10-Q 1 okta-4302019_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, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-38044
_____________________________________ 
Okta, Inc.
(Exact Name of Registrant as Specified in Its Charter)
_____________________________________ 
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
 
 
 
26-4175727
(I.R.S. Employer
Identification Number)
 
 
100 First Street, Suite 600
San Francisco, California 94105
(Address of Principal executive offices)
 
 
Registrant’s telephone number, including area code: (888) 722-7871
___________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Class A common stock, par value $0.0001 per share
 
OKTA
 
The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨ 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files) Yes 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
x
 
 
 
 
Accelerated filer 
Non-accelerated filer 
 
 
 
 
Smaller reporting company 
 
 
 
 
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨ No  ý
As of April 30, 2019, the number of shares of registrant’s Class A common stock outstanding was 103,939,987 and the number of shares of the registrant’s Class B common stock outstanding was 10,199,085.



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 profits, margins and operating expenses;
trends in our key business metrics;
the sufficiency of our cash and cash equivalents, investments and cash provided by sales of our products and services to meet our liquidity needs;
market or other opportunities arising from business combinations; and
the impact of recent accounting pronouncements on our financial statements.
Forward-looking statements are subject to a number of risks and uncertainties, many of which involve factors or circumstances that are beyond our control. Our actual results could differ materially from those stated or implied in forward-looking statements due to a number of factors, including but not limited to, risks detailed in “Risk Factors” in this Quarterly Report on Form 10-Q as well as other documents that may be filed by us from time to time with the Securities and Exchange Commission. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, except as required by law, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Quarterly Report on Form 10-Q to conform these statements to actual results or to changes in our expectations.




PART I
Item. 1 Financial Statements

4



OKTA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(unaudited)
 
April 30,
2019
 
January 31, 2019
 
 
As Adjusted (1)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
208,106

 
$
298,394

Short-term investments
339,377

 
265,374

Accounts receivable, net of allowances of $1,960 and $2,098
83,328

 
91,926

Deferred commissions
25,576

 
24,185

Prepaid expenses and other current assets
20,542

 
28,237

Total current assets
676,929

 
708,116

Property and equipment, net
52,189

 
52,921

Operating lease right-of-use assets
119,916

 
121,389

Deferred commissions, noncurrent
56,824

 
54,812

Intangible assets, net
28,022

 
13,897

Goodwill
47,964

 
18,089

Other assets
16,698

 
15,089

Total assets
$
998,542

 
$
984,313

Liabilities and stockholders’ equity
 

 
 
Current liabilities:
 

 
 
Accounts payable
$
4,352

 
$
2,431

Accrued expenses and other current liabilities
32,412

 
33,653

Accrued compensation
21,463

 
19,770

Convertible senior notes, net
275,653

 
271,628

Deferred revenue
268,033

 
245,622

Total current liabilities
601,913

 
573,104

Operating lease liabilities, noncurrent
146,044

 
147,046

Deferred revenue, noncurrent
7,671

 
8,768

Other liabilities, noncurrent
3,470

 
3,018

Total liabilities
759,098

 
731,936

Commitments and contingencies (Note 11)


 


Stockholders’ equity:
 

 
 
Preferred stock, par value $0.0001 per share; 100,000 shares authorized, no shares issued and outstanding as of April 30, 2019 and January 31, 2019.



Class A Common stock, par value $0.0001 per share; 1,000,000 shares authorized as of April 30, 2019 and January 31, 2019; 103,940 and 101,093 shares issued and outstanding as of April 30, 2019 and January 31, 2019, respectively.
10

 
10

Class B Common stock, par value $0.0001 per share; 120,000 shares authorized as of April 30, 2019 and January 31, 2019; 10,199 and 11,059 shares issued and outstanding as of April 30, 2019 and January 31, 2019, respectively.
1

 
1

Additional paid-in capital
784,067

 
744,896

Accumulated other comprehensive income (loss)
(457
)
 
(319
)
Accumulated deficit
(544,177
)
 
(492,211
)
Total stockholders’ equity
239,444

 
252,377

Total liabilities and stockholders’ equity
$
998,542

 
$
984,313

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

5



OKTA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)
 
Three Months Ended April 30,
 
2019
 
2018
Revenue:
 
 
 
Subscription
$
117,163

 
$
76,841

Professional services and other
8,060

 
6,780

Total revenue
125,223

 
83,621

Cost of revenue:
 

 
 

Subscription
24,540

 
16,332

Professional services and other
10,555

 
7,775

Total cost of revenue
35,095

 
24,107

Gross profit
90,128

 
59,514

Operating expenses:
 

 
 

Research and development
34,032

 
19,929

Sales and marketing
82,112

 
49,493

General and administrative
25,766

 
15,070

Total operating expenses
141,910

 
84,492

Operating loss
(51,782
)
 
(24,978
)
Interest expense
(4,241
)
 
(2,717
)
Other income (expense), net
2,900

 
1,502

Loss before provision for (benefit from) income taxes
(53,123
)
 
(26,193
)
Provision for (benefit from) income taxes
(1,157
)
 
(231
)
Net loss
$
(51,966
)
 
$
(25,962
)
 
 

 
 

Net loss per share, basic and diluted
$
(0.46
)
 
$
(0.25
)
 
 

 
 

Weighted-average shares used to compute net loss per share, basic and diluted
112,682

 
104,203

See Notes to Condensed Consolidated Financial Statements.


6



OKTA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(unaudited)
 
Three Months Ended April 30,
 
2019
 
2018
 
 
 
 
Net loss
$
(51,966
)
 
$
(25,962
)
Other comprehensive income (loss):
 
 
 
Net change in unrealized losses on available-for-sale securities
195

 
(125
)
Foreign currency translation adjustments
(333
)
 
(444
)
Other comprehensive income (loss)
(138
)
 
(569
)
Comprehensive loss
$
(52,104
)
 
$
(26,531
)
 
See Notes to Condensed Consolidated Financial Statements.


7



OKTA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
(unaudited)

 
Three Months Ended April 30,
 
2019
 
2018
 
 
 
 
Common stock and additional paid in capital:
 
 
 
Balance, beginning of period
$
744,907

 
$
565,663

Issuance of common stock upon exercise of stock options and other activity, net
13,516

 
12,414

Issuance of common stock for settlement of RSUs
2,809

 

Stock-based compensation
22,846

 
14,352

Equity component of convertible senior notes, net of issuance costs

 
77,642

Issuance of warrants related to convertible notes

 
52,440

Purchase of convertible senior notes hedges

 
(80,040
)
Balance, end of period
784,078

 
642,471

 
 
 
 
Accumulated deficit:
 
 
 
Balance, beginning of period
(492,211
)
 
(366,714
)
Net loss
(51,966
)
 
(25,962
)
Balance, end of period
(544,177
)
 
(392,676
)
 
 
 
 
Accumulated other comprehensive loss:
 
 
 
Balance, beginning of period
(319
)
 
391

Other comprehensive loss
(138
)
 
(569
)
Balance, end of period
(457
)
 
(178
)
Total stockholder’s equity
$
239,444

 
$
249,617


See Notes to Condensed Consolidated Financial Statements.


