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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________________________ 
FORM 10-Q
_____________________________________ 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-38044
_____________________________________ 
Okta, Inc.
(Exact Name of Registrant as Specified in Its Charter)
_____________________________________ 
Delaware
 
100 First Street, Suite 600
 
26-4175727
(State or Other Jurisdiction of
Incorporation or Organization)
 
San Francisco
 
(I.R.S. Employer
Identification Number)

 
California
 
 
 
 
94105
 
 
 
 
(Address of Principal executive offices)
 
 
Registrant’s telephone number, including area code: (888) 722-7871
___________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Class A common stock, par value $0.0001 per share
 
OKTA
 
The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files) Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
 
 
 
Accelerated filer 
Non-accelerated filer 
 
 
 
 
Smaller reporting company 
 
 
 
 
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   No  
As of November 30, 2019, the number of shares of registrant’s Class A common stock outstanding was 112,408,775 and the number of shares of the registrant’s Class B common stock outstanding was 8,795,515.



Okta, Inc.
Table of Contents

 
 
Page No.
 
 
5
 
6
 
7
 
8
 
 




FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, including but not limited to, statements regarding our financial outlook, product development, business strategy and plans and market trends, opportunities and positioning. These forward-looking statements are made as of the date they were first issued and were based on current expectations, estimates, forecasts and projections as well as the beliefs and assumptions of management. Words such as “expect,” “anticipate,” “should,” “believe,” “hope,” “target,” “project,” “goals,” “estimate,” “potential,” “predict,” “may,” “will,” “might,” “could,” “intend,” “shall” and variations of these terms or the negative of these terms and similar expressions are intended to identify these forward-looking statements, although not all forward-looking statements include these identifying words. The forward-looking statements are contained principally in “Management’s Discussion and Analysis of Financial Condition and Result of Operations” and “Risk Factors.”
Forward-looking statements contained in this Form 10-Q include, but are not limited to, statements about:
our future financial performance, including our revenue, costs of revenue, gross profits, margins and operating expenses;
trends in our key business metrics;
the sufficiency of our cash and cash equivalents, investments and cash provided by sales of our products and services to meet our liquidity needs;
market or other opportunities arising from business combinations; and
the impact of recent accounting pronouncements on our financial statements.
Forward-looking statements are subject to a number of risks and uncertainties, many of which involve factors or circumstances that are beyond our control. Our actual results could differ materially from those stated or implied in forward-looking statements due to a number of factors, including but not limited to, risks detailed in “Risk Factors” in this Quarterly Report on Form 10-Q as well as other documents that may be filed by us from time to time with the Securities and Exchange Commission. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, except as required by law, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Quarterly Report on Form 10-Q to conform these statements to actual results or to changes in our expectations.




PART I
Item. 1 Financial Statements
OKTA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(unaudited)
 
October 31, 2019
 
January 31, 2019
 
 
 
As Adjusted (1)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,039,626

 
$
298,394

Short-term investments
326,629

 
265,374

Accounts receivable, net of allowances of $1,146 and $2,098
101,778

 
91,926

Deferred commissions
29,544

 
24,185

Prepaid expenses and other current assets
29,023

 
28,237

Total current assets
1,526,600

 
708,116

Property and equipment, net
51,730

 
52,921

Operating lease right-of-use assets
126,746

 
121,389

Deferred commissions, noncurrent
65,466

 
54,812

Intangible assets, net
33,826

 
13,897

Goodwill
47,964

 
18,089

Other assets
18,445

 
15,089

Total assets
$
1,870,777

 
$
984,313

Liabilities and stockholders' equity
 

 
 
Current liabilities:
 

 
 
Accounts payable
$
4,924

 
$
2,431

Accrued expenses and other current liabilities
33,288

 
33,653

Accrued compensation
34,212

 
19,770

2023 Convertible senior notes, net
99,227

 
271,628

Deferred revenue
306,743

 
245,622

Total current liabilities
478,394

 
573,104

2025 Convertible senior notes, net
828,237

 

Operating lease liabilities, noncurrent
153,960

 
147,046

Deferred revenue, noncurrent
7,013

 
8,768

Other liabilities, noncurrent
4,779

 
3,018

Total liabilities
1,472,383

 
731,936

Commitments and contingencies (Note 11)


 


Stockholders’ equity:
 

 
 
Preferred stock, par value $0.0001 per share; 100,000 shares authorized, no shares issued and outstanding as of October 31, 2019 and January 31, 2019.



Class A Common stock, par value $0.0001 per share; 1,000,000 shares authorized as of October 31, 2019 and January 31, 2019; 112,251 and 101,093 shares issued and outstanding as of October 31, 2019 and January 31, 2019, respectively.
11

 
10

Class B Common stock, par value $0.0001 per share; 120,000 shares authorized as of October 31, 2019 and January 31, 2019; 8,880 and 11,059 shares issued and outstanding as of October 31, 2019 and January 31, 2019, respectively.
1

 
1

Additional paid-in capital
1,048,899

 
744,896

Accumulated other comprehensive income (loss)
135

 
(319
)
Accumulated deficit
(650,652
)
 
(492,211
)
Total stockholders’ equity
398,394

 
252,377

Total liabilities and stockholders' equity
$
1,870,777

 
$
984,313

(1)  
Adjusted for adoption of ASC 842, Leases. See Note 2.
See Notes to Condensed Consolidated Financial Statements.

4



OKTA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)
 
Three Months Ended
October 31,
 
Nine Months Ended
October 31,
 
2019
 
2018
 
2019
 
2018
Revenue:
 
 
 
 
 
 
 
Subscription
$
144,517

 
$
97,698

 
$
394,174

 
$
262,393

Professional services and other
8,520

 
7,878

 
24,566

 
21,390

Total revenue
153,037

 
105,576

 
418,740

 
283,783

Cost of revenue:
 

 
 

 
 
 
 
Subscription
30,124

 
20,265

 
82,581

 
55,808

Professional services and other
10,700

 
9,435

 
32,118

 
26,227

Total cost of revenue
40,824

 
29,700

 
114,699

 
82,035

Gross profit
112,213

 
75,876

 
304,041

 
201,748

Operating expenses:
 

 
 

 
 
 
 
Research and development
41,832

 
27,596

 
115,909

 
72,354

Sales and marketing
87,224

 
56,911

 
247,721

 
165,408

General and administrative
28,887

 
19,848

 
81,540

 
55,873

Total operating expenses
157,943

 
104,355

 
445,170

 
293,635

Operating loss
(45,730
)
 
(28,479
)
 
(141,129
)
 
(91,887
)
Interest expense
(7,826
)
 
(4,118
)
 
(16,371
)
 
(10,893
)
Other income, net
4,982

 
2,413

 
11,346

 
6,211

Loss on early extinguishment of debt
(14,572
)
 

 
(14,572
)
 

Interest expense and other income, net
(17,416
)
 
(1,705
)
 
(19,597
)
 
(4,682
)
Loss before provision for (benefit from) income taxes
(63,146
)
 
(30,184
)
 
(160,726
)
 
(96,569
)
Provision for (benefit from) income taxes
349

 
(667
)
 
(2,285
)
 
(1,883
)
Net loss
$
(63,495
)
 
$
(29,517
)
 
$
(158,441
)
 
$
(94,686
)
 
 

 
 

 
 
 
 
Net loss per share, basic and diluted
$
(0.53
)
 
$
(0.27
)
 
$
(1.37
)
 
$
(0.89
)
 
 

 
 

 
 
 
 
Weighted-average shares used to compute net loss per share, basic and diluted
118,976

 
108,776

 
115,598

 
106,587

See Notes to Condensed Consolidated Financial Statements.


5



OKTA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(unaudited)
 
Three Months Ended
October 31,
 
Nine Months Ended
October 31,
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
Net loss
$
(63,495
)
 
$
(29,517
)
 
$
(158,441
)
 
$
(94,686
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Net change in unrealized gains or losses on available-for-sale securities
227

 
4

 
616

 
(44
)
Foreign currency translation adjustments
1,561

 
(442
)
 
(162
)
 
(1,265
)
Other comprehensive income (loss)
1,788

 
(438
)
 
454

 
(1,309
)
Comprehensive loss
$
(61,707
)
 
$
(29,955
)
 
$
(157,987
)
 
$
(95,995
)
 
 
 
 
 
 
 
 
See Notes to Condensed Consolidated Financial Statements.


