What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-12-01 compared with 2022-09-01 · 140 added, 98 removed, 407 unchanged (37% of the section changed)

5 unchanged sentences

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.

Our Workforce Identity and Customer Identity Clouds are 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.

Every day, thousands of organizations and millions of people use Okta to securely access a wide range of cloud, mobile and web applications, on-premises servers, application programming interfaces (“APIs”), IT infrastructure providers and services from a multitude of devices.

Developers leverage our platform to securely and efficiently embed identity into the software they build, allowing them to focus on their core mission.

Employees and contractors sign into the Okta Identity Cloud to seamlessly and securely access the applications they need to do their most important work.

Organizations use our platform to collaborate with their partners, and to provide their customers with more modern and secure experiences online and via mobile devices.

Developers leverage our Customer Identity Cloud to securely and efficiently embed identity into the software they build and to provide their customers with more modern and secure experiences online and via mobile devices, allowing them to focus on their core mission.

Employees and contractors sign into the Workforce Identity Cloud to seamlessly and securely access the applications they need to do their most important work, and to collaborate with their partners.

Given the growth trends in the number of applications and cloud adoption, and the movement to remote workforces, identity is becoming the most critical layer of an organization’s security.

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, 2022, more than 16,400 customers across nearly every industry used the Okta Identity Cloud to secure and manage identities around the world.

As of October 31, 2022, more than 17,050 customers across nearly every industry used Okta 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, 2022, we had over 7,000 integrations with these cloud, mobile and web applications and IT infrastructure and security vendors.

As of October 31, 2022, 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.

We focus on acquiring and retaining our customers and increasing their spending with us through expanding the number of users who access the Okta Identity Cloud and up-selling additional products.

We focus on acquiring and retaining our customers and increasing their spending with us through expanding the number of users who access our Workforce Identity and Customer Identity Clouds and up-selling additional products.

We sell our products directly through our field and inside sales teams, as well as indirectly through our network of channel partners, including resellers, system integrators and other distribution partners.

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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, 2022.

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, RPO and billings growth as well as potential future impacts on revenue growth and other key metrics on a trailing basis.

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, 2022.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

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.

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In fiscal 2022, as the administration of vaccines increased, we reopened our offices to partial capacity, allowing our employees to voluntarily return and resumed some in-person sales and marketing activities.

In fiscal 2023, we are shifting to hybrid in-person and virtual sales formats and experiences for future annual user conferences, and we expect our future costs to increase.

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

In fiscal 2023, we shifted to hybrid in-person and virtual sales formats and experiences for our annual user conferences.

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

Acquisition of Auth0

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

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

The consideration held back was paid in full during the six months ended July 31, 2022.

A portion of the total consideration was held back by us to secure the indemnification obligations of the Auth0 securityholders and was paid in full during the nine months ended October 31, 2022.

See Note 3 to our audited consolidated financial statements included in our Form 10-K filed with the SEC on March 7, 2022.

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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.

Employee compensation costs include salaries, bonuses, benefits and stock-based compensation for each cost of revenue and operating expense category, sales commissions for sales and marketing and any compensation related taxes.

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

Employee compensation costs reflected in each of the cost of revenue and operating expense categories include salaries, bonuses, compensation related taxes, benefits and stock-based compensation.

Additionally included in in the sales and marketing expense category are sales commissions and related taxes.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Cost of Revenue and Gross Margin

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

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

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

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

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Interest and other, net consists of interest expense, which primarily includes amortization of debt discount and loss on early extinguishment and conversion of debt (in comparative periods prior to the adoption of ASU 2020-06), amortization of debt issuance costs, contractual interest expense for the Notes, interest income from our investment holdings, and gains and losses from our strategic investments.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Provision for (Benefit from) Income Taxes

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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.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Results of Operations

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

The following tables set forth our results of operations for the periods presented:

Three Months Ended

July 31, Six Months Ended

October 31, Nine Months Ended

2022 2021 2022 2021

(in thousands)

(dollars in thousands)