8



OKTA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
 
Three Months Ended April 30,
 
2019
 
2018
 
 
As Adjusted (1)
 
 
 
 
Cash flows from operating activities:
 
 
 
Net loss
$
(51,966
)
 
$
(25,962
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Stock-based compensation
22,685

 
14,135

Depreciation, amortization and accretion
3,399

 
2,069

Amortization of debt discount and issuance costs
4,025

 
2,571

Amortization of deferred commissions
6,328

 
4,572

Deferred income taxes
(1,369
)
 
(348
)
Other
(100
)
 
161

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
9,297

 
1,719

Deferred commissions
(9,795
)
 
(5,693
)
Prepaid expenses and other assets
5,975

 
(3,889
)
Operating lease right-of-use assets
3,066

 
4,564

Accounts payable
1,640

 
607

Accrued compensation
4,143

 
329

Accrued expenses and other liabilities
3,288

 
(1,023
)
Operating lease liabilities
(39
)
 
(2,954
)
Deferred revenue
20,685

 
13,114

Net cash provided by operating activities
21,262

 
3,972

Cash flows from investing activities:
 

 
 

Capitalization of internal-use software costs
(369
)
 
(1,051
)
Purchases of property and equipment
(7,710
)
 
(4,477
)
Purchases of securities available for sale
(146,545
)
 
(252,914
)
Proceeds from maturities of securities available for sale
61,244

 
19,500

Proceeds from sales of securities available for sale
11,996

 

Payments for business acquisition, net of cash acquired
(44,223
)
 

Net cash used in investing activities
(125,607
)
 
(238,942
)
Cash flows from financing activities:
 
 
 

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

Proceeds from stock option exercises, net of repurchases
13,388

 
12,196

Other, net
(126
)
 
(206
)
Net cash provided by financing activities
13,262

 
319,445

Effects of changes in foreign currency exchange rates on cash, cash equivalents and restricted cash
(282
)
 
(387
)
Net increase (decrease) in cash, cash equivalents and restricted cash
(91,365
)
 
84,088

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

 
136,233

Cash, cash equivalents and restricted cash at end of period
$
219,850

 
$
220,321

 
 
 
 
Supplementary cash flow disclosure:
 
 
 
Vesting of early exercised common stock options
128

 
243

Operating lease right-of-use assets exchanged for lease obligations
1,665


19,325

Property and equipment acquired through tenant improvement allowance

 
3,329

Property and equipment and other accrued but not yet paid
924

 
147

Bonus settled through the issuance of common stock
2,809

 

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
$
208,106

 
$
211,756

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

 

Restricted cash, noncurrent included in other assets
11,437

 
8,565

Total cash, cash equivalents and restricted cash
$
219,850

 
$
220,321

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

9



OKTA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Overview and Basis of Presentation
Description of Business
Okta, Inc. (the Company) is the leading independent identity management platform for the enterprise. The Okta Identity Cloud enables the Company’s customers to securely connect people to technology, anywhere, anytime and from any device. The Company was incorporated in January 2009 as Saasure Inc., a California corporation, and was later reincorporated in April 2010 under the name Okta, Inc. as a Delaware corporation. The Company is headquartered in San Francisco, California.
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements, which include the accounts of the Company and its wholly owned subsidiaries, have been prepared in conformity with U.S. generally accepted accounting principles (GAAP). All intercompany balances and transactions have been eliminated in consolidation.
The condensed consolidated balance sheet as of January 31, 2019, included herein, was derived from the audited financial statements as of that date. The unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the results of operations for the interim periods presented, but are not necessarily indicative of the results of operations to be anticipated for the full fiscal year ending January 31, 2020 or any future period.
The Company’s fiscal year ends on January 31. References to fiscal 2020, for example, refer to the fiscal year ending January 31, 2020.
The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Form 10-K filed with the Securities and Exchange Commission (SEC) on March 14, 2019. Effective February 1, 2018, the Company adopted the requirements of Accounting Standards Update (ASU) No. 2016-02, Leases (ASC 842) as discussed in Note 2. All amounts and disclosures set forth in this Form 10-Q have been updated to comply with this standard, as indicated by references to "as adjusted" in these condensed consolidated financial statements and related notes.
Certain reclassifications of prior period amounts have been made in our condensed consolidated financial statements to conform to the current period presentation. Accrued expenses of $14.8 million as of January 31, 2019 were included in accounts payable. These reclassifications had no impact on net loss, stockholders’ equity or cash flows as previously reported.
Convertible Senior Notes
In February 2018, the Company issued $345.0 million aggregate principal amount of 0.25% convertible senior notes due February 15, 2023 (2023 Notes) in a private offering, including the initial purchasers’ exercise in full of their option to purchase additional notes. The Company received aggregate proceeds of $345.0 million, before deducting costs of issuance of $10.0 million. See Note 9 for additional details.
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, the determination of the incremental borrowing rate used for operating lease liabilities, the valuation of deferred income tax assets, contingencies and the valuation of acquired intangible assets.

10



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

 
$
(1,214
)
 
$
28,237

Total current assets
709,330

 
(1,214
)
 
708,116

Operating lease right-of-use assets

 
121,389

 
121,389

Other noncurrent assets
15,286

 
(197
)
 
15,089

Total assets
$
864,335

 
$
119,978

 
$
984,313

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

 
$
8,913

 
$
33,653

Total current liabilities
564,191

 
8,913

 
573,104

Other noncurrent liabilities
38,999

 
(35,981
)
 
3,018

Operating lease liabilities, noncurrent

 
147,046

 
147,046

Total liabilities
611,958

 
119,978

 
731,936

Total liabilities and stockholders’ equity
$
864,335

 
$
119,978

 
$
984,313

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

11


Significant Accounting Policies
The Company’s significant accounting policies are discussed in “Note 2. Summary of Significant Accounting Policies” in Item 8. Financial Statements and Supplementary Data of its Form 10-K for the fiscal year ended January 31, 2019. Except for the accounting policies for operating leases that were updated below as a result of adopting ASC 842, there have been no significant changes to these policies for the three months ended April 30, 2019.
Operating Leases and Incremental Borrowing Rate
The Company leases office space under operating leases with expiration dates through 2028. The Company determines whether an arrangement constitutes a lease and records lease liabilities and right-of-use assets on its consolidated balance sheets at lease commencement. Lease liabilities are measured based on the present value of the total lease payments not yet paid discounted based on the more readily determinable of the rate implicit in the lease or the Company’s incremental borrowing rate, which is the estimated rate the Company would be required to pay for a collateralized borrowing equal to the total lease payments over the term of the lease. The estimation of the incremental borrowing rate is based on an analysis of publicly traded debt securities of companies with similar credit and financial profiles. Right-of-use assets are measured based on the corresponding lease liability adjusted for (i) payments made to the lessor at or before the commencement date, (ii) initial direct costs incurred and (iii) tenant incentives under the lease. Recognition of rent expense begins when the lessor makes the underlying asset available to the Company. The Company does not assume renewals or early terminations of its leases unless it is reasonably certain to exercise these options at commencement and does not allocate consideration between lease and non-lease components.
For short-term leases, the Company records rent expense in its condensed consolidated statements of operations on a straight-line basis over the lease term and records variable lease payments as incurred.
Recently Issued Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. The new model uses a forward-looking expected loss method, which will generally result in earlier recognition of allowances for losses. This guidance is effective for the Company on February 1, 2020 with early adoption permitted. The Company is currently evaluating the impact of the adoption of this standard on its condensed consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (ASU 2018-15), which requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in Accounting Standards Codification 350-40 to determine which implementation costs to defer and recognize as an asset. This guidance is effective for the Company on February 1, 2020 with early adoption permitted. The Company is currently evaluating the impact of the adoption of this standard on its condensed consolidated financial statements.
3. Business Combinations
On July 13, 2018, the Company acquired all issued and outstanding capital stock of ScaleFT, Inc. (ScaleFT), a “zero trust” security company which provides access solutions for the modern workforce. The acquisition date cash consideration transferred for ScaleFT was $15.6 million, net of $0.6 million in cash acquired. The Company recorded $4.6 million for developed technology intangible assets with an estimated useful life of three years and $11.8 million of goodwill which is primarily attributed to the assembled workforce as well as the integration of ScaleFT’s technology and the Company’s technology. The Company incurred $1.1 million of acquisition-related costs, which were recorded as general and administrative expense in the quarter ended July 31, 2018.
On March 18, 2019, the Company acquired all issued and outstanding capital stock of Azuqua, Inc. (Azuqua), a company which provides a no-code, cloud-based integration platform that automates workflows between applications and services. The acquisition date cash consideration transferred for Azuqua was $44.2 million, net of $1.1 million in cash acquired. The Company recorded $15.7 million for developed technology intangible assets with an estimated useful life of five years and preliminarily recorded $29.9 million of goodwill which is primarily attributed to the assembled workforce as well as the integration of Azuqua’s technology and the Company’s technology. The Company incurred $3.0 million of acquisition-related costs, which were recorded as general and administrative expense in the quarter ended April 30, 2019.

