Palo Alto Networks (PANW) 10-K risk factor changes: FY2020 vs FY2019

[removed: Our] [added: *Our] operations and financial results are subject to various risks and uncertainties including those described below.

If any of the following risks or others not specified below materialize, our business, financial condition, and operating results could be materially adversely [removed: affected] [added: affected,] and the market price of our common stock could decline.

[removed: Risks] [added: Risks] Related to Our Business and Our [removed: Industry][added: Industry]

[removed: Our] [added: Our] business and operations have experienced [removed: rapid] growth in recent periods, and if we do not effectively manage any future growth or are unable to improve our systems, processes, and controls, our operating results could be adversely [removed: affected.][added: affected.]

We have experienced [removed: rapid] growth and increased demand for our products and subscriptions over the last few years.

For example, from the end of fiscal [removed: 2018] [added: 2019] to the end of fiscal [removed: 2019,] [added: 2020,] our headcount increased from [removed: 5,348 to] 7,014 [added: to 8,014] employees.

To manage any future growth effectively, we must continue to improve and expand our information technology and financial infrastructure, our operating and administrative systems and controls, and our ability to manage headcount, capital, and processes in an efficient [removed: manner.][added: manner, all of which may be more difficult to accomplish the longer that our employees must work remotely from home.]

[removed: Failure to manage any future growth effectively could result in increased costs,] disrupt our existing end-customer relationships, reduce demand for or limit us to smaller deployments of our [removed: platform,] [added: products,] or harm our business performance and operating results.

[removed: Our] [added: Our] operating results may vary significantly from period to period and be unpredictable, which could cause the market price of our common stock to [removed: decline.][added: decline.]

[removed: | • |] [added: -] our ability to attract and retain new end-customers or sell additional products and subscriptions to our existing end-customers; [removed: |]

[removed: | • |] [added: -] the budgeting cycles, seasonal buying patterns, and purchasing practices of our [removed: end-customers; |][added: end-customers, including the likely slowdown in technology spending due to the recent global economic downturn;]

[removed: | • |] [added: -] changes in end-customer, distributor or reseller requirements, or market needs; [removed: |]

[removed: | • |] [added: -] price competition; [removed: |]

[removed: | • |] [added: -] the timing and success of new product and service introductions by us or our competitors or any other change in the competitive landscape of our industry, including consolidation among our competitors or end-customers and strategic partnerships entered into by and between our competitors; [removed: |]

[removed: | • |] [added: -] changes in the mix of our products, subscriptions, and support, including changes in multi-year subscriptions and support; [removed: |]

[removed: | • |] [added: -] our ability to successfully and continuously expand our business domestically and [removed: internationally; |][added: internationally, particularly in the current global economic slowdown;]

[removed: | • |] [added: -] changes in the growth rate of the enterprise security market; [removed: |]

[removed: | • |] [added: -] deferral of orders from end-customers in anticipation of new products or product enhancements announced by us or our competitors; [removed: |]

[removed: | • |] [added: -] the timing and costs related to the development or acquisition of technologies or businesses or strategic partnerships; [removed: |]

[removed: | • |] [added: -] lack of synergy or the inability to realize expected synergies, resulting from acquisitions or strategic partnerships; [removed: |]

[removed: | • |] [added: -] our inability to execute, complete or integrate efficiently any acquisitions that we may undertake; [removed: |]

[removed: | • |] [added: -] increased expenses, unforeseen liabilities, or write-downs and any impact on our operating results from any acquisitions we consummate; [removed: |]

[removed: | • |] [added: -] our ability to increase the size and productivity of our distribution channel; [removed: |]

[removed: | • |] [added: -] decisions by potential end-customers to purchase security solutions from larger, more established security vendors or from their primary network equipment vendors; [removed: |]

[removed: | • |] [added: -] changes in end-customer penetration or attach and renewal rates for our subscriptions; [removed: |]

[removed: | • |] [added: -] timing of revenue recognition and revenue deferrals; [removed: |]

[removed: | • |] [added: -] our ability to manage production and manufacturing related costs, global customer service organization costs, inventory excess and obsolescence costs, and warranty [removed: costs; |][added: costs, especially due to potential disruptions in our supply chain as a result of COVID-19;]

[removed: | • |] [added: -] insolvency or credit difficulties confronting our end-customers, which could [added: increase due to the effects of COVID-19 and] adversely affect their ability to purchase or pay for our products and subscription and support [removed: offerings,] [added: offerings in a timely manner] or [added: at all, or] confronting our key suppliers, including our sole source suppliers, which could disrupt our supply chain; [removed: |]

[removed: | • |] [added: -] any disruption in our channel or termination of our relationships with important channel partners, including as a result of consolidation among distributors and resellers of security solutions; [removed: |]

[removed: | • |] [added: -] our inability to fulfill our end-customers’ orders due to supply chain delays or events that impact our manufacturers or their [removed: suppliers; |][added: suppliers, which may be adversely affected by the effects of COVID-19;]

[removed: | • |] [added: -] the cost and potential outcomes of litigation, which could have a material adverse effect on our business; [removed: |]

[removed: | • |] [added: -] seasonality or cyclical fluctuations in our markets; [removed: |]

[removed: | • |] [added: -] increases or decreases in our expenses caused by fluctuations in foreign currency exchange rates, as an increasing amount of our expenses is incurred and paid in currencies other than the U.S. dollar; [removed: |]

[removed: | • |] [added: -] political, economic and social instability caused by the referendum in June 2016, in which voters in the United Kingdom (the “U.K.”) approved an exit from the European Union (the “E.U.”) and the U.K. government subsequently notified the E.U. of its withdrawal, which is commonly referred to as “Brexit,” continued hostilities in the Middle East, terrorist activities, and any disruption [added: from COVID-19 and any disruption] these events may cause to the broader global industrial economy; and [removed: |]

[removed: | • |] [added: -] general macroeconomic conditions, both domestically and in our foreign markets that could impact some or all regions where we [removed: operate. |][added: operate, including the expected global economic slowdown and potential global recession caused by the COVID-19 pandemic.]

[removed: Uncertain or weakened] [added: The sudden and significant] global economic [removed: conditions] [added: downturn] could have an adverse effect on our business and operating [removed: results.][added: results.]

[removed: The global macroeconomic environment has been and may continue to be inconsistent and challenging due to] [added: In addition, the] instability in the global credit markets, the [removed: current economic challenges in China,] [added: recent contraction of China’s economy,] falling demand for oil and other commodities, uncertainties regarding the effects of [removed: an increasingly prolonged and uncertain Brexit process,] [added: Brexit,] uncertainties related to [added: the timing of the lifting of governmental restrictions to mitigate the spread of COVID-19, uncertainties related to] elections and changes in public policies such as domestic and international regulations, taxes, or international trade agreements, international trade disputes, government shutdowns, geopolitical turmoil and other disruptions to global and regional economies and [removed: markets.][added: markets could continue to add uncertainty to global economic conditions.]

[removed: Our] [added: Our] revenue growth rate in recent periods may not be indicative of our future [removed: performance.][added: performance.]

We have experienced revenue growth rates of [removed: 27.5%] [added: 17.5%] and [removed: 29.5%] [added: 27.5%] in fiscal [removed: 2019] [added: 2020] and fiscal [removed: 2018,] [added: 2019,] respectively.

[removed: We] [added: We] have a history of losses, anticipate increasing our operating expenses in the future, and may not be able to achieve or maintain profitability or maintain or increase cash flow on a consistent basis, which could cause our business, financial condition, and operating results to [removed: suffer.][added: suffer.]

In addition, the impacts of COVID-19 and any worsening of the economic environment may exacerbate the risks described below, any of which could have a material impact on us.

This situation is changing rapidly, and additional impacts may arise that we are not currently aware of.*

The recent global COVID-19 outbreak could harm our business and results of operations.

The novel strain of COVID-19 identified in late 2019 has spread globally, including within the United States, and has resulted in government authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place orders, and shutdowns.

This outbreak has negatively impacted and will likely continue to have a negative impact on, worldwide economic activity and financial markets and has impacted, and will further impact, our workforce and operations, the operations of our end-customers, and those of our respective channel partners, vendors and suppliers.

In light of the uncertain and rapidly evolving situation relating to the spread of this virus and various government restrictions and guidelines, we have taken measures intended to mitigate the spread of the virus and minimize the risk to our employees, channel partners, end-customers, and the communities in which we operate.

These measures include transitioning our employee population to work remotely from home beginning in March 2020, which is planned to continue through the first quarter of fiscal 2021 and is likely to expand into future quarters.

Although we continue to monitor the situation and may adjust our current policies as more information and public health guidance become available, these precautionary measures that we have adopted could negatively affect our customer success efforts, sales and marketing efforts, delay and lengthen our sales cycles, and create operational or other challenges, any of which could harm our business and results of operations.

In addition, COVID-19 may disrupt the operations of our end-customers and channel partners for an indefinite period of time, including as a result of travel restrictions and/or business shutdowns, all of which could negatively impact our business and results of operations, including cash flows.

The impact of COVID-19 is fluid and uncertain, but it has caused and may continue to cause various negative effects, including an inability to meet with our actual or potential end-customers; our end-customers deciding to delay or abandon their planned purchases; increased requests for delayed payment terms or product discounts by our end-customers and channel partners; us delaying, canceling, or withdrawing from user and industry conferences and other marketing events, including some of our own; changes in the demand of our products, which has caused us to reprioritize our engineering and research and development efforts and make changes to our original offering roadmap; and delays or possible disruptions in our supply chain.

As a result, we may experience extended sales cycles; our demand generation activities, and our ability to close transactions with end-customers and partners may be negatively impacted; our ability to provide 24x7 worldwide support and/or replacement parts to our end-customers may be adversely affected; and it has been and, until the COVID-19 outbreak is contained and global economic activity stabilizes, will continue to be more difficult for us to forecast our operating results.

More generally, the outbreak has not only significantly and adversely increased economic and demand uncertainty, but it has caused a global economic slowdown, and it is likely that it will cause a global recession which could likely decrease technology spending and adversely affect demand for our offerings and harm our business and results of operations.

Failure to manage any future growth effectively could result in increased costs,

- our ability to manage cloud hosting costs and scale the cloud-based subscription offerings;

- future accounting pronouncements or changes in our accounting policies;

The multinational efforts to contain the spread of COVID-19 have had a significant adverse effect on the global macroeconomic environment that could lead to a global recession.

These adverse conditions could result in reductions in sales of our products and subscriptions, longer sales cycles, reductions in subscription or contract duration and value, slower adoption of new technologies, and increased price competition.

This may require increasingly sophisticated

- startups and single-vertical vendors that offer independent or emerging solutions in network;

- public cloud vendors and startups that offer solutions for cloud security (private, public and hybrid cloud); and

- large and small companies, such as Crowdstrike, Inc (“Crowdstrike”) that offer solutions for security operations and endpoint security.

- newer or disruptive products or technologies;

These risks may increase due to COVID-19.

Due to COVID-19, we slowed hiring in the third quarter of 2020, which could adversely affect our ability to retain qualified personnel.

Finally, large enterprises typically have longer implementation cycles, require

Our channel partners operations may also be negatively impacted by other effects COVID-19 is having on the global economy, such as increased credit risk of end-customers and the uncertain credit markets.

In addition, COVID-19 and the resulting increase in customer demand for work-from-home technologies and other technologies have caused us to reprioritize our engineering and R&D efforts and there can be no assurance that any product enhancements or new features will be successful or address our end-customer needs.

For example, some components that we import for final manufacturing in the United States have been impacted by these recent tariffs.

As a result, our costs have increased and we have raised, and may be required to further raise, prices on our hardware products.

COVID-19 has resulted in certain cases to cause delays and challenges in obtaining components and inventory, as well as increases to freight and shipping costs, and may result in a material adverse effect on our results of operations.

COVID-19 has made forecasting more difficult and we may experience increased challenges to our supply chain due to the unpredictability of the impacts of COVID-19.

Lead times for components may also be adversely impacted by factors outside of our control including COVID-19.

For instance, Brexit creates an uncertain political and economic environment in the U.K. and across E.U. member states for the foreseeable future, including during the transition period connected to Brexit.

Beyond our open credit arrangements, we have also experienced demands for customer financing due to COVID-19 and our competitors’ offerings.

The majority of these demands are currently facilitated by leasing and other financing arrangements provided by our distributors and resellers.

To respond to this demand, we expect to increase our customer financing activities in the future.

We believe customer financing is a competitive factor in obtaining business.

The loan financing arrangements provided by our distributors and resellers may include not only financing the acquisition of our products and services but also providing additional funds for other costs associated with network installation and integration of our products and services.

Our exposure to the credit risks relating to the financing activities described above may increase if our customers are adversely affected by a global economic downturn or periods of economic uncertainty.

