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EX-32.1 - EXHIBIT 32.1 - Pure Storage, Inc.ex-321q32016.htm
EX-31.2 - EXHIBIT 31.2 - Pure Storage, Inc.ex-312q32016.htm
EX-31.1 - EXHIBIT 31.1 - Pure Storage, Inc.ex-311q32016.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q
 
 

(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2016
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from    to    
Commission File Number: 001-37570
Pure Storage, Inc.
(Exact Name of Registrant as Specified in its Charter)
 
Delaware
27-1069557
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
650 Castro Street, Suite 400
Mountain View, California  
94041
(Address of principal executive offices, including zip code)
(Zip Code)

 (800) 379-7873
(Registrant’s telephone number, including area code)
 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  x     No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x     No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
 
Accelerated filer
o
Non-accelerated filer
x
(Do not check if a small reporting company)
Smaller reporting company
o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
As of December 6, 2016, the registrant had 82,493,782 shares of its Class A common stock outstanding and 117,381,478 shares of its Class B common stock outstanding.




Table of Contents
 
 
 
Page
 
PART I.
 
 
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
PART II.
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.



NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, about us and our industry that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this report, including statements regarding our future results of operations and financial condition, business strategy and plans and objectives of management for future operations, are forward-looking statements. In some cases, forward-looking statements may be identified by words such as “anticipate,” “believe,” “continue,” “could,” “design,” “estimate,” “expect,” “intend,” “may,” “plan,” “potentially,” “predict,” “project,” “should,” “will” or the negative of these terms or other similar expressions.  
Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements regarding our ability to sustain or manage our expansion and growth, our expectations that average sales prices may decrease over time, our plans to expand and continue to invest internationally, our plans to expand the research and development organization as well as the sales and marketing function and channel programs, our expectations regarding fluctuations in our revenue and operating results, our expectations that we may continue to experience losses, despite significant revenue growth, our ability to successfully attract, motivate, and retain qualified personnel and maintain our culture, our expectations regarding our technological leadership and market opportunity, our ability to realize benefits from our investments, our ability to innovate and introduce new products, our expectations regarding product acceptance and our technologies, products and solutions, our competitive position and the effects of competition and industry dynamics, our expectations concerning relationships with third parties, including partners and customers, the adequacy of our intellectual property rights, and expectations concerning pending legal proceedings and related costs.
We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements are subject to a number of known and unknown risks, uncertainties and assumptions, including risks described in the section titled “Risk Factors.” These risks are not exhaustive. Other sections of this report include additional factors that could harm our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time, and it is not possible for our management to predict all risk factors nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ from those contained in, or implied by, any forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. We cannot assure you that the events and circumstances reflected in the forward-looking statements will be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this report or to conform these statements to actual results or to changes in our expectations. You should read this Quarterly Report on Form 10-Q and the documents that we reference in this Quarterly Report on Form 10-Q and have filed as exhibits to this report with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

ii


PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
PURE STORAGE, INC.
Condensed Consolidated Balance Sheets
(in thousands, except per share data, unaudited)
 
As of
January 31, 2016
 
As of
October 31, 2016
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
604,742

 
$
152,461

Marketable securities

 
365,785

Accounts receivable, net of allowance of $944 and $2,414 as of January 31, 2016 and October 31, 2016
126,324

 
163,038

Inventory
20,649

 
20,112

Deferred commissions, current
15,703

 
14,298

Prepaid expenses and other current assets
20,652

 
18,756

Total current assets
788,070

 
734,450

Property and equipment, net
52,629

 
82,088

Intangible assets, net
6,980

 
6,936

Deferred income taxes, non-current
536

 
1,074

Other assets, non-current
22,568

 
29,588

Total assets
$
870,783

 
$
854,136

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
38,187

 
$
43,412

Accrued compensation and benefits
32,995

 
29,137

Accrued expenses and other liabilities
14,076

 
20,545

Deferred revenue, current
94,514

 
134,536

Liability related to early exercised stock options
4,760

 
3,967

Total current liabilities
184,532

 
231,597

Deferred revenue, non-current
121,690

 
141,849

Other liabilities, non-current
1,207

 
2,925

Total liabilities
307,429

 
376,371

Commitments and contingencies (Note 5)

 

Stockholders’ equity:
 

 
 

Preferred stock, par value of $0.0001 per share— 20,000 shares authorized as of January 31, 2016 and October 31, 2016; no shares issued and outstanding as of January 31, 2016 and October 31, 2016

 

Class A and Class B common stock, par value of $0.0001 per share— 2,250,000 (Class A 2,000,000, Class B 250,000) shares authorized as of January 31, 2016 and October 31, 2016; 190,509 (Class A 28,769, Class B 161,740) and 199,678 (Class A 75,320, Class B 124,358) shares issued and outstanding as of January 31, 2016 and October 31, 2016
19

 
20

Additional paid-in capital
1,118,670

 
1,237,012

Accumulated other comprehensive income

 
298

Accumulated deficit
(555,335
)
 
(759,565
)
Total stockholders’ equity
563,354

 
477,765

Total liabilities and stockholders’ equity
$
870,783

 
$
854,136


 See the accompanying notes to condensed consolidated financial statements.

2

PURE STORAGE, INC.
Condensed Consolidated Statements of Operations
(in thousands, except per share data, unaudited)



 
Three Months Ended 
 October 31,
 
Nine Months Ended 
 October 31,
 
2015
 
2016
 
2015
 
2016
Revenue:
 

 
 

 
 
 
 
Product
$
113,573

 
$
160,523

 
$
248,383

 
$
403,181

Support
17,791

 
36,433

 
41,719

 
96,936

Total revenue
131,364

 
196,956

 
290,102

 
500,117

Cost of revenue:
 

 
 

 


 


Product
41,995

 
54,725

 
92,348

 
131,618

Support
9,058

 
14,597

 
23,479

 
41,531

Total cost of revenue
51,053

 
69,322

 
115,827

 
173,149

Gross profit
80,311

 
127,634

 
174,275

 
326,968

Operating expenses:
 

 
 

 


 


Research and development
43,065

 
61,612

 
112,935

 
173,185

Sales and marketing
63,803

 
91,392

 
171,647

 
262,073

General and administrative
29,022

 
22,810

 
56,941

 
64,021

Legal settlement

 
30,000

 

 
30,000

Total operating expenses
135,890

 
205,814

 
341,523

 
529,279

Loss from operations
(55,579
)
 
(78,180
)
 
(167,248
)
 
(202,311
)
Other income (expense), net
(171
)
 
(192
)
 
(1,245
)
 
1,127

Loss before provision for income taxes
(55,750
)
 
(78,372
)
 
(168,493
)
 
(201,184
)
Provision for income taxes
751

 
441

 
965

 
967

Net loss
$
(56,501
)
 
$
(78,813
)
 
$
(169,458
)
 
$
(202,151
)
Net loss per share attributable to common stockholders, basic and diluted
$
(0.76
)
 
$
(0.40
)
 
$
(3.60
)
 
$
(1.05
)
Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted
74,565

 
195,807

 
47,109

 
192,637

 
See the accompanying notes to condensed consolidated financial statements.

3

PURE STORAGE, INC.
Condensed Consolidated Statements of Comprehensive Loss
(in thousands, unaudited)



 
Three Months Ended 
 October 31,
 
Nine Months Ended 
 October 31,
 
2015
 
2016
 
2015
 
2016
Net loss
$
(56,501
)
 
$
(78,813
)
 
$
(169,458
)
 
$
(202,151
)
Other comprehensive income, net of tax effect:
 

 
 

 
 
 
 
Change in unrealized net gain on available-for-sale securities

 
(554
)
 

 
298

Comprehensive loss
$
(56,501
)
 
$
(79,367
)
 
$
(169,458
)
 
$
(201,853
)


See the accompanying notes to condensed consolidated financial statements.

4

PURE STORAGE, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands, unaudited)


 
Nine Months Ended October 31,
 
2015
 
2016
CASH FLOWS FROM OPERATING ACTIVITIES


 
 
Net loss
$
(169,458
)
 
$
(202,151
)
Adjustments to reconcile net loss to net cash used in operating activities:


 


Depreciation and amortization
23,118

 
35,978

Stock-based compensation expense
36,198

 
79,129

Contribution of common stock to Pure Good Foundation
11,900

 

Other

 
1,051

Changes in operating assets and liabilities:


 


Accounts receivable, net
(53,094
)
 
(38,186
)
Inventory
(3,420
)
 
(189
)
Deferred commissions
(8,472
)
 
1,844

Prepaid expenses and other assets
(2,065
)
 
39

Accounts payable
10,224

 
3,639

Accrued compensation and other liabilities
17,216

 
6,786

Deferred revenue
87,987

 
60,180

Net cash used in operating activities
(49,866
)
 
(51,880
)
CASH FLOWS FROM INVESTING ACTIVITIES


 


Purchases of property and equipment
(29,495
)
 
(64,602
)
Purchase of intangible assets

 
(1,000
)
Purchases of marketable securities

 
(483,558
)
Sales of marketable securities

 
79,815

Maturities of marketable securities

 
38,213

Net increase in restricted cash
(2,484
)
 
(5,600
)
Net cash used in investing activities
(31,979
)
 
(436,732
)
CASH FLOWS FROM FINANCING ACTIVITIES


 


Proceeds from initial public offering, net
459,425

 

Net proceeds from exercise of stock options
4,710

 
10,725

Proceeds from issuance of common stock under employee stock purchase plan

 
25,606

Payments of deferred offering costs
(1,690
)
 

Net cash provided by financing activities
462,445

 
36,331

Net increase (decrease) in cash and cash equivalents
380,600

 
(452,281
)
Cash and cash equivalents, beginning of period
192,707

 
604,742

Cash and cash equivalents, end of period
$
573,307

 
$
152,461

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION


 


Cash paid for income taxes
$
820

 
$
2,510

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING INFORMATION


 


Conversion of convertible preferred stock to common stock upon initial public offering
$
543,940

 
$

Property and equipment purchased but not yet paid
$
1,750

 
$
5,956

Vesting of early exercised stock options
$
1,543

 
$
794

Unpaid deferred offering costs
$
2,748

 
$

 
See the accompanying notes to condensed consolidated financial statements.

5

PURE STORAGE, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
 



Note 1. Business Overview
Organization and Description of Business
Pure Storage, Inc. (the Company, we, us, or other similar pronouns) was originally incorporated in the state of Delaware in October 2009 under the name OS76, Inc. In January 2010, we changed our name to Pure Storage, Inc. We provide an enterprise data storage platform that transforms business through a dramatic increase in performance and reduction in complexity and costs. We are headquartered in Mountain View, California and have wholly owned subsidiaries throughout the world.
 