12



The Company also incurred total deferred compensation arrangements in connection with these acquisitions of $10.8 million, of which $0.9 million was recognized as compensation during the three months ended April 30, 2019. The remaining deferred compensation balance of $8.2 million will be recognized over a weighted-average period of 2.1 years subject to continued service with the Company.
These acquisitions did not have a material impact on the Company’s condensed consolidated financial statements; therefore, historical and proforma disclosures have not been presented.

4. Cash Equivalents and Short-Term Investments
The amortized cost, unrealized gain (loss) and estimated fair value of the Company’s cash equivalents and short-term investments as of April 30, 2019 and January 31, 2019 were as follows (in thousands):  
 
As of April 30, 2019
 
Amortized
Cost
 
Unrealized
Gain
 
Unrealized
Loss
 
Estimated
Fair Value 
 
 
 
 
 
 
 
 
 
(unaudited)
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
129,839

 
$

 
$

 
$
129,839

Total cash equivalents
$
129,839

 
$

 
$

 
$
129,839

Short-term investments:
 

 
 

 
 

 
 

U.S. treasury securities
214,112

 
95

 
(9
)
 
214,198

Corporate debt securities
125,093

 
87

 
(1
)
 
125,179

Total short-term investments
339,205

 
182

 
(10
)
 
339,377

Total
$
469,044

 
$
182

 
$
(10
)
 
$
469,216

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

 
$

 
$

 
$
247,426

Corporate debt securities
$
3,409

 
$

 
$
(1
)
 
$
3,408

Total cash equivalents
$
250,835

 
$

 
$
(1
)
 
$
250,834

Short-term investments:
 
 
 

 
 

 
 

U.S. treasury securities
195,913

 
37

 
(53
)
 
195,897

Corporate debt securities
69,483

 
13

 
(19
)
 
69,477

Total short-term investments
265,396

 
50

 
(72
)
 
265,374

Total
$
516,231

 
$
50

 
$
(73
)
 
$
516,208

All short-term investments were designated as available-for-sale securities as of April 30, 2019 and January 31, 2019.
The following tables present the contractual maturities of the Company’s short-term investments as of April 30, 2019 and January 31, 2019 (in thousands):

13



 
 
As of April 30, 2019
 
As of January 31, 2019
 
Amortized
Cost
 
Estimated
Fair Value
 
Amortized
Cost
 
Estimated
Fair Value
 
(unaudited)
Due within one year
$
339,205

 
$
339,377

 
$
265,396

 
$
265,374

Due between one to five years

 

 

 

 
$
339,205

 
$
339,377

 
$
265,396

 
$
265,374

 
 
 
 
 
 
 
 
The Company had 14 and 34 short-term investments in unrealized loss positions as of April 30, 2019 and January 31, 2019, respectively. There were no material gross unrealized gains or losses from available-for-sale securities and no material realized gains or losses from available-for-sale securities that were reclassified out of accumulated other comprehensive income for the three months ended April 30, 2019 or 2018.
For available-for-sale debt securities that have unrealized losses, the Company evaluates whether (i) the Company has the intention to sell any of these investments and (ii) it is not more likely than not that the Company will 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, 2019 and January 31, 2019.
5. Fair Value Measurements
The Company measures its financial assets at fair value each reporting period using a fair value hierarchy that prioritizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. A financial instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Three levels of inputs may be used to measure as follows:
Level 1-Valuations based on observable inputs that reflect quoted prices for identical assets or liabilities in active markets.
Level 2-Valuations based on inputs that are directly or indirectly observable in the marketplace.
Level 3-Valuations based on unobservable inputs that are supported by little or no market activity.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents information about the Company’s financial assets and liabilities that are measured at fair value on a recurring basis using the above input categories (in thousands):  
 
As of April 30, 2019
 
Level 1
 
Level 2 
 
Level 3
 
Total
 
 
 
 
 
 
 
 
 
(unaudited)
Assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
129,839

 
$

 
$

 
$
129,839

Total cash equivalents
$
129,839

 
$

 
$

 
$
129,839

Short-term investments:
 

 
 

 
 

 
 

U.S. treasury securities

 
214,198

 

 
214,198

Corporate debt securities

 
125,179

 

 
125,179

Total short-term investments

 
339,377

 

 
339,377

Total cash equivalents and short-term investments
$
129,839

 
$
339,377

 
$

 
$
469,216


14



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

 
$

 
$

 
$
247,426

Corporate debt securities

 
3,408

 

 
3,408

Total cash equivalents
$
247,426

 
$
3,408

 
$

 
$
250,834

Short-term investments:
 

 
 

 
 

 
 

U.S. treasury securities
$

 
$
195,897

 
$

 
$
195,897

Corporate debt securities

 
69,477

 

 
69,477

Total short-term investments

 
265,374

 

 
265,374

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

 
$
268,782

 
$

 
$
516,208

The carrying amounts of certain financial instruments, including cash held in banks, accounts receivable and accounts payable approximate fair value due to their short-term maturities and are excluded from the fair value table above.
Fair Value Measurements of Other Financial Instruments
The following table presents the carrying amounts and estimated fair values of our financial instruments that are not recorded at fair value on the condensed consolidated balance sheets (in thousands):
 
As of April 30, 2019
 
Net Carrying Amount Before Unamortized Debt Issuance Costs
 
Estimated
Fair Value 
 
 
 
 
 
(unaudited)
Convertible senior notes
$
281,938

 
$
762,964

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 9 for additional details). 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. As of April 30, 2019, the difference between the net carrying amount of the 2023 Notes and estimated fair value represents the equity conversion value premium the market assigned to the 2023 Notes. Based on the closing price of our common stock of $104.03 on April 30, 2019, the if-converted value of the 2023 Notes exceeded the principal amount of $345.0 million.
6. Deferred Commissions
Sales commissions capitalized as contract costs totaled $9.8 million and $5.7 million in the three months ended April 30, 2019 and 2018, respectively. Amortization of contract costs was $6.3 million and $4.6 million for the three months ended April 30, 2019 and 2018, respectively. There was no impairment loss in relation to the costs capitalized.
7. Goodwill and Intangible Assets, net
Goodwill
As of April 30, 2019 and January 31, 2019, goodwill was $48.0 million and $18.1 million, respectively. During the three months ended April 30, 2019, the Company recorded $29.9 million of goodwill in connection with the Azuqua acquisition that was completed in March 2019. See Note 3 for further details. No goodwill impairments were recorded during the three months ended April 30, 2019 and 2018.

