What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-12-03 compared with 2020-08-28 · 180 added, 116 removed, 362 unchanged (45% of the section changed)

12 unchanged sentences

We have rapidly expanded the breadth and depth of the Okta Integration Network, which provides customers with integrations to cloud, mobile and web applications and IT infrastructure providers that spans the functionality of our products.

As of July 31, 2020 , we had over 6,500 integrations with these cloud, mobile and web applications and IT infrastructure providers.

As of October 31, 2020, we had over 6,500 integrations with these cloud, mobile and web applications and IT infrastructure providers.

We employ a SaaS business model.

11 unchanged sentences

None of these impacts can be predicted with certainty.

Our revenue is relatively predictable as a result of our subscription-based business model, which constituted over 95% of total revenue for the three and six months ended July 31, 2020 .

Our revenue is relatively predictable as a result of our subscription-based business model, which constituted over 95% of total revenue for the three and nine months ended October 31, 2020.

Future growth may be impacted by longer sales cycles, which we have experienced, which in turn, could result in delays in deals closing, creating near-term headwinds for cash flow, remaining performance obligations (RPO) and billings growth as well as potential future impacts on revenue growth and other key metrics on a trailing basis.

Our allowance for doubtful accounts and sales reserves have increased primarily due to an increase in overall uncertainty in our forecasts of future economic conditions and concession requests.

While we see risks associated with more highly impacted companies and industries, we are

also seeing new interest from other organizations, driven by rapidly changing work and business environments.

While we see risks associated with more highly impacted

companies and industries, we are also seeing new interest from other organizations, driven by rapidly changing work and business environments.

As workforces have transitioned to working from home in a distributed model, Zero Trust has become an increasingly important and identity an increasingly critical service.

2 unchanged sentences

In addition, we shifted our annual user conference, Oktane20 Live, to a virtual-only experience, resulting in cost savings.

We have further benefited from cost savings, driven by reduced growth in employee compensation costs due to slower hiring, reductions in employee-related expenses as our sales and marketing activities shift to an online only sales format and a shift to work-from-home procedures.

We have further benefited from cost savings, driven by reduced growth in employee compensation costs due to slower hiring, reductions in employee-related expenses as our sales and marketing activities shift primarily to an online-only sales format and a shift to work-from-home procedures.

See Risk Factors for further discussion of the potential impact of COVID-19 and its related public health measures on our business.

26 unchanged sentences

Gross margin is gross profit expressed as a percentage of total revenue.

Our gross margin may fluctuate from period to period as our revenue fluctuates, and as a result of the timing and amount of investments to expand our hosting capacity, our continued efforts to build platform support and professional services teams, increased

stock-based compensation expenses, as well as the amortization of costs associated with capitalized internal-use software and acquired intangible assets.

teams, increased stock-based compensation expenses, as well as the amortization of costs associated with capitalized internal-use software and acquired intangible assets.

Operating Expenses

13 unchanged sentences

Interest and Other, Net

Interest and other, net consists of interest expense, which primarily includes amortization of debt discount and issuance costs and contractual interest expense for our Notes, interest income from our investment holdings and loss on early extinguishment of debt.

Provision for (Benefit from) Income Taxes

3 unchanged sentences

The following table sets forth our results of operations for the periods presented in dollars:

Three Months Ended July 31,

Six Months Ended July 31,

Three Months Ended

October 31, Nine Months Ended

2020 2019 2020 2019

(in thousands)

Subscription $ 206,743 $ 144,517 $ 571,213 $ 394,174

Professional services and other 10,636 8,520 29,471 24,566

2 unchanged sentences

Subscription (1)

44,762 30,124 121,420 82,581

Professional services and other (1)

12,146 10,700 35,121 32,118

Total cost of revenue 56,908 40,824 156,541 114,699

Gross profit 160,471 112,213 444,143 304,041

Operating expenses:

Research and development (1)

58,150 41,832 160,510 115,909

Sales and marketing (1)

109,812 87,224 312,177 247,721

General and administrative (1)

44,485 28,887 121,019 81,540

Total operating expenses 212,447 157,943 593,706 445,170

2 unchanged sentences

Interest income and other, net 1,878 4,982 10,737 11,346

Loss on early extinguishment of debt

Loss on early extinguishment and conversion of debt (89) (14,572) (2,263) (14,572)

Interest and other, net (20,579) (17,416) (41,589) (19,597)

Loss before benefit from income taxes

Benefit from income taxes

Loss before provision for (benefit from) income taxes (72,555) (63,146) (191,152) (160,726)

Provision for (benefit from) income taxes 209 349 (626) (2,285)

Net loss $ (72,764) $ (63,495) $ (190,526) $ (158,441)

(1) Includes stock-based compensation expense as follows:

Three Months Ended July 31,

Six Months Ended July 31,

Three Months Ended

October 31, Nine Months Ended

2020 2019 2020 2019

(in thousands)

6 unchanged sentences

The following table sets forth our results of operations for the periods presented as a percentage of total revenue:

Three Months Ended July 31,

Six Months Ended July 31,

Three Months Ended

October 31, Nine Months Ended

2020 2019 2020 2019

Subscription 95 % 94 % 95 % 94 %

Professional services and other 5 6 5 6

1 unchanged sentence

Cost of revenue

Subscription 20 20 20 19

Professional services and other 6 7 6 8

Total cost of revenue 26 27 26 27

Gross profit 74 73 74 73

Operating expenses

6 unchanged sentences

Interest income and other, net 1 3 1 3

Loss on early extinguishment of debt

Loss on early extinguishment and conversion of debt — (9) — (4)

