What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-12-02 compared with 2021-09-02 · 101 added, 101 removed, 438 unchanged (32% of the section changed)

4 unchanged sentences

Our fiscal year ends January 31.

Okta is the leading independent identity management platform for the enterprise.

Okta is the leading independent identity provider.

The Okta Identity Cloud is powered by our category-defining platform that enables our customers to securely connect the right people to the right technologies and services at the right time.

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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 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.

As of October 31, 2021, more than 14,000 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 July 31, 2021, we had over 7,000 integrations with these cloud, mobile and web applications and IT infrastructure and security vendors.

As of October 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

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.

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, including vaccine mandates, 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 approximately 96% of total revenue for the six months ended July 31, 2021.

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

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.

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.

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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.

For additional information, including pro forma results of operations for the nine months ended October 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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Overhead Allocation and Employee Compensation Costs

We allocate shared costs, such as facilities costs (including rent, utilities and depreciation on assets shared by all departments), certain information technology costs and recruiting costs to all departments based on headcount.

As such, allocated shared costs are reflected in each cost of revenue and operating expense category.

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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.

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.

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.

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Three Months Ended

July 31, Six Months Ended

October 31, Nine Months Ended

2021 2020 2021 2020

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Interest and other, net (22,088) (20,579) (61,333) (41,589)

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

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

Loss before provision for (benefit from) income taxes (220,644) (72,555) (614,010) (191,152)

Provision for (benefit from) income taxes 667 209 (6,785) (626)

Net loss $ (221,311) $ (72,764) $ (607,225) $ (190,526)

1 unchanged sentence

Three Months Ended

July 31, Six Months Ended

October 31, Nine Months Ended

2021 2020 2021 2020

8 unchanged sentences

Three Months Ended

July 31, Six Months Ended

October 31, Nine Months Ended

2021 2020 2021 2020

17 unchanged sentences

Interest and other, net (6) (9) (7) (7)

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

Benefit from income taxes (2) — (1) —

Loss before provision for (benefit from) income taxes (63) (33) (67) (32)

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

Net loss (63) % (33) % (66) % (32) %

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

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

Three Months Ended

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Total 100 % 100 %

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.

Subscription revenue increased by $130.0 million, or 63%, for the three months ended October 31, 2021 compared to the three months ended October 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.

Professional services and other revenue increased by $3.3 million, or 31%, for the three months ended October 31, 2021 compared to the three months ended October 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.

The business combination with Auth0 contributed approximately $46.0 million in total revenue for the three months ended October 31, 2021.

Cost of Revenue, Gross Profit and Gross Margin

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Total gross margin 69 74

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.

Cost of subscription revenue increased by $46.3 million, or 103%, for the three months ended October 31, 2021 compared to the three months ended October 31, 2020, primarily due to an increase of $20.8 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 $9.7 million primarily in connection with the Auth0 acquisition, an increase of $7.8 million in third-party hosting costs as we expanded capacity to support our growth and an increase of $3.7 million in software license costs.

Our gross margin for subscription revenue decreased to 73% for the three months ended October 31, 2021 from 78% during the three months ended October 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 primarily 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.

Cost of professional services and other revenue increased by $6.5 million, or 53%, for the three months ended October 31, 2021, compared to the three months ended October 31, 2020, primarily due to an increase of $4.8 million in employee compensation costs related to increased headcount, including the Auth0 acquisition.

Our gross margin for professional services and other revenue decreased to (33)% for the three months ended October 31, 2021 from (14)% during the three months ended October 31, 2020 and includes Auth0.

Operating Expenses

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Percentage of revenue 37 % 27 %

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.

Research and development expenses increased $72.4 million, or 124%, for the three months ended October 31, 2021 compared to the three months ended October 31, 2020.

The increase was primarily due to an

increase of $65.9 million in employee compensation costs due to higher headcount and the inclusion of Auth0.

The increase in employee compensation costs includes $16.4 million in stock-based compensation expense primarily related to the revesting agreements from the Auth0 acquisition.

Sales and Marketing Expenses

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Percentage of revenue 59 % 51 %

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.