 
Note 2. Basis of Presentation and Summary of Significant Accounting Policies
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the company and our wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Unaudited Interim Consolidated Financial Information
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (U.S. GAAP) and applicable rules and regulations of the Securities and Exchange Commission (the SEC) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2016.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, comprehensive loss and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full fiscal year 2017 or any future period.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and accompanying notes. Actual results could differ from these estimates. Such estimates include, but are not limited to, the determination of best estimate of selling price included in multiple-element revenue arrangements, sales commissions, useful lives of intangible assets and property and equipment, fair values of stock-based awards, provision for income taxes, including related reserves, and contingent liabilities, among others. Management bases its estimates on historical experience and on various other assumptions which are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.
Restricted Cash
Restricted cash is comprised of cash collateral for a vendor credit card program and letters of credit related to our leases. As of January 31, 2016 and October 31, 2016, we had restricted cash of $7.1 million and $12.7 million, which was included in other assets, non-current, in the condensed consolidated balance sheets.
Marketable Securities
We classify our marketable securities as available-for-sale at the time of purchase and reevaluate such classification at each balance sheet date. We may sell these securities at any time for use in current operations even if they have not yet reached maturity. As a result, we classify our securities, including those with maturities beyond twelve months, as current assets in the accompanying condensed consolidated balance sheets. We carry these securities at fair value and record unrealized gains and losses, net of tax, in other comprehensive income (loss), which is reflected as a component of stockholders’ equity. We determine any realized gains or losses on the sale of marketable

6

PURE STORAGE, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
 


securities on a specific identification method. In addition, we evaluate our securities to assess whether those with unrealized loss positions are other than temporarily impaired. Realized gains and losses and declines in value deemed to be other than temporary are reported in other income (expense), net, in the condensed consolidated statements of operations.
Deferred Commissions
Deferred commissions consist of direct and incremental costs paid to our sales force related to customer contracts. The deferred commission amounts are recoverable through the revenue streams that will be recognized under the related customer contracts. Direct sales commissions are deferred when earned and amortized over the same period that revenue is recognized from the related customer contract. Amortization of deferred commissions is included in sales and marketing expense in the condensed consolidated statements of operations.
As of January 31, 2016 and October 31, 2016, we recorded deferred commissions, current, of $15.7 million and $14.3 million, and deferred commissions, non-current, of $14.3 million and $13.8 million, in other assets, non-current, in the condensed consolidated balance sheets. We recognized sales commission expenses of $16.5 million and $21.6 million during the three months ended October 31, 2015 and 2016 and $38.6 million and $58.8 million during the nine months ended October 31, 2015 and 2016.
Revenue Recognition
We derive revenue from two sources: (1) product revenue which includes hardware and embedded software and (2) support revenue which includes customer support, hardware maintenance and software upgrades on a when-and-if-available basis.

Most of our arrangements, other than stand-alone renewals of maintenance and support agreements, are multiple-element arrangements with a combination of product and support related deliverables (as defined above). Under multiple-element arrangements, we allocate consideration at the inception of an arrangement to all deliverables based on the relative selling price method in accordance with the hierarchy provided by the multiple-element arrangement accounting guidance, which includes (i) vendor-specific objective evidence (“VSOE”), of selling price, if available; (ii) third-party evidence (“TPE”), of selling price, if VSOE is not available; and (iii) best estimate of selling price (“BESP”), if neither VSOE nor TPE is available. We determine VSOE based on our historical pricing and discounting practices for the specific products and services when sold separately. In determining VSOE, we require that a substantial majority of the stand-alone selling prices fall within a reasonably narrow pricing range. During the three months ended October 31, 2016, we established VSOE for support related deliverables as our stand-alone selling prices are now sufficiently concentrated based on an analysis of our historical data. As we have not established VSOE for any of our other deliverables and TPE cannot be obtained as our products contain a significant element of proprietary technology and our solutions offer substantially different features and functionality and hence are not comparable, we allocate consideration to all other deliverables based on BESP.
Recently Adopted Accounting Standard
In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). We elected to early adopt this standard in the second quarter of fiscal 2017 with February 1, 2016 being the effective date of adoption. Under ASU 2016-09, excess tax benefits and deficiencies are recognized prospectively in our provision for income taxes rather than additional paid-in capital. As a result of the adoption, our provision for income taxes decreased by $921,000 during the nine months ended October 31, 2016. Additionally, we elected to account for forfeitures as they occur rather than estimate expected forfeiture using a modified retrospective transition method. Accordingly, we recorded a cumulative-effect adjustment of $2.1 million to accumulated deficit and an increase of stock-based compensation expense of $864,000 during the three months ended April 30, 2016. Finally, ASU 2016-09 requires excess tax benefits to be presented as a component of operating cash flows rather than financing cash flows. We elected to adopt this requirement prospectively and accordingly, prior periods have not been adjusted. Excess tax benefits were not material for all periods presented.

7

PURE STORAGE, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
 


Recent Accounting Pronouncements Not Yet Adopted
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), requiring an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASU 2014-09 will supersede nearly all existing revenue recognition guidance under U.S. GAAP when it becomes effective. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers, deferring the effective date for ASU 2014-09 by one year, and thus, the new standard will be effective for us beginning on February 1, 2018 with early adoption permitted on or after February 1, 2017. This standard may be adopted using either the full or modified retrospective methods. We are currently evaluating adoption methods and the impact of this standard on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (ASU 2016-02). ASU 2016-02 requires lessees to recognize all leases with terms in excess of one year on their balance sheet as a right-of-use asset and a lease liability at the commencement date. The new standard also simplifies the accounting for sale and leaseback transactions. The amendments in this update will be effective for us beginning on February 1, 2019 and must be adopted using a modified retrospective method for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Early adoption is permitted. We are currently evaluating adoption methods and the impact of this standard on our consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13). ASU 2016-13 amends guidance on reporting credit losses for assets held at amortized cost basis and available-for-sale debt securities to require that credit losses on available-for-sale debt securities be presented as an allowance rather than as a write-down. The measurement of credit losses for newly recognized financial assets and subsequent changes in the allowance for credit losses are recorded in the statements of operations. The amendments in this update will be effective for us beginning on February 1, 2020 with early adoption permitted on or after February 1, 2019. We are currently evaluating the impact of this standard on our consolidated financial statements.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (ASU 2016-16), which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. ASU 2016-16 will be effective for us beginning on February 1, 2018 and will be applied on a modified retrospective basis. Early adoption is permitted. We do not expect the adoption of this standard to have any impact on our consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (ASU 2016-18), which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 will be effective for us beginning on February 1, 2018 and will be applied on a retrospective basis. Early adoption is permitted. We are currently evaluating the impact of this standard on our consolidated financial statements.
 
Note 3. Financial Instruments  
Fair Value Measurements
We measure our cash equivalents, marketable securities and restricted cash at fair value on a recurring basis. We define fair value as the exchange price that would be received from sale of an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. We measure our financial assets and liabilities at fair value at each reporting period using a fair value hierarchy which requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Three levels of inputs may be used to measure fair value:

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

8

PURE STORAGE, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
 


Level II—Observable inputs are quoted prices for similar assets and liabilities in active markets or inputs other than quoted prices that are observable for the assets or liabilities, either directly or indirectly through market corroboration, for substantially the full term of the financial instruments; and
Level III—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. These inputs are based on our own assumptions used to measure assets and liabilities at fair value and require significant management judgment or estimation.
We classify our cash equivalents, marketable securities and restricted cash within Level 1 or Level 2 because they are valued using either quoted market prices or inputs other than quoted prices which are directly or indirectly observable in the market, including readily-available pricing sources for the identical underlying security which may not be actively traded. Our fixed income available-for-sale securities consist of high quality, investment grade securities from diverse issuers. The valuation techniques used to measure the fair value of our marketable securities were derived from non-binding market consensus prices that are corroborated by observable market data, quoted market prices for similar instruments, or pricing models such as discounted cash flow techniques.
Cash Equivalents, Marketable Securities and Restricted Cash
The following tables summarize our cash equivalents, marketable securities and restricted cash by significant investment categories as of January 31, 2016 and October 31, 2016 (in thousands):
 
 
As of January 31, 2016
 
Amortized
Cost
 
Gross Unrealized
Gains
 
Gross Unrealized
Losses
 
Fair
Value
 
Cash Equivalents
 
Restricted Cash
Level 1
 

 
 

 
 

 
 

 
 

 
 

Money market funds
$
45,614

 
$

 
$

 
$
45,614

 
$
45,614

 
$

Level 2
 
 
 
 
 
 
 
 
 
 
 
Certificate of deposits
7,132

 

 

 
7,132

 

 
7,132

Total
$
52,746

 
$

 
$

 
$
52,746

 
$
45,614

 
$
7,132


 
As of October 31, 2016
 
Amortized
Cost
 
Gross Unrealized
Gains
 
Gross Unrealized
Losses
 
Fair
Value
 
Cash Equivalents
 
Marketable
Securities
 
Restricted Cash
Level 1
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market accounts
$

 
$

 
$

 
$

 
$

 
$

 
$
12,734

Level 2
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government treasury notes
143,532

 
67

 
(27
)
 
143,572

 
14,949

 
128,623

 

U.S. government agencies
41,161

 
13

 
(55
)
 
41,119

 

 
41,119

 

Corporate debt securities
192,944

 
581

 
(110
)
 
193,415

 

 
193,415

 

Foreign government bonds
2,625

 
3

 

 
2,628

 

 
2,628

 

Total
$
380,262

 
$
664

 
$
(192
)
 
$
380,734

 
$
14,949

 
$
365,785

 
$
12,734

 

9

PURE STORAGE, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
 


The amortized cost and estimated fair value of our marketable securities are shown below by contractual maturity (in thousands):
 
 
As of October 31, 2016
 
Amortized Cost
 
Fair Value
Due within one year
$
95,602

 
$
95,673

Due in one to five years
269,711

 
270,112

Total
$
365,313

 
$
365,785

 
As of October 31, 2016, there were no securities that were in an unrealized loss position for more than 12 months. Based on our evaluation of available evidence, we concluded that the gross unrealized losses on our marketable securities as of October 31, 2016 were temporary in nature. The following table presents gross unrealized losses and fair values for those investments that were in a continuous unrealized loss position for less than 12 months as of October 31, 2016, aggregated by investment category (in thousands):
 
 
Less than 12 months
 
Fair
Value
 
Unrealized
Loss
U.S. government treasury notes
$
35,647

 
$
(27
)
U.S. government agencies
28,274

 
(55
)
Corporate debt securities
47,483

 
(110
)
Total
$
111,404

 
$
(192
)
 
Gross realized gains on sale of marketable securities for the three and nine months ended October 31, 2016 were $65,000 and $175,000, respectively.
 
Note 4. Balance Sheet Components
Property and Equipment, Net
Property and equipment, net, consists of the following (in thousands):
 
 
As of
January 31, 2016
 
As of
October 31, 2016
Test equipment
$
65,663

 
$
103,491

Computer, equipment and software
31,388

 
50,235

Furniture and fixtures
2,852

 
4,072

Leasehold improvements
4,935

 
9,902

Total property and equipment
104,838

 
167,700

Less: accumulated depreciation and amortization
(52,209
)
 
(85,612
)
Property and equipment, net
$
52,629

 
$
82,088

 
Depreciation and amortization expense was $8.5 million and $13.2 million for the three months ended October 31, 2015 and 2016 and $22.1 million and $34.9 million for the nine months ended October 31, 2015 and 2016, respectively.
Intangible Assets, Net
Intangible assets, net, consist of the following (in thousands):
 

10

PURE STORAGE, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
 


 
As of
January 31, 2016
 
As of
October 31, 2016
Technology patents
$
9,125

 
$
10,125

Accumulated amortization
(2,145
)
 
(3,189
)
Intangible assets, net
$
6,980

 
$
6,936

 
Intangible assets amortization expense was $326,000 and $376,000 for the three months ended October 31, 2015 and 2016 and $978,000 and $1.0 million for the nine months ended October 31, 2015 and 2016.  Due to the defensive nature of these patents, the amortization is included in general and administrative expenses in the condensed consolidated statements of operations.
As of October 31, 2016, expected amortization expense for intangible assets for each of the next five years and thereafter is as follows (in thousands):
 
Fiscal Years Ending January 31,
Estimated 
Future
Amortization
Expense
Remainder of 2017
$
376

2018
1,504

2019
1,504

2020
1,504

2021
1,504

Thereafter
544

Total
$
6,936

Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consist of the following (in thousands):
 
 
As of January 31, 2016
 
As of October 31, 2016
Sales and use tax payable
$
299

 
$
406

Accrued professional fees
3,044

 
3,256

Accrued marketing
2,684

 
6,908

Accrued travel and entertainment expenses
2,182

 
2,977

Income tax payable
1,791

 
974

Other accrued liabilities
4,076

 
6,024

Total accrued expenses and other liabilities
$
14,076

 
$
20,545

 
Note 5. Commitments and Contingencies

Operating Leases
 
During the nine months ended October 31, 2016, we entered into four office facility lease agreements and an amendment to an existing office facility lease agreement with total additional lease obligations of approximately $43.7 million with lease periods expiring through June 2024.
Letters of Credit
As of January 31, 2016 and October 31, 2016, we had outstanding letters of credit in the aggregate amount of $7.1 million and $7.7 million respectively, in connection with our facility leases. The letters of credit are collateralized by restricted cash in the same amount and mature at various dates through June 2024.