Interest and other, net (9) (11) (7) (5)

Loss before benefit from income taxes

Benefit from income taxes

Comparison of the Three Months Ended July 31, 2020 and 2019

Three Months Ended July 31,

Loss before provision for (benefit from) income taxes (33) (41) (32) (39)

Provision for (benefit from) income taxes — — — (1)

Net loss (33) % (41) % (32) % (38) %

Comparison of the Three Months Ended October 31, 2020 and 2019

Three Months Ended

2020 2019 $ Change % Change

(dollars in thousands)

Subscription $ 206,743 $ 144,517 $ 62,226 43 %

Professional services and other 10,636 8,520 2,116 25

1 unchanged sentence

Percentage of revenue:

Subscription 95 % 94 %

Professional services and other 5 6

Subscription revenue increased by $58.2 million , or 44% , for the three months ended July 31, 2020 compared to the three months ended July 31, 2019 .

Total 100 % 100 %

Subscription revenue increased by $62.2 million, or 43%, for the three months ended October 31, 2020 compared to the three months ended October 31, 2019.

The increase was primarily due to the addition of new customers as well as an increase in users and sales of additional products to existing customers.

Professional services and other revenue increased by $1.8 million , or 22% , for the three months ended July 31, 2020 compared to the three months ended July 31, 2019 .

Professional services and other revenue increased by $2.1 million, or 25%, for the three months ended October 31, 2020 compared to the three months ended October 31, 2019.

The increase in professional services revenue was primarily related to an increase in implementation and other services associated with an increase in the number of new customers purchasing our subscription services.

Cost of Revenue, Gross Profit and Gross Margin

Three Months Ended July 31,

Three Months Ended

2020 2019 $ Change % Change

(dollars in thousands)

Cost of revenue:

Subscription $ 44,762 $ 30,124 $ 14,638 49 %

Professional services and other 12,146 10,700 1,446 14

Total cost of revenue $ 56,908 $ 40,824 $ 16,084 39 %

Gross profit $ 160,471 $ 112,213 $ 48,258 43 %

Gross margin:

Subscription 78 % 79 %

Professional services and other (14) (26)

Total gross margin 74 73

Cost of subscription revenue increased by $11.6 million , or 41% , for the three months ended July 31, 2020 compared to the three months ended July 31, 2019 , primarily due to an increase of $8.1 million in employee compensation costs related to higher headcount to support the growth in our subscription services, an increase of $1.5 million in software license costs and an increase of $1.1 million in third-party hosting costs as we increased capacity to support our growth.

Our gross margin for subscription revenue remained consistent at 79% for the three months ended July 31, 2020 compared to the three months ended July 31, 2019 .

While our gross margins for subscription revenue may fluctuate in the near-term as we invest in our growth, we expect our subscription revenue gross margin to increase over time as we achieve additional economies of scale.

Cost of professional services and other revenue increased by $0.8 million , or 7 %, for the three months ended July 31, 2020 , compared to the three months ended July 31, 2019 , due to a number of immaterial changes.

Our gross margin for professional services and other revenue improved to (19)% during the three months ended July 31, 2020 from (36)% during the three months ended July 31, 2019 , primarily due to increases in professional services and other revenue.

Cost of subscription revenue increased by $14.6 million, or 49%, for the three months ended October 31, 2020 compared to the three months ended October 31, 2019, primarily due to an increase of $9.3 million in employee compensation costs related to higher headcount to support the growth in our subscription services, an increase of $2.0 million in software license costs and an increase of $1.8 million in third-party hosting costs as we increased capacity to support our growth.

Our gross margin for subscription revenue decreased to 78% for the three months ended October 31, 2020 from 79% during the three months ended October 31, 2019.

While our gross margins for subscription revenue may fluctuate in the near-term as we invest in our growth, we expect our subscription revenue gross margin to improve over the long-term as we achieve additional economies of scale.

Cost of professional services and other revenue increased by $1.4 million, or 14%, for the three months ended October 31, 2020, compared to the three months ended October 31, 2019, due to a number of immaterial changes.

Our gross margin for professional services and other revenue improved to (14)% during the three months ended October 31, 2020 from (26)% during the three months ended October 31, 2019, primarily due to increases in professional services and other revenue.

Operating Expenses

Research and Development Expenses

Three Months Ended July 31,

Three Months Ended

2020 2019 $ Change % Change

(dollars in thousands)

1 unchanged sentence

Percentage of revenue 27 % 27 %

Research and development expenses increased $13.8 million , or 35% , for the three months ended July 31, 2020 compared to the three months ended July 31, 2019 .

Research and development expenses increased $16.3 million, or 39%, for the three months ended October 31, 2020 compared to the three months ended October 31, 2019.

The increase was primarily due to an increase of $14.6 million in employee compensation costs due to higher headcount.

Sales and Marketing Expenses

Three Months Ended July 31,

Three Months Ended

2020 2019 $ Change % Change

(dollars in thousands)

1 unchanged sentence

Percentage of revenue 51 % 57 %

Sales and marketing expenses increased $19.9 million , or 25% , for the three months ended July 31, 2020 compared to the three months ended July 31, 2019 .

