Okta, Inc. 10-Q

Item 1. Financial Statements (unaudited) 4 Condensed Consolidated Balance Sheets as of October 31, 2020 and January 31, 2020 5 Condensed Consolidated Statements of Operations for the Three and Nine Months Ended October 31, 2020 and 2019 6 Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended October 31, 2020 and 2019 7 Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended October 31, 2020 and 2019 8 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended October 31, 2020 and 2019 9 Notes to Condensed Consolidated Financial Statements 11 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 30 Item 3. Quantitative and Qualitative Disclosures about Market Risk 48 Item 4. Controls and Procedures 50 PART II. OTHER INFORMATION Item 1. Legal Proceedings 51 Item 1A. Risk Factors 51 Item 6. Exhibits 84 Signatures 86 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) October 31, 2020 January 31, 2020 (unaudited) Assets Current assets: Cash and cash equivalents $ 409,769 $ 520,048 Short-term investments 2,085,373 882,976 Accounts receivable, net of allowances of $ 2,547 and $ 1,166 139,473 130,115 Deferred commissions 40,908 33,636 Prepaid expenses and other current assets 82,016 32,950 Total current assets 2,757,539 1,599,725 Property and equipment, net 62,405 53,535 Operating lease right-of-use assets 154,699 125,204 Deferred commissions, noncurrent 94,305 77,874 Intangible assets, net 28,953 32,529 Goodwill 48,023 48,023 Other assets 24,355 18,505 Total assets $ 3,170,279 $ 1,955,395 Liabilities and stockholders' equity Current liabilities: Accounts payable $ 5,114 $ 3,837 Accrued expenses and other current liabilities 47,330 36,887 Accrued compensation 61,600 40,300 Convertible senior notes, net 35,131 100,703 Deferred revenue 424,765 365,236 Total current liabilities 573,940 546,963 Convertible senior notes, net, noncurrent 1,709,777 837,002 Operating lease liabilities, noncurrent 185,860 154,511 Deferred revenue, noncurrent 7,349 6,214 Other liabilities, noncurrent 12,705 5,361 Total liabilities 2,489,631 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 October 31, 2020 and January 31, 2020 — — Class A common stock, par value $ 0.0001 per share; 1,000,000 shares authorized; 121,283 and 113,990 shares issued and outstanding as of October 31, 2020 and January 31, 2020, respectively 12 11 Class B common stock, par value $ 0.0001 per share; 120,000 shares authorized; 8,219 and 8,648 shares issued and outstanding as of October 31, 2020 and January 31, 2020, respectively 1 1 Additional paid-in capital 1,569,714 1,105,564 Accumulated other comprehensive income 2,571 892 Accumulated deficit ( 891,650 ) ( 701,124 ) Total stockholders’ equity 680,648 405,344 Total liabilities and stockholders' equity $ 3,170,279 $ 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 October 31, Nine Months Ended October 31, 2020 2019 2020 2019 Revenue: Subscription $ 206,743 $ 144,517 $ 571,213 $ 394,174 Professional services and other 10,636 8,520 29,471 24,566 Total revenue 217,379 153,037 600,684 418,740 Cost of revenue: Subscription 44,762 30,124 121,420 82,581 Professional services and other 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 58,150 41,832 160,510 115,909 Sales and marketing 109,812 87,224 312,177 247,721 General and administrative 44,485 28,887 121,019 81,540 Total operating expenses 212,447 157,943 593,706 445,170 Operating loss ( 51,976 ) ( 45,730 ) ( 149,563 ) ( 141,129 ) Interest expense ( 22,368 ) ( 7,826 ) ( 50,063 ) ( 16,371 ) Interest income and other, net 1,878 4,982 10,737 11,346 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 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 ) Net loss per share, basic and diluted $ ( 0.56 ) $ ( 0.53 ) $ ( 1.51 ) $ ( 1.37 ) Weighted-average shares used to compute net loss per share, basic and diluted 128,813 118,976 126,222 115,598 See Notes to Condensed Consolidated Financial Statements. 6 OKTA, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (In thousands) (unaudited) Three Months Ended October 31, Nine Months Ended October 31, 2020 2019 2020 2019 Net loss $ ( 72,764 ) $ ( 63,495 ) $ ( 190,526 ) $ ( 158,441 ) Other comprehensive income (loss): Net change in unrealized gains or losses on available-for-sale securities ( 2,226 ) 227 1,344 616 Foreign currency translation adjustments ( 724 ) 1,561 335 ( 162 ) Other comprehensive income (loss) ( 2,950 ) 1,788 1,679 454 Comprehensive loss $ ( 75,714 ) $ ( 61,707 ) $ ( 188,847 ) $ ( 157,987 ) See Notes to Condensed Consolidated Financial Statements. 