Total issuance costs of $19.5 million related to the Notes were allocated between liability, totaling $14.8 million, and
equity, totaling $4.7 million, in the same proportion as the allocation of the total proceeds to the liability and equity
components. Issuance costs attributable to the liability component are being amortized to interest expense over the term of
the Notes. The excess of the principal amount of the liability component over its carrying amount is amortized to interest
expense over the contractual term of the Notes at an effective interest rate of 6.03%. The issuance costs attributable to the
equity component were netted against additional paid-in capital. The amount recorded for the equity component of the Notes
was $273.4 million, net of allocated issuance costs of $4.7 million and deferred tax impact of $0.4 million.
The net carrying amount of the liability component of the Notes is as follows:
Principal amount
Less:
Unamortized debt discount
Unamortized debt issuance costs
Net carrying amount
July 31,
2021
2020
(in thousands)
1,150,000 $
1,150,000
224,527
11,935
913,538 $
273,829
14,556
861,615
$
$
The following table sets forth total interest expense recognized related to the Notes:
Year Ended July 31,
2021
2020
Contractual interest expense
Amortization of debt discount
Amortization of debt issuance costs
Total
(in thousands)
1,441 $
49,302
2,621
53,364 $
140
4,638
247
5,025
$
$
The total fair value of the Notes was $1,931.7 million and $1,307.5 million as of July 31, 2021 and 2020, respectively.
The fair value was determined based on the closing trading price per $1,000 of the Notes as of the last day of trading for the
period. We consider the fair value of the Notes as of July 31, 2021 and 2020 to be a Level II measurement as they are not
actively traded. The fair value of the Notes is primarily affected by the trading price of our common stock and market interest
rates.
Capped Calls
In connection with the pricing of the Notes, we entered into capped call transactions with the option counterparties (the
"Capped Calls"). The Capped Calls each have an initial strike price of $150.80 per share, subject to certain adjustments,
which corresponds to the initial conversion price of the Notes. The Capped Calls have an initial cap price of $246.76 per
share, subject to certain adjustments. The Capped Calls are generally expected to reduce potential dilution to our common
stock upon any conversion of the Notes and/or offset any cash payments we are required to make in excess of the principal
amount of the converted Notes, as the case may be, with such reduction and/or offset subject to a cap. The Capped Calls are
subject to adjustment upon the occurrence of specified extraordinary events affecting us, including merger events, tender
offers and the announcement of such events. In addition, the Capped Calls are subject to certain specified additional
disruption events that may give rise to a termination of the Capped Calls, including nationalization, insolvency or delisting,
changes in law, failures to deliver, insolvency filings and hedging disruptions. For accounting purposes, the Capped Calls are
128
separate transactions, and not part of the terms of the Notes. As the Capped Calls qualify for a scope exception from
derivative accounting for instruments that are both indexed to the issuer's own stock and classified in stockholder's equity in
its statement of financial position, the premium of $145.2 million paid for the purchase of the Capped Calls was recorded as a
reduction to additional paid-in capital and will not be remeasured. As of July 31, 2021, we have not exercised any Capped
Call options.
Note 10. Operating Leases
The following is a summary of our operating lease costs:
Year Ended July 31,
2021
2020
Real Estate
Arrangements
Co-Location
Arrangements
Total
Real Estate
Arrangements
Co-Location
Arrangements
Total
(in thousands)
Operating lease, including
imputed interest
Short-term lease cost
Variable lease cost
Sublease income
$
Total operating lease costs $
Weighted-average remaining
lease term (in years)
Weighted-average discount
rate
6,442 $
1,527
3,192
(199)
10,962 $
14,504 $
694
3,244
—
18,442 $
20,946 $
2,221
6,436
(199)
29,404 $
4.7
4.4 %
1.9
2.3 %
5,020 $
1,399
1,508
(126)
7,801 $
5.1
4.8 %
8,582 $
904
1,715
—
11,201 $
13,602
2,303
3,223
(126)
19,002
2.0
3.2 %
The following table presents information about our leases in the consolidated balance sheets:
July 31,
2021
Real Estate
Arrangements
Co-Location
Arrangements
Total
Real Estate
Arrangements
(in thousands)
2020
Co-Location
Arrangements
Total
Operating lease right-of-use
assets
Operating lease liabilities,
current
Operating lease liabilities,
noncurrent
20,424 $
20,829 $
5,388 $
$
$
$
23,510 $
44,339 $
16,990 $
19,129 $
36,119
14,454 $
19,842 $
5,307 $
10,293 $
15,600
10,801 $
31,225 $
17,849 $
10,174 $
28,023
Cash paid, net of tenant incentives for amounts included in the measurement of operating lease liabilities was $22.1
million and $7.6 million for fiscal 2021 and fiscal 2020, respectively.
For fiscal 2019, the rent expense and bandwidth and co-location expenses were $3.0 million and $13.8 million,
respectively. Rent expense prior to fiscal 2020 was recognized in accordance with ASC 840, Leases, using the straight-line
method over the term of the lease.