The increase was primarily due to an increase of $17.1 million in employee compensation costs related to headcount growth, offset by a decrease of $5.0 million in employee-related expenses primarily due to reduced travel-related expenditures resulting from our temporary shift to an online only sales format.

Marketing and event costs increased by $3.5 million primarily due to increases in demand generation programs, advertising and brand awareness efforts aimed at acquiring new customers.

Sales and marketing expenses increased $22.6 million, or 26%, for the three months ended October 31, 2020 compared to the three months ended October 31, 2019.

The increase was primarily due to an increase of $16.3 million in employee compensation costs related to headcount growth, partially offset by a decrease of $5.1 million in employee-related expenses primarily due to reduced travel-related expenditures resulting from our temporary shift of our sales and marketing activities to a primarily online-only format.

Marketing and event costs increased by $8.7 million primarily due to increases in demand generation programs, advertising, brand awareness efforts aimed at acquiring new customers and changes in the timing of expenses incurred for a future event.

General and Administrative Expenses

Three Months Ended July 31,

Three Months Ended

2020 2019 $ Change % Change

(dollars in thousands)

1 unchanged sentence

Percentage of revenue 20 % 19 %

General and administrative expenses increased $15.6 million , or 58% , for the three months ended July 31, 2020 compared to the three months ended July 31, 2019 .

General and administrative expenses increased $15.6 million, or 54%, for the three months ended October 31, 2020 compared to the three months ended October 31, 2019.

The increase was primarily due to an increase of $10.4 million in employee compensation costs primarily related to higher headcount to support our continued growth.

Interest and Other, Net

Three Months Ended July 31,

Three Months Ended

2020 2019 $ Change % Change

(dollars in thousands)

1 unchanged sentence

Interest income and other, net 1,878 4,982 (3,104) (62)

Loss on early extinguishment of debt

Loss on early extinguishment and conversion of debt (89) (14,572) 14,483 (99)

Interest and other, net $ (20,579) $ (17,416) $ (3,163) 18 %

Interest expense increased $12.6 million , or 293% , for the three months ended July 31, 2020 compared to the three months ended July 31, 2019 , due to an increase of $9.3 million and $6.5 million for the 2025 Notes and 2026 Notes, respectively, offset by a decrease of $3.2 million for the 2023 Notes, due to the 2023 Notes Partial Repurchases.

Loss on early extinguishment of debt increased $2.2 million for the three months ended July 31, 2020 compared to the three months ended July 31, 2019 due to the Second Partial Repurchase of 2023 Notes.

Comparison of the Six Months Ended July 31, 2020 and 2019

Six Months Ended July 31,

Interest expense increased $14.5 million, or 186%, for the three months ended October 31, 2020 compared to the three months ended October 31, 2019, due to an increase of $4.3 million and $12.4 million for the 2025 Notes and 2026 Notes, respectively, partially offset by a decrease of $2.1 million for the 2023 Notes, due to the 2023 Notes Partial Repurchases.

Interest income and other, net decreased $3.1 million, or (62)%, for the three months ended October 31, 2020 compared to the three months ended October 31, 2019, primarily due to lower interest rates, resulting in lower interest income earned on higher cash and cash equivalents and short-term investment balances.

We expect interest income earned on our investments to continue to decrease in relation to our overall portfolio balance in fiscal 2021.

Loss on early extinguishment and conversion of debt decreased $14.5 million, or 99%, for the three months ended October 31, 2020 compared to the three months ended October 31, 2019 primarily due to the First Partial Repurchase of 2023 Notes in the three months ended October 31, 2019, but not in the three months ended October 31, 2020.

Comparison of the Nine Months Ended October 31, 2020 and 2019

Nine Months Ended

2020 2019 $ Change % Change

(dollars in thousands)

Subscription $ 571,213 $ 394,174 $ 177,039 45 %

Professional services and other 29,471 24,566 4,905 20

1 unchanged sentence

Percentage of revenue:

Subscription 95 % 94 %

Professional services and other 5 6

Subscription revenue increased by $114.8 million , or 46% , for the six months ended July 31, 2020 compared to the six months ended July 31, 2019 .

Total 100 % 100 %

Subscription revenue increased by $177.0 million, or 45%, for the nine months ended October 31, 2020 compared to the nine months ended October 31, 2019.

The increase was primarily due to the addition of new customers as well as an increase in users and sales of additional products to existing customers.

Professional services and other revenue increased by $2.8 million , or 17% , for the six months ended July 31, 2020 compared to the six months ended July 31, 2019 .

Professional services and other revenue increased by $4.9 million, or 20%, for the nine months ended October 31, 2020 compared to the nine months ended October 31, 2019.

Cost of Revenue, Gross Profit and Gross Margin

Six Months Ended July 31,

Nine Months Ended

2020 2019 $ Change % Change

(dollars in thousands)

Cost of revenue:

Subscription $ 121,420 $ 82,581 $ 38,839 47 %

Professional services and other 35,121 32,118 3,003 9

Total cost of revenue $ 156,541 $ 114,699 $ 41,842 36 %

Gross profit $ 444,143 $ 304,041 $ 140,102 46 %

Gross margin:

Subscription 79 % 79 %

Professional services and other (19) (31)

Total gross margin 74 73

Cost of subscription revenue increased by $24.2 million , or 46% , for the six months ended July 31, 2020 compared to the six months ended July 31, 2019 , primarily due to an increase of $15.8 million in employee compensation costs related to higher headcount to support the growth in our subscription services, an increase of $2.7 million in software license costs and an increase of $2.5 million in third-party hosting costs as we increased capacity to support our growth.

