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Item 7. Management’s Discussion and Analysis

2023-03-03 compared with 2022-03-07 · 203 added, 199 removed, 329 unchanged (55% of the section changed)

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The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K.

Amounts reported in millions are rounded based on the amounts in thousands.

As a result, the sum of the components reported in millions may not equal the total amount reported in millions due to rounding.

In addition, percentages presented may not add to their respective totals or recalculate due to rounding.

In addition to historical financial information, the following discussion contains forward-looking statements that are based upon current plans, expectations and beliefs that involve risks and uncertainties.

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Our fiscal year ends January 31.

References to fiscal 2023, for example, refer to the fiscal year ended January 31, 2023.

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.

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 program interfaces, 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.

Our Workforce Identity and Customer Identity Clouds are powered by our category-defining Okta Identity 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, web and Software-as-a-Service ("SaaS") applications, on-premises servers, application programming interfaces, IT infrastructure providers and services from a multitude of devices.

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

Developers leverage our Customer Identity and Workforce Identity Clouds to securely and efficiently embed identity into the software they build, allowing them to innovate and focus on their core mission.

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.

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

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 January 31, 2022, more than 15,000 customers across nearly every industry used the Okta Identity Cloud to secure and manage identities around the world.

As of January 31, 2023, more than 17,600 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.

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As of January 31, 2023, 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 employ a 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 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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We typically invoice customers in advance in annual installments for subscriptions to our platform.

Impact of COVID-19 Pandemic

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

None of these impacts can be predicted with certainty.

Our revenue is relatively predictable as a result of our subscription-based business model, which constituted approximately 96% of total revenue for the year ended January 31, 2022.

Our revenue is relatively predictable as a result of our subscription-based business model, which constituted approximately 97% of total revenue for fiscal 2023.

Future growth may be impacted by longer sales cycles, which we have experienced, which in turn, could result in delays in deals closing, creating near-term headwinds for cash flow, remaining performance obligations (“RPO”) and billings growth as well as potential future impacts on revenue growth and other key metrics on a trailing basis.

While we see risks associated with more highly impacted companies and industries, we are also seeing new interest from other organizations, driven by rapidly

changing work and business environments.

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

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

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

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

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

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.

Acquisition of Auth0

On May 3, 2021, we completed the acquisition of Auth0, Inc ("Auth0").

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

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

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

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

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

See Note 3 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

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

The acquisition date fair value, net of acquired cash, was approximately $5,671 million, including shares of our Class A common stock, cash, and assumed equity awards.

In addition, we issued unvested restricted stock and assumed unvested equity and

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

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 and was paid in full during fiscal 2023.

Financial Information and Segments

We operate our business as one reportable segment.

Our revenue has grown significantly.

For the years ended January 31, 2022, 2021 and 2020, our revenue was $1,300.2 million, $835.4 million and $586.1 million, respectively, representing a growth rate of 56% and 43%, respectively.

For the years ended January 31, 2022, 2021 and 2020, we generated net losses of $848.4 million, $266.3 million and $208.9 million, respectively.

For fiscal 2023, 2022 and 2021, our revenue was $1,858 million, $1,300 million and $835 million, respectively, representing a growth rate of 43% and 56%, respectively.

For fiscal 2023, 2022 and 2021, we generated net losses of $815 million, $848 million and $266 million, respectively.

Our accumulated deficit as of January 31, 2023 was $2,475 million.

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2023 2022 2021

(dollars in thousands)

(dollars in millions)

Number of customers 17,600 15,000 10,000

Customers with annual contract value ("ACV") above $100,000 3,930 3,100 1,950

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Remaining performance obligations $ 3,007 $ 2,694 $ 1,797

Year Ended January 31,

2022 2021 2020

(in thousands)

Calculated billings $ 2,123 $ 1,718 $ 976

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Increasing awareness of our platform and capabilities, coupled with the mainstream adoption of cloud technology, has expanded the diversity of our customer base to include organizations of all sizes across all industries.

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 ACV with us was 3,930, 3,100 and 1,950 as of January 31, 2023, 2022 and 2021, respectively.

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Current Period ACV includes any upsells and is net of contraction or churn over the trailing twelve months but excludes ACV from new customers in the current period.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

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

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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 76% in the year ended January 31, 2022 over the year ended January 31, 2021.

We implemented operational changes to our billings process in the year ended January 31, 2022 pursuant to which we billed customers earlier than we would have under our historical billing practices.

These changes had a favorable effect on billings in the year ended January 31, 2022.

Absent the impact of the billings process changes, Calculated Billings would have grown 60% year-over-year in the year ended January 31, 2022.

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

Calculated Billings increased 24% in fiscal 2023 over fiscal 2022.

See the section titled “Non-GAAP Financial Measures” for additional information and a reconciliation of Calculated Billings to total revenue.

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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 the sales and marketing expense category are sales commissions and related taxes.

Cost of Revenue and Gross Margin

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

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

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

As we continue to invest in technology innovation, we anticipate that capitalized internal-use software

costs and related amortization may increase.

We will continue to invest in technology innovation and we anticipate that costs qualifying for capitalization of internal-use software costs and related amortization may fluctuate over time.

We expect our investment in technology to expand the capability of our platform enabling us to improve our gross margin over time.

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We believe that continued investment in our platform is important for our growth.