11

PURE STORAGE, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
 


Legal Matters
On November 4, 2013, EMC filed a complaint against us in the U.S. District Court for the District of Massachusetts, alleging misappropriation of confidential information and trade secrets and unlawful interference with business and contractual relationships. The complaint sought damages and injunctive relief. On November 26, 2013 and November 18, 2014, we counterclaimed, alleging, among other things, misappropriation of trade secrets, unlawful interference with contractual and business relationships, unfair competition, commercial disparagement, and defamation. Our counterclaim sought damages and declaratory and injunctive relief. In separate litigation matters, on November 26, 2013 and March 21, 2016, EMC filed complaints against us in the U.S. District Court for the District of Delaware, alleging patent infringement. The complaints sought damages and injunctive and equitable relief.
On October 18, 2016, we entered into an agreement with Dell Inc. (Dell), as successor-in-interest to EMC to settle all litigation between EMC and us. The terms of the settlement include a payment to Dell, the dismissal of all litigation between the parties, mutual releases, and a license to the disputed patent. Accordingly, we paid Dell a one-time settlement amount of $30.0 million, and all litigation between EMC and us was dismissed prior to October 31, 2016. Settlement discussions started subsequent to the filing of our Quarterly Report on Form 10-Q for the three months ended July 31, 2016. We evaluated the settlement as a multiple-element arrangement, which requires us to allocate the one-time payment to the identifiable elements based on their relative fair values. Based on our estimates of fair value, we determined that the sole benefit of the settlement is to avoid further litigation costs with no value attributable to future use or benefit. Accordingly, we recorded the $30.0 million as a legal settlement charge in general and administrative expenses during the three months ended October 31, 2016.
On September 1, 2016, a purported securities class action entitled Ramsay v. Pure Storage, Inc., et al. was filed in the Superior Court of the State of California (San Mateo County) against us and certain of our officers, directors, investors and underwriters for our initial public offering, asserting claims under sections 11, 12 and 15 of the Securities Act of 1933 on behalf of a purported class consisting of purchasers of our common stock pursuant or traceable to our initial public offering, and seeking unspecified compensatory damages and other relief. Substantially identical lawsuits were subsequently filed in the same court, bringing the same claims against the same defendants, captioned Peter Galanis v. Pure Storage, Inc., et al. (filed September 14, 2016), Curtis Wilson v. Pure Storage, Inc., et al. (filed September 15, 2016), Loren Moe v. Pure Storage, Inc., et al. (filed September 23, 2016), and Mason Delahooke and Mahsa Shirazikia v. Pure Storage, Inc., et al. (filed October 5, 2016). On October 27, 2016, the aforementioned actions were consolidated under the caption In re Pure Storage, Inc. Shareholder Litigation.  We expect that the plaintiffs will file a consolidated complaint on December 13, 2016. We believe there is no merit to the allegations and intend to defend ourselves vigorously.
From time to time, we have become involved in claims and other legal matters arising in the normal course of business. We investigate these claims as they arise. Although claims are inherently unpredictable, we currently are not aware of any matters that may have a material adverse effect on our business, financial position, results of operations or cash flows. Accordingly, we have not recorded any loss contingency on our consolidated balance sheet as of October 31, 2016.
Indemnification
Our arrangements generally include certain provisions for indemnifying customers against liabilities if our products or services infringe a third party’s intellectual property rights. Other guarantees or indemnification arrangements include guarantees of product and service performance and standby letters of credit for lease facilities. It is not possible to determine the maximum potential amount under these indemnification obligations due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. To date, we have not incurred any material costs as a result of such obligations and have not accrued any liabilities related to such obligations in the consolidated financial statements. In addition, we indemnify our officers, directors and certain key employees while they are serving in good faith in their respective capacities. To date, there have been no claims under any indemnification provisions.
 
Note 6. Stockholders’ Equity
Preferred Stock
Upon the closing of our initial public offering (IPO) in October 2015, we filed an Amended and Restated Certificate of Incorporation, which authorized 20,000,000 shares of undesignated preferred stock, the rights, preferences and

12


privileges of which may be designated from time to time by our board of directors. As of October 31, 2016, there were no shares of preferred stock issued or outstanding.
Class A and Class B Common Stock
We have two classes of authorized common stock, Class A common stock and Class B common stock. As of October 31, 2016, we had 2,000,000,000 shares of Class A common stock authorized with a par value of $0.0001 per share and 250,000,000 shares of Class B common stock authorized with a par value of $0.0001 per share. As of October 31, 201675,319,966 shares of Class A common stock were issued and outstanding and 124,357,633 shares of Class B common stock were issued and outstanding.

Note 7. Equity Incentive Plans
Equity Incentive Plans
We maintain two equity incentive plans: the 2009 Equity Incentive Plan (our 2009 Plan) and the 2015 Equity Incentive Plan (our 2015 Plan). In August 2015, our board of directors adopted, and in September 2015 our stockholders approved, the 2015 Plan, which became effective in connection with our IPO and serves as the successor to our 2009 Plan. Our 2015 Plan provides for grants of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance stock awards, performance cash awards, and other forms of stock awards to our employees, directors and consultants. We ceased grants of new awards under our 2009 Plan after the effective date of our 2015 Plan, and no new grants will be made from our 2009 Plan. Outstanding awards granted under our 2009 Plan will remain subject to the terms of our 2009 Plan and applicable award agreements, until such outstanding awards that are stock options are exercised, terminated or expired by their terms.
We initially reserved 27,000,000 shares of our Class A common stock for issuance under our 2015 Plan. The number of shares reserved for issuance under our 2015 Plan increases automatically on the first day of February of each of 2016 through 2025, in an amount equal to 5% of the total number of shares of our capital stock outstanding as of the immediately preceding January 31.
The exercise price of stock options will generally not be less than 100% of the fair market value of our common stock on the date of grant, as determined by our board of directors.  Our equity awards generally vest over a two to four year period and expire no later than ten years from the date of grant.  
2015 Employee Stock Purchase Plan
In August 2015, our board of directors adopted and our stockholders approved, the 2015 Employee Stock Purchase Plan (2015 ESPP), which became effective in connection with our IPO. A total of 3,500,000 shares of Class A common stock was initially reserved for issuance under the 2015 ESPP. The number of shares reserved for issuance under our 2015 ESPP increases automatically on the first day of February of each of 2016 through 2025, in an amount equal to the lesser of (i) 1% of the total number of shares of our capital stock outstanding as of the immediately preceding January 31, and (ii) 3,500,000 shares of Class A common stock.
The 2015 ESPP allows eligible employees to purchase shares of our Class A common stock at a discount through payroll deductions (or other payroll contributions) of up to 30% of their eligible compensation, subject to a cap of 3,000 shares on any purchase date or $25,000 in any calendar year (as determined under applicable tax rules). Except for the initial offering period, the 2015 ESPP provides for 24 month offering periods beginning March 16th and September 16th of each year, and each offering period will consist of four six-month purchase periods, subject to a reset provision. If the closing stock price on the offering date of a new offering falls below the closing stock price on the offering date of an ongoing offering, the ongoing offering would terminate immediately following the purchase of ESPP shares on the purchase date immediately preceding the new offering and participants in the terminated ongoing offering would automatically be enrolled in the new offering (ESPP reset). On each purchase date, eligible employees will purchase our Class A common stock at a price per share equal to 85% of the lesser of the fair market value of our Class A common stock (1) on the first trading day of the applicable offering period or (2) the purchase date. The initial offering period began on October 7, 2015 and ended on March 15, 2016 as our closing stock price on the new offering date of March 16, 2016 was lower than the closing stock price on October 7, 2015, which triggered an ESPP reset. The ESPP reset resulted in a modification charge of approximately $10.6 million which is being recognized over the new 24-month offering period ending March 15, 2018.

13

PURE STORAGE, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
 


We recognized stock-based compensation related to our 2015 ESPP of $907,000 and $4.8 million during the three months ended October 31, 2015 and 2016 and $907,000 and $13.4 million during the nine months ended October 31, 2015 and 2016. As of October 31, 2016, there was $27.2 million of unrecognized stock-based compensation expense related to our 2015 ESPP that is expected to be recognized over the term of the related offering periods.
Stock Options
A summary of stock option activity under our equity incentive plans and related information is as follows:
 
 
Options Outstanding
 
Number of
Shares
 
Weighted-
Average
Exercise Price
 
Weighted-
Average
Remaining
Contractual Life (In Years)
 
Aggregate
Intrinsic
Value (in thousands)
Balance as of January 31, 2016
68,879,087

 
$
6.43

 
7.9
 
$
505,131

Options granted
1,999,000

 
12.69

 
 
 
 

Options exercised
(6,111,682
)
 
1.75

 
 
 
 

Options forfeited/cancelled
(2,196,344
)
 
11.67

 
 
 
 

Balance as of October 31, 2016
62,570,061

 
$
6.90

 
7.3
 
$
400,802

Vested and exercisable as of October 31, 2016
27,652,418

 
$
3.59

 
6.4
 
$
250,249

 
 
The aggregate intrinsic value of options vested and exercisable as of October 31, 2016 is calculated based on the difference between the exercise price and the closing price of $12.34 of our Class A common stock on October 31, 2016.
As of October 31, 2016, total unrecognized employee compensation cost related to outstanding options was $153.3 million, which is expected to be recognized over a weighted-average period of approximately 3.1 years.
During the three months ended October 31, 2015 and nine months ended October 31, 2015 and 2016, we granted options to purchase 50,000, 133,000 and 780,000 shares of common stock that vest upon satisfaction of a performance condition. No performance options were granted during the three months ended October 31, 2016. For those options that management determined it is probable that the performance condition will be satisfied, we recognized stock-based compensation expense of $797,000 and $193,000 for the three months ended October 31, 2015 and 2016 and $1.8 million and $2.2 million for the nine months ended October 31, 2015 and 2016.
In November 2016, we modified certain employee stock option awards to accelerate the vesting, contingent, in part, on certain conditions. This modification is expected to result in stock-based compensation expense of $5.9 million to be recognized during the three months ended January 31, 2017.