6



OKTA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
(unaudited)
 
Three Months Ended
October 31,
 
Nine Months Ended
October 31,
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
Common stock and additional paid-in capital:
 
 
 
 
 
 
 
Balance, beginning of period
$
839,535

 
$
677,508

 
$
744,907

 
$
565,663

Issuance of common stock upon exercise of stock options and other activity, net
9,430

 
7,646

 
46,911

 
36,800

Issuance of common stock for settlement of RSUs

 

 
2,809

 

Stock-based compensation
36,180

 
21,667

 
90,518

 
54,327

Equity component of convertible senior notes, net of issuance costs
217,347

 

 
217,347

 
77,631

Equity component of early extinguishment of 2023 convertible senior notes
(26,713
)
 

 
(26,713
)
 

Purchases of hedges related to 2023 convertible senior notes

 

 

 
(80,040
)
Proceeds from hedges related to 2023 convertible senior notes
405,851

 

 
405,851

 

Issuance of warrants related to 2023 convertible senior notes

 

 

 
52,440

Payments for warrants related to 2023 convertible senior notes
(358,622
)
 

 
(358,622
)
 

Purchases of capped calls related to 2025 convertible senior notes
(74,094
)
 

 
(74,094
)
 

Other, net
(3
)
 

 
(3
)
 

Balance, end of period
1,048,911

 
706,821

 
1,048,911

 
706,821

 


 
 
 


 
 
Accumulated deficit:


 
 
 


 
 
Balance, beginning of period
(587,157
)
 
(431,883
)
 
(492,211
)
 
(366,714
)
Net loss
(63,495
)
 
(29,517
)
 
(158,441
)
 
(94,686
)
Balance, end of period
(650,652
)
 
(461,400
)
 
(650,652
)
 
(461,400
)
 


 
 
 


 
 
Accumulated other comprehensive income (loss):


 
 
 


 
 
Balance, beginning of period
(1,653
)
 
(480
)
 
(319
)
 
391

Other comprehensive income (loss)
1,788

 
(438
)
 
454

 
(1,309
)
Balance, end of period
135

 
(918
)
 
135

 
(918
)
Total stockholder’s equity
$
398,394

 
$
244,503

 
$
398,394

 
$
244,503


See Notes to Condensed Consolidated Financial Statements.


7



OKTA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
 
Nine Months Ended
October 31,
 
2019
 
2018
 
 
As Adjusted (1)
Cash flows from operating activities:
 
 
 
Net loss
$
(158,441
)
 
$
(94,686
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Stock-based compensation
89,691

 
53,899

Depreciation, amortization and accretion
12,336

 
5,824

Amortization of debt discount and issuance costs
15,653

 
10,315

Amortization of deferred commissions
20,541

 
14,963

Deferred income taxes
(3,069
)
 
(2,269
)
Non-cash charitable contributions
1,162

 
1,008

Loss on early extinguishment of debt
14,572

 

Other
84

 
153

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(9,393
)
 
(17,539
)
Deferred commissions
(36,641
)
 
(25,907
)
Prepaid expenses and other assets
(1,518
)
 
(2,822
)
Operating lease right-of-use assets
7,851

 
12,209

Accounts payable
1,962

 
(334
)
Accrued compensation
17,352

 
7,973

Accrued expenses and other liabilities
4,017

 
1,859

Operating lease liabilities
(4,128
)
 
(5,614
)
Deferred revenue
58,737

 
46,036

Net cash provided by operating activities
30,768

 
5,068

Cash flows from investing activities:
 

 
 

Capitalization of internal-use software costs
(2,659
)
 
(2,329
)
Purchases of property and equipment
(9,980
)
 
(14,253
)
Purchases of securities available for sale and other
(321,462
)
 
(478,138
)
Proceeds from maturities of securities available for sale
244,393

 
219,650

Proceeds from sales of securities available for sale and other
17,329

 
12,470

Purchases of intangible assets
(8,500
)
 

Payments for business acquisition, net of cash acquired
(44,223
)
 
(15,616
)
Net cash used in investing activities
(125,102
)
 
(278,216
)
Cash flows from financing activities:
 
 
 

Proceeds from issuance of convertible senior notes, net of issuance costs
1,040,760

 
334,980

Payments for repurchases of 2023 convertible senior notes
(224,414
)
 

Purchases of hedges related to 2023 convertible senior notes

 
(80,040
)
Proceeds from hedges related to 2023 convertible senior notes
405,851

 

Proceeds from issuance of warrants related to 2023 convertible senior notes

 
52,440

Payments for warrants related to 2023 convertible senior notes
(358,622
)
 

Purchases of capped calls related to 2025 convertible senior notes
(74,094
)
 

Proceeds from stock option exercises, net of repurchases
36,371

 
28,524

Proceeds from shares issued in connection with employee stock purchase plan
9,005

 
6,654

Other, net
(126
)
 
(206
)
Net cash provided by financing activities
834,731

 
342,352

Effects of changes in foreign currency exchange rates on cash, cash equivalents and restricted cash
(241
)
 
(990
)
Net increase in cash, cash equivalents and restricted cash
740,156

 
68,214

Cash, cash equivalents and restricted cash at beginning of period
311,215

 
136,233

Cash, cash equivalents and restricted cash at end of period
$
1,051,371

 
$
204,447

 
 
 
 
Supplementary cash flow disclosure:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
862

 
$
403

Income taxes
845

 
395

Non-cash investing and financing activities:
 
 
 
Issuance of common stock for repurchases of 2023 convertible senior notes
380,406

 

Vesting of early exercised common stock options
370

 
629

Common stock issued as charitable contribution
1,162

 
1,008

Operating lease right-of-use assets exchanged for lease obligations
14,957

 
126,088

Property and equipment acquired through tenant improvement allowance
1,682

 
22,237

Property and equipment and other accrued but not yet paid
927

 
1,431

Bonus settled through the issuance of common stock
2,809

 

Debt issuance costs, accrued but not yet paid
101

 

Reconciliation of cash, cash equivalents and restricted cash within the condensed consolidated balance sheets to the amounts shown in the condensed consolidated statements of cash flows above:
 
 
 
Cash and cash equivalents
$
1,039,626

 
$
195,898

Restricted cash, current included in prepaid expenses and other current assets
307

 

Restricted cash, noncurrent included in other assets
11,438

 
8,549

Total cash, cash equivalents and restricted cash
$
1,051,371

 
$
204,447

 
 
 
 
(1)  
Adjusted for adoption of ASC 842, Leases. See Note 2.
 
See Notes to Condensed Consolidated Financial Statements.

8



OKTA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Overview and Basis of Presentation
Description of Business
Okta, Inc. (the Company) is the leading independent identity management platform for the enterprise. The Okta Identity Cloud enables the Company’s customers to securely connect people to technology, anywhere, anytime and from any device. The Company was incorporated in January 2009 as Saasure Inc., a California corporation, and was later reincorporated in April 2010 under the name Okta, Inc. as a Delaware corporation. The Company is headquartered in San Francisco, California.
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements, which include the accounts of the Company and its wholly owned subsidiaries, have been prepared in conformity with U.S. generally accepted accounting principles (GAAP). All intercompany balances and transactions have been eliminated in consolidation.
The condensed consolidated balance sheet as of January 31, 2019, included herein, was derived from the audited financial statements as of that date. The unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the results of operations for the interim periods presented, but are not necessarily indicative of the results of operations to be anticipated for the full fiscal year ending January 31, 2020 or any future period.
The Company’s fiscal year ends on January 31. References to fiscal 2020, for example, refer to the fiscal year ending January 31, 2020.
The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Form 10-K filed with the Securities and Exchange Commission (SEC) on March 14, 2019. Effective February 1, 2018, the Company adopted the requirements of Accounting Standards Update (ASU) No. 2016-02, Leases (ASC 842) as discussed in Note 2. All amounts and disclosures set forth in this Form 10-Q have been updated to comply with this standard, as indicated by references to "as adjusted" in these condensed consolidated financial statements and related notes.
Certain reclassifications of prior period amounts have been made in our condensed consolidated financial statements to conform to the current period presentation. We reclassified $14.8 million of certain accrued accounts payable to accrued expenses as of January 31, 2019. These reclassifications had no impact on net loss, stockholders’ equity or cash flows as previously reported.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. The Company bases its estimates on historical experience and on other assumptions that its management believes are reasonable under the circumstances. Actual results could vary from those estimates. The Company’s most significant estimates include the stand alone selling price (SSP) for each distinct performance obligation included in customer contracts with multiple performance obligations, the determination of the period of benefit for deferred commissions, the determination of the effective interest rate of the liability components of our convertible senior notes, the determination of the incremental borrowing rate used for operating lease liabilities, the valuation of deferred income tax assets, contingencies and the valuation of acquired intangible assets.