7 OKTA, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (In thousands) (unaudited) Three Months Ended October 31, Nine Months Ended October 31, 2020 2019 2020 2019 Common stock and additional paid-in capital: Balance, beginning of period $ 1,498,562 $ 839,535 $ 1,105,576 $ 744,907 Issuance of common stock upon exercise of stock options and other activity, net 8,299 9,430 51,053 46,911 Issuance of common stock for bonus settlement — — 9,818 2,809 Stock-based compensation 54,049 36,180 140,895 90,518 Equity component of convertible senior notes, net of issuance costs ( 12 ) 217,347 306,220 217,347 Equity component of early extinguishment and conversion of convertible senior notes 8,829 ( 26,713 ) 70,493 ( 26,713 ) Proceeds from hedges related to convertible senior notes — 405,851 195,046 405,851 Payments for warrants related to convertible senior notes — ( 358,622 ) ( 175,399 ) ( 358,622 ) Purchases of capped calls related to convertible senior notes — ( 74,094 ) ( 133,975 ) ( 74,094 ) Other, net — ( 3 ) ( 3 ) Balance, end of period 1,569,727 1,048,911 1,569,727 1,048,911 Accumulated deficit: Balance, beginning of period ( 818,886 ) ( 587,157 ) ( 701,124 ) ( 492,211 ) Net loss ( 72,764 ) ( 63,495 ) ( 190,526 ) ( 158,441 ) Balance, end of period ( 891,650 ) ( 650,652 ) ( 891,650 ) ( 650,652 ) Accumulated other comprehensive income (loss): Balance, beginning of period 5,521 ( 1,653 ) 892 ( 319 ) Other comprehensive income (loss) ( 2,950 ) 1,788 1,679 454 Balance, end of period 2,571 135 2,571 135 Total stockholders’ equity $ 680,648 $ 398,394 $ 680,648 $ 398,394 See Notes to Condensed Consolidated Financial Statements. 8 OKTA, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (unaudited) Nine Months Ended October 31, 2020 2019 Cash flows from operating activities: Net loss $ ( 190,526 ) $ ( 158,441 ) Adjustments to reconcile net loss to net cash provided by operating activities: Stock-based compensation 139,774 89,691 Depreciation, amortization and accretion 23,694 12,336 Amortization of debt discount and issuance costs 47,261 15,653 Amortization of deferred commissions 28,428 20,541 Deferred income taxes ( 2,414 ) ( 3,069 ) Non-cash charitable contributions 4,662 1,162 Loss on early extinguishment and conversion of debt 2,263 14,572 Other, net 4,515 84 Changes in operating assets and liabilities: Accounts receivable ( 10,547 ) ( 9,393 ) Deferred commissions ( 51,837 ) ( 36,641 ) Prepaid expenses and other assets ( 6,794 ) ( 1,518 ) Operating lease right-of-use assets 13,979 7,851 Accounts payable 1,377 1,962 Accrued compensation 37,863 17,352 Accrued expenses and other liabilities 2,442 4,017 Operating lease liabilities ( 11,750 ) ( 4,128 ) Deferred revenue 60,663 58,737 Net cash provided by operating activities 93,053 30,768 Cash flows from investing activities: Capitalization of internal-use software costs ( 3,530 ) ( 2,659 ) Purchases of property and equipment ( 11,297 ) ( 9,980 ) Purchases of securities available for sale and other ( 1,845,958 ) ( 321,462 ) Proceeds from maturities and redemption of securities available for sale 386,774 244,393 Proceeds from sales of securities available for sale and other 206,129 17,329 Purchases of intangible assets — ( 8,500 ) Payments for business acquisition, net of cash acquired — ( 44,223 ) Net cash used in investing activities ( 1,267,882 ) ( 125,102 ) Cash flows from financing activities: Proceeds from issuance of convertible senior notes, net of issuance costs 1,134,841 1,040,760 Payments for repurchases of convertible senior notes ( 447 ) ( 224,414 ) Proceeds from hedges related to convertible senior notes 195,046 405,851 Payments for warrants related to convertible senior notes ( 175,399 ) ( 358,622 ) Purchases of capped calls related to convertible senior notes ( 133,975 ) ( 74,094 ) Proceeds from stock option exercises 33,570 36,371 Proceeds from shares issued in connection with employee stock purchase plan 12,821 9,005 Other, net — ( 126 ) Net cash provided by financing activities 1,066,457 834,731 Effects of changes in foreign currency exchange rates on cash, cash equivalents and restricted cash 121 ( 241 ) Net increase (decrease) in cash, cash equivalents and restricted cash ( 108,251 ) 740,156 Cash, cash equivalents and restricted cash at beginning of period 531,953 311,215 Cash, cash equivalents and restricted cash at end of period $ 423,702 $ 1,051,371 Supplementary cash flow disclosure: Cash paid during the period for: Interest $ 1,566 $ 862 Income taxes 622 845 Non-cash activities: Issuance of common stock for repurchases and conversions of convertible senior notes 307,910 380,406 Common stock issued as charitable contribution 4,662 1,162 Operating lease right-of-use assets exchanged for lease liabilities 45,490 14,957 Property and equipment acquired through tenant improvement allowance 4,811 1,682 Impairment of operating lease right-of-use asset 2,587 — 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 $ 409,769 $ 1,039,626 Restricted cash, current included in prepaid expenses and other current assets 2,413 307 Restricted cash, noncurrent included in other assets 11,520 11,438 Total cash, cash equivalents and restricted cash $ 423,702 $ 1,051,371 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 nine months ended October 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 10 January 31, 2020. Except for the accounting policies for short-term investments and accounts receivable and allowances that were 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 nine months ended October 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 October 31, 2020, allowances reflect 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 October 31, 2020, one channel partner represented approximately 13 % of accounts receivable. As of January 31, 2020, no single customer represented greater than 10% of accounts receivable. For the nine months ended October 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 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 $ 2.6 million was recognized as compensation during the nine months ended October 31, 2020. The remaining deferred compensation balance of $ 2.2 million is associated with the acquisition of Azuqua and is being recognized over a future period of 1.4 years subject to continued service with the Company. These acquisitions did not have a material impact on the Company’s condensed consolidated financial statements; therefore, historical and proforma disclosures have not been presented. 12 4. Cash Equivalents and Short-term Investments The amortized cost, unrealized gain (loss) and estimated fair value of the Company’s cash equivalents and short-term investments as of October 31, 2020 and January 31, 2020 were as follows (in thousands): As of October 31, 2020 Amortized Cost Unrealized Gain Unrealized Loss Estimated Fair Value (unaudited) Cash equivalents: Money market funds $ 335,592 $ — $ — $ 335,592 Total cash equivalents 335,592 — — 335,592 Short-term investments: U.S. treasury securities 1,795,309 1,978 ( 130 ) 1,797,157 Corporate debt securities 287,523 722 ( 29 ) 288,216 Total short-term investments 2,082,832 2,700 ( 159 ) 2,085,373 Total $ 2,418,424 $ 2,700 $ ( 159 ) $ 2,420,965 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 October 31, 2020 and January 31, 2020. The following table presents the contractual maturities of the Company’s short-term investments as of October 31, 2020 (in thousands): As of October 31, 2020 Amortized Cost Estimated Fair Value (unaudited) Due within one year $ 1,285,936 $ 1,288,279 Due between one to five years 796,896 797,094 Total $ 2,082,832 $ 2,085,373 As of October 31, 2020 and January 31, 2020, the Company included $ 41.0 million and nil , respectively, of unsettled maturities of Short-term investments in Prepaid expenses and other current assets. The Company included $ 10.9 million and $ 5.7 million of interest receivable in Prepaid expenses and other current assets as of October 31, 2020 and January 31, 2020, respectively. The Company did not recognize an allowance for credit losses against interest receivable as of October 31, 2020 and January 31, 2020 because such potential losses were not material. 13 The Company had 62 and 7 short-term investments in unrealized loss positions as of October 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 nine months ended October 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 October 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 October 31, 2020 Level 1 Level 2 Level 3 Total (unaudited) Assets: Cash equivalents: Money market funds $ 335,592 $ — $ — $ 335,592 Total cash equivalents 335,592 — — 335,592 Short-term investments: U.S. treasury securities — 1,797,157 — 1,797,157 Corporate debt securities — 288,216 — 288,216 Total short-term investments — 2,085,373 — 2,085,373 Total cash equivalents and short-term investments $ 335,592 $ 2,085,373 $ — $ 2,420,965 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 