Restricted Stock Units
A summary of the restricted stock unit activity under our 2015 Plan and related information is as follows:
 
 
Number of Restricted Stock Units Outstanding
 
Weighted-
Average
Grant Date
Fair Value
Unvested Balance as of January 31, 2016
53,000

 
$
16.98

Granted
8,906,750

 
13.36

Vested
(622,500
)
 
14.13

Forfeited
(309,878
)
 
13.69

Unvested Balance as of October 31, 2016
8,027,372

 
$
13.32

 

14

PURE STORAGE, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
 


As of October 31, 2016, total unrecognized employee compensation cost related to outstanding restricted stock units was $98.1 million, which is expected to be recognized over a weighted-average period of approximately 2.8 years.
Stock-Based Compensation Expense
The following table summarizes the components of stock-based compensation expense recognized in the condensed consolidated statements of operations (in thousands):
 
 
Three Months Ended 
 October 31,
 
Nine Months Ended 
 October 31,
 
2015
 
2016
 
2015
 
2016
Cost of revenue—product
$
43

 
$
138

 
$
139

 
$
425

Cost of revenue—support
657

 
1,178

 
1,511

 
3,982

Research and development
8,195

 
15,241

 
18,624

 
40,875

Sales and marketing
4,559

 
8,468

 
10,539

 
24,719

General and administrative
2,085

 
3,210

 
5,385

 
9,128

Total stock-based compensation expense
$
15,539

 
$
28,235

 
$
36,198

 
$
79,129


 
Note 8. Net Loss per Share Attributable to Common Stockholders
Basic and diluted net loss per share attributable to common stockholders is presented in conformity with the two-class method required for participating securities. We consider all series of our convertible preferred stock to be participating securities. Under the two-class method, the net loss attributable to common stockholders is not allocated to the convertible preferred stock as the holders of our convertible preferred stock do not have a contractual obligation to share in our losses.
Basic net loss per share attributable to common stockholders is computed by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase. Diluted net loss per share attributable to common stockholders is computed by giving effect to all potential dilutive common stock equivalents outstanding for the period. For purposes of this calculation, convertible preferred stock, stock options, unvested restricted stock awards, repurchasable shares from early exercised stock options and shares subject to ESPP withholding are considered to be common stock equivalents but have been excluded from the calculation of diluted net loss per share attributable to common stockholders as their effect is anti-dilutive.
The rights, including the liquidation and dividend rights, of the holders of our Class A and Class B common stock are identical, except with respect to voting. As the liquidation and dividend rights are identical, the undistributed earnings are allocated on a proportionate basis and the resulting net loss per share attributed to common stockholders will, therefore, be the same for both Class A and Class B common stock on an individual or combined basis. We did not present dilutive net loss per share on an if-converted basis because the impact was not dilutive.
The following table sets forth the computation of basic and diluted net loss per share attributable to common stockholders (in thousands, except per share data):
 
 
Three Months Ended 
 October 31,
 
Nine Months Ended 
 October 31,
 
2015
 
2016
 
2015
 
2016
Net loss
$
(56,501
)
 
$
(78,813
)
 
$
(169,458
)
 
$
(202,151
)
Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted
74,565

 
195,807

 
47,109

 
192,637

Net loss per share attributable to common stockholders, basic and diluted
$
(0.76
)
 
$
(0.40
)
 
$
(3.60
)
 
$
(1.05
)


15

PURE STORAGE, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
 


The following weighted-average outstanding shares of common stock equivalents were excluded from the computation of diluted net loss per share attributable to common stockholders for the periods presented because including them would have been anti-dilutive (in thousands):
 
 
Three Months Ended 
 October 31,
 
Nine Months Ended 
 October 31,
 
2015
 
2016
 
2015
 
2016
Stock options to purchase common stock
63,738

 
62,874

 
59,611

 
65,594

Restricted stock units

 
6,342

 

 
4,155

Early exercised stock options
3,318

 
2,246

 
3,849

 
2,451

Employee stock purchase plan

 
434

 

 
434

Total
67,056

 
71,896

 
63,460

 
72,634


 
Note 9. Income Taxes
Our provision for income taxes was primarily due to taxes on international operations and state income taxes. The difference between the provision for income taxes that would be derived by applying the statutory rate to our loss before income taxes and the provision for income taxes recorded was primarily attributable to changes in our valuation allowance, non-deductible stock-based compensation expense and the tax rate differential between the U.S. and foreign countries.
As of October 31, 2016, there were no material changes to either the nature or the amounts of the uncertain tax positions previously determined for the fiscal year ended January 31, 2016.
 
Note 10. Segment Information
Our chief operating decision maker is a group which is comprised of our Chief Executive Officer, our Chief Financial Officer, and our President. This group reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. We have one business activity and there are no segment managers who are held accountable for operations or operating results. Accordingly, we have a single reportable segment.
The following table sets forth revenue by geographic area based on the billing address of our customers (in thousands):
 
 
Three Months Ended 
 October 31,
 
Nine Months Ended 
 October 31,
 
2015
 
2016
 
2015
 
2016
United States
$
105,615

 
$
152,134

 
$
229,892

 
$
385,464

Rest of the world
25,749

 
44,822

 
60,210

 
114,653

Total revenue
$
131,364

 
$
196,956

 
$
290,102

 
$
500,117

 
Long-lived assets by geographic area are summarized as follows (in thousands):
 
 
As of
January 31, 2016
 
As of
October 31, 2016
United States
$
50,501

 
$
78,952

Rest of the world
2,128

 
3,136

Total long-lived assets
$
52,629

 
$
82,088



16


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition, results of operations and cash flows should be read in conjunction with the (1) unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q, and (2) the audited consolidated financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2016. This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue,” and similar expressions or variations. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified herein, and those discussed in the section titled “Risk Factors”, set forth in Part II, Item 1A of this Form 10-Q and in our other SEC filings. We disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. Our fiscal year end is January 31.
Overview
Our mission is to deliver data storage that transforms business through a dramatic increase in performance and reduction in complexity and costs. Our innovative technology replaces storage systems designed for mechanical disk with all-flash systems optimized end-to-end for solid-state memory. At the same time, our innovative business model replaces the traditional forklift upgrade cycle with an Evergreen storage model of hardware and software upgrades and maintenance.
Our next-generation storage platform and business model are the result of our team’s substantial experience in enterprise storage and web-scale infrastructure, as well as frustration with the industry’s status quo. Our platform can deliver a 10X acceleration in business applications over legacy disk-based storage. It is also designed to be compatible with existing infrastructure, substantially more reliable and power and space efficient.
Our business model builds on our technology innovations to reverse the traditional storage business model. Instead of moving data between old and new systems via forklift upgrades, we keep business data and applications in place and upgrade technology around it. Our platform and business model are designed to add value to customers for a decade or more, reducing total cost of storage ownership while increasing loyalty.
We were incorporated in 2009 with a vision to define the next generation of enterprise storage by pioneering the all-flash array category and innovating a customer-centric business model. We deliver our three-part integrated platform as the Purity Operating Environment, our flash-optimized software, FlashArray, our modular and scalable all-flash array hardware, and Pure1, our cloud-based management and support. Since inception we have consistently expanded our technology and business model:
In 2012, we launched our first FlashArray and established our All Software Included model, which entitles customers to all Purity Operating Environment functionality in the base purchase price of a FlashArray.
In 2013, we released Purity 3.0, which included writable snapshots and introduced our Love Your Storage Guarantee, a 30-day return guarantee program.
In 2014, we expanded our product family to address a broader series of customer requirements and workloads, and released Purity 4.0, which included replication. We also launched our Forever Flash program to provide ongoing hardware upgrades as part of our maintenance and support agreements.
In 2015, we launched FlashArray//M and Pure1, our next-generation all-flash array hardware and cloud-based management and support.
In 2016, we launched our new FlashBlade product, our new elastic scale-out file and object storage system that delivers all-flash performance to terabyte-scale and multi-petabyte-scale data sets, on directed basis. FlashBlade is targeted to be generally available later in the year. We also launched a new entry-level model of our FlashArray product and FlashStack Mini, a new converged infrastructure solution, as well as upgraded versions of our existing FlashArray models.
Since launching FlashArray in May 2012, our customer base has grown to over 2,600 customers. Our customers include large and mid-size organizations across a diverse set of industry verticals, including cloud-based software and

17


service providers, consumer web, education, energy, financial services, governments, healthcare, manufacturing, media, retail and telecommunications. We define a customer as an end user that purchases our products and services either from one of our channel partners or from us directly. No customer represented over 10% of revenue for the nine months ended October 31, 2016.
We have grown rapidly in recent periods, with revenue for the three months ended October 31, 2015 and 2016 of $131.4 million and $197.0 million, representing year-over-year growth of 50%. For the nine months ended October 31, 2015 and 2016, our revenue was $290.1 million and $500.1 million, representing year-over-year revenue growth of 72%. We expect that the rate of growth in our revenue will continue to decline as our business scales, even if our revenue continues to grow in absolute terms. We have continued to make significant expenditures and investments, including in personnel-related costs, sales and marketing, infrastructure and operations, and have incurred net losses in each period since our inception, including net losses of $56.5 million and $78.8 million for the three months ended October 31, 2015 and 2016, and $169.5 million and $202.2 million for the nine months ended October 31, 2015 and 2016.
Since our founding, we have invested heavily in growing our business. Our headcount increased from over 1,300 employees as of January 31, 2016 and to over 1,650 employees as of October 31, 2016. We intend to continue to invest in our research and development organization to extend our technology leadership, enhance the functionality of our existing storage platform and introduce new products. By investing in research and development, we believe we will be well positioned to continue our rapid growth and take advantage of our large market opportunity. Our investments in research and development may result in enhancements or products that may not achieve adequate levels of market adoption, are more expensive to develop than anticipated, may take longer to generate revenue or may generate less revenue than we anticipate. We expect that our results of operations and cash flows will be impacted by the timing, size and level of success of these product development investments.
We also intend to continue to invest and expand our sales and marketing functions and channel programs, including expanding our global network of channel partners and carrying out associated marketing activities in key geographies. By investing in sales and technical training, demand generation and partner programs, we believe we can enable many of our partners to independently identify, qualify, sell and upgrade customers, with limited involvement from us. However, if we fail to effectively identify, train and manage our channel partners and to monitor their sales activity, as well as the customer support and services being provided to our customers in their local markets, our business, operating results, financial condition and cash flows could be harmed.
In addition, we intend to expand and continue to invest in our international operations, which we believe will be an important factor in our continued growth. However, even though our revenue generated from customers outside of the United States was 22% and 23% of our total revenue for the fiscal year ended January 31, 2016 and nine months ended October 31, 2016, our international operations are relatively new and we have limited experience operating in foreign jurisdictions. Our inexperience in operating our business outside of the United States increases the risk that our international expansion efforts may not be successful.
As a result of our strategy to increase our investments in research and development, sales, marketing, support and international expansion, we expect to continue to incur operating losses and negative cash flows from operations at least in the near future and may require additional capital resources to execute strategic initiatives to grow our business.
Our Business Model
Currently, we sell our platform predominantly through a high touch, channel-fulfilled model. Our global sales force works collaboratively with our channel partners. Our channel partners typically place orders with us upon receiving an order from a customer and do not stock inventory. Our sales organization is supported by systems engineers with deep technical expertise and responsibility for pre-sales technical support and engineering for our customers. We support our channel partners through product education and sales and support training. We intend to continue to invest in the channel to add more partners and to expand our reach to customers through our channel partners’ relationships. One channel partner represented over 10% of revenue for the nine months ended October 31, 2016.
Our business model enables customers to broadly adopt flash for a wide variety of workloads in their datacenter, with some of our most innovative customers adopting all-flash datacenters. We do not charge separately for software, meaning that when a customer buys a FlashArray, all software functionality of the Purity Operating Environment is included in the base purchase price, and the customer is entitled to updates and new features as long as the customer

