10-Q 1 okta-4302018_10q.htm 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________________________ 
FORM 10-Q
_____________________________________ 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2018
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
(State or Other Jurisdiction of
Incorporation or Organization)
 
 
 
26-4175727
(I.R.S. Employer
Identification Number)
 
 
301 Brannan Street
San Francisco, California 94107
(Address of Principal executive offices)
 
 
Registrant’s telephone number, including area code: (888) 722-7871
___________________________________________________
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 ý No ¨ 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) Yes ý 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 
ý
 
 
 
 
Smaller reporting company 
¨
(Do not check if a smaller reporting company)
 
 
 
 
 
Emerging growth company
ý
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. ý
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨ No  ý
As of May 31, 2018, the number of shares of registrant’s Class A common stock outstanding was 87,421,525 and the number of shares of the registrant’s Class B common stock outstanding was 19,184,082.



Okta, Inc.
Table of Contents

 
 
Page No.
 
 
 
 
 
 




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




PART I
Item. 1 Financial Statements
OKTA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(unaudited)
 
April 30, 2018
 
January 31, 2018
 
 
As Adjusted (1)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
211,756

 
$
127,949

Short-term investments
335,285

 
101,765

Accounts receivable, net of allowances of $1,569 and $1,472
50,368

 
52,248

Deferred commissions
18,551

 
17,755

Prepaid expenses and other current assets
20,203

 
17,781

Total current assets
636,163

 
317,498

Property and equipment, net
19,176

 
12,540

Deferred commissions, noncurrent
41,077

 
40,755

Intangible assets, net
11,863

 
11,761

Goodwill
6,282

 
6,282

Other assets
12,343

 
10,427

Total assets
$
726,904

 
$
399,263

Liabilities and stockholders’ equity
 

 
 
Current liabilities:
 

 
 
Accounts payable
$
11,830

 
$
9,566

Accrued expenses and other current liabilities
4,896

 
6,187

Accrued compensation
12,652

 
12,374

Deferred revenue
173,548

 
159,816

Total current liabilities
202,926

 
187,943

Convertible senior notes, net
259,920

 

Deferred revenue, noncurrent
4,346

 
4,963

Other liabilities, noncurrent
10,095

 
7,017

Total liabilities
477,287

 
199,923

Commitments and contingencies (Note 9)


 


Stockholders’ equity:
 

 
 
Preferred stock, par value $0.0001 per share; 100,000 shares authorized, no shares issued and outstanding as of April 30, 2018 and January 31, 2018.



Class A Common stock, par value $0.0001 per share; 1,000,000 shares authorized as of April 30, 2018 and January 31, 2018; 87,254 and 70,610 shares issued and outstanding as of April 30, 2018 and January 31, 2018, respectively.
9

 
7

Class B Common stock, par value $0.0001 per share; 120,000 shares authorized as of April 30, 2018 and January 31, 2018; 19,238 and 33,361 shares issued and outstanding as of April 30, 2018 and January 31, 2018, respectively.
2

 
3

Additional paid-in capital
642,460

 
565,653

Accumulated other comprehensive income (loss)
(178
)
 
391

Accumulated deficit
(392,676
)
 
(366,714
)
Total stockholders’ equity
249,617

 
199,340

Total liabilities and stockholders’ equity
$
726,904

 
$
399,263

(1)  
See Note 2 for a summary of adjustments.
See Notes to Condensed Consolidated Financial Statements.

4



OKTA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)
 
Three Months Ended April 30,
 
2018
 
2017
 
 
As Adjusted (1)
 
 
 
 
Revenue:
 
 
 
Subscription
$
76,841

 
$
48,279

Professional services and other
6,780

 
4,046

Total revenue
83,621

 
52,325

Cost of revenue:
 

 
 

Subscription
16,332

 
11,157

Professional services and other
7,775

 
6,306

Total cost of revenue
24,107

 
17,463

Gross profit
59,514

 
34,862

Operating expenses:
 

 
 

Research and development
19,929

 
15,359

Sales and marketing
49,493

 
35,303

General and administrative
15,070

 
11,639

Total operating expenses
84,492

 
62,301

Operating loss
(24,978
)
 
(27,439
)
Other expense, net
(1,215
)
 
(19
)
Loss before provision for (benefit from) income taxes
(26,193
)
 
(27,458
)
Provision for (benefit from) income taxes
(231
)
 
248

Net loss
$
(25,962
)
 
$
(27,706
)
 
 

 
 

Net loss per share attributable to common stockholders, basic and diluted
$
(0.25
)
 
$
(0.70
)
 
 

 
 

Weighted-average shares used to compute net loss per share attributable to common stockholders, basic and diluted
104,203

 
39,783

(1)
See Note 2 for a summary of adjustments.
See Notes to Condensed Consolidated Financial Statements.


5



OKTA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(unaudited)
 
Three Months Ended April 30,
 
2018
 
2017
 
 
As Adjusted (1)
 
 
 
 
Net loss
$
(25,962
)
 
$
(27,706
)
Other comprehensive income (loss):
 
 
 
Net change in unrealized losses on available-for-sale securities
(125
)
 

Foreign currency translation adjustments
(444
)
 
68

Other comprehensive income (loss)
(569
)
 
68

Comprehensive loss
$
(26,531
)
 
$
(27,638
)
(1)
See Note 2 for a summary of adjustments.
See Notes to Condensed Consolidated Financial Statements.


6



OKTA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
 
Three Months Ended April 30,
 
2018
 
2017
 
 
As Adjusted (1)
 
 
 
 
Cash flows from operating activities:
 
 
 
Net loss
$
(25,962
)
 
$
(27,706
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Stock-based compensation
14,135

 
8,906

Depreciation, amortization and accretion
2,069

 
1,575

Amortization of debt discount and issuance costs
2,571

 

Amortization of deferred commissions
4,572

 
2,162

Deferred income taxes
(348
)
 

Other
161

 
270

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
1,719

 
2,243

Deferred commissions
(5,693
)
 
(3,033
)
Prepaid expenses and other assets
(3,983
)
 
(3,756
)
Accounts payable
2,339

 
3,236

Accrued compensation
329

 
(2,121
)
Accrued expenses and other liabilities
(1,051
)
 
323

Deferred revenue
13,114

 
8,215

Net cash provided by (used in) operating activities
3,972

 
(9,686
)
Cash flows from investing activities:
 

 
 

Capitalization of internal-use software costs
(1,051
)
 
(1,208
)
Purchases of property and equipment
(4,477
)
 
(2,448
)
Purchases of securities available for sale
(252,914
)
 

Proceeds from maturities of securities available for sale
19,500

 
10,335

Proceeds from sales of securities available for sale

 
1,538

Net cash provided by (used in) investing activities
(238,942
)
 
8,217

Cash flows from financing activities:
 
 
 

Proceeds from initial public offering, net of underwriters' discounts and commissions

 
199,997

Proceeds from issuance of convertible senior notes, net of issuance costs
335,055

 

Purchase of convertible senior notes hedge
(80,040
)
 

Proceeds from issuance of warrants related to convertible notes
52,440

 

Payments of deferred offering costs

 
(2,246
)
Proceeds from stock option exercises, net of repurchases
12,196

 
2,564

Other
(206
)
 
(207
)
Net cash provided by financing activities
319,445

 
200,108

Effects of changes in foreign currency exchange rates on cash and cash equivalents
(387
)
 
68

Net increase in cash, cash equivalents and restricted cash
84,088

 
198,707

Cash, cash equivalents and restricted cash at beginning of period
136,233

 
23,282

Cash, cash equivalents and restricted cash at end of period
$
220,321

 
$
221,989

 
 
 
 
Supplementary cash flow disclosure:
 
 
 
Non-cash investing and financing activities:
 
 
 
Vesting of early exercised common stock options
243

 
328

Issuance of common stock in connection with warrant exercises

 
272

Deferred offering costs accrued but not yet paid
63

 
1,772

Property and equipment acquired through tenant improvement allowance
3,329

 

Property and equipment and other accrued but not yet paid
147

 
1,931

Issuance of common stock in connection with business combination

 
2,160

Conversion of redeemable convertible preferred stock to common stock

 
228,362

Reconciliation of cash, cash equivalents and restricted cash within the condensed consolidated balance sheets to the amounts shown in the statements of cash flows above:
 
 
 
Cash and cash equivalents
$
211,756

 
$
221,726

Restricted cash, noncurrent included in other assets
8,565

 
263

Total cash, cash equivalents and restricted cash
$
220,321

 
$
221,989

 
 
 
 
(1)
See Note 2 for a summary of adjustments.
 See Notes to Condensed Consolidated Financial Statements.