Sales and marketing expenses increased $94.1 million, or 86%, for the three months ended October 31, 2021 compared to the three months ended October 31, 2020 primarily due to an increase of $60.0 million in employee compensation costs related to higher headcount, including the Auth0 acquisition, an increase in marketing and event costs of $16.3 million primarily due to increases in demand generation programs, advertising, and brand awareness efforts aimed at acquiring new customers, offset by a decrease of $4.8 million due to a cancellation charge related to our annual customer conference incurred in the three months ended October 31, 2020 and 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 October 31, 2021, but not in the three months ended October 31, 2020.

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.

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Percentage of revenue 30 % 20 %

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.

General and administrative expenses increased $60.7 million, or 136%, for the three months ended October 31, 2021 compared to the three months ended October 31, 2020 primarily due to an increase of $44.0 million in employee compensation costs primarily related to higher headcount to support our continued growth, including the Auth0 acquisition, and an increase of $8.0 million due to acquisition and integration-related costs incurred in the three months ended October 31, 2021, but not in the three months ended October 31, 2020.

The increase in employee compensation costs includes $12.3 million in stock-based compensation expense related to the revesting agreements from our Auth0 acquisition.

Interest and Other, Net

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Interest and other, net $ (22,088) $ (20,579) $ (1,509) 7 %

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

Interest expense increased $0.8 million, or 3%, for the three months ended October 31, 2021 compared to the three months ended October 31, 2020 primarily due to the 2026 Notes.

Interest income and other, net decreased $0.8 million, or (44)%, for the three months ended October 31, 2021 compared to the three months ended October 31, 2020, primarily due to a decrease of $1.8 million in interest income, partially offset by adjustments in the carrying value of our strategic investments.

Comparison of the Nine Months Ended October 31, 2021 and 2020

Nine Months Ended

2021 2020 $ Change % Change

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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.

Subscription revenue increased by $308.7 million, or 54%, for the nine months ended October 31, 2021 compared to the nine months ended October 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.

Professional services and other revenue increased by $7.8 million, or 27%, for the nine months ended October 31, 2021 compared to the nine months ended October 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.

The business combination with Auth0 contributed approximately $83.6 million in total revenue for the period from May 3, 2021 through October 31, 2021.

Cost of Revenue, Gross Profit and Gross Margin

Six Months Ended

Nine Months Ended

2021 2020 $ Change % Change

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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 subscription revenue increased by $106.5 million, or 88%, for the nine months ended October 31, 2021 compared to the nine months ended October 31, 2020, primarily due to an increase of $52.7 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 $18.3 million

primarily in connection with the Auth0 acquisition, an increase of $17.5 million in third-party hosting costs as we expanded capacity to support our growth and an increase of $8.3 million in software license costs.

Our gross margin for subscription revenue decreased to 74% from 79% during the nine months ended October 31, 2021 compared to the nine months ended October 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 primarily in connection with the Auth0 acquisition.

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 $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.

Cost of professional services and other revenue increased by $13.9 million, or 40%, for the nine months ended October 31, 2021, compared to the nine months ended October 31, 2020, due to an increase of $10.8 million in employee compensation costs related to higher headcount, including the Auth0 acquisition.

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

Operating Expenses

Research and Development Expenses

Six Months Ended

Nine Months Ended

2021 2020 $ Change % Change

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Percentage of revenue 35 % 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.

Research and development expenses increased $161.3 million, or 100%, for the nine months ended October 31, 2021 compared to the nine months ended October 31, 2020.

The increase was primarily due to an increase of $143.5 million in employee compensation costs related to higher headcount, including the Auth0 acquisition and an increase of $6.0 million in research and design expenses.

The increase in employee compensation costs includes $31.4 million in stock-based compensation expense primarily related to the revesting agreements from our Auth0 acquisition.

Sales and Marketing Expenses

Six Months Ended

Nine Months Ended

2021 2020 $ Change % Change

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Percentage of revenue 60 % 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.