18


maintains an active maintenance and support agreement. Product revenue is recognized at the time title and risk of loss have transferred. Support revenue is recognized ratably over the term of the related maintenance and support agreement, generally ranging from 1 to 3 years. By keeping our business model simple and efficient, we allow customers to buy more products and expand their footprint more easily while allowing us to reduce our sales and marketing costs.
To deliver on the next level of operational simplicity and support excellence, we designed Pure1, our integrated cloud-based management and support. Pure1 enables our customers, support staff and partners to collaborate to achieve the best customer experience and is included with an active maintenance and support agreement. In addition, our Forever Flash program provides our customers who continually maintain active maintenance and support for three years with an included controller refresh with each additional three year maintenance and support renewal. In this way, our customers improve and extend the service life of their arrays, we reduce our cost of support by keeping the array modern and we encourage capacity expansion. In accordance with multiple-element arrangement accounting guidance, we recognize the allocated revenue of the controllers and expense the related cost in the period in which we ship these controllers.
The combination of our high-performance, all-flash products, our exceptional support and our innovative business model has had a substantial impact on customer success and loyalty and are strong drivers of both initial purchase and additional purchases of our products. For all customers that have been with us for at least 12 months as of October 31, 2016, for every $1 of initial product purchase, our top 25 customers on average spent approximately $12 on new product purchases in the first 18 months following their initial purchase.
Factors Affecting Our Performance
Adoption of All-Flash Storage Systems
Organizations are increasingly replacing traditional disk-based systems with all-flash storage systems to achieve the performance they need. Our success depends on the adoption of all-flash storage systems in IT infrastructures. Although flash is expected to penetrate the datacenter at a rapid rate, a lack of demand for all-flash storage systems for any reason, including technological challenges associated with the use of all-flash memory, the cost or availability of all-flash memory or the adoption of competing technologies and products, would adversely affect our growth prospects. To the extent more organizations recognize the benefits of all-flash memory in datacenter storage systems and as the adoption of all-flash memory storage technology increases, our target customer base will expand. Our business and results of operations will be significantly affected by the speed with which organizations implement all-flash storage systems.
Adding New Customers and Expanding Sales to Our Existing Customer Base 
We believe that the all-flash storage market is still in the early stages of adoption. We intend to target new customers by continuing to invest in our field sales force and extending our relationships with channel partners. We also intend to continue to target large customers including enterprises, service providers and government organizations who have yet to adopt all-flash storage throughout their IT environment. A typical initial order involves educating prospective customers about the technical merits and capabilities and potential cost savings of our products as compared to our competitors’ products. We believe that customer references have been, and will continue to be, an important factor in winning new business. The average size of arrays deployed by our customers has increased over time. We expect this trend to continue and that a substantial portion of our future sales will be sales to existing customers, including expansion of their arrays. We sell additional products and services to our customers as the data within their existing application deployments naturally grows and they migrate additional applications to our all-flash storage platform. Our business and results of operations will depend on our ability to continue to add new customers and sell additional products to our growing base of customers.
Leveraging Channel Partners
We sell our products predominantly through a channel-fulfilled model. Our sales force supports our channel partners and is responsible for large account penetration, global account coordination and overall market development. Our channel partners help market and sell our products, typically with assistance from our sales force. This joint sales approach provides us with the benefit of direct relationships with substantially all of our customers and expands our reach through the relationships of our channel partners. We intend to continue to expand our partner relationships to further extend our distribution coverage and to invest in education, training and programs to increase the ability of our

19


channel partners to sell our products independently. Our business and results of operations will be materially affected by our success in leveraging our channel partners.
Investing in Research and Development for Growth 
Our future performance will also depend on our ability to continue to innovate, improve functionality in our products and adapt to new technologies or changes to existing technologies. We intend to continue to invest for long-term growth. Accordingly, we expect to continue to invest heavily in our product development efforts, including software development in the Purity Operating Environment and Pure1 to further expand the capabilities and performance of our storage platform, hardware development in our hardware platforms, such as FlashArray and FlashBlade, and to introduce new products including new releases and upgrades to our software and hardware. We expect that our results of operations will be impacted by the timing, size and level of success of these product development investments.
Components of Results of Operations
Revenue
We derive revenue from the sale of our storage products and support services. Provided that all other revenue recognition criteria have been met, we typically recognize product revenue upon shipment, as title and risk of loss are transferred to our channel partners at that time. Products are typically shipped directly by us to customers, and our channel partners do not stock our inventory. We expect our product revenue may vary from period to period based on, among other things, the timing and size of orders and delivery of products and the impact of significant transactions.
We provide our support services pursuant to maintenance and support agreements, which involve customer support, hardware maintenance and software upgrades for a period of generally 1 to 3 years. We recognize revenue from maintenance and support agreements over the contractual service period. We expect our support revenue to increase as we add new customers and our existing customers renew maintenance and support agreements.
Cost of Revenue
Cost of product revenue primarily consists of costs paid to our third-party contract manufacturers, which includes the costs of our components, and personnel costs associated with our manufacturing operations. Personnel costs consist of salaries, bonuses and stock-based compensation expense. Our cost of product revenue also includes freight, allocated overhead costs and inventory write-offs. Allocated overhead costs consist of certain facilities and IT costs. We expect our cost of product revenue to increase in absolute dollars as our product revenue increases.
Cost of support revenue includes personnel costs associated with our customer support organization and allocated overhead costs. Cost of support revenue also includes parts replacement costs. We expect our cost of support revenue to increase in absolute dollars as our support revenue increases.
Operating Expenses
Our operating expenses consist of research and development, sales and marketing and general and administrative expenses. Salaries and personnel-related costs, including stock-based compensation expense, are the most significant component of each category of operating expenses. Operating expenses also include allocated overhead costs for facilities and IT costs.
Research and Development. Research and development expense consists primarily of employee compensation and related expenses, prototype expenses, depreciation associated with assets acquired for research and development, third-party engineering and contractor support costs, as well as allocated overhead. We expect our research and development expense to increase in absolute dollars, as we continue to invest in new products and existing products and build upon our technology leadership.
Sales and Marketing. Sales and marketing expense consists primarily of employee compensation and related expenses, sales commissions, marketing programs, travel and entertainment expenses, as well as allocated overhead. Marketing programs consist of advertising, events, corporate communications and brand-building activities. We expect our sales and marketing expense to increase in absolute dollars over time as we expand our sales force and increase our marketing resources, expand into new markets and further develop our channel program.

20


General and Administrative. General and administrative expense consists primarily of compensation and related expenses for administrative functions including finance, legal, human resources and fees for third-party professional services, as well as allocated overhead. We expect our general and administrative expense to increase in absolute dollars as we continue to invest in the growth of our business.
Other Income (Expense), Net
Other income (expense), net consists primarily of interest income earned on cash, cash equivalents and marketable securities and gains and losses from foreign currency transactions.
Provision for Income Taxes
Provision for income taxes consists primarily of income taxes in certain foreign jurisdictions in which we conduct business and state income taxes in the United States. We have recorded no U.S. federal income tax and provided a full valuation allowance for U.S. deferred tax assets, which includes net operating loss, carryforwards and tax credits related primarily to research and development. We expect to maintain this full valuation allowance for the foreseeable future as it is more likely than not that the assets will not be realized based on our history of losses.
Results of Operations
The following tables set forth our results of operations for the periods presented in dollars and as a percentage of our revenue (in thousands):
 
 
Three Months Ended 
 October 31,
 
Nine Months Ended 
 October 31,
 
2015
 
2016
 
2015
 
2016
 
(unaudited)
Consolidated Statements of Operations Data:
 
 
 
 
 
Revenue:
 

 
 

 
 
 
 
Product
$
113,573

 
$
160,523

 
$
248,383

 
$
403,181

Support
17,791

 
36,433

 
41,719

 
96,936

Total revenue
131,364

 
196,956

 
290,102

 
500,117

Cost of revenue:
 

 
 

 
 
 
 
Product(1)
41,995

 
54,725

 
92,348

 
131,618

Support(1)
9,058

 
14,597

 
23,479

 
41,531

Total cost of revenue
51,053

 
69,322

 
115,827

 
173,149

Gross profit
80,311

 
127,634

 
174,275

 
326,968

Operating expenses:
 

 
 

 
 
 
 
Research and development(1)
43,065

 
61,612

 
112,935

 
173,185

Sales and marketing(1)
63,803

 
91,392

 
171,647

 
262,073

General and administrative(1)
29,022

 
22,810

 
56,941

 
64,021

Legal settlement (2)

 
30,000

 

 
30,000

Total operating expenses
135,890

 
205,814

 
341,523

 
529,279

Loss from operations
(55,579
)
 
(78,180
)
 
(167,248
)
 
(202,311
)
Other income (expense), net
(171
)
 
(192
)
 
(1,245
)
 
1,127

Loss before provision for income taxes
(55,750
)
 
(78,372
)
 
(168,493
)
 
(201,184
)
Provision for income taxes
751

 
441

 
965

 
967

Net loss
$
(56,501
)
 
$
(78,813
)
 
$
(169,458
)
 
$
(202,151
)
 
 
(1)
Includes stock-based compensation expense as follows:

21


 
Three Months Ended 
 October 31,

Nine Months Ended 
 October 31,
 
2015
 
2016
 
2015
 
2016
 
(unaudited)
Cost of revenue—product
$
43

 
$
138

 
$
139

 
$
425

Cost of revenue—support
657

 
1,178

 
1,511

 
3,982

Research and development
8,195

 
15,241

 
18,624

 
40,875

Sales and marketing
4,559

 
8,468

 
10,539

 
24,719

General and administrative
2,085

 
3,210

 
5,385

 
9,128

Total stock-based compensation expense
$
15,539

 
$
28,235

 
$
36,198

 
$
79,129


(2)
Represents a one-time charge for a litigation settlement in October 2016.

 
Three Months Ended 
 October 31,
 
Nine Months Ended 
 October 31,
 
2015
 
2016
 
2015
 
2016
 
(unaudited)
Condensed Consolidated Statements of Operations Data:
 

 
 

 
 
 
 
Revenue:
 

 
 

 
 
 
 
Product
86
 %
 
82
 %
 
86
 %
 
81
 %
Support
14

 
18

 
14

 
19

Total revenue
100

 
100

 
100

 
100

Cost of revenue:
 

 
 

 
 

 
 

Product
32

 
28

 
32

 
27

Support
7

 
7

 
8

 
8

Total cost of revenue
39

 
35

 
40

 
35

Gross profit
61

 
65

 
60

 
65

Operating expenses:
 

 
 

 
 

 
 

Research and development
33

 
31

 
39

 
34

Sales and marketing
48

 
47

 
59

 
52

General and administrative
22

 
12

 
20

 
13

Legal settlement

 
15

 

 
6

Total operating expenses
103

 
105

 
118

 
105

Loss from operations
(42
)
 
(40
)
 
(58
)
 
(40
)
Other income (expense), net

 

 

 

Loss before provision for income taxes
(42
)
 
(40
)
 
(58
)
 
(40
)
Provision for income taxes
(1
)
 

 

 