9



2. Accounting Standards and Significant Accounting Policies
Recently Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (FASB) issued ASU No. 2016-02, Leases (ASC 842), which requires lessees to record a right-of-use asset and a corresponding lease liability on their balance sheet for most leases. The Company adopted the requirements of ASC 842 as of February 1, 2019, using the modified retrospective method for leases that existed as of February 1, 2017, or were entered into thereafter. The modified retrospective method provides a method for recording existing leases at adoption and in comparative periods that approximates the results of a full retrospective approach.
In order to simplify an entity’s transition, ASC 842 provides a package of three practical expedients, which must be elected together and applied consistently to all of an entity’s leases. The Company elected to utilize the package of practical expedients and, therefore, did not reassess:
whether contractual arrangements that expired prior to or existed as of February 1, 2017, are or contain leases,
the classification of leases that expired prior to or existed as of February 1, 2017, and
initial direct costs for leases that existed as of February 1, 2017.
As of the later of February 1, 2017 or each lease’s respective commencement date, the Company recorded lease liabilities equal to the present value of the remaining minimum lease payments and right-of-use assets equal to the corresponding lease liability adjusted for (i) any prepaid or accrued lease payments, (ii) the remaining balance of any lease incentives received, (iii) unamortized initial direct costs and (iv) any impairments.
The Company adjusted its condensed consolidated balance sheet from amounts previously reported due to the adoption of ASC 842. Select condensed consolidated balance sheet line items, which reflect the adoption of ASC 842, are as follows (in thousands):
 
As of January 31, 2019
 
As Reported
 
Adoption of ASC 842
 
As Adjusted
 
(unaudited)
Assets
 
 
 
 
 
Current assets:
 
 
 
 
 
Prepaid expenses and other current assets
$
29,451

 
$
(1,214
)
 
$
28,237

Total current assets
709,330

 
(1,214
)
 
708,116

Operating lease right-of-use assets

 
121,389

 
121,389

Other noncurrent assets
15,286

 
(197
)
 
15,089

Total assets
$
864,335

 
$
119,978

 
$
984,313

 
 
 
 
 
 
Liabilities and stockholders’ equity
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accrued expenses and other liabilities
$
24,740

 
$
8,913

 
$
33,653

Total current liabilities
564,191

 
8,913

 
573,104

Other noncurrent liabilities
38,999

 
(35,981
)
 
3,018

Operating lease liabilities, noncurrent

 
147,046

 
147,046

Total liabilities
611,958

 
119,978

 
731,936

Total liabilities and stockholders’ equity
$
864,335

 
$
119,978

 
$
984,313


The Company’s condensed consolidated statement of cash flows reflects the adoption of ASC 842. The adoption of ASC 842 did not have an impact on cash provided by or used in operating, investing, or financing activities or on the Company’s condensed consolidated statements of operations.

10


Significant Accounting Policies
The Company’s significant accounting policies are discussed in “Note 2. Summary of Significant Accounting Policies” in Item 8. Financial Statements and Supplementary Data of its Form 10-K for the fiscal year ended January 31, 2019. The Company further described its accounting policy for Convertible Senior Notes, and except for the accounting policies for operating leases that were updated below as a result of adopting ASC 842, there have been no significant changes to these policies for the nine months ended October 31, 2019.
Operating Leases and Incremental Borrowing Rate
The Company leases office space under operating leases with expiration dates through 2028. The Company determines whether an arrangement constitutes a lease and records lease liabilities and right-of-use assets on its consolidated balance sheets at lease commencement. Lease liabilities are measured based on the present value of the total lease payments not yet paid discounted based on the more readily determinable of the rate implicit in the lease or the Company’s incremental borrowing rate, which is the estimated rate the Company would be required to pay for a collateralized borrowing equal to the total lease payments over the term of the lease. The estimation of the incremental borrowing rate is based on an analysis of publicly traded debt securities of companies with similar credit and financial profiles. Right-of-use assets are measured based on the corresponding lease liability adjusted for (i) payments made to the lessor at or before the commencement date, (ii) initial direct costs incurred and (iii) tenant incentives under the lease. Recognition of rent expense begins when the lessor makes the underlying asset available to the Company. The Company does not assume renewals or early terminations of its leases unless it is reasonably certain to exercise these options at commencement and does not allocate consideration between lease and non-lease components.
For short-term leases, the Company records rent expense in its condensed consolidated statements of operations on a straight-line basis over the lease term and records variable lease payments as incurred.
Convertible Senior Notes
In February 2018, the Company issued $345.0 million aggregate principal amount of 0.25% convertible senior notes due February 15, 2023 (2023 Notes). In September 2019, the Company issued $1,060.0 million aggregate principal amount of 0.125% convertible senior notes due September 1, 2025 (2025 Notes, together with the 2023 Notes, the Notes). Concurrent with the issuance of the 2025 Notes, the Company used part of the net proceeds to repurchase a portion of the 2023 Notes (2023 Notes Partial Repurchase). See Note 9 for additional details.
The Notes are accounted for in accordance with FASB ASC Subtopic 470-20, Debt with Conversion and Other Options. Pursuant to ASC Subtopic 470-20, issuers of certain convertible debt instruments, such as the Notes, that have a net settlement feature and may be settled wholly or partially in cash upon conversion are required to separately account for the liability (debt) and equity (conversion option) components of the instrument. The carrying amount of the liability component of the instrument is computed by estimating the fair value of a similar liability without the conversion option. The amount of the equity component is then calculated by deducting the fair value of the liability component from the principal amount of the instrument. The difference between the principal amount and the liability component represents a debt discount that is amortized to interest expense over the respective terms of the Notes using an effective interest rate method. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. In accounting for the issuance costs related to the Notes, the allocation of issuance costs incurred between the liability and equity components were based on their relative values.
Similarly, in accordance with ASC Subtopic 470-20, transactions involving contemporaneous exchanges of cash between the same debtor and creditor in connection with the issuance of a new debt obligation and satisfaction of an existing debt obligation by the debtor, such as the contemporaneous 2023 Notes Partial Repurchase and issuance of the 2025 Notes, should be evaluated as a modification or an exchange transaction depending on whether the exchange is determined to have substantially different terms. The 2023 Notes Partial Repurchase and issuance of the 2025 Notes were deemed to have substantially different terms due to the significant difference between the value of the conversion option immediately prior to and after the exchange, and consequently, the 2023 Notes Partial Repurchase was accounted for as a debt extinguishment. Pursuant to ASC Subtopic 470-20, total consideration for the 2023 Notes Partial Repurchase was separated into liability and equity components by estimating the fair value of a similar liability without a conversion option and assigning the residual value to the equity component. The gain or loss on extinguishment of the debt is subsequently determined by comparing repurchase consideration allocated to the liability component to the sum of the carrying value of the liability component, net of the proportionate amounts of unamortized debt discount and remaining unamortized debt issuance costs.

11


Recently Issued Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. The new model uses a forward-looking expected loss method, which will generally result in earlier recognition of allowances for losses. This guidance is effective for the Company on February 1, 2020 with early adoption permitted. The Company is currently evaluating the impact of the adoption of this standard on its condensed consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (ASU 2018-15), which requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in Accounting Standards Codification 350-40 to determine which implementation costs to defer and recognize as an asset. This guidance is effective for the Company on February 1, 2020 with early adoption permitted. The Company is currently evaluating the impact of the adoption of this standard on its condensed consolidated financial statements.
3. Business Combinations
On July 13, 2018, the Company acquired all issued and outstanding capital stock of ScaleFT, Inc. (ScaleFT), a “zero trust” security company which provides access solutions for the modern workforce. The acquisition date cash consideration transferred for ScaleFT was $15.6 million, net of $0.6 million in cash acquired. The Company recorded $4.6 million for developed technology intangible assets with an estimated useful life of three years and $11.8 million of goodwill, which is primarily attributed to the assembled workforce as well as the integration of ScaleFT’s technology and the Company’s technology. The Company incurred $1.1 million of acquisition-related costs, which were recorded as general and administrative expense in the quarter ended July 31, 2018.
On March 18, 2019, the Company acquired all issued and outstanding capital stock of Azuqua, Inc. (Azuqua), a company which provides a no-code, cloud-based integration platform that automates workflows between applications and services. The acquisition date cash consideration transferred for Azuqua was $44.2 million, net of $1.1 million in cash acquired. The Company recorded $15.7 million for developed technology intangible assets with an estimated useful life of five years and preliminarily recorded $29.9 million of goodwill which is primarily attributed to the assembled workforce as well as the integration of Azuqua’s technology and the Company’s technology. The Company incurred $3.0 million of acquisition-related costs, which were recorded as general and administrative expense in the quarter ended April 30, 2019.
The Company also incurred total deferred compensation arrangements in connection with these acquisitions of $10.8 million, of which $3.2 million was recognized as compensation during the nine months ended October 31, 2019. The remaining deferred compensation balance of $5.9 million will be recognized over a future weighted-average period of 1.7 years subject to continued service with the Company.
These acquisitions did not have a material impact on the Company’s condensed consolidated financial statements; therefore, historical and proforma disclosures have not been presented.

