Okta, Inc. 10-Q

Item 1. Financial Statements (unaudited) 4 Condensed Consolidated Balance Sheets as of July 31, 2022 and January 31, 2022 5 Condensed Consolidated Statements of Operations for the Three and Six Months Ended July 31, 2022 and 2021 6 Condensed Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended July 31, 2022 and 2021 7 Condensed Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended July 31, 2022 and 2021 8 Condensed Consolidated Statements of Cash Flows for the Six Months Ended July 31 , 2022 and 2021 9 Notes to Condensed Consolidated Financial Statements 10 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 29 Item 3. Quantitative and Qualitative Disclosures about Market Risk 48 Item 4. Controls and Procedures 50 PART II. OTHER INFORMATION Item 1. Legal Proceedings 51 Item 1A. Risk Factors 51 Item 6. Exhibits 86 Signatures 88 FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, including but not limited to, statements regarding our financial outlook, product development, business strategy, plans, market trends, opportunities, positioning, the anticipated impact on our business of the COVID-19 pandemic and related public health measures, and the macroeconomic environment. These forward-looking statements are made as of the date they were first issued and were based on current expectations, estimates, forecasts and projections as well as the beliefs and assumptions of management. Words such as “expect,” “anticipate,” “should,” “believe,” “hope,” “target,” “project,” “goals,” “estimate,” “potential,” “predict,” “may,” “will,” “might,” “could,” “intend,” “shall” and variations of these terms or the negative of these terms and similar expressions are intended to identify these forward-looking statements, although not all forward-looking statements include these identifying words. The forward-looking statements are contained principally in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors.” Forward-looking statements contained in this Form 10-Q include, but are not limited to, statements about: • our future financial performance, including our revenue, costs of revenue, gross profits, margins and operating expenses; • the impact of macroeconomic conditions, including the inflation and interest rate environment, and political, economic and social instability; • our ability to successfully integrate and realize the benefits of strategic acquisitions or investments, including our acquisition of Auth0, Inc. (“Auth0“); • trends in our key business metrics; • the impact of the global COVID-19 pandemic on our business and operations; • the sufficiency of our cash and cash equivalents, investments and cash provided by sales of our products and services to meet our liquidity needs; • market or other opportunities arising from business combinations; and • the impact of recent accounting pronouncements on our financial statements. Forward-looking statements are subject to a number of risks and uncertainties, many of which involve factors or circumstances that are beyond our control. Our actual results could differ materially from those stated or implied in forward-looking statements due to a number of factors, including but not limited to, risks detailed in “Risk Factors” in this Quarterly Report on Form 10-Q as well as other documents that may be filed by us from time to time with the Securities and Exchange Commission. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, except as required by law, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Quarterly Report on Form 10-Q to conform these statements to actual results or to changes in our expectations. PART I Item. 1 Financial Statements 4 OKTA, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except per share data) July 31, 2022 January 31, 2022 (unaudited) Assets Current assets: Cash and cash equivalents $ 216,022 $ 260,134 Short-term investments 2,260,956 2,241,657 Accounts receivable, net of allowances of $ 4,195 and $ 4,359 323,377 397,509 Deferred commissions 80,657 74,728 Prepaid expenses and other current assets 64,490 66,605 Total current assets 2,945,502 3,040,633 Property and equipment, net 66,958 65,488 Operating lease right-of-use assets 141,940 147,940 Deferred commissions, noncurrent 191,309 191,029 Intangible assets, net 281,470 316,968 Goodwill 5,400,275 5,401,343 Other assets 46,553 42,294 Total assets $ 9,074,007 $ 9,205,695 Liabilities and stockholders' equity Current liabilities: Accounts payable $ 43,708 $ 20,203 Accrued expenses and other current liabilities 106,477 89,315 Accrued compensation 87,094 143,805 Convertible senior notes, net 5,209 16,194 Deferred revenue 994,097 973,289 Total current liabilities 1,236,585 1,242,806 Convertible senior notes, net, noncurrent 2,190,110 1,815,714 Operating lease liabilities, noncurrent 158,577 170,611 Deferred revenue, noncurrent 17,187 22,933 Other liabilities, noncurrent 18,532 31,775 Total liabilities 3,620,991 3,283,839 Commitments and contingencies (Note 11) Stockholders’ equity: Preferred stock, par value $ 0.0001 per share; 100,000 shares authorized; no shares issued and outstanding as of July 31, 2022 and January 31, 2022 — — Class A common stock, par value $ 0.0001 per share; 1,000,000 shares authorized; 151,808 and 149,624 shares issued and outstanding as of July 31, 2022 and January 31, 2022, respectively 15 15 Class B common stock, par value $ 0.0001 per share; 120,000 shares authorized; 7,019 and 6,978 shares issued and outstanding as of July 31, 2022 and January 31, 2022, respectively 1 1 Additional paid-in capital 7,607,382 7,749,716 Accumulated other comprehensive loss ( 41,186 ) ( 12,009 ) Accumulated deficit ( 2,113,196 ) ( 1,815,867 ) Total stockholders’ equity 5,453,016 5,921,856 Total liabilities and stockholders' equity $ 9,074,007 $ 9,205,695 See Notes to Condensed Consolidated Financial Statements. 5 OKTA, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (unaudited) Three Months Ended July 31, Six Months Ended July 31, 2022 2021 2022 2021 Revenue: Subscription $ 435,384 $ 303,121 $ 833,325 $ 543,179 Professional services and other 16,423 12,379 33,425 23,327 Total revenue 451,807 315,500 866,750 566,506 Cost of revenue: Subscription 116,342 84,457 227,218 136,855 Professional services and other 21,352 16,649 41,641 30,374 Total cost of revenue 137,694 101,106 268,859 167,229 Gross profit 314,113 214,394 597,891 399,277 Operating expenses: Research and development 155,836 122,407 317,487 191,270 Sales and marketing 264,653 198,350 517,126 344,871 General and administrative 101,686 157,077 211,029 217,257 Total operating expenses 522,175 477,834 1,045,642 753,398 Operating loss ( 208,062 ) ( 263,440 ) ( 447,751 ) ( 354,121 ) Interest expense ( 2,915 ) ( 22,872 ) ( 5,783 ) ( 45,632 ) Interest income and other, net 4,721 2,211 6,425 6,566 Loss on conversion of debt — ( 43 ) — ( 179 ) Interest and other, net 1,806 ( 20,704 ) 642 ( 39,245 ) Loss before provision for (benefit from) income taxes ( 206,256 ) ( 284,144 ) ( 447,109 ) ( 393,366 ) Provision for (benefit from) income taxes 4,216 ( 7,462 ) 6,076 ( 7,452 ) Net loss $ ( 210,472 ) $ ( 276,682 ) $ ( 453,185 ) $ ( 385,914 ) Net loss per share, basic and diluted $ ( 1.34 ) $ ( 1.83 ) $ ( 2.89 ) $ ( 2.72 ) Weighted-average shares used to compute net loss per share, basic and diluted 157,400 151,357 156,650 141,720 See Notes to Condensed Consolidated Financial Statements. 6 OKTA, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (In thousands) (unaudited) Three Months Ended July 31, Six Months Ended July 31, 2022 2021 2022 2021 Net loss $ ( 210,472 ) $ ( 276,682 ) $ ( 453,185 ) $ ( 385,914 ) Other comprehensive loss: Net change in unrealized gains or losses on available-for-sale securities ( 1,497 ) ( 353 ) ( 18,699 ) ( 1,166 ) Foreign currency translation adjustments ( 3,541 ) ( 882 ) ( 10,478 ) 151 Other comprehensive loss ( 5,038 ) ( 1,235 ) ( 29,177 ) ( 1,015 ) Comprehensive loss $ ( 215,510 ) $ ( 277,917 ) $ ( 482,362 ) $ ( 386,929 ) See Notes to Condensed Consolidated Financial Statements. 