7



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 provider of identity for the enterprise. The Okta Identity Cloud enables customers to securely connect people to technology, anywhere, anytime and from any device. The Company was incorporated in January 2009 as Saasure Inc., a California corporation, and was later reincorporated in April 2010 under the name Okta, Inc. as a Delaware corporation. The Company is headquartered in San Francisco, California.
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements, which include the accounts of the Company and its wholly owned subsidiaries, have been prepared in conformity with U.S. generally accepted accounting principles (GAAP). All intercompany balances and transactions have been eliminated in consolidation.
The condensed consolidated balance sheet as of January 31, 2018, 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 balance sheet, statements of operations, statements of comprehensive loss and the statements of cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full fiscal year ending January 31, 2019 or any future period.
The Company’s fiscal year ends on January 31. References to fiscal 2019, for example, refer to the fiscal year ending January 31, 2019.
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 12, 2018.
Effective February 1, 2018, the Company adopted the requirements of Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers as discussed in Note 2. All amounts and disclosures set forth in this Form 10-Q have been updated to comply with this standard, as indicated by references to "as adjusted" in these condensed consolidated financial statements and related notes.
Certain reclassifications of prior period amounts have been made in our condensed consolidated financial statements to conform to the current period presentation.
Initial Public Offering
In April 2017, the Company completed an initial public offering (IPO), in which the Company issued and sold 12,650,000 shares of its Class A common stock at a public offering price of $17.00 per share. The Company received aggregate proceeds of $200.0 million from the IPO, net of underwriters’ discounts and commissions, before deducting offering costs of approximately $5.6 million. Immediately prior to the completion of the IPO, all shares of common stock then outstanding were reclassified as Class B common stock, and all shares of redeemable convertible preferred stock then outstanding were converted into 59,491,640 shares of common stock on a one-to-one basis and then reclassified into Class B common stock.
Convertible Senior Notes
In February 2018, the Company issued $345.0 million aggregate principal amount of 0.25% convertible senior notes due February 15, 2023 in a private offering, including the initial purchasers’ exercise in full of their option to purchase additional notes (2023 Notes). The Company received aggregate proceeds of $345.0 million, before deducting costs of issuance of $10.0 million. See Note 8 for additional details.

8



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 the 2023 Notes, valuation of deferred income tax assets and contingencies.
2. Accounting Standards and Significant Accounting Policies
Recently Adopted Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). Topic 606 supersedes the revenue recognition requirements in Accounting Standards Codification (ASC) Topic 605, Revenue Recognition (Topic 605), and requires the recognition of revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. Topic 606 also includes Subtopic 340-40, Other Assets and Deferred Costs - Contracts with Customers, which requires the deferral of incremental costs of obtaining a contract with a customer. Collectively, the Company refers to Topic 606 and Subtopic 340-40 as "ASC 606."
The Company adopted the requirements of ASC 606 as of February 1, 2018, utilizing the full retrospective method of transition. Adoption of ASC 606 resulted in changes to the Company’s accounting policies for revenue recognition and deferred commissions as detailed below. The Company applied ASC 606 using a practical expedient where the consideration allocated to the remaining performance obligations or an explanation of when the Company expects to recognize that amount as revenue for all reporting periods presented before the date of the initial application is not disclosed.
The impact of adopting ASC 606 on fiscal 2018 and 2017 revenue is not material. The primary impact of adopting ASC 606 relates to the deferral of incremental commission costs of obtaining contracts. Under Topic 605, the Company deferred only direct and incremental commission costs to obtain a contract and amortized those costs on a straight-line basis over the term of the related contract, which was generally one to three years. Under ASC 606, the Company defers all incremental commission costs to obtain the contract. The Company amortizes these costs on a straight-line basis over a period of benefit, determined to be generally five years.
The Company adjusted its condensed consolidated financial statements from amounts previously reported due to the adoption of ASC 606. Select condensed consolidated statement of operations line items, which reflect the adoption of ASC 606, are as follows (in thousands except per share data):

9


 
Three Months Ended April 30, 2017
 
As Reported
 
Adjustments
 
As Adjusted
 
(unaudited)
Revenue:
 
 
 
 
 
Subscription
$
48,357

 
$
(78
)
 
$
48,279

Professional services and other
4,650

 
(604
)
 
4,046

Total revenue
53,007

 
(682
)
 
52,325

Gross profit
35,544

 
(682
)
 
34,862

Operating expenses:
 
 
 
 
 
Sales and marketing
37,180

 
(1,877
)
 
35,303

Total operating expenses
64,178

 
(1,877
)
 
62,301

Loss before income taxes
(28,653
)
 
1,195

 
(27,458
)
Net loss
(28,901
)
 
1,195

 
(27,706
)
Net loss per share, basic and diluted
(0.73
)
 
0.03

 
(0.70
)
Select condensed consolidated balance sheet line items, which reflect the adoption of ASC 606, are as follows (in thousands):
 
As of January 31, 2018
 
As Reported
 
Adjustments
 
As Adjusted
 
(unaudited)
Assets
 
 
 
 
 
Current assets:
 
 
 
 
 
Deferred commissions
$
16,481

 
$
1,274

 
$
17,755

Prepaid expenses and other current assets
16,973

 
808

 
17,781

Total current assets
315,416

 
2,082

 
317,498

Deferred commissions, noncurrent
10,971

 
29,784

 
40,755

Total assets
367,397

 
31,866

 
399,263

 
 
 
 
 
 
Liabilities and stockholders’ equity
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Deferred revenue
$
162,633

 
$
(2,817
)
 
$
159,816

Total current liabilities
190,760

 
(2,817
)
 
187,943

Deferred revenue, noncurrent
6,034

 
(1,071
)
 
4,963

Total liabilities
203,811

 
(3,888
)
 
199,923

Accumulated deficit
(402,468
)
 
35,754

 
(366,714
)
Total stockholders’ equity
163,586

 
35,754

 
199,340

Total liabilities and stockholders’ equity
367,397

 
31,866

 
399,263

The adoption of ASC 606 had no impact to cash provided by or used in operating, financing, or investing activities on the Company’s condensed consolidated statement of cash flows. Additionally, the adoption of ASC 606 did not have a material impact on the provision for (benefit from) income taxes. The adoption adjustments impacted the deferred income taxes pertaining to the U.S. entity which are subject to a full valuation allowance.
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, 2018. Except for the accounting policies for revenue recognition and deferred commissions that were updated

10


below as a result of adopting ASC 606, there have been no significant changes to these policies for the three months ended April 30, 2018.
Revenue Recognition
The Company derives revenue from subscription fees (which include support fees) and professional services fees. The Company sells subscriptions to its platform through arrangements that are generally one to five years in length. The Company’s arrangements are generally noncancelable and nonrefundable. Furthermore, if a customer reduces the contracted usage or service level, the customer has no right of refund. The Company’s subscription arrangements do not provide customers with the right to take possession of the software supporting the platform and, as a result, are accounted for as service arrangements. This revenue recognition policy is consistent for sales generated directly with customers and sales generated indirectly through channel partners.
The Company determines revenue recognition through the following steps:
Identification of the contract, or contracts, with a customer
Identification of the performance obligations in the contract
Determination of the transaction price
Allocation of the transaction price to the performance obligations in the contract
Recognition of revenue when, or as, the Company satisfies a performance obligation
Subscription Revenue
Subscription revenue, which includes support, is recognized on a straight-line basis over the noncancelable contractual term of the arrangement, generally beginning on the date that the Company’s service is made available to the customer.
Professional Services Revenue
The Company’s professional services principally consist of customer-specific requests for application integrations, user interface enhancements and other customer-specific requests. Revenue for the Company’s professional services are recognized as services are performed in proportion with their pattern of transfer.
Contracts with Multiple Performance Obligations
Some of the Company’s contracts with customers contain multiple performance obligations. For these contracts, the Company accounts for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative SSP basis. The Company determines SSP based on, if available, observable prices for those related services when sold separately. When observable prices are not available, the Company determines SSP based on overarching pricing objectives and strategies, taking into consideration market conditions and other factors, including customer size, volume purchased, market and industry conditions, product-specific factors and historical sales of the deliverables.
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 collectability of accounts by considering the age of each outstanding invoice and the collection history of each customer and an evaluation of potential risk of loss associated with delinquent accounts. Amounts deemed uncollectible are recorded to these allowances in the condensed consolidated balance sheets with an offsetting decrease in related deferred revenue or a charge in the condensed consolidated statement of operations.
For the three months ended April 30, 2018 and 2017, write-offs were not material.
Deferred Commissions
Sales commissions earned by the Company’s sales force are considered incremental and recoverable costs of obtaining a contract with a customer. Sales commissions for contracts are deferred and then amortized on a straight-line basis over a period of benefit that the Company has determined to be generally five years. The Company determined the period of benefit by taking into consideration its customer contracts, its technology and other factors. Amortization