Subscription $ 465,856 $ 336,702 $ 1,299,181 $ 879,881

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Three Months Ended

July 31, Six Months Ended

October 31, Nine Months Ended

2022 2021 2022 2021

(in thousands)

(dollars in thousands)

Cost of subscription revenue $ 17,106 $ 13,455 $ 51,509 $ 33,843

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Total stock-based compensation expense $ 170,985 $ 155,785 $ 511,687 $ 407,611

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

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

Three Months Ended

July 31, Six Months Ended

October 31, Nine Months Ended

2022 2021 2022 2021

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Net loss (43) % (63) % (49) % (66) %

Comparison of the Three and Six Months Ended July 31, 2022 and 2021

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Comparison of the Three and Nine Months Ended October 31, 2022 and 2021

Three Months Ended

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Total 100 % 100 %

Six Months Ended

Nine Months Ended

2022 2021 $ Change % Change

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Total 100 % 100 %

Three and six months ended

For the three and six months ended July 31, 2022, the increase in subscription revenue was primarily due to the addition of new customers and an increase in users and sales of additional products to existing customers.

Additionally, as our acquisition of Auth0 was completed on May 3, 2021, subscription revenue during the six months ended July 31, 2022 includes six months of Auth0 revenue while subscription revenue during the six months ended July 31, 2021 includes approximately three months of Auth0 revenue.

For the three and six months ended July 31, 2022, 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.

Three and nine months ended

For the three and nine months ended October 31, 2022, the increase in subscription revenue was primarily due to the addition of new customers, an increase in users and sales of additional products to existing customers.

Additionally, as our acquisition of Auth0 was completed on May 3, 2021, subscription revenue during the nine months ended October 31, 2022 includes nine months of Auth0 revenue while subscription revenue during the nine months ended October 31, 2021 includes approximately six months of Auth0 revenue.

For the three and nine months ended October 31, 2022, 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.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Cost of Revenue, Gross Profit and Gross Margin

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Total gross margin 71 69

Six Months Ended

Nine Months Ended

2022 2021 $ Change % Change

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Three months ended

For the three months ended July 31, 2021, cost of subscription revenue increased primarily due to an increase of $16.1 million in employee compensation costs related to higher headcount to support the growth in our subscription services, an increase of $5.6 million in software license costs and an increase of $4.6 million in third-party hosting costs as we expanded capacity to support our growth.

Our gross margin for subscription revenue increased to 73% from 72% for the three months ended July 31, 2022 compared to the three months ended July 31, 2021.

For the three months ended October 31, 2022, cost of subscription revenue increased primarily due to an increase of $14.7 million in employee compensation costs related to higher headcount to support the growth in our subscription services, an increase of $6.1 million in third-party hosting costs as we expanded capacity to support our growth and an increase of $3.3 million in software license costs.

Our gross margin for subscription revenue increased to 75% from 73% for the three months ended October 31, 2022 compared to the three months ended October 31, 2021.

The increase was primarily driven by improved spend efficiency resulting in lower relative cost of subscription revenue.

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.

For the three months ended July 31, 2021, cost of professional services and other revenue increased primarily due to an increase of $2.9 million in employee compensation costs related to increased headcount.

Our gross margin for professional services and other revenue improved to (30)% for the three months ended July 31, 2022 from (34)% for the three months ended July 31, 2021.

Six months ended

For the six months ended July 31, 2022, cost of subscription revenue increased primarily due to an increase of $44.6 million in employee compensation costs related to higher headcount to support the growth in our subscription services, an increase of $14.7 million in third-party hosting costs as we expanded capacity to support our growth, an increase in amortization of acquired developed technology of $11.0 million and an increase of $10.4 million in software license costs.

Our gross margin for subscription revenue decreased to 73% from 75% for the six months ended July 31, 2022 compared to the six months ended July 31, 2021.

The decrease is 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.

For the three months ended October 31, 2022, cost of professional services and other revenue increased primarily due to an increase of $1.7 million in employee compensation costs related to increased headcount.