Sales and marketing expenses increased $236.6 million, or 76%, for the nine months ended October 31, 2021, compared to the nine months ended October 31, 2020 primarily due to an increase of $148.8 million in employee compensation costs related to headcount growth, including the Auth0 acquisition, an increase in marketing and event costs of $48.4 million primarily due to increases in demand generation programs, advertising and brand awareness efforts aimed at acquiring new customers and higher production and advertising costs for our virtual format annual customer conference, offset by a decrease of $4.8 million due to a cancellation charge related to our annual customer conference incurred in the nine months ended October 31, 2020, an increase in amortization expense of $19.7 million for acquired customer relationships and trade names in connection with the Auth0 acquisition incurred in the nine months ended October 31, 2021, but not in the nine months ended October 31, 2020, an increase in allocated costs of $11.9 million and an increase in software license costs of $4.0 million.

General and Administrative Expenses

Six Months Ended

Nine Months Ended

2021 2020 $ Change % Change

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Percentage of revenue 35 % 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.

General and administrative expenses increased $201.4 million, or 166%, for the nine months ended October 31, 2021 compared to the nine months ended October 31, 2020.

The increase was primarily due to an increase of $133.5 million in employee compensation costs related to higher headcount to support our continued growth, including the Auth0 acquisition, an increase of $42.8 million due to acquisition and integration-related costs incurred in the nine months ended October 31, 2021, but not in the nine months ended October 31, 2020, an increase in software license costs of $6.1 million and an increase in consulting expenses of $4.5 million.

The increase in employee compensation costs includes $33.8 million in one-time stock-based compensation expense related to accelerated vesting of equity awards for certain Auth0 employees at transaction close and $24.2 million in stock-based compensation expense related to the revesting agreements from our Auth0 acquisition in the nine months ended October 31, 2021.

Interest and Other, Net

Six Months Ended

Nine Months Ended

2021 2020 $ Change % Change

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Interest and other, net $ (61,333) $ (41,589) $ (19,744) 47 %

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.

Interest expense increased $18.7 million, or 37%, for the nine months ended October 31, 2021 compared to the nine months ended October 31, 2020, due primarily to an increase of $19.8 million for the 2026 Notes that were issued in June 2020, partially offset by a decrease of $2.3 million for the 2023 Notes, due to the Second Partial Repurchase of 2023 Notes and other conversion activity.

Interest income and other, net decreased $3.1 million, or (29)%, for the nine months ended October 31, 2021 compared to the nine months ended October 31, 2020, primarily due to a decrease of $7.4 million in interest income resulting from lower interest rates, partially offset by changes in net realized gains and unrealized adjustments in the carrying value of our strategic investments totaling $6.3 million.

Loss on early extinguishment and conversion of debt decreased $2.1 million, or (92)%, for the nine months ended October 31, 2021 compared to the nine months ended October 31, 2020 due to the Second Partial Repurchase of 2023 Notes which occurred in the nine months ended October 31, 2020 but not in the nine months ended October 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 July 31,

As of October 31,

(dollars in thousands)

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Three Months Ended

July 31, Six Months Ended

October 31, Nine Months Ended

2021 2020 2021 2020

2 unchanged sentences

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

As of July 31, 2021, we had over 13,050 customers on our platform.

As of October 31, 2021, we had over 14,000 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.

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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 2,610 and 1,685 as of July 31, 2021 and 2020, respectively.

The number of customers who have greater than $100,000 in annual contract value (“ACV”) with us was 2,825 and 1,780 as of October 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.

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

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.

Calculated billings increased 54% in the three months ended October 31, 2021 over the three months ended October 31, 2020, and increased 69% in the nine months ended October 31, 2021 over the nine months ended October 31, 2020.

We implemented operational changes to our billings process in the nine months ended October 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 nine months ended October 31, 2021.

Absent the impact of the billings process changes, Calculated billings would have grown 53% year-over-year in the three months ended October 31, 2021 and 55% year-over-year in the nine months ended October 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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Three Months Ended

July 31, Six Months Ended

October 31, Nine Months Ended

2021 2020 2021 2020

4 unchanged sentences

Acquisition and integration-related expenses (1)

658 — 1,316 —

Non-GAAP gross profit $ 269,830 $ 170,267 $ 707,377 $ 470,076

5 unchanged sentences

Three Months Ended

July 31, Six Months Ended

October 31, Nine Months Ended

2021 2020 2021 2020

17 unchanged sentences

Three Months Ended

July 31, Six Months Ended

October 31, Nine Months Ended

2021 2020 2021 2020

11 unchanged sentences

Non-GAAP net margin (3) % 3 % (4) % 1 %

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

Weighted-average shares used to compute net loss per share, basic and diluted 153,756 128,813 145,782 126,222