11


expense is included in sales and marketing expenses in the accompanying condensed consolidated statements of operations.
Sales commissions capitalized as contract costs totaled $5.6 million and $4.2 million during the three months ended April 30, 2018 and 2017, respectively. Amortization of contract costs was $4.6 million and $3.4 million for the three months ended April 30, 2018 and 2017, respectively, and there was no impairment loss in relation to the costs capitalized.
Convertible Senior Notes
The 2023 Notes are accounted for in accordance with FASB ASC Subtopic 470‑20, Debt with Conversion and Other Options. Pursuant to ASC Subtopic 470‑20, issuers of certain convertible debt instruments, such as the 2023 Notes, that have a net settlement feature and may be settled wholly or partially in cash upon conversion are required to separately account for the liability (debt) and equity (conversion option) components of the instrument. The carrying amount of the liability component of the instrument is computed by estimating the fair value of a similar liability without the conversion option. The amount of the equity component is then calculated by deducting the fair value of the liability component from the principal amount of the instrument. The difference between the principal amount and the liability component represents a debt discount that is amortized to interest expense over the respective term of the 2023 Notes using the effective interest rate method. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. In accounting for the issuance costs related to the 2023 Notes, the allocation amount of issuance costs incurred to liability and equity components was based on their relative values.
Recently Issued Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU No. 2016-02 (Topic 842), Leases (ASU 2016-02), which supersedes the guidance in topic ASC 840, Leases. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease.  A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The Company will be required to recognize and measure leases existing at, or entered into after, the beginning of the earliest comparative period presented using a modified retrospective approach, with certain practical expedients available. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements, which will consist primarily of a balance sheet gross up of its operating leases to show equal and offsetting right-of-use assets and lease liabilities.
In February 2018, the FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (ASU 2018-02). Under existing U.S. GAAP, the effects of changes in tax rates and laws on deferred tax balances are recorded as a component of income tax expense in the period in which the law was enacted. When deferred tax balances related to items originally recorded in accumulated other comprehensive income (loss) are adjusted, certain tax effects become stranded in accumulated other comprehensive income. The amendments in ASU 2018-02 allow a reclassification from accumulated other comprehensive income (loss) to retained earnings (accumulated deficit) for stranded income tax effects resulting from the Tax Cuts and Jobs Act of 2017 (the Tax Act). The amendments in this ASU also require certain disclosures about stranded income tax effects. The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption in any period is permitted. The Company’s provisional adjustments recorded in fiscal year 2018 to account for the impact of the Tax Act did not result in stranded tax effects. The Company does not anticipate that the adoption of this standard will have a material impact on its condensed consolidated financial statements.
3. Business Combination
On February 17, 2017, the Company acquired the rights to hire certain employees and a non-exclusive intellectual property license from Stormpath, Inc. (Stormpath), a privately-held technology company which had built a user management and authentication service for software development teams. The transaction was accounted for as a business combination. The total consideration of $3.7 million, consisting of 200,000 shares of common stock valued at $2.2 million, at the time of the transaction, issued to Stormpath and replacement awards of $1.5 million issued to the hired employees, was recognized as goodwill.

12



In addition, the Company issued to Stormpath an incremental 800,000 shares of restricted common stock valued at $8.6 million, at the time of the transaction, which is being recognized as post-combination stock-based compensation expense. See Note 10 for further details.
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, 2018 and January 31, 2018 were as follows (in thousands):  
 
As of April 30, 2018
 
Amortized
Cost
 
Unrealized
Gain
 
Unrealized
Loss
 
Estimated
Fair Value 
 
 
 
 
 
 
 
 
 
(unaudited)
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
145,932

 
$

 
$

 
$
145,932

Commercial paper
9,972

 

 

 
9,972

U.S. treasury securities
9,995

 

 

 
9,995

Corporate debt securities
6,996

 

 
(1
)
 
6,995

Total cash equivalents
$
172,895

 
$

 
$
(1
)
 
$
172,894

Short-term investments:
 

 
 

 
 

 
 

Commercial paper
$
43,639

 
$

 
$

 
$
43,639

U.S. treasury securities
251,000

 

 
(270
)
 
250,730

Corporate debt securities
40,972

 
1

 
(57
)
 
40,916

Total short-term investments
335,611

 
1

 
(327
)
 
335,285

Total
$
508,506

 
$
1

 
$
(328
)
 
$
508,179

 
As of January 31, 2018
 
Amortized
Cost
 
Unrealized
Gain
 
Unrealized
Loss
 
Estimated
Fair Value 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
90,770

 
$

 
$

 
$
90,770

Total cash equivalents
$
90,770

 
$

 
$

 
$
90,770

Short-term investments:
 
 
 

 
 

 
 

Commercial paper
$
15,946

 
$

 
$

 
$
15,946

U.S. treasury securities
61,896

 

 
(158
)
 
61,738

Corporate debt securities
24,125

 

 
(44
)
 
24,081

Total short-term investments
101,967

 

 
(202
)
 
101,765

Total
$
192,737

 
$

 
$
(202
)
 
$
192,535

All short-term investments were designated as available-for-sale securities as of April 30, 2018 and January 31, 2018.

13



The following tables present the contractual maturities of the Company’s short-term investments as of April 30, 2018 and January 31, 2018 (in thousands):
 
 
As of April 30, 2018
 
As of January 31, 2018
 
Amortized
Cost
 
Estimated
Fair Value
 
Amortized
Cost
 
Estimated
Fair Value
 
 
 
 
 
 
 
 
 
(unaudited)
 
 
 
 
Due within one year
$
306,045

 
$
305,761

 
$
93,421

 
$
93,237

Due between one to five years
29,566

 
29,524

 
8,546

 
8,528

 
$
335,611

 
$
335,285

 
$
101,967

 
$
101,765

 
 
 
 
 
 
 
 
The Company had 55 and 23 short-term investments in unrealized loss positions as of April 30, 2018 and January 31, 2018, respectively. There were no material gross unrealized gains or losses from available-for-sale securities and no 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, 2018 or 2017.
For available-for-sale debt securities that have unrealized losses, the Company evaluates whether (i) it has the intention to sell any of these investments and (ii) whether it is not more likely than not that it will be required to sell any of these available-for-sale debt securities before recovery of the entire amortized cost basis. Based on this evaluation, the Company determined that there were no other-than-temporary impairments associated with short-term investments as of April 30, 2018 and January 31, 2018.
5. Fair Value Measurements
The Company measures its financial assets at fair value each reporting period using a fair value hierarchy that prioritizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. A financial instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Three levels of inputs may be used to measure as follows:
Level 1-Valuations based on observable inputs that reflect quoted prices for identical assets or liabilities in active markets.
Level 2-Valuations based on inputs that are directly or indirectly observable in the marketplace.
Level 3-Valuations based on unobservable inputs that are supported by little or no market activity.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents information about the Company’s financial assets and liabilities that are measured at fair value on a recurring basis using the above input categories (in thousands):   

14



 
As of April 30, 2018
 
Level 1
 
Level 2 
 
Level 3
 
Total
 
 
 
 
 
 
 
 
 
(unaudited)
Assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
145,932

 
$

 
$

 
$
145,932

Commercial paper

 
9,972

 

 
9,972

U.S. treasury securities

 
9,995

 

 
9,995

Corporate debt securities

 
6,995

 

 
6,995

Total cash equivalents
$
145,932

 
$
26,962

 
$

 
$
172,894

Short-term investments:
 

 
 

 
 

 
 

Commercial paper
$

 
$
43,639

 
$

 
$
43,639

U.S. treasury securities

 
250,730

 

 
250,730

Corporate debt securities

 
40,916

 

 
40,916

Total short-term investments

 
335,285

 

 
335,285

Total cash equivalents and short-term investments
$
145,932

 
$
362,247

 
$

 
$
508,179

 
As of January 31, 2018
 
Level 1
 
Level 2 
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
90,770

 
$

 
$

 
$
90,770

Total cash equivalents
$
90,770

 
$

 
$

 
$
90,770

Short-term investments:
 

 
 

 
 

 
 

Commercial paper
$

 
$
15,946

 
$

 
$
15,946

U.S. treasury securities

 
61,738

 

 
61,738

Corporate debt securities

 
24,081

 

 
24,081

Total short-term investments

 
101,765

 

 
101,765

Total cash equivalents and short-term investments
$
90,770

 
$
101,765

 
$

 
$
192,535

The Company had no transfers between levels of the fair value hierarchy of its assets measured at fair value.
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.