15



Intangible Assets, net
Intangible assets consisted of the following (in thousands):  
 
As of April 30, 2019
 
Gross
 
Accumulated Amortization
 
Net
 
 
 
 
 
 
 
(unaudited)
Capitalized internal-use software costs
$
20,304

 
$
(11,188
)
 
$
9,116

Purchased developed technology
20,300

 
(1,596
)
 
18,704

Software licenses
1,023

 
(822
)
 
201

 
$
41,627

 
$
(13,606
)
 
$
28,021

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

 
$
(9,969
)
 
$
9,869

Purchased developed technology
4,600

 
(833
)
 
3,767

Software licenses
1,023

 
(763
)
 
260

 
$
25,461

 
$
(11,565
)
 
$
13,896

 
 
 
 
 
 
The Company capitalized $0.5 million and $1.3 million of internal-use software costs in the three months ended April 30, 2019 and 2018, respectively. Included in the total amount capitalized is stock-based compensation expense of $0.1 million and $0.2 million for the three months ended April 30, 2019 and 2018, respectively.
In addition, during the three months ended April 30, 2019, the Company recorded $15.7 million of purchased developed technology from the Azuqua acquisition. See Note 3 for further details.
Intangible amortization expense was $2.1 million and $1.2 million for the three months ended April 30, 2019 and 2018, respectively.
8. Deferred Revenue and Performance Obligations
Deferred Revenue
Deferred revenue, which is a contract liability, consists primarily of payments received in advance of revenue recognition under the Company’s contracts with customers and is recognized as the revenue recognition criteria are met.
Subscription revenue recognized during the three months ended April 30, 2019 and 2018 that was included in the deferred revenue balances at the beginning of the respective periods was $98.0 million and $64.6 million, respectively. Professional services and other revenue recognized in the three months ended April 30, 2019 and 2018 from deferred revenue balances at the beginning of the respective periods was not material.
Transaction Price Allocated to the Remaining Performance Obligations
Transaction price allocated to the remaining performance obligations represents contracted revenue that has not yet been recognized, which includes deferred revenue for subscription contracts that have been invoiced and will be recognized as revenue in future periods.
As of April 30, 2019, total remaining noncancelable performance obligations under the Company’s subscription contracts with customers was approximately $792.0 million. Of this amount, the Company expects to recognize revenue of approximately $416.0 million, or 53%, over the next 12 months, with the balance to be recognized as revenue thereafter. Revenue from remaining performance obligations for professional services and other contracts as of April 30, 2019 was not material.

16



Unbilled Receivables
The Company receives payments from customers based on billing schedules as established in its contracts. Unbilled receivables and contract assets represent amounts for which the Company has recognized revenue in excess of billings pursuant to its revenue recognition policy. As of April 30, 2019 and January 31, 2019, contract assets and unbilled receivables were $0.8 million and $1.5 million, respectively, which are included in prepaid expenses and other current assets in the condensed consolidated balance sheets.
9. Convertible Senior Notes, Net
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;
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. For at least twenty trading days during the period of thirty consecutive trading days ended April 30, 2019, the last reported sale price of the Company’s common stock was equal to or exceeded 130% of the conversion price of the 2023 Notes on each applicable trading day. As a result, the 2023 Notes are convertible at the option of the holders during the fiscal quarter ending July 31, 2019 and were classified as current liabilities on the condensed consolidated balance sheet as of April 30, 2019. As of the date of this filing, none of the holders of the 2023 Notes have submitted requests for conversion.
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

17



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 the Notes 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, 2019
 
Three Months Ended April 30, 2018
 
(unaudited)
Contractual interest expense
$
216

 
$
146

Amortization of debt issuance costs
319

 
190

Amortization of debt discount
3,706

 
2,381

Total
$
4,241

 
$
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.
The 2023 Notes, net consisted of the following (in thousands):
 
As of April 30, 2019
 
(unaudited)
Liability component:
 
Principal
$
345,000

Less: unamortized debt issuance costs and debt discount
(69,347
)
Net carrying amount
$
275,653

 
 
 
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

18



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.
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.
10. Leases

The Company has entered into various non-cancelable office space operating leases with original lease periods expiring between 2019 and 2028. These do not contain material variable rent payments, residual value guarantees, covenants or other restrictions.
The Company also has a sublease for a former corporate office. The sublease has a remaining lease term of 5.4 years. Sublease income, which is recorded as a reduction of rental expense, was $0.7 million for the three months ended April 30, 2019.
Operating lease costs for the three months ended April 30, 2019 and 2018, are as follows (in thousands):
 
 
Three Months Ended April 30,
 
 
2019
 
2018
Operating lease cost(1)
 
$
5,463

 
$
3,434

(1) Amounts are presented gross of sublease income and include short-term leases, which are immaterial.
The weighted-average remaining term of the Company’s operating leases was 8.6 years and 8.9 years and the weighted-average discount rate used to measure the present value of the operating lease liabilities was 5.8% and 5.9% as of April 30, 2019 and January 31, 2019, respectively.

19



Maturities of the Company’s operating lease liabilities, which do not include short-term leases, as of April 30, 2019 are as follows (in thousands):
 
 
Operating Leases
2020
 
$
14,623

2021
 
24,553

2022
 
24,226

2023
 
23,756

2024
 
24,246

Thereafter
 
95,733

Total lease payments
 
207,137

Less imputed interest
 
(47,631
)
Total operating lease liabilities
 
$
159,506

 
 
 
Cash payments included in the measurement of the Company’s operating lease liabilities were $2.4 million and $3.1 million for the three months ended April 30, 2019 and 2018, respectively.
As of April 30, 2019, the Company has $35.6 million of undiscounted future payments under an operating lease that has not yet commenced, which is excluded from the table above. This operating lease will commence in fiscal 2020 and has a lease term of 8.7 years.
11. Commitments and Contingencies

Letters of Credit
In conjunction with the execution of leases, letters of credit in the aggregate amount of $11.7 million and $12.7 million were issued and outstanding as of April 30, 2019 and January 31, 2019, respectively. No draws have been made under such letters of credit.
Legal Matters
From time to time in the normal course of business, the Company may be subject to various legal matters such as threatened or pending claims or proceedings. There were no such material matters as of April 30, 2019.
12. Employee Incentive Plans
The Company’s equity incentive plans provide for granting stock options, restricted stock units (RSUs) and restricted stock awards to employees, consultants, officers and directors. In addition, the Company offers an Employee Stock Purchase Plan (ESPP) to eligible employees.
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,
 
2019
 
2018
 
 
 
 
 
(unaudited)
Cost of revenue
 
 
 
Subscription
$
2,422

 
$
1,529

Professional services and other
1,519

 
889

Research and development
6,346

 
4,213

Sales and marketing
6,786

 
4,153

General and administrative
5,612

 
3,351

Total
$
22,685

 
$
14,135

 
 
 
 

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, 2019 and 2018. See Note 7 for further details.
Equity Incentive Plans
The Company has two equity incentive plans: the 2009 Stock Plan (2009 Plan) and the 2017 Equity Incentive Plan (2017 Plan). Upon the completion of the Company’s initial public offering (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, 2019, options to purchase 15,258,828 shares of Class B common stock and 1,230,363 shares of Class A common stock remain outstanding.
Shares of common stock reserved for future issuance are as follows:
 
As of
 
April 30, 2019
 
(unaudited)
Stock options and unvested RSUs outstanding
21,336,935

Available for future stock option and RSU grants
17,559,281

Available for ESPP
3,976,652

 
42,872,868

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

 
$
9.16

 
7.1
 
$
1,304,446

Granted
412,360

 
82.16

 
 
 
 
Exercised
(1,632,494
)
 
8.20

 
 
 
 