Non-GAAP weighted-average effect of potentially dilutive securities — 14,579 — 15,714

8 unchanged sentences

Three Months Ended

July 31, Six Months Ended

October 31, Nine Months Ended

2021 2020 2021 2020

(dollars in thousands)

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

Net cash provided by operating activities $ 37,120 $ 43,426 $ 90,587 $ 93,053

Purchases of property and equipment (1,766) (628) (5,800) (11,297)

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Free cash flow $ 33,384 $ 41,594 $ 82,439 $ 78,226

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

Net cash provided by (used in) investing activities $ 101,459 $ (595,621) $ (210,102) $ (1,267,882)

Net cash provided by financing activities $ 9,214 $ 5,210 $ 58,447 $ 1,066,457

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Three Months Ended

July 31, Six Months Ended

October 31, Nine Months Ended

2021 2020 2021 2020

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Acquired unbilled receivables — — 2,327 —

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

Deferred revenue (beginning of period) (737,297) (396,820) (513,598) (371,450)

Unbilled receivables (end of period) (5,085) (2,427) (5,085) (2,427)

Acquired deferred revenue (900) — (66,239) —

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Liquidity and Capital Resources

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.

As of October 31, 2021, our principal sources of liquidity were cash, cash equivalents and short-term investments totaling $2,482.1 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.

treasury securities, money market funds and corporate debt securities.

treasury securities, corporate debt securities and money market funds.

Historically, we have generated significant operating losses and both positive and negative cash flows from operations as reflected in our accumulated deficit and condensed consolidated statements of cash flows.

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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 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.

Through October 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 $33.4 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 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.

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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.

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

On August 2, 2021, we completed the acquisition of atSpoke, providing total cash consideration of $79.3 million of which $13.4 million of consideration was held back as partial security for any adjustments and indemnification obligations and will be paid within 18 months of the closing date.

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.

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

As of July 31, 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.

As of October 31, 2021, we had deferred revenue of $777.9 million, of which $759.9 million was recorded as a current liability and is expected to be recorded as revenue in the next 12 months, provided all other revenue recognition criteria have been met.

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

Six Months Ended

Nine Months Ended

(in thousands)

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Effects of changes in foreign currency exchange rates on cash, cash equivalents and restricted cash (494) 121

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

Net decrease in cash, cash equivalents and restricted cash $ (61,562) $ (108,251)

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 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 $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.

During the nine months ended October 31, 2021, cash provided by operating activities was $90.6 million primarily due to our net loss of $607.2 million, adjusted for non-cash charges of $575.1 million and net cash inflows of $122.8 million provided by changes in our operating assets and liabilities.

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

The primary drivers of the changes in operating assets and liabilities related to a $198.0 million increase in deferred revenue, a $42.0 million increase in accrued compensation and accrued other expenses, and a $16.6 million decrease in operating lease right-of-use assets, partially offset by a $92.2 million increase in deferred commissions, a $29.6 million increase in accounts receivable and a $17.3 million decrease in operating lease liabilities.

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

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

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

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

Investing Activities

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.

Net cash used in investing activities during the nine months ended October 31, 2021 of $210.1 million was primarily attributable to purchases of investments of $1,333.6 million and payments of $215.1 million, net of cash acquired, in connection with our Auth0 and atSpoke acquisitions, partially offset by proceeds from the sales and maturities of investments of $1,346.8 million.

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

Financing Activities

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.

Cash provided by financing activities during the nine months ended October 31, 2021 of $58.4 million was primarily attributable to proceeds from the exercise of stock options of $41.1 million, and proceeds from employee purchases under our ESPP of $17.4 million.

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

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

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Off-Balance Sheet Arrangements

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.

As of October 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

We prepare our condensed consolidated financial statements in accordance with GAAP.

In the preparation of these condensed consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures.

In the preparation of these condensed consolidated financial statements, we are required to make estimates and assumptions that affect

the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures.

To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations would be affected.

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

There have been no significant changes to these policies for the six months ended July 31, 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 nine months ended October 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