15



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, 2018
 
Net Carrying Amount Before Unamortized Debt Issuance Costs
 
Estimated
Fair Value 
 
 
 
 
 
(unaudited)
Convertible senior notes
$
267,418

 
$
394,680

The difference between the principal amount of the 2023 Notes, $345.0 million, and the net carrying amount before unamortized debt issuance costs represents the unamortized debt discount (see Note 8). The estimated fair value of the 2023 Notes, which the Company has classified as Level 2 financial instruments, was determined based on the quoted bid price of the convertible senior notes in an over-the-counter market on the last trading day of the reporting period. Based on the closing price of our common stock of $42.81 on April 30, 2018, the if-converted value of the 2023 Notes was less than the principal amount of $345.0 million.
6. Goodwill and Intangible Assets, net
Goodwill
As of April 30, 2018 and January 31, 2018, goodwill was $6.3 million. No goodwill impairments were recorded during the three months ended April 30, 2018 and 2017.
Intangible Assets, net
Intangible assets consisted of the following (in thousands):  
 
As of April 30, 2018
 
Gross
 
Accumulated Amortization
 
Write-offs
 
Net
 
 
 
 
 
 
 
 
 
(unaudited)
Capitalized internal-use software costs
$
17,706

 
$
(6,282
)
 
$

 
$
11,424

Software licenses
1,023

 
(584
)
 

 
439

 
$
18,729

 
$
(6,866
)
 
$

 
$
11,863

 
 
 
 
 
 
 
 
 
As of January 31, 2018
 
Gross
 
Accumulated Amortization
 
Write-offs
 
Net
Capitalized internal-use software costs
$
17,511

 
$
(5,172
)
 
$
(1,077
)
 
$
11,262

Software licenses
1,094

 
(558
)
 
(37
)
 
499

Purchased developed technology
570

 
(570
)
 

 

 
$
19,175

 
$
(6,300
)
 
$
(1,114
)

$
11,761

 
 
 
 
 
 
 
 
The Company capitalized $1.3 million and $1.4 million of internal-use software costs in the three months ended April 30, 2018 and 2017, respectively. Included in the total amount capitalized is stock-based compensation expense of $0.2 million for each of the three months ended April 30, 2018 and 2017.
Intangible amortization expense was $1.2 million and $0.7 million for the three months ended April 30, 2018 and 2017, respectively.

16



7. Deferred Revenue and Performance Obligations

Deferred Revenue
Deferred revenue, which is a contract liability, consists primarily of payments received in advance of revenue recognition under the Company’s contracts with customers and is recognized as the revenue recognition criteria are met.
Subscription revenue recognized during the three months ended April 30, 2018 and 2017 that was included in the deferred revenue balances at the beginning of the respective periods was $64.6 million and $40.9 million, respectively. Professional services and other revenue recognized in the same periods from deferred revenue balances at the beginning of the respective periods was not material.
Transaction Price Allocated to the Remaining Performance Obligations
Transaction price allocated to the remaining performance obligations represents contracted revenue that has not yet been recognized, which includes deferred revenue for subscription contracts that have been invoiced and will be recognized as revenue in future periods.
As of April 30, 2018, total remaining noncancelable performance obligations under the Company’s subscription contracts with customers was approximately $499.1 million, and the Company expects to recognize revenue on approximately 56% of these remaining performance obligations over the next 12 months, with the balance to be recognized thereafter. Revenue from remaining performance obligations for professional services and other contracts as of April 30, 2018 was not material.
Unbilled Receivables
The Company receives payments from customers based on billing schedules as established in its contracts. Unbilled receivables, which is a contract asset, relate to the Company’s rights to consideration for performance obligations satisfied but not billed at the reporting date on contracts. Unbilled receivables were $1.6 million and $0.8 million as of April 30, 2018 and January 31, 2018, respectively, and are included in prepaid expenses and other current assets in the condensed consolidated balance sheets. Unbilled receivables are transferred to accounts receivable when the rights become unconditional.
8. Debt and Financing Arrangements
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 approximately $335.0 million.
The terms of the 2023 Notes are governed by an Indenture by and between the Company and Wilmington Trust, National Association, as Trustee (the Indenture). Upon conversion, the 2023 Notes may be settled in cash, shares of Class A common stock or a combination of cash and shares of Class A common stock, at the Company’s election. It is the Company’s current intent to settle the principal amount of the 2023 Notes with cash.
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 2023 Notes, which is equal to an initial conversion price of approximately $48.36 per share of Class A common stock, subject to adjustment under certain circumstances in accordance with the terms of the Indenture. Prior to the close of business on the business day immediately preceding October 15, 2022, holders of the 2023 Notes may convert all or a portion of their 2023 Notes only in multiples of $1,000 principal amount, under the following circumstances:
during any fiscal quarter commencing after the fiscal quarter ending on April 30, 2018 (and only during such fiscal quarter), if the last reported sale price of Class A common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price of the 2023 Notes on each applicable trading day;

17



during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of the 2023 Notes for each trading day of that five consecutive trading day period was less than 98% of the product of the last reported sale price of Class A common stock and the conversion rate on such trading day; or
upon the occurrence of specified corporate events, as described in the Indenture.
On or after October 15, 2022 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their 2023 Notes regardless of the foregoing circumstances. During the three months ended April 30, 2018, the conditions allowing holders of the 2023 Notes to convert were not met.
Holders of the 2023 Notes who convert their 2023 Notes in connection with certain corporate events that constitute a make-whole fundamental change (as defined in the Indenture) are, under certain circumstances, entitled to an increase in the conversion rate. Additionally, in the event of a corporate event that constitutes a fundamental change (as defined in the Indenture), holders of the 2023 Notes may require the Company to repurchase all or a portion of their 2023 Notes at a price equal to 100% of the principal amount of the 2023 Notes being repurchased, plus any accrued and unpaid interest.
In accounting for the issuance of the 2023 Notes, the Company separated the 2023 Notes into liability and equity components. The carrying amounts of the liability components were calculated by measuring the fair value of similar liabilities that do not have associated convertible features. The carrying amount of the equity components representing the conversion option were determined by deducting the fair value of the liability component from the par value of the 2023 Notes. The Company bifurcated the conversion option of the 2023 Notes from the debt instrument, classified the conversion option in equity and will accrete the resulting debt discount as interest expense over the contractual term of the 2023 Notes using the effective interest rate method. The equity component is not remeasured as long as they continue to meet the conditions for equity classification.
The effective interest rate of the liability component of the 2023 Notes is 5.68%. This interest rate was based on the interest rates of similar liabilities held by other companies with similar credit risk ratings at the time of issuance that did not have associated convertible features. The following table sets forth total interest expense recognized related to the 2023 Notes (in thousands):
 
Three Months Ended April 30, 2018
 
(unaudited)
Contractual interest expense
$
146

Amortization of debt issuance costs
190

Amortization of debt discount
2,381

Total
$
2,717

 
 
Total issuance costs of $10.0 million related to the 2023 Notes were allocated between liability and equity in the same proportion as the allocation of the total proceeds to the liability and equity components. Issuance costs attributable to the liability component are being amortized to interest expense over the respective term of the 2023 Notes using the effective interest rate method. The issuance costs attributable to the equity component were netted against the respective equity component in Additional paid-in capital. The Company recorded liability issuance costs of $7.7 million and equity issuance costs of $2.3 million.