Our gross margin for subscription revenue remained consistent at 79% during the six months ended July 31, 2020 compared to the six months ended July 31, 2019 .

Cost of professional services and other revenue increased by $1.6 million , or 7% , for the six months ended July 31, 2020 , compared to the six months ended July 31, 2019 , primarily due to an increase of $1.2 million in employee compensation costs related to higher headcount.

Our gross margin for professional services and other revenue improved to (22) % during the six months ended July 31, 2020 from (33)% during the six months ended July 31, 2019 primarily due to increases in professional services and other revenue.

Cost of subscription revenue increased by $38.8 million, or 47%, for the nine months ended October 31, 2020 compared to the nine months ended October 31, 2019, primarily due to an increase of $25.1 million in employee compensation costs related to higher headcount to support the growth in our subscription services, an increase of $4.7 million in software license costs and an increase of $4.3 million in third-party hosting costs as we increased capacity to support our growth.

Our gross margin for subscription revenue remained consistent at 79% during the nine months ended October 31, 2020 compared to the nine months ended October 31, 2019.

Cost of professional services and other revenue increased by $3.0 million, or 9%, for the nine months ended October 31, 2020, compared to the nine months ended October 31, 2019, primarily due to an increase of $2.3 million in employee compensation costs related to higher headcount.

Our gross margin for professional services and other revenue improved to (19)% during the nine months ended October 31, 2020 from (31)% during the nine months ended October 31, 2019 primarily due to increases in professional services and other revenue.

Operating Expenses

Research and Development Expenses

Six Months Ended July 31,

Nine Months Ended

2020 2019 $ Change % Change

(dollars in thousands)

1 unchanged sentence

Percentage of revenue 27 % 28 %

Research and development expenses increased $28.3 million , or 38% , for the six months ended July 31, 2020 compared to the six months ended July 31, 2019 .

Research and development expenses increased $44.6 million, or 38%, for the nine months ended October 31, 2020 compared to the nine months ended October 31, 2019.

The increase was primarily due to an increase of $41.5 million in employee compensation costs due to higher headcount.

Sales and Marketing Expenses

Six Months Ended July 31,

Nine Months Ended

2020 2019 $ Change % Change

(dollars in thousands)

1 unchanged sentence

Percentage of revenue 52 % 59 %

Sales and marketing expenses increased $41.9 million , or 26% , for the six months ended July 31, 2020 , compared to the six months ended July 31, 2019 .

The increase was primarily due to an increase of $37.2 million in employee compensation costs related to headcount growth and an increase of $2.4 million in allocated overhead costs, offset by a decrease of $8.4 million in employee-related expenses primarily due to reduced travel-related expenditures resulting from our temporary shift to an online only sales format.

Marketing and event costs increased by $11.0 million primarily due to increases in demand generation programs, advertising and brand awareness efforts aimed at acquiring new customers, offset by a decrease of $4.9 million due to a change to a virtual format for our annual customer conference in the first quarter of fiscal 2021 compared to an in-person format in the first quarter of fiscal 2020.

Sales and marketing expenses increased $64.5 million, or 26%, for the nine months ended October 31, 2020, compared to the nine months ended October 31, 2019.

The increase was primarily due to an increase of $53.5 million in employee compensation costs related to headcount growth and an increase of $3.5 million in allocated overhead costs, partially offset by a decrease of $13.6 million in employee-related expenses primarily due to reduced travel-related expenditures resulting from our temporary shift of our sales and marketing activities to a primarily online-only format.

Marketing and event costs increased by $19.7 million primarily due to increases in demand generation programs, advertising, brand awareness efforts aimed at acquiring new customers, and a change in the timing of expenses incurred for a future event, partially offset by a decrease of $4.9 million due to a change to a virtual format for our annual customer conference in the first quarter of fiscal 2021 compared to an in-person format in the first quarter of fiscal 2020.

General and Administrative Expenses

Six Months Ended July 31,

Nine Months Ended

2020 2019 $ Change % Change

(dollars in thousands)

1 unchanged sentence

Percentage of revenue 20 % 20 %

General and administrative expenses increased $23.9 million , or 45% , for the six months ended July 31, 2020 compared to the six months ended July 31, 2019 .

The increase was primarily due to an increase of $20.0 million in employee compensation costs related to higher headcount to support our continued growth.

General and administrative expenses increased $39.5 million, or 48%, for the nine months ended October 31, 2020 compared to the nine months ended October 31, 2019.

The increase was primarily due to an increase of $30.4 million in employee compensation costs related to higher headcount to support our continued growth partially offset by a $3.4 million decrease in acquisition-related costs.

Interest and Other, Net

Six Months Ended July 31,

Nine Months Ended

2020 2019 $ Change % Change

(dollars in thousands)

1 unchanged sentence

Interest income and other, net 10,737 11,346 (609) (5)

Loss on early extinguishment of debt

Loss on early extinguishment and conversion of debt (2,263) (14,572) 12,309 (84)

Interest and other, net $ (41,589) $ (19,597) $ (21,992) 112 %

Interest expense increased $19.2 million , or 224% , for the six months ended July 31, 2020 compared to the six months ended July 31, 2019 , primarily related to an increase of $18.5 million and $6.5 million for the 2025 Notes and

2026 Notes, respectively, offset by a decrease of $5.9 million for the 2023 Notes, due to the 2023 Notes Partial Repurchases.