7 OKTA, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (In thousands) (unaudited) Three Months Ended July 31, Six Months Ended July 31, 2022 2021 2022 2021 Common stock and additional paid-in capital: Balance, beginning of period $ 7,411,566 $ 1,753,856 $ 7,749,732 $ 1,656,109 Adjustments from adoption of ASU 2020-06 — — ( 527,444 ) — Issuance of common stock and value of equity awards assumed in connection with business combination — 5,409,344 — 5,409,344 Issuance of common stock upon exercise of stock options and other activity, net 23,184 34,697 29,951 52,911 Stock-based compensation 172,647 187,923 343,224 252,035 Settlement of convertible senior notes — 5,364 11,934 20,784 Proceeds from hedges related to convertible senior notes 1 1 1 2 Balance, end of period 7,607,398 7,391,185 7,607,398 7,391,185 Accumulated deficit: Balance, beginning of period ( 1,902,724 ) ( 1,076,688 ) ( 1,815,867 ) ( 967,456 ) Adjustments from adoption of ASU 2020-06 — — 155,856 — Net loss ( 210,472 ) ( 276,682 ) ( 453,185 ) ( 385,914 ) Balance, end of period ( 2,113,196 ) ( 1,353,370 ) ( 2,113,196 ) ( 1,353,370 ) Accumulated other comprehensive income: Balance, beginning of period ( 36,148 ) 5,610 ( 12,009 ) 5,390 Other comprehensive loss ( 5,038 ) ( 1,235 ) ( 29,177 ) ( 1,015 ) Balance, end of period ( 41,186 ) 4,375 ( 41,186 ) 4,375 Total stockholders’ equity $ 5,453,016 $ 6,042,190 $ 5,453,016 $ 6,042,190 See Notes to Condensed Consolidated Financial Statements. 8 OKTA, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (unaudited) Six Months Ended July 31, 2022 2021 Cash flows from operating activities: Net loss $ ( 453,185 ) $ ( 385,914 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Stock-based compensation 340,702 251,826 Depreciation, amortization and accretion 59,748 44,903 Amortization of debt discount and issuance costs 2,895 42,780 Amortization of deferred commissions 39,537 25,135 Deferred income taxes 1,539 ( 11,506 ) Non-cash charitable contributions 2,014 3,663 Loss on conversion of debt — 179 Gain on strategic investments ( 1,965 ) ( 5,271 ) Other, net 461 ( 290 ) Changes in operating assets and liabilities: Accounts receivable 74,015 ( 14,798 ) Deferred commissions ( 50,123 ) ( 55,102 ) Prepaid expenses and other assets ( 2,236 ) 718 Operating lease right-of-use assets 13,568 10,732 Accounts payable 24,632 ( 2,044 ) Accrued compensation ( 55,219 ) ( 6,507 ) Accrued expenses and other liabilities 1,144 10,092 Operating lease liabilities ( 12,807 ) ( 13,489 ) Deferred revenue 15,062 158,360 Net cash provided by (used in) operating activities ( 218 ) 53,467 Cash flows from investing activities: Capitalization of internal-use software costs ( 5,396 ) ( 378 ) Purchases of property and equipment ( 7,493 ) ( 4,034 ) Purchases of securities available for sale and other ( 571,081 ) ( 923,507 ) Proceeds from maturities and redemption of securities available for sale 521,815 763,607 Proceeds from sales of securities available for sale and other — 906 Purchases of intangible assets ( 2,497 ) ( 113 ) Payments for business acquisitions, net of cash acquired ( 4,060 ) ( 148,042 ) Net cash used in investing activities ( 68,712 ) ( 311,561 ) Cash flows from financing activities: Payments for conversions of convertible senior notes ( 6 ) ( 15 ) Proceeds from hedges related to convertible senior notes 1 2 Proceeds from stock option exercises 8,977 31,829 Proceeds from shares issued in connection with employee stock purchase plan 18,960 17,417 Net cash provided by financing activities 27,932 49,233 Effects of changes in foreign currency exchange rates on cash, cash equivalents and restricted cash ( 6,072 ) 193 Net decrease in cash, cash equivalents and restricted cash ( 47,070 ) ( 208,668 ) Cash, cash equivalents and restricted cash at beginning of period 272,656 448,630 Cash, cash equivalents and restricted cash at end of period $ 225,586 $ 239,962 Supplementary cash flow disclosure: Cash paid during the period for: Interest $ 2,840 $ 2,864 Income taxes 3,303 1,642 Non-cash activities: Issuance of common stock and value of equity awards assumed in connection with business combination — 5,409,344 Issuance of common stock for conversions of convertible senior notes 39,564 126,144 Benefit from exercise of hedges related to convertible senior notes 17,502 79,641 Common stock issued as charitable contribution 2,014 — Operating lease right-of-use assets exchanged for lease liabilities 8,442 7,696 Reconciliation of cash, cash equivalents and restricted cash within the condensed consolidated balance sheets to the amounts shown in the condensed consolidated statements of cash flows above: Cash and cash equivalents $ 216,022 $ 225,265 Restricted cash, current included in prepaid expenses and other current assets 2,103 5,037 Restricted cash, noncurrent included in other assets 7,461 9,660 Total cash, cash equivalents and restricted cash $ 225,586 $ 239,962 See Notes to Condensed Consolidated Financial Statements. 9 OKTA, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. Overview and Basis of Presentation Description of Business Okta, Inc. (the “Company”) is the leading independent identity provider. The Okta Identity Cloud enables the Company’s customers to securely connect the right people to the right technologies and services at the right time. The Company was incorporated in January 2009 as Saasure Inc., a California corporation, and was later reincorporated in April 2010 under the name Okta, Inc. as a Delaware corporation. The Company is headquartered in San Francisco, California. Basis of Presentation and Principles of Consolidation The accompanying unaudited condensed consolidated financial statements, which include the accounts of the Company and its wholly owned subsidiaries, have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). All intercompany balances and transactions have been eliminated in consolidation. The condensed consolidated balance sheet as of January 31, 2022, included herein, was derived from the audited financial statements as of that date. The unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the results of operations for the interim periods presented, but are not necessarily indicative of the results of operations to be anticipated for the full fiscal year ending January 31, 2023 or any future period. The Company’s fiscal year ends on January 31. References to fiscal 2023, for example, refer to the fiscal year ending January 31, 2023. The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 7, 2022. Certain reclassifications of components of prior period operating and investing cash flows have been made in the condensed consolidated statements of cash flows to conform to the current period presentation. These reclassifications had no impact on total operating and investing cash flows as previously reported. Use of Estimates The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. The Company bases its estimates on historical experience and on other assumptions that its management believes are reasonable under the circumstances. Actual results could vary from those estimates. The Company’s most significant estimates include the stand-alone selling price (“SSP”) for each distinct performance obligation included in customer contracts with multiple performance obligations, the determination of the period of benefit for deferred commissions, the determination of the incremental borrowing rate used for operating lease liabilities, the valuation of deferred income tax assets, the valuation of goodwill and acquired intangible assets and their useful lives and the valuation of certain equity awards assumed. 10 2. Accounting Standards and Significant Accounting Policies Significant Accounting Policies The Company’s significant accounting policies are discussed in “Note 2. Summary of Significant Accounting Policies” in Item 8. Financial Statements and Supplementary Data of its Form 10-K for the fiscal year ended January 31, 2022. The Company no longer considers the accounting policy for its convertible senior notes to be a significant accounting policy due to the adoption of Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2020-06 effective February 1, 2022, which simplified the accounting for convertible instruments. There have been no other significant changes to the Company’s significant accounting policies for the six months ended July 31, 2022. Recently Adopted Accounting Pronouncements ASU No. 2020-06 In August 2020, the FASB issued ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. Among other changes, ASU 2020-06 removes from GAAP the liability and equity separation model for convertible instruments with a cash conversion feature, and as a result, after adoption, entities will no longer separately present in equity an embedded conversion feature for such debt. Similarly, the embedded conversion feature will no longer be amortized into income as interest expense over the life of the instrument. Instead, entities will account for a convertible debt instrument wholly as debt unless (1) a convertible instrument contains features that require bifurcation as a derivative under Accounting Standards Codification (“ASC”) Topic 815, Derivatives and Hedging, or (2) a convertible debt instrument was issued at a substantial premium. Additionally, ASU 2020-06 requires the application of the if-converted method to calculate the impact of convertible instruments on diluted earnings per share, which is consistent with the Company’s accounting treatment prior to the adoption of ASU 2020-06. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021. The Company adopted ASU 2020-06 effective February 1, 2022, using the modified retrospective method. The Company recognized a cumulative effect of initially applying the ASU as an adjustment to the February 1, 2022 opening balance of accumulated deficit. Due to the elimination of the equity conversion component of the Company’s convertible senior notes outstanding as of February 1, 2022, additional paid-in capital was reduced. The elimination of the equity conversion component had the effect of increasing the Company’s net debt balance. The reduction of other liabilities is related to changes to the Company’s deferred tax liabilities. The prior period condensed consolidated financial statements have not been retrospectively adjusted and continue to be reported under the accounting standards in effect for those periods. The adoption of ASU 2020-06 resulted in the following changes to the Company’s February 1, 2022 condensed consolidated balance sheet (in thousands): Balance at January 31, 2022 Adjustments from Adoption of ASU 2020-06 Balance at February 1, 2022 Liabilities Convertible senior notes, net $ 16,194 $ 927 $ 17,121 Convertible senior notes, net, noncurrent 1,815,714 371,527 2,187,241 Other liabilities, noncurrent 31,775 ( 866 ) 30,909 Stockholders’ equity Additional paid-in capital 7,749,716 ( 527,444 ) 7,222,272 Accumulated deficit ( 1,815,867 ) 155,856 ( 1,660,011 ) The impact of adoption on the condensed consolidated statements of operations for the three and six months ended July 31, 2022 was to decrease net interest expense by approximately $ 21.0 million and $ 41.8 million, respectively. This had the effect of decreasing basic and diluted net loss per share for the three and six months ended July 31, 2022 by $ 0.13 and $ 0.27 , respectively. 11 ASU No. 2021-08 In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires entities to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC Topic 606, Revenue from Contracts with Customers, primarily in order to align the recognition of a contract liability with the definition of a performance obligation. The ASU is effective for interim and annual periods beginning after December 15, 2022, on a prospective basis, with early adoption permitted. The Company adopted this standard effective February 1, 2022 on a prospective basis. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements. ASU No. 2021-04 In May 2021, the FASB issued ASU No. 2021-04, Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. The ASU addresses the previous lack of specific guidance in the accounting standards codification related to modifications or exchanges of freestanding equity-classified written call options (such as warrants) by specifying the accounting for various modification scenarios. The ASU is effective for interim and annual periods beginning after December 15, 2021, with early adoption permitted for any periods after issuance to be applied as of the beginning of the fiscal year that includes the interim period. The Company adopted this standard effective February 1, 2022 on a prospective basis. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements. 3. Business Combinations Acquisition of Auth0 On May 3, 2021, the Company acquired all outstanding shares of privately-held Auth0, Inc. (“Auth0”), an Identity-as-a-Service company. Total consideration transferred for Auth0 was $ 5,671.0 million, including approximately 19.2 million shares of common stock valued at $ 5,175.6 million, cash of $ 257.0 million, and assumed outstanding equity awards with vested fair value of $ 238.4 million. Cash consideration of $ 3.8 million and approximately 1.1 million shares valued at $ 294.6 million were held back as partial security for post-closing true-up adjustments as well as any indemnification claims made within one year of the acquisition date. The consideration held back was paid in full during the six months ended July 31, 2022. The Company incurred $ 29.0 million of acquisition-related costs, which were recorded as general and administrative expenses in its condensed consolidated statement of operations for the six months ended July 31, 2021. The transaction was accounted for as a business combination. The total purchase price of $ 5,671.0 million was allocated to the tangible and identifiable intangible assets and liabilities based on their estimated fair values. The excess of purchase consideration over the fair value of the net tangible assets and identifiable intangible assets acquired was $ 5,290.1 million and was recorded as goodwill. Acquisition of atSpoke On August 2, 2021, the Company acquired all issued and outstanding capital stock of privately-held Townsend Street Labs, Inc. (“atSpoke”), a modern workplace operations platform. The acquisition date cash consideration for atSpoke was approximately $ 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. The Company recorded $ 18.3 million for developed technology intangible assets with an estimated useful life of 3 years and recorded $ 62.2 million of goodwill. The Company incurred $ 0.9 million of acquisition-related costs, which were recorded as general and administrative expenses in its condensed consolidated statement of operations in the three months ended July 31, 2021. 12 4. Cash Equivalents and Investments Cash Equivalents and Short-term Investments The amortized cost, unrealized gain (loss) and estimated fair value of the Company’s cash equivalents and short-term investments as of July 31, 2022 and January 31, 2022 were as follows (in thousands): As of July 31, 2022 Amortized Cost Unrealized Gain Unrealized Loss Estimated Fair Value (unaudited) Cash equivalents: Money market funds $ 78,012 $ — $ — $ 78,012 Total cash equivalents 78,012 — — 78,012 Short-term investments: U.S. treasury securities 2,022,707 85 ( 26,952 ) 1,995,840 Corporate debt securities 268,685 — ( 3,569 ) 265,116 Total short-term investments 2,291,392 85 ( 30,521 ) 2,260,956 Total $ 2,369,404 $ 85 $ ( 30,521 ) $ 2,338,968 As of January 31, 2022 Amortized Cost Unrealized Gain Unrealized Loss Estimated Fair Value Cash equivalents: Money market funds $ 152,223 $ — $ — $ 152,223 Total cash equivalents 152,223 — — 152,223 Short-term investments: U.S. treasury securities 1,922,344 10 ( 10,166 ) 1,912,188 Corporate debt securities 331,050 — ( 1,581 ) 329,469 Total short-term investments 2,253,394 10 ( 11,747 ) 2,241,657 Total $ 2,405,617 $ 10 $ ( 11,747 ) $ 2,393,880 All short-term investments were designated as available-for-sale securities as of July 31, 2022 and January 31, 2022. The following table presents the contractual maturities of the Company’s short-term investments as of July 31, 2022 (in thousands): As of July 31, 2022 Amortized Cost Estimated Fair Value (unaudited) Due within one year $ 1,743,049 $ 1,720,573 Due between one to five years 548,343 540,383 Total $ 2,291,392 $ 2,260,956 The Company included $ 7.3 million and $ 6.0 million of interest receivable in Prepaid expenses and other current assets on the condensed consolidated balance sheets as of July 31, 2022 and January 31, 2022, respectively. The Company did not recognize an allowance for credit losses against interest receivable as of July 31, 2022 and January 31, 2022 because such potential losses were not material. 