October 31, 2020 Net Carrying Amount (1) Estimated Fair Value (unaudited) 2023 convertible senior notes $ 35,614 $ 182,234 2025 convertible senior notes $ 876,852 $ 1,393,052 2026 convertible senior notes $ 856,489 $ 1,316,750 (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 $ 40.2 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 October 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 $ 209.83 on October 31, 2020, the if-converted values of the 2023 Notes and 2025 Notes exceeded the principal amounts of $ 40.2 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 $ 21.5 million and $ 15.3 million in the three months ended October 31, 2020 and 2019, respectively, and $ 51.8 million and $ 36.7 million in the nine months ended October 31, 2020 and 2019, respectively. Amortization of contract costs was $ 10.3 million and $ 7.3 million for the three months ended October 31, 2020 and 2019, respectively, and $ 28.4 million and $ 20.5 million for the nine months ended October 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 October 31, 2020 and January 31, 2020, goodwill was $ 48.0 million. No goodwill impairments were recorded during the three and nine months ended October 31, 2020 and 2019. Intangible Assets, net Intangible assets consisted of the following (in thousands): As of October 31, 2020 Gross Accumulated Amortization Write-offs Net (unaudited) Capitalized internal-use software costs $ 29,435 $ ( 18,199 ) $ — $ 11,236 Purchased developed technology 28,800 ( 11,101 ) — 17,699 Software licenses 1,112 ( 1,094 ) — 18 $ 59,347 $ ( 30,394 ) $ — $ 28,953 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 $ 1.6 million and $ 1.8 million of internal-use software costs in the three months ended October 31, 2020 and 2019, respectively and $ 4.7 million and $ 3.5 million in the nine months ended October 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 3.3 years as of October 31, 2020. Amortization expense of intangible assets for the three months ended October 31, 2020 and 2019 was $ 2.7 million and $ 2.6 million, respectively, and $ 8.2 million and $ 7.7 million for the nine months ended October 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 October 31, 2020 and 2019 that was included in the deferred revenue balances at the beginning of the respective periods was $ 174.0 million and $ 123.5 million, respectively, and $ 334.2 million and $ 224.0 million in the nine months ended October 31, 2020 and 2019, respectively. Professional services and other revenue recognized in the three and nine months ended October 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 October 31, 2020, total remaining noncancelable performance obligations under the Company’s subscription contracts with customers was approximately $ 1,581.8 million . Of this amount, the Company expects to recognize revenue of approximately $ 753.2 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 October 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 during the three and nine months ended October 31, 2019, 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 during the nine months ended October 31, 2020, 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 October 31, 2020, $ 40.2 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 17 including, the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130 % of the conversion price of the 2023 Notes on each applicable trading day; • during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of the 2023 Notes for each trading day of that five consecutive trading day period was less than 98 % of the product of the last reported sale price of Class A common stock and the conversion rate on such trading day; or • upon the occurrence of specified corporate events, as described in the 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 October 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 January 31, 2021 and were classified as current liabilities on the condensed consolidated balance sheet as of October 31, 2020. During the three and nine months ended October 31, 2020, the Company paid approximately $ 0.3 million in cash and issued approximately 0.2 million shares of Class A common stock to settle approximately $ 10.4 million principal amount of 2023 Notes (not in connection with the 2023 Notes Partial Repurchases). The loss on early note conversion was not material. No requests to convert material amounts of notes are currently outstanding. 