129
Maturities of operating lease liabilities consisted of the following as of July 31, 2021:
Year ending July 31,
2022
2023
2024
2025
2026
Thereafter
Total future minimum lease payments
Less: Imputed interest
Total
Real Estate
Arrangements
Co-Location
Arrangements
(in thousands)
Total
$
$
6,333 $
5,992
5,291
4,994
5,015
840
28,465
2,653
25,812 $
14,834 $
8,047
2,893
—
—
—
25,774
519
25,255 $
21,167
14,039
8,184
4,994
5,015
840
54,239
3,172
51,067
As of July 31, 2021, we have entered into non-cancelable operating leases with a term greater than 12 months that have
not yet commenced with undiscounted future minimum payments of $10.1 million, which are excluded from the above table.
These operating leases will commence between August 2021 and October 2022 with lease terms ranging from 1.7 years to
4.0 years.
Note 11. Commitments and Contingencies
Non-cancelable Purchase Obligations
In the normal course of business, we enter into non-cancelable purchase commitments with various third parties to
purchase products and services such as technology equipment, subscription-based cloud service arrangements, corporate and
marketing events and consulting services. As of July 31, 2021 and 2020, we had outstanding non-cancelable purchase
obligations with a term of 12 months or longer of $25.2 million and $20.0 million, respectively.
The maturities of non-cancelable purchase obligations with a term of 12 months or longer consisted of the following as
of July 31, 2021:
Year ending July 31,
2022
2023
2024
Total
Amount
(in thousands)
10,118
13,401
1,725
25,244
$
$
130
Legal Matters
Symantec Litigation
On December 12, 2016 and April 18, 2017, Symantec Corporation ("Symantec") filed two separate complaints in the
U.S. District Court for the District of Delaware, alleging that "Zscaler's cloud security platform" infringed multiple U.S.
patents held by Symantec (the "Symantec Cases"). The complaints in the Symantec Cases sought compensatory damages,
injunctions, enhanced damages and attorney fees. In July and August 2017, the Symantec Cases were transferred to the U.S.
District Court for the Northern District of California. On November 4, 2019, Broadcom, Inc. ("Broadcom") announced the
completion of its acquisition of certain assets and assumption of certain liabilities of Symantec's enterprise security business,
including all rights, titles, and interests in the patents asserted in the Symantec Cases.
On January 12, 2020, we entered into a settlement and patent license agreement with CA, Inc., a Broadcom affiliate,
pursuant to which the Symantec Cases were dismissed with prejudice effective as of January 13, 2020. In connection with the
settlement, we made a payment of $15.0 million to Broadcom, and Broadcom provided us with patent licenses, a release and
a covenant not to sue. We determined that there is no material future economic benefit from the acquired Broadcom license
and accordingly, we recorded an expense of $15.0 million within general and administrative expenses in the consolidated
statement of operations in fiscal 2020.
Finjan Litigation
On December 5, 2017, Finjan, Inc. filed a complaint, in the U.S. District Court for the Northern District of California,
alleging that certain of our products infringed four U.S. patents held by Finjan, Inc. and seeking compensatory damages, an
injunction, enhanced damages and attorney fees. On April 30, 2019, we entered into patent license and settlement agreements
with Finjan, Inc. and its affiliates (collectively "Finjan"), resolving all claims in the lawsuit, and made a payment of
$7.3 million to Finjan, Inc. Pursuant to the agreements, Finjan provided us with a worldwide fully paid license to the broader
Finjan patent portfolio, releases for past damages, and covenants not to sue. On May 1, 2019, the court dismissed Finjan,
Inc.’s complaint with prejudice. We determined that there is no material future economic benefit from the acquired Finjan
license and accordingly, we recorded an incremental expense of $4.1 million within general and administrative expenses in
the consolidated statement of operations in fiscal 2019. In prior fiscal years, we had recorded accruals related to this litigation
totaling $3.2 million.
Other Litigation and Claims
We are a party to various litigation matters from time to time and subject to claims that arise in the ordinary course of
business, including patent, commercial, product liability, employment, class action, whistleblower and other litigation and
claims, as well as governmental and other regulatory investigations and proceedings. In addition, third parties may from time
to time assert claims against us in the form of letters and other communications. There is no pending or threatened legal
proceeding to which we are a party that, in our opinion, is likely to have a material adverse effect on our future financial
results or operations; however, the results of litigation and claims are inherently unpredictable. Regardless of the outcome,
litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and
other factors. The expense of litigation and the timing of this expense from period to period are difficult to estimate, subject
to change and could adversely affect our results of operations.
131
Note 12. Common Stock
Holders of our common stock are entitled to one vote for each share of common stock held and are not entitled to
receive dividends unless declared by our board of directors.
Common Stock Reserved for Future Issuance
The following table summarizes our shares of common stock reserved for future issuance:
Equity awards outstanding:
Stock options
Unvested restricted stock units
Committed unvested performance stock awards, based on the target number of shares
Committed unvested shares of common stock not yet issued related to our acquisition of Edgewise and
Trustdome
Unvested performance stock awards
Share purchase rights committed under the employee stock purchase plan
Equity awards available for future grants:
Equity incentive plans
Employee stock purchase plan
Stock reserved for settlement of the Convertible Senior Notes
Total
July 31, 2021
(in thousands)
2,597
7,312
1,097
128
260
344
21,316
3,368
7,626
44,048
132
Note 13. Stock-Based Compensation
Equity Incentive Plans
We adopted the Fiscal Year 2018 Equity Incentive Plan (the "2018 Plan") in fiscal 2018 and the 2007 Stock Plan (the
"2007 Plan") in fiscal 2008, collectively referred to as the "Plans." Equity incentive awards which may be granted to eligible
participants under the Plans include restricted stock units, restricted stock, stock options, nonstatutory stock options, stock
appreciation rights, performance units and performance shares. With the establishment of the 2018 Plan, we no longer grant
stock-based awards under the 2007 Plan and any shares underlying stock options that expire or terminate or are forfeited or
repurchased by us under the 2007 Plan are automatically transferred to the 2018 Plan.