13 The following table presents the fair values and unrealized losses related to the Company’s investments in available-for-sale debt securities classified by length of time that the securities have been in a continuous unrealized loss position as of July 31, 2022 (in thousands): Less Than 12 Months More Than 12 Months Total Estimated Fair Value Unrealized Losses Estimated Fair Value Unrealized Losses Estimated Fair Value Unrealized Losses (unaudited) U.S. treasury securities $ 1,658,111 $ ( 22,352 ) $ 223,145 $ ( 4,600 ) $ 1,881,256 $ ( 26,952 ) Corporate debt securities 200,861 ( 2,849 ) 64,255 ( 720 ) 265,116 ( 3,569 ) Total $ 1,858,972 $ ( 25,201 ) $ 287,400 $ ( 5,320 ) $ 2,146,372 $ ( 30,521 ) The Company had 195 and 193 short-term investments in unrealized loss positions as of July 31, 2022 and January 31, 2022, respectively. There were no material realized gains or losses from available-for-sale securities that were reclassified out of accumulated other comprehensive income for the three and six months ended July 31, 2022 or 2021. For available-for-sale debt securities that have unrealized losses, the Company evaluates whether (i) the Company has the intention to sell any of these investments, (ii) it is not more likely than not that the Company will be required to sell any of these available-for-sale debt securities before recovery of the entire amortized cost basis and (iii) the decline in the fair value of the investment is due to credit or non-credit related factors. Based on this evaluation, the Company determined that for short-term investments, there were no material credit or non-credit related impairments as of July 31, 2022 and January 31, 2022. Strategic Investments The Company's strategic investments primarily include equity investments in privately-held companies, which do not have a readily determinable fair value. As of July 31, 2022 and January 31, 2022, the balance of strategic investments was $ 21.8 million and $ 15.3 million, respectively. During the three and six months ended July 31, 2022, the Company recorded $ 0.6 million and $ 2.0 million, respectively, of gains on strategic investments. During the three and six months ended July 31, 2021, the Company recorded $ 2.4 million and $ 5.3 million, respectively, of gains on strategic investments. Gains on strategic investments consists primarily of observable price adjustments related to equity investments in privately-held companies. All gains and losses on strategic investments, whether realized or unrealized, are recognized in Interest income and other, net on the condensed consolidated statements of operations. 5. Fair Value Measurements The Company measures its financial assets at fair value each reporting period using a fair value hierarchy that prioritizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. A financial instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Three levels of inputs may be used to measure as follows: Level 1—Valuations based on observable inputs that reflect quoted prices for identical assets or liabilities in active markets. Level 2—Valuations based on other inputs that are directly or indirectly observable in the marketplace. Level 3—Valuations based on unobservable inputs that are supported by little or no market activity. 14 Assets and Liabilities Measured at Fair Value on a Recurring Basis The following table presents information about the Company’s financial assets that were measured at fair value on a recurring basis using the above input categories (in thousands): As of July 31, 2022 Level 1 Level 2 Level 3 Total (unaudited) Assets: Cash equivalents: Money market funds $ 78,012 $ — $ — $ 78,012 Total cash equivalents 78,012 — — 78,012 Short-term investments: U.S. treasury securities — 1,995,840 — 1,995,840 Corporate debt securities — 265,116 — 265,116 Total short-term investments — 2,260,956 — 2,260,956 Total cash equivalents and short-term investments $ 78,012 $ 2,260,956 $ — $ 2,338,968 As of January 31, 2022 Level 1 Level 2 Level 3 Total Assets: Cash equivalents: Money market funds $ 152,223 $ — $ — $ 152,223 Total cash equivalents 152,223 — — 152,223 Short-term investments: U.S. treasury securities — 1,912,188 — 1,912,188 Corporate debt securities — 329,469 — 329,469 Total short-term investments — 2,241,657 — 2,241,657 Total cash equivalents and short-term investments $ 152,223 $ 2,241,657 $ — $ 2,393,880 The carrying amounts of certain financial instruments, including cash held in banks, accounts receivable and accounts payable, approximate fair value due to their short-term maturities and are excluded from the fair value table above. Fair Value Measurements of Other Financial Instruments The following table presents the principal amounts and estimated fair values of the Company’s financial instruments that are not recorded at fair value on the condensed consolidated balance sheets (in thousands): As of July 31, 2022 Principal Amount Estimated Fair Value (unaudited) 2023 convertible senior notes $ 5,226 $ 10,620 2025 convertible senior notes 1,059,997 989,215 2026 convertible senior notes 1,150,000 985,915 The 2023 convertible senior notes (“2023 Notes”), the 2025 convertible senior notes (“2025 Notes”), and the 2026 convertible senior notes (“2026 Notes”, and together with the 2023 Notes and 2025 Notes, the “Notes”) are recorded at face value less unamortized debt issuance costs (See Note 9 for additional details). The estimated fair values of the Notes, which are Level 2 financial instruments, were determined based on the quoted bid prices of the Notes in an over-the-counter market on the last trading day of the reporting period. 15 6. Deferred Commissions Sales commissions capitalized as contract costs totaled $ 28.0 million and $ 40.0 million in the three months ended July 31, 2022 and 2021, respectively, and $ 49.4 million and $ 54.9 million in the six months ended July 31, 2022 and 2021, respectively. Amortization of contract costs was $ 20.4 million and $ 13.3 million for the three months ended July 31, 2022 and 2021, respectively, and $ 39.5 million and $ 25.1 million for the six months ended July 31, 2022 and 2021, respectively. There was no impairment loss in relation to the costs capitalized. 7. Goodwill and Intangible Assets, net Goodwill As of July 31, 2022 and January 31, 2022, goodwill was $ 5,400.3 million and $ 5,401.3 million, respectively. No goodwill impairments were recorded during the three and six months ended July 31, 2022 and 2021. Intangible Assets, net Intangible assets consisted of the following (in thousands): As of July 31, 2022 Gross Accumulated Amortization Net (unaudited) Capitalized internal-use software costs $ 44,328 $ ( 26,956 ) $ 17,372 Purchased developed technology 219,800 ( 69,794 ) 150,006 Customer relationships 140,900 ( 43,998 ) 96,902 Trade name 21,400 ( 5,350 ) 16,050 Software licenses 1,796 ( 656 ) 1,140 $ 428,224 $ ( 146,754 ) $ 281,470 As of January 31, 2022 Gross Accumulated Amortization Net Capitalized internal-use software costs $ 36,319 $ ( 24,170 ) $ 12,149 Purchased developed technology 219,100 ( 47,085 ) 172,015 Customer relationships 140,900 ( 26,399 ) 114,501 Trade name 21,400 ( 3,210 ) 18,190 Software licenses 116 ( 3 ) 113 $ 417,835 $ ( 100,867 ) $ 316,968 The weighted-average remaining useful lives of the Company’s acquired intangible assets are as follows: Weighted-Average Remaining Useful Life As of July 31, 2022 As of January 31, 2022 (unaudited) Purchased developed technology 3.5 years 4.0 years Customer relationships 3.7 years 4.0 years Trade name 3.8 years 4.3 years Amortization expense of intangible assets for the three months ended July 31, 2022 and 2021 was $ 23.2 million and $ 21.3 million, respectively, and $ 45.9 million and $ 24.2 million for the six months ended July 31, 2022 and 2021, respectively. 16 8. Deferred Revenue and Performance Obligations Deferred Revenue Deferred revenue, which is a contract liability, consists primarily of payments received and accounts receivable recorded in advance of revenue recognition under the Company’s contracts with customers and is recognized as the revenue recognition criteria are met. Subscription revenue recognized during the three months ended July 31, 2022 and 2021 that was included in the deferred revenue balances at the beginning of the respective periods was $ 389.5 million and $ 245.4 million, respectively, and $ 656.7 million and $ 359.3 million in the six months ended July 31, 2022 and 2021, respectively. Professional services and other revenue recognized during the three months ended July 31, 2022 and 2021 that was included in the deferred revenue balances at the beginning of the respective periods was $ 6.9 million and $ 4.1 million, respectively, and $ 11.1 million and $ 5.0 million in the six months ended July 31, 2022 and 2021, respectively. Transaction Price Allocated to the Remaining Performance Obligations Transaction price allocated to the remaining performance obligations (“RPO”) represents all future, non-cancelable contracted revenue that has not yet been recognized, inclusive of deferred revenue that has been invoiced and non-cancelable amounts that will be invoiced and recognized as revenue in future periods. As of July 31, 2022, total remaining non-cancelable performance obligations under the Company’s subscription contracts with customers was approximately $ 2,790.3 million . Of this amount, the Company expects to recognize revenue of approximately $ 1,496.7 million, or 54 %, over the next 12 months, with the balance to be recognized as revenue thereafter. Remaining performance obligations for professional services and other contracts as of July 31, 2022 were not material. 