Net loss
(43
)%
 
(40
)%
 
(58
)%
 
(40
)%
 
Revenue
 
 
Three Months Ended October 31,
 
Change
 
Nine Months Ended 
 October 31,
 
Change
 
2015
 
2016
 
$
 
%
 
2015
 
2016
 
$
 
%
 
(dollars in thousands, unaudited)
Product revenue
$
113,573

 
$
160,523

 
$
46,950

 
41
%
 
$
248,383

 
$
403,181

 
$
154,798

 
62
%
Support revenue
17,791

 
36,433

 
18,642

 
105
%
 
41,719

 
96,936

 
55,217

 
132
%
Total revenue
$
131,364

 
$
196,956

 
$
65,592

 
50
%
 
$
290,102

 
$
500,117

 
$
210,015

 
72
%



22


Total revenue increased by $65.6 million, or 50%, during the three months ended October 31, 2016 compared to the three months ended October 31, 2015 and increased by $210.0 million, or 72%, during the nine months ended October 31, 2016 compared to the nine months ended October 31, 2015.  The increases in product revenue were primarily driven by repeat purchases from existing customers and a growing number of new customers. The number of customers grew from approximately 1,350 as of October 31, 2015 to over 2,600 as of October 31, 2016. The increases in support revenue were driven primarily by an increase in maintenance and support agreements sold with increased product sales, as well as increased recognition of deferred support revenue.
Cost of Revenue and Gross Margin
 
 
Three Months Ended October 31,
 
Change
 
Nine Months Ended 
 October 31,
 
Change
 
2015
 
2016
 
$
 
%
 
2015
 
2016
 
$
 
%
 
(dollars in thousands, unaudited)
Product cost of revenue
$
41,995

 
$
54,725

 
$
12,730

 
30
%
 
$
92,348

 
$
131,618

 
$
39,270

 
43
%
Support cost of revenue
9,058

 
14,597

 
5,539

 
61
%
 
23,479

 
41,531

 
18,052

 
77
%
Total cost of revenue
$
51,053

 
$
69,322

 
$
18,269

 
36
%
 
$
115,827

 
$
173,149

 
$
57,322

 
49
%
Product gross margin
63
%
 
66
%
 
 

 
 

 
63
%
 
67
%
 
 
 
 
Support gross margin
49
%
 
60
%
 
 

 
 

 
44
%
 
57
%
 
 
 
 
Total gross margin
61
%
 
65
%
 
 

 
 

 
60
%
 
65
%
 
 
 
 

Cost of revenue increased by $18.3 million, or 36%, during the three months ended October 31, 2016 compared to the three months ended October 31, 2015 and increased by $57.3 million, or 49%, during the nine months ended October 31, 2016 compared to the nine months ended October 31, 2015. The increase in product cost of revenue was primarily driven by increased product sales and, to a lesser extent, by the increased costs in our manufacturing operations, including increased personnel costs associated with increased headcount. The increase in support cost of revenue was primarily attributable to costs in our customer support organization as we continue to expand internationally. These costs are primarily driven by increased personnel costs associated with increased headcount and an increase in parts replacement associated with a higher number of maintenance and support agreements. Total headcount in these functions increased 64% from October 31, 2015 to October 31, 2016.
Total gross margin increased from 61% during the three months ended October 31, 2015 to 65% during the three months ended October 31, 2016, and increased from 60% during the nine months ended October 31, 2015 to 65% during the nine months ended October 31, 2016. Product gross margin increased 3 and 4 points from the three and nine months ended October 31, 2015 to the three and nine months ended October 31, 2016, primarily driven by a shift in the mix of products sold as we transitioned to FlashArray//M, as well as continued cost reduction on certain key components. Support gross margin increased 11 and 13 points from the three and nine months ended October 31, 2015 to the three and nine months ended October 31, 2016, primarily due to increased recognition of deferred support revenue resulting from the increase in our customer base, as well as operational efficiencies.
Operating Expenses
Research and Development

 
Three Months Ended October 31,
 
Change
 
Nine Months Ended 
 October 31,
 
Change
 
2015
 
2016
 
$
 
%
 
2015
 
2016
 
$
 
%
 
(dollars in thousands, unaudited)
Research and development
$
43,065

 
$
61,612

 
$
18,547

 
43
%
 
$
112,935

 
$
173,185

 
$
60,250

 
53
%

23



Research and development expense increased by $18.5 million, or 43%, during the three months ended October 31, 2016 compared to the three months ended October 31, 2015, as we continued to develop new and enhanced product offerings such as our FlashBlade and FlashArray//M products. The increase was primarily driven by an increase of $13.4 million in salary and related costs, including an increase of $7.0 million in stock-based compensation expense, as headcount increased by 31% from October 31, 2015 to October 31, 2016. The remainder of the increase was primarily attributable to $3.1 million in depreciation expense on test equipment and $1.0 million in allocated facilities and related costs.

Research and development expense increased by $60.3 million, or 53%, during the nine months ended October 31, 2016 compared to the nine months ended October 31, 2015, as we continued to develop new and enhanced product offerings such as our FlashBlade and FlashArray//M products. The increase was primarily driven by an increase of $45.4 million in salary and related costs, including an increase of $22.3 million in stock-based compensation expense, as headcount increased by 31% from October 31, 2015 to October 31, 2016. The remainder of the increase was primarily attributable to $8.6 million in depreciation expense on test equipment, $3.6 million in allocated facilities and related costs and $1.5 million in professional services, partially offset by a decrease of $2.2 million in prototype expenses.
Sales and Marketing

 
Three Months Ended October 31,
 
Change
 
Nine Months Ended 
 October 31,
 
Change
 
2015
 
2016
 
$
 
%
 
2015
 
2016
 
$
 
%
 
(dollars in thousands, unaudited)
Sales and marketing
$
63,803

 
$
91,392

 
$
27,589

 
43
%
 
$
171,647

 
$
262,073

 
$
90,426

 
53
%

Sales and marketing expense increased by $27.6 million, or 43%, during the three months ended October 31, 2016 compared to the three months ended October 31, 2015, as we grew our sales force and expanded our geographic footprint. The increase was primarily driven by an increase of $19.2 million in salary and related costs, including an increase of $4.2 million in sales commission expense and an increase of $3.9 million in stock-based compensation expense, as headcount increased by 31% from October 31, 2015 to October 31, 2016. The remainder of the increase was primarily attributable to $4.4 million in marketing and brand awareness program costs, $2.2 million in allocated facilities and related costs and $1.2 million in travel and other costs. 
 
Sales and marketing expense increased by $90.4 million, or 53%, during the nine months ended October 31, 2016 compared to the nine months ended October 31, 2015, as we grew our sales force and expanded our geographic footprint. The increase was primarily driven by an increase of $62.6 million in salary and related costs, including an increase of $18.8 million in sales commission expense and an increase of $14.2 million in stock-based compensation expense, as headcount increased by 31% from October 31, 2015 to October 31, 2016. The remainder of the increase was primarily attributable to $15.8 million in marketing and brand awareness program costs, $5.9 million in allocated facilities and related costs and $3.8 million in sales conference, travel and other costs.
General and Administrative
 
Three Months Ended October 31,
 
Change
 
Nine Months Ended 
 October 31,
 
Change
 
2015
 
2016
 
$
 
%
 
2015
 
2016
 
$
 
%
 
(dollars in thousands, unaudited)
General and administrative
$
29,022

 
$
22,810

 
$
(6,212
)
 
(21
)%
 
$
56,941

 
$
64,021

 
$
7,080

 
12
%

General and administrative expense decreased by $6.2 million, or 21%, during the three months ended October 31, 2016 compared to the three months ended October 31, 2015. The decrease was primarily driven by a one-time charge of $11.9 million for an equity grant to the Pure Good Foundation in September 2015, partially offset by an increase of $2.3 million in salary and related costs, including an increase of $1.1 million in stock-based compensation expense, as we increased our headcount by 26% from October 31, 2015 to October 31, 2016, a $1.2

24


million increase in professional services as we expanded internationally and now operate as a public company and a $0.7 million increase in office and related costs.

General and administrative expense increased by $7.1 million, or 12%, during the nine months ended October 31, 2016 compared to the nine months ended October 31, 2015. The increase was primarily driven by an increase of $9.0 million in salary and related costs, including an increase of $3.7 million in stock-based compensation expense, as we increased our headcount by 26% from October 31, 2015 to October 31, 2016, a $5.0 million increase in office and related costs, $0.8 million increase in insurance costs, and a $0.8 million increase in professional services as we expanded internationally and now operate as a public company. These increases were partially offset by a one-time charge of $11.9 million for an equity grant to the Pure Good Foundation in September 2015.

Legal Settlement
In October 2016, we incurred a one-time charge of $30.0 million related to a legal settlement. See Note 5. Commitments and Contingencies of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information.

Other Income (Expense), Net
 
Three Months Ended October 31,
 
Change
 
Nine Months Ended 
 October 31,
 
Change
 
2015
 
2016
 
$
 
%
 
2015
 
2016
 
$
 
%
 
(dollars in thousands, unaudited)
Other income (expense), net
$
(171
)
 
$
(192
)
 
$
(21
)
 
(12
)%
 
$
(1,245
)
 
$
1,127

 
$
2,372

 
191
%

The decrease in other income (expense), net during the three months ended October 31, 2016 compared to the three months ended October 31, 2015 was primarily driven by a $1.3 million increase in net losses from foreign currency transactions, partially offset by an increase of $1.3 million in interest income earned on our cash, cash equivalents and marketable securities. The increase in other income (expense), net during the nine months ended October 31, 2016 compared to the nine months ended October 31, 2015 was primarily driven by an increase of $3.2 million in interest income earned on our cash, cash equivalents and marketable securities, partially offset by a $1.1 million increase in net losses from foreign currency transactions.
Provision for Income Taxes
 
Three Months Ended October 31,
 
Change
 
Nine Months Ended 
 October 31,
 
Change
 
2015
 
2016
 
$
 
%
 
2015
 
2016
 
$
 
%
 
(dollars in thousands, unaudited)
Provision for income taxes
$
751

 
$
441

 
$
(310
)
 
(41
)%
 
$
965

 
$
967

 
$
2

 
%

The decrease in provision for income taxes during the three months ended October 31, 2016 compared to the three months ended October 31, 2015 was primarily driven by a tax benefit related to the adoption of ASU 2016-09. The provision for income taxes during the nine months ended October 31, 2016 was driven by a $0.9 million increase in foreign and state income taxes, offset by a tax benefit of $0.9 million related to the adoption of ASU 2016-09. Please see Note 2 of Part I, Item I of this Quarterly Report on Form 10-Q for further information on the adoption.
Liquidity and Capital Resources
As of October 31, 2016, we had cash, cash equivalents and marketable securities of $518.2 million. Our cash and cash equivalents primarily consist of bank deposits and money market accounts. Our marketable securities consist of highly liquid debt instruments of the U.S. government and its agencies, debt instruments of highly rated corporations and debt instruments issued by foreign governments. We have generated significant operating losses and negative cash flows from operations as reflected in our accumulated deficit of $759.6 million. We expect to continue to incur operating losses and negative cash flows from operations at least in the near future and may require additional capital resources to execute strategic initiatives to grow our business.