12




4. Cash Equivalents and Short-Term Investments
The amortized cost, unrealized gain (loss) and estimated fair value of the Company’s cash equivalents and short-term investments as of October 31, 2019 and January 31, 2019 were as follows (in thousands):  
 
As of October 31, 2019
 
Amortized
Cost
 
Unrealized
Gain
 
Unrealized
Loss
 
Estimated
Fair Value 
 
 
 
 
 
 
 
 
 
(unaudited)
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
989,029

 
$

 
$

 
$
989,029

Total cash equivalents
989,029

 

 

 
989,029

Short-term investments:
 

 
 

 
 

 
 

U.S. treasury securities
167,266

 
265

 

 
167,531

Corporate debt securities
158,769

 
330

 
(1
)
 
159,098

Total short-term investments
326,035

 
595

 
(1
)
 
326,629

Total
$
1,315,064

 
$
595

 
$
(1
)
 
$
1,315,658

 
As of January 31, 2019
 
Amortized
Cost
 
Unrealized
Gain
 
Unrealized
Loss
 
Estimated
Fair Value 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
247,426

 
$

 
$

 
$
247,426

Corporate debt securities
3,409

 

 
(1
)
 
3,408

Total cash equivalents
250,835

 

 
(1
)
 
250,834

Short-term investments:
 
 
 

 
 

 
 

U.S. treasury securities
195,913

 
37

 
(53
)
 
195,897

Corporate debt securities
69,483

 
13

 
(19
)
 
69,477

Total short-term investments
265,396

 
50

 
(72
)
 
265,374

Total
$
516,231

 
$
50

 
$
(73
)
 
$
516,208


All short-term investments were designated as available-for-sale securities as of October 31, 2019 and January 31, 2019.
The Company’s short-term investments as of October 31, 2019 and January 31, 2019 all mature within one year, as follows (in thousands):
 
 
As of October 31, 2019
 
As of January 31, 2019
 
Amortized
Cost
 
Estimated
Fair Value
 
Amortized
Cost
 
Estimated
Fair Value
 
(unaudited)
 
 
 
 
Due within one year
$
326,035

 
$
326,629

 
$
265,396

 
$
265,374

 
 
 
 
 
 
 
 

The Company had 1 and 34 short-term investments in unrealized loss positions as of October 31, 2019 and January 31, 2019, respectively. There were no material gross unrealized gains or losses from available-for-sale securities and no material realized gains or losses from available-for-sale securities that were reclassified out of accumulated other comprehensive income for the three and nine months ended October 31, 2019 or 2018.
For available-for-sale debt securities that have unrealized losses, the Company evaluates whether (i) the Company has the intention to sell any of these investments and (ii) it is not more likely than not that the Company will

13



be required to sell any of these available-for-sale debt securities before recovery of the entire amortized cost basis. Based on this evaluation, the Company determined that there were no other-than-temporary impairments associated with short-term investments as of October 31, 2019 and January 31, 2019.
5. Fair Value Measurements
The Company measures its financial assets at fair value each reporting period using a fair value hierarchy that prioritizes the use of observable inputs and minimizes 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 as follows:
Level 1-Valuations based on observable inputs that reflect quoted prices for identical assets or liabilities in active markets.
Level 2-Valuations based on inputs that are directly or indirectly observable in the marketplace.
Level 3-Valuations based on unobservable inputs that are supported by little or no market activity.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents information about the Company’s financial assets and liabilities that are measured at fair value on a recurring basis using the above input categories (in thousands):  
 
As of October 31, 2019
 
Level 1
 
Level 2 
 
Level 3
 
Total
 
 
 
 
 
 
 
 
 
(unaudited)
Assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
989,029

 
$

 
$

 
$
989,029

Corporate debt securities

 

 

 

Total cash equivalents
989,029

 

 

 
989,029

Short-term investments:
 

 
 

 
 

 
 

U.S. treasury securities

 
167,531

 

 
167,531

Corporate debt securities

 
159,098

 

 
159,098

Total short-term investments

 
326,629

 

 
326,629

Total cash equivalents and short-term investments
$
989,029

 
$
326,629

 
$

 
$
1,315,658

 
As of January 31, 2019
 
Level 1
 
Level 2 
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
247,426

 
$

 
$

 
$
247,426

Corporate debt securities

 
3,408

 

 
3,408

Total cash equivalents
247,426

 
3,408

 

 
250,834

Short-term investments:
 

 
 

 
 

 
 

U.S. treasury securities

 
195,897

 

 
195,897

Corporate debt securities

 
69,477

 

 
69,477

Total short-term investments

 
265,374

 

 
265,374

Total cash equivalents and short-term investments
$
247,426

 
$
268,782

 
$

 
$
516,208



14



The carrying amounts of certain financial instruments, including cash held in banks, accounts receivable and accounts payable approximate fair value due to their short-term maturities and are excluded from the fair value table above.
Fair Value Measurements of Other Financial Instruments
The following table presents the carrying amounts and estimated fair values of our financial instruments that are not recorded at fair value on the condensed consolidated balance sheets (in thousands):
 
As of October 31, 2019
 
Net Carrying Amount (1)
 
Estimated
Fair Value 
 
 
 
 
 
(unaudited)
2023 Convertible senior notes
$
101,190

 
$
279,764

2025 Convertible senior notes
$
843,265

 
$
1,006,406


(1)  
Before unamortized debt issuance costs.

The difference between the principal amount of the 2023 Notes and the 2025 Notes, $120.6 million and $1,060.0 million, respectively, and the net carrying amounts before unamortized debt issuance costs represents the unamortized debt discount (See Note 9 for additional details). The estimated fair values of the Notes, which are Level 2 financial instruments, were determined based on the quoted bid prices of the Notes in an over-the-counter market on the last trading day of the reporting period. As of October 31, 2019, the difference between the net carrying amount of the Notes and their estimated fair values represents the equity conversion value premium the market assigned to the Notes. Based on the closing price of our common stock of $109.07 on October 31, 2019, the if-converted value of the 2023 Notes exceeded the principal amount of $120.6 million, while the if-converted value of the 2025 Notes was less than the principal amount of $1,060.0 million.
6. Deferred Commissions
Sales commissions capitalized as contract costs totaled $15.3 million and $11.7 million in the three months ended October 31, 2019 and 2018, respectively, and $36.7 million and $25.9 million in the nine months ended October 31, 2019 and 2018, respectively. Amortization of contract costs was $7.3 million and $5.4 million for the three months ended October 31, 2019 and 2018, respectively, and $20.5 million and $15.0 million for the nine months ended October 31, 2019 and 2018, respectively. There was no impairment loss in relation to the costs capitalized.

7. Goodwill and Intangible Assets, net
Goodwill
As of October 31, 2019 and January 31, 2019, goodwill was $48.0 million and $18.1 million, respectively. During the nine months ended October 31, 2019, the Company recorded $29.9 million of goodwill in connection with the Azuqua acquisition that was completed in March 2019. See Note 3 for further details. No goodwill impairments were recorded during the three and nine months ended October 31, 2019 and 2018.

15



Intangible Assets, net
Intangible assets consisted of the following (in thousands):  
 
As of October 31, 2019
 
Gross
 
Accumulated Amortization
 
Net
 
 
 
 
 
 
 
(unaudited)
Capitalized internal-use software costs
$
23,264

 
$
(13,592
)
 
$
9,672

Purchased developed technology
28,800

 
(4,728
)
 
24,072

Software licenses
1,023

 
(941
)
 
82

 
$
53,087

 
$
(19,261
)
 
$
33,826

 
As of January 31, 2019
 
Gross
 
Accumulated Amortization
 
Net
Capitalized internal-use software costs
$
19,838

 
$
(9,969
)
 
$
9,869

Purchased developed technology
4,600

 
(833
)
 
3,767

Software licenses
1,023

 
(763
)
 
260

 
$
25,461

 
$
(11,565
)
 