9. Convertible Senior Notes, Net 2023 Convertible Senior Notes The 2023 Notes are senior, unsecured obligations of the Company, and bear interest at a fixed rate of 0.25 % per year. Interest is payable in cash semi-annually in arrears on February 15 and August 15 of each year, beginning on August 15, 2018. The 2023 Notes mature on February 15, 2023 unless earlier repurchased or converted. The Company may not redeem the 2023 Notes prior to maturity. The terms of the 2023 Notes are governed by an Indenture by and between the Company and Wilmington Trust, National Association, as Trustee (the “2023 Indenture”). Upon conversion, the 2023 Notes may be settled in cash, shares of Class A common stock or a combination of cash and shares of Class A common stock, at the Company’s election. The 2023 Notes are convertible at an initial conversion rate of 20.6795 shares of Class A common stock per $1,000 principal amount of the 2023 Notes, which is equal to an initial conversion price of approximately $ 48.36 per share of Class A common stock, subject to adjustment under certain circumstances in accordance with the terms of the 2023 Indenture. Prior to the close of business on the business day immediately preceding October 15, 2022, holders of the 2023 Notes may convert all or a portion of their 2023 Notes only in multiples of $1,000 principal amount, under the following circumstances: • during any fiscal quarter commencing after the fiscal quarter ending on April 30, 2018 (and only during such fiscal quarter), if the last reported sale price of Class A common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130 % of the conversion price of the 2023 Notes on each applicable trading day; • during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of the 2023 Notes for each trading day of that five consecutive trading day period was less than 98 % of the product of the last reported sale price of Class A common stock and the conversion rate on such trading day; or • upon the occurrence of specified corporate events, as described in the 2023 Indenture. 17 On or after October 15, 2022 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their 2023 Notes regardless of the foregoing circumstances. For at least 20 trading days during the period of 30 consecutive trading days ended July 31, 2022, the last reported sale price of the Company’s common stock was equal to or exceeded 130 % of the conversion price of the 2023 Notes on each applicable trading day. As a result, the 2023 Notes are convertible at the option of the holders during the fiscal quarter ending October 31, 2022. The 2023 Notes were classified as current liabilities on the condensed consolidated balance sheet as of July 31, 2022. As of July 31, 2022, $ 5.2 million of principal remained outstanding on the 2023 Notes. During the three months ended July 31, 2022, the Company settled an immaterial principal amount of the 2023 Notes in cash and during the six months ended July 31, 2022, the Company issued approximately 0.2 million shares of Class A common stock and paid an immaterial amount in cash to settle approximately $ 12.0 million principal amount of 2023 Notes. No requests to convert material amounts of the 2023 Notes are currently outstanding. During the year ended January 31, 2022, the Company issued approximately 0.5 million shares of Class A common stock and paid an immaterial amount in cash to settle approximately $ 23.0 million principal amount of 2023 Notes. Holders of the 2023 Notes who convert their 2023 Notes in connection with certain corporate events that constitute a make-whole fundamental change (as defined in the 2023 Indenture) are, under certain circumstances, entitled to an increase in the conversion rate. Additionally, in the event of a corporate event that constitutes a fundamental change (as defined in the 2023 Indenture), holders of the 2023 Notes may require the Company to repurchase all or a portion of their 2023 Notes at a price equal to 100 % of the principal amount of the 2023 Notes being repurchased, plus any accrued and unpaid interest. As of July 31, 2022, the effective interest rate on the 2023 Notes was 0.85 %. As of July 31, 2021, prior to the adoption of ASU 2020-06, the effective interest rate on the liability component of the 2023 Notes was 5.68 %. The following table sets forth total interest expense recognized related to the 2023 Notes (in thousands): Three Months Ended July 31, Six Months Ended July 31, 2022 2021 2022 2021 (unaudited) Contractual interest expense $ 3 $ 14 $ 11 $ 34 Amortization of debt issuance costs 11 24 27 62 Amortization of debt discount (1) — 241 — 624 Total $ 14 $ 279 $ 38 $ 720 (1) Not applicable subsequent to adoption of ASU 2020-06. 18 The net carrying amount of the 2023 Notes consisted of the following (in thousands): As of July 31, 2022 As of January 31, 2022 (unaudited) Liability component: Principal $ 5,226 $ 17,228 Less: unamortized debt issuance costs and debt discount (1) ( 17 ) ( 1,034 ) Net carrying amount $ 5,209 $ 16,194 As of July 31, 2022 As of January 31, 2022 (unaudited) Equity component: (1) 2023 Notes $ — $ 3,993 Less: issuance costs — ( 116 ) Carrying amount of the equity component (2) $ — $ 3,877 (1) Subsequent to the adoption of ASU 2020-06 under the modified retrospective method, the equity component and debt discount are eliminated. (2) Included in the January 31, 2022 condensed consolidated balance sheet within Additional paid-in capital. Note Hedges In connection with the pricing of the 2023 Notes, the Company entered into convertible note hedges with respect to its Class A common stock (the “Note Hedges”). The Note Hedges are purchased call options that give the Company the option to purchase shares, subject to anti-dilution adjustments substantially identical to those in the 2023 Notes, of its Class A common stock for approximately $ 48.36 per share (subject to adjustment), corresponding to the approximate initial conversion price of the 2023 Notes, exercisable upon conversion of the 2023 Notes. The Note Hedges will expire in 2023, if not exercised earlier. The Note Hedges are intended to offset potential dilution to the Company’s Class A common stock and/or offset the potential cash payments that the Company could be required to make in excess of the principal amount upon any conversion of the 2023 Notes under certain circumstances. The Note Hedges are separate transactions and are not part of the terms of the 2023 Notes. During the three months ended July 31, 2022, the Company net-share-settled Note Hedges corresponding to approximately $ 10.0 million principal amount of 2023 Notes and received approximately 0.1 million shares of Class A common stock and an immaterial cash payment. During the six months ended July 31, 2022, the Company exercised and net-share-settled Note Hedges corresponding to approximately $ 12.0 million principal amount of 2023 Notes and received approximately 0.1 million shares of Class A common stock and an immaterial cash payment. As of July 31, 2022, Note Hedges giving the Company the option to purchase approximately 0.1 million shares (subject to adjustment) remained outstanding. Warrants In connection with the issuance of the 2023 Notes, the Company also entered into separate warrant transactions pursuant to which it sold net-share-settled (or, at the Company’s election subject to certain conditions, cash-settled) warrants (the “Warrants”) to acquire shares, subject to anti-dilution adjustments, over 80 scheduled trading days beginning in May 2023 of the Company’s Class A common stock at an initial exercise price of approximately $ 68.06 per share (subject to adjustment). If the Warrants are not exercised on their exercise dates, they will expire. If the market value per share of the Company’s Class A common stock exceeds the applicable exercise price of the Warrants, the Warrants could have a dilutive effect on the Company’s Class A common stock unless, subject to the terms of the Warrants, the Company elects to cash settle the Warrants. The Warrants are separate transactions and are not part of the terms of the 2023 Notes or the Note Hedges. As of July 31, 2022, Warrants to acquire up to approximately 1.0 million shares (subject to adjustment) remained outstanding. 