We expect our research and development expenses will increase in absolute dollars as our business grows.

Sales and Marketing.

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

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

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

General and Administrative.

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

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

Restructuring and Other Charges.

Restructuring and other charges consist primarily of personnel costs, such as notice period, employee severance payments and termination benefits.

In addition, restructuring and other charges include certain lease impairment charges.

Interest and Other, Net

Interest and other, net consists of interest expense, which primarily includes amortization of debt discount and issuance costs and contractual interest expense for our 2023 Notes, convertible notes due in 2025 ("2025 Notes") and convertible notes due in 2026 ("2026 Notes", together with the 2023 Notes and 2025 Notes, the "Notes"), interest income from our investment holdings, gains and losses from our strategic investments and loss on early extinguishment and conversion of debt.

Interest and other, net consists of interest expense, which primarily includes amortization of debt discount (in comparative periods prior to the adoption of Accounting Standards Update ("ASU") No.

2020-06, Accounting for Convertible Instruments and Contracts in an Entity's Own Equity ("ASU 2020-06")), amortization of debt issuance costs, contractual interest expense for our 2023 Notes, convertible notes due in 2025 ("2025 Notes") and convertible notes due in 2026 ("2026 Notes", together with the 2023 Notes and 2025 Notes, the "Notes"), interest income from our investment holdings, and gains and losses from our strategic investments.

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 table sets forth our results of operations for the periods presented:

Year Ended January 31,

2023 2022 2021

(in thousands)

(dollars in millions)

Subscription $ 1,794 $ 1,249 $ 797

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Subscription (1)

329,131 170,095 116,445

Professional services and other (1)

67,274 47,586 42,937

Total cost of revenue 546 396 218

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Research and development (1)

469,259 222,826 159,269

Sales and marketing (1)

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General and administrative (1)

431,314 171,726 112,892

Restructuring and other charges 29 — —

Total operating expenses 2,124 1,672 821

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2023 2022 2021

(in thousands)

(dollars in millions)

Cost of subscription revenue $ 69 $ 49 $ 21

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Total stock-based compensation expense $ 677 $ 566 $ 195

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:

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General and administrative 22 34 20

Restructuring and other charges 2 — —

Total operating expenses 115 129 98

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Net loss (44) % (65) % (32) %

A discussion regarding our financial condition and results of operations for the year ended January 31, 2022 compared to the year ended January 31, 2021 is presented below.

A discussion regarding our financial condition and results of operations for the year ended January 31, 2021 compared to the year ended January 31, 2020 can be found under Item 7 in our Annual Report on Form 10-K for the fiscal year ended January 31, 2021, filed with the SEC on March 4, 2021, which is available free of charge on the SEC’s website at www.sec.gov and our Investor Relations website at investor.okta.com.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

A discussion regarding our financial condition and results of operations for fiscal 2023 compared to fiscal 2022 is presented below.

A discussion regarding our financial condition and results of operations for fiscal 2022 compared to fiscal 2021 can be found under Item 7 in our Annual Report on Form 10-K for fiscal 2022, filed with the SEC on March 7, 2022, which is available free of charge on the SEC’s website at www.sec.gov and our Investor Relations website at investor.okta.com.

Comparison of the Years Ended January 31, 2023 and 2022

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2023 2022 $ Change % Change

(dollars in thousands)

(dollars in millions)

Subscription $ 1,794 $ 1,249 $ 545 44 %

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Total 100 % 100 %

Subscription revenue increased by $452.6 million, or 57%, for the year ended January 31, 2022 compared to the year ended January 31, 2021.

The increase was primarily due to the addition of new customers, an increase in users and sales of additional products to existing customers, and the inclusion of Auth0 revenue from the acquisition date of May 3, 2021,

Professional services and other revenue increased by $12.2 million, or 31%, for the year ended January 31, 2022 compared to the year ended January 31, 2021.

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

The business combination with Auth0 contributed approximately $139.7 million in total revenue for the period from the acquisition date.

For fiscal 2023, subscription revenue increased primarily due to the addition of new customers, an increase in users and sales of additional products to existing customers.

The increase in revenue was attributable to a 17% increase in total customers, from over 15,000 as of January 31, 2022, to over 17,600 as of January 31, 2023, and revenue from existing customers as reflected in our Dollar-Based Net Retention Rate of 120% as of January 31, 2023.

Additionally, as our acquisition of Auth0 was completed on May 3, 2021, subscription revenue during fiscal 2023 includes twelve months of Auth0 revenue while subscription revenue during fiscal 2022 includes approximately nine months of Auth0 revenue.

For fiscal 2023, professional services revenue increased primarily due to an increase in implementation and other services associated with growth in the number of new customers purchasing our subscription services.

Cost of Revenue, Gross Profit and Gross Margin

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2023 2022 $ Change % Change

(dollars in thousands)

(dollars in millions)

Cost of revenue:

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Total gross margin 71 % 70 %

Cost of subscription revenue increased by $159.0 million, or 93%, for the year ended January 31, 2022 compared to the year ended January 31, 2021, primarily due to an increase of $77.5 million in employee compensation costs related to higher headcount to support the growth in our subscription services, including the Auth0 acquisition, an increase in amortization of acquired developed technology of $28.0 million primarily in connection with the Auth0 acquisition, an increase of $26.6 million in third-party hosting costs as we expanded capacity to support our growth and an increase of $11.8 million in software license costs.

