Okta, Inc. 10-Q

Item 1. Financial Statements (unaudited) 4 Condensed Consolidated Balance Sheets as of July 31, 2020 and January 31, 2020 5 Condensed Consolidated Statements of Operations for the Three and Six Months Ended July 31, 2020 and 2019 6 Condensed Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended July 31, 2020 and 2019 7 Condensed Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended July 31, 2020 and 2019 8 Condensed Consolidated Statements of Cash Flows for the Six Months Ended July 31, 2020 and 2019 9 Notes to Condensed Consolidated Financial Statements 10 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 29 Item 3. Quantitative and Qualitative Disclosures about Market Risk 47 Item 4. Controls and Procedures 48 PART II. OTHER INFORMATION Item 1. Legal Proceedings 49 Item 1A. Risk Factors 49 Item 6. Exhibits 80 Signatures 82 FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, including but not limited to, statements regarding our financial outlook, product development, business strategy, plans, market trends, opportunities, positioning, and the anticipated impact on our business of the COVID-19 pandemic, related public health measures and any associated economic downturn. These forward-looking statements are made as of the date they were first issued and were based on current expectations, estimates, forecasts and projections as well as the beliefs and assumptions of management. Words such as “expect,” “anticipate,” “should,” “believe,” “hope,” “target,” “project,” “goals,” “estimate,” “potential,” “predict,” “may,” “will,” “might,” “could,” “intend,” “shall” and variations of these terms or the negative of these terms and similar expressions are intended to identify these forward-looking statements, although not all forward-looking statements include these identifying words. The forward-looking statements are contained principally in “Management’s Discussion and Analysis of Financial Condition and Result of Operations” and “Risk Factors.” Forward-looking statements contained in this Form 10-Q include, but are not limited to, statements about: • our future financial performance, including our revenue, costs of revenue, gross profits, margins and operating expenses; • the impact of the global coronavirus pandemic on our business and operations; • 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) July 31, 2020 January 31, 2020 (unaudited) Assets Current assets: Cash and cash equivalents $ 957,234 $ 520,048 Short-term investments 1,557,279 882,976 Accounts receivable, net of allowances of $3,243 and $1,166 110,540 130,115 Deferred commissions 37,808 33,636 Prepaid expenses and other current assets 44,074 32,950 Total current assets 2,706,935 1,599,725 Property and equipment, net 63,406 53,535 Operating lease right-of-use assets 157,781 125,204 Deferred commissions, noncurrent 86,556 77,874 Intangible assets, net 30,031 32,529 Goodwill 48,023 48,023 Other assets 22,283 18,505 Total assets $ 3,115,015 $ 1,955,395 Liabilities and stockholders' equity Current liabilities: Accounts payable $ 4,726 $ 3,837 Accrued expenses and other current liabilities 54,803 36,887 Accrued compensation 39,227 40,300 Convertible senior notes, net 43,578 100,703 Deferred revenue 391,246 365,236 Total current liabilities 533,580 546,963 Convertible senior notes, net, noncurrent 1,689,438 837,002 Operating lease liabilities, noncurrent 189,208 154,511 Deferred revenue, noncurrent 5,574 6,214 Other liabilities, noncurrent 12,018 5,361 Total liabilities 2,429,818 1,550,051 Commitments and contingencies (Note 11) Stockholders’ equity: Preferred stock, par value $0.0001 per share; 100,000 shares authorized; no shares issued and outstanding as of July 31, 2020 and January 31, 2020 — — Class A common stock, par value $0.0001 per share; 1,000,000 shares authorized; 119,960 and 113,990 shares issued and outstanding as of July 31, 2020 and January 31, 2020, respectively 12 11 Class B common stock, par value $0.0001 per share; 120,000 shares authorized; 8,128 and 8,648 shares issued and outstanding as of July 31, 2020 and January 31, 2020, respectively 1 1 Additional paid-in capital 1,498,549 1,105,564 Accumulated other comprehensive income 5,521 892 Accumulated deficit ( 818,886 ) ( 701,124 ) Total stockholders’ equity 685,197 405,344 Total liabilities and stockholders' equity $ 3,115,015 $ 1,955,395 See Notes to Condensed Consolidated Financial Statements. 5 OKTA, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (unaudited) Three Months Ended July 31, Six Months Ended July 31, 2020 2019 2020 2019 Revenue: Subscription $ 190,689 $ 132,494 $ 364,470 $ 249,657 Professional services and other 9,757 7,986 18,835 16,046 Total revenue 200,446 140,480 383,305 265,703 Cost of revenue: Subscription 39,501 27,917 76,658 52,457 Professional services and other 11,646 10,863 22,975 21,418 Total cost of revenue 51,147 38,780 99,633 73,875 Gross profit 149,299 101,700 283,672 191,828 Operating expenses: Research and development 53,866 40,045 102,360 74,077 Sales and marketing 98,322 78,385 202,365 160,497 General and administrative 42,499 26,887 76,534 52,653 Total operating expenses 194,687 145,317 381,259 287,227 Operating loss ( 45,388 ) ( 43,617 ) ( 97,587 ) ( 95,399 ) Interest expense ( 16,931 ) ( 4,304 ) ( 27,695 ) ( 8,545 ) Interest income and other, net 3,960 3,464 8,859 6,364 Loss on early extinguishment of debt ( 2,174 ) — ( 2,174 ) — Interest and other, net ( 15,145 ) ( 840 ) ( 21,010 ) ( 2,181 ) Loss before benefit from income taxes ( 60,533 ) ( 44,457 ) ( 118,597 ) ( 97,580 ) Benefit from income taxes ( 433 ) ( 1,477 ) ( 835 ) ( 2,634 ) Net loss $ ( 60,100 ) $ ( 42,980 ) $ ( 117,762 ) $ ( 94,946 ) Net loss per share, basic and diluted $ ( 0.48 ) $ ( 0.37 ) $ ( 0.94 ) $ ( 0.83 ) Weighted-average shares used to compute net loss per share, basic and diluted 126,319 115,033 124,922 114,042 See Notes to Condensed Consolidated Financial Statements. 6 OKTA, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (In thousands) (unaudited) Three Months Ended July 31, Six Months Ended July 31, 2020 2019 2020 2019 Net loss $ ( 60,100 ) $ ( 42,980 ) $ ( 117,762 ) $ ( 94,946 ) Other comprehensive income (loss): Net change in unrealized gains or losses on available-for-sale securities ( 1,064 ) 194 3,570 389 Foreign currency translation adjustments 2,843 ( 1,390 ) 1,059 ( 1,723 ) Other comprehensive income (loss) 1,779 ( 1,196 ) 4,629 ( 1,334 ) Comprehensive loss $ ( 58,321 ) $ ( 44,176 ) $ ( 113,133 ) $ ( 96,280 ) See Notes to Condensed Consolidated Financial Statements. 7 OKTA, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (In thousands) (unaudited) Three Months Ended July 31, Six Months Ended July 31, 2020 2019 2020 2019 Common stock and additional paid-in capital: Balance, beginning of period $ 1,168,140 $ 784,078 $ 1,105,576 $ 744,907 Issuance of common stock upon exercise of stock options and other activity, net 28,046 23,965 42,754 37,481 Issuance of common stock for bonus settlement — — 9,818 2,809 Stock-based compensation 48,808 31,492 86,846 54,338 Equity component of convertible senior notes, net of issuance costs 306,232 — 306,232 — Equity component of early extinguishment of convertible senior notes 61,664 — 61,664 — Proceeds from hedges related to convertible senior notes 195,046 — 195,046 — Payments for warrants related to convertible senior notes ( 175,399 ) — ( 175,399 ) — Purchases of capped calls related to convertible senior notes ( 133,975 ) — ( 133,975 ) — Balance, end of period 1,498,562 839,535 1,498,562 839,535 Accumulated deficit: Balance, beginning of period ( 758,786 ) ( 544,177 ) ( 701,124 ) ( 492,211 ) Net loss ( 60,100 ) ( 42,980 ) ( 117,762 ) ( 94,946 ) Balance, end of period ( 818,886 ) ( 587,157 ) ( 818,886 ) ( 587,157 ) Accumulated other comprehensive income (loss): Balance, beginning of period 3,742 ( 457 ) 892 ( 319 ) Other comprehensive income (loss) 1,779 ( 1,196 ) 4,629 ( 1,334 ) Balance, end of period 5,521 ( 1,653 ) 5,521 ( 1,653 ) Total stockholders’ equity $ 685,197 $ 250,725 $ 685,197 $ 250,725 See Notes to Condensed Consolidated Financial Statements. 