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 October 31, Nine Months Ended October 31, 2020 2019 2020 2019 (unaudited) Contractual interest expense $ 27 $ 99 $ 154 $ 530 Amortization of debt issuance costs 49 214 266 862 Amortization of debt discount 511 2,403 2,839 9,868 Total $ 587 $ 2,716 $ 3,259 $ 11,260 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 October 31, 2020 (unaudited) Liability component: Principal $ 40,246 Less: unamortized debt issuance costs and debt discount ( 5,115 ) Net carrying amount $ 35,131 As of October 31, 2020 (unaudited) Equity component: 2023 Notes $ 9,328 Less: issuance costs ( 271 ) Carrying amount of the equity component (1) $ 9,057 (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. During the three months ended October 31, 2020, the Company 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. As of October 31, 2020, Note Hedges giving the Company the option to purchase approximately 0.8 million shares (subject to adjustment), which excludes the exercised portion to be net share settled in our fiscal fourth quarter, 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. 19 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. 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 October 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 October 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 October 31, 2020, the Company did no t redeem any of the 2025 Notes. 20 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 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 October 31, Nine Months Ended October 31, 2020 2019 2020 2019 (unaudited) Contractual interest expense $ 332 $ 188 $ 994 $ 188 Amortization of debt issuance costs 530 275 1,554 275 Amortization of debt discount 8,526 4,649 25,320 4,649 Total $ 9,388 $ 5,112 $ 27,868 $ 5,112 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 October 31, 2020 (unaudited) Liability component: Principal $ 1,060,000 Less: unamortized debt issuance costs and debt discount ( 196,126 ) Net carrying amount $ 863,874 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 $ 1,134.8 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 October 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 22 immediately preceding 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 October 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 Months Ended Nine Months Ended October 31, 2020 (unaudited) Contractual interest expense $ 1,078 $ 1,653 Amortization of debt issuance costs 318 483 Amortization of debt discount 10,997 16,799 Total $ 12,393 $ 18,935 Total issuance costs of $ 15.2 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. 23 The 2026 Notes, net consisted of the following (in thousands): As of October 31, 2020 (unaudited) Liability component: Principal $ 1,150,000 Less: unamortized debt issuance costs and debt discount ( 304,097 ) Net carrying amount $ 845,903 At Issuance (unaudited) Equity component: 2026 Notes $ 310,311 Less: issuance costs ( 4,090 ) Carrying amount of the equity component (1) $ 306,221 (1) Included in the condensed consolidated balance sheets within Additional paid-in capital. 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 2021 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 October 31, Nine Months Ended October 31, 2020 2019 2020 2019 (unaudited) Operating lease cost (1) $ 8,554 $ 5,882 $ 24,258 $ 16,965 (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 7.1 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 October 31, 2020 and January 31, 2020, respectively. Maturities of the Company’s operating lease liabilities, which do not include short-term leases, as of October 31, 2020 were as follows (in thousands): 24 Operating Leases (unaudited) 2021 $ 5,475 2022 37,094 2023 37,758 2024 38,655 2025 36,111 Thereafter 99,860 Total lease payments 254,953 Less imputed interest ( 47,078 ) Total operating lease liabilities $ 207,875 Cash payments included in the measurement of the Company’s operating lease liabilities were $ 7.7 million and $ 6.1 million for the three months ended October 31, 2020 and 2019, respectively, and $ 22.7 million and $ 10.9 million for the nine months ended October 31, 2020 and 2019, respectively. 