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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 April 30, 2020
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 April 30, 2020, the number of shares of registrant’s Class A common stock outstanding was 116,135,161 and the number of shares of the registrant’s Class B common stock outstanding was 8,474,062.



Okta, Inc.
Table of Contents

 
 
Page No.
 
 
6
 
7
 
8
 
9
 
 




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, plans, market trends, opportunities, positioning, and the anticipated impact on our business of the COVID-19 pandemic, related public health measures and any associated economic downturn. 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

4



OKTA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
 
April 30, 2020
 
January 31, 2020
 
(unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
619,221

 
$
520,048

Short-term investments
827,556

 
882,976

Accounts receivable, net of allowances of $4,318 and $1,166
111,039

 
130,115

Deferred commissions
34,795

 
33,636

Prepaid expenses and other current assets
40,912

 
32,950

Total current assets
1,633,523

 
1,599,725

Property and equipment, net
61,914

 
53,535

Operating lease right-of-use assets
162,763

 
125,204

Deferred commissions, noncurrent
79,270

 
77,874

Intangible assets, net
31,032

 
32,529

Goodwill
48,023

 
48,023

Other assets
20,482

 
18,505

Total assets
$
2,037,007

 
$
1,955,395

Liabilities and stockholders' equity
 

 
 
Current liabilities:
 

 
 
Accounts payable
$
8,021

 
$
3,837

Accrued expenses and other current liabilities
36,601

 
36,887

Accrued compensation
31,447

 
40,300

2023 convertible senior notes, net
102,198

 
100,703

Deferred revenue
392,121

 
365,236

Total current liabilities
570,388

 
546,963

2025 convertible senior notes, net
845,862

 
837,002

Operating lease liabilities, noncurrent
194,889

 
154,511

Deferred revenue, noncurrent
6,070

 
6,214

Other liabilities, noncurrent
6,702

 
5,361

Total liabilities
1,623,911

 
1,550,051

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 April 30, 2020 and January 31, 2020



Class A common stock, par value $0.0001 per share; 1,000,000 shares authorized; 116,135 and 113,990 shares issued and outstanding as of April 30, 2020 and January 31, 2020, respectively
12

 
11

Class B common stock, par value $0.0001 per share; 120,000 shares authorized; 8,474 and 8,648 shares issued and outstanding as of April 30, 2020 and January 31, 2020, respectively
1

 
1

Additional paid-in capital
1,168,127

 
1,105,564

Accumulated other comprehensive income
3,742

 
892

Accumulated deficit
(758,786
)
 
(701,124
)
Total stockholders’ equity
413,096

 
405,344

Total liabilities and stockholders' equity
$
2,037,007

 
$
1,955,395

See Notes to Condensed Consolidated Financial Statements.

5



OKTA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)
 
Three Months Ended April 30,
 
2020
 
2019
Revenue:
 
 
 
Subscription
$
173,781

 
$
117,163

Professional services and other
9,078

 
8,060

Total revenue
182,859

 
125,223

Cost of revenue:
 

 
 

Subscription
37,157

 
24,540

Professional services and other
11,329

 
10,555

Total cost of revenue
48,486

 
35,095

Gross profit
134,373

 
90,128

Operating expenses:
 

 
 

Research and development
48,494

 
34,032

Sales and marketing
104,043

 
82,112

General and administrative
34,035

 
25,766

Total operating expenses
186,572

 
141,910

Operating loss
(52,199
)
 
(51,782
)
Interest expense
(10,764
)
 
(4,241
)
Interest income and other, net
4,899

 
2,900

Interest and other, net
(5,865
)
 
(1,341
)
Loss before benefit from income taxes
(58,064
)
 
(53,123
)
Benefit from income taxes
(402
)
 
(1,157
)
Net loss
$
(57,662
)
 
$
(51,966
)
 
 

 
 

Net loss per share, basic and diluted
$
(0.47
)
 
$
(0.46
)
 
 

 
 

Weighted-average shares used to compute net loss per share, basic and diluted
123,494

 
112,682


See Notes to Condensed Consolidated Financial Statements.


6



OKTA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(unaudited)
 
Three Months Ended April 30,
 
2020
 
2019
Net loss
$
(57,662
)
 
$
(51,966
)
Other comprehensive income (loss):
 
 
 
Net change in unrealized gains or losses on available-for-sale securities
4,634

 
195

Foreign currency translation adjustments
(1,784
)
 
(333
)
Other comprehensive income (loss)
2,850

 
(138
)
Comprehensive loss
$
(54,812
)
 
$
(52,104
)
See Notes to Condensed Consolidated Financial Statements.


7



OKTA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
(unaudited)
 
Three Months Ended April 30,
 
2020
 
2019
Common stock and additional paid-in capital:
 
 
 
Balance, beginning of period
$
1,105,576

 
$
744,907

Issuance of common stock upon exercise of stock options and other activity, net
14,708

 
13,516

Issuance of common stock for bonus settlement
9,818

 
2,809

Stock-based compensation
38,038

 
22,846

Balance, end of period
1,168,140

 
784,078

 


 
 
Accumulated deficit:


 
 
Balance, beginning of period
(701,124
)
 
(492,211
)
Net loss
(57,662
)
 
(51,966
)
Balance, end of period
(758,786
)
 
(544,177
)
 


 
 
Accumulated other comprehensive income (loss):


 
 
Balance, beginning of period
892

 
(319
)
Other comprehensive income (loss)
2,850

 
(138
)
Balance, end of period
3,742

 
(457
)
Total stockholders’ equity
$
413,096

 
$
239,444

See Notes to Condensed Consolidated Financial Statements.