Interest income and other, net increased $2.5 million , or 39% , for the six months ended July 31, 2020 compared to the six months ended July 31, 2019 , primarily due to interest income earned on higher cash and cash equivalents and short-term investment balances.

We expect interest income earned on our investments to decrease in relation to our overall portfolio balance in fiscal 2021 due to decreases in interest rates.

Loss on early extinguishment of debt increased $2.2 million for the six months ended July 31, 2020 compared to the six months ended July 31, 2019 due to the Second Partial Repurchase of 2023 Notes.

Interest expense increased $33.7 million, or 206%, for the nine months ended October 31, 2020 compared to the nine months ended October 31, 2019, primarily related to an increase of $22.8 million and $18.9 million for the 2025 Notes and 2026 Notes, respectively, partially offset by a decrease of $8.0 million for the 2023 Notes, due to the 2023 Notes Partial Repurchases.

Loss on early extinguishment and conversion of debt decreased $12.3 million or (84)% for the nine months ended October 31, 2020 compared to the nine months ended October 31, 2019 primarily due to differences in the loss on early extinguishment of debt recognized for the First Partial Repurchase of 2023 Notes in the nine months ended October 31, 2019 compared to the Second Partial Repurchase of 2023 Notes in the nine months ended October 31, 2020.

Key Business Metrics

We review a number of operating and financial metrics, including the following key metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans, and make strategic decisions.

As of July 31,

As of October 31,

(dollars in thousands)

3 unchanged sentences

Remaining performance obligations $ 1,581,800 $ 1,031,260

Three Months Ended July 31,

Six Months Ended July 31,

Three Months Ended

October 31, Nine Months Ended

2020 2019 2020 2019

(in thousands)

1 unchanged sentence

Total Customers and Number of Customers with Annual Contract Value Above $100,000

As of July 31, 2020 , we had over 8,950 customers on our platform.

As of October 31, 2020, we had over 9,400 customers on our platform.

We believe that our ability to increase the number of customers on our platform is an indicator of our market penetration, the growth of our business, and our potential future business opportunities.

1 unchanged sentence

Over time, larger customers have constituted a greater share of our revenue, which has contributed to an increase in average revenue per customer.

The number of customers who have greater than $100,000 in annual contract value, or ACV, with us was 1,685 and 1,222 as of July 31, 2020 and 2019 , respectively.

The number of customers who have greater than $100,000 in annual contract value, or ACV, with us was 1,780 and 1,325 as of October 31, 2020 and 2019, respectively.

We expect this trend to continue as larger enterprises recognize the value of our platform and replace their legacy identity access management, or IAM infrastructure.

8 unchanged sentences

We then calculate the ACV from these same customers as of the current period end, or Current Period ACV.

Current Period ACV includes any upsells and is net of contraction or churn over the trailing twelve months but excludes revenue from new customers in the current period.

Current Period ACV includes any upsells and is net of contraction or churn over the trailing twelve months but excludes ACV from new customers in the current period.

We then divide the total Current Period ACV by the total Prior Period ACV to arrive at our Dollar-Based Net Retention Rate.

9 unchanged sentences

We typically invoice customers in advance in annual installments for subscriptions to our platform.

Calculated Billings increased 27% in the three months ended July 31, 2020 over the three months ended July 31, 2019 , and increased 35% in the six months ended July 31, 2020 , over the six months ended July 31, 2019 .

Calculated Billings increased 44% in the three months ended October 31, 2020 over the three months ended October 31, 2019, and increased 38% in the nine months ended October 31, 2020, over the nine months ended October 31, 2019.

As our Calculated Billings continue to grow in absolute terms, we expect our Calculated Billings growth rate to trend down over time.

8 unchanged sentences

A reconciliation is provided below for each non-GAAP financial measure to the most directly comparable financial measure stated in accordance with GAAP.

Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures, and not to rely on any single financial measure to evaluate our business.

Investors are

encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures, and not to rely on any single financial measure to evaluate our business.

Non-GAAP Gross Profit and Non-GAAP Gross Margin

We define non-GAAP gross profit and non-GAAP gross margin as GAAP gross profit and GAAP gross margin, adjusted for stock-based compensation expense and amortization of acquired intangibles.

Three Months Ended July 31,

Six Months Ended July 31,

Three Months Ended

October 31, Nine Months Ended

2020 2019 2020 2019

(dollars in thousands)

Gross profit $ 160,471 $ 112,213 $ 444,143 $ 304,041

Stock-based compensation expense included in cost of revenue 8,203 5,504 21,153 14,429

1 unchanged sentence

Non-GAAP gross profit $ 170,267 $ 119,064 $ 470,076 $ 322,365

Gross margin 74 % 73 % 74 % 73 %

Non-GAAP gross margin 78 % 78 % 78 % 77 %

1 unchanged sentence

We define non-GAAP operating income (loss) and non-GAAP operating margin as GAAP operating loss and GAAP operating margin, adjusted for stock-based compensation expense, non-cash charitable contributions, amortization of acquired intangibles and acquisition-related expenses.