19 2025 Convertible Senior Notes The 2025 Notes are senior, unsecured obligations of the Company, and bear interest at a fixed rate of 0.125 % per year. Interest is payable in cash semi-annually in arrears on March 1 and September 1 of each year, beginning on March 1, 2020. The 2025 Notes mature on September 1, 2025 unless earlier redeemed, repurchased or converted. The terms of the 2025 Notes are governed by an Indenture by and between the Company and Wilmington Trust, National Association, as Trustee (the “2025 Indenture”). Upon conversion, the 2025 Notes may be settled in cash, shares of Class A common stock or a combination of cash and shares of Class A common stock, at the Company’s election. The 2025 Notes are convertible at an initial conversion rate of 5.2991 shares of Class A common stock per $1,000 principal amount of the 2025 Notes, which is equal to an initial conversion price of approximately $ 188.71 per share of Class A common stock, subject to adjustment under certain circumstances in accordance with the terms of the 2025 Indenture. Prior to the close of business on the business day immediately preceding June 1, 2025, holders of the 2025 Notes may convert all or a portion of their 2025 Notes only in multiples of $1,000 principal amount, under the following circumstances: • during any fiscal quarter commencing after the fiscal quarter ending on January 31, 2020 (and only during such fiscal quarter), if the last reported sale price of Class A common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130 % of the conversion price of the 2025 Notes on each applicable trading day; • during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of the 2025 Notes for each trading day of that five consecutive trading day period was less than 98 % of the product of the last reported sale price of Class A common stock and the conversion rate on such trading day; • if the Company calls the notes for redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; or • upon the occurrence of specified corporate events, as described in the 2025 Indenture. On or after June 1, 2025 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their 2025 Notes regardless of the foregoing circumstances. During the three months ended July 31, 2022, the conditions allowing holders of the 2025 Notes to convert were not met, and as a result, the 2025 Notes were classified as noncurrent liabilities as of July 31, 2022. The Company may redeem for cash all or any portion of the 2025 Notes, at its option, on or after September 6, 2022, if the last reported sale price of the Company’s Class A common stock has been at least 130 % of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on and including the trading day preceding the date on which the Company provides notice of redemption at a redemption price equal to 100 % of the principal amount of the 2025 Notes to be redeemed, plus any accrued and unpaid interest to, but excluding, the redemption date. During the three months ended July 31, 2022, the Company did no t redeem any of the 2025 Notes. Holders of the 2025 Notes who convert their 2025 Notes in connection with certain corporate events that constitute a make-whole fundamental change (as defined in the 2025 Indenture) or in connection with the Company’s issuance of a redemption notice are, under certain circumstances, entitled to an increase in the conversion rate. Additionally, in the event of a corporate event that constitutes a fundamental change (as defined in the 2025 Indenture), holders of the 2025 Notes may require the Company to repurchase all or a portion of their 2025 Notes at a price equal to 100 % of the principal amount of the 2025 Notes being repurchased, plus any accrued and unpaid interest. 20 As of July 31, 2022, the effective interest rate on the 2025 Notes was 0.43 %. As of July 31, 2021, prior to the adoption of ASU 2020-06, the effective interest rate on the liability component of the 2025 Notes was 4.10 %. The following table sets forth total interest expense recognized related to the 2025 Notes (in thousands): Three Months Ended July 31, Six Months Ended July 31, 2022 2021 2022 2021 (unaudited) Contractual interest expense $ 331 $ 331 $ 662 $ 662 Amortization of debt issuance costs 808 568 1,615 1,124 Amortization of debt discount (1) — 8,790 — 17,490 Total $ 1,139 $ 9,689 $ 2,277 $ 19,276 (1) Not applicable subsequent to adoption of ASU 2020-06. The net carrying amount of the 2025 Notes consisted of the following (in thousands): As of July 31, 2022 As of January 31, 2022 (unaudited) Liability component: Principal $ 1,059,997 $ 1,059,997 Less: unamortized debt issuance costs and debt discount (1) ( 10,048 ) ( 149,333 ) Net carrying amount $ 1,049,949 $ 910,664 As of July 31, 2022 As of January 31, 2022 (unaudited) Equity component: (1) 2025 Notes $ — $ 221,387 Less: issuance costs — ( 4,040 ) Carrying amount of the equity component (2) $ — $ 217,347 (1) Subsequent to the adoption of ASU 2020-06 under the modified retrospective method, the equity component and debt discount are eliminated. (2) Included in the January 31, 2022 condensed consolidated balance sheet within Additional paid-in capital. 2025 Capped Calls In connection with the pricing of the 2025 Notes, the Company entered into capped call transactions with respect to its Class A common stock (the “2025 Capped Calls”). The 2025 Capped Calls are purchased call options that give the Company the option to purchase approximately 5.6 million shares, subject to anti-dilution adjustments substantially identical to those in the 2025 Notes, of its Class A common stock for approximately $ 188.71 per share (subject to adjustment), corresponding to the approximate initial conversion price of the 2025 Notes, exercisable upon conversion of the 2025 Notes. The 2025 Capped Calls have initial cap prices of $ 255.88 per share (subject to adjustment) and will expire in 2025, if not exercised earlier. The 2025 Capped Calls are intended to offset potential dilution to the Company’s Class A common stock and/or offset the potential cash payments that the Company could be required to make in excess of the principal amount upon any conversion of the 2025 Notes under certain circumstances. The 2025 Capped Calls are separate transactions and are not part of the terms of the 2025 Notes. 2026 Convertible Senior Notes The 2026 Notes are senior, unsecured obligations of the Company, and bear interest at a fixed rate of 0.375 % per year. Interest is payable in cash semi-annually in arrears on June 15 and December 15 of each year, beginning on December 15, 2020. The 2026 Notes mature on June 15, 2026 unless earlier redeemed, repurchased or converted. 21 The terms of the 2026 Notes are governed by an Indenture by and between the Company and Wilmington Trust, National Association, as Trustee (the “2026 Indenture”). Upon conversion, the 2026 Notes may be settled in cash, shares of Class A common stock or a combination of cash and shares of Class A common stock, at the Company’s election. The 2026 Notes are convertible at an initial conversion rate of 4.1912 shares of Class A common stock per $1,000 principal amount of the 2026 Notes, which is equal to an initial conversion price of approximately $ 238.60 per share of Class A common stock, subject to adjustment under certain circumstances in accordance with the terms of the Indenture. Prior to the close of business on the business day immediately preceding March 15, 2026, holders of the 2026 Notes may convert all or a portion of their 2026 Notes only in multiples of $1,000 principal amount, under the following circumstances: • during any fiscal quarter commencing after the fiscal quarter ending on October 31, 2020 (and only during such fiscal quarter), if the last reported sale price of the Company’s Class A common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130 % of the conversion price of the 2026 Notes on each applicable trading day; • during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of the 2026 Notes for each trading day of that five consecutive trading day period was less than 98 % of the product of the last reported sale price of the Company’s Class A common stock and the conversion rate on such trading day; • if the Company calls the notes for redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; or • upon the occurrence of specified corporate events, as described in the 2026 Indenture. On or after March 15, 2026 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their 2026 Notes regardless of the foregoing circumstances. During the three months ended July 31, 2022, the conditions allowing holders of the 2026 Notes to convert were not met, and as a result, the 2026 Notes were classified as noncurrent liabilities as of July 31, 2022. The Company may redeem for cash all or any portion of the 2026 Notes, at its option, on or after June 20, 2023, if the last reported sale price of the Company’s Class A common stock has been at least 130 % of the conversion price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which the Company provides notice of redemption, during any 30 consecutive trading day period ending on and including the trading day preceding the date on which the Company provides notice of redemption price equal to 100 % of the principal amount of the notes to be redeemed, plus any accrued and unpaid interest to, but excluding, the redemption date. During the three months ended July 31, 2022, the Company did no t redeem any of the 2026 Notes. Holders of the 2026 Notes who convert their 2026 Notes in connection with certain corporate events that constitute a make-whole fundamental change (as defined in the 2026 Indenture) or in connection with the Company’s issuance of a redemption notice are, under certain circumstances, entitled to an increase in the conversion rate. Additionally, in the event of a corporate event that constitutes a fundamental change (as defined in the Indenture), holders of the 2026 Notes may require the Company to repurchase all or a portion of their 2026 Notes at a price equal to 100 % of the principal amount of the 2026 Notes being repurchased, plus any accrued and unpaid interest. 