8



OKTA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
 
Three Months Ended April 30,
 
2020
 
2019
Cash flows from operating activities:
 
 
 
Net loss
$
(57,662
)
 
$
(51,966
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Stock-based compensation
37,728

 
22,685

Depreciation, amortization and accretion
5,466

 
3,399

Amortization of debt discount and issuance costs
10,357

 
4,025

Amortization of deferred commissions
8,680

 
6,328

Deferred income taxes
(905
)
 
(1,369
)
Non-cash charitable contributions
536

 

Other, net
915

 
(100
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
18,250

 
9,297

Deferred commissions
(11,865
)
 
(9,795
)
Prepaid expenses and other assets
(3,493
)
 
5,975

Operating lease right-of-use assets
4,055

 
3,066

Accounts payable
3,943

 
1,640

Accrued compensation
2,995

 
4,143

Accrued expenses and other liabilities
(2,773
)
 
3,288

Operating lease liabilities
(4,270
)
 
(39
)
Deferred revenue
26,740

 
20,685

Net cash provided by operating activities
38,697

 
21,262

Cash flows from investing activities:
 

 
 

Capitalization of internal-use software costs
(1,000
)
 
(369
)
Purchases of property and equipment
(7,930
)
 
(7,710
)
Purchases of securities available for sale and other
(129,079
)
 
(146,545
)
Proceeds from maturities and redemption of securities available for sale
102,293

 
61,244

Proceeds from sales of securities available for sale
86,320

 
11,996

Payments for business acquisition, net of cash acquired

 
(44,223
)
Net cash provided by (used in) investing activities
50,604

 
(125,607
)
Cash flows from financing activities:
 
 
 

Proceeds from stock option exercises
14,172

 
13,388

Other, net
(5
)
 
(126
)
Net cash provided by financing activities
14,167

 
13,262

Effects of changes in foreign currency exchange rates on cash, cash equivalents and restricted cash
(1,128
)
 
(282
)
Net increase (decrease) in cash, cash equivalents and restricted cash
102,340

 
(91,365
)
Cash, cash equivalents and restricted cash at beginning of period
531,953

 
311,215

Cash, cash equivalents and restricted cash at end of period
$
634,293

 
$
219,850

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Supplementary cash flow disclosure:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
784

 
$
431

Income taxes
209

 
143

Non-cash investing and financing activities:
 
 
 
Vesting of early exercised common stock options

 
128

Common stock issued as charitable contribution
536

 

Operating lease right-of-use assets exchanged for lease obligations
41,444

 
1,665

Property and equipment acquired through tenant improvement allowance
2,598

 

Property and equipment and other accrued but not yet paid
533

 
924

Issuance of common stock for bonus settlement
9,818

 
2,809

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
$
619,221

 
$
208,106

Restricted cash, current included in prepaid expenses and other current assets
2,254

 
307

Restricted cash, noncurrent included in other assets
12,818

 
11,437

Total cash, cash equivalents and restricted cash
$
634,293

 
$
219,850

See Notes to Condensed Consolidated Financial Statements.


9



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 accounting principles generally accepted in the United States of America (GAAP). All intercompany balances and transactions have been eliminated in consolidation.
The condensed consolidated balance sheet as of January 31, 2020, 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, 2021 or any future period.
The Company’s fiscal year ends on January 31. References to fiscal 2021, for example, refer to the fiscal year ending January 31, 2021.
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 6, 2020.
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 its convertible senior notes, the determination of the incremental borrowing rate used for operating lease liabilities, the valuation of deferred income tax assets, and the valuation of acquired intangible assets.
In March 2020, the World Health Organization (WHO) declared the outbreak of the novel coronavirus (COVID-19) a pandemic, which continues to spread across the globe. The Company considered the impact of COVID-19 on the assumptions and estimates used and determined that there were no material adverse impacts on the condensed consolidated financial statements for the period ended April 30, 2020. As events continue to evolve and additional information becomes available, our assumptions and estimates may change materially in future periods.
2. Accounting Standards and Significant Accounting Policies

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, 2020. Except for the accounting policies for short-term investments and accounts receivable and allowances that were

10


updated below as a result of adopting the Financial Accounting Standards Board’s (FASB) Accounting Standards Update (ASU) No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13) on February 1, 2020, there have been no significant changes to these policies for the three months ended April 30, 2020.
Short-Term Investments
The Company’s short-term investments comprise U.S. treasury securities and corporate debt securities. The Company determines the appropriate classification of its short-term investments at the time of purchase and reevaluates such designation at each balance sheet date. The Company has classified and accounted for its short-term investments as available-for-sale securities as the Company may sell these securities at any time for use in its current operations or for other purposes, even prior to maturity. As a result, short-term investments, including securities with stated maturities beyond twelve months, are classified within current assets in the consolidated balance sheets.
Available-for-sale securities are recorded at fair value each reporting period and are periodically evaluated for unrealized losses. For unrealized losses in securities that the Company intends to hold and will not more likely than not be required to sell before recovery, the Company further evaluates whether declines in fair value below amortized cost are due to credit or non-credit related factors.
The Company considers credit related impairments to be changes in value that are driven by a change in the creditor’s ability to meet its payment obligations, and records an allowance and recognizes a corresponding loss in interest income and other, net when the impairment is incurred. Unrealized non-credit related losses and unrealized gains are reported as a separate component of accumulated other comprehensive loss in the condensed consolidated balance sheets until realized. Realized gains and losses are determined based on the specific identification method and are reported in interest income and other, net in the condensed consolidated statements of operations.
Accounts Receivable and Allowances
Accounts receivable are recorded at the invoiced amount, net of allowances. These allowances are based on the Company’s assessment of the collectibility of accounts by considering the age of each outstanding invoice, the collection history of each customer, and an evaluation of current expected risk of credit loss based on current conditions and reasonable and supportable forecasts of future economic conditions over the life of the receivable. We assess collectibility by reviewing accounts receivable on an aggregated basis where similar characteristics exist and on an individual basis when we identify specific customers with known disputes or collectibility issues. Amounts deemed uncollectible are recorded as an allowance in the condensed consolidated balance sheets with an offsetting decrease in deferred revenue or a charge to general and administrative expense in the condensed consolidated statements of operations.
As of April 30, 2020, allowances reflect increased collectibility and concession concerns stemming from business and market disruption caused by COVID-19 and may fluctuate materially in future periods as the duration and severity of the impact of the COVID-19 pandemic remains uncertain.
Concentrations of Significant Customers
As of April 30, 2020 and January 31, 2020, no single customer represented greater than 10% of accounts receivable. For the three months ended April 30, 2020 and 2019, no single customer represented greater than 10% of revenue.
Recently Adopted Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, which changes the existing incurred loss impairment model for financial assets held at amortized cost. The new model uses a forward-looking expected loss method to calculate credit loss estimates. ASU 2016-13 also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. These changes will result in earlier recognition of credit losses. The Company adopted the requirements of ASU 2016-13 as of February 1, 2020 on a modified retrospective basis. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements.