Our gross margin for professional services and other revenue decreased to (34)% from (33)% for the three months ended October 31, 2022 compared to the three months ended October 31, 2021.

Nine months ended

For the nine months ended October 31, 2022, cost of subscription revenue increased primarily due to an increase of $59.3 million in employee compensation costs related to higher headcount to support the growth in our subscription services, an increase of $20.8 million in third-party hosting costs as we expanded capacity to support

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

our growth, an increase of $13.7 million in software license costs and an increase in amortization of acquired developed technology of $11.0 million.

Our gross margin for subscription revenue decreased to 73% from 74% for the nine months ended October 31, 2022 compared to the nine months ended October 31, 2021.

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.

For the six months ended July 31, 2022, cost of professional services and other revenue increased primarily due to an increase of $7.5 million in employee compensation costs related to increased headcount.

Our gross margin for professional services and other revenue improved to (25)% for the six months ended July 31, 2022 from (30)% for the six months ended July 31, 2021.

For the nine months ended October 31, 2022, cost of professional services and other revenue increased primarily due to an increase of $9.1 million in employee compensation costs related to increased headcount.

Our gross margin for professional services and other revenue improved to (28)% from (31)% for the nine months ended October 31, 2022 compared to the nine months ended October 31, 2021.

Operating Expenses

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Percentage of revenue 31 % 37 %

Six Months Ended

Nine Months Ended

2022 2021 $ Change % Change

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Percentage of revenue 35 % 35 %

Three and six months ended

For the three and six months ended July 31, 2022, the increase in research and development expenses is primarily due to increases of $30.8 million and $115.3 million, respectively, in employee compensation costs related to higher headcount.

Three and nine months ended

For the three and nine months ended October 31, 2022, the increase in research and development expenses is primarily due to increases of $17.4 million and $132.7 million, respectively, in employee compensation costs related to higher headcount.

Sales and Marketing Expenses

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Percentage of revenue 60 % 59 %

Six Months Ended

Nine Months Ended

2022 2021 $ Change % Change

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Percentage of revenue 60 % 60 %

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Three months ended

For the three months ended July 31, 2021, sales and marketing expenses increased primarily due to an increase of $39.7 million in employee compensation costs related to higher headcount, an increase in marketing and event costs of $7.6 million primarily due to increases in demand generation programs, advertising, and brand awareness efforts aimed at acquiring new customers, and an increase in travel expenses of $6.9 million.

For the three months ended October 31, 2022, sales and marketing expenses increased primarily due to an increase of $73.3 million in employee compensation costs related to higher headcount and an increase in travel expenses of $4.1 million.

We expect sales and marketing expenses will increase in absolute dollars in future periods as we invest in acquiring new customers.

Six months ended

For the six months ended July 31, 2022, sales and marketing expenses increased primarily due to an increase of $104.8 million in employee compensation costs related to headcount growth, an increase in marketing and event costs of $18.4 million primarily due to increases in demand generation programs, advertising and brand awareness efforts aimed at acquiring new customers, an increase in travel expenses of $12.7 million, an increase in amortization expense of $9.9 million for acquired customer relationships and trade names and an increase in consulting expenses of $7.0 million.

Nine months ended

For the nine months ended October 31, 2022, sales and marketing expenses increased primarily due to an increase of $178.1 million in employee compensation costs related to headcount growth, an increase in marketing and event costs of $19.9 million primarily due to increases in demand generation programs, advertising and brand awareness efforts aimed at acquiring new customers, an increase in travel expenses of $16.8 million, an increase in amortization expense of $9.9 million for acquired customer relationships and trade names and an increase in consulting expenses of $8.5 million.

We expect sales and marketing expenses will increase in absolute dollars in future periods as we invest in acquiring new customers.

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Percentage of revenue 23 % 30 %

Six Months Ended

Nine Months Ended

2022 2021 $ Change % Change

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Three months ended

For the three months ended July 31, 2021, general and administrative expenses decreased primarily due to a decrease of $31.6 million in employee compensation costs primarily related to $33.8 million in one-time stock-based compensation expense relating to accelerated vesting of equity awards for certain Auth0 employees incurred in the three months ended July 31, 2021, but not in the three months ended July 31, 2022, and a decrease of $27.7 million in acquisition and integration-related costs due to costs incurred in the three months ended July 31, 2021, but not in the three months ended July 31, 2022.