$
13,896


The Company capitalized $1.8 million and $0.7 million of internal-use software costs in the three months ended October 31, 2019 and 2018, respectively, and $3.5 million and $2.8 million of internal-use software costs in the nine months ended October 31, 2019 and 2018, respectively. Stock-based compensation expense included in the total amounts capitalized were immaterial.
During the nine months ended October 31, 2019, the Company recorded $24.2 million of purchased developed technology, of which $15.7 million related to the Azuqua acquisition (see Note 3 for further details), and the remainder in connection with an asset acquisition in May 2019, whereby the Company recorded $8.5 million of purchased developed technology with an estimated useful life of five years. During the nine months ended October 31, 2018, the Company recorded $4.6 million of purchased developed technology from the ScaleFT acquisition. See Note 3 for further details.
Intangible amortization expense was $2.6 million and $1.8 million for the three months ended October 31, 2019 and 2018, respectively, and $7.7 million and $4.1 million for the nine months ended October 31, 2019 and 2018, respectively.
8. Deferred Revenue and Performance Obligations
Deferred Revenue
Deferred revenue, which is a contract liability, consists primarily of payments received in advance of revenue recognition under the Company’s contracts with customers and is recognized as the revenue recognition criteria are met.
Subscription revenue recognized during the three months ended October 31, 2019 and 2018 that was included in the deferred revenue balances at the beginning of the respective periods was $123.5 million and $81.6 million, respectively, and $224.0 million and $147.0 million for the nine months ended October 31, 2019 and 2018, respectively. Professional services and other revenue recognized in the three and nine months ended October 31, 2019 and 2018 from deferred revenue balances at the beginning of the respective periods was not material.
Transaction Price Allocated to the Remaining Performance Obligations
Transaction price allocated to the remaining performance obligations represents contracted revenue that has not yet been recognized, which includes deferred revenue for subscription contracts that have been invoiced and will be recognized as revenue in future periods.

16



As of October 31, 2019, total remaining noncancelable performance obligations under the Company’s subscription contracts with customers was approximately $1,031.3 million. Of this amount, the Company expects to recognize revenue of approximately $515.9 million, or 50%, over the next 12 months, with the balance to be recognized as revenue thereafter. Revenue from remaining performance obligations for professional services and other contracts as of October 31, 2019 was not material.
Unbilled Receivables
The Company receives payments from customers based on billing schedules as established in its contracts. Unbilled receivables and contract assets represent amounts for which the Company has recognized revenue in excess of billings pursuant to its revenue recognition policy. As of October 31, 2019 and January 31, 2019, contract assets and unbilled receivables were $1.0 million and $1.5 million, respectively, which are included in prepaid expenses and other current assets in the condensed consolidated balance sheets.
9. Convertible Senior Notes, Net
2023 Convertible Senior Notes
The 2023 Notes are senior, unsecured obligations of the Company, and bear interest at a fixed rate of 0.25% per year. Interest is payable in cash semi-annually in arrears on February 15 and August 15 of each year, beginning on August 15, 2018. The 2023 Notes mature on February 15, 2023 unless earlier repurchased or converted. The Company may not redeem the 2023 Notes prior to maturity. The total net proceeds from the 2023 Notes, after deducting initial purchasers’ discounts and debt issuance costs, was $335.0 million.
In September 2019, the Company used part of the net proceeds from the issuance of the 2025 Notes for the 2023 Notes Partial Repurchase, which consisted of a repurchase of $224.4 million aggregate principal amount of the 2023 Notes in privately-negotiated transactions for aggregate consideration of $604.8 million, consisting of approximately $224.4 million in cash and approximately 3.0 million shares of Class A common stock. Of the $604.8 million in aggregate consideration, $197.7 million and $407.1 million were allocated to the debt and equity components, respectively, utilizing an effective discount rate of 4.00% to determine the fair value of the liability component. As of the repurchase date, the carrying value of the notes subject to the 2023 Notes Partial Repurchase, net of unamortized debt discount and issuance costs, was $183.1 million. The 2023 Notes Partial Repurchase resulted in a $14.6 million loss on early debt extinguishment, of which $3.8 million consisted of unamortized debt issuance costs. As of October 31, 2019, $120.6 million of principal remains outstanding on the 2023 Notes.
The terms of the 2023 Notes are governed by an Indenture by and between the Company and Wilmington Trust, National Association, as Trustee (the Indenture). Upon conversion, the 2023 Notes may be settled in cash, shares of Class A common stock or a combination of cash and shares of Class A common stock, at the Company’s election.
The 2023 Notes are convertible at an initial conversion rate of 20.6795 shares of Class A common stock per $1,000 principal amount of the 2023 Notes, which is equal to an initial conversion price of approximately $48.36 per share of Class A common stock, subject to adjustment under certain circumstances in accordance with the terms of the Indenture. Prior to the close of business on the business day immediately preceding October 15, 2022, holders of the 2023 Notes may convert all or a portion of their 2023 Notes only in multiples of $1,000 principal amount, under the following circumstances:
during any fiscal quarter commencing after the fiscal quarter ending on April 30, 2018 (and only during such fiscal quarter), if the last reported sale price of Class A common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price of the 2023 Notes on each applicable trading day;
during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of the 2023 Notes for each trading day of that five consecutive trading day period was less than 98% of the product of the last reported sale price of Class A common stock and the conversion rate on such trading day; or
upon the occurrence of specified corporate events, as described in the Indenture.
On or after October 15, 2022 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their 2023 Notes regardless of the foregoing

17



circumstances. For at least twenty trading days during the period of thirty consecutive trading days ended October 31, 2019, the last reported sale price of the Company’s common stock was equal to or exceeded 130% of the conversion price of the 2023 Notes on each applicable trading day. As a result, the 2023 Notes are convertible at the option of the holders during the fiscal quarter ending January 31, 2020 and were classified as current liabilities on the condensed consolidated balance sheet as of October 31, 2019. In addition, as of the date of this filing, holders of the 2023 Notes have converted an immaterial amount of such notes (which was not in connection with the 2023 Notes Partial Repurchase).
Holders of the 2023 Notes who convert their 2023 Notes in connection with certain corporate events that constitute a make-whole fundamental change (as defined in the Indenture) are, under certain circumstances, entitled to an increase in the conversion rate. Additionally, in the event of a corporate event that constitutes a fundamental change (as defined in the Indenture), holders of the 2023 Notes may require the Company to repurchase all or a portion of their 2023 Notes at a price equal to 100% of the principal amount of the 2023 Notes being repurchased, plus any accrued and unpaid interest.
In accounting for the issuance of the 2023 Notes, the Company separated the 2023 Notes into liability and equity components, utilizing an effective interest rate of 5.68% to determine the fair value of the liability component. This interest rate was based on the interest rates of similar liabilities held by other companies with similar credit risk ratings at the time of issuance that did not have associated convertible features. The following table sets forth total interest expense recognized related to the 2023 Notes (in thousands):
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2019
 
2018
 
2019
 
2018
 
(unaudited)
Contractual interest expense
$
99

 
$
215

 
$
530

 
$
577

Amortization of debt issuance costs
214

 
299

 
862

 
777

Amortization of debt discount
2,403

 
3,604

 
9,868

 
9,539

Total
$
2,716

 
$
4,118

 
$
11,260

 
$
10,893


Total issuance costs of $10.0 million related to the 2023 Notes were allocated between liability and equity in the same proportion as the allocation of the total proceeds to the liability and equity components. Issuance costs attributable to the liability component are being amortized to interest expense over the respective term of the 2023 Notes using the effective interest rate method. The issuance costs attributable to the equity component were netted against the respective equity component in Additional paid-in capital. The Company recorded liability issuance costs of $7.7 million and equity issuance costs of $2.3 million.
The 2023 Notes, net consisted of the following (in thousands):
 
As of October 31, 2019
 
(unaudited)
Liability component:
 
Principal
$
120,589

Less: unamortized debt issuance costs and debt discount
(21,362
)
Net carrying amount
$
99,227

 
 
 
At Issuance
 
(unaudited)
Equity component:
 
2023 Notes
$
27,949

Less: issuance costs
(811
)
Carrying amount of the equity component(1)
$
27,138

(1) Included in the condensed consolidated balance sheets within Additional paid-in capital.