11


In August 2018, the FASB issued ASU No. 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. The Company adopted the requirements of ASU 2018-15 as of February 1, 2020 on a prospective basis. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements.
In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (ASU 2019-12), as part of its Simplification Initiative to reduce the cost and complexity in accounting for income taxes. ASU 2019-12 removes certain exceptions related to the approach for intraperiod tax allocation and clarifies the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The guidance is effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted. The Company early adopted ASU 2019-12 as of February 1, 2020 on a prospective basis. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements.
3. Business Combinations
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 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.
In connection with Azuqua and prior acquisitions, the Company entered into deferred compensation arrangements totaling $10.8 million, of which $1.2 million was recognized as compensation during the three months ended April 30, 2020. The remaining deferred compensation balance of $3.6 million is being recognized over a future weighted-average period of 1.6 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.

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 April 30, 2020 and January 31, 2020 were as follows (in thousands):  
 
As of April 30, 2020
 
Amortized
Cost
 
Unrealized
Gain
 
Unrealized
Loss
 
Estimated
Fair Value 
 
(unaudited)
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
497,208

 
$

 
$

 
$
497,208

Corporate debt securities
6,001

 
5

 

 
6,006

Total cash equivalents
503,209

 
5

 

 
503,214

Short-term investments:
 

 
 

 
 

 
 

U.S. treasury securities
575,143

 
4,935

 
(1
)
 
580,077

Corporate debt securities
246,587

 
1,029

 
(137
)
 
247,479

Total short-term investments
821,730

 
5,964

 
(138
)
 
827,556

Total
$
1,324,939

 
$
5,969

 
$
(138
)
 
$
1,330,770


12



 
As of January 31, 2020
 
Amortized
Cost
 
Unrealized
Gain
 
Unrealized
Loss
 
Estimated
Fair Value 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
416,584

 
$

 
$

 
$
416,584

U.S. treasury securities
19,996

 

 

 
19,996

Total cash equivalents
436,580

 

 

 
436,580

Short-term investments:
 
 
 

 
 

 
 

U.S. treasury securities
575,920

 
686

 
(8
)
 
576,598

Corporate debt securities
305,859

 
519

 

 
306,378

Total short-term investments
881,779

 
1,205

 
(8
)
 
882,976

Total
$
1,318,359

 
$
1,205

 
$
(8
)
 
$
1,319,556


All short-term investments were designated as available-for-sale securities as of April 30, 2020 and January 31, 2020.
The following table presents the contractual maturities of the Company’s short-term investments as of April 30, 2020 (in thousands):
 
As of April 30, 2020
 
Amortized
Cost
 
Estimated
Fair Value
 
(unaudited)
Due within one year
$
634,510

 
$
638,854

Due between one to five years
187,220

 
188,702

 Total
$
821,730

 
$
827,556


The Company had 12 and 7 short-term investments in unrealized loss positions as of April 30, 2020 and January 31, 2020, 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 months ended April 30, 2020 or 2019.
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, (ii) it is not more likely than not that the Company will be required to sell any of these available-for-sale debt securities before recovery of the entire amortized cost basis and (iii) the decline in the fair value of the investment is due to credit or non-credit related factors. Based on this evaluation, the Company determined that for short-term investments, there were no material credit or non-credit related impairments as of April 30, 2020 and January 31, 2020.
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 other 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.

13



Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents information about the Company’s financial assets that were measured at fair value on a recurring basis using the above input categories (in thousands):  
 
As of April 30, 2020
 
Level 1
 
Level 2 
 
Level 3
 
Total
 
(unaudited)
Assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
497,208

 
$

 
$

 
$
497,208

Corporate debt securities

 
6,006

 

 
6,006

Total cash equivalents
497,208

 
6,006

 

 
503,214

Short-term investments:
 

 
 

 
 

 
 

U.S. treasury securities

 
580,077

 

 
580,077

Corporate debt securities

 
247,479

 

 
247,479

Total short-term investments

 
827,556

 

 
827,556

Total cash equivalents and short-term investments
$
497,208

 
$
833,562

 
$

 
$
1,330,770

 
As of January 31, 2020
 
Level 1
 
Level 2 
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
416,584

 
$

 
$

 
$
416,584

U.S. treasury securities

 
19,996

 

 
19,996

Total cash equivalents
416,584

 
19,996

 

 
436,580

Short-term investments:
 

 
 

 
 

 
 

U.S. treasury securities

 
576,598

 

 
576,598

Corporate debt securities

 
306,378

 

 
306,378

Total short-term investments

 
882,976

 

 
882,976

Total cash equivalents and short-term investments
$
416,584

 
$
902,972

 
$

 
$
1,319,556


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 April 30, 2020
 
Net Carrying Amount (1)
 
Estimated
Fair Value 
 
(unaudited)
2023 convertible senior notes
$
103,911

 
$
375,264

2025 convertible senior notes
$
859,889

 
$
1,126,769


(1)  
Before unamortized debt issuance costs.

14



The difference between the principal amount of the 2023 convertible senior notes (2023 Notes) and the 2025 convertible senior notes (2025 Notes, and together with the 2023 Notes, the 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 April 30, 2020, the difference between the net carrying amount of the Notes and their estimated fair values represented the equity conversion value premium the market assigned to the Notes. Based on the closing price of our common stock of $151.30 on April 30, 2020, 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 $11.9 million and $9.8 million in the three months ended April 30, 2020 and 2019, respectively. Amortization of contract costs was $8.7 million and $6.3 million for the three months ended April 30, 2020 and 2019, respectively. There was no impairment loss in relation to the costs capitalized.
7. Goodwill and Intangible Assets, net
Goodwill
As of April 30, 2020 and January 31, 2020, goodwill was $48.0 million. No goodwill impairments were recorded during the three months ended April 30, 2020 and 2019.
Intangible Assets, net
Intangible assets consisted of the following (in thousands):  
 
As of April 30, 2020
 
(unaudited)
 
Gross
 
Accumulated Amortization
 
Write-offs
 
Net
Capitalized internal-use software costs
$
26,093

 
$
(16,007
)
 
$

 
$
10,086

Purchased developed technology
28,800

 
(7,914
)
 

 
20,886

Software licenses
1,112

 
(1,052
)
 

 
60

 
$
56,005

 
$
(24,973
)
 
$

 
$
31,032

 
As of January 31, 2020
 
Gross
 
Accumulated Amortization
 
Write-offs
 
Net
Capitalized internal-use software costs
$
24,890

 
$
(14,828
)
 
$
(119
)
 
$
9,943

Purchased developed technology
28,800

 
(6,321
)
 

 
22,479

Software licenses
1,112

 
(1,005
)
 

 
107

 
$
54,802

 
$
(22,154
)
 
$
(119
)
 
$
32,529


The Company capitalized $1.3 million and $0.5 million of internal-use software costs during the three months ended April 30, 2020 and 2019, respectively. Stock-based compensation expense included in the total amounts capitalized was immaterial.
The remaining weighted-average useful life of all purchased developed technology was 3.7 years as of April 30, 2020.
Amortization expense of intangible assets for the three months ended April 30, 2020 and 2019 was $2.8 million and $2.1 million, respectively.