Six months ended

For the six months ended July 31, 2022, general and administrative expenses was relatively flat, decreasing by $6.2 million, primarily due to a decrease in acquisition and integration-related costs of $29.3 million, partially offset by an increase in employee compensation and related costs associated with headcount growth.

For the three months ended October 31, 2022, general and administrative expenses increased primarily due to lease impairment charges of $14.2 million related to our real estate optimization plan and the closing of duplicative sites and underutilized offices, partially offset by a decrease of $8.0 million in acquisition and integration-related costs incurred in the three months ended October 31, 2021, but not in the three months ended October 31, 2022.

Nine months ended

For the nine months ended October 31, 2022, general and administrative expenses was relatively flat, primarily due to a decrease in acquisition and integration-related costs of $37.3 million, offset by lease impairment charges of $14.2 million related to our real estate optimization plan and the closing of duplicative sites and underutilized offices, and an increase in employee compensation and related costs associated with headcount growth.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Interest and Other, Net

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Interest and other, net $ 1,430 $ (22,088) $ 23,518 (106)

Six Months Ended

Nine Months Ended

2022 2021 $ Change % Change

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Interest and other, net $ 2,072 $ (61,333) $ 63,405 (103)

Three and six months ended

For the three and six months ended July 31, 2022, the change in interest and other, net was primarily due to a decrease in interest expense resulting from the adoption of ASU 2020-06.

Three and nine months ended

For the three and nine months ended October 31, 2022, the change in interest and other, net was primarily due to a decrease in interest expense resulting from the adoption of ASU 2020-06.

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

2022 2021 2022 2021

(in thousands)

(dollars in thousands)

Calculated Billings $ 531,637 $ 388,679 $ 1,412,147 $ 1,115,067

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

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

As of July 31, 2022, we had over 16,400 customers on our platform.

As of October 31, 2022, we had over 17,050 customers on our platform.

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

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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 3,525 and 2,610 as of July 31, 2022 and 2021, respectively.

The number of customers who have greater than $100,000 in annual contract value (“ACV”) with us was 3,740 and 2,825 as of October 31, 2022 and 2021, respectively.

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

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Current RPO represents the portion of RPO expected to be recognized during the next 12 months.

RPO fluctuates due to a number of factors, including the timing, duration and dollar amount of customer contracts.

RPO fluctuates due to a number of factors, including the timing, duration and dollar amount of customer contracts and fluctuations in foreign currency exchange rates.

Calculated Billings

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

Calculated Billings increased 36% in the three months ended July 31, 2022 over the three months ended July 31, 2021, and increased 21% in the six months ended July 31, 2022 over the six months ended July 31, 2021.

Calculated Billings increased 37% in the three months ended October 31, 2022 over the three months ended October 31, 2021, and increased 27% in the nine months ended October 31, 2022 over the nine months ended

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

October 31, 2021.

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

We periodically reassess the components of our Non-GAAP adjustments for changes in how we evaluate our performance, changes in how we make financial and operational decisions, and consider the use of these measures by our competitors and peers to ensure the adjustments remain relevant and meaningful.

Non-GAAP Gross Profit and Non-GAAP Gross Margin

We define Non-GAAP gross profit and Non-GAAP gross margin as GAAP gross profit and GAAP gross margin, adjusted for stock-based compensation expense included in cost of revenue, amortization of acquired intangibles and acquisition and integration-related expenses.

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

Three Months Ended

July 31, Six Months Ended

October 31, Nine Months Ended

2022 2021 2022 2021

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Acquisition and integration-related expenses — 658 459 1,316

— 658 459 658

Non-GAAP gross profit $ 375,451 $ 269,830 $ 1,038,366 $ 707,377

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

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

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

We define Non-GAAP operating income (loss) and Non-GAAP operating margin as GAAP operating loss and GAAP operating margin, adjusted for stock-based compensation expense, non-cash charitable contributions, amortization of acquired intangibles, acquisition and integration-related expenses and restructuring costs related to lease impairments in connection with the closing of certain leased facilities.

