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

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

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



Okta, Inc.
Table of Contents

 
 
Page No.
 
 
 
 
 
 
 




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




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

 
$
298,394

Short-term investments
326,629

 
265,374

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

 
91,926

Deferred commissions
29,544

 
24,185

Prepaid expenses and other current assets
29,023

 
28,237

Total current assets
1,526,600

 
708,116

Property and equipment, net
51,730

 
52,921

Operating lease right-of-use assets
126,746

 
121,389

Deferred commissions, noncurrent
65,466

 
54,812

Intangible assets, net
33,826

 
13,897

Goodwill
47,964

 
18,089

Other assets
18,445

 
15,089

Total assets
$
1,870,777

 
$
984,313

Liabilities and stockholders' equity
 

 
 
Current liabilities:
 

 
 
Accounts payable
$
4,924

 
$
2,431

Accrued expenses and other current liabilities
33,288

 
33,653

Accrued compensation
34,212

 
19,770

2023 Convertible senior notes, net
99,227

 
271,628

Deferred revenue
306,743

 
245,622

Total current liabilities
478,394

 
573,104

2025 Convertible senior notes, net
828,237

 

Operating lease liabilities, noncurrent
153,960

 
147,046

Deferred revenue, noncurrent
7,013

 
8,768

Other liabilities, noncurrent
4,779

 
3,018

Total liabilities
1,472,383

 
731,936

Commitments and contingencies (Note 11)


 


Stockholders’ equity:
 

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



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

 
10

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

 
1

Additional paid-in capital
1,048,899

 
744,896

Accumulated other comprehensive income (loss)
135

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

 
252,377

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

 
$
984,313

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

4



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

 
$
97,698

 
$
394,174

 
$
262,393

Professional services and other
8,520

 
7,878

 
24,566

 
21,390

Total revenue
153,037

 
105,576

 
418,740

 
283,783

Cost of revenue:
 

 
 

 
 
 
 
Subscription
30,124

 
20,265

 
82,581

 
55,808

Professional services and other
10,700

 
9,435

 
32,118

 
26,227

Total cost of revenue
40,824

 
29,700

 
114,699

 
82,035

Gross profit
112,213

 
75,876

 
304,041

 
201,748

Operating expenses:
 

 
 

 
 
 
 
Research and development
41,832

 
27,596

 
115,909

 
72,354

Sales and marketing
87,224

 
56,911

 
247,721

 
165,408

General and administrative
28,887

 
19,848

 
81,540

 
55,873

Total operating expenses
157,943

 
104,355

 
445,170

 
293,635

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

 
2,413

 
11,346

 
6,211

Loss on early extinguishment of debt
(14,572
)
 

 
(14,572
)
 

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

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

 
 

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

 
 

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

 
108,776

 
115,598

 
106,587

See Notes to Condensed Consolidated Financial Statements.


5



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

 
4

 
616

 
(44
)
Foreign currency translation adjustments
1,561

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

 
(438
)
 
454

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


6



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

 
$
677,508

 
$
744,907

 
$
565,663

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

 
7,646

 
46,911

 
36,800

Issuance of common stock for settlement of RSUs

 

 
2,809

 

Stock-based compensation
36,180

 
21,667

 
90,518

 
54,327

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

 

 
217,347

 
77,631

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

 
(26,713
)
 

Purchases of hedges related to 2023 convertible senior notes

 

 

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

 

 
405,851

 

Issuance of warrants related to 2023 convertible senior notes

 

 

 
52,440

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

 
(358,622
)
 

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

 
(74,094
)
 

Other, net
(3
)
 

 
(3
)
 

Balance, end of period
1,048,911

 
706,821

 
1,048,911

 
706,821

 


 
 
 


 
 
Accumulated deficit:


 
 
 


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


 
 
 


 
 
Accumulated other comprehensive income (loss):


 
 
 


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

Other comprehensive income (loss)
1,788

 
(438
)
 
454

 
(1,309
)
Balance, end of period
135

 
(918
)
 
135

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

 
$
244,503

 
$
398,394

 
$
244,503


See Notes to Condensed Consolidated Financial Statements.


7



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

 
53,899

Depreciation, amortization and accretion
12,336

 
5,824

Amortization of debt discount and issuance costs
15,653

 
10,315

Amortization of deferred commissions
20,541

 
14,963

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

 
1,008

Loss on early extinguishment of debt
14,572

 

Other
84

 
153

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

 
12,209

Accounts payable
1,962

 
(334
)
Accrued compensation
17,352

 
7,973

Accrued expenses and other liabilities
4,017

 
1,859

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

 
46,036

Net cash provided by operating activities
30,768

 
5,068

Cash flows from investing activities:
 

 
 

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

 
219,650

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

 
12,470

Purchases of intangible assets
(8,500
)
 

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

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

 
334,980

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

Purchases of hedges related to 2023 convertible senior notes

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

 

Proceeds from issuance of warrants related to 2023 convertible senior notes

 
52,440

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

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

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

 
28,524

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

 
6,654

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

 
342,352

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

 
68,214

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

 
136,233

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

 
$
204,447

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

 
$
403

Income taxes
845

 
395

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

 

Vesting of early exercised common stock options
370

 
629

Common stock issued as charitable contribution
1,162

 
1,008

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

 
126,088

Property and equipment acquired through tenant improvement allowance
1,682

 
22,237

Property and equipment and other accrued but not yet paid
927

 
1,431

Bonus settled through the issuance of common stock
2,809

 