Canceled
(94,469
)
 
9.66

 
 
 
 
Outstanding as of April 30, 2019 (unaudited)
16,489,191

 
$
11.08

 
7.0
 
$
1,532,670

As of April 30, 2019
 
 
 
 
 
 
 
Vested and exercisable (unaudited)
9,893,164

 
$
7.68

 
6.5
 
$
953,187

As of April 30, 2019, there was a total of $46.5 million of unrecognized stock-based compensation expense, which is expected to be recognized over a weighted-average period of 1.9 years.
Restricted Stock Units
A summary of the Company’s RSU activity and related information is as follows:  

21



 
Number of
RSUs
 
Weighted-
Average
Grant Date Fair Value Per Share
 
 
 
 
Outstanding as of January 31, 2019
4,835,536

 
$
44.49

Granted
533,256

 
82.38

Vested
(354,075
)
 
37.45

Forfeited
(166,973
)
 
40.91

Outstanding as of April 30, 2019 (unaudited)
4,847,744

 
$
49.30

As of April 30, 2019, there was $207.2 million of unrecognized stock-based compensation expense related to unvested RSUs, which is expected to be recognized over a weighted-average period of 3.0 years based on vesting under the award service conditions.
Employee Stock Purchase Plan
As of April 30, 2019, there was $2.3 million of unrecognized stock-based compensation expense related to ESPP that is expected to be recognized over an average vesting period of 0.6 years.
13. Income Taxes
For the three months ended April 30, 2019, the Company recorded a tax benefit of $1.2 million on a pretax loss of $53.1 million. The effective tax rate for the three months ended April 30, 2019 was 2.2%. The effective tax rate differs from the statutory rate primarily as a result of not recognizing deferred tax assets for U.S. losses due to a full valuation allowance against U.S. deferred tax assets, release of the valuation allowance in the United States in connection with the Azuqua acquisition and excess tax benefits from stock-based compensation in the United Kingdom. The tax benefit was partially offset by income tax expense in profitable foreign jurisdictions and U.S. state taxes.
For the three months ended April 30, 2018, the Company recorded a tax benefit of $0.2 million on a pretax loss of $26.2 million. The effective tax rate for the three months ended April 30, 2018 was 0.9%. The effective tax rate differs from the statutory rate primarily as a result of not recognizing a deferred tax asset for U.S. losses due to having a full valuation allowance against U.S. deferred tax assets.
14. Net Loss Per Share
The following table presents the calculation of basic and diluted net loss per share (in thousands, except per share data):  
 
Three Months Ended April 30,
 
2019
 
2018
 
Class A
 
Class B
 
Class A
 
Class B
 
 
 
 
 
 
 
 
 
(unaudited)
Numerator:
 
 
 
 
 
 
 
Net loss
$
(47,227
)
 
$
(4,739
)
 
$
(19,929
)
 
$
(6,033
)
Denominator:
 
 
 
 
 
 
 
Weighted-average shares outstanding - basic and diluted
102,407

 
10,275

 
79,988

 
24,215

Net loss per share, basic and diluted
$
(0.46
)
 
$
(0.46
)
 
$
(0.25
)
 
$
(0.25
)
 
 
 
 
 
 
 
 

22



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,
 
2019
 
2018
 
 
 
 
 
(unaudited)
Unvested restricted common stock issued and outstanding

 
400

Stock options issued and outstanding
16,489

 
22,675

Unvested RSUs issued and outstanding
4,848

 
3,433

Unvested restricted stock awards issued and outstanding
177

 
388

Shares related to convertible senior notes
7,134

 

Shares subject to warrants related to the issuance of convertible senior notes
7,134

 

Shares committed under the ESPP
261

 
1,062

Unvested shares subject to repurchase
30

 
139

 
36,073

 
28,097

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 of the 2023 Notes and exercise rights of the warrants will have a dilutive impact on net income per share of common stock when the average market price per share of the Company’s Class A common stock for a given period exceeds the conversion price of the 2023 Notes of $48.36 per share and exercise price of the warrants of $68.06 per share, respectively. During the three months ended April 30, 2019, the weighted average price per share of the Company’s Class A common stock exceeded the conversion price of the 2023 Notes and exercise price of the warrants; however, since the Company is in a net loss position there was no dilutive effect during any period presented.

23




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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K. As discussed in the section titled “Forward-Looking Statements,” the following discussion and analysis contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those identified below and those discussed in the section titled “Risk Factors” under Part II, Item 1A in this Quarterly Report on Form 10-Q and Part I, Item 1A in our Annual Report on Form 10-K. Our fiscal year ends January 31.
Overview
Okta is the leading independent identity management platform for the enterprise. The Okta Identity Cloud is our category-defining platform that enables our customers to securely connect people to technology, anywhere, anytime and from any device. Every day, millions of people use Okta to securely access a wide range of cloud, mobile and web applications, IT infrastructure providers, servers and services from a multitude of devices. Employees and contractors sign into the Okta Identity Cloud to seamlessly and securely access the applications they need to do their most important work. Organizations use our platform to collaborate with their partners, and to provide their customers with more modern experiences online and via mobile devices. Developers leverage our platform to securely embed identity into their software. Our approach allows our customers to simplify and scale their IT and security infrastructures more efficiently as the number of users, devices, clouds and other technologies in their ecosystem grows.
We founded the company in 2009 to reinvent identity for the modern cloud era, where identity is the critical foundation for connection and trust between users and technology. Since our inception, we have consistently innovated to enhance our platform and our product offerings.
In parallel to this product innovation, we have rapidly expanded the breadth and depth of the Okta Integration Network, which provides customers with integrations to cloud, mobile and web applications and IT infrastructure providers that spans the functionality of our products. As of April 30, 2019, we had over 6,000 integrations with these cloud, mobile and web applications and IT infrastructure providers.
We employ a SaaS business model. We focus on acquiring and retaining our customers and increasing their spending with us through expanding the number of users who access our platform and up-selling additional products. We sell our products directly through our field and inside sales teams, as well as indirectly through our network of channel partners, including resellers, independent software vendors, or ISVs, system integrators and other distribution partners. Our subscription fees include the use of our service and our technical support and management of our platform. We base subscription fees primarily on the products used and the number of users on our platform. The Okta Identity Cloud is used by our customers to manage and secure their employees, contractors and partners, which we refer to as workforce identity. Our platform is also used to manage and secure the identities of an organization's own customers via the powerful APIs we have developed, which we refer to as customer identity. We typically invoice customers in advance in annual installments for subscriptions to our platform.
Components of Results of Operations
Revenue
Subscription Revenue.    Subscription revenue primarily consists of fees for access to and usage of our cloud-based platform and related support. Subscription revenue is driven primarily by the number of customers, the number of users per customer and the products used. We typically invoice customers in advance in annual installments for subscriptions to our platform.
Professional Services and Other.    Professional services revenue includes fees from assisting customers in implementing and optimizing the use of our products. These services include application configuration, system integration and training services.