18



Note Hedges
In connection with the pricing of the 2023 Notes, the Company entered into convertible note hedge transactions with respect to its Class A common stock (Note Hedges). The Note Hedges are purchased call options that give the Company the option to purchase, subject to anti-dilution adjustments substantially identical to those in the 2023 Notes, approximately 7.1 million shares of its Class A common stock for approximately $48.36 per share (subject to adjustment), corresponding to the approximate initial conversion price of the 2023 Notes, exercisable upon conversion of the 2023 Notes. The Note Hedges will expire in 2023, if not exercised earlier. The Note Hedges are intended to offset potential dilution to the Company’s Class A common stock and/or offset the potential cash payments that the Company could be required to make in excess of the principal amount upon any conversion of the 2023 Notes under certain circumstances. The Note Hedges are separate transactions and are not part of the terms of the 2023 Notes.
The Company paid an aggregate amount of $80.0 million for the Note Hedges. The amount paid for the Note Hedges was recorded as a reduction to Additional paid-in capital in the condensed consolidated balance sheets.
In September 2019, and in connection with the 2023 Notes Partial Repurchase, the Company terminated Note Hedges corresponding to approximately 4.6 million shares for cash proceeds of $405.9 million. The proceeds were recorded as an increase to Additional paid-in capital in the condensed consolidated balance sheets. As of October 31, 2019, Note Hedges giving the Company the option to purchase approximately 2.5 million shares (subject to adjustment) remain outstanding.
Warrants
In connection with the issuance of the 2023 Notes, the Company also entered into separate warrant transactions pursuant to which it sold net-share-settled (or, at the Company’s election subject to certain conditions, cash-settled) warrants (Warrants) to acquire, subject to anti-dilution adjustments, up to approximately 7.1 million shares over 80 scheduled trading days beginning in May 2023 of the Company’s Class A common stock at an initial exercise price of approximately $68.06 per share (subject to adjustment). If the Warrants are not exercised on their exercise dates, they will expire. If the market value per share of the Company’s Class A common stock exceeds the applicable exercise price of the Warrants, the Warrants could have a dilutive effect on the Company’s Class A common stock unless, subject to the terms of the Warrants, the Company elects to cash settle the Warrants. The Warrants are separate transactions and are not part of the terms of the 2023 Notes or the Note Hedges.
The Company received aggregate proceeds of $52.4 million from the sale of the Warrants in connection with the 2023 Notes. The proceeds from the sale of the Warrants were recorded as an increase to Additional paid-in capital in the condensed consolidated balance sheets.
In September 2019, and in connection with the 2023 Notes Partial Repurchase, the Company terminated Warrants corresponding to approximately 4.6 million shares for total cash payments of $358.6 million. The termination payment was recorded as a decrease to Additional paid-in capital in the condensed consolidated balance sheets. As of October 31, 2019, Warrants to acquire up to approximately 2.5 million shares (subject to adjustment) remain outstanding.
2025 Convertible Senior Notes
The 2025 Notes are senior, unsecured obligations of the Company, and bear interest at a fixed rate of 0.125% per year. Interest is payable in cash semi-annually in arrears on March 1 and September 1 of each year, beginning on March 1, 2020. The 2025 Notes mature on September 1, 2025 unless earlier redeemed, repurchased or converted. The total net proceeds from the 2025 Notes, after deducting initial purchasers’ discounts and debt issuance costs, were $1,040.7 million.
The terms of the 2025 Notes are governed by an Indenture by and between the Company and Wilmington Trust, National Association, as Trustee (the Indenture). Upon conversion, the 2025 Notes may be settled in cash, shares of Class A common stock or a combination of cash and shares of Class A common stock, at the Company’s election.
The 2025 Notes are convertible at an initial conversion rate of 5.2991 shares of class A common stock per $1,000 principal amount of the 2025 Notes, which is equal to an initial conversion price of approximately $188.71 per share of Class A common stock, subject to adjustment under certain circumstances in accordance with the terms of the Indenture. Prior to the close of business on the business day immediately preceding June 1, 2025, holders of the 2025 Notes may convert all or a portion of their 2025 Notes only in multiples of $1,000 principal amount, under the following circumstances:

19



during any fiscal quarter commencing after the fiscal quarter ending on January 31, 2020 (and only during such fiscal quarter), if the last reported sale price of Class A common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price of the 2025 Notes on each applicable trading day;
during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of the 2025 Notes for each trading day of that five consecutive trading day period was less than 98% of the product of the last reported sale price of Class A common stock and the conversion rate on such trading day;
if the Company calls the notes for redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; or
upon the occurrence of specified corporate events, as described in the Indenture.
On or after June 1, 2025 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their 2025 Notes regardless of the foregoing circumstances. During the three months ended October 31, 2019, the conditions allowing holders of the 2025 Notes to convert were not met.
The Company may redeem for cash all or any portion of the 2025 Notes, at its option, on or after September 6, 2022, if the last reported sale price of the Company’s Class A common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on and including the trading day preceding the date on which the Company provides notice of redemption at a redemption price equal to 100% of the principal amount of the 2025 Notes to be redeemed, plus any accrued and unpaid interest to, but excluding, the redemption date. During the three months ended October 31, 2019, the Company has not redeemed any of the 2025 Notes.
Holders of the 2025 Notes who convert their 2025 Notes in connection with certain corporate events that constitute a make-whole fundamental change (as defined in the Indenture) or in connection with the Company’s issuance of a redemption notice are, under certain circumstances, entitled to an increase in the conversion rate. Additionally, in the event of a corporate event that constitutes a fundamental change (as defined in the Indenture), holders of the 2025 Notes may require the Company to repurchase all or a portion of their 2025 Notes at a price equal to 100% of the principal amount of the 2025 Notes being repurchased, plus any accrued and unpaid interest.
In accounting for the issuance of the 2025 Notes, the Company separated the 2025 Notes into liability and equity components utilizing an effective interest rate of 4.10% to determine the fair value of the liability component. This interest rate was based on the interest rates of similar liabilities held by other companies with similar credit risk ratings at the time of issuance that did not have associated convertible features. The following table sets forth total interest expense recognized related to the 2025 Notes (in thousands):
 
Three Months Ended October 31,
 
2019
 
(unaudited)
Contractual interest expense
$
188

Amortization of debt issuance costs
275

Amortization of debt discount
4,649

Total
$
5,112


Total issuance costs of $19.3 million related to the 2025 Notes were allocated between liability and equity in the same proportion as the allocation of the total proceeds to the liability and equity components. Issuance costs attributable to the liability component are being amortized to interest expense over the respective term of the 2025 Notes using the effective interest rate method. The issuance costs attributable to the equity component were netted against the respective equity component in Additional paid-in capital. The Company recorded liability issuance costs of $15.3 million and equity issuance costs of $4.0 million.

20



The 2025 Notes, net consisted of the following (in thousands):
 
As of October 31, 2019
 
(unaudited)
Liability component:
 
Principal
$
1,060,000

Less: unamortized debt issuance costs and debt discount
(231,763
)
Net carrying amount
$
828,237

 
 
 
At Issuance
 
(unaudited)
Equity component:
 
2025 Notes
$
221,387

Less: issuance cost
(4,040
)
Carrying amount of the equity component(1)
$
217,347

(1) Included in the condensed consolidated balance sheets within Additional paid-in capital.
Capped Calls
In connection with the pricing of the 2025 Notes, the Company entered into capped call transactions with respect to its Class A common stock (Capped Calls). The Capped Calls are purchased call options that give the Company the option to purchase, subject to anti-dilution adjustments substantially identical to those in the 2025 Notes, approximately 5.6 million shares of its Class A common stock for approximately $188.71 per share (subject to adjustment), corresponding to the approximate initial conversion price of the 2025 Notes, exercisable upon conversion of the 2025 Notes. The Capped Calls have initial cap prices of $255.88 per share (subject to adjustment) and will expire in 2025, if not exercised earlier. The Capped Calls are intended to offset potential dilution to the Company’s Class A common stock and/or offset the potential cash payments that the Company could be required to make in excess of the principal amount upon any conversion of the 2025 Notes under certain circumstances. The Capped Calls are separate transactions and are not part of the terms of the 2025 Notes.
The Company paid an aggregate amount of $74.1 million for the Capped Calls. The amount paid for the Capped Calls was recorded as a reduction to Additional paid-in capital in the condensed consolidated balance sheets.
10. Leases

The Company has entered into various non-cancelable office space operating leases with original lease periods expiring between 2020 and 2028. These do not contain material variable rent payments, residual value guarantees, covenants or other restrictions.
The Company has various sublease agreements with third parties. The subleases have remaining lease terms of between one and five years. Sublease income, which is recorded as a reduction of rental expense, was $0.8 million and $2.2 million for the three and nine months ended October 31, 2019.
Operating lease costs for the three and nine months ended October 31, 2019 and 2018, are as follows (in thousands):
 
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
 
2019
 
2018
 
2019
 
2018
 
 
(unaudited)
Operating lease cost(1)
 
$
5,882

 
$
6,973

 
$
16,965

 
$
16,213

(1) Amounts are presented gross of sublease income and include short-term leases, which are immaterial.
The weighted-average remaining term of the Company’s operating leases was 8.2 and 8.9 years and the weighted-average discount rate used to measure the present value of the operating lease liabilities was 5.7% and 5.8% as of October 31, 2019 and January 31, 2019, respectively.