Our gross margin for subscription revenue decreased to 74% from 79% during the year ended January 31, 2022, compared to the year ended January 31, 2021 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 fiscal 2023, cost of subscription revenue increased primarily due to an increase of $69 million in employee compensation costs related to higher headcount to support the growth in our subscription services, an increase of $26 million in third-party hosting costs as we expanded capacity to support our growth, an increase of $17 million in software costs and an increase in amortization of acquired developed technology of $11 million.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Our gross margin for subscription revenue remained consistent at 74% during fiscal 2023.

While our gross margins for subscription revenue may fluctuate in the near-term as we invest in our growth, we expect our subscription revenue gross margin to improve over the long-term as we achieve additional economies of scale.

Cost of professional services and other revenue increased by $19.7 million, or 41%, for the year ended January 31, 2022, compared to the year ended January 31, 2021, primarily due to an increase of $15.5 million in employee compensation costs related to higher headcount, including the Auth0 acquisition.

Our gross margin for professional services and other revenue decreased to (32)% during the year ended January 31, 2022 from (23)% during the year ended January 31, 2021 and includes Auth0.

For fiscal 2023, cost of professional services and other revenue increased primarily due to an increase of $11 million in employee compensation costs related to higher headcount.

Our gross margin for professional services and other revenue improved to (27)% during fiscal 2023 from (32)% during fiscal 2022 primarily due to increases in professional services and other revenue at a faster rate than increases in associated costs.

Operating Expenses

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2023 2022 $ Change % Change

(dollars in thousands)

(dollars in millions)

Research and development $ 620 $ 469 $ 151 32 %

Percentage of revenue 33 % 36 %

Research and development expenses increased $246.4 million, or 111%, for the year ended January 31, 2022 compared to the year ended January 31, 2021.

The increase was primarily due to an increase of $220.2 million in employee compensation costs related to higher headcount, including the Auth0 acquisition and an increase of $8.1 million in research and design expenses.

The increase in employee compensation costs includes $47.8 million in stock-based compensation expense primarily related to the revesting agreements from our Auth0 acquisition.

For fiscal 2023, research and development expenses increased primarily due to an increase of $139 million in employee compensation costs related to higher headcount.

We expect our research and development expenses will increase in absolute dollars as our business grows.

Sales and Marketing Expenses

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2023 2022 $ Change % Change

(dollars in thousands)

(dollars in millions)

Sales and marketing $ 1,066 $ 771 $ 295 38 %

Percentage of revenue 58 % 59 %

Sales and marketing expenses increased $343.0 million, or 80%, for the year ended January 31, 2022, compared to the year ended January 31, 2021 primarily due to an increase of $208.7 million in employee compensation costs related to headcount growth, including the Auth0 acquisition, an increase in marketing and event costs of $65.7 million primarily due to increases in demand generation programs, advertising and brand awareness efforts aimed at acquiring new customers and higher production and advertising costs for our virtual format annual customer conference, an increase in amortization expense of $29.6 million for acquired customer relationships and trade names in connection with the Auth0 acquisition incurred in the year ended January 31, 2022, but not in the year ended January 31, 2021, an increase in software license costs of $5.6 million, an increase in consulting expenses of $4.0 million and an increase in travel expenses of $3.1 million.

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

For fiscal 2023, sales and marketing expenses increased primarily due to an increase of $217 million in employee compensation costs related to headcount growth, an increase in travel expenses of $19 million, an increase in marketing and event costs of $16 million primarily due to increases in demand generation programs, advertising and brand awareness efforts aimed at acquiring new customers and an increase in amortization expense of $10 million for acquired customer relationships and trade names.

We expect our sales and marketing expenses will continue to be our largest operating expense category for the foreseeable future as we expand our sales and marketing efforts.

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

General and Administrative Expenses

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2023 2022 $ Change % Change

(dollars in thousands)

(dollars in millions)

General and administrative $ 409 $ 432 $ (23) (5) %

Percentage of revenue 22 % 34 %

General and administrative expenses increased $259.6 million, or 151%, for the year ended January 31, 2022 compared to the year ended January 31, 2021.

The increase was primarily due to an increase of $178.5 million in employee compensation costs related to higher headcount to support our continued growth, including the Auth0 acquisition, an increase of $51.2 million due to acquisition and integration-related costs incurred in the year ended January 31, 2022, but not in the year ended January 31, 2021, an increase in software license costs of $9.2 million and an increase in consulting expenses of $4.5 million.

The increase in employee compensation costs includes $33.8 million in one-time stock-based compensation expense related to accelerated vesting of equity awards for certain Auth0 employees at transaction close and $36.5 million in stock-based compensation expense related to the revesting agreements from our Auth0 acquisition in the year ended January 31, 2022.

For fiscal 2023, general and administrative expenses decreased primarily due to a decrease in acquisition and integration-related costs of $46 million, partially offset by increases in employee compensation and related costs associated with headcount growth.

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

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Restructuring and Other Charges

Year Ended January 31,

2023 2022 $ Change % Change

(dollars in millions)

Restructuring and other charges $ 29 $ — $ 29 — %

Percentage of revenue 2 % — %

For fiscal 2023, restructuring and other charges relate to severance and termination benefit costs of $15 million and lease impairment charges of $14 million.