24



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. We expect our general and administrative expenses will increase in absolute dollars as our business grows.
Interest Expense and Other Income (Expense), Net
Interest expense and other income (expense), net consists principally of interest expense, which primarily includes amortization of debt discount and issuance costs and contractual interest expense for our $345.0 million

25



aggregate principal amount of 0.25% convertible senior notes due February 15, 2023 (2023 Notes) and interest income from our investment holdings.
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 against related deferred tax assets.
Results of Operations
The following tables set forth our results of operations for the periods presented in dollars and as a percentage of our revenue:
 
Three Months Ended April 30,
 
2019
 
2018
 
 
 
 
 
(in thousands)
Revenue:
 
 
 
Subscription
$
117,163

 
$
76,841

Professional services and other
8,060

 
6,780

Total revenue
125,223

 
83,621

Cost of revenue:
 

 
 

Subscription(1)
24,540

 
16,332

Professional services and other(1)
10,555

 
7,775

Total cost of revenue
35,095

 
24,107

Gross profit
90,128

 
59,514

Operating expenses:
 

 
 

Research and development(1)
34,032

 
19,929

Sales and marketing(1)
82,112

 
49,493

General and administrative(1)
25,766

 
15,070

Total operating expenses
141,910

 
84,492

Operating loss
(51,782
)
 
(24,978
)
Interest expense
(4,241
)
 
(2,717
)
Other income (expense), net
2,900

 
1,502

Loss before provision for (benefit from) income taxes
(53,123
)
 
(26,193
)
Provision for (benefit from) income taxes
(1,157
)
 
(231
)
Net loss
$
(51,966
)
 
$
(25,962
)
_______________________________
(1) 
Includes stock-based compensation expense as follows:
 
Three Months Ended April 30,
 
2019
 
2018
 
 
 
 
 
(in thousands)
Cost of subscription revenue
$
2,422

 
$
1,529

Cost of professional services and other revenue
1,519

 
889

Research and development
6,346

 
4,213

Sales and marketing
6,786

 
4,153

General and administrative
5,612

 
3,351

Total stock-based compensation expense
$
22,685

 
$
14,135


26



 
Three Months Ended April 30,
 
2019
 
2018
Revenue
 
 
 
Subscription
94
 %
 
92
 %
Professional services and other
6

 
8

Total revenue
100

 
100

Cost of revenue
 
 
 
Subscription
20

 
20

Professional services and other
8

 
9

Total cost of revenue
28

 
29

Gross profit
72

 
71

Operating expenses
 
 
 
Research and development
27

 
24

Sales and marketing
65

 
59

General and administrative
21

 
18

Total operating expenses
113

 
101

Operating loss
(41
)
 
(30
)
Interest expense
(3
)
 
(3
)
Other income (expense), net
2

 
2

Loss before provision for (benefit from) income taxes
(42
)
 
(31
)
Provision for (benefit from) income taxes
(1
)
 

Net loss
(41
)%
 
(31
)%
Comparison of the Three Months Ended April 30, 2019 and 2018
Revenue
 
Three Months Ended April 30,
 
 
 
2019
 
2018
 
$ Change
 
% Change
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Revenue:
 
 
 
 
 
 
 
Subscription
$
117,163

 
$
76,841

 
$
40,322

 
52
%
Professional services and other
8,060

 
6,780

 
1,280

 
19

Total revenue
$
125,223

 
$
83,621

 
$
41,602

 
50

Percentage of revenue:
 

 
 
 
 

 
 

Subscription
94
%
 
92
%
 
 

 
 

Professional services and other
6

 
8

 
 

 
 

Total
100
%
 
100
%
 
 

 
 

Subscription revenue increased by $40.3 million, or 52%, for the three months ended April 30, 2019 compared to the three months ended April 30, 2018. The increase was primarily due to the addition of new customers as well as an increase in users and sales of additional products to existing customers.
Professional services and other revenue increased by $1.3 million, or 19%, for the three months ended April 30, 2019 compared to the three months ended April 30, 2018. The increase in professional services revenue primarily related to an increase in implementation and other services associated with an increase in the number of new customers purchasing our subscription services.

27



Cost of Revenue, Gross Profit and Gross Margin
 
Three Months Ended April 30,
 
 
 
2019
 
2018
 
$ Change
 
% Change
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Cost of revenue:
 
 
 
 
 
 
 
Subscription
$
24,540

 
$
16,332

 
$
8,208

 
50
%
Professional services and other
10,555

 
7,775

 
2,780

 
36

Total cost of revenue
$
35,095

 
$
24,107

 
$
10,988

 
46

Gross profit
$
90,128

 
$
59,514

 
$
30,614

 
51

Gross margin:
 

 
 
 
 

 
 

Subscription
79
 %
 
79
 %
 
 

 
 

Professional services and other
(31
)
 
(15
)
 
 

 
 

Total gross margin
72

 
71

 
 

 
 

Cost of subscription revenue increased by $8.2 million, or 50%, for the three months ended April 30, 2019 compared to the three months ended April 30, 2018, primarily due to an increase of $3.7 million in employee compensation costs related to higher headcount to support the growth in our subscription services and an increase of $1.8 million in data center costs as we increased capacity to support our growth.
Our gross margin for subscription revenue was 79% for the three months ended April 30, 2019 and 2018. While our gross margins for subscription revenue may fluctuate in the near-term as we invest in our growth, we expect our subscription revenue gross margin to increase over time as we achieve additional economies of scale.
Cost of professional services and other revenue increased by $2.8 million, or 36%, for the three months ended April 30, 2019, compared to the three months ended April 30, 2018, primarily due to an increase of $1.6 million in employee compensation costs related to higher headcount.
Our gross margin for professional services and other revenue decreased to (31)% during the three months ended April 30, 2019 from (15)% during the three months ended April 30, 2018, primarily due to additional investment in our professional services organization.
Operating Expenses
Research and Development Expenses
 
Three Months Ended April 30,
 
 
 
2019
 
2018
 
$ Change
 
% Change
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Research and development
$
34,032

 
$
19,929

 
$
14,103

 
71
%
Percentage of revenue
27
%
 
24
%
 
 

 
 

Research and development expenses increased $14.1 million, or 71%, for the three months ended April 30, 2019 compared to the three months ended April 30, 2018. The increase was primarily due to an increase of $10.4 million in employee compensation costs due to higher headcount and an increase of $1.4 million in allocated overhead costs.
Sales and Marketing Expenses
 
Three Months Ended April 30,
 
 
 
2019
 
2018
 
$ Change
 
% Change
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Sales and marketing
$
82,112

 
$
49,493

 
$
32,619

 
66
%
Percentage of revenue
65
%
 
59
%
 
 

 
 


28



Sales and marketing expenses increased $32.6 million, or 66%, for the three months ended April 30, 2019 compared to the three months ended April 30, 2018. The increase was primarily due to an increase of $12.2 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 the expense of our annual customer conference, which was held during the first quarter of fiscal 2020, but not during the first quarter of fiscal 2019. Additionally there was an increase of $11.7 million in employee compensation costs related to headcount growth, an increase of $2.8 million in allocated overhead costs and an increase of $2.7 million in employee-related expenses.
General and Administrative Expenses
 
Three Months Ended April 30,
 
 
 
2019
 
2018
 
$ Change
 
% Change
 
 
 
 
 
 
 
 
 
(dollars in thousands)
General and administrative
$
25,766

 
$
15,070

 
$
10,696

 
71
%
Percentage of revenue
21
%
 
18
%
 
 

 
 

General and administrative expenses increased $10.7 million, or 71%, for the three months ended April 30, 2019 compared to the three months ended April 30, 2018. The increase was primarily due to an increase of $5.9 million in employee compensation costs primarily related to higher headcount to support our continued growth and an increase of $3.0 million in acquisition-related costs for our acquisition of Azuqua.
Interest Expense and Other Income (Expense), Net
 
Three Months Ended April 30,
 
 
 
2019
 
2018
 
$ Change
 
% Change
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Interest expense
$
(4,241
)
 
$
(2,717
)
 
$
(1,524
)
 