15



8. Deferred Revenue and Performance Obligations
Deferred Revenue
Deferred revenue, which is a contract liability, consists primarily of payments received and accounts receivable recorded 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 April 30, 2020 and 2019 that was included in the deferred revenue balances at the beginning of the respective periods was $147.0 million and $98.0 million, respectively. Professional services and other revenue recognized in the three months ended April 30, 2020 and 2019 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 all future, noncancelable contracted revenue that has not yet been recognized, inclusive of deferred revenue that has been invoiced and noncancelable amounts that will be invoiced and recognized as revenue in future periods.
As of April 30, 2020, total remaining noncancelable performance obligations under the Company’s subscription contracts with customers was approximately $1,240.2 million. Of this amount, the Company expects to recognize revenue of approximately $619.1 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 April 30, 2020 was not material.
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 to repurchase a portion of the 2023 Notes, 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 (2023 Notes Partial Repurchase). Of the $604.8 million in aggregate consideration, $197.7 million and $407.1 million were allocated to the debt and equity components, respectively, using an effective interest rate of 4.00% to determine the fair value of the liability component. This interest rate was based on the income and market based approaches used to determine the effective interest rate of the 2025 Notes, adjusted for the remaining tenor of the 2023 Notes. 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 in fiscal 2020, of which $3.8 million consisted of unamortized debt issuance costs. As of April 30, 2020, $120.6 million of principal remained 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 2023 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 2023 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

16



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 2023 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 circumstances. For at least twenty trading days during the period of thirty consecutive trading days ended April 30, 2020, 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 July 31, 2020 and were classified as current liabilities on the condensed consolidated balance sheet as of April 30, 2020. In addition, as of the date of this filing, the Company has received an immaterial amount of conversion requests and holders of the 2023 Notes have converted an immaterial amount of such notes (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 2023 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 2023 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, using an effective interest rate of 5.68% to determine the fair value of the liability component. This interest rate was based on both an income and a market based approach. For the income approach, the Company used a convertible bond pricing model, which included several assumptions including volatility and the risk-free rate. For the market approach, the Company observed the price of the Note Hedges (see below) it purchased for its 2023 Notes and also performed an evaluation of issuances of convertible debt securities by other companies with similar credit risk ratings at the time of issuance. The following table sets forth total interest expense recognized related to the 2023 Notes (in thousands):
 
Three Months Ended April 30,
 
2020
 
2019
 
(unaudited)
Contractual interest expense
$
75

 
$
216

Amortization of debt issuance costs
127

 
319

Amortization of debt discount
1,370

 
3,706

Total
$
1,572

 
$
4,241


Total initial 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 initially recorded liability issuance costs of $7.7 million and equity issuance costs of $2.3 million.

17



The 2023 Notes, net consisted of the following (in thousands):
 
As of April 30, 2020
 
(unaudited)
Liability component:
 
Principal
$
120,586

Less: unamortized debt issuance costs and debt discount
(18,388
)
Net carrying amount
$
102,198

 
 
 
As of April 30, 2020
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.
Note Hedges
In connection with the pricing of the 2023 Notes, the Company entered into convertible note hedges 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 April 30, 2020, Note Hedges giving the Company the option to purchase approximately 2.5 million shares (subject to adjustment) remained 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

18



was recorded as a decrease to Additional paid-in capital in the condensed consolidated balance sheets. As of April 30, 2020, Warrants to acquire up to approximately 2.5 million shares (subject to adjustment) remained 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 2025 Indenture, and together with the 2023 Indenture, the Indentures). 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 2025 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:
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 2025 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 April 30, 2020, 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 April 30, 2020, the Company had 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 2025 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 2025 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 using an effective interest rate of 4.10% to determine the fair value of the liability component. This interest

19



rate was based on both an income and a market based approach. For the income approach, the Company used a convertible bond pricing model, which included several assumptions including volatility and the risk-free rate. For the market approach, the Company performed an evaluation of issuances of convertible debt securities by other companies with similar credit risk ratings at the time of issuance. The following table sets forth total interest expense recognized related to the 2025 Notes (in thousands):
 
Three Months Ended April 30,
 
2020
 
(unaudited)
Contractual interest expense
$
331

Amortization of debt issuance costs
506

Amortization of debt discount
8,354

Total
$
9,191


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.
The 2025 Notes, net consisted of the following (in thousands):
 
As of April 30, 2020
 
(unaudited)
Liability component:
 
Principal
$
1,060,000

Less: unamortized debt issuance costs and debt discount
(214,138
)
Net carrying amount
$
845,862

 
 
 
At Issuance
Equity component:
 
2025 Notes
$
221,387

Less: issuance costs
(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.

20



10. Leases

The Company has entered into various non-cancelable office space operating leases with original lease periods expiring between 2020 and 2028. These leases do not contain material variable rent payments, residual value guarantees, covenants or other restrictions.
Operating lease costs were as follows (in thousands):
 
 
Three Months Ended April 30,
 
 
2020
 
2019
 
 
(unaudited)
Operating lease cost(1)
 
$
7,370

 
$
5,463

(1) Amounts are presented exclusive of sublease income and include short-term leases, which are immaterial.
The weighted-average remaining term of the Company’s operating leases was 7.7 and 7.9 years and the weighted-average discount rate used to measure the present value of the operating lease liabilities was 5.6% and 5.7% as of April 30, 2020 and January 31, 2020, respectively.
Maturities of the Company’s operating lease liabilities, which do not include short-term leases, as of April 30, 2020 were as follows (in thousands):
 
 
Operating Leases
 
 
(unaudited)
2021
 
$
20,796

2022
 
35,980

2023
 
36,482

2024
 
37,346

2025
 
35,305

Thereafter
 
99,540

Total lease payments
 
265,449

Less imputed interest
 
(52,428
)
Total operating lease liabilities
 
$
213,021


Cash payments included in the measurement of the Company’s operating lease liabilities were $7.1 million and $2.4 million for the three months ended April 30, 2020 and 2019, respectively.
As of April 30, 2020, the Company has $4.7 million of undiscounted future payments under an operating lease that has not yet commenced, which is excluded from the table above. This operating lease will commence in fiscal 2021 and has a lease term of 4.0 years.
11. Commitments and Contingencies

Letters of Credit
In conjunction with the execution of certain office space operating leases, letters of credit in the aggregate amount of $13.1 million and $11.9 million were issued and outstanding as of April 30, 2020 and January 31, 2020, 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 April 30, 2020.

21



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.
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 April 30,
 
2020
 
2019
 
(unaudited)
Cost of revenue
 
 
 
Subscription
$
3,975

 
$
2,422

Professional services and other
1,811

 
1,519

Research and development
11,935

 
6,346

Sales and marketing
11,160

 
6,786

General and administrative
8,847

 
5,612

Total
$
37,728

 
$
22,685


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 months ended April 30, 2020 and 2019. 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 April 30, 2020, options to purchase 1,285,569 shares of Class A common stock and 9,881,424 shares of Class B common stock remained outstanding.
Shares of common stock reserved for future issuance were as follows:
 
As of
 
April 30, 2020
 
(unaudited)
Stock options and unvested RSUs outstanding
16,057,236

Available for future stock option and RSU grants
21,816,827

Available for ESPP
4,880,235

 
42,754,298



22



Stock Options
A summary of the Company’s stock option activity and related information was 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, 2020
12,359,302

 
$
11.82

 
6.2
 
$
1,436,487

Granted
372,829

 
142.47

 
 
 
 
Exercised
(1,449,052
)
 
9.78

 
 
 
 
Canceled
(116,086
)
 
21.22

 
 
 
 
Outstanding as of April 30, 2020 (unaudited)
11,166,993

 
$
16.35

 
6.1
 
$
1,506,963

As of April 30, 2020
 
 
 
 
 
 
 
Vested and exercisable (unaudited)
8,283,315

 
$
9.27

 
5.7
 
$
1,176,501


As of April 30, 2020, there was a total of $45.6 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 activities and related information was as follows:  
 
Number of
RSUs
 
Weighted-
Average
Grant Date Fair Value Per Share
Outstanding as of January 31, 2020
4,893,241

 
$
77.99

Granted
688,649

 
125.94

Vested
(517,323
)
 
67.51

Forfeited
(174,324
)
 
73.82

Outstanding as of April 30, 2020 (unaudited)
4,890,243

 
$
86.00


As of April 30, 2020, there was $368.2 million of unrecognized stock-based compensation expense related to unvested RSUs, which is expected to be recognized over a weighted-average period of 2.7 years based on vesting under the award service conditions.
Employee Stock Purchase Plan
As of April 30, 2020, there was $4.9 million of unrecognized stock-based compensation expense related to the ESPP that is expected to be recognized over an average vesting period of 0.4 years.
13. Income Taxes
For the three months ended April 30, 2020, the Company recorded a tax benefit of $0.4 million on a pretax loss of $58.1 million. The effective tax rate for the three months ended April 30, 2020 was 0.7%. 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 and excess tax benefits from stock-based compensation in the United Kingdom. The tax benefit recognized for the three months ended April 30, 2020 was partially offset by income tax expense in profitable foreign jurisdictions and U.S. state taxes.
For the three months ended April 30, 2019, the Company recorded a tax benefit of $1.2 million on a pretax loss of $53.1 million. The effective tax rate for the three months ended April 30, 2019 was 2.2%. 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

23



the Azuqua acquisition and excess tax benefits from stock-based compensation in the United Kingdom. The tax benefit was partially offset by income tax expense in profitable foreign jurisdictions and U.S. state taxes.
On March 27, 2020, the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act). The CARES Act provides numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future utilization of net operating losses, temporary changes to the prior and future limitations on interest deductions, temporary suspension of certain payment requirements for the employer portion of Social Security taxes, technical corrections from prior tax legislation for tax depreciation of certain qualified improvement property, and the creation of certain refundable employee retention credits. The Company does not expect there to be a material tax impact on its condensed consolidated financial statements at this time, and will continue to assess the implications of the CARES Act and its continuing developments and interpretations.
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 April 30,
 
2020
 
2019
 
Class A
 
Class B
 
Class A
 
Class B
 
(unaudited)
Numerator:
 
 
 
 
 
 
 
Net loss
$
(53,684
)
 
$
(3,978
)
 
$
(47,227
)
 
$
(4,739
)
Denominator:
 
 
 
 
 
 
 
Weighted-average shares outstanding - basic and diluted
114,975

 
8,519

 
102,407

 
10,275

Net loss per share, basic and diluted
$
(0.47
)
 
$
(0.47
)
 
$
(0.46
)
 
$
(0.46
)

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 April 30,
 
2020
 
2019
 
(unaudited)
Issued and outstanding stock options
11,167

 
16,489

Unvested RSUs issued and outstanding
4,890

 
4,848

Unvested restricted stock awards issued and outstanding

 
177

Unvested shares subject to repurchase
3

 
30

Shares committed under the ESPP
244

 
261

Shares related to the 2023 Notes
2,494

 
7,134

Shares subject to warrants related to the issuance of the 2023 Notes
2,494

 
7,134

Shares related to the 2025 Notes
5,617

 

 
26,909

 
36,073


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 April 30, 2020, 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.

24



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 the right people to the right technologies at the right time. Every day, millions of people use Okta to securely access a wide range of cloud, mobile and web applications, on premise servers, application program interfaces, or APIs, IT infrastructure providers 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 and efficiently embed identity into their software, allowing them to focus on their core mission. Our approach to identity allows our customers to simplify and efficiently scale their security infrastructures across internal IT systems and external customer facing applications.
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 April 30, 2020, 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 upselling 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, 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.
Impact of Coronavirus (COVID-19) Pandemic

In December 2019, a novel coronavirus (COVID-19) was reported in China, in January 2020, the World Health Organization (WHO) declared it a Public Health Emergency of International Concern and in March 2020, the WHO declared it a pandemic. This contagious disease outbreak has continued to spread across the globe and is impacting worldwide economic activity and financial markets. The extent of the impact of COVID-19 on our future operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, related public health measures, and their impact on the macroeconomy, our current and prospective customers, employees and vendors. None of these impacts can be predicted with certainty.

Our revenue is relatively predictable as a result of our subscription-based business model, which constituted over 95% of total revenue for the three months ended April 30, 2020. Future growth may be impacted by longer sales cycles, which we have experienced, which in turn, could result in delays in deals closing, creating near-term headwinds for cash flow, remaining performance obligations (RPO) and billings growth as well as potential future impacts on revenue growth and other key metrics on a trailing basis. Our allowance for doubtful accounts and sales reserves have increased primarily due to an increase in overall uncertainty in our forecasts of future economic conditions and concession requests. While we see risks associated with more highly impacted companies and industries, we are also seei

25



ng new interest from other organizations, driven by rapidly changing work and business environments. As workforces have transitioned to working from home in a distributed model, Zero Trust has become an increasingly important and identity an increasingly critical service.

We believe we will be able to continue to deliver our cloud-based platform and support to our customers, without compromising our employees’ safety. As of March 2020, we have put in place mandatory work-from-home procedures for all of our global office locations, and our employees have the necessary tools and technology to remain connected and productive. In addition, we shifted our annual user conference, Oktane20 Live, to a virtual-only experience, resulting in cost savings. We have further benefited from cost savings, driven by reduced growth in employee compensation costs due to slower hiring, reductions in employee-related expenses as our sales and marketing activities shift to an online only sales format and a shift to work-from-home procedures.

See Risk Factors for further discussion of the potential impact of COVID-19 and its related public health measures on our business.
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.
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 anticipate capitalized internal-use software costs and related amortization may 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

26



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 total revenue as our total 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 and Other, Net
Interest and other, net consists of interest expense, which primarily includes amortization of debt discount and issuance costs and contractual interest expense for our Notes, and interest income from our investment holdings.
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.

27



Results of Operations
The following table sets forth our results of operations for the periods presented in dollars and as a percentage of our revenue:
 
Three Months Ended April 30,
 
2020
 
2019
 
(in thousands)
Revenue:
 
 
 
Subscription
$
173,781

 
$
117,163

Professional services and other
9,078

 
8,060

Total revenue
182,859

 
125,223

Cost of revenue:
 

 
 

Subscription(1)
37,157

 
24,540

Professional services and other(1)
11,329

 
10,555

Total cost of revenue
48,486

 
35,095

Gross profit
134,373

 
90,128

Operating expenses:
 

 
 

Research and development(1)
48,494

 
34,032

Sales and marketing(1)
104,043

 
82,112

General and administrative(1)
34,035

 
25,766

Total operating expenses
186,572

 
141,910

Operating loss
(52,199
)
 
(51,782
)
Interest expense
(10,764
)
 
(4,241
)
Interest income and other, net
4,899

 
2,900

Interest and other, net
(5,865
)
 
(1,341
)
Loss before benefit from income taxes
(58,064
)
 
(53,123
)
Benefit from income taxes
(402
)
 
(1,157
)
Net loss
$
(57,662
)
 
$
(51,966
)
(1) 
Includes stock-based compensation expense as follows:
 
Three Months Ended April 30,
 
2020
 
2019
 
(in thousands)
Cost of subscription revenue
$
3,975

 
$
2,422

Cost of professional services and other revenue
1,811

 
1,519

Research and development
11,935

 
6,346

Sales and marketing
11,160

 
6,786

General and administrative
8,847

 
5,612

Total stock-based compensation expense
$
37,728

 
$
22,685


The following table sets forth our results of operations for the periods presented as a percentage of total revenue:

28



 
Three Months Ended April 30,
 
2020
 
2019
Revenue
 
 
 
Subscription
95
 %
 
94
 %
Professional services and other
5

 
6

Total revenue
100

 
100

Cost of revenue
 
 
 
Subscription
21

 
20

Professional services and other
6

 
8

Total cost of revenue
27

 
28

Gross profit
73

 
72

Operating expenses
 
 
 
Research and development
26

 
27

Sales and marketing
57

 
65

General and administrative
19

 
21

Total operating expenses
102

 
113

Operating loss
(29
)
 
(41
)
Interest expense
(6
)
 
(3
)
Interest income and other, net
3

 
2

Interest and other, net
(3
)
 
(1
)
Loss before benefit from income taxes
(32
)
 
(42
)
Benefit from income taxes

 
(1
)
Net loss
(32
)%
 
(41
)%

Comparison of the Three Months Ended April 30, 2020 and 2019
Revenue
 
Three Months Ended April 30,
 
 
 
2020
 
2019
 
$ Change
 
% Change
 
(dollars in thousands)
Revenue:
 
 
 
 
 
 
 
Subscription
$
173,781

 
$
117,163

 
$
56,618

 
48
%
Professional services and other
9,078

 
8,060

 
1,018

 
13

Total revenue
$
182,859

 
$
125,223

 
$
57,636

 
46
%
Percentage of revenue:
 

 
 
 
 

 
 

Subscription
95
%
 
94
%
 
 

 
 

Professional services and other
5

 
6

 
 

 
 

Total
100
%
 
100
%
 
 

 
 

Subscription revenue increased by $56.6 million, or 48%, for the three months ended April 30, 2020 compared to the three months ended April 30, 2019. The increase was primarily due to the addition of new customers as well as an increase in users and sales of additional products to existing customers.
Professional services and other revenue increased by $1.0 million, or 13%, for the three months ended April 30, 2020 compared to the three months ended April 30, 2019. The increase in professional services revenue primarily related to an increase in implementation and other services associated with an increase in the number of new customers purchasing our subscription services.

29



Cost of Revenue, Gross Profit and Gross Margin
 
Three Months Ended April 30,
 
 
 
2020
 
2019
 
$ Change
 
% Change
 
(dollars in thousands)
Cost of revenue:
 
 
 
 
 
 
 
Subscription
$
37,157

 
$
24,540

 
$
12,617

 
51
%
Professional services and other
11,329

 
10,555

 
774

 
7

Total cost of revenue
$
48,486

 
$
35,095

 
$
13,391

 
38
%
Gross profit
$
134,373

 
$
90,128

 
$
44,245

 
49
%
Gross margin:
 

 
 
 
 

 
 

Subscription
79
 %
 
79
 %
 
 

 
 

Professional services and other
(25
)
 
(31
)
 
 

 
 

Total gross margin
73

 
72

 
 

 
 

Cost of subscription revenue increased by $12.6 million, or 51%, for the three months ended April 30, 2020 compared to the three months ended April 30, 2019, primarily due to an increase of $7.7 million in employee compensation costs related to higher headcount to support the growth in our subscription services, an increase of $1.4 million in third-party hosting costs as we increased capacity to support our growth, and an increase of $1.3 million in software license costs.
Our gross margin for subscription revenue remained consistent at 79% for the three months ended April 30, 2020 compared to the three months ended April 30, 2019. While our gross margins for subscription revenue may fluctuate in the near-term as we invest in our growth, we expect our subscription revenue gross margin to increase over time as we achieve additional economies of scale.
Cost of professional services and other revenue increased by $0.8 million, or 7%, for the three months ended April 30, 2020, compared to the three months ended April 30, 2019, primarily due to an increase of $0.9 million in employee compensation costs.
Our gross margin for professional services and other revenue improved to (25)% during the three months ended April 30, 2020 from (31)% during the three months ended April 30, 2019, primarily due to increases in professional services and other revenue.
Operating Expenses
Research and Development Expenses
 
Three Months Ended April 30,
 
 
 
2020
 
2019
 
$ Change
 
% Change
 
(dollars in thousands)
Research and development
$
48,494

 
$
34,032

 
$
14,462

 
42
%
Percentage of revenue
26
%
 
27
%
 
 

 
 

Research and development expenses increased $14.5 million, or 42%, for the three months ended April 30, 2020 compared to the three months ended April 30, 2019. The increase was primarily due to an increase of $14.2 million in employee compensation costs due to higher headcount.

30



Sales and Marketing Expenses
 
Three Months Ended April 30,
 
 
 
2020
 
2019
 
$ Change
 
% Change
 
(dollars in thousands)
Sales and marketing
$
104,043

 
$
82,112

 
$
21,931

 
27
%
Percentage of revenue
57
%
 
65
%
 
 

 
 

Sales and marketing expenses increased $21.9 million, or 27%, for the three months ended April 30, 2020 compared to the three months ended April 30, 2019. The increase was primarily due to an increase of $20.1 million in employee compensation costs related to headcount growth, offset by a decrease of $3.5 million in employee-related expenses primarily due to reduced travel-related expenditures resulting from our temporary shift to an online only sales format. Marketing and event costs increased by $7.5 million primarily due to increases in demand generation programs, advertising, and brand awareness efforts aimed at acquiring new customers, offset by a decrease of $4.9 million due to a change to a virtual format for our annual customer conference in the first quarter of fiscal 2021 compared to an in-person format in the first quarter of fiscal 2020.
General and Administrative Expenses
 
Three Months Ended April 30,
 
 
 
2020
 
2019
 
$ Change
 
% Change
 
(dollars in thousands)
General and administrative
$
34,035

 
$
25,766

 
$
8,269

 
32
%
Percentage of revenue
19
%
 
21
%
 
 

 
 

General and administrative expenses increased $8.3 million, or 32%, for the three months ended April 30, 2020 compared to the three months ended April 30, 2019. The increase was primarily due to an increase of $8.7 million in employee compensation costs primarily related to higher headcount to support our continued growth and an increase of $0.9 million in costs from professional services. The increase was offset by a decrease of $3.4 million due to acquisition-related expenses incurred in the first quarter of fiscal 2020, but not in the first quarter of fiscal 2021.
Interest and Other, Net
 
Three Months Ended April 30,
 
 
 
2020
 
2019
 
$ Change
 
% Change
 
(dollars in thousands)
Interest expense
$
(10,764
)
 
$
(4,241
)
 
(6,523
)
 
154
%
Interest income and other, net
4,899

 
2,900

 
1,999

 
69

Interest and other, net
$
(5,865
)
 
$
(1,341
)
 
$
(4,524
)
 
337
%
Interest expense increased $6.5 million, or 154%, for the three months ended April 30, 2020 compared to the three months ended April 30, 2019, due to an increase of $9.2 million for the 2025 Notes offset by a decrease of $2.7 million for the 2023 Notes, due to the 2023 Notes Partial Repurchase. Interest income and other, net increased $2.0 million, or 69%, for the three months ended April 30, 2020 compared to the three months ended April 30, 2019. The increase was primarily due to interest and other income earned on higher cash and short-term investment balances despite a decrease in interest rates in the three months ended April 30, 2020. We expect interest income for our short-term investment portfolio to decrease in fiscal 2021 due to decreases in interest rates.

Key Business Metrics
We review a number of operating and financial metrics, including the following key metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans, and make strategic decisions.

31



 
As of April 30,
 
2020
 
2019
 
(dollars in thousands)
Customers with annual contract value (ACV) above $100,000
1,580

 
1,142

Dollar-based net retention rate for the trailing 12 months ended
121
%
 
119
%
Current remaining performance obligations
$
619,104

 
$
416,043

Remaining performance obligations
$
1,240,224

 
$
792,047

 
Three Months Ended April 30,
 
2020
 
2019
 
(in thousands)
Calculated billings
$
209,505

 
$
147,195

Total Customers and Number of Customers with Annual Contract Value Above $100,000
As of April 30, 2020, we had over 8,400 customers on our platform. We believe that our ability to increase the number of customers on our platform is an indicator of our market penetration, the growth of our business, and our potential future business opportunities. Increasing awareness of our platform and capabilities, coupled with the mainstream adoption of cloud technology, has expanded the diversity of our customer base to include organizations of all sizes across all industries. Over time, larger customers have constituted a greater share of our revenue, which has contributed to an increase in average revenue per customer. The number of customers who have greater than $100,000 in annual contract value, or ACV, with us was 1,580 and 1,142 as of April 30, 2020 and 2019, respectively. We expect this trend to continue as larger enterprises recognize the value of our platform and replace their legacy identity access management, or IAM infrastructure. We define a customer as a separate and distinct buying entity, such as a company, an educational or government institution, or a distinct business unit of a large company that has an active contract with us or one of our partners to access our platform.
Dollar-Based Net Retention Rate
Our ability to generate revenue is dependent upon our ability to maintain our relationships with our customers and to increase their utilization of our platform. We believe we can achieve these goals by focusing on delivering value and functionality that enables us to both retain our existing customers and expand the number of users and products used within an existing customer. We assess our performance in this area by measuring our Dollar-Based Net Retention Rate. Our Dollar-Based Net Retention Rate measures our ability to increase revenue across our existing customer base through expansion of users and products associated with a customer as offset by churn and contraction in the number of users and/or products associated with a customer.
Our Dollar-Based Net Retention Rate is based upon our ACV which is calculated based on the terms of that customer’s contract and represents the total contracted annual subscription amount as of that period end. We calculate our Dollar-Based Net Retention Rate as of a period end by starting with the ACV from all customers as of twelve months prior to such period end, or Prior Period ACV. We then calculate the ACV from these same customers as of the current period end, or Current Period ACV. Current Period ACV includes any upsells and is net of contraction or churn over the trailing twelve months but excludes revenue from new customers in the current period. We then divide the total Current Period ACV by the total Prior Period ACV to arrive at our Dollar-Based Net Retention Rate.
Our strong Dollar-Based Net Retention Rate is primarily attributable to an expansion of users and upselling additional products within our existing customers. Larger enterprises often implement a limited initial deployment of our platform before increasing their deployment on a broader scale.
Remaining Performance Obligations
Remaining performance obligations, or RPO, represent all future, noncancelable, contracted revenue under our subscription contracts with customers that has not yet been recognized, inclusive of deferred revenue that has been invoiced and noncancelable amounts that will be invoiced and recognized as revenue in future periods. Current RPO represents the portion of RPO expected to be recognized during the next 12 months. RPO fluctuates due to a number of factors, including the timing, duration and dollar amount of customer contracts.

32



Calculated Billings
Calculated Billings represent our total revenue plus the change in deferred revenue and less the change in unbilled receivables in the period. Calculated Billings in any particular period reflects sales to new customers plus subscription renewals and upsells to existing customers, and represent amounts invoiced for subscription, support and professional services. We typically invoice customers in advance in annual installments for subscriptions to our platform.
Calculated Billings increased 42% in the three months ended April 30, 2020 over the three months ended April 30, 2019. As our Calculated Billings continue to grow in absolute terms, we expect our Calculated Billings growth rate to trend down over time.
Non-GAAP Financial Measures
In addition to our results determined in accordance with U.S. generally accepted accounting principles, or GAAP, we believe the following non-GAAP measures are useful in evaluating our operating performance. We use the below referenced non-GAAP financial information, collectively, to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that non-GAAP financial information, when taken collectively with GAAP financial measures, may be helpful to investors because it provides consistency and comparability with past financial performance, and assists in comparisons with other companies, some of which use similar non-GAAP financial information to supplement their GAAP results. The non-GAAP financial information is presented for supplemental informational purposes only, and should not be considered a substitute for financial information presented in accordance with GAAP, and may be different from similarly-titled non-GAAP measures used by other companies. The principal limitation of these non-GAAP financial measures is that they exclude significant expenses that are required by GAAP to be recorded in our financial statements. In addition, they are subject to inherent limitations as they reflect the exercise of judgment by our management about which expenses are excluded or included in determining these non-GAAP financial measures. A reconciliation is provided below for each non-GAAP financial measure to the most directly comparable financial measure stated in accordance with GAAP. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures, and not to rely on any single financial measure to evaluate our business.
Non-GAAP Gross Profit and Non-GAAP Gross Margin
We define non-GAAP gross profit and non-GAAP gross margin as GAAP gross profit and GAAP gross margin, adjusted for stock-based compensation expense and amortization of acquired intangibles.
 
Three Months Ended April 30,
 
2020
 
2019
 
(dollars in thousands)
Gross profit
$
134,373

 
$
90,128

Add:
 
 
 
Stock-based compensation expense included in cost of revenue
5,786

 
3,941

Amortization of acquired intangibles
1,593

 
763

Non-GAAP gross profit
$
141,752

 
$
94,832

Gross margin
73
%
 
72
%
Non-GAAP gross margin
78
%
 
76
%

33



Non-GAAP Operating Loss and Non-GAAP Operating Margin
We define non-GAAP operating loss and non-GAAP operating margin as GAAP operating loss and GAAP operating margin, adjusted for stock-based compensation expense, charitable contributions, amortization of acquired intangibles and acquisition-related expenses.
 
Three Months Ended April 30,
 
2020
 
2019
 
(dollars in thousands)
Operating loss
$
(52,199
)
 
$
(51,782
)
Add:
 
 
 
Stock-based compensation expense
37,728

 
22,685

Charitable contributions
536

 

Amortization of acquired intangibles
1,593

 
763

Acquisition-related expenses(1)

 
3,449

Non-GAAP operating loss
$
(12,342
)
 
$
(24,885
)
Operating margin
(29
)%
 
(41
)%
Non-GAAP operating margin
(7
)%
 
(20
)%
(1) 
We define acquisition-related expenses as costs associated with acquisitions, including transaction costs and other non-recurring incremental costs incurred.
Non-GAAP Net Loss and Non-GAAP Net Margin
We define non-GAAP net loss and non-GAAP net margin as GAAP net loss and GAAP net margin, adjusted for stock-based compensation expense, charitable contributions, amortization of acquired intangibles, acquisition-related expenses, amortization of debt discount and loss on early extinguishment of debt, net of debt issuance costs.
 
Three Months Ended April 30,
 
2020
 
2019
 
(dollars in thousands)
Net loss
$
(57,662
)
 
$
(51,966
)
Add:
 
 
 
Stock-based compensation expense
37,728

 
22,685

Charitable contributions
536

 

Amortization of acquired intangibles
1,593

 
763

Acquisition-related expenses(1)

 
3,449

Amortization of debt discount
9,724

 
3,706

Non-GAAP net loss
$
(8,081
)
 
$
(21,363
)
Net margin
(32
)%
 
(41
)%
Non-GAAP net margin
(4
)%
 
(17
)%
(1) We define acquisition-related expenses as costs associated with acquisitions, including transaction costs and other non-recurring incremental costs incurred.

34




Free Cash Flow and Free Cash Flow Margin
We define Free Cash Flow as net cash provided by operating activities, less cash used for purchases of property and equipment, net of sales proceeds, and capitalized internal-use software costs. Free cash flow margin is calculated as free cash flow divided by total revenue.
 
Three Months Ended April 30,
 
2020
 
2019
 
(dollars in thousands)
Net cash provided by operating activities
$
38,697

 
$
21,262

Less:
 
 
 
Purchases of property and equipment
(7,930
)
 
(7,710
)
Capitalization of internal-use software costs
(1,000
)
 
(369
)
Free cash flow
$
29,767

 
$
13,183

Net cash provided by (used in) investing activities
$
50,604

 
$
(125,607
)
Net cash provided by financing activities
$
14,167

 
$
13,262

Free cash flow margin
16
%
 
11
%

Calculated Billings
We define Calculated Billings as total revenue plus the change in deferred revenue and less the change in unbilled receivables during the period.
 
Three Months Ended April 30,
 
2020
 
2019
 
(in thousands)
Total revenue
$
182,859