8 OKTA, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (unaudited) Six Months Ended July 31, 2020 2019 Cash flows from operating activities: Net loss $ ( 117,762 ) $ ( 94,946 ) Adjustments to reconcile net loss to net cash provided by operating activities: Stock-based compensation 86,106 53,959 Depreciation, amortization and accretion 12,691 7,916 Amortization of debt discount and issuance costs 26,330 8,113 Amortization of deferred commissions 18,077 13,192 Deferred income taxes ( 1,915 ) ( 3,057 ) Non-cash charitable contributions 2,417 652 Loss on early extinguishment of debt 2,174 — Other, net 1,435 84 Changes in operating assets and liabilities: Accounts receivable 18,626 4,459 Deferred commissions ( 30,332 ) ( 21,372 ) Prepaid expenses and other assets ( 7,622 ) 1,534 Operating lease right-of-use assets 8,972 6,189 Accounts payable 810 1,368 Accrued compensation 15,045 4,717 Accrued expenses and other liabilities ( 3,131 ) 1,304 Operating lease liabilities ( 7,663 ) ( 159 ) Deferred revenue 25,369 36,175 Net cash provided by operating activities 49,627 20,128 Cash flows from investing activities: Capitalization of internal-use software costs ( 2,326 ) ( 1,330 ) Purchases of property and equipment ( 10,669 ) ( 9,917 ) Purchases of securities available for sale and other ( 1,029,281 ) ( 237,693 ) Proceeds from maturities and redemption of securities available for sale 280,395 136,344 Proceeds from sales of securities available for sale and other 89,620 17,329 Purchases of intangible assets — ( 8,500 ) Payments for business acquisition, net of cash acquired — ( 44,223 ) Net cash used in investing activities ( 672,261 ) ( 147,990 ) Cash flows from financing activities: Proceeds from issuance of convertible senior notes, net of issuance costs 1,135,418 — Payments for repurchases of convertible senior notes ( 181 ) — Proceeds from hedges related to convertible senior notes 195,046 — Payments for warrants related to convertible senior notes ( 175,399 ) — Purchases of capped calls related to convertible senior notes ( 133,975 ) — Proceeds from stock option exercises 27,517 27,453 Proceeds from shares issued in connection with employee stock purchase plan 12,821 9,005 Other, net — ( 126 ) Net cash provided by financing activities 1,061,247 36,332 Effects of changes in foreign currency exchange rates on cash, cash equivalents and restricted cash 578 ( 1,187 ) Net increase (decrease) in cash, cash equivalents and restricted cash 439,191 ( 92,717 ) Cash, cash equivalents and restricted cash at beginning of period 531,953 311,215 Cash, cash equivalents and restricted cash at end of period $ 971,144 $ 218,498 Supplementary cash flow disclosure: Cash paid during the period for: Interest $ 841 $ 431 Income taxes 393 654 Non-cash investing and financing activities: Issuance of common stock for repurchases of convertible senior notes 260,368 — Vesting of early exercised common stock options — 370 Common stock issued as charitable contribution 2,417 652 Operating lease right-of-use assets exchanged for lease liabilities 41,388 1,665 Property and equipment acquired through tenant improvement allowance 3,852 — Issuance of common stock for bonus settlement 9,818 2,809 Reconciliation of cash, cash equivalents and restricted cash within the condensed consolidated balance sheets to the amounts shown in the condensed consolidated statements of cash flows above: Cash and cash equivalents $ 957,234 $ 206,753 Restricted cash, current included in prepaid expenses and other current assets 2,217 307 Restricted cash, noncurrent included in other assets 11,693 11,438 Total cash, cash equivalents and restricted cash $ 971,144 $ 218,498 See Notes to Condensed Consolidated Financial Statements. 9 OKTA, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. Overview and Basis of Presentation Description of Business Okta, Inc. (the Company) is the leading independent identity management platform for the enterprise. The Okta Identity Cloud enables the Company’s customers to securely connect people to technology, anywhere, anytime and from any device. The Company was incorporated in January 2009 as Saasure Inc., a California corporation, and was later reincorporated in April 2010 under the name Okta, Inc. as a Delaware corporation. The Company is headquartered in San Francisco, California. Basis of Presentation and Principles of Consolidation The accompanying unaudited condensed consolidated financial statements, which include the accounts of the Company and its wholly owned subsidiaries, have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). All intercompany balances and transactions have been eliminated in consolidation. The condensed consolidated balance sheet as of January 31, 2020 , included herein, was derived from the audited financial statements as of that date. The unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the results of operations for the interim periods presented, but are not necessarily indicative of the results of operations to be anticipated for the full fiscal year ending January 31, 2021 or any future period. The Company’s fiscal year ends on January 31. References to fiscal 2021 , for example, refer to the fiscal year ending January 31, 2021 . The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Form 10-K filed with the Securities and Exchange Commission (SEC) on March 6, 2020. Use of Estimates The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. The Company bases its estimates on historical experience and on other assumptions that its management believes are reasonable under the circumstances. Actual results could vary from those estimates. The Company’s most significant estimates include the stand alone selling price (SSP) for each distinct performance obligation included in customer contracts with multiple performance obligations, the determination of the period of benefit for deferred commissions, the determination of the effective interest rate of the liability components of its convertible senior notes, the determination of the incremental borrowing rate used for operating lease liabilities, the valuation of deferred income tax assets, and the valuation of acquired intangible assets. In March 2020, the World Health Organization (WHO) declared the outbreak of the novel coronavirus (COVID-19) a pandemic, which continues to spread across the globe. The Company considered the impact of COVID-19 on the assumptions and estimates used and determined that there were no material adverse impacts on the condensed consolidated financial statements for the three and six months ended July 31, 2020 . As events continue to evolve and additional information becomes available, our assumptions and estimates may change materially in future periods. 2. Accounting Standards and Significant Accounting Policies Significant Accounting Policies The Company’s significant accounting policies are discussed in “Note 2. Summary of Significant Accounting Policies” in Item 8. Financial Statements and Supplementary Data of its Form 10-K for the fiscal year ended January 31, 2020 . Except for the accounting policies for short-term investments and accounts receivable and allowances that were 10 updated below as a result of adopting the Financial Accounting Standards Board’s (FASB) Accounting Standards Update (ASU) No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13) on February 1, 2020, there have been no significant changes to our significant accounting policies for the six months ended July 31, 2020 . Short-Term Investments The Company’s short-term investments comprise U.S. treasury securities and corporate debt securities. The Company determines the appropriate classification of its short-term investments at the time of purchase and reevaluates such designation at each balance sheet date. The Company has classified and accounted for its short-term investments as available-for-sale securities as the Company may sell these securities at any time for use in its current operations or for other purposes, even prior to maturity. As a result, short-term investments, including securities with stated maturities beyond twelve months, are classified within current assets in the consolidated balance sheets. Available-for-sale securities are recorded at fair value each reporting period and are periodically evaluated for unrealized losses. For unrealized losses in securities that the Company intends to hold and will not more likely than not be required to sell before recovery, the Company further evaluates whether declines in fair value below amortized cost are due to credit or non-credit related factors. The Company considers credit related impairments to be changes in value that are driven by a change in the creditor’s ability to meet its payment obligations, and records an allowance and recognizes a corresponding loss in interest income and other, net when the impairment is incurred. Unrealized non-credit related losses and unrealized gains are reported as a separate component of accumulated other comprehensive loss in the condensed consolidated balance sheets until realized. Realized gains and losses are determined based on the specific identification method and are reported in interest income and other, net in the condensed consolidated statements of operations. Accounts Receivable and Allowances Accounts receivable are recorded at the invoiced amount, net of allowances. These allowances are based on the Company’s assessment of the collectibility of accounts by considering the