56
%
Other income (expense), net
2,900

 
1,502

 
1,398

 
93
%
Interest expense increased $1.5 million, or 56%, for the three months ended April 30, 2019 compared to the three months ended April 30, 2018, primarily related to the 2023 Notes. Other income (expense), net increased $1.4 million, or 93%, for the three months ended April 30, 2019 compared to the three months ended April 30, 2018. The increase was primarily due to interest and other 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,
 
2019
 
2018
 
 
 
 
Customers with Annual Contract Value (ACV) above $100,000
1,142

 
747

Dollar-Based Retention Rate for the trailing 12 months ended
119
%
 
121
%
 
Three Months Ended April 30,
 
2019
 
2018
 
 
 
 
 
(in thousands)
Calculated Billings
$
147,195

 
$
95,926


29



Number of Customers with Annual Contract Value Above $100,000
As of April 30, 2019, we had over 6,550 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 1,142 and 747 as of April 30, 2019 and 2018, 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 Dollar-Based Retention Rate for the trailing 12 months ended April 30, 2019 and 2018 was 119% and 121%, respectively.
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.
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.
As we add larger customers and the size of our initial deployments continues to grow, we expect our Dollar-Based Retention Rate will remain strong, with period to period fluctuations.
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. 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 53% in the three months ended April 30, 2019 over the three months ended April 30, 2018. As our Calculated Billings continue to grow in absolute terms, we expect our Calculated Billings growth rate to trend down over time.
Non-GAAP Financial Measures
In addition to our results determined in accordance with U.S. generally accepted accounting principles, or GAAP, we believe the following non-GAAP measures are useful in evaluating our operating performance. We use the below referenced non-GAAP financial information, collectively, to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that non-GAAP financial information, when taken collectively with GAAP financial measures, may be helpful to investors because it provides consistency and comparability with past financial performance, and assists in comparisons with other companies, some of which use similar non-GAAP financial information to supplement their GAAP results. The non-GAAP financial information is presented for supplemental informational purposes only, and should not be considered a substitute for financial information presented in accordance with GAAP, and may be different from similarly-titled non-GAAP measures used by other companies. The principal

30



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.
 
Three Months Ended April 30,
 
2019
 
2018
 
 
 
 
 
(dollars in thousands)
Gross profit
$
90,128

 
$
59,514

Add:
 
 
 
Stock-based compensation expense included in cost of revenue
3,941

 
2,418

Amortization of acquired intangibles
763

 

Non-GAAP gross profit
$
94,832

 
$
61,932

Gross margin
72
%
 
71
%
Non-GAAP gross margin
76
%
 
74
%
Non-GAAP Operating Loss and Non-GAAP Operating Margin
We define non-GAAP operating loss and non-GAAP operating margin as GAAP operating loss and GAAP operating margin, adjusted for stock-based compensation expense, charitable contributions, amortization of acquired intangibles and acquisition-related expenses.
 
Three Months Ended April 30,
 
2019
 
2018
 
 
 
 
 
(dollars in thousands)
Operating loss
$
(51,782
)
 
$
(24,978
)
Add:
 
 
 
Stock-based compensation expense
22,685

 
14,135

Amortization of acquired intangibles
763

 

Acquisition-related expenses
3,449

 

Non-GAAP operating loss
$
(24,885
)
 
$
(10,843
)
Operating margin
(41
)%
 
(30
)%
Non-GAAP operating margin
(20
)%
 
(13
)%

31



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,
 
2019
 
2018
 
 
 
 
 
(in thousands)
Net cash provided by operating activities
$
21,262

 
$
3,972

Less:
 
 
 
Purchases of property and equipment
(7,710
)
 
(4,477
)
Capitalization of internal-use software costs
(369
)
 
(1,051
)
Free Cash Flow
$
13,183

 
$
(1,556
)
Net cash used in investing activities
$
(125,607
)
 
$
(238,942
)
Net cash provided by financing activities
$
13,262

 
$
319,445

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,
 
2019
 
2018
 
 
 
 
 
(in thousands)
Total revenue
$
125,223

 
$
83,621

Add:
 
 
 
Deferred revenue (end of period)
275,704

 
177,894

Unbilled receivables (beginning of period)
1,457

 
809

Less:
 
 
 
Unbilled receivables (end of period)
(799
)
 
(1,619
)
Deferred revenue (beginning of period)
(254,390
)
 
(164,779
)
Calculated billings
$
147,195

 
$
95,926

Liquidity and Capital Resources
As of April 30, 2019, our principal sources of liquidity were cash, cash equivalents and short-term investments totaling $547.5 million, which were held for working capital purposes. Our cash equivalents and investments were comprised primarily of money market funds, U.S. treasury securities 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.

32



We believe our existing cash and cash equivalents, our investments 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 expansion of our international operations, 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.
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, 2019, we had deferred revenue of $275.7 million, of which $268.0 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,
 
2019
 
2018
 
 
 
 
 
(in thousands)
Net cash provided by operating activities
$
21,262

 
$
3,972

Net cash used in investing activities
(125,607
)
 
(238,942
)
Net cash provided by financing activities
13,262

 
319,445

Effects of changes in foreign currency exchange rates on cash, cash equivalents and restricted cash
(282
)
 
(387
)
Net increase (decrease) in cash, cash equivalents and restricted cash
$
(91,365
)
 
$
84,088

Operating Activities
Our largest source of operating cash is cash collections from our customers for subscription and professional services. Our primary uses of cash from operating activities are for employee-related expenditures, marketing expenses and third-party hosting costs. Historically, we have generated negative cash flows from operating activities and have supplemented working capital requirements through net proceeds from the private sale of equity securities and more recently from the net proceeds from the sale of the 2023 Notes and from our IPO.
During the three months ended April 30, 2019, cash provided by operating activities was $21.3 million primarily due to our net loss of $52.0 million, adjusted for non-cash charges of $35.0 million and net cash inflows of $38.3 million provided by changes in our operating assets and liabilities. Non-cash charges primarily consisted of stock-based compensation, amortization of debt discount and issuance costs, amortization of deferred commissions and depreciation and amortization of property and equipment and intangible assets. The primary drivers of the changes in operating assets and liabilities related to a $20.7 million increase in deferred revenue, a $5.8 million increase in accounts payable and accrued compensation, a $9.3 million decrease in accounts receivable, a $6.0 million decrease in prepaid expenses and other assets and a $3.1 million decrease in operating lease right-of-use assets, partially offset by a $9.8 million increase in deferred commissions and a $3.3 million decrease in accrued expenses and other liabilities.
During the three months ended April 30, 2018, cash provided by operating activities was $4.0 million primarily due to our net loss of $26.0 million, adjusted for non-cash charges of $23.2 million and net cash inflows of $6.8 million provided by changes in our operating assets and liabilities. Non-cash charges primarily consisted of stock-based compensation, amortization of debt discount and issuance costs, amortization of deferred commissions and depreciation and amortization of property and equipment and intangible assets. The primary drivers of the changes in operating assets and liabilities related to a $13.1 million increase in deferred revenue, a $0.9 million increase in accounts payable and accrued compensation, a $4.6 million decrease in operating lease right-of-use assets and a