As of July 31, 2021, a total of 31.7 million shares of common stock have been reserved for the issuance of equity awards
under the 2018 Plan, of which 21.3 million shares were available for grant. The number of shares of common stock available
for issuance under the 2018 Plan also includes an annual increase on the first day of each fiscal year pursuant to its automatic
annual increase provision.
Stock Options
The stock option activity consisted of the following for fiscal 2021:
Outstanding
Stock
Options
Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual
Term
(in years)
Aggregate
Intrinsic
Value
Balance as of July 31, 2020
Granted
Exercised
Canceled, forfeited or expired
Balance as of July 31, 2021
Exercisable and expected to vest as of July 31, 2020
Exercisable and expected to vest as of July 31, 2021
(in thousands, except per share amounts)
$
$8.90
4.0
625,904
$—
$7.39
$8.31
$10.37
$6.46
$8.53
$
421,789
3.2
3.5
2.9
$
$
$
585,829
314,111
404,151
5,175
—
(2,466)
(112)
2,597
2,546
1,777
The aggregate intrinsic value of the options exercised represents the difference between the fair value of our common
stock on the date of exercise and their exercise price. The total intrinsic value of options exercised for fiscal 2021, fiscal 2020
and fiscal 2019 was $421.8 million, $242.4 million and $300.9 million, respectively. The weighted-average grant-date fair
value per share of awards granted for fiscal 2020 was $22.76.
We estimated the fair value of stock options using the Black-Scholes option pricing model with the following
assumptions:
Expected term (in years)
Expected stock price volatility
Risk-free interest rate
Dividend yield
133
Year Ended July 31(1)
2020
6.1
46.1%
1.7%
0.0%
(1) There were no stock options granted during fiscal 2021 and fiscal 2019.
Restricted Stock Units and Performance Stock Awards
The 2018 Plan allows for the grant of RSUs. Generally, RSUs are subject to a four-year vesting period, with 25% of the
shares vesting approximately one year from the vesting commencing date and quarterly thereafter over the remaining vesting
term.
The 2018 Plan allows for the grant of PSAs. The right to earn the PSAs is subject to achievement of the defined
performance metrics and continuous employment service. The performance metrics are defined and approved by the
compensation committee of our board of directors or by our senior management for certain types of awards. Generally,
earned PSAs are subject to additional time-based vesting.
PSAs related to the fiscal 2019 performance period, totaling approximately 0.5 million shares with a weighted-average
grant date fair value per share of $36.90, were forfeited effective at the end of fiscal 2019, resulting in a reversal of
$3.8 million of accrued stock-based compensation expense recognized in the nine months ended April 30, 2019. Accordingly,
no stock-based compensation expense was recognized for these awards in fiscal 2019.
As of July 31, 2021, we determined that the service inception date for 0.1 million PSAs preceded the grant date, and we
recognized $13.1 million of stock-based compensation expense associated with these PSAs in fiscal 2021.
As of July 31, 2021, there were 0.7 million outstanding PSAs for which the performance metrics have not been defined
as of such date. Accordingly, such awards are not considered granted for accounting purposes as of July 31, 2021 and have
been excluded from the below table.
The activity of RSUs and PSAs consisted of the following for fiscal 2021:
Balance as of July 31, 2020
Granted
Vested
Canceled or forfeited
Balance as of July 31, 2021
Employee Stock Purchase Plan
Underlying
Shares
Weighted-Average
Grant Date Fair Value
(in thousands, except per share data)
$60.72
$
Aggregate
Intrinsic Value
1,110,694
8,553
2,910
(2,953)
(747)
7,763
$172.79
$63.05
$71.09
$100.84
$
530,027
$
1,831,376
We adopted the Fiscal Year 2018 Employee Stock Purchase Plan (the "ESPP") in the third quarter of fiscal 2018. As of
July 31, 2021, a total of 6.0 million shares of common stock have been reserved for issuance under the ESPP, out of which
3.7 million shares were available for grant. The number of shares reserved includes an annual increase on the first day of each
fiscal year pursuant to its automatic annual increase provision. The ESPP provides for consecutive offering periods that will
typically have a duration of approximately 24 months in length and is comprised of four purchase periods of approximately
six months in length. The offering periods are scheduled to start on the first trading day on or after June 15 and December 15
of each year. During fiscal 2021, fiscal 2020 and fiscal 2019, employees purchased approximately 0.3 million, 0.8 million
and 1.1 million shares of common stock, respectively, under the ESPP at an average purchase price of $75.92, $18.76 and
$14.53, respectively with proceeds of $25.7 million, $15.3 million and $16.4 million, respectively.
134
ESPP employee payroll contributions accrued as of July 31, 2021 and 2020, was $5.2 million and $3.5 million,
respectively, and are included within accrued compensation in the consolidated balance sheets. Payroll contributions accrued
as of July 31, 2021 will be used to purchase shares at the end of the current ESPP purchase period ending on December 15,
2021. Payroll contributions ultimately used to purchase shares are reclassified to stockholders' equity on the purchase date.