age of each outstanding invoice, the collection history of each customer, and an evaluation of current expected risk of credit loss based on current conditions and reasonable and supportable forecasts of future economic conditions over the life of the receivable. We assess collectibility by reviewing accounts receivable on an aggregated basis where similar characteristics exist and on an individual basis when we identify specific customers with known disputes or collectibility issues. Amounts deemed uncollectible are recorded as an allowance in the condensed consolidated balance sheets with an offsetting decrease in deferred revenue or a charge to general and administrative expense in the condensed consolidated statements of operations. As of July 31, 2020 , allowances reflect increased collectibility and concession concerns stemming from business and market disruption caused by COVID-19 and may fluctuate materially in future periods as the duration and severity of the impact of the COVID-19 pandemic remains uncertain. Concentrations of Significant Customers As of July 31, 2020 and January 31, 2020, no single customer represented greater than 10% of accounts receivable. For the six months ended July 31, 2020 and 2019, no single customer represented greater than 10% of revenue. Recently Adopted Accounting Pronouncements In June 2016, the FASB issued ASU 2016-13, which changes the existing incurred loss impairment model for financial assets held at amortized cost. The new model uses a forward-looking expected loss method to calculate credit loss estimates. ASU 2016-13 also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. These changes will result in earlier recognition of credit losses. The Company adopted the requirements of ASU 2016-13 as of February 1, 2020 on a modified retrospective basis. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements. 11 In August 2018, the FASB issued ASU No. 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (ASU 2018-15), which requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in Accounting Standards Codification 350-40 to determine which implementation costs to defer and recognize as an asset. The Company adopted the requirements of ASU 2018-15 as of February 1, 2020 on a prospective basis. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements. In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (ASU 2019-12), as part of its Simplification Initiative to reduce the cost and complexity in accounting for income taxes. ASU 2019-12 removes certain exceptions related to the approach for intraperiod tax allocation and clarifies the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The guidance is effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted. The Company early adopted ASU 2019-12 as of February 1, 2020 on a prospective basis. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements. Recent Accounting Pronouncements Not Yet Adopted In August 2020, the FASB issued ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (ASU 2020-06), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. Among other changes, ASU 2020-06 removes from U.S. GAAP the liability and equity separation model for convertible instruments with a cash conversion feature, and as a result, after adoption, entities will no longer separately present in equity an embedded conversion feature for such debt. Similarly, the embedded conversion feature will no longer be amortized into income as interest expense over the life of the instrument. Instead, entities will account for a convertible debt instrument wholly as debt unless (1) a convertible instrument contains features that require bifurcation as a derivative under ASC Topic 815, Derivatives and Hedging, or (2) a convertible debt instrument was issued at a substantial premium. Among other potential impacts, this change is expected to reduce reported interest expense, increase reported net income, and result in a reclassification of certain conversion feature balance sheet amounts from stockholders’ equity to liabilities as it relates to the Company’s convertible senior notes. Additionally, ASU 2020-06 requires the application of the if-converted method to calculate the impact of convertible instruments on diluted earnings per share (EPS), which is consistent with the Company’s accounting treatment under the current standard. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, with early adoption permitted for fiscal years beginning after December 15, 2020, and can be adopted on either a fully retrospective or modified retrospective basis. The Company is currently evaluating the timing, method of adoption and overall impact of this standard on its consolidated financial statements. 3. Business Combinations On March 18, 2019, the Company acquired all issued and outstanding capital stock of Azuqua, Inc. (Azuqua), a company which provides a no-code, cloud-based integration platform that automates workflows between applications and services. The acquisition date cash consideration transferred for Azuqua was $ 44.2 million , net of $ 1.1 million in cash acquired. The Company recorded $ 15.7 million for developed technology intangible assets with an estimated useful life of five years and recorded $ 29.9 million of goodwill which is primarily attributed to the assembled workforce as well as the integration of Azuqua’s technology and the Company’s technology. The Company incurred $ 3.0 million of acquisition-related costs, which were recorded as general and administrative expense in the quarter ended April 30, 2019. In connection with Azuqua and prior acquisitions, the Company entered into deferred compensation arrangements totaling $ 10.8 million , of which $ 2.2 million was recognized as compensation during the six months ended July 31, 2020 . The remaining deferred compensation balance of $ 2.6 million is being recognized over a future weighted-average period of 1.6 years subject to continued service with the Company. These acquisitions did not have a material impact on the Company’s condensed consolidated financial statements; therefore, historical and proforma disclosures have not been presented. 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 July 31, 2020 and January 31, 2020 were as follows (in thousands): As of July 31, 2020 Amortized Cost Unrealized Gain Unrealized Loss Estimated Fair Value (unaudited) Cash equivalents: Money market funds $ 857,921 $ — $ — $ 857,921 Total cash equivalents 857,921 — — 857,921 Short-term investments: U.S. treasury securities 1,142,143 3,376 ( 39 ) 1,145,480 Corporate debt securities 410,369 1,484 ( 54 ) 411,799 Total short-term investments 1,552,512 4,860 ( 93 ) 1,557,279 Total $ 2,410,433 $ 4,860 $ ( 93 ) $ 2,415,200 As of January 31, 2020 Amortized Cost Unrealized Gain Unrealized Loss Estimated Fair Value Cash equivalents: Money market funds $ 416,584 $ — $ — $ 416,584 U.S. treasury securities 19,996 — — 19,996 Total cash equivalents 436,580 — — 436,580 Short-term investments: U.S. treasury securities 575,920 686 ( 8 ) 576,598 Corporate debt securities 305,859 519 — 306,378 Total short-term investments 881,779 1,205 ( 8 ) 882,976 Total $ 1,318,359 $ 1,205 $ ( 8 ) $ 1,319,556 All short-term investments were designated as available-for-sale securities as of July 31, 2020 and January 31, 2020 . The following table presents the contractual maturities of the Company’s short-term investments as of July 31, 2020 (in thousands): As of July 31, 2020 Amortized Cost Estimated Fair Value (unaudited) Due within one year $ 1,051,614 $ 1,055,302 Due between one to five years 500,898 501,977 Total $ 1,552,512 $ 1,557,279 As of July 31, 2020 and January 31, 2020 , the Company included $ 15.6 million and nil , respectively, of unsettled purchases of Short-term investments in Accrued expenses and other short-term liabilities. The Company included $ 7.6 million and $ 5.7 million of interest receivable in Prepaid expenses and other current assets as of July 31, 2020 and January 31, 2020, respectively. The Company did not recognize an allowance for credit losses against interest receivable as of July 31, 2020 and January 31, 2020 because such potential losses were not material. 13 The Company had 37 and 7 short-term investments in unrealized loss positions as of July 31, 2020 and January 31, 2020 , respectively. There were no material gross unrealized gains or losses from available-for-sale securities and no material realized gains or losses from available-for-sale securities that were reclassified out of accumulated other comprehensive income for the three and six months ended July 31, 2020 or 2019 . For available-for-sale debt securities that have unrealized losses, the Company evaluates whether (i) the Company has the intention to sell any of these investments, (ii) it is not more likely than not that the Company will be required to sell any of these available-for-sale debt securities before recovery of the entire amortized cost basis and (iii) the decline in the fair value of the investment is due to credit or non-credit related factors. Based on this evaluation, the Company determined that for short-term investments, there were no material credit or non-credit related impairments as of July 31, 2020 and January 31, 2020 . 