In the past, we have experienced non-material losses due to bankruptcies among customers.

| | |

| --- | --- |

| • | future accounting pronouncements or changes in our accounting policies, including the impact of the adoption and implementation of the Financial Accounting Standards Board’s new standard regarding revenue recognition; |

| • | small and large companies that offer point solutions and/or cloud security services that compete with some of the features present in our platform. |

If expected revenue at the end of any fiscal quarter is delayed for any reason, including the

products from multiple vendors, and contain multiple generations of products that have been added over time.

The identification of suitable acquisition candidates is

recruit additional companies to enter into strategic distributor relationships.

We have entered into

A small number of channel partners represent a large percentage of our revenue and gross accounts receivable.

Our

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.

instability or violence in the region.

The CCPA was amended in 2018, and legislators have proposed additional amendments to the CCPA before its effective date.

In the United States, the Tax Cuts and Jobs Act (“TCJA”) contains many significant changes to the U.S. federal income tax laws, the consequences of which, to us, could have a material impact on the value of our deferred tax assets and could increase our future U.S. income tax expense.

Furthermore, changes to the taxation of undistributed foreign earnings, if any, could change our future intentions regarding reinvestment of such earnings.

The foregoing items could have a material adverse effect on our business, cash flows, operating results, or financial condition.

Additionally, as we have worked toward adopting and implementing the new revenue accounting standard, management has made judgments and assumptions based on our interpretation of the new standard.

The new revenue standard is principle based and interpretation of those principles may vary from company to company based on their unique circumstances.

and Japan and may be enacted in other regions, including in the United States, and we are, or may in the future be, subject to these laws and regulations.

Holders of the Notes of either series will have the right under the applicable indenture governing the Notes to require us to repurchase all or a portion of their Notes of such series upon the occurrence of a fundamental change before the applicable maturity date at a repurchase price equal to 100% of the principal amount of such Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the applicable fundamental change repurchase date.

In addition, upon conversion of the Notes of either series, we will be required to make cash payments for each $1,000 in principal amount of such Notes converted of at least the lesser of $1,000 and the sum of the daily conversion values for such series of Notes.

Moreover, we will be required to repay the Notes in cash at their respective maturity, unless earlier converted or repurchased.

and diminish our cash reserves.

judgments and causing investor perceptions to be adversely affected and potentially resulting in a decline in the market price of our stock.

[removed: The] [added: *The] following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K.

Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Annual Report on Form 10-K, and in particular, the risks discussed under the caption “Risk Factors” in Part I, Item 1A of this [removed: report.][added: report.*]

[removed: | • | Overview.] [added: - Overview.] A discussion of our business and overall analysis of financial and other highlights in order to provide context for the remainder of MD&A. [removed: |]

[removed: | • |] [added: -] Key Financial [removed: Metrics.] [added: Metrics.] A summary of our GAAP and non-GAAP key financial metrics, which management monitors to evaluate our performance. [removed: |]

[removed: | • |] [added: -] Results of [removed: Operations.] [added: Operations.] A discussion of the nature and trends in our financial results and an analysis of our financial results comparing fiscal [removed: 2019 to 2018 and fiscal 2018] [added: 2020] to [removed: 2017. |][added: 2019.]

[removed: | • |] [added: -] Liquidity and Capital [removed: Resources.] [added: Resources.] An analysis of changes in our balance sheets and cash flows, and a discussion of our financial condition and our ability to meet cash needs. [removed: |]

[removed: | • |] [added: -] Contractual Obligations and [removed: Commitments.] [added: Commitments.] An overview of our contractual obligations, contingent liabilities, commitments, and off-balance sheet arrangements outstanding as of July 31, [removed: 2019,] [added: 2020,] including expected payment schedules. [removed: |]

[removed: | • |] [added: -] Critical Accounting [removed: Estimates.] [added: Estimates.] A discussion of our accounting policies that require critical estimates, assumptions, and judgments. [removed: |]

[removed: | • |] [added: -] Recent Accounting [removed: Pronouncements.] [added: Pronouncements.] A discussion of expected impacts of impending accounting changes on financial information to be reported in the future. [removed: |]

[removed: Overview][added: Overview]

[removed: | • | Secure the network through our Next-Generation Firewalls, available as physical appliances, virtual appliances called VM-Series, or a cloud-delivered service called Prisma Access (formerly GlobalProtect cloud service), and Panorama management delivered as an appliance or as a virtual machine for the public or private cloud.] This also includes security services such as [removed: WildFire,] Threat Prevention, [added: WildFire,] URL Filtering, [added: DNS Security, IoT Security,] GlobalProtect, [added: SD-WAN] and [removed: DNS Security] [added: Data Loss Prevention] that are delivered as SaaS subscriptions to our [added: ML-powered] Next-Generation Firewalls. [removed: |]

[removed: | • |] [added: -] Secure the future of security operations through our Cortex [removed: platform,] [added: security offerings,] which includes Cortex XDR [removed: (formerly Magnifier)] for [added: prevention,] detection and response, Cortex [removed: Data Lake (formerly Logging Service) to collect and integrate security data for analytics, Demisto] [added: XSOAR] for security orchestration, [removed: automation,] [added: automation] and response (“SOAR”), [removed: and AutoFocus for threat intelligence. These products are delivered as software or SaaS subscriptions. |]

For fiscal [removed: 2019, 2018,] [added: 2020] and [removed: 2017,] [added: 2019,] total revenue was [removed: $2.9 billion, $2.3 billion,] [added: $3.4 billion] and [removed: $1.8] [added: $2.9] billion, respectively, representing year-over-year growth of [removed: 27.5% for fiscal 2019 and 29.5% for fiscal 2018.][added: 17.5%.]

Our growth reflects the increased adoption of our [removed: hybrid SaaS revenue model,] [added: portfolio,] which consists of product, subscriptions, and support.

We believe [removed: this model] [added: our portfolio] will enable us to benefit from recurring revenues as we continue to grow our installed end-customer base.

As of July 31, [removed: 2019,] [added: 2020,] we had end-customers in over [removed: 150] [added: 170] countries.

Our product revenue [removed: grew to] [added: was] $1.1 billion or [removed: 37.8%] [added: 31.2%] of total revenue for fiscal [removed: 2019,] [added: 2020,] representing [added: a slight decrease] year-over-year [removed: growth] of [removed: 24.6%.][added: 2.9%.]

Product revenue is generated from sales of our appliances, primarily our [added: ML-powered] Next-Generation Firewall, which is available in [removed: physical] [added: a number of form factors, including as physical, virtual] and [removed: virtualized form.][added: containerized appliances.]

Our [added: ML-powered] Next-Generation Firewall incorporates our [removed: proprietary] PAN-OS operating system, which provides a consistent set of capabilities across our entire product line.

Our products are designed for different performance requirements throughout an organization, ranging from our PA-220, which is designed for small organizations and remote or branch offices, to our top-of-the-line PA-7080, which is [removed: especially suited] [added: designed] for [removed: very] large [removed: enterprise deployments] [added: scale data centers] and service provider [removed: customers.][added: use.]

The same firewall functionality that is delivered in our physical appliances is also available in our VM-Series virtual firewalls, which secure virtualized and cloud-based computing [removed: environments.][added: environments and in our CN-Series container firewalls, which secures container environments and traffic.]

Our subscription and support revenue grew to [removed: $1.8] [added: $2.3] billion or [removed: 62.2%] [added: 68.8%] of total revenue for fiscal [removed: 2019,] [added: 2020,] representing year-over-year growth of [removed: 29.4%.][added: 30.0%.]

Our subscriptions provide our end-customers with [added: near] real-time access to the latest antivirus, intrusion prevention, web filtering, and modern malware prevention capabilities across the network, endpoints, and the cloud.

When end-customers purchase our [removed: physical or] [added: physical,] virtual [added: or container] firewall appliances, they typically purchase support in order to receive ongoing security updates, upgrades, bug fixes, and repairs.

We continue to invest in innovation [added: and acquire businesses] as we evolve and further extend the capabilities of our [removed: platform,] [added: portfolio,] as we believe that innovation and timely development of new features and products is essential to meeting the needs of our end-customers and improving our competitive position.

We believe that the growth of our business and our short-term and long-term success are dependent upon many factors, including our ability to extend our technology leadership, grow our base of end-customers, expand deployment of our [removed: platform] [added: portfolio] and support offerings within existing end-customers, and focus on end-customer satisfaction.

[removed: Key] [added: Key] Financial [removed: Metrics][added: Metrics]

| | [removed: July 31,] | | [added: July 31,] | | | | | [added: | | | | | | | | | |]

| | [removed: 2019] | | [added: 2020] | | [removed: 2018] | | | [added: | 2019 | | | | | | 2018 | | | | | | | | | | | | | | |]

| | [removed: (in millions)] | | [added: (in millions)] | | | | | [added: | | | | | | | | | |]

| Total deferred [removed: revenue(1)] [added: revenue] | [added: | |] $ | [removed: 2,888.7] [added: 3,810.2] | | | [added: | |] $ | [removed: 2,279.3] [added: 2,888.7] | | [added: | | | | | |]

| Cash, cash equivalents, and investments | [added: | |] $ | [removed: 3,378.5] [added: 4,302.2] | | | [added: | |] $ | [removed: 3,950.9] [added: 3,378.5] | | [added: | | | | | |]

| | [removed: Year] [added: | | Year] Ended July [removed: 31,] [added: 31,] | | | | | | | | | | | [added: | | | | | | | | | | | | | | | |]

| | [removed: 2019] | | [added: 2020] | | [removed: 2018(1)] | | | | [removed: 2017(1)] [added: 2019] | | | [added: | | | 2018 | | | | | | | | | | | | | | |]

| | [removed: (dollars] [added: | | (dollars] in [removed: millions)] [added: millions)] | | | | | | | | | | | [added: | | | | | | | | | | | | | | | |]

| Total revenue | [added: | |] $ | [added: 3,408.4 | | | | | $ |] 2,899.6 | | | [added: | |] $ | 2,273.6 | | | [removed: $] | [removed: 1,755.1] | | [added: | | | | | | | |]

| Total revenue year-over-year percentage increase | [added: | | 17.5 | | % | | | |] 27.5 | | % | | [added: | |] 29.5 | | % | | [removed: 27.3] | | [removed: %] | [added: | | | | | | | |]

| Gross margin | [added: | | 70.7 | | % | | | |] 72.1 | | % | | [added: | |] 71.6 | | % | | [removed: 72.9] | | [removed: %] | [added: | | | | | | | |]

| Operating loss | [added: | |] $ | [removed: (54.1] [added: (179.0)] | [removed: )] | | [added: | |] $ | [removed: (104.2] [added: (54.1)] | [removed: )] | | [added: | |] $ | [removed: (165.8] [added: (104.2)] | [removed: )] | [added: | | | | | | | | | | | |]

| Operating margin | [removed: (1.9] | | [removed: )%] [added: (5.3)] | | [removed: (4.6] [added: %] | | [removed: )%] | | [removed: (9.4] [added: (1.9)] | | [removed: )%] [added: %] | [added: | | | (4.6) | | % | | | | | | | | | | | | |]

For discussion and analysis related to our financial results comparing fiscal 2019 to 2018, refer to Part II, Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for fiscal 2019, which was filed with the Securities and Exchange Commission on September 9, 2019.

We empower enterprises, service providers, and government entities to secure all users, applications, data, networks and devices with comprehensive visibility and context continuously across all locations.

We deliver cybersecurity products covering a broad range of use cases, enabling our end-customers to secure their networks, remote workforce, access to the service edge, branch locations, public and private clouds, and to advance their Security Operations Centers (“SOC”).

We believe our portfolio offers advanced prevention and security, while reducing the total cost of ownership for organizations by improving operational efficiency and eliminating the need for siloed point products.

We do this with solutions focused on delivering value in three fundamental areas:

- Secure the network through our ML-powered Next-Generation Firewalls, available in a number of form factors, including physical, virtual and containerized appliances, as well as a cloud-delivered service, with Panorama management available as an appliance or as a virtual machine for the public or private cloud.

- Secure the cloud through our Prisma security offerings, such as Prisma Cloud, the industry’s most comprehensive Cloud Native Security Platform (“CNSP”), protecting applications, data and the entire cloud native technology stack, throughout the full development lifecycle and across multi- and hybrid- cloud environments, Prisma SaaS for protecting SaaS applications, Prisma Access, a comprehensive Secure Access Service Edge (“SASE”) offering, that, together with CloudGenix SD-WAN, securing SD-WAN to enable the cloud delivered branch, and VM-Series and CN-Series for in-line network security in multi- and hybrid- cloud environments.

CloudGenix SD-WAN autonomous networking and integrated security is available as a combination of physical, virtual and cloud-delivered appliances and services.

AutoFocus for threat intelligence, and Cortex Data Lake to collect and integrate security data for analytics.

These products are delivered as software or SaaS subscriptions.

During fiscal 2020, we introduced several new offerings, including: PAN-OS 10.0 with over 70 new features; our new ML-powered Next-Generation Firewalls; and our Cortex XSOAR solution that redefines security orchestration and automation with integrated threat intelligence management.

Additionally, we acquired productive investments that fit well within our long-term strategy.