The fair value of the purchase right for the ESPP was estimated on the grant date using the Black-Scholes option-
pricing model with the following assumptions:
Expected term (in years)
Expected stock price volatility
Risk-free interest rate
Dividend yield
Deferred Merger Consideration
2021
0.5 - 2.0
Year Ended July 31,
2020
0.5 - 2.0
2019
0.5 - 2.0
46.2% - 67.4% 53.6% - 73.6% 44.0% - 61.9%
1.9% - 2.7%
0.2% - 1.7%
0.1% - 0.2%
0.0%
0.0%
0.0%
In connection with the acquisition of Trustdome, as further described in Note 6, Business Combinations, certain former
employees who became our employees are entitled to receive a deferred merger consideration payable in shares of our
authorized common stock and RSUs. These awards are subject to time-based vesting. The fair value of these awards of
approximately $10.1 million will be recognized as stock-based compensation expense on a straight-line basis over the vesting
period within research and development expenses in the consolidated statements of operations.
In connection with the acquisition of Edgewise, as further described in Note 6, Business Combinations, certain former
employees who became our employees are entitled to receive a deferred merger consideration payable in shares of our
authorized common stock. These awards are subject to time-based vesting. The fair value of these awards of approximately
$9.3 million will be recognized as stock-based compensation expense on a straight-line basis over the vesting period within
research and development expenses in the consolidated statements of operations.
Stock-based Compensation Expense
The components of stock-based compensation expense recognized in the consolidated statements of operations consisted
of the following:
Cost of revenue
Sales and marketing
Research and development
General and administrative
Total
$
$
2021
Year Ended July 31,
2020
(in thousands)
14,036 $
133,115
67,803
43,581
258,535 $
7,318 $
66,539
30,173
17,365
121,395 $
2019
2,926
23,118
15,090
5,289
46,423
As of July 31, 2021, the unrecognized stock-based compensation cost related to outstanding equity-based awards,
including awards for which the service inception date has been met but the grant date has not been met, was $729.2 million,
which we expect to be amortized over a weighted-average period of 2.9 years.
During fiscal 2021, fiscal 2020 and fiscal 2019, we capitalized $6.3 million, $4.4 million and $0.5 million, respectively,
of stock-based compensation associated with the development of software for internal-use.
135
Note 14. Income Taxes
The following table sets forth the geographical breakdown of the income (loss) before the provision for income taxes:
Domestic
International
Loss before provision for income taxes
2021
Year ended July 31,
2020
(in thousands)
2019
$
$
(275,189) $
18,011
(257,178) $
(123,085) $
10,357
(112,728) $
(34,145)
6,233
(27,912)
The following table sets forth the components of the provision for income taxes:
Current:
Federal
State
Foreign
Total current tax expense
Deferred:
Federal
State
Foreign
Total deferred tax expense
$
2021
Year ended July 31,
2020
(in thousands)
— $
126
7,104
7,230
— $
45
4,013
4,058
(349)
(3)
(2,027)
(2,379)
(864)
(243)
(563)
(1,670)
2019
—
64
2,325
2,389
(1,431)
(107)
(108)
(1,646)
Total provision for income taxes
$
4,851 $
2,388 $
743
136
The following table presents the reconciliation of the statutory federal income tax rate to our effective tax rate:
Tax at federal statutory rate
State taxes
Impact of foreign rate differential
Meals and entertainment
Stock-based compensation
Provision to return adjustments
U.S. tax credits
Change in valuation allowance
Withholding tax
Other
Effective tax rate
Year ended July 31,
2020
2021
2019
21.0 %
—
0.4
(0.1)
43.9
0.1
4.1
(70.6)
(0.7)
—
(1.9) %
21.0 %
0.2
—
(0.2)
37.0
(0.3)
6.8
(65.0)
(1.1)
(0.5)
(2.1) %
21.0 %
0.1
(0.9)
(1.9)
147.2
1.2
10.0
(176.9)
(2.4)
(0.1)
(2.7) %
Our estimated effective tax rate for the periods presented differs from the U.S. statutory rate primarily due to our foreign
earnings which are taxed at different rates than the U.S. statutory rate, as well as the benefit of stock compensation
deductions, offset by the impact of the valuation allowance we maintain against our U.S. federal and state deferred tax assets.
During fiscal 2020 and fiscal 2019, we recognized an income tax benefit of $1.1 million and $1.4 million, respectively, as a
result of a release in our valuation allowance on deferred tax assets due to deferred taxes recorded as part of the acquisition
accounting of Cloudneeti, Edgewise and Appsulate. Refer to Note 6, Business Combinations, for further information.
The following table presents the tax effects of temporary differences that give rise to significant portions of our deferred
tax assets and liabilities:
137
Deferred tax assets:
Net operating losses carryovers
Accruals and reserves
Deferred revenue
Tax credits carryovers
Stock-based compensation
Property and equipment
Operating lease liabilities
Other
Gross deferred tax assets
Less: Valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Intangible assets
Deferred contract acquisition costs
Convertible senior notes
Operating lease right-of-use assets
Other
Total deferred tax liabilities
Net deferred tax assets
July 31,
2021
2020
(in thousands)
341,777 $
7,769
33,028
42,225
21,849
1,273
10,505
742
459,168
(345,756)
113,412 $
149,430
3,896
27,123
23,573
14,218
1,002
8,571
33
227,846
(130,236)
97,610
(6,341) $
(46,709)
(50,593)
(9,069)
—
(112,712) $
(4,224)
(24,727)
(61,071)
(6,978)
(131)
(97,131)
700 $
479
$
$
$
$
$
A deferred tax liability has not been recognized on the excess of the amount for financial reporting over the tax basis of
investments in foreign subsidiaries that are indefinitely reinvested outside the U.S. Income taxes are generally incurred upon
a repatriation of assets, a sale, or a liquidation of the subsidiary. The excess of the amount for financial reporting over the tax
basis in the investments in foreign subsidiaries, as well as the unrecognized deferred tax liability, are not material for the
periods presented.