Three Months Ended July 31,

Six Months Ended July 31,

Three Months Ended

October 31, Nine Months Ended

2020 2019 2020 2019

(dollars in thousands)

9 unchanged sentences

Non-GAAP Net Income (Loss) and Non-GAAP Net Margin

We define non-GAAP net income (loss) and non-GAAP net margin as GAAP net loss and GAAP net margin, adjusted for stock-based compensation expense, non-cash charitable contributions, amortization of acquired intangibles, acquisition-related expenses, amortization of debt discount and debt issuance costs and loss on early extinguishment of debt.

Three Months Ended July 31,

Six Months Ended July 31,

Three Months Ended

October 31, Nine Months Ended

2020 2019 (1)

(dollars in thousands)

Net loss $ (72,764) $ (63,495) $ (190,526) $ (158,441)

Stock-based compensation expense 53,652 35,735 139,774 89,694

3 unchanged sentences

Amortization of debt discount and debt issuance costs (3)

Loss on early extinguishment of debt (4)

20,931 7,540 47,261 15,653

Loss on early extinguishment and conversion of debt (4)

89 14,572 2,263 14,572

Non-GAAP net income (loss) $ 5,746 $ (3,791) $ 8,214 $ (30,016)

Net margin (33) % (41) % (32) % (38) %

Non-GAAP net margin 3 % (2) % 1 % (7) %

2 unchanged sentences

(2) We define acquisition-related expenses as costs associated with acquisitions, including transaction costs and other non-recurring incremental costs incurred.

(3) Amortization of debt issuance costs is an adjustment to non-GAAP net income (loss), effective the three and six months ended July 31, 2020.

Debt issuance costs included are $0.8 million and $1.4 million for the three and six months ended July 31, 2020, respectively, and $0.3 million and $0.6 million for the three and six months ended July 31, 2019, respectively.

(4) Loss on early extinguishment of debt is calculated inclusive of write-offs of debt issuance costs, effective the three and six months ended July 31, 2020.

The amounts of these write-offs are $1.0 million for the three and six months ended July 31, 2020, respectively, and nil for the three and six months ended July 31, 2019, respectively.

(3) Amortization of debt issuance costs is an adjustment to non-GAAP net income (loss), effective July 31, 2020.

Debt issuance costs included are $0.9 million and $2.3 million for the three and nine months ended October 31, 2020, respectively, and $0.5 million and $1.1 million for the three and nine months ended October 31, 2019, respectively.

(4) Loss on early extinguishment and conversion of debt is calculated inclusive of write-offs of debt issuance costs, effective July 31, 2020.

The amounts of these write-offs are $0.1 million and $1.1 million for the three and nine months ended October 31, 2020, respectively, and $3.8 million for the three and nine months ended October 31, 2019, respectively.

Non-GAAP Net Income (Loss) per share, basic and diluted

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Accordingly, the Company did not record any adjustments to non-GAAP net income (loss) for the potential impact of the convertible senior notes outstanding under the if-converted method.

Three Months Ended July 31,

Six Months Ended July 31,

Three Months Ended

October 31, Nine Months Ended

2020 2019 (1)

(dollars in thousands)

Net loss $ (72,764) $ (63,495) $ (190,526) $ (158,441)

Stock-based compensation expense 53,652 35,735 139,774 89,694

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Amortization of debt discount and debt issuance costs (3)

Loss on early extinguishment of debt (4)

20,931 7,540 47,261 15,653

Loss on early extinguishment and conversion of debt (4)

89 14,572 2,263 14,572

Non-GAAP net income (loss) $ 5,746 $ (3,791) $ 8,214 $ (30,016)

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Non-GAAP net income (loss) per share, basic (5)

$ 0.04 $ (0.03) $ 0.07 $ (0.26)

Non-GAAP net income (loss) per share, diluted (5)

$ 0.04 $ (0.03) $ 0.06 $ (0.26)

(1) Prior periods have been adjusted to conform to the current presentation.

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(2) We define acquisition-related expenses as costs associated with acquisitions, including transaction costs and other non-recurring incremental costs incurred.

(3) Amortization of debt issuance costs is an adjustment to non-GAAP net income (loss), effective the three and six months ended July 31, 2020.

(4) Loss on early extinguishment of debt is calculated inclusive of write-offs of debt issuance costs, effective the three and six months ended July 31, 2020.

The amounts of these write-offs are $1.0 million for the three and six months ended July 31, 2020, respectively, and nil for the three and six months ended July 31, 2019, respectively.

(5) The total impact of the adjustments noted in footnotes (3) and (4) and for the periods noted in footnote (1) above on non-GAAP net income (loss) per share, basic and diluted is nil and $0.01 for the three and six months ended July 31, 2019, respectively.

(3) Amortization of debt issuance costs is an adjustment to non-GAAP net income (loss), effective July 31, 2020.

(4) Loss on early extinguishment and conversion of debt is calculated inclusive of write-offs of debt issuance costs, effective July 31, 2020.

(5) The total impact of the adjustments noted in footnotes (3) and (4) and for the periods noted in footnote (1) above on non-GAAP net income (loss) per share, basic and diluted is $0.04 and $0.04 for the three and nine months ended October 31, 2019, respectively.

Free Cash Flow and Free Cash Flow Margin

We define Free Cash Flow as net cash provided by (used in) operating activities, less cash used for purchases of property and equipment, net of sales proceeds, and capitalized internal-use software costs.