5. Fair Value Measurements The Company measures its financial assets at fair value each reporting period using a fair value hierarchy that prioritizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. A financial instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Three levels of inputs may be used to measure as follows: Level 1—Valuations based on observable inputs that reflect quoted prices for identical assets or liabilities in active markets. Level 2—Valuations based on other inputs that are directly or indirectly observable in the marketplace. Level 3—Valuations based on unobservable inputs that are supported by little or no market activity. Assets and Liabilities Measured at Fair Value on a Recurring Basis The following table presents information about the Company’s financial assets that were measured at fair value on a recurring basis using the above input categories (in thousands): As of July 31, 2020 Level 1 Level 2 Level 3 Total (unaudited) Assets: Cash equivalents: Money market funds $ 857,921 $ — $ — $ 857,921 Total cash equivalents 857,921 — — 857,921 Short-term investments: U.S. treasury securities — 1,145,480 — 1,145,480 Corporate debt securities — 411,799 — 411,799 Total short-term investments — 1,557,279 — 1,557,279 Total cash equivalents and short-term investments $ 857,921 $ 1,557,279 $ — $ 2,415,200 14 As of January 31, 2020 Level 1 Level 2 Level 3 Total Assets: Cash equivalents: Money market funds $ 416,584 $ — $ — $ 416,584 U.S. treasury securities — 19,996 — 19,996 Total cash equivalents 416,584 19,996 — 436,580 Short-term investments: U.S. treasury securities — 576,598 — 576,598 Corporate debt securities — 306,378 — 306,378 Total short-term investments — 882,976 — 882,976 Total cash equivalents and short-term investments $ 416,584 $ 902,972 $ — $ 1,319,556 The carrying amounts of certain financial instruments, including cash held in banks, accounts receivable and accounts payable approximate fair value due to their short-term maturities and are excluded from the fair value table above. Fair Value Measurements of Other Financial Instruments The following table presents the carrying amounts and estimated fair values of our financial instruments that are not recorded at fair value on the condensed consolidated balance sheets (in thousands): As of July 31, 2020 Net Carrying Amount (1) Estimated Fair Value (unaudited) 2023 convertible senior notes $ 44,242 $ 219,886 2025 convertible senior notes $ 868,327 $ 1,417,220 2026 convertible senior notes $ 845,491 $ 1,341,487 (1) Before unamortized debt issuance costs. The principal amounts of the 2023 convertible senior notes (2023 Notes), the 2025 convertible senior notes (2025 Notes), and the 2026 convertible senior notes (2026 Notes, and together with the 2023 Notes and 2025 Notes, the Notes) are $ 50.7 million , $ 1,060.0 million , and $ 1,150.0 million , respectively. The difference between the principal amounts and the respective 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 July 31, 2020 , the difference between the net carrying amount of the Notes and their estimated fair values represented the equity conversion value premium the market assigned to the Notes. Based on the closing price of our common stock of $ 220.98 on July 31, 2020 , the if-converted values of the 2023 Notes and 2025 Notes exceeded the principal amounts of $ 50.7 million and $ 1,060.0 million , respectively, while the if-converted value of the 2026 Notes was less than the principal amount of $ 1,150.0 million . 6. Deferred Commissions Sales commissions capitalized as contract costs totaled $ 18.4 million and $ 11.6 million in the three months ended July 31, 2020 and 2019 , respectively, and $ 30.3 million and $ 21.4 million in the six months ended July 31, 2020 and 2019 , respectively . Amortization of contract costs was $ 9.4 million and $ 6.9 million for the three months ended July 31, 2020 and 2019 , respectively, and $ 18.1 million and $ 13.2 million for the six months ended July 31, 2020 and 2019 , respectively . There was no impairment loss in relation to the costs capitalized. 15 7. Goodwill and Intangible Assets, net Goodwill As of July 31, 2020 and January 31, 2020 , goodwill was $ 48.0 million . No goodwill impairments were recorded during the three and six months ended July 31, 2020 and 2019 . Intangible Assets, net Intangible assets consisted of the following (in thousands): As of July 31, 2020 (unaudited) Gross Accumulated Amortization Write-offs Net Capitalized internal-use software costs $ 27,837 $ ( 17,138 ) $ — $ 10,699 Purchased developed technology 28,800 ( 9,508 ) — 19,292 Software licenses 1,112 ( 1,072 ) — 40 $ 57,749 $ ( 27,718 ) $ — $ 30,031 As of January 31, 2020 Gross Accumulated Amortization Write-offs Net Capitalized internal-use software costs $ 24,890 $ ( 14,828 ) $ ( 119 ) $ 9,943 Purchased developed technology 28,800 ( 6,321 ) — 22,479 Software licenses 1,112 ( 1,005 ) — 107 $ 54,802 $ ( 22,154 ) $ ( 119 ) $ 32,529 The Company capitalized $ 1.8 million and $ 1.2 million of internal-use software costs during the three months ended July 31, 2020 and 2019, respectively and $ 3.1 million and $ 1.7 million of internal use software costs in the six months ended July 31, 2020 and 2019, respectively. Stock-based compensation expense included in the total amounts capitalized were immaterial. The remaining weighted-average useful life of all purchased developed technology was 3.5 years as of July 31, 2020 . Amortization expense of intangible assets for the three months ended July 31, 2020 and 2019 was $ 2.8 million and $ 3.0 million , respectively and $ 5.6 million and $ 5.1 million of internal-use software costs in the six months ended July 31, 2020 and 2019 , respectively. 8. Deferred Revenue and Performance Obligations Deferred Revenue Deferred revenue, which is a contract liability, consists primarily of payments received and accounts receivable recorded in advance of revenue recognition under the Company’s contracts with customers and is recognized as the revenue recognition criteria are met. Subscription revenue recognized during the three months ended July 31, 2020 and 2019 that was included in the deferred revenue balances at the beginning of the respective periods was $ 165.0 million and $ 113.1 million , respectively, and $ 261.9 million and $ 174.9 million in the six months ended July 31, 2020 and 2019 , respectively. Professional services and other revenue recognized in the three and six months ended July 31, 2020 and 2019 from deferred revenue balances at the beginning of the respective periods was not material. Transaction Price Allocated to the Remaining Performance Obligations Transaction price allocated to the remaining performance obligations represents all future, noncancelable contracted revenue that has not yet been recognized, inclusive of deferred revenue that has been invoiced and noncancelable amounts that will be invoiced and recognized as revenue in future periods. 16 As of July 31, 2020 , total remaining noncancelable performance obligations under the Company’s subscription contracts with customers was approximately $ 1,426.7 million . Of this amount, the Company expects to recognize revenue of approximately $ 684.5 million , or 48 % , 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 July 31, 2020 was not material. 