For example, in September 2019, we acquired Zingbox, which we believe will accelerate our delivery of IoT security through our Next-Generation Firewall and Cortex offerings; in December 2019, we acquired Aporeto, which we believe will strengthen our cloud-native security platform capabilities delivered by Prisma Cloud; and in April 2020, we acquired CloudGenix, which we believe will strengthen our SASE offering.

Impact of COVID-19 on our Business

We are actively monitoring, evaluating and responding to developments relating to COVID-19, which has and is expected to result in continued significant global social and business disruption.

As described in “Impacts of COVID-19 on our Business” included in Part I, Item 1 Business in this Annual Report, we have made some changes to our business that include instituting a global work-from-home policy beginning in March 2020 that did not incur significant disruptions in our work operations during fiscal 2020.

We will continue to actively monitor the situation and will make further changes to 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, end-customers, partners, suppliers and stockholders.

Our focus remains on the safety of our employees, striving to protect the health and well-being of the communities in which we operate, and providing technology to our employees, end-customers and partners to help them do their best work while remote.

Although some end-customers adopted Prisma Access as their secure work-from-home solution for the longer term, COVID-19 may curtail our end-customers' spending and could lead them to delay or defer purchasing decisions, and lengthen sales cycles and payment terms, which could materially adversely impact our business, results of operations and overall financial performance.

Also, certain of our end-customers or partners may be or may become credit or cash constrained making it difficult for them to fulfill their payment obligations to us.

The extent of the impact of COVID-19 on our operational and financial performance will depend on

developments, including the duration and spread of the virus, impact on our end-customers’ spending, volume of sales and length of our sales cycles, impact on our partners, suppliers and employees, actions that may be taken by governmental authorities and other factors identified in Part I, Item 1A "Risk Factors" in this Form 10-K.

Given the dynamic nature of these circumstances, the full impact of COVID-19 on our ongoing business, results of operations and overall financial performance cannot be reasonably estimated at this time.

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| | | | 2020 | | | | | | 2019 | | | | | | | | |

The majority of our deferred revenue balance consists of subscription and support revenue that is recognized ratably over the contractual service period.

We monitor our deferred revenue balance because it represents a significant portion of revenue to be recognized in future periods.

- Billings. We define billings as total revenue plus the change in total deferred revenue, net of acquired deferred revenue, during the period.

We consider billings to be a key metric used by management to manage our business.

We believe billings provides investors with an important indicator of the health and visibility of our business because it includes subscription and support revenue, which is recognized ratably over the contractual service period, and product revenue, which is recognized at the time of shipment, provided that all other conditions for revenue recognition have been met.

We consider billings to be a useful metric for management and investors, particularly if we continue to experience increased sales of subscriptions and strong renewal rates for subscription and support offerings, and as we monitor our near-term cash flows.

We calculate billings in the following manner:

| Total revenue | | | $ | 3,408.4 | | | | | $ | 2,899.6 | | | | | $ | 2,273.6 | | | | | | | | | | | | | |

| Billings | | | $ | 4,301.7 | | | | | $ | 3,489.8 | | | | | $ | 2,856.2 | | | | | | | | | | | | | |

- Cash Flow Provided by Operating Activities. We monitor cash flow provided by operating activities as a measure of our overall business performance.

Our cash flow provided by operating activities is driven in large part by sales of our products and from up-front payments for subscription and support offerings.

- Free Cash Flow (non-GAAP). We define free cash flow, a non-GAAP financial measure, as cash provided by operating activities less purchases of property, equipment, and other assets.

We consider free cash flow to be a profitability and liquidity measure that provides useful information to management and investors about the amount of cash generated by the business after necessary capital expenditures.

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We have pioneered the next generation of security through our innovative platform that empowers enterprises, service providers, and government entities to secure their organizations by safely enabling applications and data running in their networks, on their endpoints, and in the cloud, and by preventing breaches that stem from targeted cyberattacks.

Our platform uses an innovative traffic classification engine that identifies network traffic by application, user, and content and provides consistent security across the network, endpoint, and cloud.

Accordingly, our platform enables our end-customers to pursue transformative digital initiatives, like public cloud and mobility, that grow their business, while maintaining the visibility and control needed to protect their valued data and critical control systems.

We believe the architecture of our platform offers superior performance compared to legacy approaches and reduces the total cost of ownership for organizations by simplifying their security operations and infrastructure and eliminating the need for multiple, stand-alone hardware and software security products, and consists of three primary areas of security capabilities.

| • | Secure the endpoints through our Traps advanced endpoint protection software, delivered as a light-weight software agent with cloud or on-premise management capabilities. |

| • | Secure the cloud through our Prisma cloud security offerings, such as Prisma Public Cloud (formerly RedLock) for security and compliance in public clouds, Prisma Access (formerly GlobalProtect cloud service) for securing user access, Prisma SaaS (formerly Aperture) for protecting SaaS applications, VM-Series for in-line network security in public and private clouds, Traps for host-based public cloud infrastructure protection, and Twistlock for protecting containers in public and private clouds, as well as PureSec for protecting serverless functions in public clouds. |

For example: in October 2018, we acquired RedLock, which expanded our security capabilities for the public cloud with the addition of RedLock’s cloud security analytics technology; in February 2019, we introduced PAN-OS 9.0, with over 60 new features, our new DNS Security Service subscription, which uses machine learning to proactively block malicious domains and stop attacks in progress, and Cortex XDR, our cloud-based detection, investigation, and response application that natively integrates network, endpoint, and cloud data; in March 2019, we acquired Demisto, which expanded the functionality of our platform with the addition of Demisto’s SOAR product; and in June and July 2019, we acquired PureSec and Twistlock, respectively, which extend our Prisma cloud security strategy with the addition of PureSec’s security for serverless applications and Twistlock’s container security capabilities.

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______________

| (1) | The amount for fiscal 2018 has been adjusted due to our adoption of the new revenue recognition standard. Refer to Note 1. Description of Business and Summary of Significant Accounting Policies in Part II, Item 8 of this Annual Report on Form 10-K for more information. |

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| (1) | These amounts have been adjusted due to our adoption of the new revenue recognition standard and new guidance related to the presentation of restricted cash and cash equivalents in the statement of cash flows. Refer to Note 1. Description of Business and Summary of Significant Accounting Policies in Part II, Item 8 of this Annual Report on Form 10-K for more information. |

| (1) | These amounts have been adjusted due to our adoption of the new revenue recognition standard. Refer to Note 1. Description of Business and Summary of Significant Accounting Policies in Part II, Item 8 of this Annual Report on Form 10-K for more information. |

| (1) | The amounts for fiscal 2018 and fiscal 2017 have been adjusted due to our adoption of new guidance related to the presentation of restricted cash and cash equivalents in the statement of cash flows. Refer to Note 1. Description of Business and Summary of Significant Accounting Policies in Part II, Item 8 of this Annual Report on Form 10-K for more information. |

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| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| (1) | Certain amounts have been adjusted due to our adoption of the new revenue recognition standard. Refer to Note 1. Description of Business and Summary of Significant Accounting Policies in Part II, Item 8 of this Annual Report on Form 10-K for more information. |

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Product revenue increased for fiscal 2018 compared to fiscal 2017 due to increased demand for our newly introduced appliances.

The increase in both periods was due to increased demand for our subscription and support offerings from both new and existing end-customers.

The change in subscription and support revenue due to changes in pricing was not significant for either period.

Cost of product revenue increased for fiscal 2018 compared to fiscal 2017 primarily due to higher product costs related to our newly introduced appliances.

| (1) | The amounts for fiscal 2018 and 2017 have been adjusted due to our adoption of the new revenue recognition standard. Refer to Note 1. Description of Business and Summary of Significant Accounting Policies in Part II, Item 8 of this Annual Report on Form 10-K for more information. |

Amortization of purchased intangible assets increased $26.2 million for fiscal 2019 compared to fiscal 2018 as a result of our recent acquisitions.

The remaining increase was primarily due to an increase in data center and cloud hosting costs to support the adoption of our cloud-based subscription offerings and costs to expand our customer service capabilities.

Cost of subscription and support revenue increased for fiscal 2018 compared to fiscal 2017 primarily due to an increase in personnel costs for our global customer support and technical operations organizations, which grew $53.5 million to $208.9 million, primarily due to headcount growth.

The remaining increase was primarily due to data center and cloud hosting costs to support the adoption of our cloud-based subscription offerings, costs to expand our customer service capabilities, and allocated costs.

The increase in allocated costs was primarily due to our expansion of facilities to support the growth of our business.

For sales of our subscription and support offerings, our subscription offerings typically have higher gross margins than our support offerings.

Product gross margin increased for fiscal 2019 compared to fiscal 2018 primarily due to improved operations in our supply chain management and increased leverage of our operations organization.

Product gross margin decreased for fiscal 2018 compared to fiscal 2017, driven by higher product costs related to our newly introduced appliances, which had lower product margins.

Subscription and support gross margin decreased slightly for fiscal 2018 compared to fiscal 2017, primarily due to higher data center and cloud hosting costs to support the adoption of our cloud-based subscription offerings and costs to expand our customer service capabilities, partially offset by a decrease in customer support and repair costs.

Research and development expense increased year-over-year for both fiscal 2019 and fiscal 2018.

Sales and marketing expense increased year-over-year for both fiscal 2019 and fiscal 2018.

The increase in both periods was primarily due to an increase in personnel costs, which grew $181.7 million to $1.0 billion for fiscal 2019 compared to fiscal 2018 and grew $133.8 million to $829.6 million for fiscal 2018 compared to fiscal 2017.

[removed: Foreign] [added: Foreign] Currency Exchange [removed: Risk][added: Risk]

A portion of our operating expenses are incurred outside of the United States and are denominated in foreign currencies and are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the euro, British pound, Singapore dollar, Israeli [removed: shekel,] [added: shekel] and Japanese yen.

The effect of an immediate 10% adverse change in foreign exchange rates on monetary assets and liabilities at July 31, [removed: 2019] [added: 2020] would not be material to [added: our financial condition or results of operations.]

As of July 31, [removed: 2019,] [added: 2020,] foreign currency transaction gains and losses and exchange rate fluctuations have not been material to our financial statements.

The effectiveness of our existing hedging transactions and the availability and effectiveness of any hedging transactions we may decide to enter into in the future may be [removed: limited] [added: limited,] and we may not be able to successfully hedge our exposure, which could adversely affect our financial condition and operating results.

[removed: In addition, a weakening U.S. dollar can increase the costs of our international] expansion and a strengthening U.S. dollar can increase the real cost of our products to our end-customers outside of the United States, leading to delays in the purchase of our products and services.

[removed: Interest] [added: Interest] Rate [removed: Risk][added: Risk]

The effect of an immediate 10% change in interest rates at July 31, [removed: 2019] [added: 2020] would not have been material to our operating results and the total value of the portfolio assuming consistent investment levels.

[removed: Market] [added: Market] Risk and Market Interest [removed: Risk][added: Risk]

In July 2018, we issued $1.7 billion aggregate principal amount of 0.75% Convertible Senior Notes due 2023 (the “2023 [removed: Notes”).][added: Notes”) and in June 2020, we issued $2.0 billion aggregate principal amount of 0.375% Convertible Senior Notes due 2025 (the "2025 Notes").]

In addition, a weakening U.S. dollar can increase the costs of our international

\- 52 -

our financial condition or results of operations.

\- 54 -

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[removed: General][added: General]

[removed: | • | Secure the network through our Next-Generation Firewalls, available as physical appliances, virtual appliances called VM-Series, or a cloud-delivered service called Prisma Access (formerly GlobalProtect cloud service), and Panorama management delivered as an appliance or as a virtual machine for the public or private cloud.] This also includes security services such as [removed: WildFire,] Threat Prevention, [added: WildFire,] URL Filtering, [added: DNS Security, IoT Security,] GlobalProtect, [added: SD-WAN] and [removed: DNS Security] [added: Data Loss Prevention] that are delivered as SaaS subscriptions to our [added: ML-powered] Next-Generation Firewalls. [removed: |]

[removed: | • |] [added: -] Secure the future of security operations through our Cortex [removed: platform,] [added: security offerings,] which includes Cortex XDR [removed: (formerly Magnifier)] for [added: prevention,] detection and response, Cortex [removed: Data Lake (formerly Logging Service) to collect and integrate security data for analytics, Demisto] [added: XSOAR] for security orchestration, [removed: automation,] [added: automation] and response (“SOAR”), [removed: and] AutoFocus for threat [removed: intelligence. These products are delivered as software or SaaS subscriptions. |][added: intelligence, and Cortex Data Lake to collect and integrate security data for analytics.]

[removed: Product,] [added: Product,] Subscription, and Support [removed: Offerings][added: Offerings]

Our [removed: platform is] [added: products are] available in the form of the product, subscription, and support offerings described below.

[removed: Firewall] [added: Firewall] Appliances and [removed: Software.][added: Software.]