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

Non-GAAP Operating Loss and Non-GAAP Operating Margin

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

Beginning in the third quarter of fiscal 2023, we updated our definition of Non-GAAP operating income (loss) and Non-GAAP operating margin to include restructuring costs as defined in the preceding paragraph.

Three Months Ended

July 31, Six Months Ended

October 31, Nine Months Ended

2022 2021 2022 2021

5 unchanged sentences

Acquisition and integration-related expenses — 10,060 6,555 46,664

— 29,550 6,555 36,604

Non-GAAP operating loss $ (15,006) $ (24,539) $ (56,031) $ (40,437)

Restructuring costs 14,161 — 14,161 —

Non-GAAP operating income (loss) $ 264 $ (9,521) $ (55,767) $ (49,958)

Operating margin (43) % (57) % (49) % (60) %

Non-GAAP operating margin — % (3) % (4) % (5) %

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

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

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

We define Non-GAAP net loss and Non-GAAP net margin as GAAP net loss and GAAP net margin, adjusted for stock-based compensation expense, non-cash charitable contributions, amortization of acquired intangibles, acquisition and integration-related expenses, restructuring costs related to lease impairments in connection with the closing of certain leased facilities, amortization of debt discount, amortization of debt issuance costs and loss on early extinguishment and conversion of debt.

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

Adjustments reflect the adoption of ASU 2020-06 under the modified retrospective method as of February 1, 2022, as applicable.

Beginning in the third quarter of fiscal 2023, we updated our definition of Non-GAAP net loss and Non-GAAP net margin to include restructuring costs as defined in the preceding paragraph.

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

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

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

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

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

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

The note hedge and capped call agreements are intended to offset potential dilution to our Class A common stock upon any conversion or settlement of the convertible senior notes under certain circumstances.

Accordingly, we did not record any adjustments for the potential impact of the convertible senior notes outstanding under the if-converted method.

Three Months Ended

July 31, Six Months Ended

October 31, Nine Months Ended

2022 2021 2022 2021

5 unchanged sentences

Acquisition and integration-related expenses — 10,060 6,555 46,664

— 29,550 6,555 36,604

Amortization of debt discount and debt issuance costs (1)

1 unchanged sentence

Loss on conversion of debt (1)

Restructuring costs 14,161 — 14,161 —

Non-GAAP net loss $ (589) $ (10,578) $ (59,159) $ (39,849)

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Non-GAAP net loss per share, basic and diluted $ — $ (0.07) $ (0.38) $ (0.27)

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

(1) Reflects the adoption of ASU 2020-06 under the modified retrospective method effective February 1, 2022.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Free Cash Flow and Free Cash Flow Margin

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

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

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

Three Months Ended

July 31, Six Months Ended

October 31, Nine Months Ended

2022 2021 2022 2021

(dollars in thousands)

Net cash provided by (used in) operating activities $ (19,049) $ (2,608) $ (218) $ 53,467

Net cash provided by operating activities $ 9,980 $ 37,120 $ 9,762 $ 90,587

Purchases of property and equipment (1,884) (1,766) (9,377) (5,800)

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Three Months Ended

July 31, Six Months Ended

October 31, Nine Months Ended

2022 2021 2022 2021

(in thousands)

(dollars in thousands)

Total revenue $ 481,042 $ 350,680 $ 1,347,792 $ 917,186

6 unchanged sentences

Calculated Billings $ 531,637 $ 388,679 $ 1,412,147 $ 1,115,067

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Liquidity and Capital Resources

As of July 31, 2022, our principal sources of liquidity were cash, cash equivalents and short-term investments totaling $2,477.0 million, which were held for working capital and general corporate purposes, including potential future acquisition activity.