See Note 16 to our consolidated financial statements "Restructuring and Other Charges" for additional information.

Interest and Other, Net

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2023 2022 $ Change % Change

(dollars in thousands)

(dollars in millions)

Interest expense $ (11) $ (91) $ 80 (88) %

Interest income and other, net 22 9 13 126

Loss on early extinguishment and conversion of debt (179) (2,263) 2,084 (92)

Interest and other, net $ 11 $ (82)

Interest expense increased $19.5 million, or 27%, for the year ended January 31, 2022 compared to the year ended January 31, 2021, due primarily to an increase of $20.5 million for the 2026 Notes that were issued in the second quarter of fiscal year 2021, partially offset by a decrease of $2.6 million for the 2023 Notes, due to the partial repurchase of the 2023 Notes in June 2020 ("Second Partial Repurchase of 2023 Notes") and other conversion activity.

Interest income and other, net decreased $3.1 million, or (24)%, for the year ended January 31, 2022 compared to the year ended January 31, 2021, primarily due to a decrease of $8.4 million in interest income resulting from lower interest rates and an increase of $2.9 million in foreign currency exchange losses, partially offset by an $8.2 million change in net realized gains and unrealized adjustments in the carrying value of our strategic investments.

Loss on early extinguishment and conversion of debt decreased $2.1 million, or (92)%, for the year ended January 31, 2022 compared to the year ended January 31, 2021 due to the Second Partial Repurchase of 2023 Notes which occurred in the year ended January 31, 2021 but not in the year ended January 31, 2022.

For fiscal 2023, the change in interest and other, net was primarily due to a decrease in interest expense resulting from the adoption of ASU 2020-06 and an increase in interest income from our short-term investments.

We expected interest income from our short-term investments to continue to increase as a result of increasing interest rates.

Provision for (Benefit from) Income Taxes

Year Ended January 31,

2023 2022 $ Change % Change

(dollars in millions)

Provision for (benefit from) income taxes $ 14 $ (2) $ 16 (1,158) %

For fiscal 2023, income tax expense resulted primarily from income from profitable foreign jurisdictions, the tax impact of shortfalls from stock-based compensation in the United Kingdom, and state taxes.

For fiscal 2022, the income tax benefit resulted from the release of valuation allowance in the United States in connection with acquisitions and excess tax benefits from stock-based compensation in the United Kingdom, offset by income tax expense related to profitable foreign jurisdictions.

Non-GAAP Financial Measures

In addition to our results determined in accordance with U.S.

generally accepted accounting principles, or GAAP, we believe the following non-GAAP measures are useful in evaluating our operating performance .

In addition to our results determined in accordance with accounting principles generally accepted in the United States (“GAAP”), we believe the following non-GAAP measures are useful in evaluating our operating performance.

We use the below referenced non-GAAP financial information, collectively, to evaluate our ongoing operations and for internal planning and forecasting purposes.

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The non-GAAP financial information is presented for supplemental informational purposes only, and should not be considered a substitute for financial information presented in accordance with GAAP, and may be different from similarly-titled non-GAAP measures used by other companies.

The principal limitation of these non-GAAP financial measures is that they exclude significant expenses

that are required by GAAP to be recorded in our financial statements.

The principal limitation of these non-GAAP financial measures is that they exclude significant expenses that are required by GAAP to be recorded in our financial statements.

In addition, they are subject to inherent limitations as they reflect the exercise of judgment by our management about which expenses are excluded or included in determining these non-GAAP financial measures.

A reconciliation is provided below for each non-GAAP financial measure to the most directly comparable financial measure stated in accordance with GAAP.

A reconciliation is provided below for

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

each non-GAAP financial measure to the most directly comparable financial measure stated in accordance with GAAP.

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 the transaction close.

Year Ended January 31,

2023 2022 2021

(dollars in thousands)

(dollars in millions)

Gross profit $ 1,312 $ 904 $ 617

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Non-GAAP gross margin 78 % 77 % 78 %

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

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

We define Non-GAAP operating income (loss) and Non-GAAP operating margin as GAAP operating loss and GAAP operating margin, adjusted for stock-based compensation expense, non-cash charitable contributions, amortization of acquired intangibles, acquisition and integration-related expenses and restructuring costs related to severance and termination benefits and 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 the transaction close.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

In 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.

Year Ended January 31,

2023 2022 2021

(dollars in thousands)

(dollars in millions)

Operating loss $ (812) $ (768) $ (204)

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Acquisition and integration-related expenses 7 56 —

56,667 — 3,449

Restructuring costs 29 — —

Non-GAAP operating income (loss) $ (10) $ (74) $ 7

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Non-GAAP operating margin (1) % (6) % 1 %

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

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

We define Non-GAAP net income (loss) and Non-GAAP net margin as GAAP net loss and GAAP net margin, adjusted for stock-based compensation expense, non-cash charitable contributions, amortization of acquired intangibles, acquisition and integration-related expenses, amortization of debt discount, amortization of debt issuance costs, loss on early extinguishment and conversion of debt and restructuring costs related to severance and termination benefits and 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 the transaction close.