These features include: App-ID, User-ID, [added: Content-ID,] site-to-site virtual private network (“VPN”), remote access Secure Sockets Layer (“SSL”) VPN, and Quality-of-Service (“QoS”).

Our firewall appliances come in a physical form [removed: factor as well as] [added: factor,] in a virtual form factor, called VM-Series, that is available for virtualization and cloud environments from companies such as VMware, Inc. (“VMware”), Microsoft Corporation (“Microsoft”), Amazon.com, Inc. (“Amazon”), and Google, Inc. (“Google”), and in Kernel-based Virtual Machine (“KVM”)/OpenStack [removed: environments.][added: environments, as well as in a containerized form factor, called CN-Series.]

[added: Panorama.] Panorama is our centralized security management solution for global control of all of our firewall appliances and software deployed on an end-customer’s [removed: network] [added: network,] as well as in their instances in public or private cloud environments as a virtual [added: appliance or a physical appliance.]

Panorama controls the security, network address translation (“NAT”), QoS, policy-based forwarding, decryption, application override, captive portal, and distributed denial of service/denial of service (“DDoS/DoS”) protection aspects of the appliances, software, [removed: and] virtual [added: and containerized] systems under management.

Panorama centrally manages device software and associated updates, including SSL-VPN clients, [removed: GlobalProtect clients,] [added: SD-WAN,] dynamic content updates, and software licenses.

Panorama offers [added: network security monitoring through] the ability to view logs and run reports from all managed appliances and software [added: in one location] without the need to forward the logs and [removed: to report on aggregate user activity] [added: reliably expands log storage] for [removed: all users, including mobile users.][added: long-term event investigation and analysis.]

[added: Virtual System Upgrades.] Virtual System Upgrades are available as extensions to the Virtual System capacity that ships with our physical appliances.

[added: Subscription Offerings.] We offer a number of subscriptions as part of our [removed: platform.][added: portfolio.]

Of these subscription offerings, Threat [removed: Prevention Subscription,] [added: Prevention, WildFire,] URL [removed: Filtering Subscription, WildFire Subscription, GlobalProtect Subscription, and] [added: Filtering,] DNS [removed: Security Subscription] [added: Security, IoT Security, GlobalProtect, SD-WAN and Data Loss Prevention] are sold as options to our firewall appliances and software, whereas [removed: VM-Series, Traps,] AutoFocus, Prisma Access (formerly GlobalProtect cloud service), [added: CloudGenix SD-WAN,] Prisma [removed: Public] Cloud (formerly [removed: RedLock),] [added: Redlock Inc. (“RedLock”), Twistlock LTD. (“Twistlock”), PureSec Ltd. (“PureSec”) and Aporeto Inc. (“Aporeto”)),] Prisma SaaS (formerly Aperture), Cortex [removed: XDR (formerly Magnifier), Cortex] Data Lake (formerly Logging Service), [added: Cortex XDR (formerly Cortex XDR] and [added: Traps) and Cortex XSOAR (formerly] Demisto [added: Inc. (“Demisto”))] are sold on a per-user, per-endpoint, or capacity-based basis.

[removed: | • |] [added: -] Threat [removed: Prevention Subscription.] [added: Prevention.] This subscription provides [removed: the] intrusion detection and prevention capabilities [removed: of our platform. Our threat prevention engine] [added: and] blocks vulnerability exploits, viruses, spyware, buffer overflows, denial-of-service attacks, and port scans from compromising and damaging enterprise information resources. [removed: It includes mechanisms such as protocol decoder-based analysis, protocol anomaly-based protection, stateful pattern matching, statistical anomaly detection, heuristic-based analysis, custom vulnerability, and spyware “phone home” signatures. |]

[removed: | • | WildFire Subscription. This cloud-based or appliance-based subscription provides protection against targeted malware and advanced persistent threats, and provides a near real-time analysis engine for detecting previously unseen malware.] The core component of this subscription is a sandbox environment that can operate on an end-customers’ private cloud or our public [removed: cloud] [added: cloud,] where files can be run and monitored for more than 100 behavioral characteristics that identify the file as malware. [removed: Once identified, preventive measures are automatically generated and delivered to all subscribed devices. By providing this as a cloud-based subscription, all of our end-customers benefit from malware found on any network. |]

[removed: | • | AutoFocus Subscription.] This [removed: cloud-based subscription provides threat intelligence capabilities to our end-customers’ security operations teams. Indicators of compromise and anomalies that occur on an end-customer’s network can be correlated with similar data that has been centrally collected from among all our participating end-customers. This] offers our end-customers priority alerts, deep attack context, and high-fidelity threat intelligence across millions of malware samples and tens of billions of file artifacts. [removed: |]

[removed: | • | DNS Security Service Subscription. This cloud-based subscription uses machine learning to proactively block malicious domains and stops attacks in progress.] It [removed: offers] [added: allows] firewalls [removed: with] access to DNS signatures [added: that are] generated using advanced predictive [removed: analysis and] [added: analysis,] machine [removed: learning using] [added: learning, and] malicious domain data from a growing threat intelligence sharing [removed: community. |][added: community of which we are a part.]

[removed: | • |] [added: -] Prisma [removed: Access (formerly GlobalProtect Cloud Service) Subscription.] [added: Access.] This cloud-based subscription enables our end-customers to utilize the preventive capabilities of our [removed: Security Operating Platform] [added: portfolio] to secure remote offices and mobile users, providing consistent protection across globally distributed network and cloud environments without the need for firewall appliances or software in the remote locations. [removed: With this offering, our end-customers can quickly and easily add or remove remote locations and users, and establish and adjust security policies as needed, using a multi-tenant, cloud-based security infrastructure that we operate on their behalf. |]

[removed: | • |] [added: -] Cortex Data [removed: Lake (formerly Logging Service) Subscription.] [added: Lake.] This cloud-based subscription allows our [removed: end-customers] [added: customers] to collect large amounts of context-rich [removed: data] [added: enhanced network logs] generated by our security offerings, including those of our [added: ML-powered] Next-Generation Firewalls, Prisma Access [removed: (formerly GlobalProtect cloud service)] subscription, and [removed: Traps,] [added: Cortex XDR subscription,] without needing to plan for local [removed: processing power and] [added: data] storage. [removed: |]

[removed: | • |] [added: -] Cortex [removed: XDR (formerly Magnifier) Subscription.] [added: XDR.] This cloud-based subscription enables organizations to identify and stop the most sophisticated attacks by applying AI and machine learning to [added: context] rich network, endpoint, and cloud [removed: data. |][added: data, to quickly find and stop targeted attacks, insider abuse, and compromised endpoints.]

[removed: | • | Demisto. Available as a cloud-based subscription or on-premises appliance, Demisto is a comprehensive SOAR platform that combines playbook orchestration, incident management, and real-time collaboration to serve security teams across the incident lifecycle.] With [removed: Demisto,] [added: Cortex XSOAR,] security teams can standardize processes, automate repeatable tasks and manage incidents across their security product stack to improve response time and analyst productivity. [removed: |]

[added: Support.] We offer Standard Support, Premium Support, [removed: and] four-hour Premium Support [added: and Platinum Support] to our end-customers and channel partners.

[added: Professional Services.] Professional services are delivered directly [added: by us] and through our authorized channel partners [added: to our end-customers] and include on-location and remote, hands-on experts who plan, design, and deploy effective security solutions tailored to our end-customers’ specific requirements.

Our education services provide online and [removed: classroom-style] [added: in-classroom] training and are also primarily delivered through our authorized training partners.

[removed: Technology][added: Technology]

It includes mechanisms such as protocol decoder-based analysis, protocol anomaly-based protection, stateful pattern matching, statistical anomaly detection, heuristic-based analysis, custom [removed: vulnerability,] [added: vulnerability] and spyware “phone home” [removed: signatures.][added: signatures, and workflows to manage popular open-source signature formats to extend our leading coverage.]

By providing [removed: WildFire] [added: this] as a cloud-based [removed: service,] [added: subscription,] all of our end-customers benefit from malware found on any [removed: network or endpoint.][added: of our end-customer’s networks.]

Our [added: cloud-based] URL filtering database consists of millions of URLs across many categories and is designed to [removed: monitor and control employee] [added: analyze] web [removed: surfing activities.][added: traffic and prevent web-based threats such as phishing, malware, and command-and-control.]

The [added: curated] on-appliance URL database can be augmented to suit the traffic patterns of the local user community with a custom URL database.

Our end-customers [added: deploy our portfolio of products for a]

[added: Certifications.] Many of our products have been awarded Federal Information Processing Standard (“FIPS”) 140-2 Level 2, Common Criteria/National Information Assurance Partnership (“NIAP”) Evaluation Assurance Level [removed: (“EAL”)] [added: (“EAL”)] 2, Common Criteria/NIAP EAL4+, Network Equipment-Building System (“NEBS”), and ICSA Firewall certifications.

[removed: Research] [added: Research] and [removed: Development][added: Development]

Our research and development [removed: effort is] [added: efforts are] focused on developing new hardware and software and on enhancing and improving our existing product and subscription offerings.

We supplement our own research and development [removed: effort] [added: efforts] with technologies and products that we license from third parties.

We plan to continue to significantly invest in our research and development effort as we evolve and extend the capabilities of our [removed: platform.][added: portfolio.]

[removed: Intellectual Property][added: Intellectual Property]

[removed: Competition][added: Competition]

Our main competitors fall into [removed: three] [added: five] categories:

Palo Alto Networks, Inc. is a global cybersecurity provider with a vision of a world where each day is safer and more secure than the one before.

We were incorporated in 2005 and are headquartered in Santa Clara, California.

We empower enterprises, service providers, and government entities to secure all users, applications, data, networks and devices with comprehensive visibility and context continuously across all locations.

We deliver cybersecurity products covering a broad range of use cases, enabling our end-customers to secure their networks, remote workforce, access to the service edge, branch locations, public and private clouds, and to advance their Security Operations Centers (“SOC”).

We believe our portfolio offers advanced prevention and security, while reducing the total cost of ownership for organizations by improving operational efficiency and eliminating the need for siloed point products.

We do this with solutions focused on delivering value in three fundamental areas:

- Secure the network through our ML-powered Next-Generation Firewalls, available in a number of form factors, including physical, virtual and containerized appliances, as well as a cloud-delivered service, with Panorama management available as an appliance or as a virtual machine for the public or private cloud.

- Secure the cloud through our Prisma security offerings, such as Prisma Cloud, the industry’s most comprehensive Cloud Native Security Platform (“CNSP”), protecting applications, data and the entire cloud native technology stack, throughout the full development lifecycle and across multi- and hybrid- cloud environments, Prisma SaaS for protecting SaaS applications, Prisma Access, a comprehensive Secure Access Service Edge (“SASE”) offering, that, together with CloudGenix SD-WAN, securing SD-WAN to enable the cloud delivered branch, and VM-Series and CN-Series for in-line network security in multi- and hybrid- cloud environments.

These products are delivered as software or SaaS subscriptions.

Impact of COVID-19 on our Business

We are actively monitoring, evaluating and responding to developments relating to COVID-19, which has and is expected to result in continued significant global social and business disruption.

While we instituted a global work-from-home policy beginning in March 2020, we did not incur significant disruptions in our work operations during fiscal 2020.

We are conducting business as usual with restrictions to employee travel and transitioning of in-person marketing events to virtual formats, among other modifications.

These changes will substantially remain in effect in the first quarter of fiscal 2021 and are likely to extend to future quarters.

We will continue to actively monitor the situation and will make further changes to 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, end-customers, partners, suppliers and stockholders.

Our focus remains on the safety of our employees, striving to protect the health and well-being of the communities in which we operate, and providing technology to our employees, end-customers and partners to help them do their best work while remote.

Although some end-customers adopted Prisma Access as their secure work-from-home solution for the longer term, COVID-19 may curtail our end-customers' spending and could lead them to delay or defer purchasing decisions, and lengthen sales cycles and payment terms, which could materially adversely impact our business, results of operations and overall financial performance.

Also, certain of our end-customers or partners may be or may become credit or cash constrained making it difficult for them to fulfill their payment obligations to us.

The extent of the impact of COVID-19 on our operational and financial performance will depend on developments, including the duration and spread of the virus, impact on our end-customers’ spending, volume of sales and length of our sales cycles, impact on our partners, suppliers and employees, actions that may be taken by governmental authorities and other factors identified in Part I, Item 1A "Risk Factors" in this Form 10-K.

Given the dynamic nature of these circumstances, the full impact of COVID-19 on our ongoing business, results of operations and overall financial performance cannot be reasonably estimated at this time.

Secure the Enterprise:

- WildFire. This cloud-based or appliance-based subscription provides protection against targeted malware and advanced persistent threats and provides a near real-time analysis engine for detecting previously unseen malware while resisting attacker evasion techniques.

A machine learning module derived from the cloud sandbox environment is now delivered in-line on the ML-powered Next-Generation Firewalls to identify the majority of unknown threats without cloud connectivity.