Debt issuance costs, accrued but not yet paid
101

 

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

 
$
195,898

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

 

Restricted cash, noncurrent included in other assets
11,438

 
8,549

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

 
$
204,447

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

8



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

9



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

 
$
(1,214
)
 
$
28,237

Total current assets
709,330

 
(1,214
)
 
708,116

Operating lease right-of-use assets

 
121,389

 
121,389

Other noncurrent assets
15,286

 
(197
)
 
15,089

Total assets
$
864,335

 
$
119,978

 
$
984,313

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

 
$
8,913

 
$
33,653

Total current liabilities
564,191

 
8,913

 
573,104

Other noncurrent liabilities
38,999

 
(35,981
)
 
3,018

Operating lease liabilities, noncurrent

 
147,046

 
147,046

Total liabilities
611,958

 
119,978

 
731,936

Total liabilities and stockholders’ equity
$
864,335

 
$
119,978

 
$
984,313


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

10


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

11


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

12




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

 
$

 
$

 
$
989,029

Total cash equivalents
989,029

 

 

 
989,029

Short-term investments:
 

 
 

 
 

 
 

U.S. treasury securities
167,266

 
265

 

 
167,531

Corporate debt securities
158,769

 
330

 
(1
)
 
159,098

Total short-term investments
326,035

 
595

 
(1
)
 
326,629

Total
$
1,315,064

 
$
595

 
$
(1
)
 
$
1,315,658

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

 
$

 
$

 
$
247,426

Corporate debt securities
3,409

 

 
(1
)
 
3,408

Total cash equivalents
250,835

 

 
(1
)
 
250,834

Short-term investments:
 
 
 

 
 

 
 

U.S. treasury securities
195,913

 
37

 
(53
)
 
195,897

Corporate debt securities
69,483

 
13

 
(19
)
 
69,477

Total short-term investments
265,396

 
50

 
(72
)
 
265,374

Total
$
516,231

 
$
50

 
$
(73
)
 
$
516,208


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

 
$
326,629

 
$
265,396

 
$
265,374

 
 
 
 
 
 
 
 

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

13



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

 
$

 
$

 
$
989,029

Corporate debt securities

 

 

 

Total cash equivalents
989,029

 

 

 
989,029

Short-term investments:
 

 
 

 
 

 
 

U.S. treasury securities

 
167,531

 

 
167,531

Corporate debt securities

 
159,098

 

 
159,098

Total short-term investments

 
326,629

 

 
326,629

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

 
$
326,629

 
$

 
$
1,315,658

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

 
$

 
$

 
$
247,426

Corporate debt securities

 
3,408

 

 
3,408

Total cash equivalents
247,426

 
3,408

 

 
250,834

Short-term investments:
 

 
 

 
 

 
 

U.S. treasury securities

 
195,897

 

 
195,897

Corporate debt securities

 
69,477

 

 
69,477

Total short-term investments

 
265,374

 

 
265,374

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

 
$
268,782

 
$

 
$
516,208



14



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

 
$
279,764

2025 Convertible senior notes
$
843,265

 
$
1,006,406


(1)  
Before unamortized debt issuance costs.

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

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

15



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

 
$
(13,592
)
 
$
9,672

Purchased developed technology
28,800

 
(4,728
)
 
24,072

Software licenses
1,023

 
(941
)
 
82

 
$
53,087

 
$
(19,261
)
 
$
33,826

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

 
$
(9,969
)
 
$
9,869

Purchased developed technology
4,600

 
(833
)
 
3,767

Software licenses
1,023

 
(763
)
 
260

 
$
25,461

 
$
(11,565
)
 
$
13,896


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

16



As of October 31, 2019, total remaining noncancelable performance obligations under the Company’s subscription contracts with customers was approximately $1,031.3 million. Of this amount, the Company expects to recognize revenue of approximately $515.9 million, or 50%, over the next 12 months, with the balance to be recognized as revenue thereafter. Revenue from remaining performance obligations for professional services and other contracts as of October 31, 2019 was not material.
Unbilled Receivables
The Company receives payments from customers based on billing schedules as established in its contracts. Unbilled receivables and contract assets represent amounts for which the Company has recognized revenue in excess of billings pursuant to its revenue recognition policy. As of October 31, 2019 and January 31, 2019, contract assets and unbilled receivables were $1.0 million and $1.5 million, respectively, which are included in prepaid expenses and other current assets in the condensed consolidated balance sheets.
9. Convertible Senior Notes, Net
2023 Convertible Senior Notes
The 2023 Notes are senior, unsecured obligations of the Company, and bear interest at a fixed rate of 0.25% per year. Interest is payable in cash semi-annually in arrears on February 15 and August 15 of each year, beginning on August 15, 2018. The 2023 Notes mature on February 15, 2023 unless earlier repurchased or converted. The Company may not redeem the 2023 Notes prior to maturity. The total net proceeds from the 2023 Notes, after deducting initial purchasers’ discounts and debt issuance costs, was $335.0 million.
In September 2019, the Company used part of the net proceeds from the issuance of the 2025 Notes for the 2023 Notes Partial Repurchase, which consisted of a repurchase of $224.4 million aggregate principal amount of the 2023 Notes in privately-negotiated transactions for aggregate consideration of $604.8 million, consisting of approximately $224.4 million in cash and approximately