18



The 2023 Notes, net consisted of the following (in thousands):
 
As of April 30, 2018
 
(unaudited)
Liability component:
 
Principal
$
345,000

Less: unamortized debt issuance costs and debt discount
(85,080
)
Net carrying amount
$
259,920

 
 
 
At Issuance
 
(unaudited)
Equity component:
 
2023 Notes
$
79,962

Less: issuance costs
(2,320
)
Carrying amount of the equity component(1)
$
77,642

 
 
(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 hedge transactions with respect to its Class A common stock (the 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 $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.
See Note 11 for the tax impacts of the 2023 Notes and Note Hedges.
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 (the 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 $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 was recorded as an increase to Additional paid-in capital in the condensed consolidated balance sheets.
Loan and Security Agreement
The Company has available a line of credit (Revolving Line) with Silicon Valley Bank (SVB) in the amount of $40.0 million, with a maturity date of November 21, 2018. The available amount, not to exceed $40.0 million, is based on certain revenue metrics and is reduced by letters of credit totaling $4.2 million as of April 30, 2018 established in connection with facility lease agreements. As of April 30, 2018, $35.8 million was available under the Revolving Line.

19



Proceeds from loans made under the Revolving Line may be borrowed, repaid and reborrowed until November 21, 2018. Repayment of any outstanding proceeds are payable on November 21, 2018, but may be prepaid without penalty. Borrowings under the Revolving Line bear interest at an annual rate based on the one-year Prime rate plus a spread of 0.75%. Interest is payable quarterly. The Company is required to pay a quarterly facility fee to SVB of 0.15% per annum on the average undrawn portion available under the facility plus balances of outstanding letters of credits. Additionally, the Company is required to pay an upfront, one-time, commitment fee of $0.1 million and annual anniversary fees of $0.1 million on the amendment’s first and second anniversary dates.
As of April 30, 2018 and January 31, 2018, no amounts had been drawn under the Revolving Line and the Company was in compliance with all covenants pursuant to the loan and security agreement.
9. Commitments and Contingencies
Leases
The Company leases office space under noncancelable operating leases for its San Francisco, California headquarters, as well as its offices in various cities in the United States, United Kingdom, Australia and Canada. These office leases expire on various dates through October 2028.
Deferred rent was $9.0 million and $5.5 million as of April 30, 2018 and January 31, 2018, respectively, which is included in accrued expenses and other current liabilities and other liabilities, noncurrent in the condensed consolidated balance sheets. Rent expense was $3.4 million and $2.2 million for the three months ended April 30, 2018 and 2017, respectively.
In conjunction with the execution of leases, letters of credit in the aggregate amount of $12.4 million and $12.2 million were issued and outstanding as of April 30, 2018 and January 31, 2018, respectively. No draws have been made under such letters of credit. The Company secured its new corporate headquarters lease in San Francisco with an $8.0 million letter of credit, which is designated as restricted cash and included in other assets on its condensed consolidated balance sheet as of April 30, 2018.
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, 2018.
10. 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,
 
2018
 
2017
 
 
 
 
 
(unaudited)
Cost of revenue
 
 
 
Subscription
$
1,529

 
$
686

Professional services and other
889

 
469

Research and development
4,213

 
3,301

Sales and marketing
4,153

 
2,375

General and administrative
3,351

 
2,075

Total
$
14,135

 
$
8,906

 
 
 
 

20



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, 2018 and 2017. See Note 6 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). Upon the completion of the Company’s IPO in April 2017, the Company ceased granting equity under the 2009 Plan, and all shares that remained available for future issuance under the 2009 Plan at that time were transferred to the 2017 Plan. As of April 30, 2018, options granted under the 2009 Plan to purchase 21,910,897 shares of Class B common stock remain outstanding and options granted under the 2017 Plan to purchase 764,596 shares of Class A common stock remain outstanding.
Shares of common stock reserved for future issuance are as follows:
 
As of
 
April 30, 2018
 
(unaudited)
Stock options and unvested RSUs outstanding
26,108,047

Available for future stock option and RSU grants
14,193,351

Available for ESPP
3,470,337

 
43,771,735

 
 
Stock Options
A summary of the Company’s stock option activity and related information is as follows:  
 
Number of
Options 
 
Weighted-
Average
Exercise
Price 
 
Weighted-
Average
Remaining
Contractual
Term (Years)
 
Aggregate
Intrinsic Value
(in thousands)
Outstanding as of January 31, 2018
24,917,045

 
$
7.37

 
7.6
 
$
550,173

Granted
684,500

 
39.21

 
 
 
 
Exercised
(2,461,383
)
 
4.95

 
 
 
 
Canceled
(464,669
)
 
8.24

 
 
 
 
Outstanding as of April 30, 2018 (unaudited)
22,675,493

 
$
8.58

 
7.7
 
$
776,287

As of April 30, 2018
 
 
 
 
 
 
 
Vested and exercisable (unaudited)
9,285,314

 
$
5.81

 
6.9
 
$
343,540

 The weighted-average grant-date fair value of options granted was $17.21 and $5.36 during the three months ended April 30, 2018 and 2017, respectively. The total grant-date fair value of stock options vested was $5.6 million and $4.6 million during the three months ended April 30, 2018 and 2017, respectively. The intrinsic value of the options exercised, which represents the difference between the fair market value of the Company’s common stock on the date of exercise and the exercise price of each option, was $81.9 million and $14.1 million for the three months ended April 30, 2018 and 2017, respectively.
As of April 30, 2018, there was a total of $58.0 million of unrecognized stock-based compensation expense, which is expected to be recognized over a weighted-average period of 2.5 years.

21



The Company used the Black-Scholes option pricing model to estimate the fair value of stock options granted with the following assumptions:
 
Three Months Ended April 30,
 
2018
 
2017
 
 
 
 
 
(unaudited) 
Expected volatility
40%
 
40% - 41%
Expected term (in years)
6.25
 
6.0 - 6.4
Risk-free interest rate
2.70%
 
2.06% - 2.21%
Expected dividend yield
 
Restricted Stock Units
A summary of the Company’s RSU activity and related information is as follows:  
 
Number of
RSUs
 
Weighted-
Average
Grant Date Fair Value Per Share
 
 
 
 
Outstanding as of January 31, 2018
2,862,929

 
$
24.38

Granted
717,630

 
39.97

Vested
(58,825
)
 
17.00

Forfeited
(89,180
)
 
24.74

Outstanding as of April 30, 2018 (unaudited)
3,432,554

 
$
27.75

As of April 30, 2018, there was $81.8 million of unrecognized stock-based compensation expense related to unvested RSUs, which is expected to be recognized over a weighted-average period of 3.4 years based on vesting under the award service conditions.
Equity Awards Issued in Connection with Business Combination
In connection with the Stormpath transaction in February 2017, the Company issued 800,000 shares of restricted common stock to Stormpath with an aggregate fair value of $8.6 million at the time of the transaction to be recognized as post combination stock-based compensation. The restricted common stock vests ratably on the first and second anniversaries of the transaction date upon achievement of the respective performance conditions, of which 400,000 shares vested during the three months ended April 30, 2018. As of April 30, 2018, there was $1.7 million of unrecognized compensation expense related to restricted common stock which is expected to be recognized over the remaining weighted average life of 0.8 years.
The Company separately entered into retention arrangements with certain employees of Stormpath and issued 598,500 restricted stock awards under the 2009 Plan with an aggregate fair value of $6.6 million at the time of the transaction with performance conditions. Additionally, the Company granted 518,900 service-based stock options under the 2009 Plan to certain Stormpath employees with an aggregate fair value of $2.5 million to vest ratably over the requisite four-year service period. Of the $9.1 million total aggregate fair value of the awards, $1.5 million was related to pre-combination service and was recognized as goodwill and a reduction to the post-combination compensation expense. The post-combination expenses for the restricted stock awards and stock options are $5.5 million and $2.1 million, respectively. The expense related to the restricted stock awards is being recognized over two or three years based on an accelerated attribution method. The expense for the stock options is being recognized ratably over the requisite service period.
During the three months ended April 30, 2018, 210,850 shares of restricted stock awards vested. As of April 30, 2018, there was $1.8 million of unrecognized compensation expense related to unvested restricted stock awards, which is expected to be recognized over the remaining weighted average life of 1.3 years.