The following table presents the change in the valuation allowance:
Balance as of the beginning of the period
Change during the period
Balance as of the end of the period
2021
Year ended July 31,
2020
(in thousands)
2019
$
$
130,236 $
215,520
345,756 $
103,732 $
26,504
130,236 $
45,578
58,154
103,732
The realization of deferred tax assets is dependent upon the generation of sufficient taxable income of the appropriate
character in future periods. We regularly assess the ability to realize our deferred tax assets and establish a valuation
allowance if it is more-likely-than-not that some portion of the deferred tax assets will not be realized. We weigh all available
positive and negative evidence, including our earnings history and results of recent operations, scheduled reversals of
138
deferred tax liabilities, projected future taxable income, and tax planning strategies. Due to the weight of objectively
verifiable negative evidence, including our history of losses, we believe that it is more likely than not that our U.S. federal
and, state deferred tax assets will not be realized as of July 31, 2021 and 2020, and as such, we have maintained a full
valuation allowance against such deferred tax assets. During fiscal 2019, we determined that due to the weight of objectively
verifiable negative evidence, our U.K. deferred tax assets are no longer more likely than not to be realized in the future and a
full valuation allowance was recorded and has been maintained as of July 31, 2021 and 2020.
The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable
income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative
losses is no longer present and additional weight may be given to subjective evidence such as our projections for growth. In
the event we determine that we will be able to realize all or part of our net deferred tax assets in the future, the valuation
allowance against our deferred tax assets will be reversed in the period in which we make such determination. The release of
a valuation allowance may cause greater volatility in the effective tax rate in the periods in which the valuation allowance is
released. The valuation allowance against our U.S. federal, state and U.K. deferred tax assets increased by $215.5 million,
$26.5 million and $58.2 million in fiscal 2021, fiscal 2020 and fiscal 2019, respectively. The increase in the valuation
allowance in fiscal 2021, fiscal 2020 and fiscal 2019 was related to tax losses for which insufficient positive evidence exists
to support their realizability.
As of July 31, 2021 and 2020, we have net operating loss carryforwards for U.S. federal income tax purposes of $1,421.0
million and $626.3 million, respectively, which are available to offset future federal taxable income. Beginning in 2027,
$177.7 million of the federal net operating losses will begin to expire. The remaining $1,243.3 million of the federal net
operating losses will carry forward indefinitely. As of July 31, 2021 and 2020, we have net operating loss carryforwards for
state income tax purposes of $396.3 million and $177.1 million, respectively. Beginning in 2024, $300.1 million of state net
operating losses will begin to expire at different periods. The remaining $96.3 million of state net operating losses will carry
forward indefinitely. As of July 31, 2021 and 2020, we had foreign net operating loss carryforward of $54.6 million and $19.5
million, respectively, all of which will be carried forward indefinitely. Beginning in 2027, $0.9 million of foreign net
operating losses will begin to expire. The remaining $53.7 million of foreign net operating losses will carry forward
indefinitely.
As of July 31, 2021, we had federal and California research and development tax credit carryforwards of approximately
$34.7 million and $26.1 million, respectively. If not utilized, the federal credit carryforwards will begin expiring at different
periods beginning in 2033. The California credit will be carried forward indefinitely.
Federal and state tax laws impose restrictions on the utilization of net operating loss and research and development tax
credit carryforwards in the event of a change in our ownership as defined by the Internal Revenue Code, Sections 382 and
383. Under Section 382 and 383 of the Code, substantial changes in our ownership and the ownership of acquired companies
may limit the amount of net operating loss and research and development tax credit carryforwards that are available to offset
taxable income. The annual limitation would not automatically result in the loss of net operating loss or research and
development tax credit carryforwards but may limit the amount available in any given future period.
We are subject to income taxes in the U.S. and various foreign jurisdictions. As of July 31, 2021, all years are open for
examination and may become subject to examination in the future. Significant judgment is required in evaluating our tax
positions and determining our income tax expense for the fiscal year. During the ordinary course of business, there are
transactions and calculations for which the ultimate tax determination is uncertain. Our estimate of the potential outcome of
any tax position is subject to management’s assessment of relevant risks, facts and circumstances existing at that time. These
unrecognized tax benefits are established when we believe that certain positions might be challenged despite the belief that
our tax return positions are fully supportable. We recognize interest and penalties associated with our unrecognized tax
139
benefits as a component of our income tax expense. For the periods presented, we did not have material interest or penalties
associated with the unrecognized tax benefits in the consolidated financial statements.