25


In August 2014, we entered into a two-year revolving line of credit facility to provide up to $15.0 million based on 80% of qualifying accounts receivable. Borrowings under the line of credit bear interest at the lender’s prime rate plus 1%. The revolving line of credit facility was collateralized by substantially all of our assets, excluding any intellectual property. It also contains various covenants, including covenants related to the delivery of financial and other information, as well as limitations on dispositions, mergers, consolidations and other corporate activities. As of January 31, 2016, we had no borrowings from this line of credit and we were in compliance with all financial covenants. In April 2016, we terminated this line of credit.
We believe our existing cash, cash equivalents and marketable securities will be sufficient to fund our operating and capital needs for at least the next 12 months. Our future capital requirements will depend on many factors including our growth rate, the timing and extent of spending to support development efforts, the expansion of sales and marketing and international operation activities, the timing of new product introductions and the continuing market acceptance of our products and services. We may in the future enter into arrangements to acquire or invest in complementary businesses, services and technologies, including intellectual property rights. For example, we acquired a portfolio of technology patents for $1.0 million during the nine months ended October 31, 2016. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, operating results and financial condition would be adversely affected.
As of January 31, 2016 and October 31, 2016, we had letters of credit in the aggregate amount of $7.1 million and $7.7 million, in connection with our facility leases. The letters of credit are collateralized by restricted cash in the same amount and mature at various dates through June 2024.
The following table summarizes our cash flows for the periods presented (in thousands, unaudited):
 
 
Nine Months Ended October 31,
 
2015
 
2016
 
 
 
 
Net cash used in operating activities
$
(49,866
)
 
$
(51,880
)
Net cash used in investing activities
$
(31,979
)
 
$
(436,732
)
Net cash provided by financing activities
$
462,445

 
$
36,331

 
Operating Activities
Net cash used in operating activities during the nine months ended October 31, 2016 was $51.9 million, which resulted from a net loss of $202.2 million, including a $30.0 million one-time legal settlement payment, partially offset by non-cash charges for stock-based compensation expense of $79.1 million, $36.0 million for depreciation and amortization and net cash inflows of $34.1 million from changes in operating assets and liabilities. The net cash inflows from changes in operating assets and liabilities was primarily the result of a $60.2 million increase in deferred revenue, a $6.8 million increase in accrued compensation and other liabilities, a $3.6 million increase in accounts payable and a decrease in deferred commissions of $1.8 million, partially offset by a $38.2 million increase in accounts receivable. The increase in deferred revenue was primarily due to new sales order growth during the nine months ended October 31, 2016. The increases in accounts receivable, accounts payable and in accrued compensation and other liabilities were primarily attributable to revenue growth and increased activities to support overall business growth.
Net cash used in operating activities during the nine months ended October 31, 2015 was $49.9 million, which resulted from a net loss of $169.5 million, partially offset by non-cash charges for stock-based compensation expense and contribution of common stock to the Pure Good Foundation of $36.2 million and $11.9 million, $23.1 million for depreciation and amortization and net cash inflows of $48.4 million from changes in operating assets and liabilities. The net cash inflows from changes in operating assets and liabilities was primarily the result of a $88.0 million increase in deferred revenue and a $17.2 million increase in accrued compensation and other liabilities and a $10.2 million increase in accounts payable, partially offset by a $53.1 million increase in accounts receivable, $8.5 million increase in deferred commissions, $3.4 million increase in inventory and $2.1 million increase in prepaid expenses and other assets. The increase in deferred revenue was primarily due to new sales order growth during the nine months ended October 31, 2015. The increases in accounts receivable, accrued compensation and other liabilities and accounts payable were primarily attributed to revenue growth and increased activities to support overall business growth.

26


Investing Activities
Net cash used in investing activities of $436.7 million during the nine months ended October 31, 2016 resulted from net purchases of marketable securities of $365.5 million, capital expenditures of $64.6 million, an increase in restricted cash of $5.6 million related to a vendor credit card program and security deposit for office space, as well as the purchase of a portfolio of technology patents for $1.0 million.
Net cash used in investing activities of $32.0 million during the nine months ended October 31, 2015 resulted from capital expenditures of $29.5 million and an increase in restricted cash related to security deposits for new office spaces of $2.5 million.
Financing Activities
Net cash provided by financing activities of $36.3 million during the nine months ended October 31, 2016 was primarily due to $25.6 million of proceeds from issuance of common stock under ESPP and $10.7 million of proceeds from the exercise of stock options.
Net cash provided by financing activities of $462.4 million during the nine months ended October 31, 2015 was primarily due to $459.4 million in net proceeds from our initial public offering, $4.7 million of proceeds from the exercise of stock options, partially offset by payments of IPO costs of $1.7 million.
 
Contractual Obligations and Commitments

During the nine months ended October 31, 2016, we entered into four office facility lease agreements and an amendment to an existing office facility lease agreement with total additional lease obligations of approximately $43.7 million with lease periods expiring through June 2024.

Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.
Please see Note 2 of Part I, Item 1 of this Quarterly Report on Form 10-Q for the summary of significant accounting policies. In addition, please see “Critical Accounting Policies and Estimates” in our latest 10-K. There have been no material changes to our critical accounting policies and estimates since our 10-K filed on March 25, 2016.
Available Information
Our website is located at www.purestorage.com, and our investor relations website is located at http://investor.purestorage.com. The following filings will be available through our investor relations website after we file them with the SEC: Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and our Proxy Statements for our annual meetings of stockholders, and are also available for download free of charge. We will also provide a link to the section of the SEC's website at www.sec.gov that has all of our public filings, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, all amendments to those reports, our Proxy Statements, and other ownership related filings. Further, a copy of this Quarterly Report on Form 10-Q is located at the SEC's Public Reference Room at 100 F Street, NE, Room 1580, Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330.
We webcast our earnings calls and certain events we participate in or host with members of the investment community on our investor relations website. Additionally, we provide notifications of news or announcements regarding our financial performance, including SEC filings, investor events, press and earnings releases, social media accounts (Twitter, Facebook and LinkedIn), and blogs as part of our investor relations websiteInvestors and others can receive notifications of new information posted on our investor relations website in real time by signing up for email alerts and RSS feeds. Further corporate governance information, including our certificate of incorporation, bylaws, governance

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guidelines, board committee charters, and code of conduct, is also available on our investor relations website under the heading “Corporate Governance.” The content of our websites are not incorporated by reference into this Quarterly Report on Form 10-Q or in any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
We have operations both within the United States and internationally, and we are exposed to market risk in the ordinary course of our business.
Interest Rate Risk
Our cash, cash equivalents and marketable securities primarily consist of bank deposits and money market accounts, U.S. government notes and U.S. agency notes, and highly rated corporate debt. As of October 31, 2016, we had cash, cash equivalents and marketable securities of $518.2 million. The carrying amount of our cash equivalents reasonably approximates fair value, due to the short maturities of these instruments. The primary objectives of our investment activities are the preservation of capital, the fulfillment of liquidity needs and the fiduciary control of cash and investments. We do not enter into investments for trading or speculative purposes. Our investments are exposed to market risk due to a fluctuation in interest rates, which may affect our interest income and the fair value of our investments.  
We considered the historical volatility of short-term interest rates and determined that it was reasonably possible that an adverse change of 100 basis points could be experienced in the near term. A hypothetical 1.00% (100 basis points) increase in interest rates would have resulted in a decrease in the fair value of our marketable securities of approximately $4.2 million as of October 31, 2016.
Foreign Currency Exchange Risk
Our sales contracts are primarily denominated in U.S. dollars with a small number of contracts denominated in foreign currencies. A portion of our operating expenses are incurred outside the United States and denominated in foreign currencies and are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the British pound and Euro. Additionally, fluctuations in foreign currency exchange rates may cause us to recognize transaction gains and losses in our statement of operations. Given the impact of foreign currency exchange rates has not been material to our historical operating results, we have not entered into any derivative or hedging transactions, but we may do so in the future if our exposure to foreign currency exchange should become more significant.
We considered the historical trends in currency exchange rates and determined that it was reasonably possible that adverse changes in exchange rates of 10% for all currencies could be experienced in the near term. These reasonably possible adverse changes in exchange rates of 10% were applied to total monetary assets and liabilities denominated in currencies other than U.S. dollar at the balance sheet dates to compute the adverse impact these changes would have had on our loss before income taxes in the near term. These changes would have resulted in an adverse impact on loss before income taxes of approximately $4.0 million as of October 31, 2016.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this report.  Based on management’s evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective at a reasonable assurance level.
In designing and evaluating our disclosure controls and procedures, management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the

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fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended October 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings.
The information set forth under the "Legal Matters" subheading in Note 5. Commitments and Contingencies of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q is incorporated herein by reference.
In addition, we may from time to time, be involved in various legal proceedings arising from the normal course of business, and an unfavorable resolution of any of these matters could materially affect our future results of operations, cash flows or financial position.
 
 
Item 1A. Risk Factors.
Investing in our Class A common stock involves a high degree of risk. Investors should carefully consider the risks and uncertainties described below, together with all of the other information contained in this report, including our consolidated financial statements and the related notes appearing in this quarterly report, before deciding to invest in our Class A common stock. If any of the following risks actually occur, it could harm our business, prospects, operating results and financial condition. In such event, the trading price of our Class A common stock could decline and investors might lose all or part of their investment.
Risks Related to Our Business and Industry
We have experienced rapid growth in recent periods, and we may not be able to sustain or manage future growth effectively.
We have significantly expanded our overall business, customer base, headcount, channel partner relationships and operations in recent periods, and we anticipate that we will continue to expand and may experience significant growth in future periods. For example, our headcount increased to over 1,300 employees as of January 31, 2016, and to over 1,650 employees as of October 31, 2016. Our future operating results will depend to a large extent on our ability to successfully manage our anticipated expansion and growth. To manage our growth successfully, we believe that we must, among other things, effectively:
maintain and extend our product leadership;
recruit, hire, train and manage additional personnel;
maintain and further develop our channel partner relationships;
enhance and expand our distribution and supply chain infrastructure;
expand our support capabilities;
forecast and control expenses;
enhance and expand our international operations; and
implement, improve and maintain our internal systems, procedures and controls.
We expect that our future growth will continue to place a significant strain on our managerial, administrative, operational, financial and other resources. We will incur costs associated with this future growth prior to realizing the anticipated benefits, and the return on these investments may be lower, may develop more slowly than we expect or may never materialize. If we are unable to manage our growth effectively, we may not be able to take advantage of market opportunities or develop new products or enhancements to existing products in a timely manner, and we may fail to satisfy customers’ expectations, maintain product quality, execute on our business plan or adequately respond to competitive pressures, each of which could adversely affect our business and operating results.
We intend to continue focusing on revenue growth and increasing our market penetration and international presence by investing heavily in our business and this may impede near-term profitability.
Our strategy is to continue with our investments in marketing, sales, support and research and development. We believe our decision to continue investing heavily in our business will be critical to our future success. We anticipate