22



As of April 30, 2018, there was $1.5 million of unrecognized compensation cost related to unvested stock options, which is expected to be recognized over the remaining weighted average life of 2.2 years. The related stock options expense and activity are included within the Stock Options section above.
Employee Stock Purchase Plan
As of April 30, 2018, there was $1.5 million of unrecognized stock-based compensation expense related to ESPP that is expected to be recognized over an average vesting period of 0.2 years.
11. Income Taxes
For the three months ended April 30, 2018 and 2017, the Company recorded a tax benefit of $0.2 million and a tax provision of $0.2 million on a pretax loss of $26.2 million and $27.5 million, respectively. The effective tax rate for the three months ended April 30, 2018 and 2017 was 0.9% and (0.9)%, respectively. The effective tax rate for the three months ended April 30, 2018 differs from the statutory rate primarily as a result of tax benefits from stock-based compensation in the United Kingdom, providing no benefit on pretax losses incurred in the United States, as the Company has determined that the benefit of the losses is not more likely than not to be realized, and changes to provisional amounts recorded for certain aspects of the Tax Act. The effective tax rate for the three months ended April 30, 2017 differs from the statutory rate primarily as a result of the Company not providing any benefit on pretax losses incurred in the United States, as the Company has determined that the benefit of the losses is not more likely than not to be realized.
The difference between the book and tax bases of the 2023 Notes, Note Hedges and debt issuance costs resulted in deductible temporary differences and corresponding deferred tax assets of $0.6 million, which are subject to a full valuation allowance.
On December 22, 2017, the Tax Act was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease to 21% effective for tax years beginning after December 31, 2017, and changes to how the United States imposes income tax on multinational corporations.
In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which allows the Company to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. The Company recorded a provisional amount of $61.0 million as of January 31, 2018 related to the remeasurement of certain deferred tax balances before valuation allowance. For the three months ended April 30, 2018, the Company has not made a material adjustment to the provisional amount. The Company will continue to analyze and refine the calculations to the measurement of these balances. For the three months ended April 30, 2018, no other changes have been made to the provisional amounts previously recorded. The Company expects to complete its analysis within the measurement period in accordance with SAB 118.
The United Kingdom tax authority completed its examination of fiscal year 2016 income tax returns for the Company’s UK subsidiary during the three months ended April 30, 2018. As a result, the Company’s UK subsidiary is no longer subject to examination for fiscal years prior to 2017.

23



12. 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,
 
2018
 
2017
 
Class A
 
Class B
 
Class A
 
Class B
 
 
 
 
 
 
 
 
 
(unaudited)
Numerator:
 
 
 
 
 
 
 
Net loss (1)
$
(19,929
)
 
$
(6,033
)
 
$
(2,292
)
 
$
(25,414
)
Denominator:
 
 
 
 
 
 
 
Weighted-average shares outstanding - basic and diluted
79,988

 
24,215

 
3,291

 
36,492

Net loss per share attributable to common stockholders, basic and diluted:
$
(0.25
)
 
$
(0.25
)
 
$
(0.70
)
 
$
(0.70
)
 
 
 
 
 
 
 
 
(1)  
Net loss for the three months ended April 30, 2017 has been adjusted. See Note 2 for a summary of adjustments.
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,
 
2018
 
2017
 
 
 
 
 
(unaudited)
Unvested restricted common stock issued and outstanding
400

 
800

Stock options issued and outstanding
22,675

 
33,939

Unvested RSUs issued and outstanding
3,433

 
59

Unvested restricted stock awards issued and outstanding
388

 
599

Shares committed under the ESPP
1,062

 
1,040

Unvested shares subject to repurchase
139

 
439

 
28,097

 
36,876

The Company expects to settle the principal amount of the 2023 Notes in cash, and therefore, the Company uses the treasury stock method for calculating any potential dilutive effect of the conversion option on diluted net income per share, if applicable. The conversion option 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 price of the 2023 Notes of $48.36 per share. During the three months ended April 30, 2018, the weighted average price per share of the Company’s Class A common stock was below the conversion price of the 2023 Notes.

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 provider of identity for the enterprise. The Okta Identity Cloud is our category-defining platform that enables our customers to securely connect people to technology, anywhere, anytime and from any device. Every day, people use Okta to securely access a wide range of cloud applications, websites, mobile applications and services from a multitude of devices. Workforces sign into our platform to seamlessly access the applications they need to do their most important work. Organizations use our platform to provide their customers with more modern experiences online and via mobile devices, and to connect with partners to streamline their operations. Developers leverage our platform to securely embed identity into their software.
Our approach to identity eliminates duplicative, sprawling credentials and disparate authentication policies, allowing our customers to simplify and scale their IT and security infrastructures more efficiently as the number of users, devices, clouds and other technologies in their ecosystem grows. Our customers are able to achieve fast time to value, lower costs and increased efficiency while improving compliance and providing security that is persistent, perimeter-less and context-aware. These benefits are delivered through multiple products on a unified platform, our superior cloud architecture and a vast and increasing network of integrations.
We founded the company in 2009 to reinvent identity for the modern cloud era, where identity is the critical foundation for connection and trust between users and technology. Since our inception, we have consistently innovated to enhance our platform and our product offerings.
In parallel to this product innovation, we have rapidly expanded the breadth and depth of the Okta Integration Network, which provides customers with a pre-integrated set of cloud, mobile and web applications that spans the functionality of our products. As of April 30, 2018, we had over 5,500 integrations with cloud, mobile and web applications and IT infrastructure providers.
We employ a SaaS business model. We focus on acquiring and retaining our customers and increasing their spending with us through expanding the number of users who access our platform and up-selling additional products. We sell our products directly through our field and inside sales teams, as well as indirectly through our network of independent software vendors, or ISVs, and channel 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. Our customers use our platform to manage and secure their extended enterprise (employees, contractors and partners), which we previously referred to as the internal use case. Organizations also use our platform to manage and secure their customers' identities via the powerful APIs we have developed, which we previously referred to as the external use case. We typically invoice customers in advance in annual installments for subscriptions to our platform.
Components of Results of Operations
Revenue
Subscription Revenue.    Subscription revenue primarily consists of fees for access to and usage of our cloud-based platform and related support. We generate subscription fees pursuant to noncancelable contracts. 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. We recognize subscription revenue ratably over the term of the subscription period beginning on the date access to our platform is provided.

25



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 expect capitalized internal-use software costs and related amortization to increase. We expect our investment in technology to expand the capability of our platform enabling us to improve our gross margin over time. The level and timing of investment in these areas could affect our cost of subscription revenue in the future.
Cost of Professional Services and Other.    Cost of professional services consists primarily of employee-related costs for our professional services delivery team, travel-related costs, and costs of outside services associated with supplementing our professional services delivery team. The cost of providing professional services has historically been higher than the associated revenue we generate.
Gross Margin.    Gross margin is gross profit expressed as a percentage of total revenue. Our gross margin may fluctuate from period to period as our revenue fluctuates, and as a result of the timing and amount of investments to expand our hosting capacity, our continued efforts to build platform support and professional services teams, increased stock-based compensation expenses, as well as the amortization of costs associated with capitalized internal-use software and acquired intangible assets.
Operating Expenses
Research and Development.    Research and development expenses consist primarily of employee compensation costs and allocated overhead. We believe that continued investment in our platform is important for our growth. We expect our research and development expenses will increase in absolute dollars as our business grows.
Sales and Marketing.    Sales and marketing expenses consist primarily of employee compensation costs, costs of general marketing activities and promotional activities, travel-related expenses and allocated overhead. Commissions earned by our sales force that are considered incremental and recoverable costs of obtaining a contract with a customer are deferred and then amortized on a straight-line basis over a period of benefit that we have determined to be generally five years. We expect our sales and marketing expenses will increase in absolute dollars and continue to be our largest operating expense category for the foreseeable future as we expand our sales and marketing efforts. However, we expect our sales and marketing expenses to decrease as a percentage of our revenue as our revenue grows.
General and Administrative.    General and administrative expenses consist primarily of employee compensation costs for finance, accounting, legal and human resources personnel. In addition, general and administrative expenses include non-personnel costs, such as legal and other professional fees, charitable contributions, and all other supporting corporate expenses not allocated to other departments.