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

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

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

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

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

In addition, Non-GAAP net income (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.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Year Ended January 31,

2023 2022 2021

(dollars in thousands)

(dollars in millions, shares in thousands, except per share data)

Net loss $ (815) $ (848) $ (266)

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Acquisition and integration-related expenses 7 56 —

56,667 — 3,449

Amortization of debt discount and debt issuance costs 6 86 69

Loss on early extinguishment and conversion of debt — — 2

Restructuring costs 29 — —

Non-GAAP net income (loss) $ (7) $ (68) $ 16

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Non-GAAP net income (loss) per share, diluted $ (0.04) $ (0.46) $ 0.11

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

Free Cash Flow and Free Cash Flow Margin

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2023 2022 2021

(in thousands)

(dollars in millions)

Net cash provided by operating activities $ 86 $ 104 $ 128

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Free cash flow margin 3 % 7 % 13 %

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Calculated Billings

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2023 2022 2021

(in thousands)

(dollars in millions)

Total revenue $ 1,858 $ 1,300 $ 835

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Liquidity and Capital Resources

As of January 31, 2022, our principal sources of liquidity were cash, cash equivalents and short-term investments totaling $2,501.8 million, which were held for working capital and general corporate purposes, including future acquisition activity.

As of January 31, 2023, our principal sources of liquidity were cash, cash equivalents and short-term investments totaling $2,580 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 proceeds of $345.0 million, before deducting costs of issuance of $10.0 million.

In February 2018, we completed our private offering of the 2023 Notes due on February 15, 2023 and received aggregate proceeds of $345 million.

Nearly all of the 2023 Notes have been repurchased or converted as of January 31, 2023.

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.

In connection with the issuance of the 2023 Notes, we entered into convertible note hedges ("Note Hedges") with respect to our Class A common stock.

We used an aggregate amount of $80.0 million of the net proceeds from the sale of the 2023 Notes to purchase the Note Hedges.

The cost of the Note Hedges was partially offset by proceeds of $52.4 million from the sale of warrants to purchase shares of our Class A common stock ("Warrants") in connection with the issuance of the 2023 Notes.

In September 2019, we completed our private offering of the 2025 Notes due on September 1, 2025 and received aggregate proceeds of $1,060.0 million, before deducting issuance costs of approximately $19.3 million.

The interest rate on the 2025 Notes is fixed at 0.125% per annum and is payable semi-annually in arrears on March 1 and September 1 of each year, beginning on March 1, 2020.

In connection with the 2025 Notes, we entered into capped call transactions ("2025 Capped Calls") with respect to our Class A common stock.

We used an aggregate amount of $74.1 million of the net proceeds from the sale of the 2025 Notes to purchase the 2025 Capped Calls.

Concurrent with the private offering of the 2025 Notes, we repurchased $224.4 million principal amount of the 2023 Notes in privately-negotiated transactions for aggregate consideration of $604.8 million, including approximately $224.4 million in cash and approximately 3.0 million shares of Class A common stock.

We also terminated a portion of our existing Note Hedges and Warrants in amounts corresponding to the principal amount of the partial repurchase of the 2023 Notes in September 2019 ("First Partial Repurchase of 2023 Notes", and together with the Second Partial Repurchase of 2023 Notes, the "2023 Notes Partial Repurchases") for net proceeds of $47.2 million.

In June 2020, we completed our private offering of the 2026 Notes due on June 15, 2026 and received aggregate proceeds of $1,150.0 million, before deducting issuance costs of approximately $15.2 million.

In connection with the issuance of the 2023 Notes, we used a portion of the proceeds to enter into convertible note hedges ("Note Hedges") with respect to our Class A common stock.

The cost of the Note Hedges was partially offset by proceeds from the sale of warrants to purchase shares of our Class A common stock ("Warrants") in connection with the issuance of the 2023 Notes.

In September 2019, we completed our private offering of the 2025 Notes due on September 1, 2025 and received aggregate gross proceeds of $1,060 million The interest rate on the 2025 Notes is fixed at 0.125% per annum and is payable semi-annually in arrears on March 1 and September 1 of each year, beginning on March 1, 2020.

In connection with the 2025 Notes, we used a portion of the proceeds to enter into capped call transactions ("2025 Capped Calls") with respect to our Class A common stock.

Concurrent with the private offering of the 2025 Notes, we repurchased a portion of the 2023 Notes and terminated a portion of our existing Note Hedges and Warrants.

In June 2020, we completed our private offering of the 2026 Notes due on June 15, 2026 and received aggregate proceeds of $1,150 million.

The interest rate on the 2026 Notes is fixed at 0.375% per year and is payable semi-annually in arrears on June 15 and December 15 of each year, beginning on December 15, 2020.

In connection with the 2026 Notes, we entered into capped call transactions ("2026 Capped Calls") with respect to our Class A common stock.

We used an aggregate amount of $134.0 million of the net proceeds from the sale of the 2026 Notes to purchase the 2026 Capped Calls.

Concurrent with the private offering of the 2026 Notes, we repurchased $69.9 million principal amount of the 2023 Notes in privately-negotiated transactions for aggregate consideration of $260.5 million, including approximately 1.4 million shares of Class A common stock and $0.2 million in cash.

We also terminated a portion of our existing Note Hedges and Warrants in amounts corresponding to the principal amount of the Second Partial Repurchase of 2023 Notes for net proceeds of $19.6 million.

Through January 31, 2022, we converted and settled approximately $33.4 million principal amount of 2023 Notes (not in connection with the 2023 Notes Partial Repurchases) and exercised and net-share-settled Note Hedges corresponding to approximately $33.4 million principal amount of 2023 Notes.