9. Convertible Senior Notes, Net 2023 Convertible Senior Notes The 2023 Notes are senior, unsecured obligations of the Company, and bear interest at a fixed rate of 0.25 % per year. Interest is payable in cash semi-annually in arrears on February 15 and August 15 of each year, beginning on August 15, 2018. The 2023 Notes mature on February 15, 2023 unless earlier repurchased or converted. The Company may not redeem the 2023 Notes prior to maturity. The total net proceeds from the 2023 Notes, after deducting initial purchasers’ discounts and debt issuance costs, was $ 335.0 million . In September 2019, the Company used part of the net proceeds from the issuance of the 2025 Notes to repurchase a portion of the 2023 Notes, which consisted of a repurchase of $ 224.4 million aggregate principal amount of the 2023 Notes in privately-negotiated transactions, for aggregate consideration of $ 604.8 million , consisting of approximately $ 224.4 million in cash and approximately 3.0 million shares of Class A common stock (First Partial Repurchase of 2023 Notes). The $ 604.8 million in aggregate consideration was allocated between the debt and equity components in the amounts of $ 197.7 million and $ 407.1 million respectively, using an effective interest rate of 4.00 % to determine the fair value of the liability component. As of the repurchase date, the carrying value of the notes subject to the First Partial Repurchase of 2023 Notes, net of unamortized debt discount and issuance costs, was $ 183.1 million . The First Partial Repurchase of 2023 Notes resulted in a $ 14.6 million loss on early debt extinguishment in fiscal 2020 , of which $ 3.8 million consisted of unamortized debt issuance costs. In June 2020, the Company used part of the net proceeds from the issuance of the 2026 Notes to repurchase a portion of the 2023 Notes, which consisted of a repurchase of $ 69.9 million aggregate principal amount of the 2023 Notes in privately-negotiated transactions, for aggregate consideration of $ 260.5 million , consisting of approximately $ 0.2 million in cash and approximately 1.4 million shares of Class A common stock (Second Partial Repurchase of 2023 Notes, and together with the First Partial Repurchase of 2023 Notes, the 2023 Notes Partial Repurchases). The $ 260.5 million in aggregate consideration was allocated between the debt and equity components in the amounts of $ 61.8 million and $ 198.7 million respectively, using an effective interest rate of 4.90 % to determine the fair value of the liability component. As of the repurchase date, the carrying value of the notes subject to the Second Partial Repurchase of 2023 Notes, net of unamortized debt discount and issuance costs, was $ 59.6 million . The Second Partial Repurchase of 2023 Notes resulted in a $ 2.2 million loss on early debt extinguishment in fiscal 2021, of which $ 1.0 million consisted of unamortized debt issuance costs. The interest rates used in the 2023 Notes Partial Repurchases were based on the income and market based approaches used to determine the effective interest rate of the 2025 Notes and 2026 Notes, adjusted for the remaining tenor of the 2023 Notes. As of July 31, 2020 , $ 50.7 million of principal remained outstanding on the 2023 Notes. The terms of the 2023 Notes are governed by an Indenture by and between the Company and Wilmington Trust, National Association, as Trustee (the 2023 Indenture). Upon conversion, the 2023 Notes may be settled in cash, shares of Class A common stock or a combination of cash and shares of Class A common stock, at the Company’s election. The 2023 Notes are convertible at an initial conversion rate of 20.6795 shares of Class A common stock per $1,000 principal amount of the 2023 Notes, which is equal to an initial conversion price of approximately $ 48.36 per share of Class A common stock, subject to adjustment under certain circumstances in accordance with the terms of the 2023 Indenture. Prior to the close of business on the business day immediately preceding October 15, 2022, holders of the 2023 Notes may convert all or a portion of their 2023 Notes only in multiples of $1,000 principal amount, under the following circumstances: • during any fiscal quarter commencing after the fiscal quarter ending on April 30, 2018 (and only during such fiscal quarter), if the last reported sale price of Class A common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130 % of the conversion price of the 2023 Notes on each applicable trading day; 17 • during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of the 2023 Notes for each trading day of that five consecutive trading day period was less than 98 % of the product of the last reported sale price of Class A common stock and the conversion rate on such trading day; or • upon the occurrence of specified corporate events, as described in the 2023 Indenture. On or after October 15, 2022 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their 2023 Notes regardless of the foregoing circumstances. For at least twenty trading days during the period of thirty consecutive trading days ended July 31, 2020 , the last reported sale price of the Company’s common stock was equal to or exceeded 130 % of the conversion price of the 2023 Notes on each applicable trading day. As a result, the 2023 Notes are convertible at the option of the holders during the fiscal quarter ending October 31, 2020 and were classified as current liabilities on the condensed consolidated balance sheet as of July 31, 2020 . In addition, as of the date of this filing, the Company has received an immaterial amount of conversion requests and holders of the 2023 Notes have converted an immaterial amount of such notes (not in connection with the 2023 Notes Partial Repurchases). Holders of the 2023 Notes who convert their 2023 Notes in connection with certain corporate events that constitute a make-whole fundamental change (as defined in the 2023 Indenture) are, under certain circumstances, entitled to an increase in the conversion rate. Additionally, in the event of a corporate event that constitutes a fundamental change (as defined in the 2023 Indenture), holders of the 2023 Notes may require the Company to repurchase all or a portion of their 2023 Notes at a price equal to 100 % of the principal amount of the 2023 Notes being repurchased, plus any accrued and unpaid interest. In accounting for the issuance of the 2023 Notes, the Company separated the 2023 Notes into liability and equity components, using an effective interest rate of 5.68 % to determine the fair value of the liability component. This interest rate was based on both an income and a market based approach. For the income approach, the Company used a convertible bond pricing model, which included several assumptions including volatility and the risk-free rate. For the market approach, the Company observed the price of the Note Hedges (see below) it purchased for its 2023 Notes and also performed an evaluation of issuances of convertible debt securities by other companies with similar credit risk ratings at the time of issuance. The following table sets forth total interest expense recognized related to the 2023 Notes (in thousands): Three Months Ended July 31, Six Months Ended July 31, 2020 2019 2020 2019 (unaudited) Contractual interest expense $ 52 $ 215 $ 127 $ 431 Amortization of debt issuance costs 90 329 217 648 Amortization of debt discount 958 3,759 2,328 7,465 Total $ 1,100 $ 4,303 $ 2,672 $ 8,544 Total initial issuance costs of $ 10.0 million related to the 2023 Notes were allocated between liability and equity in the same proportion as the allocation of the total proceeds to the liability and equity components. Issuance costs attributable to the liability component are being amortized to interest expense over the respective term of the 2023 Notes using the effective interest rate method. The issuance costs attributable to the equity component were netted against the respective equity component in Additional paid-in capital. The Company initially recorded liability issuance costs of $ 7.7 million and equity issuance costs of $ 2.3 million . 18 The 2023 Notes, net consisted of the following (in thousands): As of July 31, 2020 (unaudited) Liability component: Principal $ 50,665 Less: unamortized debt issuance costs and debt discount ( 7,087 ) Net carrying amount $ 43,578 As of July 31, 2020 (unaudited) Equity component: 2023 Notes $ 11,743 Less: issuance costs ( 341 ) Carrying amount of the equity component (1) $ 11,402 (1) Included in the condensed consolidated balance sheets within Additional paid-in capital. Note Hedges In connection with the pricing of the 2023 Notes, the Company entered into convertible note hedges with respect to its Class A common stock (Note Hedges). The Note Hedges are purchased call options that give the Company the option to purchase, subject to anti-dilution adjustments substantially identical to those in the 2023 Notes, approximately 7.1 million shares of its Class A common stock for approximately $ 48.36 per share (subject to adjustment), corresponding to the approximate initial conversion price of the 2023 Notes, exercisable upon conversion of the 2023 Notes. The Note Hedges will expire in 2023, if not exercised earlier. The Note Hedges are intended to offset potential dilution to the Company’s Class A common stock and/or offset the potential cash payments that the Company could be required to make in excess of the principal amount upon any conversion of the 2023 Notes under certain circumstances. The Note Hedges are separate transactions and are not part of the terms of the 2023 Notes. The Company paid an aggregate amount of $ 80.0 million for the Note Hedges. The amount paid for the Note Hedges was recorded as a reduction to Additional paid-in capital in the condensed consolidated balance sheets. In September 2019 and in June 2020, and in connection with the First Partial Repurchase of 2023 Notes and Second Partial Repurchase of 2023 Notes, the Company terminated Note Hedges corresponding to approximately 4.6 million and 1.4 million shares for cash proceeds of $ 405.9 million and $ 195.0 million , respectively. The proceeds were recorded as an increase to Additional paid-in capital in the condensed consolidated balance sheets. As of July 31, 2020 , Note Hedges giving the Company the option to purchase approximately 1.0 million shares (subject to adjustment) remained outstanding. Warrants In connection with the issuance of the 2023 Notes, the Company also entered into separate warrant transactions pursuant to which it sold net-share-settled (or, at the Company’s election subject to certain conditions, cash-settled) warrants (Warrants) to acquire, subject to anti-dilution adjustments, up to approximately 7.1 million shares over 80 scheduled trading days beginning in May 2023 of the Company’s Class A common stock at an initial exercise price of approximately $ 68.06 per share (subject to adjustment). If the Warrants are not exercised on their exercise dates, they will expire. If the market value per share of the Company’s Class A common stock exceeds the applicable exercise price of the Warrants, the Warrants could have a dilutive effect on the Company’s Class A common stock unless, subject to the terms of the Warrants, the Company elects to cash settle the Warrants. The Warrants are separate transactions and are not part of the terms of the 2023 Notes or the Note Hedges. The Company received aggregate proceeds of $ 52.4 million from the sale of the Warrants in connection with the 2023 Notes. The proceeds from the sale of the Warrants were recorded as an increase to Additional paid-in capital in the condensed consolidated balance sheets. 19 In September 2019 and in June 2020, and in connection with the First Partial Repurchase of 2023 Notes and Second Partial Repurchase of 2023 Notes, the Company terminated Warrants corresponding to approximately 4.6 million and 1.4 million shares for total cash payments of $ 358.6 million and $ 175.4 million , respectively. The termination payments were recorded as a decrease to Additional paid-in capital in the condensed consolidated balance sheets. As of July 31, 2020 , Warrants to acquire up to approximately 1.0 million shares (subject to adjustment) remained outstanding. 2025 Convertible Senior Notes The 2025 Notes are senior, unsecured obligations of the Company, and bear interest at a fixed rate of 0.125 % per year. Interest is payable in cash semi-annually in arrears on March 1 and September 1 of each year, beginning on March 1, 2020. The 2025 Notes mature on September 1, 2025 unless earlier redeemed, repurchased or converted. The total net proceeds from the 2025 Notes, after deducting initial purchasers’ discounts and debt issuance costs, were $ 1,040.7 million . The terms of the 2025 Notes are governed by an Indenture by and between the Company and Wilmington Trust, National Association, as Trustee (the 2025 Indenture). Upon conversion, the 2025 Notes may be settled in cash, shares of Class A common stock or a combination of cash and shares of Class A common stock, at the Company’s election. The 2025 Notes are convertible at an initial conversion rate of 5.2991 shares of class A common stock per $1,000 principal amount of the 2025 Notes, which is equal to an initial conversion price of approximately $ 188.71 per share of Class A common stock, subject to adjustment under certain circumstances in accordance with the terms of the 2025 Indenture. Prior to the close of business on the business day immediately preceding June 1, 2025, holders of the 2025 Notes may convert all or a portion of their 2025 Notes only in multiples of $1,000 principal amount, under the following circumstances: • during any fiscal quarter commencing after the fiscal quarter ending on January 31, 2020 (and only during such fiscal quarter), if the last reported sale price of Class A common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130 % of the conversion price of the 2025 Notes on each applicable trading day; • during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of the 2025 Notes for each trading day of that five consecutive trading day period was less than 98 % of the product of the last reported sale price of Class A common stock and the conversion rate on such trading day; • if the Company calls the notes for redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; or • upon the occurrence of specified corporate events, as described in the 2025 Indenture. On or after June 1, 2025 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their 2025 Notes regardless of the foregoing circumstances. During the three months ended July 31, 2020 , the conditions allowing holders of the 2025 Notes to convert were not met. The Company may redeem for cash all or any portion of the 2025 Notes, at its option, on or after September 6, 2022, if the last reported sale price of the Company’s Class A common stock has been at least 130 % of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on and including the trading day preceding the date on which the Company provides notice of redemption at a redemption price equal to 100 % of the principal amount of the 2025 Notes to be redeemed, plus any accrued and unpaid interest to, but excluding, the redemption date. During the three months ended July 31, 2020 , the Company did no t redeem any of the 2025 Notes. Holders of the 2025 Notes who convert their 2025 Notes in connection with certain corporate events that constitute a make-whole fundamental change (as defined in the 2025 Indenture) or in connection with the Company’s issuance of a redemption notice are, under certain circumstances, entitled to an increase in the conversion rate. Additionally, in the event of a corporate event that constitutes a fundamental change (as defined in the 2025 Indenture), holders of 20 the 2025 Notes may require the Company to repurchase all or a portion of their 2025 Notes at a price equal to 100 % of the principal amount of the 2025 Notes being repurchased, plus any accrued and unpaid interest. In accounting for the issuance of the 2025 Notes, the Company separated the 2025 Notes into liability and equity components using an effective interest rate of 4.10 % to determine the fair value of the liability component. This interest rate was based on both an income and a market based approach. For the income approach, the Company used a convertible bond pricing model, which included several assumptions including volatility and the risk-free rate. For the market approach, the Company performed an evaluation of issuances of convertible debt securities by other companies with similar credit risk ratings at the time of issuance. The following table sets forth total interest expense recognized related to the 2025 Notes (in thousands): Three Months Ended Six Months Ended July 31, 2020 (unaudited) Contractual interest expense $ 331 $ 662 Amortization of debt issuance costs 518 1,024 Amortization of debt discount 8,440 16,794 Total $ 9,289 $ 18,480 Total issuance costs of $ 19.3 million related to the 2025 Notes were allocated between liability and equity in the same proportion as the allocation of the total proceeds to the liability and equity components. Issuance costs attributable to the liability component are being amortized to interest expense over the respective term of the 2025 Notes using the effective interest rate method. The issuance costs attributable to the equity component were netted against the respective equity component in Additional paid-in capital. The Company recorded liability issuance costs of $ 15.3 million and equity issuance costs of $ 4.0 million . The 2025 Notes, net consisted of the following (in thousands): As of July 31, 2020 (unaudited) Liability component: Principal $ 1,060,000 Less: unamortized debt issuance costs and debt discount ( 205,182 ) Net carrying amount $ 854,818 At Issuance Equity component: 2025 Notes $ 221,387 Less: issuance costs ( 4,040 ) Carrying amount of the equity component (1) $ 217,347 (1) Included in the condensed consolidated balance sheets within Additional paid-in capital. 21 2025 Capped Calls In connection with the pricing of the 2025 Notes, the Company entered into capped call transactions with respect to its Class A common stock (2025 Capped Calls). The 2025 Capped Calls are purchased call options that give the Company the option to purchase, subject to anti-dilution adjustments substantially identical to those in the 2025 Notes, approximately 5.6 million shares of its Class A common stock for approximately $ 188.71 per share (subject to adjustment), corresponding to the approximate initial conversion price of the 2025 Notes, exercisable upon conversion of the 2025 Notes. The 2025 Capped Calls have initial cap prices of $ 255.88 per share (subject to adjustment) and will expire in 2025, if not exercised earlier. The 2025 Capped Calls are intended to offset potential dilution to the Company’s Class A common stock and/or offset the potential cash payments that the Company could be required to make in excess of the principal amount upon any conversion of the 2025 Notes under certain circumstances. The Capped Calls are separate transactions and are not part of the terms of the 2025 Notes. The Company paid an aggregate amount of $ 74.1 million for the 2025 Capped Calls. The amount paid for the 2025 Capped Calls was recorded as a reduction to Additional paid-in capital in the condensed consolidated balance sheets. 2026 Convertible Senior Notes The 2026 Notes are senior, unsecured obligations of the Company, and bear interest at a fixed rate of 0.375 % per year. Interest is payable in cash semi-annually in arrears on June 15 and December 15 of each year, beginning on December 15, 2020. The 2026 Notes mature on June 15, 2026 unless earlier redeemed, repurchased or converted. The total net proceeds from the 2026 Notes, after deducting initial purchasers’ discounts and debt issuance costs, were $ 1,134.9 million . The terms of the 2026 Notes are governed by an Indenture by and between the Company and Wilmington Trust, National Association, as Trustee (the 2026 Indenture, and together with the 2023 Indenture and 2025 Indenture, the Indentures). Upon conversion, the 2026 Notes may be settled in cash, shares of Class A common stock or a combination of cash and shares of Class A common stock, at the Company’s election. The 2026 Notes are convertible at an initial conversion rate of 4.1912 shares of Class A common stock per $1,000 principal amount of the 2026 Notes, which is equal to an initial conversion price of approximately $ 238.60 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 March 15, 2026, holders of the 2026 Notes may convert all or a portion of their 2026 Notes only in multiples of $1,000 principal amount, under the following circumstances: • during any fiscal quarter commencing after the fiscal quarter ending on October 31, 2020 (and only during such fiscal quarter), if the last reported sale price of our 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 2026 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 2026 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 our Class A common stock and the conversion rate on such trading day; • if the Company calls the notes for redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; or • upon the occurrence of specified corporate events, as described in the Indenture. On or after March 15, 2026 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 2026 Notes regardless of the foregoing circumstances. During the three months ended July 31, 2020 , the conditions allowing holders of the 2026 Notes to convert were not met. The Company may redeem for cash all or any portion of the 2026 Notes, at its option, on or after June 20, 2023, if the last reported sale price of the Company’s Class A common stock has been at least 130 % of the conversion price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding 22 the date on which we provide notice of redemption, during any 30 consecutive trading day period ending on and including the trading day preceding the date on which we provide notice of redemption price equal to 100 % of the principal amount of the notes to be redeemed, plus any accrued and unpaid interest to, but excluding, the redemption date. During the three months ended July 31, 2020 , the Company did no t redeem any of the 2026 Notes. Holders of the 2026 Notes who convert their 2026 Notes in connection with certain corporate events that constitute a make-whole fundamental change (as defined in the Indenture) or in connection with the Company’s issuance of a redemption notice are, under certain circumstances, entitled to an increase in the conversion rate. Additionally, in the event of a corporate event that constitutes a fundamental change (as defined in the Indenture), holders of the 2026 Notes may require the Company to repurchase all or a portion of their 2026 Notes at a price equal to 100 % of the principal amount of the 2026 Notes being repurchased, plus any accrued and unpaid interest. In accounting for the issuance of the 2026 Notes, the Company separated the 2026 Notes into liability and equity components using an effective interest rate of 5.75 % to determine the fair value of the liability component. This interest rate was based on both an income and a market based approach. For the income approach, the Company used a convertible bond pricing model, which included several assumptions including volatility, the risk-free rate and observable trading activity for the Company’s existing Notes. For the market approach, the Company performed an evaluation of issuances of debt securities without conversion features by other companies with similar credit risk ratings at the time of issuance. The following table sets forth total interest expense recognized related to the 2026 Notes (in thousands): Three and Six Months Ended July 31, 2020 (unaudited) Contractual interest expense $ 575 Amortization of debt issuance costs 165 Amortization of debt discount 5,802 Total $ 6,542 Total issuance costs of $ 15.1 million related to the 2026 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 2026 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 $ 11.0 million and equity issuance costs of $ 4.1 million . The 2026 Notes, net consisted of the following (in thousands): As of July 31, 2020 (unaudited) Liability component: Principal $ 1,150,000 Less: unamortized debt issuance costs and debt discount ( 315,380 ) Net carrying amount $ 834,620 At Issuance (unaudited) Equity component: 2026 Notes $ 310,311 Less: issuance costs ( 4,079 ) Carrying amount of the equity component (1) $ 306,232 (1) Included in the condensed consolidated balance sheets within Additional paid-in capital. 23 2026 Capped Calls In connection with the pricing of the 2026 Notes, the Company entered into capped call transactions with respect to its Class A common stock (2026 Capped Calls). The 2026 Capped Calls are purchased call options that give the Company the option to purchase, subject to anti-dilution adjustments substantially identical to those in the 2026 Notes, approximately 4.8 million shares of its Class A common stock for approximately $ 238.60 per share (subject to adjustment), corresponding to the approximate initial conversion price of the 2026 Notes, exercisable upon conversion of the 2026 Notes. The 2026 Capped Calls have initial cap prices of $ 360.14 per share (subject to adjustment) and will expire in 2026, if not exercised earlier. The 2026 Capped Calls are intended to offset potential dilution to the Company’s Class A common stock and/or offset the potential cash payments that the Company could be required to make in excess of the principal amount upon any conversion of the 2026 Notes under certain circumstances. The 2026 Capped Calls are separate transactions and are not part of the terms of the 2026 Notes. The Company paid an aggregate amount of $ 134.0 million for the 2026 Capped Calls. The amount paid for the 2026 Capped Calls was recorded as a reduction to Additional paid-in capital in the consolidated balance sheets. 10. Leases The Company has entered into various non-cancelable office space operating leases with original lease periods expiring between 2020 and 2028. These leases do not contain material variable rent payments, residual value guarantees, covenants or other restrictions. Operating lease costs were as follows (in thousands): Three Months Ended July 31, Six Months Ended July 31, 2020 2019 2020 2019 (unaudited) Operating lease cost (1) $ 8,334 $ 5,620 $ 15,704 $ 11,083 (1) Amounts are presented exclusive of sublease income and include short-term leases, which are immaterial. The weighted-average remaining term of the Company’s operating leases was 7.4 and 7.9 years and the weighted-average discount rate used to measure the present value of the operating lease liabilities was 5.6 % and 5.7 % as of July 31, 2020 and January 31, 2020 , respectively. Maturities of the Company’s operating lease liabilities, which do not include short-term leases, as of July 31, 2020 were as follows (in thousands): Operating Leases (unaudited) 2021 $ 12,971 2022 35,972 2023 36,596 2024 37,461 2025 35,415 Thereafter 99,891 Total lease payments 258,306 Less imputed interest ( 49,616 ) Total operating lease liabilities $ 208,690 Cash payments included in the measurement of the Company’s operating lease liabilities were $ 7.8 million and $ 2.4 million for the three months ended July 31, 2020 and 2019 , respectively, and $ 15.0 million and $ 4.8 million in the six months ended July 31, 2020 and 2019 , respectively. As of July 31, 2020 , the Company has $ 4.7 million of undiscounted future payments under an operating lease that has not yet commenced, which is excluded from the table above. This operating lease will commence in fiscal 2021 and has a lease term of 4.0 years. 