26



We expect to incur additional expenses as a result of operating as a public company, including costs to comply with the rules and regulations applicable to companies listed on a national securities exchange, costs related to compliance and reporting obligations pursuant to the rules and regulations of the Securities and Exchange Commission (SEC), and increased expenses for insurance, investor relations and professional services. We expect our general and administrative expenses will increase in absolute dollars as our business grows.
Other Expense, Net
Other expense, net consists of interest income from our investment holdings and interest expense, which primarily includes amortization of debt discount and issuance costs and contractual interest expense for our $345.0 million aggregate principal amount of 0.25% convertible senior notes due February 15, 2023 (2023 Notes).
Provision for (Benefit from) for 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.
Results of Operations
The following tables set forth our results of operations for the periods presented in dollars and as a percentage of our revenue:
 
Three Months Ended April 30,
 
2018
 
2017
 
 
As Adjusted (1)
 
 
 
 
 
(in thousands)
Revenue:
 
 
 
Subscription
$
76,841

 
$
48,279

Professional services and other
6,780

 
4,046

Total revenue
83,621

 
52,325

Cost of revenue:
 

 
 

Subscription(2)
16,332

 
11,157

Professional services and other(2)
7,775

 
6,306

Total cost of revenue
24,107

 
17,463

Gross profit
59,514

 
34,862

Operating expenses:
 

 
 

Research and development(2)
19,929

 
15,359

Sales and marketing(2)
49,493

 
35,303

General and administrative(2)
15,070

 
11,639

Total operating expenses
84,492

 
62,301

Operating loss
(24,978
)
 
(27,439
)
Other expense, net
(1,215
)
 
(19
)
Loss before provision for (benefit from) income taxes
(26,193
)
 
(27,458
)
Provision for (benefit from) income taxes
(231
)
 
248

Net loss
$
(25,962
)
 
$
(27,706
)
_______________________________
(1)  
See Note 2 to our condensed consolidated financial statements for a summary of adjustments.  
(2) 
Includes stock-based compensation expense as follows:

27



 
Three Months Ended April 30,
 
2018
 
2017
 
 
 
 
 
(in thousands)
Cost of subscription revenue
$
1,529

 
$
686

Cost of professional services and other revenue
889

 
469

Research and development
4,213

 
3,301

Sales and marketing
4,153

 
2,375

General and administrative
3,351

 
2,075

Total stock-based compensation expense
$
14,135

 
$
8,906

 
Three Months Ended April 30,
 
2018
 
2017
 
 
As Adjusted (1)
Revenue
 
 
 
Subscription
92
 %
 
92
 %
Professional services and other
8

 
8

Total revenue
100

 
100

Cost of revenue
 
 
 
Subscription
20

 
21

Professional services and other
9

 
12

Total cost of revenue
29

 
33

Gross profit
71

 
67

Operating expenses
 
 
 
Research and development
24

 
29

Sales and marketing
59

 
68

General and administrative
18

 
22

Total operating expenses
101

 
119

Operating loss
(30
)
 
(52
)
Other expense, net
(1
)
 

Loss before provision for (benefit from) income taxes
(31
)
 
(52
)
Provision for (benefit from) income taxes

 

Net loss
(31
)%
 
(52
)%
_______________________________
(1)  
See Note 2 to our condensed consolidated financial statements for a summary of adjustments.


28



Comparison of the Three Months Ended April 30, 2018 and 2017
Revenue
 
Three Months Ended April 30,
 
 
 
2018
 
2017
 
$ Change
 
% Change
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Revenue:
 
 
 
 
 
 
 
Subscription
$
76,841

 
$
48,279

 
$
28,562

 
59
%
Professional services and other
6,780

 
4,046

 
2,734

 
68

Total revenue
$
83,621

 
$
52,325

 
$
31,296

 
60

 
 
 
 
 
 
 
 
Percentage of revenue:
 

 
 
 
 

 
 

Subscription
92
%
 
92
%
 
 

 
 

Professional services and other
8

 
8

 
 

 
 

Total
100
%
 
100
%
 
 

 
 

Subscription revenue increased by $28.6 million, or 59%, for the three months ended April 30, 2018 compared to the three months ended April 30, 2017. 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 $2.7 million, or 68%, for the three months ended April 30, 2018 compared to the three months ended April 30, 2017. The increase in professional services revenue primarily related to an increase in implementation services priced on a time and material basis, associated with an increase in the number of new customers purchasing our subscription services.
Cost of Revenue, Gross Profit and Gross Margin
 
Three Months Ended April 30,
 
 
 
2018
 
2017
 
$ Change
 
% Change
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Cost of revenue:
 
 
 
 
 
 
 
Subscription
$
16,332

 
$
11,157

 
$
5,175

 
46
%
Professional services and other
7,775

 
6,306

 
1,469

 
23

Total cost of revenue
$
24,107

 
$
17,463

 
$
6,644

 
38

Gross profit
$
59,514

 
$
34,862

 
$
24,652

 
71

 
 
 
 
 
 
 
 
Gross margin:
 

 
 
 
 

 
 

Subscription
79
 %
 
77
 %
 
 

 
 

Professional services and other
(15
)
 
(56
)
 
 

 
 

Total gross margin
71

 
67

 
 

 
 

Cost of subscription revenue increased by $5.2 million, or 46%, for the three months ended April 30, 2018 compared to the three months ended April 30, 2017, primarily due to an increase of $2.7 million in employee compensation costs related to higher headcount to support the growth in our subscription services, an increase of $0.7 million in data center costs as we increased capacity to support our growth and an increase of $0.5 million related to the amortization of capitalized internal-use software costs due to the continued development of our software.
Our gross margin for subscription revenue increased from 77% during the three months ended April 30, 2017 to 79% during the three months ended April 30, 2018, due to economies of scale as our subscription revenue increased. 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.

29



Cost of professional services and other revenue increased by $1.5 million, or 23%, for the three months ended April 30, 2018, compared to the three months ended April 30, 2017, primarily due to an increase of $1.2 million in employee compensation costs related to higher headcount.
Our gross margin for professional services and other revenue improved to (15)% during the three months ended April 30, 2018 from (56)% during the three months ended April 30, 2017 primarily due to more efficient utilization from our professional services team.
Operating Expenses
Research and Development Expenses
 
Three Months Ended April 30,
 
 
 
2018
 
2017
 
$ Change
 
% Change
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Research and development
$
19,929

 
$
15,359

 
$
4,570

 
30
%
Percentage of revenue
24
%
 
29
%
 
 

 
 

Research and development expenses increased $4.6 million, or 30%, for the three months ended April 30, 2018 compared to the three months ended April 30, 2017. The increase was primarily due to an increase of $3.5 million in employee compensation costs due to higher headcount and the post combination compensation expense related to the equity awards issued in connection with the Stormpath business combination and an increase of $0.5 million in allocated overhead costs.
Sales and Marketing Expenses
 
Three Months Ended April 30,
 
 
 
2018
 
2017
 
$ Change
 
% Change
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Sales and marketing
$
49,493

 
$
35,303

 
$
14,190

 
40
%
Percentage of revenue
59
%
 
68
%
 
 

 
 

Sales and marketing expenses increased $14.2 million, or 40%, for the three months ended April 30, 2018 compared to the three months ended April 30, 2017. The increase was primarily due to an increase of $8.4 million in employee compensation costs related to headcount growth, an increase of $3.0 million related to marketing and event costs primarily driven by increases in demand generation programs, advertising, customer sponsorships and brand awareness efforts aimed at acquiring new customers and an increase of $1.3 million in allocated overhead costs.
General and Administrative Expenses
 
Three Months Ended April 30,
 
 
 
2018
 
2017
 
$ Change
 
% Change
 
 
 
 
 
 
 
 
 
(dollars in thousands)
General and administrative
$
15,070

 
$
11,639

 
$
3,431

 
29
%
Percentage of revenue
18
%
 
22
%
 
 

 
 

General and administrative expenses increased $3.4 million, or 29%, for the three months ended April 30, 2018 compared to the three months ended April 30, 2017. The increase was primarily due to an increase of $3.3 million in employee compensation costs primarily related to higher headcount to support our continued growth, an increase of $0.5 million in costs from professional services consisting primarily of IT, accounting, and consulting fees and an increase of $0.5 million in allocated overhead costs.