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

Subsequent to January 31, 2022, the Company received conversion requests for approximately $2.0 million aggregate principal amount of the 2023 Notes.

In connection with the 2026 Notes, we used a portion of the proceeds to enter into capped call transactions ("2026 Capped Calls") with respect to our Class A common stock.

Concurrent with the private offering of the 2026 Notes, we repurchased a portion of the 2023 Notes and terminated a portion of our existing Note Hedges and Warrants.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

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

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In addition, we assumed outstanding employee equity awards with vested fair value of $238 million.

Our consolidated results of operations include the results of operations for Auth0 for the period from May 3, 2021 through January 31, 2022.

On August 2, 2021, we completed the acquisition of atSpoke, providing total cash consideration, net of cash acquired of $79.0 million.

On August 2, 2021, we completed the acquisition of Townsend Street Labs, Inc.

("atSpoke"), providing total cash consideration, net of cash acquired of $79 million.

Of this amount, $13 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.

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

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

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

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

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2023 2022 2021

(in thousands)

(dollars in millions)

Net cash provided by operating activities $ 86 $ 104 $ 128

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Effects of changes in foreign currency exchange rates on cash, cash equivalents and restricted cash (6) (2) 2

Net (decrease) increase in cash, cash equivalents and restricted cash $ (175,974) $ (83,323) $ 220,738

Net decrease in cash, cash equivalents and restricted cash $ (2) $ (176) $ (83)

Operating Activities

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

During the year ended January 31, 2022, cash provided by operating activities was $104.1 million primarily due to our net loss of $848.4 million, adjusted for non-cash charges of $811.4 million and net cash inflows of $141.1 million provided by changes in our operating assets and liabilities.

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

The primary drivers of the changes in operating assets and liabilities related to a $416.4 million increase in deferred revenue, a $78.5 million increase in accrued compensation, accrued other expenses and accounts payable, and a $22.9 million decrease in operating lease right-of-use assets, partially offset by a $174.8 million increase in accounts receivable, a $170.6 million increase in deferred commissions, a $24.5 million decrease in operating lease liabilities and a $6.8 million increase in prepaid expenses and other assets.

During the year ended January 31, 2021, cash provided by operating activities was $128.0 million primarily due to our net loss of $266.3 million, adjusted for non-cash charges of $357.0 million and net cash inflows of $37.3 million provided by changes in our operating assets and liabilities.

Non-cash charges primarily consisted of stock-based compensation, amortization of debt discount and issuance costs, amortization of deferred commissions, depreciation and amortization of property and equipment and intangible assets, non-cash charitable contributions, loss on early extinguishment and conversion of debt and deferred income taxes.

The primary drivers of the changes in operating assets and liabilities related to a $142.1 million increase in deferred revenue, a $53.8 million increase in accounts payable, accrued compensation and accrued other expenses and a $19.1 million decrease in operating lease right-of-use assets, partially offset by a $81.0 million increase in deferred commissions, a $66.4 million increase in accounts receivable, a $17.2 million decrease in operating lease liabilities and a $13.2 million increase in prepaid expenses and other assets.

During fiscal 2023, cash provided by operating activities was $86 million, decreasing by $18 million compared to fiscal 2022.

The decrease was primarily attributable to an increase in cash paid to employees and vendors, partially offset by an increase in cash received from customers.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Investing Activities

Net cash used in investing activities during the year ended January 31, 2022 of $366.8 million was primarily attributable to purchases of investments of $1,846.7 million, payments of $215.2 million, net of cash acquired, in connection with our Auth0 and atSpoke acquisitions and purchases of property and equipment of $12.3 million to support additional office space and headcount and the capitalization of internal-use software costs of $4.3 million

associated with the development of additional features and functionality for our platform.

These activities were partially offset by proceeds from the sales and maturities of investments of $1,711.8 million.

Net cash used in investing activities during the year ended January 31, 2021 of $1,305.1 million was primarily attributable to the purchases of investments of $2,029.0 million, purchases of property and equipment of $13.1 million to support additional office space and headcount and the capitalization of internal-use software costs of $4.2 million associated with the development of additional features and functionality for our platform.

These activities were offset by proceeds from the sales and maturities of investments of $741.3 million.

During fiscal 2023, cash used in investing activities was $130 million, decreasing by $237 million compared to fiscal 2022.

The decrease was primarily attributable to a decrease in payments for business acquisitions, net of cash acquired, and a decrease in cash used from net investment purchases, sales, and maturities.

Financing Activities

Cash provided by financing activities during the year ended January 31, 2022 of $89.1 million was primarily attributable to proceeds from the exercise of stock options of $53.5 million, and proceeds from employee purchases under our employee stock purchase plan ("ESPP") of $35.6 million.

Cash provided by financing activities during the year ended January 31, 2021 of $1,091.6 million was primarily attributable to the issuance of the 2026 Notes for proceeds of $1,134.8 million, net of issuance costs and proceeds from the termination of Note Hedges of $195.0 million, offset by payments for termination of Warrants of $175.4 million and the purchase of the 2026 Capped Calls of $134.0 million.

Other items impacting cash provided by financing activities include proceeds from the exercise of stock options of $45.6 million and proceeds from our ESPP of $25.9 million.