We define Free Cash Flow as net cash provided by operating activities, less cash used for purchases of property and equipment, net of sales proceeds, and capitalized internal-use software costs.

Free cash flow margin is calculated as free cash flow divided by total revenue.

Three Months Ended July 31,

Six Months Ended July 31,

Three Months Ended

October 31, Nine Months Ended

2020 2019 2020 2019

(dollars in thousands)

Net cash provided by (used in) operating activities

Net cash provided by operating activities $ 43,426 $ 10,640 $ 93,053 $ 30,768

Purchases of property and equipment (628) (63) (11,297) (9,980)

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We define Calculated Billings as total revenue plus the change in deferred revenue and less the change in unbilled receivables during the period.

Three Months Ended July 31,

Six Months Ended July 31,

Three Months Ended

October 31, Nine Months Ended

2020 2019 2020 2019

(in thousands)

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Liquidity and Capital Resources

As of July 31, 2020 , our principal sources of liquidity were cash, cash equivalents and short-term investments totaling $2,514.5 million , which were held for working capital purposes.

As of October 31, 2020, our principal sources of liquidity were cash, cash equivalents and short-term investments totaling $2,495.1 million, which were held for working capital purposes.

Our cash equivalents and investments consisted primarily of U.S.

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We also terminated a portion of our existing Note Hedges and Warrants in amounts corresponding to the principal amount of the Second Partial Repurchase of 2023 Notes for net proceeds of $19.6 million.

Through the nine months ended October 31, 2020, we converted certain 2023 Notes (not in connection with the 2023 Notes Partial Repurchases) and exercised corresponding Note Hedges.

In connection with these transactions, we made immaterial cash payments and issued approximately 0.2 million shares of Class A common stock to settle approximately $10.4 million principal amount of 2023 Notes.

In addition, we exercised a portion of the Note Hedges, corresponding to approximately $10.4 million principal amount of 2023 Notes, which will be net share settled in our fiscal fourth quarter in accordance with their contractual terms.

While the potential impacts of the COVID-19 pandemic may create near-term headwinds for cash flow caused by factors such as delays in customer payments and delays in deals closing, we believe our existing cash and cash equivalents, our short-term investments and cash provided by sales of our products and services will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months.

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Deferred revenue consists of the unearned portion of billed fees for our subscriptions, which is recognized as revenue in accordance with our revenue recognition policy.

As of July 31, 2020 , we had deferred revenue of $396.8 million , of which $391.2 million was recorded as a current liability and is expected to be recorded as revenue in the next 12 months, provided all other revenue recognition criteria have been met.

As of October 31, 2020, we had deferred revenue of $432.1 million, of which $424.8 million was recorded as a current liability and is expected to be recorded as revenue in the next 12 months, provided all other revenue recognition criteria have been met.

The following table summarizes our cash flows for the periods indicated:

Six Months Ended July 31,

Nine Months Ended

(in thousands)

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In recent periods, we have supplemented working capital requirements through net proceeds from the issuance of the 2023, 2025 and 2026 Notes in February 2018, September 2019 and June 2020, respectively, and from our IPO in April 2017.

During the six months ended July 31, 2020 , cash provided by operating activities was $49.6 million primarily due to our net loss of $117.8 million , adjusted for non-cash charges of $147.3 million and net cash inflows of $20.1 million provided by changes in our operating assets and liabilities.

During the nine months ended October 31, 2020, cash provided by operating activities was $93.1 million primarily due to our net loss of $190.5 million, adjusted for non-cash charges of $248.2 million and net cash inflows of $35.4 million provided by changes in our operating assets and liabilities.

Non-cash charges primarily consisted of stock-based compensation, amortization of debt discount and issuance costs, amortization of deferred commissions and depreciation, amortization and accretion of property and equipment, intangible assets and short-term investments.

The primary drivers of the changes in operating assets and liabilities related to a $25.4 million increase in deferred revenue, a $18.6 million decrease in accounts receivable, a $15.9 million increase in accounts payable and accrued compensation and a $9.0 million decrease in operating lease right-of-use assets, partially offset by a $30.3 million increase in deferred commissions, a $7.7 million decrease in operating lease liabilities, a $7.6 million increase in prepaid expenses and other assets and a $3.1 million decrease in accrued expenses and other liabilities.

During the six months ended July 31, 2019, cash provided by operating activities was $20.1 million primarily due to our net loss of $94.9 million, adjusted for non-cash charges of $80.9 million and net cash inflows of $34.2 million provided by changes in our operating assets and liabilities.

Non-cash charges primarily consisted of stock-based compensation, amortization of debt discount and issuance costs, amortization of deferred commissions and depreciation and amortization of property and equipment and intangible assets, offset by non-cash income from deferred income taxes.

The primary drivers of the changes in operating assets and liabilities related to a $36.2 million increase in deferred revenue, a $7.4 million increase in accounts payable, accrued compensation, and accrued other expenses, a $4.5 million decrease in accounts receivable, a $1.5 million decrease in prepaid expenses and other assets and a $6.2 million decrease in operating lease right-of-use assets, partially offset by a $21.4 million increase in deferred commissions.

The primary drivers of the changes in operating assets and liabilities related to a $60.7 million increase in deferred revenue, a $41.7 million increase in accounts payable, accrued compensation and accrued other expenses and a $14.0 million decrease in operating lease right-of-use assets, partially offset by a $51.8 million increase in deferred commissions, an $11.8 million decrease in operating lease liabilities, a $10.5 million increase in accounts receivable, and a $6.8 million increase in prepaid expenses and other assets.