24 11. Commitments and Contingencies Letters of Credit In conjunction with the execution of certain office space operating leases, letters of credit in the aggregate amount of $ 11.2 million and $ 11.9 million were issued and outstanding as of July 31, 2020 and January 31, 2020 , respectively. No draws have been made under such letters of credit. Legal Matters From time to time in the normal course of business, the Company may be subject to various legal matters such as threatened or pending claims or proceedings. There were no such material matters as of July 31, 2020 . 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 July 31, Six Months Ended July 31, 2020 2019 2020 2019 (unaudited) Cost of revenue Subscription $ 5,164 $ 3,111 $ 9,139 $ 5,533 Professional services and other 2,000 1,873 3,811 3,392 Research and development 14,953 9,082 26,888 15,428 Sales and marketing 13,165 9,236 24,325 16,022 General and administrative 13,112 7,972 21,959 13,584 Total $ 48,394 $ 31,274 $ 86,122 $ 53,959 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 and six months ended July 31, 2020 and 2019 . See Note 7 for further details. Equity Incentive Plans The Company has two equity incentive plans: the 2009 Stock Plan (2009 Plan) and the 2017 Equity Incentive Plan (2017 Plan). All shares that remain available for future grants are under the 2017 Plan. As of July 31, 2020 , options to purchase 1,210,791 shares of Class A common stock and 8,707,490 shares of Class B common stock remained outstanding. Shares of common stock reserved for future issuance were as follows: As of July 31, 2020 (unaudited) Stock options and unvested RSUs outstanding 15,180,332 Available for future stock option and RSU grants 20,798,312 Available for ESPP 4,752,501 40,731,145 25 Stock Options A summary of the Company’s stock option activity and related information was as follows: Number of Options Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term (Years) Aggregate Intrinsic Value (in thousands) Outstanding as of January 31, 2020 12,359,302 $ 11.82 6.2 $ 1,436,487 Granted 399,936 144.58 Exercised ( 2,705,093 ) 10.17 Canceled ( 135,864 ) 19.68 Outstanding as of July 31, 2020 (unaudited) 9,918,281 $ 17.52 6.0 $ 2,017,986 As of July 31, 2020 Vested and exercisable (unaudited) 7,606,991 $ 9.43 5.6 $ 1,609,285 As of July 31, 2020 , there was a total of $ 41.6 million of unrecognized stock-based compensation expense, which is expected to be recognized over a weighted-average period of 1.5 years. Restricted Stock Units A summary of the Company’s RSU activities and related information was as follows: Number of RSUs Weighted- Average Grant Date Fair Value Per Share Outstanding as of January 31, 2020 4,893,241 $ 77.99 Granted 1,779,276 159.92 Vested ( 1,156,701 ) 78.72 Forfeited ( 253,765 ) 79.89 Outstanding as of July 31, 2020 (unaudited) 5,262,051 $ 105.44 As of July 31, 2020 , there was $ 519.4 million of unrecognized stock-based compensation expense related to unvested RSUs, which is expected to be recognized over a weighted-average period of 2.7 years based on vesting under the award service conditions. 26 Employee Stock Purchase Plan The ESPP provides for 12-month offering periods beginning June 21 and December 21 of each year, and each offering period consists of up to two six-month purchase periods. The Company estimated the fair value of ESPP purchase rights using a Black-Scholes option pricing model with the following assumptions: Three Months Ended July 31, Six Months Ended July 31, 2020 2019 2020 2019 (unaudited) Expected volatility 50% - 54% 43% - 59% 50% - 54% 43% - 59% Expected term (in years) 0.5 - 1.0 0.5 - 1.0 0.5 - 1.0 0.5 - 1.0 Risk-free interest rate 0.17% - 0.18% 1.95% - 2.05% 0.17% - 0.18% 1.95% - 2.05% Expected dividend yield — — — — During the three and six months ended July 31, 2020 , the Company’s employees purchased 127,734 shares of its Class A common stock under the ESPP. The shares were purchased at a weighted-average purchase price of $ 100.38 per share, with total proceeds of $ 12.8 million . As of July 31, 2020 , there was $ 4.1 million of unrecognized stock-based compensation expense related to the ESPP that is expected to be recognized over an average vesting period of 0.6 years. 13. Income Taxes For the three and six months ended July 31, 2020 , the Company recorded a tax benefit of $ 0.4 million and $ 0.8 million on pretax losses of $ 60.5 million and $ 118.6 million , respectively. The effective tax rate for the three and six months ended July 31, 2020 was 0.7 % . The effective tax rate differs from the statutory rate primarily as a result of not recognizing deferred tax assets for U.S. losses due to a full valuation allowance against U.S. deferred tax assets and excess tax benefits from stock-based compensation in the United Kingdom. The tax benefit was partially offset by income tax expense in profitable foreign jurisdictions and U.S. state taxes. For the three and six months ended July 31, 2019 , the Company recorded a tax benefit of $ 1.5 million and $ 2.6 million on pretax losses of $ 44.5 million and $ 97.6 million , respectively. The effective tax rate for the three and six months ended July 31, 2019 was 3.3 % and 2.7 % , respectively. 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 benefits were partially offset by income tax expense in profitable foreign jurisdictions and U.S. state taxes. On March 27, 2020, the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act). The CARES Act provides numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future use of net operating losses, temporary changes to the prior and future limitations on interest deductions, temporary suspension of certain payment requirements for the employer portion of Social Security taxes, technical corrections from prior tax legislation for tax depreciation of certain qualified improvement property, and the creation of certain refundable employee retention credits. The Company does not expect there to be a material tax impact on its condensed consolidated financial statements at this time, and will continue to assess the implications of the CARES Act and its continuing developments and interpretations. 27 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 July 31, Six Months Ended July 31, 2020 2019 2020 2019 Class A Class B Class A Class B Class A Class B Class A Class B (unaudited) Numerator: Net loss $ ( 56,090 ) $ ( 4,010 ) $ ( 39,250 ) $ ( 3,730 ) $ ( 109,774 ) $ ( 7,988 ) $ ( 86,516 ) $ ( 8,430 ) Denominator: Weighted-average shares outstanding - basic and diluted 117,891 8,428 105,049 9,984 116,449 8,473 103,917 10,125 Net loss per share, basic and diluted $ ( 0.48 ) $ ( 0.48 ) $ ( 0.37 ) $ ( 0.37 ) $ ( 0.94 ) $ ( 0.94 ) $ ( 0.83 ) $ ( 0.83 ) 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 July 31, 2020 2019 (unaudited) Issued and outstanding stock options 9,918 14,587 Unvested RSUs issued and outstanding 5,262 5,401 Unvested restricted stock awards issued and outstanding — 177 Unvested shares subject to repurchase 1 14 Shares committed under the ESPP 141 215 Shares related to the 2023 Notes 1,048 7,134 Shares subject to warrants related to the issuance of the 2023 Notes 1,048 7,134 Shares related to the 2025 Notes 5,617 — Shares related to the 2026 Notes 4,820 — 27,855 34,662 The Company uses the if-converted method for calculating any potential dilutive effect of the conversion options embedded in the Notes on diluted net income per share, if applicable. The conversion options of the 2023, 2025 and 2026 Notes are dilutive in periods of net income on a weighted average basis using an assumed conversion date equal to the later of the beginning of the reporting period and the date of issuance of the respective Notes. The exercise rights of the Warrants will have a dilutive impact on net income per share of common stock under the treasury-stock method when the average market price per share of the Company’s Class A common stock for a given period exceeds the conversion price of $ 68.06 per share. During the three and six months ended July 31, 2020 , the average price per share of the Company’s Class A common stock exceeded the exercise price of the Warrants; however, since the Company is in a net loss position, there was no dilutive effect during any period presented. 28