We had $18.5 million of gross unrecognized tax benefits as of July 31, 2021, none of which would affect our effective
tax rate if recognized due to our U.S. valuation allowance. The gross unrecognized tax benefits relate to income tax positions
which, if recognized, would be in the form of additional deferred tax assets that would be offset by a valuation allowance. As
of July 31, 2021, we do not believe that our estimates, as otherwise provided for, on such tax positions will significantly
increase or decrease within the next twelve months.
The changes in our gross unrecognized tax benefits for fiscal 2021 consisted of the following:
Balance as of July 31, 2019
Gross increase for tax positions of prior fiscal years
Gross increase for tax positions of current fiscal years
Balance as of July 31, 2020
Gross (decrease) for tax positions of prior fiscal years
Gross increase for tax positions of current fiscal year
Balance as of July 31, 2021
Note 15. Net Loss Per Share
Amount
(in thousands)
4,427
1,611
4,471
10,509
(581)
8,573
18,501
$
$
Basic net loss per share 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 is computed by giving effect to
all potential dilutive common stock equivalents outstanding for the period. For purposes of this calculation, our stock options,
shares subject to repurchase from early exercised stock options, share purchase rights under the employee stock purchase
plan, unvested RSUs, unvested PSAs and shares related to the Notes are considered to be potential common stock
equivalents.
Since we have reported net losses for all periods presented, we have excluded all potentially dilutive securities from the
calculation of the diluted net loss per share as their effect is antidilutive and accordingly, basic and diluted net loss per share
is the same for all periods presented.
The following table sets forth the computation of basic and diluted net loss per share:
2021
Year Ended July 31,
2020
(in thousands, except per share data)
2019
Net loss
Weighted-average shares used in computing net loss per share, basic
and diluted
Net loss per share, basic and diluted
$
(262,029) $
(115,116) $
(28,655)
135,654
129,323
$
(1.93) $
(0.89) $
123,566
(0.23)
140
The following table summarizes the outstanding potentially dilutive securities that were excluded from the computation of
diluted net loss per share because the impact of including them would have been antidilutive:
Unvested RSUs and shares of common stock
Stock options
Unvested PSAs(1)
Share purchase rights under the ESPP
Convertible senior notes(2)
Total
2021
7,440
2,597
562
344
7,626
18,569
July 31,
2020
(in thousands)
8,088
5,175
723
568
—
14,554
2019
4,274
8,861
—
913
—
14,048
(1) The number of unvested PSAs is estimated at 100% of the target number of shares granted and excludes unvested PSAs for
which performance conditions have not been established as of July 31, 2021, as they are not considered outstanding for
accounting purposes. Refer to Note 13, Stock-Based Compensation, for further information.
(2) The shares underlying the conversion option in the Notes were not considered in the calculation of diluted net loss per
share as the effect would have been antidilutive. Based on the initial conversion price, the entire outstanding principal amount
of the Notes as of July 31, 2021 would have been convertible into approximately 7.6 million shares of our common stock,
which is reflected in the above table. As we expect to settle the principal amount of the Notes in cash, only the amount by
which the conversion value exceeds the aggregate principal amount of the Notes (the "conversion spread") is considered in
the diluted earnings per share computation under the treasury stock method. The conversion spread has a dilutive impact on
diluted net income per share when the average market price of our common stock for a given reporting period exceeds the
initial conversion price of $150.80 per share for the Notes. As of July 31, 2021, we have not received any conversion notices
for the Notes. In connection with the issuance of the Notes, we entered into Capped Calls, which will not be included in the
computation of the number of diluted shares outstanding, as their effect would be antidilutive. The Capped Calls are expected
to partially offset the potential dilution to our common stock upon any conversion of the Notes.
Note 16. Segment and Geographic Information
Our chief operating decision maker ("CODM") is our chief executive officer. We derive our revenue primarily from sales
of subscription services to our cloud platform and related support services. Our CODM reviews financial information
presented on a consolidated basis for the purposes of allocating resources and evaluating financial performance. Accordingly,
we determined that we operate as one operating segment.
Our long-lived assets consist of property and equipment and operating lease right-of-use assets, which are summarized
by geographic area as follows:
July 31,
2021
2020
(in thousands)
$
$
112,251 $
40,664
152,915 $
74,264
37,589
111,853
United States
Rest of the world
Total
Refer to Note 2, Revenue Recognition for information on revenue by geography.
141
Note 17. 401(k) Plan
We have a defined-contribution plan intended to qualify under Section 401 of the Internal Revenue Code (the "401(k)
Plan"). We contract with a third-party provider to act as a custodian and trustee, and to process and maintain the records of
participant data. We make matching contributions to the plan for our employees.
142
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain “disclosure controls and procedures,” as defined in Rule 13a–15(e) and Rule 15d–15(e) under the Exchange
Act that are designed to provide reasonable assurance that information required to be disclosed by a company in the reports
that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods
specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and
procedures designed to provide reasonable assurance that information required to be disclosed by a company in the reports
that it files or submits under the Exchange Act is accumulated and communicated to our management, including our principal
executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has evaluated
the effectiveness of our disclosure controls and procedures as of July 31, 2021. Based on such evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures
were effective at the reasonable assurance level.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate “internal control over financial reporting,” as
defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act. Our management conducted an evaluation of the
effectiveness of our internal control over financial reporting as of July 31, 2021 based on the criteria established in Internal
Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on the results of its evaluation, management concluded that our internal control over financial reporting was
effective as of July 31, 2021. The effectiveness of our internal control over financial reporting as of July 31, 2021 has been
audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in its report which is
included in Item 8 of this Form 10-K.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting identified in connection with the evaluation required
by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the fiscal quarter ended July 31, 2021 that has
materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, believes that our disclosure
controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of
achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that
our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all
fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations
in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud,
if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty,
and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the
individual acts of some persons, by collusion of two or more people or by management override of the controls. The design
143
of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can
be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time,
controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures
may deteriorate. Because of the inherent limitations in a cost–effective control system, misstatements due to error or fraud
may occur and not be detected.
Item 9B. Other Information
None.
144
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The information required by this Item (other than the information set forth in the next paragraph) will be included in our
definitive proxy statement for our 2021 annual meeting of stockholders (the "2021 Proxy Statement"), which will be filed
with the SEC within 120 days after the end of our fiscal year ended July 31, 2021, and is incorporated herein by reference.
We have adopted a code of business conduct and ethics (the "Code of Conduct") that applies to all of our employees,
executive officers and directors. The full text of the Code of Conduct is available on our website at ir.zscaler.com. The
nominating and corporate governance committee of our board of directors is responsible for overseeing the Code of Conduct
and must approve any waivers of the Code of Conduct for employees, executive officers and directors. We expect that any
amendments to the Code of Conduct, or any waivers of its requirements, will be disclosed on our website, as required by
applicable law or the listing standards of The Nasdaq Global Market.
Item 11. Executive Compensation
The information required by this item is incorporated herein by reference to our 2021 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated herein by reference to our 2021 Proxy Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated herein by reference to our 2021 Proxy Statement.
Item 14. Principal Accountant Fees and Services
The information required by this item is incorporated herein by reference to our 2021 Proxy Statement.
145
PART IV
Item 15. Exhibits, Financial Statement Schedule
(a)(1) Financial Statements
See Index to Financial Statements in Item 8 of this Annual Report on Form 10-K.
(a)(2) Financial Statement Schedule
All financial statement schedules have been omitted as the information is not required under the related instructions or is
not applicable or because the information required is already included in the financial statements or the notes to those
financial statements.
(a)(3) Exhibits
We have filed the exhibits listed on the accompanying Exhibit Index, which is incorporated herein by reference.
Item 16. Form 10-K Summary
None.
146
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
September 16, 2021
Zscaler, Inc.
/s/ Remo Canessa
Remo Canessa
Chief Financial Officer
147
148
Exhibit
Number
3.1
3.2
4.1
Exhibit Description
Amended and Restated Certificate of Incorporation.
Amended and Restated Bylaws.
Amended and Restated Investors’ Rights Agreement among the
Registrant and certain holders of its capital stock, dated as of July
24, 2015.
4.2
4.3
4.4
4.5
10.1
10.2+
10.3+
10.4+
10.5+
10.6+
10.7+
10.8+
10.9+
10.10+
10.11+
10.12+
10.13+
10.14+
10.15+
10.16
10.17
10.18†
10.19
21.1
23.1
24.1
31.1
Form of common stock certificate of the Registrant.
Description of Capital Stock.
Indenture, dated as of June 25, 2020, by and between the Registrant
and U.S. Bank National Association, as Trustee.
Form of Note, representing Registrant's 0.125% Convertible Senior
Notes due 2025 (included as Exhibit A to the Indenture filed as
Exhibit 4.4).
Form of Indemnification Agreement between the Registrant and
each of its directors and executive officers.
Fiscal Year 2018 Equity Incentive Plan and related form
agreements.
Fiscal Year 2018 Employee Stock Purchase Plan and related form
agreements.
2007 Stock Plan and related form agreements.
Employee Incentive Compensation Plan.
Change of Control and Severance Policy.
Employment Agreement between the Registrant and Jagtar S.
Chaudhry, dated as of August 23, 2017.
Offer Letter between the Registrant and Remo Canessa, dated as of
January 8, 2017.
Offer Letter between the Registrant and Robert Schlossman, dated
as of December 22, 2015.
Offer Letter between the Registrant and Dali Rajic, dated as of
September 6, 2019.
Offer Letter between the Registrant and Amit Sinha, dated as of
October 18, 2010.
Offer Letter between the Registrant and Karen Blasing, dated as of
December 23, 2016.
October 14, 2015.
Offer Letter between the Registrant and Andrew Brown, dated as of
Offer Letter between the Registrant and Scott Darling, dated as of
November 16, 2016.
Offer Letter between the Registrant and Charles Giancarlo, dated as
of November 22, 2016.
Office Lease Agreement, by and between the Registrant and SRI
Eleven Row LLC, dated as of June 30, 2015.
First Amendment to Office Lease Agreement, by and between the
Registrant and SRI Eleven Row LLC, dated as of October 30, 2015.
Sublease, by and between Registrant and Micron Technology, Inc.
Form of Confirmation for Capped Call Transactions.
Significant subsidiaries of the Registrant.
Consent of PricewaterhouseCoopers LLP, Independent Registered
Public Accounting Firm.
Power of Attorney (incorporated by reference to the signature page
to this Annual Report on Form 10-K).
Certification of the Principal Executive Officer pursuant to
Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
149
Incorporated by Reference
Form
10-Q
10-Q
S-1
File No.
001-38413
001-38413
333-223072
Exhibit
3.1
3.2
4.1
Filing Date
June 7, 2018
June 7, 2018
February 16, 2018
Filed
Herewith
S-1
10-K
333-223072
001-38413
8-K
001-38413
8-K
001-38413
4.2
4.3
4.1
4.1
February 16, 2018
September 18,
2019
June 25, 2020
June 25, 2020
S-1
333-223072
10.1
February 16, 2018
10-K
001-38413
S-1/A 333-223072
S-1/A 333-223072
333-223072
S-1
333-223072
S-1
333-223072
S-1
10.2
10.3
10.4
10.5
10.7
10.8
September 18,
2019
March 13, 2018
March 5, 2018
February 16, 2018
February 16, 2018
February 16, 2018
S-1
333-223072
10.10
February 16, 2018
S-1
333-223072
10.11
10-Q
001-38413
10.1
S-1
333-223072
10.12
February 16, 2018
December 8, 2020
February 16, 2018
S-1
333-223072
10.14
February 16, 2018
S-1
333-223072
10.15
February 16, 2018
S-1
333-223072
10.16
February 16, 2018
S-1
333-223072
10.17
February 16, 2018
S-1
333-223072
10.18
February 16, 2018
S-1
333-223072
10.19
February 16, 2018
10-Q
8-K
001-38413
001-38413
10.1
10.1
June 5, 2019
June 25, 2020
X
X
X
X
31.2
32.1*
Certification of the Principal Financial Officer pursuant to
Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of the Principal Executive Officer and Principal
Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
_______________________________________
+ Indicates management contract or compensatory plan or arrangement.
X
X
X
X
X
X
X
X
† Certain portions of this exhibit (indicated by "[***]") have been omitted as Registrant determined the omitted
information (i) is not material and (ii) would be competitively harmful to Registrant if publicly disclosed.
* The certifications furnished in Exhibit 32.1 hereto are deemed to accompany this Annual Report on Form 10-K and
will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, except to the
extent that the registrant specifically incorporates it by reference.
150
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes
and appoints Jagtar Chaudhry and Remo Canessa, and each of them, as his or her true and lawful attorney-in-fact and agent
with full power of substitution, for him or her in any and all capacities, to sign any and all amendments to this report, and to
file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact, proxy, and agent full power and authority to do and perform each and every
act and thing requisite and necessary to be done in connection therewith, as fully for all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all that said attorney-in-fact, proxy and agent, or his substitute,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Jagtar Chaudhry
Jagtar Chaudhry
President, Chief Executive Officer and
Chairman of the Board of Directors (Principal
Executive Officer)
September 16, 2021
/s/ Remo Canessa
Remo Canessa
/s/ Karen Blasing
Karen Blasing
/s/ Andrew Brown
Andrew Brown
/s/ Scott Darling
Scott Darling
/s/ Charles Giancarlo
Charles Giancarlo
/s/ David Schneider
David Schneider
/s/ Amit Sinha
Amit Sinha
/s/ Eileen Naughton
Eileen Naughton
Chief Financial Officer
(Principal Accounting and Financial Officer)
September 16, 2021
September 16, 2021
September 16, 2021
September 16, 2021
September 16, 2021
September 16, 2021
September 16, 2021
September 16, 2021
Director
Director
Director
Director
Director
Director
Director
151
Corporate Information
Corporate Executives
Jay Chaudhry
President, Chief Executive Officer and
Chairman of the Board of Directors
Board of Directors
Jay Chaudhry
President, Chief Executive Officer and
Chairman of the Board of Directors
Remo Canessa
Chief Financial Officer
Amit Sinha
President of Research and Development,
Operations and Customer Service,
Chief Technology Officer
Dali Rajic
President Go-To-Market and
Chief Revenue Officer
Robert Schlossman
Chief Legal Officer and Secretary
Corporate Information
Corporate Auditors
Zscaler Inc
120 Holger Way
San Jose, California 95134, USA
T: +1.408.533.0288
F: +1 408.868.4089
www.zscaler.com
Karen Blasing
Former Chief Financial Officer,
Guidewire Software
Andrew Brown
Chief Executive Officer and Co-Founder,
Sand Hill East
Common Stock Listing
Nasdaq
Ticker Symbol: ZS
Scott Darling
President, Dell Technologies Capital
Charles Giancarlo
Chief Executive Officer, Pure Storage
Eileen Naughton
Former Chief People Officer, Google
David Schneider
General Partner, Coatue Management
Amit Sinha
President of Research and Development,
Operations and Customer Service,
Chief Technology Officer
Annual Meeting
Wednesday, January 5, 2022, at 1 p.m. PST
Virtual Meeting
Registrar and Transfer Agent
For questions regarding your account,
changes of address or consolidation of
accounts, please contact the Company’s
transfer agent:
America Stock Transfer & Trust Company,
6201 15th Avenue
Brooklyn, NY 11219
T: (800) 937.5449 or +1 708.921.8124
Legal Counsel
Wilson Sonsini Goodrich & Rosati
Professional Corporation
Palo Alto, California
Independent Auditors
PricewaterhouseCoopers
San Jose, California
Investor Relations
Zscaler, Inc.
Investor Relations
120 Holger Way
San Jose, California 95134
ir@zscaler.com
Fiscal 2021 Annual Report
and Proxy Statement
120 Holger Way
San Jose, CA 95134
Zscaler™ and the other trademarks listed at https://www.zscaler.com/legal/trademarks are either (i) registered trademarks or service marks or (ii) trademarks
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