22 As of July 31, 2022, the effective interest rate on the 2026 Notes was 0.60 %. As of July 31, 2021, prior to the adoption of ASU 2020-06, the effective interest rate on the liability component of the 2026 Notes was 5.75 %. The following table sets forth total interest expense recognized related to the 2026 Notes (in thousands): Three Months Ended July 31, Six Months Ended July 31, 2022 2021 2022 2021 (unaudited) Contractual interest expense $ 1,078 $ 1,078 $ 2,156 $ 2,156 Amortization of debt issuance costs 627 352 1,253 692 Amortization of debt discount (1) — 11,474 — 22,788 Total $ 1,705 $ 12,904 $ 3,409 $ 25,636 (1) Not applicable subsequent to adoption of ASU 2020-06. The net carrying amount of the 2026 Notes consisted of the following (in thousands): As of July 31, 2022 As of January 31, 2022 (unaudited) Liability component: Principal $ 1,150,000 $ 1,150,000 Less: unamortized debt issuance costs and debt discount (1) ( 9,839 ) ( 244,950 ) Net carrying amount $ 1,140,161 $ 905,050 As of July 31, 2022 As of January 31, 2022 (unaudited) Equity component: (1) 2026 Notes $ — $ 310,311 Less: issuance costs — ( 4,090 ) Carrying amount of the equity component (2) $ — $ 306,221 (1) Subsequent to the adoption of ASU 2020-06 under the modified retrospective method, the equity component and debt discount are eliminated. (2) Included in the January 31, 2022 condensed consolidated balance sheet within Additional paid-in capital. 2026 Capped Calls In connection with the pricing of the 2026 Notes, the Company entered into capped call transactions with respect to its Class A common stock (the “2026 Capped Calls”). The 2026 Capped Calls are purchased call options that give the Company the option to purchase approximately 4.8 million shares, subject to anti-dilution adjustments substantially identical to those in the 2026 Notes, of its Class A common stock for approximately $ 238.60 per share (subject to adjustment), corresponding to the approximate initial conversion price of the 2026 Notes, exercisable upon conversion of the 2026 Notes. The 2026 Capped Calls have initial cap prices of $ 360.14 per share (subject to adjustment) and will expire in 2026, if not exercised earlier. The 2026 Capped Calls are intended to offset potential dilution to the Company’s Class A common stock and/or offset the potential cash payments that the Company could be required to make in excess of the principal amount upon any conversion of the 2026 Notes under certain circumstances. The 2026 Capped Calls are separate transactions and are not part of the terms of the 2026 Notes. 23 10. Leases The Company has entered into various non-cancelable office space operating leases with original lease periods expiring between 2022 and 2029. These leases do not contain material variable rent payments, residual value guarantees, covenants or other restrictions. Operating lease costs were as follows (in thousands): Three Months Ended July 31, Six Months Ended July 31, 2022 2021 2022 2021 (unaudited) Operating lease cost (1) $ 10,459 $ 9,621 $ 20,736 $ 18,458 (1) Amounts are presented exclusive of sublease income and include leases with an original term of 12 months or less (short-term leases), which are immaterial. The weighted-average remaining term of the Company’s operating leases was 5.5 years and 5.9 years as of July 31, 2022 and January 31, 2022, respectively, and the weighted-average discount rate used to measure the present value of the operating lease liabilities was 5.3 % and 5.5 %, respectively. Maturities of the Company’s operating lease liabilities, which do not include short-term leases, were as follows (in thousands): As of July 31, 2022 Fiscal Year Ending January 31: (unaudited) 2023 (remaining six months) $ 22,786 2024 45,362 2025 41,774 2026 31,527 2027 30,619 Thereafter 53,726 Total lease payments 225,794 Less imputed interest ( 31,157 ) Less tenant improvement allowances not yet recognized ( 2,454 ) Total operating lease liabilities $ 192,183 Cash payments made related to operating lease liabilities were $ 7.4 million and $ 10.0 million for the three months ended July 31, 2022 and 2021, respectively, and $ 18.1 million and $ 19.1 million in the six months ended July 31, 2022 and 2021, respectively. 11. Commitments and Contingencies Letters of Credit In conjunction with the execution of certain office space operating leases, letters of credit in the aggregate amount of $ 8.5 million and $ 8.6 million were issued and outstanding as of July 31, 2022 and January 31, 2022, respectively. No draws have been made under such letters of credit. Noncurrent restricted cash of $ 6.4 million associated with these letters of credit is included in Other assets on the condensed consolidated balance sheets as of July 31, 2022 and January 31, 2022. Purchase Obligations Except as discussed below, there were no significant changes in future minimum purchase obligations as disclosed in the Company’s audited consolidated financial statements for the year ended January 31, 2022. Effective July 2022, the Company terminated its existing agreement and entered into a new agreement with a cloud services provider with a total obligation of $ 450.0 million over a four-year period. 24 Legal Matters From time to time in the normal course of business, the Company may be subject to various legal matters such as threatened or pending claims or proceedings. There were no such material matters as of July 31, 2022. Warranties and Indemnification To date, the Company has not incurred significant costs and has not accrued any material liabilities in the accompanying condensed consolidated financial statements as a result of its warranty and indemnification obligations. 12. Employee Incentive Plans The Company’s equity incentive plans provide for granting stock options, restricted stock units (“RSUs”), restricted stock awards to employees, consultants, officers and directors and restricted stock units with market-based vesting conditions to certain executives. In addition, the Company offers an Employee Stock Purchase Plan (“ESPP”) to eligible employees. Stock-based compensation expense was recorded in the following cost and expense categories in the Company’s condensed consolidated statements of operations (in thousands): Three Months Ended July 31, Six Months Ended July 31, 2022 2021 2022 2021 (unaudited) Cost of revenue Subscription $ 17,778 $ 13,138 $ 34,403 $ 20,388 Professional services and other 3,816 3,161 7,453 5,503 Research and development 70,078 53,332 139,122 73,425 Sales and marketing 38,982 41,288 78,784 62,354 General and administrative 40,525 76,795 80,940 90,156 Total $ 171,179 $ 187,714 $ 340,702 $ 251,826 Equity Incentive Plans The Company has two equity incentive plans: the 2009 Stock Plan and the 2017 Equity Incentive Plan (“2017 Plan”). In addition, the Company assumed Auth0 equity incentive plans. All shares that remain available for future grants are under the 2017 Plan. As of July 31, 2022, options to purchase 1,968,404 shares of Class A common stock and 5,295,955 shares of Class B common stock remained outstanding. Shares of common stock reserved for future issuance were as follows: As of July 31, 2022 (unaudited) Stock options and unvested RSUs outstanding 15,970,767 Available for future stock option and RSU grants 27,206,401 Available for ESPP 7,053,433 50,230,601 25 Stock Options A summary of the Company’s stock option activity and related information was as follows: Number of Options Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term (Years) Aggregate Intrinsic Value (in thousands) (unaudited) Outstanding as of January 31, 2022 7,984,078 $ 39.59 5.2 $ 1,314,031 Granted — — Exercised ( 575,423 ) 15.61 Canceled ( 144,296 ) 93.18 Outstanding as of July 31, 2022 7,264,359 $ 40.42 4.7 $ 543,909 As of July 31, 2022 Vested and exercisable 6,323,025 $ 23.19 4.2 $ 519,908 As of July 31, 2022, there was a total of $ 139.6 million of unrecognized stock-based compensation expense related to options, which is being recognized over a weighted-average period of 2.0 years. Restricted Stock Units A summary of the Company’s RSU activity (inclusive of market-based RSUs) and related information was as follows: Number of RSUs Weighted- Average Grant Date Fair Value Per Share (unaudited) Outstanding as of January 31, 2022 6,225,747 $ 207.26 Granted 4,620,990 136.54 Vested ( 1,256,680 ) 168.50 Forfeited ( 883,649 ) 201.08 Outstanding as of July 31, 2022 8,706,408 $ 175.95 As of July 31, 2022, there was $ 1,371.4 million of unrecognized stock-based compensation expense related to unvested RSUs, which is being recognized over a weighted-average period of 3.2 years based on vesting under the award service conditions. Market-based Restricted Stock Units In March 2022, the Company granted market-based RSUs (“PSUs”) to certain members of management. The target number of PSUs granted was 58,150 . One-third of these PSUs vest over each of a one-, two- and three-year performance period, each starting on February 1, 2022. The number of shares that can be earned ranges from 0 % to 200 % of the target number of shares based on the relative performance of the per share price of the Company’s common stock as compared to the Nasdaq Composite Index over the respective performance periods and subject to continuous employment through the vesting dates. The $ 244.73 grant date fair value per target PSU was determined using a Monte Carlo simulation approach. Compensation expense for awards with market conditions is recognized over the service period using the accelerated attribution method and is not reversed if the market condition is not met. 26 Restricted Stock Awards Issued in Connection with Business Combinations In fiscal year 2022, the Company entered into revesting agreements with the founders of the acquired businesses pursuant to which 1,269,008 restricted shares of Okta’s Class A common stock with a weighted-average fair value per share of $ 268.98 issued as of the respective closing dates will vest over 3 years. In connection with the business combinations, as of July 31, 2022, there was $ 200.8 million of unrecognized stock-based compensation expense related to unvested restricted shares, which is being recognized over a weighted-average period of 1.8 years based on vesting under the award service conditions. Employee Stock Purchase Plan The ESPP provides for 12-month offering periods beginning June 21 and December 21 of each year, and each offering period consists of up to two six-month purchase periods. The ESPP contains a reset provision under which the offering period resets if the fair market value of the Company’s common stock on the purchase date is less than the fair market value on the offering date. The Company estimated the fair value of ESPP purchase rights using a Black-Scholes option pricing model with the following assumptions: Three and Six Months Ended July 31, 2022 2021 (unaudited) Expected volatility 63 %- 78 % 47 % - 48 % Expected term (in years) 0.5 - 1.0 0.5 - 1.0 Risk-free interest rate 2.46 % - 2.92 % 0.06 % - 0.09 % Expected dividend yield — — During the three and six months ended July 31, 2022, the Company’s employees purchased 269,814 shares of its Class A common stock under the ESPP. The shares were purchased at a weighted-average purchase price of $ 70.27 per share, with total proceeds of $ 19.0 million. As of July 31, 2022, there was $ 20.8 million of unrecognized stock-based compensation expense related to the ESPP that is expected to be recognized over a weighted-average vesting period of 0.8 years. 13. Income Taxes For the three and six months ended July 31, 2022, the Company recorded a tax provision of $ 4.2 million and $ 6.1 million on pretax losses of $ 206.3 million and $ 447.1 million, respectively. The effective tax rate for the three and six months ended July 31, 2022 was approximately ( 2.0 )% and ( 1.4 )%, respectively. The effective tax rate differs from the statutory rate primarily as a result of not recognizing the tax benefit for U.S. losses due to a full valuation allowance against U.S. deferred tax assets, the tax effect of foreign operations, and U.S. state taxes. The Tax Cuts and Jobs Act enacted on December 22, 2017 amended Internal Revenue Code Section 174 to require that specific research and experimental ("R&E") expenditures be capitalized and amortized over five years (U.S. R&E) or fifteen years (non-U.S. R&E) beginning in the Company's fiscal 2023. Although Congress has considered legislation that would defer, modify or repeal the capitalization and amortization requirement, there is no assurance the provision will be deferred, repealed or otherwise modified. If the requirement is not modified, the Company may be required to utilize some of its federal and state tax attributes and there may be increases to cash taxes or tax expense. For the three and six months ended July 31, 2021, the Company recorded a tax benefit of $ 7.5 million and $ 7.5 million on pretax losses of $ 284.1 million and $ 393.4 million, respectively. The effective tax rate for the three and six months ended July 31, 2021 was approximately 2.6 % and 1.9 %, respectively. The effective tax rate differs from the statutory rate primarily as a result of not recognizing deferred tax assets for U.S. losses due to a full valuation allowance against U.S. deferred tax assets, release of the valuation allowance in the United States in connection with the Auth0 acquisition, a remeasurement of deferred tax assets in connection with a tax rate change in the United Kingdom, and excess tax benefits from stock-based compensation in the United Kingdom. The tax benefit was partially offset by income tax expense in profitable foreign jurisdictions and U.S. state taxes. 27 14. Net Loss Per Share The following table presents the calculation of basic and diluted net loss per share (in thousands, except per share data): Three Months Ended July 31, Six Months Ended July 31, 2022 2021 2022 2021 Class A Class B Class A Class B Class A Class B Class A Class B (unaudited) Numerator: Net loss $ ( 201,124 ) $ ( 9,348 ) $ ( 263,151 ) $ ( 13,531 ) $ ( 432,980 ) $ ( 20,205 ) $ ( 364,976 ) $ ( 20,938 ) Denominator: Weighted-average shares outstanding, basic and diluted 150,409 6,991 143,955 7,402 149,666 6,984 134,031 7,689 Net loss per share, basic and diluted $ ( 1.34 ) $ ( 1.34 ) $ ( 1.83 ) $ ( 1.83 ) $ ( 2.89 ) $ ( 2.89 ) $ ( 2.72 ) $ ( 2.72 ) As the Company was in a loss position for all periods presented, basic net loss per share is the same as diluted net loss per share as the inclusion of all potential common shares outstanding would have been anti-dilutive. Potentially dilutive securities that were not included in the diluted per share calculations because they would be anti-dilutive were as follows (in thousands): As of July 31, 2022 2021 (unaudited) Issued and outstanding stock options 7,264 9,077 Unvested RSUs issued and outstanding 8,648 5,302 Unvested PSUs issued and outstanding 116 — Unvested restricted stock awards issued and outstanding 859 1,231 Shares committed under the ESPP 626 227 Shares related to the 2023 Notes 108 356 Shares subject to warrants related to the issuance of the 2023 Notes 1,048 1,048 Shares related to the 2025 Notes 5,617 5,617 Shares related to the 2026 Notes 4,820 4,820 29,106 27,678 The Company uses the if-converted method for calculating any potential dilutive effect of the conversion options embedded in the Notes on diluted net income per share, if applicable. The conversion options of the 2023, 2025 and 2026 Notes are dilutive in periods of net income on a weighted-average basis using an assumed conversion date equal to the later of the beginning of the reporting period and the date of issuance of the respective Notes. The exercise rights of the Warrants will have a dilutive impact on net income per share of common stock under the treasury-stock method when the average market price per share of the Company’s Class A common stock for a given period exceeds the conversion price of $ 68.06 per share. During the three months ended July 31, 2022, the average price per share of the Company’s Class A common stock exceeded the exercise price of the Warrants; however, since the Company is in a net loss position, there was no dilutive effect during any period presented. 28