Obligations and Other Commitments

Our principal commitments consist of obligations under our convertible senior notes, operating leases for office space, data center hosting facilities, and other sales and marketing obligations.

Our obligations under our convertible senior notes are described in the "Liquidity and Capital Resources" section of Item 7 of this Annual Report on Form 10-K and in Note 9 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Information regarding our non-cancellable lease and other purchase commitments as of January 31, 2022 can be found in Notes 10 and 11 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

During fiscal 2023, cash provided by financing activities was $48 million, decreasing by $41 million compared to fiscal 2022.

The decrease was primarily attributable to a decrease in proceeds from the exercise of stock options and a decrease in proceeds from employee purchases under our employee stock purchase plan ("ESPP").

Material Cash Requirements

Contractual Obligations

The following table represents the Company’s known short-term (i.e., the next twelve months) and long-term (i.e., beyond the next twelve months) obligations as of January 31, 2023:

Short-term Long-term Total

(dollars in millions)

Convertible Senior Notes:

Principal payments $ — $ 2,210 $ 2,210

Interest payments 6 13 19

Operating leases (2)

Purchase obligations (3)

Total contractual obligations $ 286 $ 2,744 $ 3,030

(1) See Note 9 to our consolidated financial statements "Convertible Senior Notes, Net" for additional information.

(2) See Note 10 to our consolidated financial statements "Leases" for additional information.

(3) Purchase obligations primarily relate to data center hosting facilities, and other sales and marketing obligations.

Indemnification Agreements

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In addition, we have entered into indemnification agreements with our directors and certain officers and employees that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers or employees.

No demands have been made upon us to provide indemnification under such agreements and there are no claims that we are aware of that could have a material effect on our consolidated balance sheets, consolidated statements of operations and comprehensive loss, or consolidated statements of cash flows.

Critical Accounting Policies and Estimates

We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America ("GAAP").

No material demands have been made upon us to provide indemnification under such agreements and there are no claims that we are aware of that could have a material effect on our consolidated balance sheets, consolidated statements of operations and comprehensive loss, or consolidated statements of cash flows.

Critical Accounting Estimates

We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America.

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

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We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis.

We refer to accounting estimates of this type as critical accounting policies and estimates, which we discuss below.

Revenue Recognition

We derive revenue from subscription fees (which include support fees) and professional services fees.

We sell subscriptions to our platform through arrangements that are generally one to five years in length.

Our arrangements are generally non-cancellable and non-refundable.

Furthermore, if a customer reduces the contracted

usage or service level, the customer has no right of refund.

Our subscription arrangements do not provide customers with the right to take possession of the software supporting the platform and, as a result, are accounted for as service arrangements.

This revenue recognition policy is consistent for sales generated directly with customers and sales generated indirectly through channel partners.

We determine revenue recognition through the following steps:

• Identification of the contract, or contracts, with a customer;

• Identification of the performance obligations in the contract;

• Determination of the transaction price;

• Allocation of the transaction price to the performance obligations in the contract;

• Recognition of revenue when, or as, we satisfy a performance obligation.

Subscription Revenue

Subscription revenue, which includes support, is recognized on a straight-line basis over the non-cancellable contractual term of the arrangement, generally beginning on the date that our service is made available to the customer.

Professional Services Revenue

Our professional services principally consist of customer-specific requests for application integrations, user interface enhancements and other customer specific requests.

Revenue for our professional services is recognized as services are performed in proportion with their pattern of transfer.

Contracts with Multiple Performance Obligations

Some of our contracts with customers contain multiple performance obligations.

For these contracts, we account for individual performance obligations separately if they are distinct.

The transaction price is allocated to the separate performance obligations on a relative stand-alone selling price ("SSP") basis.

We determine SSP based on observable prices, if available, for those related services when sold separately.

When such observable prices are not available, we determine SSP based on overarching pricing objectives and strategies, taking into consideration market conditions and other factors, including customer size, volume purchased, market and industry conditions, product-specific factors and historical sales of the deliverables.

We refer to accounting estimates of this type as critical accounting estimates, which we discuss below.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Income taxes are accounted for in accordance with the liability method.

Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, as well as for operating loss and tax credit carryforwards.

Deferred tax assets and liabilities are measured using enacted tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled.

Valuation allowances are established when necessary to reduce deferred tax assets to the amounts that are more likely than not expected to be realized based on the weighting of positive and negative evidence.

Future realization of deferred tax assets ultimately depends on the existence of sufficient taxable income of the appropriate character, within the carry-back or carry-forward periods available under the applicable tax law.

In assessing the need for a valuation allowance, we consider available evidence, including past operating results, estimates of future taxable income, and the feasibility of tax planning strategies.

Our judgment regarding future estimates may change due to many factors, including future market conditions and the ability to successfully execute our business plans and tax planning strategies.

Should there be a change in the ability to recover deferred tax assets, our provision for income taxes would increase or decrease in the period in which the assessment is changed.

Our tax positions are subject to income tax audits by multiple tax jurisdictions throughout the world.

We recognize the tax benefit of an uncertain tax position only if it is more likely than not that the position is sustainable upon examination by the taxing authority, based on the technical merits.

Significant judgment is required in determining the technical merits of an uncertain tax position, such as taking into account current tax laws, our interpretation of current tax laws and possible outcomes of current and future audits conducted by foreign and domestic tax authorities.