21



Maturities of the Company’s operating lease liabilities, which do not include short-term leases, as of October 31, 2019 are as follows (in thousands):
 
 
Operating Leases
 
 
(unaudited)
2020
 
$
6,010

2021
 
26,552

2022
 
26,654

2023
 
26,662

2024
 
27,218

Thereafter
 
103,340

Total lease payments
 
216,436

Less imputed interest
 
(47,720
)
Total operating lease liabilities
 
$
168,716


Cash payments included in the measurement of the Company’s operating lease liabilities were $6.1 million and $3.1 million for the three months ended October 31, 2019 and 2018, respectively, and $10.9 million and $9.2 million for the nine months ended October 31, 2019 and 2018, respectively.
As of October 31, 2019, the Company has $55.0 million of undiscounted future payments under various operating leases that has not yet commenced, which are excluded from the table above. These operating leases will commence in fiscal 2021 and have lease terms between 4.9 and 8.7 years.
11. Commitments and Contingencies

Letters of Credit
In conjunction with the execution of leases, letters of credit in the aggregate amount of $11.7 million and $12.7 million were issued and outstanding as of October 31, 2019 and January 31, 2019, respectively. No draws have been made under such letters of credit.
Legal Matters
From time to time in the normal course of business, the Company may be subject to various legal matters such as threatened or pending claims or proceedings. There were no such material matters as of October 31, 2019.
12. Employee Incentive Plans
The Company’s equity incentive plans provide for granting stock options, restricted stock units (RSUs) and restricted stock awards to employees, consultants, officers and directors. In addition, the Company offers an Employee Stock Purchase Plan (ESPP) to eligible employees.

22



Stock-based compensation expense was recorded in the following cost and expense categories in the Company’s condensed consolidated statements of operations (in thousands):  
 
Three Months Ended
October 31,
 
Nine Months Ended
October 31,
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
(unaudited)
Cost of revenue
 
 
 
 
 
 
 
Subscription
$
3,604

 
$
2,383

 
$
9,137

 
$
5,813

Professional services and other
1,900

 
1,305

 
5,292

 
3,277

Research and development
10,894

 
6,291

 
26,322

 
15,776

Sales and marketing
10,937

 
6,228

 
26,959

 
15,852

General and administrative
8,400

 
5,335

 
21,984

 
13,181

Total
$
35,735

 
$
21,542

 
$
89,694

 
$
53,899


Stock-based compensation expense recorded to research and development in the condensed consolidated statements of operations excludes amounts that were capitalized related to internal-use software for the three and nine months ended October 31, 2019 and 2018. See Note 7 for further details.
Equity Incentive Plans
The Company has two equity incentive plans: the 2009 Stock Plan (2009 Plan) and the 2017 Equity Incentive Plan (2017 Plan). All shares that remain available for future grants are under the 2017 Plan. As of October 31, 2019, options to purchase 12,343,495 shares of Class B common stock and 1,082,093 shares of Class A common stock remain outstanding.
Shares of common stock reserved for future issuance are as follows:
 
As of
 
October 31, 2019
 
(unaudited)
Stock options and unvested RSUs outstanding
18,526,930

Available for future stock option and RSU grants
16,558,291

Available for ESPP
3,778,949

 
38,864,170





23



Stock Options
A summary of the Company’s stock option activity and related information is as follows:  
 
Number of
Options 
 
Weighted-
Average
Exercise
Price 
 
Weighted-
Average
Remaining
Contractual
Term (Years)
 
Aggregate
Intrinsic 
Value
(in thousands)
Outstanding as of January 31, 2019
17,803,794

 
$
9.16

 
7.1
 
$
1,304,446

Granted
415,547

 
82.33

 
 
 
 
Exercised
(4,406,311
)
 
8.26

 
 
 
 
Canceled
(387,442
)
 
13.76

 
 
 
 
Outstanding as of October 31, 2019 (unaudited)
13,425,588

 
$
11.59

 
6.4
 
$
1,308,703

As of October 31, 2019
 
 
 
 
 
 
 
Vested and exercisable (unaudited)
9,018,364

 
$
8.03

 
6.0
 
$
911,209


As of October 31, 2019, there was a total of $33.3 million of unrecognized stock-based compensation expense, which is expected to be recognized over a weighted-average period of 1.6 years.
Restricted Stock Units
A summary of the Company’s RSU activity and related information is as follows:  
 
Number of
RSUs
 
Weighted-
Average
Grant Date Fair Value Per Share
Outstanding as of January 31, 2019
4,835,536

 
$
44.49

Granted
2,157,585

 
114.18

Vested
(1,391,628
)
 
44.34

Forfeited
(500,151
)
 
49.36

Outstanding as of October 31, 2019 (unaudited)
5,101,342

 
$
73.53


As of October 31, 2019, there was $341.6 million of unrecognized stock-based compensation expense related to unvested RSUs, which is expected to be recognized over a weighted-average period of 2.8 years based on vesting under the award service conditions.

24



Employee Stock Purchase Plan
Except for the initial offering period which began April 7, 2017 and ended on June 20, 2018, the ESPP provides for 12-month offering periods beginning June 21 and December 21 of each year, and each offering period consists of up to two six-month purchase periods.
The Company estimated the fair value of ESPP purchase rights using a Black-Scholes option pricing model with the following assumptions:
 
Three Months Ended
October 31,
 
Nine Months Ended
October 31,
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
(unaudited)
Expected volatility
 
 
43% - 59%
 
39% - 40%
Expected term (in years)
 
 
0.5 - 1.0
 
0.5 - 1.0
Risk-free interest rate
 
 
2.05% - 1.95%
 
2.12% - 2.34%
Expected dividend yield
 
 
 

During the nine months ended October 31, 2019, the Company’s employees purchased 197,703 shares of its Class A common stock under the ESPP. The shares were purchased at a weighted-average purchase price of $45.55 per share, with total proceeds of $9.0 million.
As of October 31, 2019, there was $5.4 million of unrecognized stock-based compensation expense related to the ESPP that is expected to be recognized over an average vesting period of 0.6 years.
13. Income Taxes
For the three and nine months ended October 31, 2019, the Company recorded a tax provision of $0.3 million and tax benefit of $2.3 million on pretax losses of $63.1 million and $160.7 million, respectively. The effective tax rate for the three and nine months ended October 31, 2019 was (0.6)% and 1.4%, respectively. The effective tax rate differs from the statutory rate primarily as a result of not recognizing deferred tax assets for U.S. losses due to a full valuation allowance against U.S. deferred tax assets, release of the valuation allowance in the United States in connection with the Azuqua acquisition and excess tax benefits from stock-based compensation in the United Kingdom. The tax benefit recognized for the nine months ended October 31, 2019 was partially offset by income tax expense in profitable foreign jurisdictions and U.S. state taxes.
For the three and nine months ended October 31, 2018, the Company recorded a tax benefit of $0.7 million and $1.9 million, respectively, on pretax losses of $30.2 million and $96.6 million, respectively. The effective tax rate for the three and nine months ended October 31, 2018 was 2.2% and 1.9%, respectively. The effective tax rate differs from the statutory rate primarily as a result of not recognizing deferred tax assets for U.S. losses due to a full valuation allowance against U.S. deferred tax assets, release of the valuation allowance in the United States in connection with the ScaleFT acquisition and excess tax benefits from stock-based compensation in the United Kingdom. These tax benefits were partially offset by income tax expense in profitable foreign jurisdictions and U.S. state taxes.


25




14. Net Loss Per Share
The following table presents the calculation of basic and diluted net loss per share (in thousands, except per share data):  
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2019
 
2018
 
2019
 
2018
 
Class A
 
Class B
 
Class A
 
Class B
 
Class A
 
Class B
 
Class A
 
Class B
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(unaudited)
Numerator:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
$
(58,761
)
 
$
(4,734
)
 
$
(26,502
)
 
$
(3,015
)
 
$
(145,139
)
 
$
(13,302
)
 
$
(79,991
)
 
$
(14,695
)
Denominator:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average shares outstanding - basic and diluted
110,105

 
8,871

 
97,665

 
11,111

 
105,893

 
9,705

 
90,045

 
16,542

Net loss per share, basic and diluted
$
(0.53
)
 
$
(0.53
)
 
$
(0.27
)
 
$
(0.27
)
 
$
(1.37
)
 
$
(1.37
)
 
$
(0.89
)
 
$
(0.89
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

As the Company was in a loss position for all periods presented, basic net loss per share is the same as diluted net loss per share as the inclusion of all potential common shares outstanding would have been anti-dilutive. Potentially dilutive securities that were not included in the diluted per share calculations because they would be anti-dilutive were as follows (in thousands):  
 
As of October 31,
 
2019
 
2018
 
 
 
 
 
(unaudited)
Unvested restricted common stock issued and outstanding

 
400

Stock options issued and outstanding
13,426

 
19,314

Unvested RSUs issued and outstanding
5,101

 
4,936

Unvested restricted stock awards issued and outstanding
177

 
388

Shares related to 2023 convertible senior notes
2,494

 
7,134

Shares subject to warrants related to the issuance of 2023 convertible senior notes
2,494

 

Shares related to 2025 convertible senior notes
5,617

 

Shares committed under the ESPP
209

 
359

Unvested shares subject to repurchase
7

 
67

 
29,525

 
32,598


The Company uses the if-converted method for calculating any potential dilutive effect of the conversion options embedded in the Notes on diluted net income per share, if applicable. The conversion options of the 2023 and 2025 Notes and exercise rights of the Warrants will have a dilutive impact on net income per share of common stock when the average market price per share of the Company’s Class A common stock for a given period exceeds the conversion prices of $48.36 per share, $188.71 per share and exercise price of $68.06 per share, respectively. During the three months ended October 31, 2019, the weighted average price per share of the Company’s Class A common stock exceeded the conversion price of the 2023 Notes and the exercise price of the Warrants; however, since the Company is in a net loss position there was no dilutive effect during any period presented.