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 October 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 October 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 October 31, Nine Months Ended October 31, 2020 2019 2020 2019 (unaudited) Cost of revenue Subscription $ 6,090 $ 3,604 $ 15,229 $ 9,137 Professional services and other 2,113 1,900 5,924 5,292 Research and development 17,546 10,894 44,434 26,322 Sales and marketing 14,368 10,937 38,693 26,959 General and administrative 13,535 8,400 35,494 21,984 Total $ 53,652 $ 35,735 $ 139,774 $ 89,694 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 nine months ended October 31, 2020 and 2019. 25 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 October 31, 2020, options to purchase 1,176,642 shares of Class A common stock and 8,065,566 shares of Class B common stock remained outstanding. Shares of common stock reserved for future issuance were as follows: As of October 31, 2020 (unaudited) Stock options and unvested RSUs outstanding 14,069,326 Available for future stock option and RSU grants 20,720,051 Available for ESPP 4,752,501 39,541,878 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 402,891 145.08 Exercised ( 3,383,144 ) 9.92 Canceled ( 136,841 ) 19.62 Outstanding as of October 31, 2020 (unaudited) 9,242,208 $ 18.21 5.8 $ 1,770,981 As of October 31, 2020 Vested and exercisable (unaudited) 7,429,026 $ 9.87 5.4 $ 1,485,523 As of October 31, 2020, there was a total of $ 36.2 million of unrecognized stock-based compensation expense related to unvested stock options, 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 1,960,358 164.64 Vested ( 1,667,917 ) 79.28 Forfeited ( 358,564 ) 84.64 Outstanding as of October 31, 2020 (unaudited) 4,827,118 $ 112.24 As of October 31, 2020, there was $ 501.8 million of unrecognized stock-based compensation expense related to unvested RSUs, which is expected to be recognized over a weighted-average period of 2.6 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 October 31, Nine Months Ended October 31, 2020 2019 2020 2019 (unaudited) Expected volatility — % — % 50 % - 54 % 43 % - 59 % Expected term (in years) — — 0.5 - 1.0 0.5 - 1.0 Risk-free interest rate — % — % 0.17 % - 0.18 % 1.95 % - 2.05 % Expected dividend yield — — — — During the nine months ended October 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 October 31, 2020, there was $ 2.0 million of unrecognized stock-based compensation expense related to the ESPP that is expected to be recognized over an average vesting period of 0.5 years. 13. Income Taxes For the three and nine months ended October 31, 2020, the Company recorded a tax provision of $ 0.2 million and tax benefit of $ 0.6 million on a pretax loss of $ 72.6 million and $ 191.2 million, respectively. The effective tax rate for the three and nine months ended October 31, 2020 was ( 0.3 )% and 0.3 %, 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 and excess tax benefits from stock-based compensation in the United Kingdom. The tax benefit recognized for the nine months ended October 31, 2020 was partially offset by income tax expense in profitable foreign jurisdictions and U.S. state taxes. For the three and nine months ended October 31, 2019, the Company recorded a tax provision of $ 0.3 million and tax benefit of $ 2.3 million on pretax losses of $ 63.1 million and $ 160.7 million, respectively. The effective tax rate for the three and nine months ended October 31, 2019 was ( 0.6 )% and 1.4 %, 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 benefit recognized for the nine months ended October 31, 2019 was 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 October 31, Nine Months Ended October 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 $ ( 68,146 ) $ ( 4,618 ) $ ( 58,761 ) $ ( 4,734 ) $ ( 177,887 ) $ ( 12,639 ) $ ( 145,139 ) $ ( 13,302 ) Denominator: Weighted-average shares outstanding, basic and diluted 120,637 8,176 110,105 8,871 117,849 8,373 105,893 9,705 Net loss per share, basic and diluted $ ( 0.56 ) $ ( 0.56 ) $ ( 0.53 ) $ ( 0.53 ) $ ( 1.51 ) $ ( 1.51 ) $ ( 1.37 ) $ ( 1.37 ) 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 October 31, 2020 2019 (unaudited) Issued and outstanding stock options 9,242 13,426 Unvested RSUs issued and outstanding 4,827 5,101 Unvested restricted stock awards issued and outstanding — 177 Unvested shares subject to repurchase 1 7 Shares committed under the ESPP 137 209 Shares related to the 2023 Notes 832 2,494 Shares subject to warrants related to the issuance of the 2023 Notes 1,048 2,494 Shares related to the 2025 Notes 5,617 5,617 Shares related to the 2026 Notes 4,820 — 26,524 29,525 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 nine months ended October 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