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$1.7 million decrease in accounts receivable, partially offset by a $5.7 million increase in deferred commissions, a $3.9 million increase in prepaid expenses and other assets, a $3.0 million decrease in operating lease liabilities and a $1.0 million decrease in other accrued expenses.
Investing Activities
Net cash used in investing activities during the three months ended April 30, 2019 of $125.6 million was primarily attributable to the purchases of investments of $146.5 million, payment of $44.2 million, net of cash acquired, in connection with our Azuqua acquisition and purchases of property and equipment of $7.7 million to support additional office space and headcount. These activities were offset by proceeds from the sales and maturities of investments of $73.2 million.
Net cash used in investing activities during the three months ended April 30, 2018 of $238.9 million was primarily attributable to the purchase of investments of $252.9 million, purchases of property and equipment of $4.5 million to support additional office space and headcount and the capitalization of internal-use software costs of $1.1 million associated with the development of additional features and functionality of our platform. These activities were partially offset by proceeds from the sale and maturities of investments of $19.5 million.
Financing Activities
Cash provided by financing activities during the three months ended April 30, 2019 of $13.3 million was primarily attributable to proceeds from the exercise of stock options, net of repurchases, of $13.4 million.
Cash provided by financing activities during the three months ended April 30, 2018 of $319.4 million was primarily attributable to proceeds from the issuance of the 2023 Notes of $335.1 million, net of costs of issuance, proceeds from the issuance of warrants of $52.4 million and proceeds from the exercise of stock options of $12.2 million, net of repurchases, partially offset by cash used to purchase the Note Hedges of $80.0 million.
Indemnification Agreements
In the ordinary course of business, we enter into agreements of varying scope and terms pursuant to which we agree to indemnify customers, vendors, lessors, business partners and other parties with respect to certain matters, including, but not limited to, losses arising out of the breach of such agreements, services to be provided by us or from intellectual property infringement claims made by third parties. In addition, we have entered into indemnification agreements with our directors and certain officers and employees that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers or employees. No demands have been made upon us to provide indemnification under such agreements and there are no claims that we are aware of that could have a material effect on our condensed consolidated financial statements.
Off-Balance Sheet Arrangements
As of April 30, 2019, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Critical Accounting Policies and Estimates
We prepare our condensed consolidated financial statements in accordance with GAAP. In the preparation of these condensed consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations would be affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as critical accounting policies and estimates, which we discuss below.
Our significant accounting policies are discussed in “Notes to Consolidated Financial Statements - Note 2. Summary of Significant Accounting Policies” in our Form 10-K. There have been no significant changes to these policies for the three months ended April 30, 2019, except as described in Note 2 to our condensed consolidated financial statements “Accounting Standards and Significant Accounting Policies”.

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Recent Accounting Pronouncements
See Note 2 to our condensed consolidated financial statements “Accounting Standards and Significant Accounting Policies” for more information.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Foreign Currency Exchange Risk
The functional currencies of our foreign subsidiaries are the respective local currencies. Most of our sales are denominated in U.S. dollars, and therefore our revenue is not currently subject to significant foreign currency risk. Our operating expenses are denominated in the currencies of the countries in which our operations are located, which are primarily in the United States, the United Kingdom, Canada and Australia. Our condensed consolidated results of operations and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates and may be adversely affected in the future due to changes in foreign exchange rates. To date, we have not entered into any hedging arrangements with respect to foreign currency risk or other derivative financial instruments. During the three months ended April 30, 2019 and 2018, a hypothetical 10% change in foreign currency exchange rates applicable to our business would not have had a material impact on our condensed consolidated financial statements.
Interest Rate Risk
We had cash, cash equivalents and short-term investments totaling $547.5 million as of April 30, 2019, of which $469.2 million was invested in money market funds, U.S. treasury securities and corporate debt securities. Our cash and cash equivalents are held for working capital purposes. Our short-term investments are made for capital preservation purposes. We do not enter into investments for trading or speculative purposes.
Our cash equivalents and our investment portfolio are subject to market risk due to changes in interest rates. Fixed rate securities may have their market value adversely affected due to a rise in interest rates. Due in part to these factors, our future investment income may fall short of our expectations due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates. However, because we classify our short-term investments as “available for sale,” no gains or losses are recognized due to changes in interest rates unless such securities are sold prior to maturity or declines in fair value are determined to be other-than-temporary.
As of April 30, 2019, a hypothetical 10% relative change in interest rates would not have had a material impact on the value of our cash equivalents or investment portfolio. Fluctuations in the value of our cash equivalents and investment portfolio caused by a change in interest rates (gains or losses on the carrying value) are recorded in other comprehensive income (loss), and are realized only if we sell the underlying securities prior to maturity.
Convertible Senior Notes
In February 2018, we issued the 2023 Notes due February 15, 2023 with a principal amount of $345.0 million. Concurrently with the issuance of the 2023 Notes, we entered into separate Note Hedges and warrant transactions. The Note Hedges were completed to reduce the potential dilution from the conversion of the 2023 Notes.
The 2023 Notes have a fixed annual interest rate of 0.25%; accordingly, we do not have economic interest rate exposure on the 2023 Notes. However, the fair value of the 2023 Notes is exposed to interest rate risk. Generally, the fair market value of the fixed interest rate 2023 Notes will increase as interest rates fall and decrease as interest rates rise. In addition, the fair value of the 2023 Notes fluctuates when the market price of our common stock fluctuates. The fair value was determined based on the quoted bid price of the 2023 Notes in an over-the-counter market on the last trading day of the reporting period. See Note 5 to our condensed consolidated financial statements for more information.

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Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our principal executive officer and principal financial officer have concluded that, as of such date, our disclosure controls and procedures were effective at a reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 
Inherent Limitations on Effectiveness of Controls
Our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.


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Part II. OTHER INFORMATION
Item 1. Legal Proceedings
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 material such matters as of April 30, 2019.
Item 1A. Risk Factors
A description of the risks and uncertainties associated with our business is set forth below. You should carefully consider the risks and uncertainties described below, as well as the other information in this Quarterly Report on Form 10-Q, including our condensed consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The occurrence of any of the events or developments described below, or of additional risks and uncertainties not presently known to us or that we currently deem immaterial, could materially and adversely affect our business, results of operations, financial condition and growth prospects. In such an event, the market price of our Class A common stock could decline and you could lose all or part of your investment.
Risks Related to Our Business
We have a limited operating history, which makes it difficult to forecast our revenue and evaluate our business and future prospects.
We have been in existence since 2009, and much of our growth has occurred in recent periods. As a result of our limited operating history, our ability to forecast our future results of operations and plan for and model future growth is limited and subject to a number of uncertainties. We have encountered and will continue to encounter risks and uncertainties frequently experienced by growing companies in rapidly changing industries, such as the risks and uncertainties described herein. Additionally, the sales cycle for the evaluation and implementation of our platform, which typically extends for multiple months for enterprise deals, may also cause us to experience a delay between increasing operating expenses and the generation of corresponding revenue, if any. Accordingly, we may be unable to prepare accurate internal financial forecasts or replace anticipated revenue that we do not receive as a result of delays arising from these factors, and our results of operations in future reporting periods may be below the expectations of investors. If we do not address these risks successfully, our results of operations could differ materially from our estimates and forecasts or the expectations of investors, causing our business to suffer and our stock price to decline.
We have experienced rapid growth in recent periods, and our recent growth rates may not be indicative of our future growth. As our costs increase, we may not be able to generate sufficient revenue to achieve and, if achieved, maintain profitability.
From fiscal 2017 to fiscal 2018, our revenue grew from $160.8 million to $256.5 million, an increase of 60%, and from fiscal 2018 to fiscal 2019, our revenue grew from $256.5 million to $399.3 million, an increase of 56%. In future periods, we may not be able to sustain revenue growth consistent with recent history, or at all. We believe our revenue growth depends on a number of factors, including, but not limited to, our ability to:
price our platform effectively so that we are able to attract and retain customers without compromising our profitability;
attract new customers, successfully deploy and implement our platform, upsell or otherwise increase our existing customers’ use of our platform, obtain customer renewals and provide our customers with excellent customer support;
increase our network of channel partners, which include resellers, ISVs, system integrators and other distribution partners;
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