26



Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K. As discussed in the section titled “Forward-Looking Statements,” the following discussion and analysis contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those identified below and those discussed in the section titled “Risk Factors” under Part II, Item 1A in this Quarterly Report on Form 10-Q and Part I, Item 1A in our Annual Report on Form 10-K. Our fiscal year ends January 31.
Overview
Okta is the leading independent identity management platform for the enterprise. The Okta Identity Cloud is our category-defining platform that enables our customers to securely connect people to technology, anywhere, anytime and from any device. Every day, millions of people use Okta to securely access a wide range of cloud, mobile and web applications, IT infrastructure providers, servers and services from a multitude of devices. Employees and contractors sign into the Okta Identity Cloud to seamlessly and securely access the applications they need to do their most important work. Organizations use our platform to collaborate with their partners, and to provide their customers with more modern experiences online and via mobile devices. Developers leverage our platform to securely embed identity into their software. Our approach allows our customers to simplify and scale their IT and security infrastructures more efficiently as the number of users, devices, clouds and other technologies in their ecosystem grows.
We founded the company in 2009 to reinvent identity for the modern cloud era, where identity is the critical foundation for connection and trust between users and technology. Since our inception, we have consistently innovated to enhance and extend our platform and our product offerings.
In parallel to this product innovation, we have rapidly expanded the breadth and depth of the Okta Integration Network, which provides customers with integrations to cloud, mobile and web applications and IT infrastructure providers that spans the functionality of our products. As of October 31, 2019, we had over 6,500 integrations with these cloud, mobile and web applications and IT infrastructure providers.
We employ a SaaS business model. We focus on acquiring and retaining our customers and increasing their spending with us through expanding the number of users who access our platform and up-selling additional products. We sell our products directly through our field and inside sales teams, as well as indirectly through our network of channel partners, including resellers, independent software vendors, or ISVs, system integrators and other distribution partners. Our subscription fees include the use of our service and our technical support and management of our platform. We base subscription fees primarily on the products used and the number of users on our platform. The Okta Identity Cloud is used by our customers to manage and secure their employees, contractors and partners, which we refer to as workforce identity. Our platform is also used to manage and secure the identities of an organization's own customers via the powerful APIs we have developed, which we refer to as customer identity. We typically invoice customers in advance in annual installments for subscriptions to our platform.
Components of Results of Operations
Revenue
Subscription Revenue.    Subscription revenue primarily consists of fees for access to and usage of our cloud-based platform and related support. Subscription revenue is driven primarily by the number of customers, the number of users per customer and the products used. We typically invoice customers in advance in annual installments for subscriptions to our platform.
Professional Services and Other.    Professional services revenue includes fees from assisting customers in implementing and optimizing the use of our products. These services include application configuration, system integration and training services.
We generally invoice customers as the work is performed for time-and-materials arrangements, and up front for fixed fee arrangements. All professional services revenue is recognized as the services are performed.

27



Overhead Allocation and Employee Compensation Costs
We allocate shared costs, such as facilities (including rent, utilities and depreciation on assets shared by all departments), information technology costs, and recruiting costs to all departments based on headcount. As such, allocated shared costs are reflected in each cost of revenue and operating expense category. Employee compensation costs include salaries, bonuses, benefits and stock-based compensation for each operating expense category and sales commissions for sales and marketing.
Cost of Revenue and Gross Margin
Cost of Subscription.    Cost of subscription primarily consists of expenses related to hosting our services and providing support. These expenses include employee-related costs associated with our cloud-based infrastructure and our customer support organization, third-party hosting fees, software and maintenance costs, outside services associated with the delivery of our subscription services, travel-related costs, amortization expense associated with capitalized internal-use software and acquired technology, and allocated overhead.
We intend to continue to invest additional resources in our platform infrastructure and our platform support organizations. As we continue to invest in technology innovation, we expect capitalized internal-use software costs and related amortization to increase. We expect our investment in technology to expand the capability of our platform enabling us to improve our gross margin over time. The level and timing of investment in these areas could affect our cost of subscription revenue in the future.
Cost of Professional Services and Other.    Cost of professional services consists primarily of employee-related costs for our professional services delivery team, travel-related costs, and costs of outside services associated with supplementing our professional services delivery team. The cost of providing professional services has historically been higher than the associated revenue we generate.
Gross Margin.    Gross margin is gross profit expressed as a percentage of total revenue. Our gross margin may fluctuate from period to period as our revenue fluctuates, and as a result of the timing and amount of investments to expand our hosting capacity, our continued efforts to build platform support and professional services teams, increased stock-based compensation expenses, as well as the amortization of costs associated with capitalized internal-use software and acquired intangible assets.
Operating Expenses
Research and Development.    Research and development expenses consist primarily of employee compensation costs and allocated overhead. We believe that continued investment in our platform is important for our growth. We expect our research and development expenses will increase in absolute dollars as our business grows.
Sales and Marketing.    Sales and marketing expenses consist primarily of employee compensation costs, costs of general marketing activities and promotional activities, travel-related expenses and allocated overhead. Commissions earned by our sales force that are considered incremental and recoverable costs of obtaining a contract with a customer are deferred and then amortized on a straight-line basis over a period of benefit that we have determined to be generally five years. We expect our sales and marketing expenses will increase in absolute dollars and continue to be our largest operating expense category for the foreseeable future as we expand our sales and marketing efforts. However, we expect our sales and marketing expenses to decrease as a percentage of our revenue as our revenue grows.
General and Administrative.    General and administrative expenses consist primarily of employee compensation costs for finance, accounting, legal and human resources personnel. In addition, general and administrative expenses include non-personnel costs, such as legal, accounting and other professional fees, charitable contributions, and all other supporting corporate expenses not allocated to other departments. We expect our general and administrative expenses will increase in absolute dollars as our business grows.
Interest Expense and Other Income, Net
Interest expense and other income, net consists of interest expense, which primarily includes amortization of debt discount and issuance costs and contractual interest expense for our Notes, interest income from our investment holdings and loss on early extinguishment of debt.

28



Provision for (Benefit from) Income Taxes
Our provision for (benefit from) income taxes consists of federal and state income taxes in the United States and income taxes in certain foreign jurisdictions, and is determined for interim periods using an estimate of our annual effective tax rate, adjusted for discrete items occurring in the quarter. The primary difference between our effective tax rate and the federal statutory rate relates to the net operating losses in jurisdictions with a valuation allowance against related deferred tax assets.
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:
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2019
 
2018
 
2019
 
2018
 
(in thousands)
Revenue:
 
 
 
 
 
 
 
Subscription
$
144,517

 
$
97,698

 
$
394,174

 
$
262,393

Professional services and other
8,520

 
7,878

 
24,566

 
21,390

Total revenue
153,037

 
105,576

 
418,740

 
283,783

Cost of revenue:
 

 
 

 
 
 
 
Subscription(1)
30,124

 
20,265

 
82,581

 
55,808

Professional services and other(1)
10,700

 
9,435

 
32,118

 
26,227

Total cost of revenue
40,824

 
29,700

 
114,699

 
82,035

Gross profit
112,213

 
75,876

 
304,041

 
201,748

Operating expenses:
 

 
 

 
 
 
 
Research and development(1)
41,832

 
27,596

 
115,909

 
72,354

Sales and marketing(1)
87,224

 
56,911

 
247,721

 
165,408

General and administrative(1)
28,887

 
19,848

 
81,540

 
55,873

Total operating expenses
157,943

 
104,355

 
445,170

 
293,635

Operating loss
(45,730
)
 
(28,479
)
 
(141,129
)
 
(91,887
)
Interest expense
(7,826
)
 
(4,118
)
 
(16,371
)
 
(10,893
)
Other income, net
4,982

 
2,413