We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate.

To the extent the final tax outcome of these matters is different than the amounts recorded, such differences may impact the provision for income taxes in the period in which such determination is made.

Business Combinations

When we acquire a business, the purchase price is allocated to the net tangible and identifiable intangible assets acquired based on their estimated fair values.

When we acquire a business, the purchase price is allocated to the acquired assets, including separately identifiable intangible assets, and assumed liabilities at their respective estimated fair values.

Any residual purchase price is recorded as goodwill.

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These estimates are inherently uncertain and unpredictable, and unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.

During the measurement period, which may be up to one year from the acquisition date, adjustments to the fair value of these tangible and intangible assets acquired and liabilities assumed may be recorded, with the corresponding offset to goodwill.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

We continue to collect information and reevaluate these estimates and assumptions quarterly and record any adjustments to our preliminary estimates to goodwill provided that we are within the measurement period.

Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the consolidated statements of operations.

Goodwill on our consolidated balance sheets totaled $5,401.3 million and $48.0 million as of January 31, 2022 and 2021, respectively.

Goodwill is tested for impairment annually on November 1 or more frequently if certain indicators are present.

Based on the annual assessment, no indicator of impairment was noted and as such no impairment charge was recorded during the years ended January 31, 2022, 2021 and 2020.

Convertible Senior Notes

We account for the issuance of convertible senior notes in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Subtopic 470-20, Debt with Conversion and Other Options ("ASC 470-20").

Pursuant to ASC 470-20, as our Notes have a net settlement feature and may be settled wholly or partially in cash upon conversion, we are required to separately account for the liability (debt) and equity (conversion option) components of the instrument.

The carrying amount of the liability component is computed by estimating the fair value of a similar liability without the conversion option using income and market based approaches.

For the income-based approach, we use a convertible bond pricing model that includes several assumptions such as volatility, the risk-free rate, and observable trading activity for our existing Notes.

For the market-based approach, we observe the price of derivative instruments purchased in conjunction with our convertible senior note issuances or we evaluate issuances of convertible debt securities by other companies with similar credit risk ratings at the time of issuance.

The amount of the equity component is then calculated by deducting the fair value of the liability component from the principal amount of the instrument.

This difference represents a debt discount that is amortized to interest expense over the respective terms of the Notes using an effective interest rate method.

The equity component is not remeasured as long as it continues to meet the conditions for equity classification.

In accounting for the issuance costs related to the Notes, the allocation of issuance costs incurred between the liability and equity components were based on their relative values.

Similarly, in accordance with ASC 470-20, transactions involving contemporaneous exchanges of cash between the same debtor and creditor in connection with the issuance of a new debt obligation and satisfaction of an existing debt obligation by the debtor should be evaluated as a modification or an exchange transaction depending on whether the exchange is determined to have substantially different terms.

When the exchange is deemed to have substantially different terms due to a significant difference between the value of the conversion option immediately prior to and after the exchange, the transaction is accounted for as a debt extinguishment.

Pursuant to ASC 470-20, total consideration for the satisfaction of an existing debt obligation is separated into liability and equity components by estimating the fair value of a similar liability without a conversion option and assigning the residual value to the equity component.

The effective interest rate used to estimate the fair value of the liability component is based on the income and market based approaches used to determine the effective interest rate of the new debt obligation, adjusted for the remaining tenor of the extinguished debt.

The difference between the fair value and the amortized carrying value of the extinguished debt, net of the proportionate amounts of unamortized debt discount and remaining unamortized debt issuance costs, is recorded as a gain or loss on extinguishment.

Loss Contingencies

We evaluate contingent liabilities, including threatened or pending litigation, and make provisions for such liabilities when it is both probable that a loss has been incurred and its amount can be reasonably estimated.

Because of uncertainties inherent in litigation, we base our estimate and accrue the liabilities, if any, on the information available at the time of our assessment.

Significant judgment is required to determine both the probability and the estimated amount of loss given such legal proceedings are inherently unpredictable and subject to significant uncertainties, some of which are beyond our control.

Developments in these matters could affect the amount of any liability we may accrue.

As additional information becomes available, we may revise our estimates.

Any revisions in the estimates of potential liabilities could have a material impact on our operating results and financial position.

Further, until the final resolution of any such matter, there may be a loss exposure in excess of the liability recognized and such amount could be significant.

Revenue Recognition

We derive our revenues primarily from subscription fees and professional services fees.

A description of our revenue recognition policies is included in Note 2 to our consolidated financial statements "Summary of Significant Accounting Policies."

Our contracts with customers often contain multiple performance obligations.

For these contracts, we account for individual performance obligations separately if they are distinct.

The transaction price of the contract is allocated to the separate performance obligations on a relative standalone selling price basis.

Evaluating customer contracts with multiple performance obligations and complex terms may require significant judgment in identifying the distinct performance obligations.

Recent Accounting Pronouncements

See Note 2 to our consolidated financial statements “Summary of Significant Accounting Policies — Recently Adopted Accounting Pronouncements" and " — Recently Issued Accounting Pronouncements Not Yet Adopted” for more information.

See Note 2 to our consolidated financial statements “Summary of Significant Accounting Policies — Recently Adopted Accounting Pronouncements" for more information.

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-K

Item 7. Management’s Discussion and Analysis