During the nine months ended October 31, 2019, cash provided by operating activities was $30.8 million primarily due to our net loss of $158.4 million, adjusted for non-cash charges of $151.0 million and net cash inflows of $38.2 million provided by changes in our operating assets and liabilities.

Non-cash charges primarily consisted of stock-based compensation, loss on early extinguishment and conversion of debt, amortization of deferred commissions, amortization of debt discount and issuance costs, depreciation and amortization of property and equipment and intangible assets, and non-cash charitable contributions, offset by non-cash income from deferred income taxes.

The primary drivers of the changes in operating assets and liabilities related to a $58.7 million increase in deferred revenue, a $23.3 million increase in accounts payable, accrued compensation, and accrued other expenses and a $7.9 million decrease in operating lease right-of-use assets, partially offset by a $36.6 million increase in deferred commissions, a $9.4 million increase in accounts receivable, a $4.1 million decrease in operating lease liabilities and a $1.5 million increase in prepaid expenses and other assets.

Investing Activities

Net cash used in investing activities during the six months ended July 31, 2020 of $672.3 million was primarily attributable to purchases of investments of $1,029.3 million partially offset by proceeds from the sales and maturities of investments of $370.0 million , purchases of property and equipment of $10.7 million to support additional office space and headcount and the capitalization of internal-use software costs of $2.3 million associated with the development of additional features and functionality of our platform.

Net cash used in investing activities during the six months ended July 31, 2019 of $148.0 million was primarily attributable to the purchases of investments of $237.7 million, payment of $44.2 million, net of cash acquired, in connection with our Azuqua acquisition, payment of $8.5 million in connection with the purchase of developed technology intangible assets, purchases of property and equipment of $9.9 million to support additional office space and headcount, and the capitalization of internal-use software costs of $1.3 million associated with the development of additional features and functionality of our platform.

Net cash used in investing activities during the nine months ended October 31, 2020 of $1,267.9 million was primarily attributable to purchases of investments of $1,846.0 million partially offset by proceeds from the sales and maturities of investments of $592.9 million, purchases of property and equipment of $11.3 million to support additional office space and headcount and the capitalization of internal-use software costs of $3.5 million associated with the development of additional features and functionality of our platform.

Net cash used in investing activities during the nine months ended October 31, 2019 of $125.1 million was primarily attributable to the purchases of investments of $321.5 million, payment of $44.2 million, net of cash acquired, in connection with our Azuqua acquisition, payment of $8.5 million in connection with the purchase of developed technology intangible assets, purchases of property and equipment of $10.0 million to support additional office space and headcount, and the capitalization of internal-use software costs of $2.7 million associated with the

development of additional features and functionality of our platform.

These activities were offset by proceeds from the sales and maturities of investments of $261.7 million.

Financing Activities

Cash provided by financing activities during the six months ended July 31, 2020 of $1,061.2 million was primarily attributable to the issuance of 2026 Notes for proceeds of $1,135.4 million , net of issuance costs and proceeds from the termination of existing Note Hedges of $195.0 million , offset by payments for the termination of existing Warrants of $175.4 million and the purchase of 2026 Capped Calls of $134.0 million .

Cash provided by financing activities during the nine months ended October 31, 2020 of $1,066.5 million was primarily attributable to the issuance of 2026 Notes for proceeds of $1,134.8 million, net of issuance costs and proceeds from the termination of existing Note Hedges of $195.0 million, offset by payments for the termination of existing Warrants of $175.4 million and the purchase of 2026 Capped Calls of $134.0 million.

Other items impacting cash provided by financing activities include proceeds from the exercise of stock options of $33.6 million and proceeds from employee purchases under our ESPP of $12.8 million.

Cash provided by financing activities during the six months ended July 31, 2019 of $36.3 million was primarily attributable to proceeds from the exercise of stock options, net of repurchases, of $27.5 million and proceeds from employee purchases under our ESPP of $9.0 million.

Cash provided by financing activities during the nine months ended October 31, 2019 of $834.7 million was primarily attributable to the issuance of the 2025 Notes for proceeds of $1,040.8 million, net of issuance costs and proceeds from the termination of Note Hedges of $405.9 million, offset by cash payments for the 2023 Notes Partial Repurchase of $224.4 million, payments for the termination of Warrants of $358.6 million, and the purchase of Capped Calls for the 2025 notes of $74.1 million.

Other items impacting cash provided by financing activities include proceeds from the exercise of stock options, net of repurchases, of $36.4 million and proceeds from employee purchases under our ESPP of $9.0 million.

Indemnification Agreements

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Off-Balance Sheet Arrangements

As of July 31, 2020 , we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

As of October 31, 2020, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Critical Accounting Policies and Estimates

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Summary of Significant Accounting Policies” in our Form 10-K.

There have been no significant changes to these policies for the six months ended July 31, 2020 , except as described in Note 2 to our condensed consolidated financial statements “Accounting Standards and Significant Accounting Policies”.

There have been no significant changes to these policies for the nine months ended October 31, 2020, except as described in Note 2 to our condensed consolidated financial statements “Accounting Standards and Significant Accounting Policies”.

Recent Accounting Pronouncements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis