What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-09-02 compared with 2021-05-27 · 208 added, 113 removed, 331 unchanged (49% of the section changed)

12 unchanged sentences

Our approach to identity allows our customers to simplify and efficiently scale their security infrastructures across internal IT systems and external customer facing applications.

As of April 30, 2021, more than 10,650 customers across nearly every industry used the Okta Identity Cloud to secure and manage identities around the world.

As of July 31, 2021, more than 13,050 customers across nearly every industry used the Okta Identity Cloud to secure and manage identities around the world.

Our customers consist of leading global organizations ranging from the largest enterprises, to small and medium-sized businesses, universities, non-profits and government agencies.

We also partner with leading application, IT infrastructure and security vendors through our Okta Integration Network.

As of April 30, 2021, we had over 7,000 integrations with these cloud, mobile and web applications and IT infrastructure and security vendors.

As of July 31, 2021, we had over 7,000 integrations with these cloud, mobile and web applications and IT infrastructure and security vendors.

We employ a Software-as-a-Service (“SaaS”) business model, and generate revenue primarily by selling multi-year subscriptions to our cloud-based offerings.

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Impact of Coronavirus (COVID-19) Pandemic

In December 2019, a novel coronavirus (COVID-19) was reported in China, in January 2020, the WHO declared it a Public Health Emergency of International Concern and in March 2020, the WHO declared it a pandemic.

This contagious disease outbreak has continued to spread across the globe and is impacting worldwide economic activity and financial markets.

The extent of the impact of COVID-19 on our future operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, related public health measures, and their impact on the macroeconomy, our current and prospective customers, employees and vendors.

The extent of the impact of COVID-19 on our future operational and financial performance remains uncertain and will depend on certain developments, including the duration and spread of COVID-19 and variants of concern, related public health measures, the manufacture, distribution, efficacy and public acceptance of treatments and vaccines, and their impact on the macroeconomy, our current and prospective customers, employees and vendors.

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 96% of total revenue for the three months ended April 30, 2021.

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 slightly from pre-pandemic levels primarily due to an increase in overall uncertainty in our forecasts of future economic conditions and risks.

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 security model and identity an increasingly critical service.

Our revenue is relatively predictable as a result of our subscription-based business model, which constituted approximately 96% of total revenue for the six months ended July 31, 2021.

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 fully remote and hybrid work models, Zero Trust has become an increasingly important security model and identity an increasingly critical service.

We believe we will be able to continue to deliver our cloud-based platform and support to our customers, without compromising our employees’ safety.

Since March 2020, we have put in place mandatory work-from-home procedures for our global office locations, and our employees have the necessary tools and technology to remain connected and productive.

For most of fiscal 2021, we established mandatory work-from-home procedures for our global office locations, and our employees had the necessary tools and technology to remain connected and productive.

In addition, in fiscal 2021 we shifted our customer, employee and industry events, including our annual user conference to virtual-only formats, resulting in cost savings.

We further experienced cost savings driven by reductions in employee-related expenses as our sales and marketing activities shifted primarily to an online-only sales format and our employees shifted to work-from-home procedures.

As we anticipate returning to in-person sales formats and experiences for future annual user conferences, we expect our future costs to increase.

In fiscal 2022, as the administration of vaccines has increased, we have reopened our offices to partial capacity, allowing our employees to voluntarily return.

We continue to evaluate our strategy to return to in-person sales formats and experiences for future annual user conferences, and we expect our future costs to increase.

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

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On May 3, 2021, we completed the acquisition of Auth0.

We provided total consideration, net of acquired cash and subject to final adjustments, of approximately $6.5 billion, including approximately 20.4 million shares of the Company's Class A common stock as Stock Consideration, $268.7 million in cash, and equity awards convertible into shares with a fair market value of $700.2 million based upon our closing stock price as of April 30, 2021.

Approximately $325.0 million of the consideration was held back by us to secure the indemnification obligations of the Auth0 securityholders arising during the twelve months following the closing.

In addition, we established a retention pool in an aggregate amount of approximately $25.0 million that will be allocated to certain Auth0 employees in accordance with the terms of the Merger Agreement.

The retention awards will vest consistent with Okta’s standard RSU vesting periods and terms.

The following discussion and analysis of our results of operations and our liquidity and capital resources focuses on our existing operations exclusive of the impact of the acquisition of Auth0.

Any forward-looking statements contained herein do not take into account the impact of the acquisition.

The acquisition date fair value, net of acquired cash and subject to final adjustments, was approximately $5,671.0 million, including approximately 19.2 million shares of our Class A common stock valued at $5,175.6 million, $257.0 million in cash, and assumed equity awards with an initial fair market value of $238.4 million.

In addition, we issued unvested restricted stock valued at $332.1 million and assumed unvested equity and restricted cash awards valued at $430.2 million, which are subject to future vesting and will be recorded as expense over the period the services are provided.

Approximately 5% of the total consideration was held back by us to secure the indemnification obligations of the Auth0 securityholders arising during the twelve months following the closing.

The estimated transaction value of approximately $6,500.0 million, as previously announced, includes restricted stock and assumed equity and restricted cash awards subject to future vesting and was based on the fixed conversion stock price specified in the Merger Agreement.

Further, the estimated transaction value excludes the impact of cash acquired and other customary closing purchase price adjustments.

See Note 3 to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

The following discussion and analysis of our results of operations and our liquidity and capital resources includes the results of operations for Auth0 for the period from May 3, 2021 through July 31, 2021.

For additional information, including pro forma results of operations for the six months ended July 31, 2021 and 2020 calculated as if Auth0 had been acquired as of February 1, 2020, see Note 3 to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Components of Results of Operations

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Cost of subscription primarily consists of expenses related to hosting our services and providing support.

These expenses include employee-related costs associated with our cloud-based infrastructure and our customer support organization, third-party hosting fees, software and maintenance costs, outside services associated with the delivery of our subscription services, amortization expense associated with capitalized internal-use software and acquired technology, and allocated overhead.

We intend to continue to invest additional resources in our platform infrastructure and our platform support organizations.

14 unchanged sentences

Sales and Marketing.

Sales and marketing expenses consist primarily of employee compensation costs, costs of general marketing and promotional activities, travel-related expenses and allocated overhead.

Sales and marketing expenses consist primarily of employee compensation costs, costs of general marketing and promotional activities, travel-related expenses, amortization expense associated with acquired customer relationships (including unbilled and unrecognized contracts yet to be fulfilled) and trade names and allocated overhead.

Commissions earned by our sales force that are considered incremental and recoverable costs of obtaining a contract with a customer are deferred and then amortized on a straight-line basis over a period of benefit that we have determined to be generally five years.

We expect our sales and marketing expenses will increase in absolute dollars and continue to be our largest operating expense category for the foreseeable future as we expand our sales and marketing efforts and as we return to in-person sales formats and experiences for future annual user conferences.

However, over time, we expect our sales and marketing expenses to decrease as a percentage of our total revenue as our total revenue grows.

In the short-term, our sales and marketing expenses may increase as a percentage of our total revenue, however, over time, we expect this percentage to decrease as our total revenue grows.

General and Administrative.

General and administrative expenses consist primarily of employee compensation costs for finance, accounting, legal, information technology and human resources personnel.

In addition, general and administrative expenses include acquisition-related costs, non-personnel costs, such as legal, accounting and other professional fees, charitable contributions, and all other supporting corporate expenses, such as information technology, not allocated to other departments.

In addition, general and administrative expenses include acquisition and integration-related costs, non-personnel costs, such as legal, accounting and other professional fees, charitable contributions, and all other supporting corporate expenses, such as information technology, not allocated to other departments.

We expect our general and administrative expenses will increase in absolute dollars as our business grows.

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

Provision for (Benefit from) Income Taxes

Our provision for (benefit from) income taxes consists of federal and state income taxes in the United States and income taxes in certain foreign jurisdictions, and is determined for interim periods using an estimate of our annual effective tax rate, adjusted for discrete items occurring in the quarter.

The primary difference between our

effective tax rate and the federal statutory rate relates to the net operating losses in jurisdictions with a valuation allowance against related deferred tax assets.

Benefit from Income Taxes

Our benefit from income taxes consists of federal and state income taxes in the United States and income taxes in certain foreign jurisdictions, and is determined for interim periods using an estimate of our annual effective tax rate, adjusted for discrete items occurring in the quarter.

The primary difference between our effective tax rate and the federal statutory rate relates to the net operating losses in jurisdictions with a valuation allowance against related deferred tax assets.

Results of Operations

1 unchanged sentence

Three Months Ended

July 31, Six Months Ended

2021 2020 2021 2020

(in thousands)

20 unchanged sentences

Interest income and other, net 2,211 3,960 6,566 8,859

Loss on conversion of debt (136) —

Loss on early extinguishment and conversion of debt (43) (2,174) (179) (2,174)

Interest and other, net (20,704) (15,145) (39,245) (21,010)

Loss before provision for (benefit from) income taxes (109,222) (58,064)

Provision for (benefit from) income taxes 10 (402)

Loss before benefit from income taxes (284,144) (60,533) (393,366) (118,597)

Benefit from income taxes (7,462) (433) (7,452) (835)

Net loss $ (276,682) $ (60,100) $ (385,914) $ (117,762)

1 unchanged sentence

Three Months Ended

July 31, Six Months Ended

2021 2020 2021 2020

(in thousands)

7 unchanged sentences

Three Months Ended

July 31, Six Months Ended

2021 2020 2021 2020

Subscription 96 % 95 % 96 % 95 %

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Interest and other, net (7) (7) (6) (6)

Loss before provision for (benefit from) income taxes (44) (32)

Provision for (benefit from) income taxes — —

Loss before benefit from income taxes (90) (30) (69) (31)

Benefit from income taxes (2) — (1) —

Net loss (88) % (30) % (68) % (31) %

Comparison of the Three Months Ended April 30, 2021 and 2020

Comparison of the Three Months Ended July 31, 2021 and 2020

Three Months Ended

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Total 100 % 100 %

Subscription revenue increased by $66.3 million, or 38%, for the three months ended April 30, 2021 compared to the three months ended April 30, 2020.

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 $1.9 million, or 21%, for the three months ended April 30, 2021 compared to the three months ended April 30, 2020.

The increase in professional services revenue

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

Subscription revenue increased by $112.4 million, or 59%, for the three months ended July 31, 2021 compared to the three months ended July 31, 2020.

The increase was primarily due to the addition of new customers and an increase in users and sales of additional products to existing customers, as well as the inclusion of Auth0 revenue in the current period.

Professional services and other revenue increased by $2.6 million, or 27%, for the three months ended July 31, 2021 compared to the three months ended July 31, 2020.

The increase in professional services revenue was primarily related to an increase in implementation and other services associated with growth in the number of new customers purchasing our subscription services, as well as the inclusion of Auth0 revenue in the current period.

The business combination with Auth0 contributed approximately $37.6 million in total revenue for the period from May 3, 2021 through July 31, 2021.

Cost of Revenue, Gross Profit and Gross Margin

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Total gross margin 68 74

Cost of subscription revenue increased by $15.2 million, or 41%, for the three months ended April 30, 2021 compared to the three months ended April 30, 2020, primarily due to an increase of $10.2 million in employee compensation costs related to higher headcount to support the growth in our subscription services, an increase of $2.2 million in third-party hosting costs as we expanded capacity to support our growth and $1.7 million in software license costs.

Our gross margin for subscription revenue decreased to 78% for the three months ended April 30, 2021 from 79% during the three months ended April 30, 2020.

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 $2.4 million, or 21%, for the three months ended April 30, 2021, compared to the three months ended April 30, 2020, due to an increase of $2.0 million in employee compensation costs due to higher headcount.

Our gross margin for professional services and other revenue remained consistent at (25)% during the three months ended April 30, 2021 and 2020.

Cost of subscription revenue increased by $45.0 million, or 114%, for the three months ended July 31, 2021 compared to the three months ended July 31, 2020, primarily due to an increase of $21.7 million in employee compensation costs related to higher headcount to support the growth in our subscription services, including the Auth0 acquisition, an increase in amortization of acquired developed technology of $8.5 million in connection with the Auth0 acquisition, an increase of $7.5 million in third-party hosting costs as we expanded capacity to support our growth and an increase of $3.0 million in software license costs.

Our gross margin for subscription revenue decreased to 72% for the three months ended July 31, 2021 from 79% during the three months ended July 31, 2020 primarily due to the inclusion of Auth0 revenue, which carries a higher relative cost and lower gross margin as well as an increase in amortization of acquired developed technology in connection with the Auth0 acquisition.

While our gross margin 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 $5.0 million, or 43%, for the three months ended July 31, 2021, compared to the three months ended July 31, 2020, due to an increase of $4.0 million in employee compensation costs related to increased headcount, including the Auth0 acquisition.

Our gross margin for professional services and other revenue decreased to (34)% for the three months ended July 31, 2021 from (19)% during the three months ended July 31, 2020 and includes Auth0.

Operating Expenses

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Percentage of revenue 39 % 27 %

Research and development expenses increased $20.4 million, or 42%, for the three months ended April 30, 2021 compared to the three months ended April 30, 2020.

The increase was primarily due to an increase of $17.1 million in employee compensation costs due to higher headcount.

Research and development expenses increased $68.5 million, or 127%, for the three months ended July 31, 2021 compared to the three months ended July 31, 2020.

The increase was primarily due to an increase of $60.5

million in employee compensation costs related to higher headcount, including the Auth0 acquisition, as well as an increase of $2.4 million in research and design expenses.

Sales and Marketing Expenses

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Percentage of revenue 63 % 49 %

Sales and marketing expenses increased $42.5 million, or 41%, for the three months ended April 30, 2021 compared to the three months ended April 30, 2020.

The increase was primarily due to an increase of $27.2 million in employee compensation costs related to higher headcount, partially offset by a decrease of $2.0 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 $13.5 million primarily due to increases in demand generation programs, advertising, and brand awareness efforts aimed at acquiring new customers, as well as higher production and advertising costs for our virtual format annual customer conference.

Sales and marketing expenses increased $100.0 million, or 102%, for the three months ended July 31, 2021 compared to the three months ended July 31, 2020 primarily due to an increase of $61.6 million in employee compensation costs related to higher headcount, including the Auth0 acquisition, an increase in marketing and event costs of $18.6 million primarily due to increases in demand generation programs, advertising, and brand awareness efforts aimed at acquiring new customers, an increase in amortization expense of $9.9 million for acquired customer relationships and trade names in connection with the Auth0 acquisition incurred in the three months ended July 31, 2021, but not in the three months ended July 31, 2020, and increased allocations from general and administrative expenses of $5.3 million due to higher headcount and the inclusion of Auth0.

We expect sales and marketing expenses will increase in absolute dollars and may increase as a percentage of total revenue in future periods as we invest in acquiring new customers for both Okta and Auth0 products.

General and Administrative Expenses

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Percentage of revenue 49 % 21 %

General and administrative expenses increased $26.1 million, or 77%, for the three months ended April 30, 2021 compared to the three months ended April 30, 2020.

The increase was primarily due to an increase of $12.4 million in employee compensation costs primarily related to higher headcount to support our continued growth and an increase of $7.1 million due to acquisition-related costs incurred in the first quarter of fiscal 2022, but not in the first quarter of fiscal 2021.

General and administrative expenses increased $114.6 million, or 270%, for the three months ended July 31, 2021 compared to the three months ended July 31, 2020 primarily due to an increase of $77.1 million in employee compensation costs primarily related to higher headcount to support our continued growth, including the Auth0 acquisition, and an increase of $27.7 million due to acquisition and integration-related costs incurred in the three months ended July 31, 2021, but not in the three months ended July 31, 2020.

The increase in employee compensation costs includes $33.8 million in one-time stock-based compensation expense relating to accelerated vesting of equity awards for certain Auth0 employees in the three months ended July 31, 2021.

Interest and Other, Net

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Interest income and other, net 2,211 3,960 (1,749) (44)

Loss on conversion of debt (136) — (136) —

Loss on early extinguishment and conversion of debt (43) (2,174) 2,131 (98)

Interest and other, net $ (20,704) $ (15,145) $ (5,559) 37 %

Interest expense increased $12.0 million, or 111%, for the three months ended April 30, 2021 compared to the three months ended April 30, 2020, due to an increase of $12.7 million and $0.4 million for the 2026 Notes and 2025 Notes, respectively, partially offset by a decrease of $1.1 million for the 2023 Notes, due to the Second Partial Repurchase of 2023 Notes and other conversion activity.

Interest income and other, net decreased $0.5 million, or (11)%, for the three months ended April 30, 2021 compared to the three months ended April 30, 2020, primarily due to a decrease of $3.4 million in interest income resulting from lower interest rates, despite higher cash and cash equivalents and short-term investment balances.

Interest expense increased $5.9 million, or 35%, for the three months ended July 31, 2021 compared to the three months ended July 31, 2020 primarily due to an increase of $6.4 million for the 2026 Notes, partially offset by a decrease of $0.8 million for the 2023 Notes, due to the Second Partial Repurchase of 2023 Notes and other conversion activity.

Interest income and other, net decreased $1.7 million, or (44)%, for the three months ended July 31, 2021 compared to the three months ended July 31, 2020, primarily due to a decrease of $2.2 million in interest income resulting from lower interest rates, partially offset by a realized gain and unrealized adjustments in the carrying value of our strategic investments totaling $2.4 million incurred in the three months ended July 31, 2021 but not in the three months ended July 31, 2020.

Loss on early extinguishment and conversion of debt decreased $2.1 million or (98.0)% for the three months ended July 31, 2021 compared to the three months ended July 31, 2020 due to the Second Partial Repurchase of 2023 Notes which occurred in the three months ended July 31, 2020 but not in the three months ended July 31, 2021.

Comparison of the Six Months Ended July 31, 2021 and 2020

Six Months Ended

2021 2020 $ Change % Change

(dollars in thousands)

Subscription $ 543,179 $ 364,470 $ 178,709 49 %

Professional services and other 23,327 18,835 4,492 24

Total revenue $ 566,506 $ 383,305 $ 183,201 48 %

Percentage of revenue:

Subscription 96 % 95 %

Professional services and other 4 5

Total 100 % 100 %

Subscription revenue increased by $178.7 million, or 49%, for the six months ended July 31, 2021 compared to the six months ended July 31, 2020.

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, as well as the inclusion of Auth0 revenue in the current period.

Professional services and other revenue increased by $4.5 million, or 24%, for the six months ended July 31, 2021 compared to the six months ended July 31, 2020.

The business combination with Auth0 contributed approximately $37.6 million in total revenue for the period from May 3, 2021 through July 31, 2021.

Cost of Revenue, Gross Profit and Gross Margin

Six Months Ended

2021 2020 $ Change % Change

(dollars in thousands)

Cost of revenue:

Subscription $ 136,855 $ 76,658 $ 60,197 79 %

Professional services and other 30,374 22,975 7,399 32

Total cost of revenue $ 167,229 $ 99,633 $ 67,596 68 %

Gross profit $ 399,277 $ 283,672 $ 115,605 41 %

Gross margin:

Subscription 75 % 79 %

Professional services and other (30) (22)

Total gross margin 70 74

Cost of subscription revenue increased by $60.2 million, or 79%, for the six months ended July 31, 2021 compared to the six months ended July 31, 2020, primarily due to an increase of $31.9 million in employee compensation costs related to higher headcount to support the growth in our subscription services, including the Auth0 acquisition, an increase of $9.6 million in third-party hosting costs as we expanded capacity to support our growth, an increase in amortization of acquired developed technology of $8.5 million in connection with the Auth0 acquisition and an increase of $4.6 million in software license costs.

Our gross margin for subscription revenue decreased to 75% from 79% during the six months ended July 31, 2021 compared to the six months ended July 31, 2020 primarily due to the inclusion of Auth0 revenue, which carries a higher relative cost and lower gross margin as well as an increase in amortization of acquired developed technology in connection with the Auth0 acquisition.

Cost of professional services and other revenue increased by $7.4 million, or 32%, for the six months ended July 31, 2021, compared to the six months ended July 31, 2020, due to an increase of $6.0 million in employee compensation costs related to higher headcount, including the Auth0 acquisition.

Our gross margin for professional services and other revenue decreased to (30)% during the six months ended July 31, 2021 from (22)% during the six months ended July 31, 2020 and includes Auth0.

Operating Expenses

Research and Development Expenses

Six Months Ended

2021 2020 $ Change % Change

(dollars in thousands)

Research and development $ 191,270 $ 102,360 $ 88,910 87 %

Percentage of revenue 34 % 27 %

Research and development expenses increased $88.9 million, or 87%, for the six months ended July 31, 2021 compared to the six months ended July 31, 2020.

The increase was primarily due to an increase of $77.6 million in employee compensation costs related to higher headcount, including the Auth0 acquisition, an increase of $4.0 million in research and design expenses, and increased allocations from general and administrative expenses of $3.7 million due to higher headcount and the inclusion of Auth0.

Sales and Marketing Expenses

Six Months Ended

2021 2020 $ Change % Change

(dollars in thousands)

Sales and marketing $ 344,871 $ 202,365 $ 142,506 70 %

Percentage of revenue 61 % 52 %

Sales and marketing expenses increased $142.5 million, or 70%, for the six months ended July 31, 2021, compared to the six months ended July 31, 2020 primarily due to an increase of $88.8 million in employee compensation costs related to headcount growth, including the Auth0 acquisition, an increase in marketing and event costs of $32.1 million primarily due to increases in demand generation programs, advertising and brand awareness efforts aimed at acquiring new customers, as well as higher production and advertising costs for our virtual format annual customer conference, an increase in amortization expense of $9.9 million for acquired customer relationships and trade names in connection with the Auth0 acquisition incurred in the six months ended July 31, 2021, but not in the six months ended July 31, 2020 and increased allocations from general and administrative expenses of $7.9 million due to headcount growth and the inclusion of Auth0.

General and Administrative Expenses

Six Months Ended

2021 2020 $ Change % Change

(dollars in thousands)

General and administrative $ 217,257 $ 76,534 $ 140,723 184 %

Percentage of revenue 38 % 20 %

General and administrative expenses increased $140.7 million, or 184%, for the six months ended July 31, 2021 compared to the six months ended July 31, 2020.

The increase was primarily due to an increase of $89.5 million in employee compensation costs related to higher headcount to support our continued growth, including the Auth0 acquisition, an increase of $34.8 million due to acquisition and integration-related costs incurred in the six months ended July 31, 2021, but not in the six months ended July 31, 2020, an increase in consulting expenses of $3.5 million and an increase in software license costs of $3.4 million.

Interest and Other, Net

Six Months Ended

2021 2020 $ Change % Change

(dollars in thousands)

Interest expense $ (45,632) $ (27,695) $ (17,937) 65 %

Interest income and other, net 6,566 8,859 (2,293) (26)

Loss on early extinguishment and conversion of debt (179) (2,174) 1,995 (92)

Interest and other, net $ (39,245) $ (21,010) $ (18,235) 87 %

Interest expense increased $17.9 million, or 65%, for the six months ended July 31, 2021 compared to the six months ended July 31, 2020, due to an increase of $19.1 million for the 2026 Notes issued in June 2020, partially offset by a decrease of $2.0 million for the 2023 Notes, due to the Second Partial Repurchase of 2023 Notes and other conversion activity.

Interest income and other, net decreased $2.3 million, or (26)%, for the six months ended July 31, 2021 compared to the six months ended July 31, 2020, primarily due to a decrease of $5.5 million in interest income resulting from lower interest rates, partially offset by a realized gain and unrealized adjustments in the carrying value of our strategic investments totaling $5.3 million incurred in the six months ended July 31, 2021 but not in the six months ended July 31, 2020.

Loss on early extinguishment and conversion of debt decreased $2.0 million, or (92)%, for the six months ended July 31, 2021 compared to the six months ended July 31, 2020 due to the Second Partial Repurchase of 2023 Notes which occurred in the six months ended July 31, 2020 but not in the six months ended July 31, 2021.

Key Business Metrics

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

As of April 30,

As of July 31,

(dollars in thousands)

4 unchanged sentences

Three Months Ended

July 31, Six Months Ended

2021 2020 2021 2020

(in thousands)

1 unchanged sentence

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

As of April 30, 2021, we had over 10,650 customers on our platform.

As of July 31, 2021, we had over 13,050 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 total 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 (“ACV”) with us was 2,075 and 1,580 as of April 30, 2021 and 2020, respectively.

The number of customers who have greater than $100,000 in annual contract value (“ACV”) with us was 2,610 and 1,685 as of July 31, 2021 and 2020, respectively.

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

We define a customer as a separate and distinct buying entity, such as a company, an educational or government institution, or a distinct business unit of a large company that has an active contract with us or one of our partners to access our platform.

For purposes of determining our customer count, we do not include customers that use our platform under self-service arrangements only.

Dollar-Based Net Retention Rate

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

Our Dollar-Based Net Retention Rate is inclusive of ACV from self-service customers.

Our strong Dollar-Based Net Retention Rate is primarily attributable to gross retention, an expansion of users and upselling additional products within our existing customers.

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Calculated Billings

Calculated Billings represent our total revenue plus the change in deferred revenue and less the change in unbilled receivables in the period.

Calculated billings represent our total revenue plus the change in deferred revenue, net of acquired deferred revenue, and less the change in unbilled receivables, net of acquired unbilled receivables, in the period.

Calculated billings in any particular period reflect sales to new customers plus subscription renewals and upsells to existing customers, and represent amounts invoiced for subscription, support and professional services.

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

Calculated Billings increased 74% in the three months ended April 30, 2021 over the three months ended April 30, 2020.

We implemented operational changes to our billings process in the three months ended April 30, 2021 pursuant to which we billed customers earlier than we would have under our historical billing practices.

These changes had a favorable effect on billings in the three months ended April 30, 2021.

Absent the impact of the billings process changes, calculated billings would have grown 40% year-over-year.

Calculated billings increased 83% in the three months ended July 31, 2021 over the three months ended July 31, 2020, and increased 78% in the six months ended July 31, 2021 over the six months ended July 31, 2020.

We implemented operational changes to our billings process in the six months ended July 31, 2021 pursuant to which we billed customers earlier than we would have under our historical billing practices.

These changes had a favorable effect on billings in the three and six months ended July 31, 2021.

Absent the impact of the billings process changes, Calculated billings would have grown 74% year-over-year in the three months ended July 31, 2021 and 57% year-over-year in the six months ended July 31, 2021, respectively.

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

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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 included in cost of revenue and amortization of acquired intangibles.

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 included in cost of revenue, amortization of acquired intangibles and acquisition and integration-related expenses.

Three Months Ended

July 31, Six Months Ended

2021 2020 2021 2020

(dollars in thousands)

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Amortization of acquired intangibles 10,128 1,594 11,721 3,187

Acquisition and integration-related expenses (1)

Non-GAAP gross profit $ 241,479 $ 158,057 $ 437,547 $ 299,809

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Non-GAAP gross margin 77 % 79 % 77 % 78 %

Non-GAAP Operating Loss and Non-GAAP Operating Margin

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

(1) Acquisition and integration-related expenses include transaction costs and other non-recurring incremental costs incurred through the one-year anniversary of transaction close.

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

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 and integration-related expenses.

Three Months Ended

July 31, Six Months Ended

2021 2020 2021 2020

(dollars in thousands)

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Amortization of acquired intangibles 19,998 1,594 21,591 3,187

Acquisition-related expenses (1)

Non-GAAP operating loss $ (15,898) $ (12,342)

Acquisition and integration-related expenses (1)

29,550 — 36,604 —

Non-GAAP operating income (loss) $ (24,539) $ 6,481 $ (40,437) $ (5,861)

Operating margin (83) % (23) % (63) % (25) %

Non-GAAP operating margin (8) % 3 % (7) % (2) %

(1) Acquisition-related expenses include transaction costs and other non-recurring incremental costs incurred through the one-year anniversary of transaction close.

Non-GAAP Net Loss, Non-GAAP Net Margin and Non-GAAP Net Loss Per Share, Basic and Diluted

We define non-GAAP net 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 conversion of debt.

We define non-GAAP net loss per share, basic, as non-GAAP net loss divided by GAAP weighted-average shares used to compute net loss per share, basic and diluted.

We define non-GAAP net loss per share, diluted, as non-GAAP net loss divided by GAAP weighted-average shares used to compute net loss per share, basic and diluted adjusted for the potentially dilutive effect of (i) employee equity incentive plans, excluding the impact of unrecognized stock-based compensation expense, and (ii) convertible senior notes outstanding and related warrants.

In addition, non-GAAP net loss per share, diluted, includes the anti-dilutive impact of the Company’s note hedge and capped call agreements on convertible senior notes outstanding.

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

(1) Acquisition and integration-related expenses include transaction costs and other non-recurring incremental costs incurred through the one-year anniversary of transaction close.

Non-GAAP Net Income (Loss), Non-GAAP Net Margin and Non-GAAP Net Income (Loss) Per Share, Basic and Diluted

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 and integration-related expenses, amortization of debt discount and debt issuance costs and loss on early extinguishment and conversion of debt.

We define Non-GAAP net income (loss) per share, basic, as Non-GAAP net income (loss) divided by GAAP weighted-average shares used to compute net loss per share, basic and diluted.

We define Non-GAAP net income (loss) per share, diluted, as Non-GAAP net income (loss) divided by GAAP weighted-average shares used to compute net loss per share, basic and diluted adjusted for the potentially dilutive effect of (i) employee equity incentive plans, excluding the impact of unrecognized stock-based compensation expense, and (ii) convertible senior notes outstanding and related warrants.

In addition, Non-GAAP net income (loss) per share, diluted, includes the anti-dilutive impact of our note hedge and capped call agreements on convertible senior notes outstanding.

Accordingly, we 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

2021 2020 2021 2020

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Amortization of acquired intangibles 19,998 1,594 21,591 3,187

Acquisition-related expenses (2)

Amortization of debt discount and debt issuance costs (3)

Acquisition and integration-related expenses (1)

29,550 — 36,604 —

Loss on conversion of debt 136 —

Non-GAAP net loss $ (12,982) $ (7,448)

Amortization of debt discount and debt issuance costs 21,449 15,973 42,780 26,330

Loss on early extinguishment and conversion of debt 43 2,174 179 2,174

Non-GAAP net income (loss) $ (16,289) $ 9,916 $ (29,271) $ 2,468

Net margin (88) % (30) % (68) % (31) %

Non-GAAP net margin (5) % 5 % (5) % 1 %

Weighted-average shares used to compute net loss per share, basic and diluted 131,777 123,494

Weighted-average shares used to compute net income (loss) per share, basic and diluted 151,357 126,319 141,720 124,922

Non-GAAP weighted-average effect of potentially dilutive securities — 15,936 — 16,281

Non-GAAP weighted-average shares used to compute non-GAAP net loss per share, diluted 131,777 123,494

Non-GAAP weighted-average shares used to compute non-GAAP net income (loss) per share, diluted 151,357 142,255 141,720 141,203

Net loss per share, basic and diluted $ (1.83) $ (0.48) $ (2.72) $ (0.94)

Non-GAAP net loss per share, basic and diluted (4)

$ (0.10) $ (0.06)

(1) Prior period has been adjusted to conform to the current presentation.

See footnote (3) and (4) for additional details.

(2) Acquisition-related expenses include transaction costs and other non-recurring incremental costs incurred through the one-year anniversary of transaction close.

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

Debt issuance costs included are $0.9 million for the three months ended April 30, 2021 and $0.6 million for the three months ended April 30, 2020.

(4) The total impact of the adjustments noted in footnote (3) for the period noted in footnote (1) above on non-GAAP net loss per share, basic and diluted is $0.01 for the three months ended April 30, 2020.

Non-GAAP net income (loss) per share, basic $ (0.11) $ 0.08 $ (0.21) $ 0.02

Non-GAAP net income (loss) per share, diluted $ (0.11) $ 0.07 $ (0.21) $ 0.02

(1) Acquisition and integration-related expenses include transaction costs and other non-recurring incremental costs incurred through the one-year anniversary of transaction close.

Free Cash Flow and Free Cash Flow Margin

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Three Months Ended

July 31, Six Months Ended

2021 2020 2021 2020

(dollars in thousands)

Net cash provided by operating activities $ 56,075 $ 38,697

Net cash provided by (used in) operating activities $ (2,608) $ 10,930 $ 53,467 $ 49,627

Purchases of property and equipment (775) (2,739) (4,034) (10,669)

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Free cash flow $ (3,751) $ 6,865 $ 49,055 $ 36,632

Net cash provided by investing activities $ 151,905 $ 50,604

Net cash used in investing activities $ (463,466) $ (722,865) $ (311,561) $ (672,261)

Net cash provided by financing activities $ 33,054 $ 1,047,080 $ 49,233 $ 1,061,247

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Calculated Billings

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

We define Calculated billings as total revenue plus the change in deferred revenue, net of acquired deferred revenue, and less the change in unbilled receivables, net of acquired unbilled receivables, in the period.

Three Months Ended

July 31, Six Months Ended

2021 2020 2021 2020

(in thousands)

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Unbilled receivables (beginning of period) 894 1,121 2,604 1,026

Acquired unbilled receivables 2,327 — 2,327 —

Unbilled receivables (end of period) (3,409) (2,113) (3,409) (2,113)

Deferred revenue (beginning of period) (624,912) (398,191) (513,598) (371,450)

Acquired deferred revenue (65,339) — (65,339) —

Calculated billings $ 362,358 $ 198,083 $ 726,388 $ 407,588

Liquidity and Capital Resources

As of April 30, 2021, our principal sources of liquidity were cash, cash equivalents and short-term investments totaling $2,690.1 million, which were held for working capital and general corporate purposes, including potential future acquisition activity.

As of July 31, 2021, our principal sources of liquidity were cash, cash equivalents and short-term investments totaling $2,468.9 million, which were held for working capital and general corporate purposes, including potential future acquisition activity.

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 April 30, 2021, we converted and settled approximately $27.6 million principal amount of 2023 Notes (not in connection with the 2023 Notes Partial Repurchases) and exercised and net-share-settled Note Hedges corresponding to approximately $17.9 million principal amount of 2023 Notes.

Through July 31, 2021, we converted and settled approximately $33.4 million principal amount of 2023 Notes (not in connection with the 2023 Notes Partial Repurchases) and exercised and net-share-settled Note Hedges corresponding to approximately $30.4 million principal amount of 2023 Notes.

In connection with these transactions, we issued approximately 0.7 million shares of Class A common stock and received approximately 0.5 million shares of Class A common stock, accompanied by immaterial cash payments.

During the three months ended April 30, 2021, we received additional conversion requests, and approximately $2.9 million aggregate principal amount of the 2023 Notes were primarily settled in shares of Class A common stock during the three months ending July 31, 2021.

No requests to convert material amounts of 2023 Notes or 2025 Notes are currently outstanding.

As of April 30, 2021, we exercised Note Hedges corresponding to approximately $9.6 million principal amount of 2023 Notes expected to be settled in the second quarter of fiscal 2022, and subsequent to April 30, 2021, we further exercised an immaterial amount of Note Hedges.

During the three months ended July 31, 2021, we received additional conversion requests, and an immaterial aggregate principal amount of the 2023 Notes was settled in cash during the fiscal quarter ending October 31, 2021.

No requests to convert material amounts of 2023 Notes are currently outstanding.

As of July 31, 2021, we exercised Note Hedges corresponding to approximately $3.0 million principal amount of 2023 Notes expected to be settled during the three months ending October 31, 2021.

On May 3, 2021, we completed the acquisition of Auth0.

In connection with this acquisition, consideration included cash of $257.0 million and approximately 19.2 million shares of our common stock with an estimated fair value of $5,175.6 million.

In addition, we assumed outstanding employee equity awards with vested fair value of $238.4 million.

We further entered into revesting agreements with Auth0’s founders pursuant to which approximately 1.2 million additional restricted shares of Okta’s Class A common stock with a fair value of $332.1 million as of the closing date are issued and outstanding and will vest over three years.

Our condensed consolidated results of operations include the results of operations for Auth0 for the period from May 3, 2021 through July 31, 2021.

On August 2, 2021, we completed the acquisition of atSpoke.

We provided total consideration, subject to final adjustments, of $89.0 million consisting of cash and our Class A common stock.

An agreed upon amount of consideration was held back by us to secure the indemnification obligations of the selling stockholders.

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 investments and cash provided by sales of our products and services will be sufficient to meet our short-term and long-term projected working capital and capital expenditure needs for the foreseeable future.

Our future capital requirements will depend on many factors, including our subscription growth rate, subscription renewal activity, billing frequency, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the expansion of our international operations, the introduction of new and enhanced product offerings, and the continuing market adoption of our platform.

Our future capital requirements will depend on many factors, including our subscription growth rate, subscription renewal activity, billing frequency, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the expansion of our international operations, the introduction of new and enhanced product offerings, the continuing market adoption of our platform, and the integration of acquired businesses.

We continue to assess our capital structure and evaluate the merits of deploying available cash.

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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 April 30, 2021, we had deferred revenue of

$624.9 million, of which $613.2 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.

On March 3, 2021, we and Auth0 entered into the Merger Agreement, pursuant to which, effective on the Closing Date, Auth0 became a direct, wholly owned subsidiary.

The effect the Acquisition had on our liquidity, financial condition and results of operations will be reflected in our financial information beginning in the second quarter of fiscal 2022.

As of July 31, 2021, we had deferred revenue of $737.3 million, of which $721.8 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:

Three Months Ended

Six Months Ended

(in thousands)

Net cash provided by operating activities $ 53,467 $ 49,627

Net cash provided by investing activities 151,905 50,604

Net cash used in investing activities (311,561) (672,261)

Net cash provided by financing activities 49,233 1,061,247

Effects of changes in foreign currency exchange rates on cash, cash equivalents and restricted cash 193 578

Net increase in cash, cash equivalents and restricted cash $ 224,806 $ 102,340

Net increase (decrease) in cash, cash equivalents and restricted cash $ (208,668) $ 439,191

Operating Activities

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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 initial public offering (“IPO”) in April 2017.

During the three months ended April 30, 2021, cash provided by operating activities was $56.1 million primarily due to our net loss of $109.2 million, adjusted for non-cash charges of $107.9 million and net cash inflows of $57.4 million provided by changes in our operating assets and liabilities.

During the six months ended July 31, 2021, cash provided by operating activities was $53.5 million primarily due to our net loss of $385.9 million, adjusted for non-cash charges of $351.4 million and net cash inflows of $88.0 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, depreciation, amortization and accretion of property and equipment, intangible assets and short-term investments and amortization of deferred commissions.

The primary drivers of the changes in operating assets and liabilities related to a $111.3 million increase in deferred revenue and a $5.1 million decrease in operating lease right-of-use assets, partially offset by a $22.7 million increase in accounts receivable, a $14.9 million increase in deferred commissions, a $11.2 million decrease in accounts payable, accrued compensation and accrued other expenses, a $6.3 million decrease in operating lease liabilities and a $3.9 million increase in prepaid expenses and other assets.

During the three months ended April 30, 2020, cash provided by operating activities was $38.7 million primarily due to our net loss of $57.7 million, adjusted for non-cash charges of $62.8 million and net cash inflows of $33.6 million provided by changes in our operating assets and liabilities.

The primary drivers of the changes in operating assets and liabilities related to a $158.4 million increase in deferred revenue and a $10.7 million decrease in operating lease right-of-use assets, partially offset by a $55.1 million increase in deferred commissions, a $14.8 million increase in accounts receivable and a $13.5 million decrease in operating lease liabilities.

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.

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.

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Investing Activities

Net cash provided by investing activities during the three months ended April 30, 2021 of $151.9 million was primarily attributable to proceeds from the sales and maturities of investments of $344.8 million, partially offset by

purchases of investments of $189.5 million and purchases of property and equipment of $3.3 million to support additional office space and headcount.

Net cash provided by investing activities during the three months ended April 30, 2020 of $50.6 million was primarily attributable to proceeds from the sales and maturities of investments of $188.6 million, partially offset by purchases of investments of $129.1 million, purchases of property and equipment of $7.9 million to support additional office space and headcount, and the capitalization of internal-use software costs of $1.0 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, 2021 of $311.6 million was primarily attributable to purchases of investments of $923.6 million, payments of $148.0 million, net of cash acquired, in connection with our acquisition of Auth0, purchases of property and equipment of $4.0 million to support additional office space and headcount, partially offset by proceeds from the sales and maturities of investments of $764.5 million.

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.

Financing Activities

Cash provided by financing activities during the three months ended April 30, 2021 of $16.2 million was primarily attributable to proceeds from the exercise of stock options of $16.2 million.

Cash provided by financing activities during the three months ended April 30, 2020 of $14.2 million was primarily attributable to proceeds from the exercise of stock options.

Cash provided by financing activities during the six months ended July 31, 2021 of $49.2 million was primarily attributable to proceeds from the exercise of stock options of $31.8 million, and proceeds from employee purchases under our ESPP of $17.4 million.

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.

Other items impacting cash provided by financing activities include proceeds from the exercise of stock options of $27.5 million and proceeds from employee purchases under our ESPP of $12.8 million.

Indemnification Agreements

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Off-Balance Sheet Arrangements

As of April 30, 2021, 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 July 31, 2021, 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 three months ended April 30, 2021, 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 six months ended July 31, 2021, 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