Once identified, whether in the cloud or in-line, preventive measures are automatically generated and delivered to all subscribed devices in seconds or less.

- URL Filtering. This subscription provides the uniform resource locator (“URL”) filtering capabilities of our portfolio.

Our cloud-delivered service features network-based phishing protection, including a machine learning module delivered inline on our ML-powered Next-Generation Firewalls.

These machine learning techniques can detect and stop never before seen threats and evasive phishing before they reach users or endpoints.

Native integration with our ML-

powered Next-Generation Firewalls eliminates the need for customers to deploy and manage their web security separately from network security.

- DNS Security. This cloud-based subscription uses machine learning to proactively block malicious domains and stops attacks in progress.

Unlike other solutions, it does not require endpoint routing configurations to be maintained and therefore cannot be by-passed.

Expanded categorization of DNS traffic and comprehensive analytics allow deep insights into threats, empowering security personnel with the context to optimize their security posture.

- IoT Security. IoT Security is a new subscription on our ML-powered Next-Generation Firewalls with backward compatibility to older versions of PAN-OS.

Using machine learning and our App-ID technology, it can accurately identify and classify various IoT and operational technology (“OT”) devices including never-been-seen-before devices, mission critical OT devices and unmanaged legacy systems.

It uses machine learning to baseline normal behavior, identify anomalous activity, assess risk, and provide policy recommendations to allow trusted behavior with a new Device-ID policy construct on our ML-powered Next-Generation Firewalls.

Our existing subscription-based security services have also been enhanced with IoT context to prevent threats on various devices, including IoT and OT devices.

- GlobalProtect. This appliance-based subscription provides protection for users of both traditional laptop and mobile devices.

It expands the boundaries of the end-users’ physical network, effectively establishing a logical perimeter that encompasses remote laptop and mobile device users irrespective of their location.

When a remote user logs into the device, GlobalProtect automatically determines the closest gateway available to the roaming device and establishes a secure connection.

Regardless of the operating systems, laptops, tablets and phones will stay connected to the corporate network when they are on a network of any kind and as a result, are protected as if they never left the corporate campus.

We were incorporated in 2005 as Palo Alto Networks, Inc., a Delaware corporation.

Our corporate headquarters are located in Santa Clara, California.

We have pioneered the next generation of security through our innovative platform that empowers enterprises, service providers, and government entities to secure their organizations by safely enabling applications and data running in their networks, on their endpoints, and in the cloud, and by preventing breaches that stem from targeted cyberattacks.

Our platform uses an innovative traffic classification engine that identifies network traffic by application, user, and content and provides consistent security across the network, endpoint, and cloud.

Accordingly, our platform enables our end-customers to pursue transformative digital initiatives, like public cloud and mobility, that grow their business, while maintaining the visibility and control needed to protect their valued data and critical control systems.

We believe the architecture of our platform offers superior performance compared to legacy approaches and reduces the total cost of ownership for organizations by simplifying their security operations and infrastructure and eliminating the need for multiple, stand-alone hardware and software security products, and consists of three primary areas of security capabilities.

| | |

| --- | --- |

| • | Secure the endpoints through our Traps advanced endpoint protection software, delivered as a light-weight software agent with cloud or on-premise management capabilities. |

| • | Secure the cloud through our Prisma cloud security offerings, such as Prisma Public Cloud (formerly RedLock) for security and compliance in public clouds, Prisma Access (formerly GlobalProtect cloud service) for securing user access, Prisma SaaS (formerly Aperture) for protecting SaaS applications, VM-Series for in-line network security in public and private clouds, Traps for host-based public cloud infrastructure protection, and Twistlock for protecting containers in public and private clouds, as well as PureSec for protecting serverless functions in public clouds. |

Panorama.

appliance or a physical appliance.

Panorama reliably expands the log storage for long-term event investigation and analysis through high-availability features for central management.

Virtual System Upgrades.

Subscription Offerings.

| • | URL Filtering Subscription. This subscription provides the uniform resource locator (“URL”) filtering capabilities of our platform. The URL filtering database consists of millions of URLs across many categories and is designed to monitor and control employee web surfing activities. The on-appliance URL database can be augmented to suit the traffic patterns of the local user community with a custom URL database. URLs that are not categorized by the local URL database can be pulled into a separate, cache-based URL database from a very extensive, cloud-based URL database. |

| • | GlobalProtect Subscription. This appliance-based subscription provides protection for mobile users of both traditional laptop devices and mobile devices. It expands the boundaries of the physical network, effectively establishing a logical perimeter that encompasses remote laptop and mobile device users irrespective of their location. When a remote user logs into the device, GlobalProtect automatically determines the closest gateway available to the roaming device and establishes a secure connection. Windows and Apple laptops as well as mobile devices, such as Android phones and tablets and Apple iPhones and iPads, will stay connected to the corporate network whenever they are on a network of any kind. As a result, they are protected as if they never left the corporate campus. GlobalProtect ensures that the same secure application enablement policies that protect users at the corporate site are enforced for all users, independent of their location. |

| • | VM-Series Subscription. VM-Series, the software form factor of our Next-Generation Firewall, is offered as both a perpetual license as well as a term-based subscription. The VM-Series provides all of the same security capabilities of our hardware appliances, but is delivered as a software package that can be deployed on VMware’s NSX and ESXi, Microsoft’s Hyper-V, and Red Hat KVM hypervisors, as well as natively in Amazon Web Services (“AWS”) cloud, Microsoft Azure cloud (“Azure”), and Google Cloud Platform (“GCP”). |

| • | Traps Endpoint Protection Subscription. This subscription provides protection for endpoints against cyberattacks that aim to run malicious code or exploit software vulnerabilities. It prevents known and previously unknown attacks through its unique capability of stopping the underlying exploit techniques and can prevent cyberattacks without relying on prior knowledge of the attack. Through its local machine learning engine, it can prevent cyberattacks that rely on malware, including continuously learning via its integration with WildFire. Traps offers the unique Behavioral Threat Protection engine intended to stop the most sophisticated attacks by examining multiple behaviors together to uncover and stop threats. |

| • | Prisma Public Cloud (formerly RedLock) Subscription. This cloud-based subscription provides comprehensive visibility and threat detection across our end-customers’ public cloud environments. |

| • | Prisma SaaS (formerly Aperture) Subscription. This cloud-based subscription provides content control for IT-sanctioned SaaS applications. It offers end-customers the capability to safely use these SaaS applications and avert risks associated with improper sharing of confidential data and risks associated with sharing of malicious content. |

Support.

Professional Services.

We combine our proprietary hardware and software architecture to provide a comprehensive security platform.

Our Next-Generation Firewall integrates application visibility and control and is comprised of three identification technologies: App-ID, User-ID, and Content-ID.

These technologies allow organizations to enable the secure use of applications while managing the inherent risks of doing so.

These fine-grained policy management and enforcement capabilities are delivered at low latency, multi-gigabit performance through our innovative single-pass, parallel processing (“SP3”) architecture.

App-ID.

App-ID is our application classification engine that uses multiple identification techniques to determine the exact identity of applications traversing the network.

App-ID is the foundational classification engine that provides the core traffic classification to all other functions in our platform.

The App-ID classification is used to invoke other security functions.

App-ID uses a series of classification techniques to accurately identify an application.

When traffic first enters the network, App-ID applies an initial policy check based on Internet Protocol (“IP”) and port.

Signatures are then applied to the traffic to identify the application based on application properties and related transaction characteristics.

If the traffic is encrypted and a decryption policy is in place, the application is first decrypted, then application signatures are applied.

Additional context-based signature analysis is then performed to identify known protocols that may be hiding other applications.

Encrypted traffic that was decrypted is then re-encrypted before being sent back into the network.

For evasive applications that cannot be identified through advanced signature and protocol analysis, heuristics or behavioral analysis are used to determine the identity of the application.

When an application is accurately identified during this series of successive techniques, the policy check determines how to treat the application and associated functions.

The policy check can block the application, allow it and scan for threats, inspect it for unauthorized file transfer and data patterns, or shape its use of network resources by applying a quality-of-service policy.

The information set forth under the “Litigation” subheading in Note [removed: 11.][added: 12.]

Commitments and Contingencies [removed: of Notes to Consolidated Financial Statements] in Part II, Item 8 of this Annual Report on Form 10-K is incorporated herein by reference.

| | |

| --- | --- |

[removed: UNITED STATES][added: UNITED STATES]

[removed: SECURITIES] [added: SECURITIES] AND EXCHANGE [removed: COMMISSION][added: COMMISSION]

[removed: Washington,] [added: Washington,] D.C. [removed: 20549][added: 20549]

[removed: FORM 10-K][added: FORM 10-K]

[removed: (Mark One)][added: (Mark One)]

[removed: | x | ANNUAL] [added: ☒ ANNUAL] REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF [removed: 1934 |][added: 1934]

[removed: For] [added: For] the fiscal year [removed: ended] [added: ended] July 31, [removed: 2019][added: 2020]

[removed: | ¨ | TRANSITION] [added: ☐ TRANSITION] REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF [removed: 1934 |][added: 1934]

[removed: For] [added: For] the transition period [removed: from to][added: from to]

[removed: Commission] [added: Commission] File [removed: Number 001-35594][added: Number 001-35594]

[removed: Palo] [added: Palo] Alto Networks, [removed: Inc.][added: Inc.]

[removed: (Exact] [added: (Exact] name of registrant as specified in its [removed: charter)][added: charter)]

| [removed: Delaware] [added: Delaware] | [removed: 20-2530195] | [added: | 20-2530195 | | |]

| [removed: (State] [added: (State] or other jurisdiction of incorporation or [removed: organization)] [added: organization)] | [removed: (I.R.S.] [added: | | (I.R.S.] Employer Identification [removed: No.)] [added: No.)] | [added: | |]

[removed: | 3000 Tannery Way Santa Clara, California 95054 (Address] [added: (Address] of principal executive offices, including zip [removed: code) | |][added: code)]

[removed: (408) 753-4000][added: (408) 753-4000]

[removed: (Registrant’s] [added: (Registrant’s] telephone number, including area [removed: code)][added: code)]

[removed: Securities] [added: Securities] registered pursuant to Section 12(b) of the [removed: Act:][added: Act:]

| [removed: Title] [added: Title] of each [removed: class] [added: class] | | [removed: Trading Symbol(s)] | | [removed: Name] [added: | | Trading Symbol(s) | | | | | | Name] of each exchange on which [removed: registered] [added: registered] | [added: | |]

| Common stock, $0.0001 par value per share | | [added: | | | |] PANW | | [added: | | | |] New York Stock Exchange | [added: | |]

[removed: Securities] [added: Securities] registered pursuant to Section 12(g) of the [removed: Act:][added: Act:]

Yes [removed: x] [added: ☒] No [removed: ¨][added: ☐]

Yes [removed: ¨] [added: ☐] No [removed: x][added: ☒]

| Large accelerated filer | [removed: x] | [added: | ☒ | | |] Accelerated filer | [removed: ¨] | [added: | ☐ | | |]

| Non-accelerated filer | [removed: ¨] | [added: | ☐ | | |] Smaller reporting company | [removed: ¨] | [added: | ☐ | | |]

| | | [added: | | | |] Emerging growth company | [removed: ¨] | [added: | ☐ | | |]

The aggregate market value of voting stock held by non-affiliates of the registrant was [removed: $19,595,846,244] [added: $22,950,644,677] as of January 31, [removed: 2019,] [added: 2020,] the last business day of the registrant’s most recently completed second fiscal quarter (based on the closing sales price for the common stock on the New York Stock Exchange on such date).

On August [removed: 23, 2019, 96,990,480] [added: 21, 2020, 96,373,294] shares of the registrant’s common stock, $0.0001 par value, were outstanding.

[removed: DOCUMENTS] [added: DOCUMENTS] INCORPORATED BY [removed: REFERENCE][added: REFERENCE]

Portions of the information called for by Part III of this Annual Report on Form 10-K is hereby incorporated by reference from the definitive proxy statement for the registrant’s [added: 2020] annual meeting of stockholders, which will be filed with the Securities and Exchange Commission not later than 120 days after the registrant’s fiscal year ended July 31, [removed: 2019.][added: 2020.]

[removed: TABLE] [added: TABLE] OF [removed: CONTENTS][added: CONTENTS]

| | | [removed: Page] | [added: | | | Page | | |]

| | [added: | |] PART I | | [added: | | | |]

| Item 1. | [removed: [Business](#s1158B52D65925D73B08E500103F3F213)] | [removed: [4](#s1158B52D65925D73B08E500103F3F213)] | [added: [Business](#ic3ab314b04ab4857be358cc28a025f8d_13) | | | [4](#ic3ab314b04ab4857be358cc28a025f8d_13) | | |]

| Item 1A. | [added: | |] [Risk [removed: Factors](#s752FF7419EF15EFEB609F57B03FC3B28)] [added: Factors](#ic3ab314b04ab4857be358cc28a025f8d_46)] | [removed: [12](#s752FF7419EF15EFEB609F57B03FC3B28)] | [added: | [12](#ic3ab314b04ab4857be358cc28a025f8d_46) | | |]

| Item 1B. | [added: | |] [Unresolved Staff [removed: Comments](#s4968C775595653198CD4D0F220063E40)] [added: Comments](#ic3ab314b04ab4857be358cc28a025f8d_49)] | [removed: [33](#s4968C775595653198CD4D0F220063E40)] | [added: | [34](#ic3ab314b04ab4857be358cc28a025f8d_49) | | |]

| Item 2. | [removed: [Properties](#s60AD47D7FBD2504E9F1E1EA6834C375F)] | [removed: [33](#s60AD47D7FBD2504E9F1E1EA6834C375F)] | [added: [Properties](#ic3ab314b04ab4857be358cc28a025f8d_52) | | | [34](#ic3ab314b04ab4857be358cc28a025f8d_52) | | |]

| Item 3. | [added: | |] [Legal [removed: Proceedings](#s95A1C5F8FA5552D6AF91A11DF16AEC4E)] [added: Proceedings](#ic3ab314b04ab4857be358cc28a025f8d_55)] | [removed: [34](#s95A1C5F8FA5552D6AF91A11DF16AEC4E)] | [added: | [34](#ic3ab314b04ab4857be358cc28a025f8d_55) | | |]

| Item 4. | [added: | |] [Mine Safety [removed: Disclosures](#s3E0EC6820BFE5B2A97E114AF3D423F2B)] [added: Disclosures](#ic3ab314b04ab4857be358cc28a025f8d_58)] | [removed: [34](#s3E0EC6820BFE5B2A97E114AF3D423F2B)] | [added: | [34](#ic3ab314b04ab4857be358cc28a025f8d_58) | | |]

| | [added: | |] PART II | | [added: | | | |]

or

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| --- | --- | --- | --- | --- | --- |

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3000 Tannery Way

Santa Clara, California 95054

| | | | | | | | | | | | | | | |

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Yes ☒ No ☐

Yes ☒ No ☐

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| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

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.

Yes ☐ No ☒

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| --- | --- | --- | --- | --- | --- | --- | --- | --- |

| | | | | | | | | |

| | | | | | | | | |

| | | | | | | | | |

| | | | | | | | | |

| | | | [Signatures](#ic3ab314b04ab4857be358cc28a025f8d_304) | | | [105](#ic3ab314b04ab4857be358cc28a025f8d_304) | | |

- our expectations regarding the impacts on our business, the business of our customers, suppliers and partners, and the economy as a result of the global COVID-19 pandemic and related public health measures;

- our expectation that we will increase our customer financing activities;

In light of these risks, uncertainties, and assumptions, the forward-looking events and circumstances discussed in this Annual Report on Form

10-K 1 panw-7312019x10k.htm 10-K

| | |

| --- | --- |

or

| | | | | |

| --- | --- | --- | --- | --- |

| | | | |

| --- | --- | --- | --- |

| | | |

| --- | --- | --- |

| | [Signatures](#sDCADEAB463E95FE4A00D57A894D5A818) | [107](#sDCADEAB463E95FE4A00D57A894D5A818) |

| • | our plans to use the upfront cash reimbursement received from our landlords against future rental payments; |

| • | our plans to acquire Zingbox, Inc. (“Zingbox”); the timing of when the Zingbox acquisition will be completed; the finalization of the accounting for the Zingbox acquisition; the expected benefit of the Zingbox acquisition to us and our customers; the expected impact of the acquisition on our offerings; and |

In light of

| | |

| --- | --- |

[removed: Commitments and Contingencies] [added: Leases] in Part II, Item 8 of this Annual Report on Form 10-K for more information on our operating leases.

We intend to expand our facilities or add new facilities as we add employees and enter new geographic markets, and we believe that suitable additional or alternative space will be [added: available as needed to accommodate ongoing operations and any such growth.]

Additionally, we own 5.8 acres of land adjacent to our headquarters in Santa Clara, California, which we intend to develop to accommodate future expansion, the speed of which development has been slowed due to the current environment.

We also lease a total of approximately 422,000 square feet of space at two other locations in Santa Clara, which collectively served as our previous corporate headquarters through August 2017, when we relocated to our current campus.

Approximately 122,000 square feet of our previous corporate headquarters space is being sublet, and the remaining 300,000 square feet of space is being actively marketed for sublease.

The leases for our previous corporate headquarters expire in April 2021 and July 2023.

\- 33 -

available as needed to accommodate ongoing operations and any such growth.

| | |

| --- | --- |

[removed: PART II][added: PART II]

| | |

| --- | --- |

[removed: Market Information][added: Market Information]

[removed: Holders] [added: Holders] of [removed: Record][added: Record]

As of August [removed: 23, 2019,] [added: 21, 2020,] there were [removed: 83] [added: 151] holders of record of our common stock.

[removed: Securities] [added: Securities] Authorized for Issuance under Equity Compensation [removed: Plans][added: Plans]

[removed: Recent] [added: Recent] Sale of Unregistered [removed: Securities][added: Securities]

[removed: Purchases] [added: Purchases] of Equity Securities by the Issuer and Affiliated [removed: Purchasers][added: Purchasers]

[added: (1)] On February 26, 2019, we announced that our board of directors authorized a $1.0 billion share repurchase program which will be funded from available working capital.

The repurchase authorization will expire on December 31, [removed: 2020,] [added: 2020] and may be suspended or discontinued at any time.

[removed: Between May 1, 2019 and May 31, 2019, June 1, 2019 and June 30, 2019, and July 1, 2019 and July 31, 2019,] [added: (2) Includes] shares of restricted common stock [removed: were] delivered by certain employees upon vesting of equity awards to satisfy tax withholding requirements.

The [removed: average value] [added: number] of shares delivered [added: by these employees] to satisfy tax withholding requirements during [removed: these periods] [added: the period] was [removed: $223.69, $200.09, and $222.26, respectively.][added: not significant.]

[removed: Stock] [added: Stock] Price Performance [removed: Graph][added: Graph]

[removed: This] [added: *This] performance graph shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or incorporated by reference into any filing of Palo Alto Networks, Inc. under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such [removed: filing.][added: filing.*]

This performance graph compares the cumulative total return on our common stock with that of the NYSE Composite Index and the NYSE Arca Tech 100 Index for the five years ended July 31, [removed: 2019.][added: 2020.]

This performance graph assumes $100 was invested on July 31, [removed: 2014,] [added: 2015,] in each of the common stock of Palo Alto Networks, Inc., the NYSE Composite Index, and the NYSE Arca Tech 100 Index, and assumes the reinvestment of any dividends.

[removed: ][added: ]

| [removed: Company/Index] [added: Company/Index] | [removed: 7/31/2014] | | [added: 7/31/2015] | | [removed: 7/31/2015] | | | | [removed: 7/31/2016] [added: 7/31/2016] | | | | [removed: 7/31/2017] | | [added: 7/31/2017] | | [removed: 7/31/2018] | | | | [removed: 7/31/2019] [added: 7/31/2018] | | | [added: | | | 7/31/2019 | | | | | | 7/31/2020 | | |]

During fiscal 2020, we issued a total of 22,724 shares of our unregistered common stock in connection with the acquisition of Zingbox (“Zingbox Transaction”) and a total of 11,983 shares of our unregistered common stock in connection with the acquisition of Aporeto (“Aporeto Transaction”).

None of the Zingbox Transaction or Aporeto Transaction involved any underwriters, any underwriting discounts or commissions, or any public offering.

We believe the offers, sales, and issuances of the securities pursuant to the Zingbox Transaction, were exempt from registration under the Securities Act of 1933, as amended (the “Act”) by virtue of Section 4(a)(2) of the Act and Rule 506 of Regulation D promulgated thereunder, because the issuance of securities to the recipients did not involve a public offering.

The recipients of the securities in the Zingbox Transaction represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were placed upon the stock certificates issued in these transactions.

All recipients had adequate access, through their relationships with us or otherwise, to information about us.

The issuances of these securities were made without any general solicitation or advertising.

During fiscal 2020, we also issued 2.0 million shares of our common stock to certain financial counterparties that were holders of warrants that we issued in connection with the issuance of our 2019 Notes.

The shares of common stock issued upon exercise of these warrants were issued in reliance on an exemption from registration provided by Section 3(a)(9) of the Securities Act of 1933, as amended.

The following table summarizes stock repurchases during the three months ended July 31, 2020 (in millions, except per share amounts):

| | | | | | | | | | | | | | | | | | | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| Period | | | | | | Total Number of Shares Purchased | | | | | | Average Price Paid per Share | | | | | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1) | | | | | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs(1) | | |

| May 1, 2020 to May 31, 2020(2) | | | | | | 0.0 | | | | | | $ | 195.15 | | | | | 0.0 | | | | | | $ | 801.9 | |

| June 1, 2020 to June 30, 2020(2)(3) | | | | | | 1.0 | | | | | | $ | 209.28 | | | | | 1.0 | | | | | | $ | 801.9 | |

| July 1, 2020 to July 31, 2020(2) | | | | | | 0.0 | | | | | | $ | 251.79 | | | | | 0.0 | | | | | | $ | 801.9 | |

| Total | | | | | | 1.0 | | | | | | $ | 209.82 | | | | | 1.0 | | | | | | | | |

______________

On February 24, 2020, we announced that our board of directors approved the repurchase of $1.0 billion of our common stock through an accelerated share repurchase (“ASR”) transaction, which was completed in fiscal 2020.

This ASR was in addition to our above-mentioned share repurchase authorization.

(3) Includes repurchases under our ASR transaction.

During the three months ended July 31, 2020, we purchased approximately 1.0 million shares out of the 5.2 million shares of our common stock purchased under the ASR transaction, to conclude the program.

| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| Palo Alto Networks, Inc. | | | $ | 100.00 | | | | | $ | 70.44 | | | | | $ | 70.91 | | | | | $ | 106.69 | | | | | $ | 121.91 | | | | | $ | 137.72 | |

| NYSE Composite Index | | | $ | 100.00 | | | | | $ | 99.11 | | | | | $ | 109.97 | | | | | $ | 119.12 | | | | | $ | 120.07 | | | | | $ | 114.54 | |

| NYSE Arca Tech 100 Index | | | $ | 100.00 | | | | | $ | 101.00 | | | | | $ | 124.57 | | | | | $ | 155.55 | | | | | $ | 167.37 | | | | | $ | 193.31 | |

There were no sales of unregistered securities during fiscal 2019 other than those transactions previously reported on our Current Reports on Form 8-K.

There were no shares repurchased under our share repurchase program during the three months ended July 31, 2019.

As of July 31, 2019, $1.0 billion remained available for future share repurchases under our repurchase program.

The number of shares delivered to satisfy tax withholding requirements in these periods was not significant.

| | | | | | | | | | | | | | | | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| Palo Alto Networks, Inc. | $ | 100.00 | | | $ | 229.82 | | | $ | 161.87 | | | $ | 162.97 | | | $ | 245.19 | | | $ | 280.16 | |

| NYSE Composite Index | $ | 100.00 | | | $ | 101.45 | | | $ | 100.55 | | | $ | 111.57 | | | $ | 120.85 | | | $ | 121.82 | |

| NYSE Arca Tech 100 Index | $ | 100.00 | | | $ | 110.96 | | | $ | 112.07 | | | $ | 138.23 | | | $ | 172.60 | | | $ | 185.71 | |

| | |

| --- | --- |

The selected consolidated statement of operations data for fiscal [added: 2020,] 2019, [removed: 2018,] and [removed: 2017] [added: 2018] and consolidated balance sheet data as of July 31, [removed: 2019] [added: 2020] and [removed: 2018] [added: 2019] are derived from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

The selected consolidated statement of operations data for fiscal [removed: 2016] [added: 2017] and [removed: 2015] [added: 2016] and consolidated balance sheet data as of July 31, [added: 2018,] 2017, [removed: 2016,] and [removed: 2015] [added: 2016] are derived from audited financial statements not included in this Annual Report on Form 10-K.

| | [removed: Year] [added: | | Year] Ended July [removed: 31,] [added: 31,] | | | | | | | | | | | | | | | | | | | [added: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |]

| | [removed: 2019] | | [added: 2020] | | [removed: 2018] | | | | [removed: 2017] [added: 2019] | | | | [removed: 2016] | | [added: 2018] | | [removed: 2015] | | | [added: | 2017 | | | | | | 2016 | | | | | | | | | | | | | | | | | | | | | | | | | | |]

| | [removed: (in millions)] | | [added: (in millions)] | | | | | | | | | | | | | | | | | [added: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |]

| [removed: Selected] [added: Selected] Consolidated Statements of Operations [removed: Data:] [added: Data:] | | | | | | | | | | | | | | | | | | | | [added: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |]

| Total revenue(1) | [added: | |] $ | [added: 3,408.4 | | | | | $ |] 2,899.6 | | | [added: | |] $ | 2,273.6 | | | [added: | |] $ | 1,755.1 | | | [added: | |] $ | 1,378.5 | | | [removed: $] | [removed: 928.1] | | [added: | | | | | | | | | | | | | | | | | | | |]

| Total gross profit(1) | [added: | | 2,408.9 | | | | | |] 2,091.2 | | | | [added: | |] 1,628.5 | | | | [added: | |] 1,278.7 | | | | [added: | |] 1,008.5 | | | | [removed: 676.6] | | | [added: | | | | | | | | | | | | | | | | | | | |]

| Operating loss(1) | [removed: (54.1] | | [removed: )] [added: (179.0)] | | [removed: (104.2] | | [removed: )] | | [removed: (165.8] [added: (54.1)] | | [removed: )] | | [removed: (157.3] | | [removed: )] [added: (104.2)] | | [removed: (99.8] | | [removed: )] | [added: | (165.8) | | | | | | (157.3) | | | | | | | | | | | | | | | | | | | | | | | | | | |]

| Net loss(1) | [added: | |] $ | [removed: (81.9] [added: (267.0)] | [removed: )] | | [added: | |] $ | [removed: (122.2] [added: (81.9)] | [removed: )] | | [added: | |] $ | [removed: (203.0] [added: (122.2)] | [removed: )] | | [added: | |] $ | [removed: (192.7] [added: (203.0)] | [removed: )] | | [added: | |] $ | [removed: (131.3] [added: (192.7)] | [removed: )] | [added: | | | | | | | | | | | | | | | | | | | | | | | |]

| Net loss per share, basic and diluted(1) | [added: | |] $ | [removed: (0.87] [added: (2.76)] | [removed: )] | | [added: | |] $ | [removed: (1.33] [added: (0.87)] | [removed: )] | | [added: | |] $ | [removed: (2.24] [added: (1.33)] | [removed: )] | | [added: | |] $ | [removed: (2.21] [added: (2.24)] | [removed: )] | | [added: | |] $ | [removed: (1.61] [added: (2.21)] | [removed: )] | [added: | | | | | | | | | | | | | | | | | | | | | | | |]

| Weighted-average shares used to compute net loss per share, basic and diluted | [added: | | 96.9 | | | | | |] 94.5 | | | | [added: | |] 91.7 | | | | [added: | |] 90.6 | | | | [added: | |] 87.1 | | | | [removed: 81.6] | | | [added: | | | | | | | | | | | | | | | | | | | |]

| | [removed: July 31,] | | [added: July 31,] | | | | | | | | | | | | | | | | | [added: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |]

| [removed: Selected] [added: Selected] Consolidated Balance Sheet [removed: Data:] [added: Data:] | | | | | | | | | | | | | | | | | | | | [added: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |]

| Cash and cash equivalents | [added: | |] $ | [added: 2,958.0 | | | | | $ |] 961.4 | | | [added: | |] $ | 2,506.9 | | | [added: | |] $ | 744.3 | | | [added: | |] $ | 734.4 | | | [removed: $] | [removed: 375.8] | | [added: | | | | | | | | | | | | | | | | | | | |]

| Investments | [added: | | 1,344.2 | | | | | |] 2,417.1 | | | | [added: | |] 1,444.0 | | | | [added: | |] 1,420.0 | | | | [added: | |] 1,204.0 | | | | [removed: 952.0] | | | [added: | | | | | | | | | | | | | | | | | | | |]

| Working capital(1)(2) | [added: | | 2,437.5 | | | | | |] 1,611.5 | | | | [added: | |] 2,036.8 | | | | [added: | |] 818.1 | | | | [added: | |] 927.2 | | | | [removed: 79.3] | | | [added: | | | | | | | | | | | | | | | | | | | |]

| Total assets(1) | [added: | | 9,065.4 | | | | | |] 6,592.2 | | | | [added: | |] 5,948.9 | | | | [added: | |] 3,538.5 | | | | [added: | |] 2,858.2 | | | | [removed: 2,026.1] | | | [added: | | | | | | | | | | | | | | | | | | | |]

| Total deferred revenue(1) | [added: | | 3,810.2 | | | | | |] 2,888.7 | | | | [added: | |] 2,279.3 | | | | [added: | |] 1,692.4 | | | | [added: | |] 1,240.8 | | | | [removed: 713.7] | | | [added: | | | | | | | | | | | | | | | | | | | |]

| Convertible senior notes, net(2) | [added: | | 3,084.1 | | | | | |] 1,430.0 | | | | [added: | |] 1,920.1 | | | | [added: | |] 524.7 | | | | [added: | |] 500.2 | | | | [removed: 476.8] | | | [added: | | | | | | | | | | | | | | | | | | | |]

| Common stock and additional paid-in capital | [added: | | 2,259.2 | | | | | |] 2,490.9 | | | | [added: | |] 1,967.4 | | | | [added: | |] 1,599.7 | | | | [added: | |] 1,515.5 | | | | [removed: 988.7] | | | [added: | | | | | | | | | | | | | | | | | | | |]

| Total stockholders’ equity(1) | [added: | |] $ | [added: 1,101.8 | | | | | $ |] 1,586.3 | | | [added: | |] $ | 1,160.3 | | | [added: | |] $ | 927.8 | | | [added: | |] $ | 894.9 | | | [removed: $] | [removed: 559.7] | | [added: | | | | | | | | | | | | | | | | | | | |]

[removed: | (1) | The] [added: (1)The] amounts for fiscal 2018 and 2017 have been adjusted due to our adoption of the new revenue recognition standard. [removed: Fiscal years prior to 2017 have not been adjusted. Refer to Note 1. Description of Business and Summary of Significant Accounting Policies in Part II, Item 8 of this Annual Report on Form 10-K for more information. |]

[removed: | (2) | The] [added: (2)The] net carrying amount of the 2019 Notes was classified as a current liability in our consolidated balance sheets as of July 31, [removed: 2018, and July 31, 2015,] [added: 2018] and was classified as a long-term liability for all other prior periods presented. [removed: None of the 2019 Notes remained outstanding as of July 31, 2019. The net carrying amount of the 2023 Notes was classified as a long-term liability as of July 31, 2019 and July 31, 2018. Refer to Note 10. Debt in Part II, Item 8 of this Annual Report on Form 10-K for more information on the Notes. |]

| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |

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| | | | (in millions, except per share data) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |

| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| | | | 2020 | | | | | | 2019 | | | | | | 2018 | | | | | | 2017 | | | | | | 2016 | | | | | | | | | | | | | | | | | | | | | | | | | | |

| Long-term operating lease liabilities(3) | | | 336.6 | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | |

Fiscal year 2016 has not been adjusted.

The net carrying amounts of the 2023 Notes and 2025 Notes were classified as a long-term liability in the periods they were presented.

Refer to Note 10.

Debt in Part II, Item 8 of this Annual Report on Form 10-K for more information on the Notes.

(3)We adopted the new lease accounting standard effective August 1, 2019 on a modified retrospective basis, under which financial results reported in periods prior to fiscal 2020 were not adjusted.

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| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| | |

| --- | --- |

[removed: INDEX] [added: INDEX] TO CONSOLIDATED FINANCIAL [removed: STATEMENTS][added: STATEMENTS]

| [Reports of Independent Registered Public Accounting [removed: Firm](#sB7FD28371E3C587F989A3B9F4504BC47)] [added: Firm](#ic3ab314b04ab4857be358cc28a025f8d_160)] | [removed: [56](#sB7FD28371E3C587F989A3B9F4504BC47)] | [added: | [55](#ic3ab314b04ab4857be358cc28a025f8d_160) | | |]

[removed: | [Management’s Report on Internal Control Over Financial Reporting](#s80FF314ACEDC5280BA20C7E6F696DCD7) | [59](#s80FF314ACEDC5280BA20C7E6F696DCD7) |][added: MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING]

[removed: | [Consolidated Balance Sheets](#s96ECAA7E747F53E8917C54912910255C) | [60](#s96ECAA7E747F53E8917C54912910255C) |][added: CONSOLIDATED BALANCE SHEETS]

[removed: | [Consolidated Statements of Operations](#s04F6D127ECCF5793B8EB89290EE78C46) | [61](#s04F6D127ECCF5793B8EB89290EE78C46) |][added: CONSOLIDATED STATEMENTS OF OPERATIONS]

[removed: | [Consolidated Statements of Comprehensive Loss](#s464657437D865CB8A8E27B5BD22896A8) | [62](#s464657437D865CB8A8E27B5BD22896A8) |][added: CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS]

[removed: | [Consolidated Statements of Stockholders’ Equity](#s5DC712A544BF557FB89111AF359FC2EA) | [63](#s5DC712A544BF557FB89111AF359FC2EA) |][added: CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY]

[removed: | [Consolidated Statements of Cash Flows](#sC8236C4CDDD65A14831B86E1BB998603) | [64](#sC8236C4CDDD65A14831B86E1BB998603) |][added: CONSOLIDATED STATEMENTS OF CASH FLOWS]

[removed: | [Notes to Consolidated Financial Statements](#s8E5BF40FBAD752FEB3FA4B6C7B285AAE) | [66](#s8E5BF40FBAD752FEB3FA4B6C7B285AAE) |][added: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS]

[removed: REPORT] [added: REPORT] OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING [removed: FIRM][added: FIRM]

[removed: Opinion] [added: Opinion] on the Financial [removed: Statements][added: Statements]

We have audited the accompanying consolidated balance sheets of Palo Alto Networks, Inc. (the Company) as of July 31, [removed: 2019] [added: 2020] and [removed: 2018,] [added: 2019,] the related consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for each of the three years in the period ended July 31, [removed: 2019,] [added: 2020,] and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at July 31, [removed: 2019] [added: 2020] and [removed: 2018,] [added: 2019,] and the results of its operations and its cash flows for each of the three years in the period ended July 31, [removed: 2019,] [added: 2020,] in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of July 31, [removed: 2019,] [added: 2020,] based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated September [removed: 9, 2019] [added: 4, 2020] expressed an unqualified opinion thereon.

[removed: Basis] [added: Basis] for [removed: Opinion][added: Opinion]

[removed: Critical] [added: Critical] Audit [removed: Matters][added: Matters]

| | | [removed: Revenue Recognition] | [added: | | | Revenue Recognition | | |]

| [removed: Description] [added: *Description] of the [removed: Matter] [added: Matter*] | | [added: | | | |] As described in Note 1 to the consolidated financial statements, the [removed: Company adopted ASU No. 2014‑09, Revenue from Contracts with Customers, as amended, in the year ended July 31, 2019. The] Company’s contracts with customers sometimes contain multiple performance obligations, which are accounted for separately if they are distinct. In such cases, the transaction price is then allocated to the distinct performance obligations on a relative standalone selling price [removed: basis] [added: basis,] and revenue is recognized when control of the distinct performance obligation is transferred. For example, product revenue is recognized at the time of hardware shipment or delivery of software license, and subscription and support revenue is recognized over time as the services are performed. Auditing the [removed: Company’s] [added: Company's] revenue recognition was [removed: challenging, specifically related to the effort required to analyze the effect of ASU No. 2014‑09 on the Company’s various product offerings as part of the Company’s implementation using the full retrospective method of adoption, as well as ongoing accounting. This included] [added: complex, including] the identification and determination of [removed: the] distinct performance obligations and the timing of revenue recognition. For example, there were nonstandard terms and conditions that required judgment to determine the distinct performance obligations and the impact on the timing of revenue recognition. | [added: | |]

| [removed: How] [added: *How] We Addressed the Matter in Our [removed: Audit] [added: Audit*] | | [added: | | | |] We obtained an understanding, evaluated the design and tested the operating effectiveness of the [removed: Company’s] [added: Company's] process and controls to identify and determine the distinct performance obligations and the timing of revenue recognition. [removed: Among the procedures we performed to] [added: To] test the identification and determination of the distinct performance obligations and the timing of revenue recognition, [removed: we read] [added: our audit procedures included, among others, reading] the executed contract and purchase order to understand the contract, [removed: identified] [added: identifying] the performance obligation(s), [removed: determined] [added: determining] the distinct performance obligations, and [removed: evaluated] [added: evaluating] the timing of revenue recognition for a sample of individual sales transactions. We evaluated the accuracy of the Company’s contract summary documentation, specifically related to the identification and determination of distinct performance obligations and the timing of revenue recognition. | [added: | |]

| | | [removed: Business Combinations] | [added: | | | Business Combinations | | |]

| [removed: Description] [added: *Description] of the [removed: Matter] [added: Matter*] | | [added: | | | |] As [removed: of July 31, 2019,] [added: described in Note 6 to] the [added: consolidated financial statements, the] Company completed [removed: the acquisition of Demisto, Inc. for net consideration of $474.2 million, the] [added: an] acquisition of [removed: RedLock] [added: CloudGenix,] Inc. for net consideration of [removed: $158.2 million, and the acquisition of Twistlock Ltd. for net consideration of $378.1 million. As discussed] [added: $402.7 million] in [removed: Note 6 to] the [removed: consolidated financial statements, the] [added: year ended July 31, 2020. The] Company accounted for [removed: these acquisitions] [added: this acquisition] as [added: a] business [removed: combinations.] [added: combination.] Auditing the accounting for [removed: acquisitions] [added: the acquisition] was complex due to the significant estimation uncertainty in determining the fair values of identified intangible assets, which [removed: primarily] consisted of developed technology of [removed: $156.7] [added: $67.2] million and customer relationships of [removed: $27.6] [added: $42.7] million. The significant estimation uncertainty was primarily due to the sensitivity of the respective fair values to underlying assumptions about future performance of the acquired [removed: businesses] [added: business] and due to the limited historical data on which to base these assumptions. The significant assumptions used to form the basis of the forecasted results included revenue growth rates and technology migration curves. These significant assumptions were forward-looking and could be affected by future economic and market conditions. | [added: | |]

| [removed: How] [added: *How] We Addressed the Matter in Our [removed: Audit] [added: Audit*] | | [added: | | | |] We obtained an understanding, evaluated the design and tested the operating effectiveness of the Company’s controls over its accounting for [removed: acquisitions.] [added: the acquisition.] This included testing controls over the estimation process supporting the recognition and measurement of identified intangible assets, and management’s judgment and evaluation of underlying assumptions and estimates with regards to the fair values of the identified intangible assets. To test the estimated fair values of the identified intangible assets, our audit procedures included, among others, [removed: involvement] [added: reading the underlying agreements, testing management’s application] of [added: the relevant accounting guidance, and involving] a specialist to assist us in the evaluation of the [removed: Company’s] [added: Company's] valuation methodology and testing of the significant assumptions. For example, we compared the revenue growth rates and technology migration curves to current industry, market and economic trends. Additionally, we tested the completeness and accuracy of the underlying data supporting the significant assumptions and estimates. | [added: | |]

