Fair Value Measurements

9 Months Ended

Apr. 30, 2021

NOTE 3. FAIR VALUE MEASUREMENTS

The fair value of our financial assets and liabilities measured on a recurring basis is as follows:


	As of July 31, 2020
	Level I		Level II		Level III		Total
	(in thousands)
Financial Assets:
Cash equivalents:
Money market funds	$	142,936	$	—	$	—	$	142,936
Commercial paper		—		8,999		—		8,999
Short-term investments:
Corporate bonds		—		345,265		—		345,265
Commercial paper		—		29,702		—		29,702
U.S. government securities		—		26,074		—		26,074
Total measured at fair value	$	142,936	$	410,040	$	—	$	552,976
Cash								166,802
Total cash, cash equivalents and short-term investments							$	719,778


	As of April 30, 2021
	Level I		Level II		Level III		Total
	(in thousands)
Financial Assets:
Cash equivalents:
Money market funds	$	57,443	$	—	$	—	$	57,443
Commercial paper		—		26,999		—		26,999
Corporate bonds		—		2,007		—		2,007
Short-term investments:
Corporate bonds		—		534,209		—		534,209
Commercial paper		—		351,699		—		351,699
U.S. Government securities		—		94,237		—		94,237
Total measured at fair value	$	57,443	$	1,009,151	$	—	$	1,066,594
Cash								188,227
Total cash, cash equivalents and short-term investments							$	1,254,821

Financial Instruments Not Recorded at Fair Value on a Recurring Basis

We report our financial instruments at fair value, with the exception of the 0% convertible senior notes, due in January 2023, (the "2023 Notes") and the 2.50% convertible senior notes, due in 2026, (the "2026 Notes") (collectively, the "Notes"). Financial instruments that are not recorded at fair value on a recurring basis are measured at fair value on a quarterly basis for disclosure purposes. The carrying values and estimated fair values of financial instruments not recorded at fair value are as follows:


	As of July 31, 2020				As of April 30, 2021
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
	(in thousands)
2023 Notes	$	490,222	$	529,385	$	515,101	$	568,899
2026 Notes		—		—		522,912		939,143
Total	$	490,222	$	529,385	$	1,038,013	$	1,508,042

The carrying value of the 2023 Notes as of July 31, 2020 and April 30, 2021 was net of the unamortized debt discount of $80.3 million and $56.7 million, respectively, and unamortized debt issuance costs of $4.5 million and $3.2 million, respectively.

The carrying value of the 2026 Notes as of April 30, 2021 includes $8.9 million of non-cash interest expense that was converted to the principal balance, net of the unamortized debt discount of $211.8 million and unamortized debt issuance costs of $24.2 million.

The total estimated fair value of the 2023 Notes was determined based on the closing trading price per $100 of the 2023 Notes as of the last day of trading for the period. We consider the fair value of the 2023 Notes to be a Level 2 valuation due to the limited trading activity.

The total estimated fair value of the 2026 Notes is based on a binomial model. We consider the fair value of the 2026 Notes to be a Level 3 valuation, as the 2026 Notes are not publicly traded. The Level 3 inputs used are the same as those used to determine the estimated fair value of the associated derivative liability, as detailed below.

Derivative Liability

The conversion feature of the 2026 Notes represents an embedded derivative. The 2026 Notes are not considered to be conventional debt and we determined that the embedded conversion feature was required to be bifurcated from the host debt and accounted for as a derivative liability, as the 2026 Notes are convertible into a variable number of shares until the conversion price becomes fixed in September 2021, based on the level of achievement of the associated financial performance metric. As such, the initial fair value of the derivative instrument was recorded as a liability in the condensed consolidated balance sheet with the corresponding amount recorded as a discount to the 2026 Notes upon issuance. The derivative liability is considered a Level 3 valuation and is recorded at its estimated fair value at the end of each reporting period, with the change in fair value recognized within other expense, net in the condensed consolidated statements of operations.

The following table shows the estimated fair value of the derivative liability as of the issuance of the 2026 Notes and the change in fair value from issuance through April 30, 2021:


	Nine Months Ended April 30, 2021
	(in thousands)
Derivative liability at issuance of the 2026 Notes	$	230,910
Change in fair value		81,353
Derivative liability, end of period	$	312,263

We estimated the fair value of the derivative liability using a binomial model, with the following valuation inputs:


	As of
	September 24, 2020	April 30, 2021
Conversion ratio (1)	Conversion price of $26.63 with a 37.552 conversion rate per $1,000	Conversion price of $27.75 with a 36.036 conversion rate per $1,000
Risk-free rate	0.4%	0.9%
Discount rate (2)	9.0%	6.3%
Volatility	42.7%	40.0%
Stock price	$21.26	$27.04

(1)

The conversion ratio was estimated based on the latest forecast of the associated financial performance metric.

(2)

The discount rate was estimated based on the implied rate for the 2023 Notes as well as a credit analysis.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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