As of October 31, 2022, our principal sources of liquidity were cash, cash equivalents and short-term investments totaling $2,473.2 million, which were held for working capital and general corporate purposes, including potential future acquisition activity.

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

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We expect to continue to incur operating losses and cash flows from operations that may fluctuate between positive and negative amounts for the foreseeable future.

In February 2018, we completed our private offering of the 2023 Notes due on February 15, 2023 and received aggregate gross proceeds of $345.0 million, of which approximately $339.8 million principal amount has been repurchased or converted as of July 31, 2022.

The interest rate on the 2023 Notes is fixed at 0.25% per annum and is payable semi-annually in arrears on February 15 and August 15 of each year, beginning on August 15, 2018.

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Therefore, a substantial source of our cash is from our deferred revenue, which is included on our condensed consolidated balance sheet as a liability.

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, 2022, we had deferred revenue of $1,011.3 million, of which $994.1 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.

Deferred revenue consists of the unearned portion of billed fees for our subscriptions, which is recognized

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

as revenue in accordance with our revenue recognition policy.

As of October 31, 2022, we had deferred revenue of $1,062.5 million, of which $1,044.6 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

(in thousands)

Net cash provided by (used in) operating activities $ (218) $ 53,467

Nine Months Ended

(dollars in thousands)

Net cash provided by operating activities $ 9,762 $ 90,587

Net cash used in investing activities (47,223) (210,102)

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

During the six months ended July 31, 2022, cash used in operating activities was $0.2 million primarily due to our net loss of $453.2 million, adjusted for non-cash charges of $444.9 million and net cash inflows of $8.0 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 and amortization of deferred commissions.

The primary drivers of the changes in operating assets and liabilities related to a $74.0 million decrease in accounts receivable, a $24.6 million increase in accounts payable and a $15.1 million increase in deferred revenue partially offset by a $55.2 million decrease in accrued compensation, and a $50.1 million increase in deferred commissions.

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 nine months ended October 31, 2022, cash provided by operating activities was $9.8 million primarily due to our net loss of $662.1 million, adjusted for non-cash charges of $685.1 million and net cash outflows of $13.3 million provided by changes in our operating assets and liabilities.

Non-cash charges primarily consisted of stock-based compensation, depreciation, amortization, and accretion, amortization of deferred commissions and lease impairment charges.

The primary drivers of the changes in operating assets and liabilities related to a $82.6 million increase in deferred commissions primarily due to increased sales and a $30.6 million decrease in accrued compensation, partially offset by a $66.2 million increase in deferred revenue, a $29.8 million increase in accounts payable, and a $15.0 million decrease in accounts receivable.

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, 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.

Investing Activities

Net cash used in investing activities during the six months ended July 31, 2022 of $68.7 million was primarily attributable to purchases of investments of $571.1 million and purchases of property and equipment of $7.5 million, partially offset by proceeds from the sales and maturities of investments of $521.8 million.

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, and 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 nine months ended October 31, 2022 of $47.2 million was primarily attributable to purchases of investments of $872.0 million and purchases of property and equipment of $9.4 million, partially offset by proceeds from maturities of investments of $848.5 million.

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.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Financing Activities

Cash provided by financing activities during the six months ended July 31, 2022 of $27.9 million was primarily attributable to proceeds from employee purchases under our ESPP of $19.0 million, and proceeds from the exercise of stock options of $9.0 million.

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 nine months ended October 31, 2022 of $33.6 million was primarily attributable to proceeds from employee purchases under our ESPP of $19.0 million, and proceeds from the exercise of stock options of $14.6 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.

Indemnification Agreements

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Off-Balance Sheet Arrangements

As of July 31, 2022, 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, 2022, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Critical Accounting Policies and Estimates

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We no longer consider estimates related to our convertible senior notes to be a critical accounting policy due to the adoption of ASU 2020-06 effective February 1, 2022, which simplified the accounting for convertible instruments.

There have been no other significant changes to these policies for the six months ended July 31, 2022.

There have been no other significant changes to these policies for the nine months ended October 31, 2022.

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