[removed: Opinion] [added: Opinion] on Internal Control Over Financial [removed: Reporting][added: Reporting]

We have audited Palo Alto Networks, Inc.’s internal control over financial reporting as of July 31, [removed: 2019,] [added: 2020,] based on criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria).

In our opinion, Palo Alto Networks, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of July 31, [removed: 2019,] [added: 2020,] based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of July 31, [removed: 2019] [added: 2020] and [removed: 2018,] [added: 2019,] the related consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for each of the three years in the period ended July 31, [removed: 2019,] [added: 2020,] and the related notes and our report dated September [removed: 9, 2019] [added: 4, 2020] expressed an unqualified opinion thereon.

[removed: Definition] [added: Definition] and Limitations of Internal Control Over Financial [removed: Reporting][added: Reporting]

[removed: MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING][added: | [Management’s Report on Internal Control Over Financial Reporting](#ic3ab314b04ab4857be358cc28a025f8d_166) | | | [59](#ic3ab314b04ab4857be358cc28a025f8d_166) | | |]

Management assessed the effectiveness of the Company’s internal control over financial reporting as of July 31, [removed: 2019,] [added: 2020,] based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control - Integrated Framework (2013 framework).

Based on that assessment, management concluded that, as of July 31, [removed: 2019,] [added: 2020,] the Company’s internal control over financial reporting was effective.

The effectiveness of the Company’s internal control over financial reporting as of July 31, [removed: 2019,] [added: 2020,] has been audited by Ernst & Young LLP, the independent registered public accounting firm that audits the Company’s Consolidated Financial Statements, as stated in their report preceding this report, which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of July 31, [removed: 2019.][added: 2020.]

[removed: PALO ALTO] [added: PALO ALTO] NETWORKS, [removed: INC.][added: INC.]

[removed: CONSOLIDATED BALANCE SHEETS][added: | [Consolidated Balance Sheets](#ic3ab314b04ab4857be358cc28a025f8d_169) | | | [60](#ic3ab314b04ab4857be358cc28a025f8d_169) | | |]

[removed: (In] [added: (In] millions, except per share [removed: data)][added: data)]

| | [removed: July 31,] | | [added: July 31,] | | | | | [added: | | | | | | | | | |]

| | [removed: 2019] | | | | [removed: 2018] | | | [added: | 2019 | | | | | | 2018 | | | | | | | | | | | |]

| [removed: Assets] [added: Assets] | | | | | | | | [added: | | | | | | | | | |]

| Current assets: | | | | | | | | [added: | | | | | | | | | |]

| Cash and cash equivalents | [added: | |] $ | [added: 2,958.0 | | | | | $ |] 961.4 | | | [added: | |] $ | 2,506.9 | | [added: | | | | | | | | | | | |]

| Short-term investments | [added: | | 789.8 | | | | | |] 1,841.7 | | | | [removed: 896.5] | | | [added: | |]

| [Notes to Consolidated Financial Statements](#ic3ab314b04ab4857be358cc28a025f8d_187) | | | [66](#ic3ab314b04ab4857be358cc28a025f8d_187) | | |

\- 54 -

| | | | | | | Convertible Notes | | |

| *Description of the Matter* | | | | | | As described in Note 10 to the consolidated financial statements, the Company issued $2.0 billion of convertible senior notes due in 2025 (Convertible Notes) in the year ended July 31, 2020. The accounting for the transaction was complex, as it required assessment as to whether features, other than the conversion feature, required bifurcation and separate valuation. Additionally, the transaction was complex as it required valuation of the conversion feature in the debt instrument, which involved estimation of the fair value of the debt instrument absent of any conversion feature, and evaluation of the appropriate classification of the conversion feature in the financial statements. Auditing the Company’s accounting for the Convertible Notes was complex due to the significant judgment required in determining the liability component of the Convertible Notes as well as the balance sheet classification of the elements of the Convertible Notes. The Company estimated the fair value of the liability component of the Convertible Notes, absent any embedded conversion features, using an income approach which considers the instrument’s discounted cash flow model with a risk adjusted yield. Additionally, the Company performed a detailed analysis of the terms of the Convertible Notes to identify whether any derivatives that required separate mark-to-market accounting under applicable accounting guidance were present. | | |

| *How We Addressed the Matter in Our Audit* | | | | | | We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company’s Convertible Notes. For example, we tested the Company’s controls over the initial recognition and measurement of the Convertible Notes, including the recording of the associated liability and equity components. We also tested the evaluation of the Convertible Notes and the identification and evaluation of specific features and the related accounting. To test the accounting for the Convertible Notes, our audit procedures included, among others, reading the underlying Convertible Notes agreements, testing management’s application of the relevant accounting guidance, and involving a specialist to assist us in the evaluation of the Company's valuation methodology and testing of the significant assumptions. Our testing of the fair value of the liability component, included, among other procedures, evaluating the Company’s selection of the valuation methodology and significant assumptions used by the Company, and evaluating the completeness and accuracy of the underlying data supporting the significant assumptions. Specifically, when assessing the key assumptions, we evaluated the appropriateness of the Company’s estimates of its credit risk, volatility, dividend yield and the market risk free rate as well as its analysis of comparable issuances of debt securities by companies with a similar credit risk rating. | | |

September 4, 2020

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Basis for Opinion

September 4, 2020

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| | | | 2020 | | | | | | 2019 | | | | | | | | |

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| Operating lease right-of-use assets | | | 258.7 | | | | | | — | | | | | | | | |

| | | | | | | | | | | | | | | | | | |

| Long-term operating lease liabilities | | | 336.6 | | | | | | — | | | | | | | | |

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PALO ALTO NETWORKS, INC.

(In millions, except per share data)

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PALO ALTO NETWORKS, INC.

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*See notes to consolidated financial statements*.

PALO ALTO NETWORKS, INC.

(In millions)

| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |

| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |

| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |

| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |

| Net loss | | | — | | | | | | — | | | | | | — | | | | | | (267.0) | | | | | | (267.0) | | | | | | | | |

| Other comprehensive income | | | — | | | | | | — | | | | | | 14.2 | | | | | | — | | | | | | 14.2 | | | | | | | | |

| Settlement of warrants | | | 2.0 | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | | | |

| Equity component of convertible senior notes, net | | | — | | | | | | 398.7 | | | | | | — | | | | | | — | | | | | | 398.7 | | | | | | | | |

| | |

| --- | --- |

Adoption of New Accounting Standard

As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for revenue from contracts with customers in the year ended July 31, 2019 due to the adoption of ASU No. 2014‑09, Revenue from Contracts with Customers, as amended.

See below for discussion of our related critical audit matter.

| | | |

| --- | --- | --- |

September 9, 2019

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| --- | --- | --- | --- | --- | --- | --- | --- |

| | | | | | (As Adjusted) | | |

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| | | | | | (As Adjusted) | | | | (As Adjusted) | | |

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| | | | | | | | | | | | | (As Adjusted) | | | | (As Adjusted) | | |

| Balance as of July 31, 2016 | 90.5 | | | $ | 1,515.5 | | | $ | 1.0 | | | $ | (467.0 | ) | | $ | 1,049.5 | |

| Cumulative-effect adjustment from adoption of new accounting pronouncement | — | | | — | | | | — | | | | (28.3 | | ) | | (28.3 | | ) |

| Temporary equity reclassification | — | | | 21.9 | | | | — | | | | — | | | | 21.9 | | |

1.

We offer a platform that empowers enterprises, service providers, and government entities to secure their organizations by safely enabling applications and data running in their networks, on their endpoints, and in the cloud, and by preventing breaches that stem from targeted cyberattacks.

Certain prior period amounts have been reclassified to conform to our current period presentation.

In addition, certain prior period amounts have been adjusted due to our retrospective adoption of new accounting guidance related to revenue from contracts with customers and new accounting guidance related to the presentation of restricted cash and cash equivalents in the statement of cash flows.

Actual results could differ materially from those estimates.

We maintain an allowance for doubtful accounts for estimated potential credit losses.

As of July 31, 2019, three distributors represented 29.9%, 18.9%, and 14.2% of our gross accounts receivable.

For fiscal 2019, four distributors represented 31.8%, 22.1%, 10.7%, and 10.0% of our total revenue.

Comprehensive Loss

We classify our investments in marketable debt securities as available-for-sale at the time of purchase since it is our intent that these investments are available for current operations, and include these investments on our consolidated balance sheets as cash equivalents, short-term investments, or long-term investments depending on their maturity.

Through July 31, 2019, we have not recognized any impairment losses on our goodwill and intangible assets.

During the year ended July 31, 2017, we recognized an impairment loss of $20.9 million on property and equipment related to the relocation of our corporate headquarters.

Depending on who the contract is with, our customers are either our channel partners or our end-customers.

We rent our facilities under operating lease agreements and recognize related rent expense on a straight-line basis over the term of the lease.

Rent holidays and scheduled rent increases are included in the determination of rent expense to be recorded over the lease term.

Renewals are not assumed in the determination of the lease term unless they are deemed to be reasonably assured at the inception of the lease.

We begin recognizing rent expense on the date that we obtain the legal right to use and control the leased space.

Upon exiting a leased property before the lease term expires, we assess the fair value of our remaining obligation under the lease and record a cease-use loss, if needed.

The cease-use loss is calculated as the present value of the amount by which the remaining lease obligation, adjusted for the effects of any deferred items recognized under the lease and related costs, exceeds the estimated sublease rentals that could be reasonably obtained.

The cease-use loss will be adjusted as a result of the remeasurement of the cease-use liability if the timing or amount of estimated cash flows change.

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[removed: Evaluation] [added: Evaluation] of Disclosure Controls and [removed: Procedures][added: Procedures]

Based on our evaluation, our chief executive officer and chief financial officer concluded that, as of July 31, [removed: 2019,] [added: 2020,] our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission (“SEC”) rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

[removed: Management’s] [added: Management’s] Annual Report on Internal Control over Financial [removed: Reporting][added: Reporting]

[removed: Changes] [added: Changes] in Internal Control over Financial [removed: Reporting][added: Reporting]

[removed: There] [added: However there] were no changes 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 quarter ended July 31, [removed: 2019] [added: 2020] that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

As a result of COVID-19, most of our workforce has been working from home since March 2020.

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[removed: PART III][added: PART III]

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The information required by this item will be contained in our definitive proxy statement to be filed with the SEC in connection with our [removed: 2019] [added: 2020] annual meeting of stockholders (the “Proxy Statement”), which is expected to be filed not later than 120 days after the end of our fiscal year ended July 31, [removed: 2019,] [added: 2020,] and is incorporated in this report by reference.

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[removed: PART IV][added: PART IV]

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[removed: | 1. | Consolidated] [added: 1.Consolidated] Financial Statements [removed: |]

[removed: | 2. | Financial] [added: 2.Financial] Statement Schedules [removed: |]

[removed: EXHIBIT INDEX][added: EXHIBIT INDEX]

| [removed: Exhibit Number] [added: Exhibit Number] | | [removed: Exhibit Description] | | [removed: Incorporated] [added: | | Exhibit Description | | | | | | Incorporated] by [removed: Reference] [added: Reference] | | | | | | | [added: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |]