Convertible Senior Notes

9 Months Ended

Oct. 31, 2020

In June 2018, the Company issued $250.0 million aggregate principal amount of 0.75% convertible senior notes due 2024 in a private placement and, in July 2018, the Company issued an additional $50.0 million aggregate principal amount of convertible senior notes pursuant to the exercise in full of the initial purchasers’ option to purchase additional convertible senior notes (collectively, the “2024 Notes”). The 2024 Notes are senior unsecured obligations of the Company and interest is payable semiannually in arrears on June 15 and December 15 of each year, beginning on December 15, 2018, at a rate of 0.75% per year. The 2024 Notes will mature on June 15, 2024, unless earlier converted, redeemed or repurchased. The total net proceeds from the offering, after deducting initial purchase discounts and debt issuance costs, were approximately $291.1 million.

In January 2020, the Company issued $1.0 billion aggregate principal amount of 0.25% convertible senior notes due 2026 in a private placement and, also in January 2020, the Company issued an additional $150.0 million aggregate principal amount of convertible senior notes pursuant to the exercise in full of the initial purchasers’ option to purchase additional convertible senior notes (collectively, the “2026 Notes”). The 2026 Notes are senior unsecured obligations of the Company and interest is payable semiannually in arrears on July 15 and January 15 of each year, beginning on July 15, 2020, at a rate of 0.25% per year. The 2026 Notes will mature on January 15, 2026, unless earlier converted, redeemed or repurchased. The

total net proceeds from the offering, after deducting initial purchase discounts and estimated debt issuance costs, were approximately $1.13 billion.

On January 14, 2020, in connection with the issuance of the 2026 Notes, the Company used a portion of the net proceeds to repurchase $210.0 million aggregate principal amount of the 2024 Notes (the “2024 Notes Partial Repurchase”) leaving $90.0 million aggregate principal outstanding on the 2024 Notes immediately after the exchange. The 2024 Notes Partial Repurchase were not pursuant to a redemption notice and were individually privately negotiated transactions. The 2024 Notes Partial Repurchase and issuance of the 2026 Notes were deemed to have substantially different terms due to the significant difference between the value of the conversion option immediately prior to and after the exchange, and accordingly, the 2024 Notes Partial Repurchase was accounted for as a debt extinguishment. The Company used $479.2 million of the net proceeds from the issuance of the 2026 Notes to complete the 2024 Notes Partial Repurchase, of which $175.1 million and $303.9 million were allocated to the liability and equity components of the 2024 Notes, respectively, and $0.2 million was allocated to the proportional interest paid.

Refer to Note 7, Convertible Senior Notes, in the Notes to Consolidated Financial Statements included in Part II, Item 8 of the Company’s 2020 Form 10-K for further information on the 2024 Notes, the 2026 Notes and the 2024 Notes Partial Repurchase.

During the three months ended October 31, 2020, the conditional conversion feature of the 2024 Notes was triggered as the last reported sale price of the Company's Class A common stock was more than or equal to 130% of the conversion price for at least 20 trading days in the period of 30 consecutive trading days ending on October 30, 2020 (the last trading day of the fiscal quarter) and therefore the 2024 Notes are currently convertible, in whole or in part, at the option of the holders from November 1, 2020 through January 31, 2021. Whether the 2024 Notes will be convertible following such period will depend on the continued satisfaction of this condition or another conversion condition in the future. During the nine months ended October 31, 2020, the Company converted immaterial amounts of their 2024 Notes to certain holders, unrelated to the 2024 Notes Partial Repurchase. Since the Company has the election of repaying the 2024 Notes in cash, shares of the Company’s Class A common stock, or a combination of both, the Company continued to classify the liability component of the 2024 Notes as long-term debt on the Company’s consolidated balance sheet as of October 31, 2020.

During the three months ended October 31, 2020, the conditions allowing holders of the 2026 Notes to convert have not been met. The 2026 Notes were therefore not convertible during the three and nine months ended October 31, 2020 and the liability component was classified as long-term debt on the Company’s condensed consolidated balance sheet as of October 31, 2020.

The net carrying amounts of the liability component of the 2024 Notes and 2026 Notes were as follows (in thousands):


	October 31, 2020
	2024 Notes		2026 Notes
Principal	$	90,001	$	1,150,000
Unamortized debt discount	(16,477)		(260,875)
Unamortized debt issuance costs	(1,338)		(13,659)
Net carrying amount	$	72,186	$	875,466

As of October 31, 2020, the total estimated fair values (Level 2) of the outstanding 2024 Notes and the 2026 Notes were approximately $327.2 million and $1.51 billion, respectively. The fair values were determined based on the closing trading price per $100 of the 2024 Notes and 2026 Notes as of the last day of trading for the period. The fair values of the 2024 Notes and 2026 Notes are primarily affected by the trading price of the Company’s Class A common stock and market interest rates.

The following table sets forth the interest expense related to the 2024 Notes and 2026 Notes (in thousands):


	Three Months Ended October 31,								Nine Months Ended October 31,
	2020				2019				2020				2019
	2024 Notes		2026 Notes		2024 Notes		2026 Notes		2024 Notes		2026 Notes		2024 Notes		2026 Notes
Contractual interest expense	$	168	$	718	$	563	$	—	$	506	$	2,156	$	1,688	$	—
Amortization of debt discount	1,002		10,826		3,132		—		2,958		32,058		9,248		—
Amortization of issuance costs	70		469		202		—		203		1,366		585		—
Total	$	1,240	$	12,013	$	3,897	$	—	$	3,667	$	35,580	$	11,521	$	—

Capped Calls

In connection with the pricing of the 2024 Notes and 2026 Notes, the Company entered into privately negotiated capped call transactions with certain counterparties (the “Capped Calls”). The Capped Calls associated with the 2024 Notes each have an initial strike price of approximately $68.15 per share, subject to certain adjustments, which corresponds to the initial conversion price of the 2024 Notes. These Capped Calls have initial cap prices of $106.90 per share, subject to certain adjustments.

The Capped Calls associated with the 2026 Notes each have an initial strike price of approximately $211.20 per share, subject to certain adjustments, which corresponds to the initial conversion price of the 2026 Notes. These Capped Calls have initial cap prices of $296.42 per share, subject to certain adjustments.

Refer to Note 7, Convertible Senior Notes, in the Notes to Consolidated Financial Statements included in Part II, Item 8 of the Company’s 2020 Form 10-K for further information on the Capped Calls.