30



Other Expense, Net
 
Three Months Ended April 30,
 
 
 
2018
 
2017
 
$ Change
 
% Change
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Other expense, net
$
(1,215
)
 
$
(19
)
 
$
(1,196
)
 
N/A
Other expense, net increased $(1.2) million for the three months ended April 30, 2018 compared to the three months ended April 30, 2017. The increase was primarily due to an increase of $2.7 million in interest expense incurred related to the 2023 Notes, offset by an increase of $1.6 million in interest income earned on higher cash and short-term investment balances.

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.
 
As of April 30,
 
2018
 
2017
 
 
 
 
Customers with Annual Contract Value (ACV) above $100,000
747

 
493

Dollar-Based Retention Rate for the trailing 12 months ended
121
%
 
123
%
 
Three Months Ended April 30,
 
2018
 
2017
 
 
 
 
 
(in thousands)
Calculated Billings
$
95,926

 
$
59,928

Number of Customers with Annual Contract Value Above $100,000
As of April 30, 2018, we had over 4,700 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 ACV with us was 747 and 493 as of April 30, 2018 and 2017, respectively. We expect this trend to continue as larger enterprises recognize the value of our platform and replace their legacy 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 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 Retention Rate. Our Dollar-Based 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 or products associated with a customer.

31



Our Dollar-Based 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 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 attrition 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 Retention Rate.
Our Dollar-Based Retention Rate has consistently exceeded 120%, which is primarily attributable to an expansion of users and up-selling 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.
Calculated Billings
Calculated Billings represent our total revenue plus the change in total deferred revenue and the change in total unbilled receivables in the period. While we had in previous SEC filings defined calculated billings as total revenue plus the change in total deferred revenue in the period, our current definition better aligns with ASC 606, which became effective for our interim and annual periods beginning February 1, 2018. Refer to Note 2 to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information regarding ASC 606. 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, as well as our rights to consideration for performance obligations satisfied but unbilled as of the reporting date. We typically invoice customers in advance in annual installments for subscriptions to our platform.
Calculated Billings increased 60% in the three months ended April 30, 2018 over the three months ended April 30, 2017. 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, 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 and income 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 and income 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.


32



 
Three Months Ended April 30,
 
2018
 
2017
 
 
As Adjusted (1)
 
 
 
 
 
(dollars in thousands)
Gross profit
$
59,514

 
$
34,862

Add:
 
 
 
Stock-based compensation expense included in cost of revenue
2,418

 
1,155

Amortization of acquired intangibles

 
4

Non-GAAP gross profit
$
61,932

 
$
36,021

 
 
 
 
Gross margin
71
%
 
67
%
Non-GAAP gross margin
74
%
 
69
%
(1)  
See Note 2 to our condensed consolidated financial statements for a summary of adjustments.
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 and amortization of acquired intangibles.
 
Three Months Ended April 30,
 
2018
 
2017
 
 
As Adjusted (1)
 
 
 
 
 
(dollars in thousands)
Operating loss
$
(24,978
)
 
$
(27,439
)
Add:
 
 
 
Stock-based compensation expense
14,135

 
8,906

Amortization of acquired intangibles

 
4

Non-GAAP operating loss
$
(10,843
)
 
$
(18,529
)
 
 
 
 
Operating margin
(30
)%
 
(52
)%
Non-GAAP operating margin
(13
)%
 
(35
)%
(1)  
See Note 2 to our condensed consolidated financial statements for a summary of adjustments.
Free Cash Flow
We define Free Cash Flow as net cash used in operating activities, less cash used for purchases of property and equipment and capitalized internal-use software costs.
 
Three Months Ended April 30,
 
2018
 
2017
 
 
 
 
 
(in thousands)
Net cash provided by (used in) operating activities
$
3,972

 
$
(9,686
)
Less:
 
 
 
Purchases of property and equipment
(4,477
)
 
(2,448
)
Capitalization of internal-use software costs
(1,051
)
 
(1,208
)
Free Cash Flow
$
(1,556
)
 
$
(13,342
)
 
 
 
 
Net cash provided by (used in) investing activities
$
(238,942
)
 
$
8,217

Net cash provided by financing activities
$
319,445

 
$
200,108


33



Calculated Billings
We define Calculated Billings as total revenue plus the change in deferred revenue and unbilled receivables during the period.
 
Three Months Ended April 30,
 
2018
 
2017
 
 
As Adjusted (1)
 
 
 
 
 
(in thousands)
Total revenue
$
83,621

 
$
52,325

Add:
 
 
 
Deferred revenue (end of period)
177,894

 
115,337

Unbilled receivables (beginning of period)
809

 
1,537

Less:
 
 
 
Unbilled receivables (end of period)
(1,619
)
 
(2,151
)
Deferred revenue (beginning of period)
(164,779
)
 
(107,120
)
Calculated billings
$
95,926

 
$
59,928

 
 
 
 
(1)  
See Note 2 to our condensed consolidated financial statements for a summary of adjustments.
Liquidity and Capital Resources
As of April 30, 2018, our principal sources of liquidity were cash, cash equivalents and short-term investments totaling $547.0 million, which were held for working capital purposes, as well as the available balance of our credit facility, described further below. Our cash equivalents and investments were comprised primarily of money market funds, U.S. treasury securities, commercial paper and corporate debt securities. We have generated significant operating losses and negative cash flows from operations as reflected in our accumulated deficit and condensed consolidated statements of cash flows. We expect to continue to incur operating losses and negative cash flows from operations for the foreseeable future.
In February 2018, we completed our private offering of the 2023 Notes and received aggregate proceeds of $345.0 million, before deducting costs of issuance of $10.0 million. In connection with the issuance of the 2023 Notes, we entered into convertible note hedge transactions with respect to our Class A common stock (Note Hedges). We paid an aggregate amount of $80.0 million of the net proceeds from the sale of the 2023 Notes to purchase the Note Hedges. The cost of the Note Hedges was partially offset by the proceeds of $52.4 million from the sale of warrants to purchase shares of our Class A common stock in connection with the issuance of the 2023 Notes.
In April 2017, upon completion of our IPO, we received aggregate proceeds of $200.0 million, net of underwriters’ discounts and commissions, before deducting offering costs of approximately $5.6 million. Historically, we have financed our operations primarily through the net proceeds we received through private sales of equity securities, as well as payments received from customers for subscription and professional services. We believe our existing cash and cash equivalents, our investments, our credit facility, and cash provided by sales of our products and services will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. Our future capital requirements will depend on many factors, including our subscription growth rate, subscription renewal activity, billing frequency, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced product offerings, and the continuing market adoption of our platform. We may in the future enter into arrangements to acquire or invest in complementary businesses, services and technologies, including intellectual property rights. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in new technologies this could reduce our ability to compete successfully and harm our results of operations.
We have a line of credit (Revolving Line) with Silicon Valley Bank (SVB) in the amount of $40.0 million, with a maturity date of November 2018. The available amount, not to exceed $40.0 million, is based on certain revenue metrics and is reduced by letters of credit totaling $4.2 million as of April 30, 2018 established in connection with facility

34



lease agreements. As of April 30, 2018, $35.8 million was available under the Revolving Line, of which no amounts had been drawn.
A significant majority of our customers pay in advance for annual subscriptions. Therefore, a substantial source of our cash is from our deferred revenue, which is included on our condensed consolidated balance sheet as a liability. Deferred revenue consists of the unearned portion of billed fees for our subscriptions, which is recognized as revenue in accordance with our revenue recognition policy. As of April 30, 2018, we had deferred revenue of $177.9 million, of which $173.5 million was recorded as a current liability and is expected to be recorded as revenue in the next 12 months, provided all other revenue recognition criteria have been met.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
 
Three Months Ended April 30,
 
2018
 
2017
 
 
 
 
 
(in thousands)
Net cash provided by (used in) operating activities
$
3,972

 
$
(9,686
)
Net cash provided by (used in) investing activities
(238,942
)
 
8,217