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that our operating costs and expenses will continue to increase. In addition, we expect to incur significant legal, accounting and other expenses in order to operate effectively as a public company. Even if we achieve or maintain significant revenue growth, we may continue to experience losses, and this may impede our near-term profitability.
We have not achieved profitability for any fiscal year since our inception. We incurred a net loss of $213.8 million for the fiscal year ended January 31, 2016 and $202.2 million for the nine months ended October 31, 2016, and we had an accumulated deficit of $555.3 million as of January 31, 2016 and $759.6 million as of October 31, 2016. Our operating expenses largely are based on anticipated revenue, and a high percentage of our expenses are, and will continue to be, fixed in the short term. If we fail to adequately increase revenue and manage costs, we may not achieve or maintain profitability in the future. As a result, our business could be harmed and our operating results could suffer.
We have a limited operating history, which makes our future operating results difficult to predict.
We were founded in October 2009, but have generated substantially all of our revenue in the fiscal years ended January 31, 2014 and later. We have a limited operating history in an industry characterized by rapid technological change, changing customer needs, evolving industry standards and frequent introductions of new products and services. Our limited operating history makes it difficult to evaluate our current business and our future prospects, including our ability to plan for and model future growth. All of these factors make our future operating results difficult to predict, which may impair our ability to manage our business and reduce investors’ ability to assess our prospects.
Investors should not consider our revenue growth in prior quarterly or annual periods as indicative of our future performance. In future periods, we do not expect to achieve similar percentage revenue growth rates as we have achieved in some past periods. If we are unable to maintain adequate revenue or revenue growth, our stock price could be volatile, and it may be difficult to achieve and maintain profitability.
The market for all-flash storage products is rapidly evolving, which makes it difficult to forecast customer adoption rates and demand for our products.
The market for all-flash storage products is rapidly evolving. As a result, our future financial performance will depend on the continued growth of this market and on our ability to adapt to competitive dynamics and emerging customer demands and trends. Sales of our products have largely focused on use cases that require performance storage products such as virtualization and transaction processing. Many of our target customers have never purchased all-flash storage products and may not have the desire or available budget to invest in a new technology such as ours. Incumbent vendors are actively promoting storage products retrofitted with flash, which may seem to reduce the value of purpose-built, all-flash products like ours. It is difficult to predict with any precision customer adoption rates of flash, customer demand for our products or the future growth rate and size of our market. Our products may never reach mass adoption, and changes or advances in alternative technologies or adoption of cloud storage offerings not utilizing our storage platform could adversely affect the demand for our products. For instance, offerings from large-scale cloud providers are expanding quickly and may serve as alternatives to our products for a variety of customer workloads. Since these providers are known for developing storage systems internally, this trend could reduce the demand for storage systems developed by original equipment manufacturers, such as us.  Further, although flash storage has a number of advantages as compared to other data storage alternatives, such as hard disk drives, flash storage has certain limitations as well, including, in some use cases, a higher price per gigabyte of raw storage, more limited methods for data recovery and reduced performance gains for certain uses, such as sequential input/output, or I/O, transactions. A slowing in or reduced demand for all-flash storage products caused by lack of customer acceptance, technological challenges, alternative technologies and products or otherwise would result in a lower revenue growth rate or decreased revenue, either of which would negatively impact our business and operating results.
We face intense competition from a number of established companies and new entrants.
We face intense competition from a number of established companies that sell competitive storage products. These competitors include Dell EMC, HP Enterprise, Hitachi Data Systems, IBM, Lenovo and NetApp. These competitors, as well as other potential competitors, may have:
greater name recognition and longer operating histories;
larger sales and marketing and customer support budgets and resources;
broader distribution and established relationships with distribution partners and customers;
the ability to bundle storage products with other products and services to address customers’ requirements;

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greater resources to make acquisitions;
larger and more mature product and intellectual property portfolios; and
substantially greater financial, technical and other resources.
We also face competition from a number of other companies, one or more of which may become significant competitors in the future. For example, we compete against certain cloud providers and vendors offering products that combine compute, networking and storage, or hyperconverged products. Some cloud providers are expanding quickly, and their offerings could, if we are unable to effectively sell to these providers, displace demand for our storage products. Vendors offering hyperconverged products are attempting to displace dedicated storage products like ours. New competitors could emerge and acquire significant market share. The spinoff of HP Enterprise, the acquisition of SolidFire by NetApp and the acquisition of EMC by Dell have introduced new competitive dynamics.  All of our competitors may utilize a broad range of competitive strategies. For example, some of our competitors have offered bundled products and services in order to reduce the initial cost of their storage products. Our competitors may also choose to adopt more aggressive pricing policies than we choose to adopt. Some of our competitors have offered their products either at significant discounts or even for free in competing against us and in response to our efforts to market the overall benefits and technological merits of our products.
Many competitors have developed competing all-flash or hybrid storage technologies. For example, several of our competitors have introduced all-flash storage products with performance-focused designs and/or with data reduction technologies that directly compete with our products, or have introduced business programs that attempt to compete with, or mitigate against, the value of our innovative programs, such as our Evergreen Storage model of hardware and software upgrades and maintenance. We expect our competitors to continue to improve the performance of their products, reduce their prices and introduce new feature, services and technologies that may, or that they may claim to, offer greater performance and improved total cost of ownership as compared to our products. In addition, our competitors may develop enhancements to, or future generations of, competitive products that may render our products or technologies obsolete or less competitive. These and other competitive pressures may prevent us from competing successfully against current or future competitors.
Many of our established competitors have long-standing relationships with key decision makers at many of our current and prospective customers, which may inhibit our ability to compete effectively and maintain or increase our market share.
Many of our competitors benefit from established brand awareness and long-standing relationships with key decision makers at many of our current and prospective customers. We expect that our competitors will seek to leverage these existing relationships to discourage customers from evaluating or purchasing our products. In particular, when competing against us, we expect our competitors to promote the adequacy of their all-flash or hybrid storage products and emphasize the perceived risks of relying on products from a company that has a shorter operating history. Sales and marketing tactics by established competitors may include incomplete or misleading statements about their products, or about us and our products that could harm or impede our business. Additionally, most of our prospective customers have existing storage systems manufactured by our competitors. This gives an incumbent competitor an advantage in retaining the customer because the incumbent competitor already understands the customer’s network infrastructure, user demands and IT needs. In the event that we are unable to successfully sell our products to new customers or persuade our customers to continue purchasing our products, we will not be able to maintain or increase our market share and revenue, which could adversely affect our business and operating results.
Our ability to increase our revenue will substantially depend on our ability to attract, motivate and retain sales, engineering and other key personnel, including our management team, and any failure to attract, motivate and retain these employees could harm our business, operating results and financial condition.
Our ability to increase our revenue will substantially depend on our ability to attract and retain qualified sales, engineering and other key employees, including our management. These positions may require candidates with specific backgrounds in software and the storage industry, and competition for employees with such expertise is intense. Our ability to attract, motivate or retain employees may be reduced, as the value of our stock fluctuates and as our employees have the opportunity to sell their equity in the future. We may not be successful in attracting, motivating and retaining qualified personnel. We have from time to time experienced, and we expect to continue to experience, difficulty in hiring and retaining highly skilled employees with appropriate qualifications. To the extent that we are successful in hiring to fill these positions, we need a significant amount of time to train the new employees before they can become effective and efficient in performing their jobs. From time to time, there may be changes in our management team

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resulting from the hiring or departure of those individuals. Members of our management team, including our executive officers, are generally employed on an at-will basis, which means that they could terminate their employment with us at any time. If we are unable to attract, motivate and retain qualified sales, engineering and other key employees, including our management, our business and operating results could suffer.
If we fail to adequately expand and optimize our sales force our growth will be impeded.
We will need to continue to expand and optimize our sales infrastructure in order to grow our customer base and our business. We plan to continue to expand and train our sales force, both domestically and internationally. Identifying, recruiting and training qualified sales personnel require significant time, expense and attention. It can take time before our sales representatives are fully trained and productive. Our business may be adversely affected if our efforts to expand and train our sales force do not generate a corresponding increase in revenue. In particular, if we are unable to hire, develop and retain qualified sales personnel or if new sales personnel are unable to achieve desired productivity levels in a reasonable period of time, we may not be able to realize the expected benefits of this investment or increase our revenue.
If we fail to develop and introduce new or enhanced products on a timely basis, our ability to attract and retain customers could be impaired and our competitive position could be harmed.
We operate in a dynamic environment characterized by rapidly changing technologies and industry standards and technological obsolescence. To compete successfully, we must design, develop, market and sell new or enhanced products that provide increasingly higher levels of performance, capacity and reliability and that meet the cost expectations of our customers, which is a complex and uncertain process. The introduction of new products by our competitors, the market acceptance of products based on new or alternative technologies or the emergence of new industry standards could render our existing or future products obsolete or less competitive. As we introduce new or enhanced products, we must successfully manage product launches and transitions to the next generations of our products. For example, we started initial shipments of our new FlashArray//M10 in June 2016, and FlashBlade products in July 2016. If we are not able to successfully manage the development and release of these products, our business, operating results and financial condition could be harmed. Similarly, if we fail to introduce new or enhanced products, such as new or improved software features, that meet the needs of our customers in a timely or cost-effective fashion, we may lose market share and our operating results could be adversely affected.
Our research and development efforts may not produce successful products that result in significant revenue in the near future, if at all.
Developing new products and related enhancements, including new or improved features, is expensive and time intensive. Our investments in research and development may result in products that may not achieve market adoption, are more expensive to develop than anticipated, may take longer to generate revenue or may generate less revenue than we anticipate. Our future plans include significant investments in research and development for new products and related opportunities. We believe that we must continue to dedicate significant resources to our research and development efforts to maintain or expand our competitive position. However, these efforts may not result in significant revenue in the near future, if at all, which could adversely affect our business and operating results.
If we fail to successfully maintain or grow our relationships with channel partners, our business, operating results and financial condition could be harmed.
Our future success is highly dependent upon our ability to establish and maintain successful relationships with a variety of channel partners in markets where we do not have a large direct sales force or direct customer support personnel. In addition to selling our products, our partners may offer installation, post-sale service and support on our behalf in their local markets. In markets where we rely on partners more heavily, we have less contact with our customers and less control over the sales process and the quality and responsiveness of our partners. As a result, it may be more difficult for us to ensure the proper delivery and installation of our products or the quality or responsiveness of the support and services being offered. Any failure on our part to effectively identify, train and manage our channel partners and to monitor their sales activity, as well as the customer support and services being provided to our customers in their local markets, could harm our business, operating results and financial condition.
Our channel partners may choose to discontinue offering our products and services or may not devote sufficient attention and resources toward selling our products and services. We typically enter into non-exclusive, written agreements with our channel partners. These agreements generally have a one-year, self-renewing term, have no

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minimum sales commitment and do not prohibit our channel partners from offering products and services that compete with ours. Accordingly, our channel partners may choose to discontinue offering our products and services or may not devote sufficient attention and resources toward selling our products and services. Additionally, our competitors may provide incentives to our existing and potential channel partners to use, purchase or offer their products and services or to prevent or reduce sales of our products and services. The occurrence of any of these events could harm our business, operating results and financial condition.
Our gross margins are impacted by a variety of factors, are subject to variation from period to period and are difficult to predict.
Our gross margins fluctuate from period to period due primarily to product costs, customer mix and product mix. Over the last six quarters, our quarterly gross margins ranged from 58% to 66%. Our gross margins are likely to continue to fluctuate and may be affected by a variety of factors, including:
demand for our products;
sales and marketing initiatives, discount levels, rebates and competitive pricing;
changes in customer, geographic or product mix, including mix of configurations within products;
the cost of freight and components, including NAND flash;
new product introductions and enhancements, potentially with initial sales at relatively small volumes and higher product costs;
the timing and amount of revenue recognized and deferred;
excess inventory levels or purchase commitments as a result of changes in demand forecasts or product transitions;
an increase in product returns, order rescheduling and cancellations;
the timing of technical support service contracts and contract renewals;
inventory stocking requirements to mitigate supply constraints, accommodate unforeseen demand or support new product introductions; and 
product quality and serviceability issues.
Due to such factors, gross margins are subject to variation from period to period and are difficult to predict. If we are unable to manage these factors effectively, our gross margins may decline, and fluctuations in gross margins may make it difficult to manage our business and achieve or maintain profitability, which could materially harm our business, operating results and financial condition.
Our operating results may fluctuate significantly, which could make our future results difficult to predict and could cause our operating results to fall below expectations.
Our operating results may fluctuate due to a variety of factors, many of which are outside of our control. As a result, comparing our operating results on a period-to-period basis may not be meaningful. Investors should not rely on our past results as an indication of our future performance. If our revenue or operating results fall below the expectations of investors or any securities analysts that follow our company, the price of our Class A common stock would likely decline.
Factors that are difficult to predict and that could cause our operating results to fluctuate include:
the timing and magnitude of orders, shipments and acceptance of our products in any quarter, including product returns, order rescheduling and cancellations by our customers;
fluctuations in demand and prices for our products;
potential seasonality in the markets we serve;
our ability to control the costs of the components we use in our hardware products;